Signature Bank, Appellant, vs. Marshall Bank, Respondent. A05-2337, A05-2556, Court of Appeals Unpublished, October 10, 2006.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. ง 480A.08, subd. 3 (2004).

STATE OF MINNESOTA

IN COURT OF APPEALS

A05-2337

A05-2556

Signature Bank,

Appellant,

vs.

Marshall Bank,

Respondent.

Filed October 10, 2006

Affirmed

Peterson, Judge

Hennepin County District Court

File No. 04-19405

Kay Nord Hunt, Seth M. Colton, Lommen, Abdo, Cole, King & Stageberg, 2000 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402 (for appellant)

Thomas L. Fabel, Lindquist & Vennum, 4200 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402 (for respondent)

Considered and decided by Randall, Presiding Judge; Klaphake, Judge; and Peterson, Judge.

U N P U B L I S H E D O P I N I O N

PETERSON, Judge

In these consolidated appeals, appellant bank challenges summary judgment on its claims based on a loan-participation agreement for which the underlying loan went into default, arguing that (a) it pleaded fraud with sufficient particularity under Minn. R. Civ. P. 9.02; (b) respondent bank owed appellant a duty of care that it breached, making respondent liable for negligent misrepresentation; (c) the loan-participation agreement was a security under Minn. Stat. ง 80A.14, subd. 18(a) (2004), and misrepresentations respondent made regarding the participation agreement violated Minn. Stat. ง 80A.01 (2004); (d) respondent breached the loan-participation agreement because the loan guarantees were forged; and (e) attorney fees should not have been awarded under the loan-participation agreement. We affirm.

FACTS

In early 2004, respondent Marshall Bank proposed that appellant Signature Bank participate in a loan to two companies, Lancers, LLC, and Agenzia Sports, Inc. The total amount of the loan was $2,560,000, of which appellant would provide $500,000. Patrick Forciea, who allegedly controlled both companies, intended to use the funds to acquire one minor-league hockey team and to refinance debts relating to another. Respondent required personal guarantees for the loan from two individuals characterized as Forciea’s wealthy business partners, and Forciea provided the guarantees.

Appellant entered into a “participation certificate and agreement” (participation agreement) with respondent on March 24, 2004. Respondent disbursed the loan proceeds to Forciea on behalf of his companies. In May 2004, it was discovered that Forciea had made significant misrepresentations. The individuals who allegedly guaranteed the loan advised respondent that their signatures on the guarantees were forged. Other financial information provided was inaccurate or untrue, and Forciea has since pleaded guilty to fraud charges in federal district court.

The loan went into default. Respondent sought to collect on the loan and recovered more than $1 million, some of which was paid to appellant pursuant to the participation agreement and some of which was reserved for future legal expenses. Appellant filed a complaint against respondent in December 2004, alleging breach of contract, negligence or gross negligence, negligent misrepresentation, and negligent misrepresentation through violation of the Minnesota Regulation of Securities Act, Minn. Stat. ง ง 80A.01-.31 (2004). Respondent moved for summary judgment, which the district court granted. Respondent then moved for attorney fees pursuant to the participation agreement, which the court also granted. Appellant filed separate appeals from these two decisions, and this court consolidated the appeals.

D E C I S I O N

The first issue we consider is the district court’s decision that it would not address appellant’s claims of fraud or fraud in the inducement because appellant failed to plead the claims with particularity as required under Minn. R. Civ. P. 9.02. “A Rule 56 motion which is decided solely on the basis of pleadings will be considered a motion for judgment on the pleadings under Rule 12.03 on appeal.” 2 David F. Herr & Roger S. Haydock, Minnesota Practice ง 56.6 (4th ed. 2002) (citing Abresch v. Nw. Bell Tel. Co., 246 Minn. 408, 412, 75 N.W.2d 206, 209 (1956)). In reviewing such a dismissal, “the question before the appellate court is whether the complaint sets forth a legally sufficient claim for relief.” Bodah v. Lakeville Motor Express, Inc., 663 N.W.2d 550, 553 (Minn. 2003). Our review is de novo, the facts in the complaint are accepted as true, and reasonable inferences are construed in favor of the nonmoving party. Id.

After the deadline for discovery had passed and within the time for filing dispositive motions before trial, respondent moved for summary judgment, focusing on the claims explicitly raised in appellant’s complaint. In its response to the motion, appellant raised for the first time the issue of fraud in the inducement. Respondent then filed a reply memorandum objecting to the new claim, noting that appellant had not moved to amend its complaint and arguing that any amendment at that late date would be prejudicial because the discovery deadlines had passed. The district court ruled that because the fraud claims that appellant sought to raise were never pleaded, considering them at that late stage was inappropriate.

Pleadings must be “construed as to do substantial justice.” Minn. R. Civ. P. 8.06. “[C]ourts should construe pleadings liberally in favor of the pleader and judge them by their substance and not their form.” Basich v. Bd. of Pensions of the Evangelical Church in Am., 493 N.W.2d 293, 295 (Minn. App. 1992). The pleadings must be examined as a whole, rather than focusing on individual paragraphs. Id. “A major purpose of pleadings is to give fair notice to the adverse party of the incident giving rise to the suit with sufficient clarity to disclose the pleading theory upon which his claim for relief is based.” Id. (quotation omitted). When the complaint is inadequate, a party may move to amend the complaint pursuant to Minn. R. Civ. P. 15.01. Id.

“A pleading which sets forth a claim for relief . . . shall contain a short and plain statement of the claim showing that the pleader is entitled to relief and a demand for judgment for the relief sought. . . .” Minn. R. Civ. P. 8.01. In all averments of fraud, “the circumstances constituting fraud . . . shall be stated with particularity.” Minn. R. Civ. P. 9.02. Appellant’s complaint included four counts: breach of contract, negligence or gross negligence, negligent misrepresentation, and negligent misrepresentation based on a violation of Minnesota Securities Law, Minn. Stat. งง 80A.01-.31 (2004). It did not plead a fraud count. Appellant argues that even if it did not include a specific label of “fraud” in its complaint, the pleading was sufficient to encompass this claim, even if “inaptly named.” See Equitable Holding Co. v. Equitable Bldg. & Loan Ass’n, 202 Minn. 529, 538, 279 N.W. 736, 741-42 (1938) (providing that vital question is not how complaint is labeled, but whether facts set out justify relief).

Appellant argues that it pleaded fraud because negligent misrepresentation is a form of fraud. See Florenzano v. Olson, 387 N.W.2d 168, 177 (Minn. 1986) (stating that “under the broad category of fraud we have three types of actionable misrepresentation,” including deceit, reckless misrepresentation, and negligent misrepresentation) (Simonett, J., concurring specially). Appellant essentially argues that because it pleaded negligent misrepresentation, which is a kind of fraud, and fraud can be any one of three types of misrepresentation, it should be deemed to have pleaded deceit or reckless misrepresentation. These three types of misrepresentation are distinctive, requiring different types of proof. Florenzano, 387 N.W.2d at 172-74. Appellant’s argument has no merit.

Next, appellant argues that the facts alleged in its complaint are sufficiently particular to support both reckless-misrepresentation and intentional-misrepresentation claims, even if neither of these claims was explicitly pleaded. At oral argument, appellant’s counsel limited this argument to reckless misrepresentation.

Minn. R. Civ. P. 9.02 does not specify what constitutes sufficient particularity. But in addressing an argument that a complaint did not satisfy the requirements of Minn. R. Civ. P. 9.02 because the allegations of fraud were not pleaded with sufficient particularity, the supreme court has stated that “[t]he requirements for a plea of fraud are satisfied when the ultimate facts are alleged.” Purdy v. Nordquist, (In re Estate of Williams), 254 Minn. 272, 283, 95 N.W.2d 91, 100 (1959). And the Eighth Circuit Court of Appeals has explained with respect to rule 9(b) of the Federal Rules of Civil Procedure, which is the counterpart to Minn. R. Civ. P. 9.02, that “‘[c]ircumstances’ include such matters as the time, place, and contents of false representations, as well as the identity of the person making the misrepresentation and what was obtained or given up thereby.” Murr Plumbing, Inc. v. Scherer Bros. Fin. Servs. Co., 48 F.3d 1067, 1069 (8th Cir. 1995) (quotation omitted).

One element of reckless misrepresentation is that the person who made the representation asserted it as of his own knowledge without knowing whether it was true or false. Florenzano, 387 N.W.2d at 174 n.4 (citations omitted). Respondent argues that appellant did not allege the ultimate facts needed to prove this element. We agree.

Several allegations in appellant’s complaint describe information in the loan application that Forciea submitted to respondent and state that respondent represented this information to appellant. But none of the allegations state that respondent represented the contents of the loan application to appellant as of respondent’s own knowledge. Several times, the allegations in the complaint state that respondent either represented or misrepresented a particular fact. But the allegations do not state when or where the representations were made or identify who made the representations. Without this information, respondent could not know the factual basis for any reckless-misrepresentation claim.

Appellant contends that the summary-judgment record fully supports its claim of fraud. It argues that the court erred in failing to examine the summary-judgment record and to allow appellant to amend its complaint to assert fraud. See Urbaniak Implement Co. v. Monsrud, 336 N.W.2d 286, 287-88 (Minn. 1983) (holding that on remand, motion to amend complaint should be granted and appellant should be required to allege fraud claims with particularity). But appellant did not move for leave to amend its complaint. Because we agree with the district court that the fraud claim was not pleaded with particularity, we conclude that the district court properly did not address appellant’s claims of fraud and fraud in the inducement.

II.

Appellant argues that the district court erred in granting summary judgment on its negligent-misrepresentation claims. In an appeal from summary judgment, this court will examine whether there are genuine issues of material fact and whether the district court erred as a matter of law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). The district court ruled that respondent did not owe appellant a duty of care such that respondent would be liable for negligent misrepresentation and that under the language of the parties’ agreement, appellant could not show justifiable reliance on statements made by respondent.

Negligent misrepresentation occurs “when the misrepresenter has not discovered or communicated certain information that the ordinary person in his or her position would have discovered or communicated.” Florenzano, 387 N.W.2d at 174. “In Minnesota, one making representations is held to this duty of care only when supplying information, for the guidance of others in the course of a transaction in which one has a pecuniary interest, or in the course of one’s business, profession or employment.” Safeco Ins. Co. of Am. v. Dain Bosworth Inc., 531 N.W.2d 867, 870 (Minn. App. 1995), review denied (Minn. July 20, 1995). In contrast, when adversarial parties negotiate at arm’s length, no duty other than honesty exists. Id. at 871. Instead, the aggrieved party is limited to a suit in contract or in fraud. Id. at 873.

Appellant first argues that this court should not follow Safeco. But Safeco is controlling law, and we do not agree with appellant’s arguments to the contrary.

Next, appellant argues that under Safeco, even if the parties negotiated at arm’s length, a duty existed because there was a special relationship between the parties. In Safeco, this court held that when one party was selling a deal to another party, rather than supplying guidance, and there was no showing that the purchasing party placed “undivided trust” in the selling party’s advice, no special relationship was shown. Id. at 872. The mere fact that the selling party provided and analyzed information did not mean that a duty was imposed on that party. Id. at 872-73.

Appellant argues that there was no guidance in Safeco as to what constitutes a special relationship and cites a New York case that addresses a claim for professional negligence where the parties were not in privity but had “near-privity” or a “special relationship,” such as exists when “accountants or lawyers have made negligent misrepresentations to known third parties whom the professionals knew would rely on the misrepresentations.” Houbigant, Inc. v. Dev. Specialists, Inc., 229 F. Supp. 2d 208, 216 (S.D.N.Y. 2002) (quotation omitted.) But here, appellant and respondent were in privity; they entered into the participation agreement. And this case does not involve a claim for professional negligence. Houbigant does not apply, and appellant has not shown the existence of a special relationship.

The district court determined that the parties here are sophisticated parties who engaged in an arm’s-length commercial transaction. The court also cited clauses in the participation agreement that state that the parties understood that neither owed a duty to the other. The court cited paragraph 23A, which provides that the parties agree that the participation agreement is not intended and should not be construed as creating a partnership, joint venture, agency, or trust relationship; paragraph 10, which provides that appellant received all loan documents it requested and that were necessary to fully evaluate the quality of the loan before consenting to the agreement; and paragraph 17, in which appellant acknowledged that it independently investigated the loan and other matters and that it was not relying on respondent’s judgment or warranty. Although it recognized that exculpatory clauses are not favored, the district court determined that these provisions in the agreement demonstrate that neither party owed the other a duty of care. Because the parties were commercial parties negotiating at arm’s length without a special relationship, the district court properly ruled that respondent did not owe a duty to appellant.

III.

Appellant claims that the participation agreement is a security and that misrepresentations that respondent made about the participation agreement violated the Minnesota Regulation of Securities Act, Minn. Stat. งง 80A.01-.31 (2004). Questions of statutory interpretation raise issues of law, which we review de novo. Hibbing Educ. Ass’n v. Pub. Employment Relations Bd., 369 N.W.2d 527, 529 (Minn. 1985).

It is unlawful for any person, in connection with the offer, sale or purchase of any securities, directly or indirectly: . . .

(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[ .]

Minn. Stat. ง 80A.01 (2004). By its plain language, this statute applies only to the offer, sale, or purchase of a security. For the purposes of this statute,

“[s]ecurity” means any note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable shares; investment contract; investment metal contract or investment gem contract; voting trust certificate; certificate of deposit for a security; certificate of interest or participation in an oil, gas or mining right; title or lease or in payments out of production under the right, title or lease; or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Minn. Stat. ง 80A.14, subd. 18(a) (2004) (emphasis added).

After analyzing several different tests that federal courts and Minnesota courts have used to determine whether an instrument is a security, the district court concluded that the participation agreement is not a security under Minn. Stat. ง 80A.14, subd. 18(a), and, therefore, granted respondent summary judgment on appellant’s claim that the participation agreement violated the securities act. Citing Reves v. Ernst & Young, 494 U.S. 56, 110 S. Ct. 945 (1990), appellant argues that the district court applied the wrong test when determining whether the participation agreement is a security. Appellant did not cite Reves in the district court.

In Reves, the Supreme Court adopted the “family resemblance” test set out in Exchange Nat’l Bank of Chi. v. Touche Ross & Co., 544 F.2d 1126, 1137 (2d Cir. 1976), as the test for determining whether a note is a security. 494 U.S. at 64-65, 110 S. Ct. at 951. The Supreme Court explained that this test begins with a presumption that every note is a security, but recognizes that this presumption cannot be irrebuttable. Id. at 65, 110 S. Ct. at 951. The Supreme Court then explained that the Court of Appeals for the Second Circuit has identified a list of instruments that are commonly denominated “notes” but that are not securities. Id. This list includes

“the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small business or some of its assets, the note evidencing a ‘character’ loan to a bank customer, short-term notes secured by an assignment of accounts receivable, or a note which simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized)”

Id. (quoting Exchange Nat’l Bank,544 F.2d at 1138). The Supreme Court also explained that the second circuit has added to this list “‘notes evidencing loans by commercial banks for current operations.’” Id. (quoting Chem. Bank v. Arthur Andersen & Co., 726 F.2d 930, 939 (2d Cir. 1984). The Supreme Court then identified four factors to be used when determining whether a note resembles one of the notes on the list and concluded

that in determining whether an instrument denominated a “note” is a “security,” courts are to apply the version of the “family resemblance” test that we have articulated here: A note is presumed to be a “security,” and that presumption may be rebutted only by a showing that the note bears a strong resemblance (in terms of the four factors we have identified) to one of the enumerated categories of instrument. If an instrument is not sufficiently similar to an item on the list, the decision whether another category should be added is to be made by examining the same factors.

Id. at 67, 110 S. Ct. at 952.

In Banco Espanol de Credito v. Sec. Pac. Nat’l Bank, 973 F.2d 51, 54-55 (2d Cir. 1992), the second circuit cited the four strong-resemblance factors that the Supreme Court identified in Reves and then applied the factors to loan participations in short-term, unsecured loans that were sold by an originating bank to 17 institutional and corporate entities. The four strong-resemblance factors are:

(1) the motivations that would prompt a reasonable buyer and seller to enter into the transaction; (2) the plan of distribution of the instrument; (3) the reasonable expectations of the investing public; and (4) whether some factor, such as the existence of another regulatory scheme, significantly reduces the risk of the instrument, thereby rendering application of the securities laws unnecessary.

973 F.2d at 55. After applying these factors, the Banco Espanol court held that the loan participations “are analogous to the enumerated category of loans issued by banks for commercial purposes and therefore do not satisfy the statutory definition of ‘notes’ which are ‘securities.’” Id. at 56.

The participation agreement in this case is similar to the loan participations in Banco Espanol. See id. at 55 (applying factors). The overall motivation of the parties was to finance the borrowers’ commercial purposes of acquiring one hockey team and refinancing debts relating to another; the participation agreement was offered to financial and commercial institutions, and not the general public; appellant received ample notice that the participation agreement was a participation in a loan and not an investment in a business; and, as appellant acknowledges, the Office of the Comptroller of the Currency has issued policy guidelines that address the sale of loan participations. We conclude that like the loan participations in Banco Espanol, the participation agreement is not a security, and although the district court did not base its decision on Reves and Banco Espanol, we affirm its grant of summary judgment on appellant’s claim that respondent violated Minn. Stat. ง 80A.01.

IV.

Appellant argues that the district court erred in granting summary judgment on its breach-of-contract claim. The construction and effect of a contract are matters of law, unless the contract is ambiguous. Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 66 (Minn. 1979). Appellant does not claim that the contract is ambiguous; it argues that the district court erred in its legal analysis of the contract.

Based on the fact that appellant obtained guarantees that were later found to have been forged, appellant contends that respondent breached several provisions of the contract when it failed to provide the loan guarantees that it agreed to provide. The district court determined that there was no breach of contract because the participation agreement did not require respondent to provide “properly executed” loan documentation or to ensure that the loan documentation represented “valid collateral.” Instead, the court found that several unambiguous clauses in the agreement state that appellant purchased its loan participation “without recourse to Seller”; acknowledged “receipt of all Loan documents which Purchaser specifically requested and deemed reasonably necessary to fully evaluate the quality of the Loan before consenting to this Agreement”; and agreed

that it has made an independent investigation of the Loan, and has satisfied itself with respect to the credit standing of any Obligor of the Loan, the value of any security for the Loan, the validity and enforceability of the Loan Agreement, the Promissory Note and any guaranty and security and all other matters in connection with the Loan.

(Emphasis added.) The court determined that, read together, these provisions of the agreement show that appellant received all of the documentation that it sought to evaluate the loan, investigated the loan, including the enforceability of guarantees and security, was satisfied with the documentation, and accepted its participation without recourse to seller. The court concluded that appellant’s claim that respondent was obligated under the participation agreement to provide “properly executed” guarantees and security is not supported by the plain, unambiguous language of the contract and granted respondent summary judgment on appellant’s breach-of-contract claim. Because we find no error in the district court’s construction and application of the unambiguous contract language, we affirm the summary judgment on appellant’s breach-of-contract claim.

Appellant’s final challenge concerns attorney fees. Paragraph 22 of the participation agreement provides: “If any lawsuit or proceeding is brought by Seller or Purchaser to enforce the terms of this Agreement, the unsuccessful party will pay the prevailing party all its court costs and reasonable attorneys’ fees incurred in bringing or defending such action.”

Appellant argues that if this court reverses the grant of summary judgment, respondent is not a prevailing party and, therefore, the judgment as to attorney fees and costs should be reversed. Because we do not reverse the summary judgment, this argument fails.

Appellant next argues that it was not seeking to enforce the terms of the agreement and was, instead, claiming that because of respondent’s fraud, there was no enforceable agreement between the parties. But the first count of appellant’s complaint alleges a breach of contract, which is an action to enforce the terms of the agreement.

Finally, appellant contends that the district court did not have jurisdiction to award fees after an appeal was taken from the underlying judgment. But after an appeal is perfected, the district court retains jurisdiction over matters collateral and supplemental to the decision on the merits. Minn. R. Civ. App. P. 108.03. Appellant acknowledges that when attorney fees are allowed by statute, a proceeding to recover fees is a supplemental or collateral proceeding over which the district court has continuing jurisdiction. Spaeth v. City of Plymouth, 344 N.W.2d 815, 826 (Minn. 1984). But, citing Holmes v. J. Ray McDermott & Co., 682 F.2d 1143, 1146 (5th Cir. 1982), abrogated by Budinich v. Becton Dickinson & Co., 486 U.S. 196, 108 S. Ct. 1717 (1988), appellant contends that when attorney fees are allowed by contract, the fees are an integral part of the merits of the case, and a proceeding to recover fees should not be characterized as supplemental or collateral. Holmes, however, did not address the court’s jurisdiction to award fees after an appeal was taken from the underlying judgment. Holmes involved the appealability of the underlying order when the court had not determined the amount of attorney fees to be awarded, and the Holmes court determined that it did not have jurisdiction to hear the appeal from the underlying order until the amount of the attorney-fee award was determined. Id. at 1148. We are not persuaded that when attorney fees are allowed by contract, a proceeding to recover fees is not a supplemental or collateral proceeding over which the district court has continuing jurisdiction.

Affirmed.