Minnesota Fraud Measure of Damages

A Minneapolis, Minnesota fraud attorney will often ask his client to estimate her damages, which can be difficult.

A party asserting a fraud claim must prove the following elements: a) there was a representation; b) which was false; c) which had to do with a past or present fact; d) it was material; e) it was susceptible of knowledge; f) the representer knew it to be false, or asserted it as his own knowledge without knowing it to be true or false; g) the representer intended the other person to be induced to act, or justified in so acting; h) the aggrieved person’s action was in reliance upon the representation; i)  the aggrieved person must suffer damage; and j) the damage must be related to the representation.  Davis v. Re-Trac Mfg., Corp., 149 N.W.2d 37, 38-39 (Minn. 1967).

In a case where the UCC is implicated (i.e., a contract for the sale of goods), the statute provides:

Minn. Stat. Section 336.2-721 REMEDIES FOR FRAUD.

Remedies for material misrepresentation or fraud include all remedies available under this article for nonfraudulent breach. Neither rescission or a claim for rescission of the contract for sale nor rejection or return of the goods shall bar or be deemed inconsistent with a claim for damages or other remedy.

Defendants will often argue that a representation or expectation as to future acts is not a sufficient basis to support an action for fraud merely because the represented act or event did not take place. It is true that a misrepresentation of a present intention could amount to fraud. However, it must be made affirmatively to appear that the promisor had no intention to perform at the time the promise was made. Belisle v. Southdale Realty Company, 168 N.W.2d 361 (Minn. 1969).

The “out-of-pocket” damages rule is the rule of recovery for fraud in Minnesota. Lewis v. Citizens Agency of Madelia, Inc., 235 N.W.2d 831, 835 (Minn. 1975). The out-of-pocket rule allows recovery of those damages which are the natural and proximate loss sustained by a party because of reliance on misrepresentations. Id.  The issue is not what the injured party might have gained through the transaction but what was lost by reason of the other party’s misrepresentations. Id. The loss is usually measured as the difference between what the injured party parted with and what he received, together with other damages that were proximately caused by the fraud. Strouth v. Wilkison, 224 N.W.2d 511, 513-14 (Minn. 1974). The amount of damages is to be determined by the finder of fact. Id.

Some have argued that exceptions to the general rule exist.  One type of exception is where a plaintiff believed it had something it did not actually have.  In Lewis v. Citizens Agency of Madelia, Inc., 235 NW 2d 831 (Minn. 1975) the plaintiff thought she was the beneficiary of her husband’s life insurance policy; there her damages were not limited to the premiums that were paid on the policy.  The court found:

In cases of fraud or deceit, the defendant is responsible for those results which must be presumed to have been within his contemplation at the time of the commission of the fraud, and plaintiff may recover for any injury which is the direct and natural consequence of his acting on the faith of defendant’s representations. It must appear that the fraud and damage sustain to each other relation of cause and effect, or at least that the damage might have resulted directly from the fraud.

Another exception is where a court finds that breach of contract damages (i.e., benefit of the bargain damages) provide a better measure of damages because out of pocket damages are too difficult to estimate. In an unpublished opinion (and therefore nonbinding) styled as Williams v. Heins, Mills & Olson, PLC, (Minn. Ct. App. 2010) the court found:

The Minnesota Supreme Court has acknowledged, however, that there are some cases in which “the out-of-pocket rule does not work.” B.F. Goodrich, 430 N.W.2d at 182. The most common case is one in which misrepresentations cause damage to a plaintiff’s existing property— sometimes called the economic-loss exception. Id. at 183 (explaining that “[t]his direct economic loss is not measurable by the out-of-pocket rule”). Other examples have included the recovery of life-insurance proceeds (rather than premiums) by a plaintiff who was led to believe that she was purchasing life insurance, rather than an annuity, Lewis v. Citizens Agency of Madelia, Inc., 306 Minn. 194, 200, 235 N.W.2d 831, 835 (1975), and rescission of a stock sale based on a misrepresentation as to the purchaser, Estate of Jones v. Kvamme, 449 N.W.2d 428, 432 (Minn. 1989).

Yet another exception appears to exist when a plaintiff was persuaded not to protect the value of his property due to defendant’s conduct. In Kreitzer v. Xethanol Corp., (D.C. Minn. 2009) Judge Doty found:

Minnesota courts, however, recognize exceptions to the out-of-pocket rule where strict application of the rule may not return the plaintiff to the status quo. See B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d 180, 183 (Minn. 1988); Jensen v. Peterson, 264 N.W.2d 139, 143 (Minn. 1978). In such cases, the plaintiff may recover for any economic injury that is the direct and natural consequence of having acted in reliance on the misrepresentation. See Lewis, 235 N.W.2d at 835-36 (expectation damages awarded because loss suffered was expected life insurance proceeds not premiums already paid). Exceptions to the out-of-pocket rule have been allowed only where the defendant’s misrepresentation prevents the plaintiff from taking measures to protect the value of property he already owned. Compare B.F. Goodrich Co., 430 N.W.2d at 183 (exception applies when misrepresentation caused plaintiff to lose established business), and Hughes v. Sinclair Mktg. Inc., 389 N.W.2d 194, 199 (Minn. 1986) (same), and Sports Page, Inc. v. First Union Mgmt., Inc., 438 N.W.2d 428, 432 (Minn. Ct. App. 1989) (same), with Butler Gen. Store, Inc. v. Binger, No. C3-93-817, 1994 WL 6854, at *3 (Minn. Ct. App. Jan. 11, 1994) (expectation damages not allowed when alleged misrepresentation did not harm preexisting business). See generally Johnson Bldg. Co. v. River Bluff Dev. Co., 374 N.W.2d 187, 196 (Minn. Ct. App. 1985) (narrowly construing exception to out-of-pocket rule).