This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2002).
STATE OF MINNESOTA
IN COURT OF APPEALS
Loop Corp., et al.,
Gary McIlroy, et al.,
Ernst & Young,
Filed October 5, 2004
Gordon W. Shumaker, Judge
Hennepin County District Court
File No. CT 02-016448
Michael J. Broich, Ravich Meyer Kirkman McGrath & Nauman, 4545 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402; and
C. Philip Curley, Robinson Curley & Clayton, P.C., 300 South Wacker Drive, Suite 1700, Chicago, IL 60606 (for appellants)
Wendy J. Wildung, Jason K. Walbourn, Faegre & Benson LLP, 2200 Wells Fargo Center, 90 South Seventh Street, Minneapolis, MN 55402-3901 (for respondents McIlroy, et al.)
Steven J. Wells, Thomas P. Swigert, F. Matthew Ralph, Dorsey & Whitney LLP, 50 South Sixth Street, Suite 1500, Minneapolis, MN 55402-1498 (for respondent Ernst & Young)
Considered and decided by Lansing, Presiding Judge; Harten, Judge; and Shumaker, Judge.
U N P U B L I S H E D O P I N I O N
GORDON W. SHUMAKER, Judge
Appellants challenge the denial of their postjudgment motions and the dismissal of their claims. They argue that the district court erred in denying their postjudgment motion to amend their complaint a third time and in dismissing their claims for negligent misrepresentation, violation of the Minnesota Securities Act, and violation of the Minnesota Consumer Fraud Act. We affirm.
Appellants brought this action as purchasers and holders of common stock of Health Risk Management, Inc. (HRM) against respondents Gary McIlroy, chairman and chief executive officer of HRM, Marlene Travis, president and chief operating officer of HRM, and accountants Ernst & Young (E&Y). Appellant Loop Corp. brought separate claims against respondents pursuant to a master agreement, under which Loop Corp. agreed to provide $6.1 million in funding to HRM.
Appellants assert that, as a result of false financial information relating to medical services payable and related net medical expenses contained in financial statements provided by respondents, they were induced to both purchase and hold HRM stock to their financial detriment. They contend that, as senior managers, McIlroy and Travis had responsibility for the preparation of financial statements at issue. Further, they contend that E&Y had responsibility as auditor to certify the accuracy of the financial statements.
In an amended complaint, appellants asserted claims for negligent misrepresentation, violation of the Minnesota Securities Act, and violation of the Minnesota Consumer Fraud Act relating to alleged misstatements in the audited financial statements of HRM. Appellant Loop Corp. brought similar claims based on the master agreement. Respondents moved to dismiss. The district court granted respondents’ motion to dismiss with prejudice claims based on alleged misstatements in HRM’s 2000 financial statement. The court also found that the complaint as to the 1998 and 1999 financial statements failed to plead facts with the required particularity, but the court allowed appellants to conduct discovery and replead the remaining claims. The court issued an amended order denying respondents’ motion to dismiss appellant Loop Corp.’s claims.
Appellants then filed a second amended complaint and respondents again moved to dismiss. The district court granted the motion to dismiss with prejudice, and judgment was entered. Appellants then moved to vacate or amend the judgment and for leave to amend the second amended complaint. The district court denied the motion, and this appeal followed.
D E C I S I O N
We first address appellants’ challenge to the district court’s postjudgment order denying their motion to amend their complaint. “Generally, the decision to permit or deny amendments to pleadings is within the discretion of the district court and will not be reversed absent a clear abuse of discretion.” Johns v. Harborage I, Ltd., 664 N.W.2d 291, 295 (Minn. 2003). The construction of a rule of court procedure will be reviewed de novo. Patterson v. Wu Family Corp., 608 N.W.2d 863, 866 (Minn. 2000).
After judgment was entered on the second amended complaint, appellants moved to file a third amended complaint. The district court held, in relevant part, that a motion under Minn. R. Civ. P. 15.01 was not proper once judgment was entered, and it denied the motion to amend. Appellants contend that the district court abused its discretion in failing to allow them an opportunity to file a third amended complaint under Minn. R. Civ. P. 15.01.
Under rule 15.01, after a responsive pleading has been served, “a party may amend a pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.” Minn. R. Civ. P. 15.01. Generally, once judgment is entered, courts will not allow amendment of the complaint. Johns, 664 N.W.2d at 295. An exception may arise if the party seeks an amendment to allow it to enforce the judgment against a successor party. Id. Because here appellants seek an amendment to challenge the judgment, not to enforce it against a successor party, the district court properly denied the postjudgment motion to amend. Appellants have not shown the district court abused its discretion or erred as a matter of law.
In reviewing a dismissal for failure to state a claim on which relief can be granted under Minn. R. Civ. P. 12.02(e), an appellate court will address “whether the complaint sets forth a legally sufficient claim for relief.” Elzie v. Comm’r of Pub. Safety, 298 N.W.2d 29, 32 (Minn. 1980) (alteration in original) (quotation omitted). The allegations in the complaint will be accepted as true. Id. at 33.
Appellants brought negligent misrepresentation claims relating to their purchases of HRM stock in 2000 and 2001 against McIlroy and Travis and against E&Y, contending that they detrimentally relied on material misstatements and omissions in certain financial statements and audit reports. Appellant Loop Corp. also alleged negligent misrepresentation relating to the $6.1 million Master Agreement on the same grounds. The district court dismissed these claims for lack of particularity under Minn. R. Civ. P. 9.02.
We first address appellants’ argument that, because the negligent misrepresentation claims do not allege fraud, rule 9.02 does not apply. Minn. R. Civ. P. 9.02 provides: “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.”
Minnesota law recognizes distinct claims for fraudulent misrepresentation and negligent misrepresentation. Florenzano v. Olson, 387 N.W.2d 168, 173 (Minn. 1986). “Fraud is distinguished from negligence by the element of scienter required.” Id. (footnote omitted). But a misrepresentation, “whether negligent or fraudulent, constitutes fraud under Minnesota law.” Juster Steel v. Carlson Cos., 366 N.W.2d 616, 618 (Minn. App. 1985).
Both respondents argue that applying the heightened pleading standards to negligent misrepresentation claims makes sense because fraud and negligent misrepresentation claims contain all the same elements, except for scienter. See Florenzano, 387 N.W.2d at 173. Because scienter is the one element of fraud that need not be pleaded with particularity under rule 9.02, it is logical to measure the remaining elements that fraud and negligent misrepresentation have in common against the same heightened pleading standards. We agree that the pleading standards set out in rule 9.02 apply to a claim of negligent misrepresentation. See Juster, 366 N.W.2d at 618-19. The district court properly ruled that rule 9.02 applies here and the claim must be pleaded with particularity.
Appellants next argue that even if rule 9.02 applies, their claims were made with sufficient particularity to meet its standards. The district court ruled that the second amended complaint did not meet the heightened pleading standards for the negligent misrepresentation claims required under rule 9.02.
Rule 9.02 requires, but does not define, particularity. Stubblefield v. Gruenberg, 426 N.W.2d 912, 914 (Minn. App. 1988). “General allegations of fraud are insufficient to meet the requirements of Rule 9.02.” Id.
As to McIlroy and Travis, the district court concluded that the second amended complaint identifies only inaccuracies, not misrepresentations, as to the financial statements, fails to tie them to the financial statements, and fails to allege with particularity how they could have been responsible for the 2000 statements that were issued after McIlroy and Travis resigned. In addition, the court ruled that the complaint contains insufficient allegations as to what was wrong or how McIlroy and Travis were allegedly negligent. Further, appellants were unable to show how they justifiably relied on the allegedly false statements, where appellants were put on notice that the allegedly false statements were estimates and were not guaranteed. Appellants have failed to show error in the district court rulings.
As to E&Y, the district court noted that appellants pleaded that E&Y knew that HRM supplied E&Y’s audit reports to appellants, intending to influence appellants, but failed to provide any basis for the claims. Regarding appellants’ stock-purchase plans, the court stated that they did not identify any specific transactions in which they purchased HRM stock, how E&Y knew about those transactions before they took place, or why appellants were intended to be benefited and guided by the audit reports.
First, while appellants cite various facts contained in their third amended complaint in support of their argument, we must review the second amended complaint that was before the court as the subject of the motion to dismiss, not the third.
Next, we address appellants’ contention that E&Y owed them a duty to ensure that HRM stated its financial statements completely and accurately and that E&Y complied with accounting and auditing standards. Appellants contend they relied on the financial statements in purchasing stock.
An accountant may incur liability by supplying “false information for the guidance of others in their business transactions . . . if he fails to exercise reasonable care or competence in obtaining or communicating the information.” NorAm Inv. Servs., Inc. v. Stirtz Bernards Boyden Surdel & Larter, P.A., 611 N.W.2d 372, 374 (Minn. App. 2000) (quoting Restatement (Second) of Torts § 552 (1977)). Accountants may be liable for negligent misrepresentations to those who, although not themselves foreseen, are members of a limited class whose reliance on the representation is specifically foreseen. Bonhiver v. Graff, 311 Minn. 111, 128, 248 N.W.2d 291, 301-02 (1976). The liability is limited to the particular losses suffered:
(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.
NorAm, 611 N.W.2d at 375 (quoting Restatement (Second) of Torts § 552).
Appellants argue that they did fall within a limited group of people expected to gain access to the financial statement information, because E&Y directed audit reports to HRM shareholders and consented to having its reports included in HRM’s filings with the SEC, and because E&Y attended shareholder meetings to answer questions. But accountants are not liable if they “merely know of the ever-present possibility of repetition to anyone, and the possibility of action in reliance upon [an audit], on the part of anyone to whom it may be repeated.” NorAm, 611 N.W.2d at 375 (quoting Restatement (Second) of Torts § 552, cmt. h).
Next, appellant Loop Corp. brought a negligent misrepresentation claim against E&Y based upon entering into the $6.1 million master agreement. The district court dismissed the claim, ruling that appellants failed to plead how or why E&Y intended that Loop Corp. would benefit or be guided by the issuance of the 2000 statements or how or why E&Y would have intended to influence Loop Corp.’s financing. Loop Corp. contends that because it was a known user of the 2000 audit financial statements, that was sufficient to state a prima facie cause of action. The district court properly dismissed the claim.
Appellants contend that the district court erred in denying them the opportunity to conduct discovery before dismissing their negligent-misrepresentation claims. A district court has broad discretion to grant or deny discovery requests, and it will not be reversed absent an abuse of discretion. State by Humphrey v. Philip Morris, Inc., 606 N.W.2d 676, 685 (Minn. App. 2000), review denied (Minn. Apr. 25, 2000). Appellants have failed to show that the district court abused its discretion. See Elwood v. County of Rice, 423 N.W.2d 671, 676 (Minn. 1988) (“[p]laintiffs cannot expect discovery to provide factual support for conclusory allegations” where particularity is required).
Next, we review appellants’ argument that Minnesota recognizes common-law claims by stockholders induced to continue holding stock. The district court concluded that Minnesota law does not recognize such a cause of action.
In support of their claim, appellants contend that Minnesota law has recognized that representations that induce a plaintiff to refrain from acting are actionable. See, e.g., Atcas v. Credit Clearing Corp. of Am., 292 Minn. 334, 197 N.W.2d 448 (1972), overruled on other grounds, Onvoy, Inc. v. SHAL, LLC, 669 N.W.2d 344, 351 (Minn. 2003). Appellants cite language stating that the elements of a misrepresentation claim include a situation in which “plaintiffs took or refrained from taking action in reliance on misstatements.” Id. at 349, 197 N.W.2d at 457 (emphasis added). Appellants alleged that they refrained from selling their shares of stock in direct reliance on the false information provided by respondents.
Atcas is distinguishable because it did not involve securities. Instead, the plaintiffs in Atcas claimed they were fraudulently induced to agree to an arbitration clause in a franchise agreement. Id. at 341-42, 197 N.W.2d at 452-53. While appellants cite foreign law in support of their claim, Minnesota law has not recognized a common-law holding claim related to securities. The district court’s ruling was proper.
Appellants contend that the district court erred in dismissing their claims under the Minnesota Securities Act. The Minnesota Securities Act makes it unlawful “in connection with the offer, sale or purchase of any security,” for any person
(a) to employ any device, scheme, or artifice to defraud;
(b) to make any untrue statement of a material fact or to omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or
(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Minn. Stat. § 80A.01 (2002).
Appellants first contend they have a cause of action for stock purchased in 2000 and 2001 based on misrepresentations McIlroy and Travis made in certain financial statements and that E&Y made in connection with their audits of these statements under Minn. Stat. § 80A.01(b), (c). The district court determined that scienter is an element of claims under the Minnesota Securities Act, and because appellants failed to plead it, dismissed the claims with prejudice. Appellants argue that scienter is not required and that allegations of negligence are sufficient.
The Minnesota Securities Act prohibits untrue statements or omissions of material fact “in connection with the offer, sale or purchase of any security, directly or indirectly.” Minn. Stat. § 80A.01 (2002). This is “Minnesota’s counterpart to Rule 10b-5, 17 C.F.R. § 240.10b-5.” Foley v. Allard, 427 N.W.2d 647, 650 (Minn. 1988). Rule 10b-5 similarly prohibits fraud “in connection with the purchase or sale of any security.” Id. at 650 n.2 (citing 17 C.F.R. § 240.10b-5). The legislature expressly stated that the Minnesota act should be construed to coordinate its interpretation with the related federal regulation. Minn. Stat. § 80A.31. The Minnesota Securities Act is patterned after rule 10b-5 and should be interpreted consistent with corresponding federal law. Minneapolis Employees Retirement Fund v. Allison-Williams Co., 519 N.W.2d 176, 179 (Minn. 1994). Consequently, federal caselaw is considered valued precedent. Foley, 427 N.W.2d at 650.
Under federal caselaw, scienter is an “essential element of a Rule 10b-5 claim,” requiring at least a showing of recklessness. Florida State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 653-54 (8th Cir. 2001). In Allison-Williams, the supreme court, in addressing the issue of whether the plaintiff had to prove scienter for an unsuitability claim brought under the Minnesota Securities Act, looked to the provision of the federal securities law under which the claim would fall. 510 N.W.2d at 180-81. The court expressly rejected the claim that plaintiff need not show fraudulent intent or recklessness to bring an unsuitability claim. Id. Although appellants contend this court ruled otherwise in Sprangers v. Interactive Techs., Inc., 394 N.W.2d 498, 503 (Minn. App. 1986), review denied (Minn. Nov. 19, 1986), we note the supreme court cited Sprangers in Allison-Williams, 519 N.W.2d at 181. In any event, following the lead of the supreme court in Allison-Williams and federal law, we agree with the district court that scienter is required. See Allison-Williams, 519 N.W.2d at 181; Fawcett v. Heimbach, 591 N.W.2d 516, 522 (Minn. App. 1999) (citing federal caselaw stating that one of the essential elements of a rule 10b-5 claim is scienter).
Appellants next contend that the district court erred in holding that Minnesota law does not permit claims by shareholders who are induced to continue to hold, rather than sell, securities under various theories.
Under federal law, an action under rule 10b-5 is limited to actual purchasers or sellers. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731, 737-38, 95 S. Ct. 1917, 1923, 1926 (1975). Thus, the district court correctly dismissed the holding claim under the Minnesota Securities Act.
Finally, we address appellants’ claims under the Minnesota Consumer Fraud Act. First, the district court concluded that the securities do not constitute “merchandise” for the purchases of the Minnesota Consumer Fraud Act. Appellants argue that the definition of merchandise is broad enough to encompass securities.
Under the Minnesota Consumer Fraud Act, fraud or misrepresentation is prohibited “in connection with the sale of any merchandise.” Minn. Stat. § 325F.69, subd. 1 (2002). “Merchandise” is defined as “any objects, wares, goods, commodities, intangibles, real estate, loans, or services.” Minn. Stat. § 325F.68, subd. 2 (2002). Securities are not expressly included. Further, Minn. Stat. § 325F.67, regarding false statements in advertising, differentiates securities from merchandise. The legislature clearly included securities within purview of one portion but chose not to refer to them in sections 325F.68 and 325F.69. This fact, coupled with the fact that the legislature created a separate statutory scheme to address securities violations—Minnesota Securities Act, Minn. Stat. § 80A.01—supports the district court’s conclusion that securities are not included in the definition of merchandise.
Appellants argue that the district court erred by holding that the Minnesota Consumer Fraud Act, Minn. Stat. § 325F.69, subd. 1, required them to plead scienter. We find it unnecessary to reach this issue in light of our decision that securities are not included within the definition of merchandise within the meaning of the act.
Finally, appellants brought a claim under the Minnesota Consumer Fraud Act based on their argument that they were induced to continue to hold stock. It is also unnecessary to reach this issue for the same reason.
The decision of the district court is affirmed.