Opinion
No. C8-99-972.
Filed December 7, 1999.
Appeal from the District Court, Hennepin County, File No. 9816291.
Richard D. Donohoo, (for appellant)
Scott G. Harris, Harris Cargill, P.A., (for respondent)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (1998).
UNPUBLISHED OPINION
Appellant D. Kris Bandal seeks reversal of the district court's summary judgment dismissal of his breach of contract, promissory estoppel, and fraudulent misrepresentation claims under rule 12 for failure to state claims upon which relief may be granted. Appellant also seeks reversal of the district court's imposition of attorney fees as rule 11 sanctions. Because endorsing a check as a co-payee does not give rise to liability to the maker of that check, we affirm the district court's dismissal of the breach of contract claim. Because promissory estoppel and fraudulent misrepresentation claims cannot be premised on actions occurring after the act allegedly induced thereby, we affirm the summary judgment dismissal of those claims. In addition, because the district court did not abuse its discretion, we affirm the district court's award of attorney fees as rule 11 sanctions.
DECISION I. Breach of Contract, Promissory Estoppel, and Fraud Claims
The sole question before appellate courts when reviewing a dismissal for failure to state a claim is whether the complaint sets forth a legally sufficient claim upon which relief may be granted. U.S. West Communications, Inc. v. City of Redwood Falls, 558 N.W.2d 512, 515 (Minn.App. 1997), review denied (Minn. Apr. 15, 1997).
A. Breach of Contract
Appellant first argues that the district court erred in dismissing its breach of contract claim because respondent endorsed the loan proceeds check, transmitted information regarding his personal residence, social security number, and the loan proceeds breakdown, affirmed Baldwin's promises, and caused loan payments to be made to appellant. Although appellant's complaint fails to set forth any direct contact or communication by respondent prior to the loan, appellant contends that respondent's endorsement of the loan proceeds check imposes liability on respondent for breach of contract.
In this case, the cashier's check was made payable to "Marlo Dean Baldwin and Stewart A. Cohen and Century Design." Minnesota law states that endorsers who endorse as joint payees are jointly and severally liable in the capacity in which they sign. Minn. Stat. § 336.3-116(a) (1998); see also Minn. Stat. § 336.3-204(a) (1998) (explaining that an endorsement is a signature, alone or accompanied by words, made on an instrument for the purpose of negotiating, restricting payment on, or incurring endorser's liability on that instrument); Minn. Stat. § 336.3-204(b) (1998) (defining an "endorser" as any person making an endorsement). Respondent's endorsement was therefore in his joint capacity as a co-payee and pursuant to Minn. Stat. § 336.3-116(a), liability, if any, would be joint and several between the co-payees.
However, an endorser's liability only arises if the instrument is dishonored and any liability is discharged once a bank accepts the check. Minn. Stat. § 336.3-415(a), (d) (1998). Moreover, even if an instrument is dishonored, an endorser is not liable to the maker of the instrument because liability for the amount due on the check would be "to a person entitled to enforce the instrument or to a subsequent endorser who paid the instrument * * *." Minn. Stat. § 336.3-415(a). Since the bank accepted the cashier's check and deposited the funds, respondent's liability was discharged. In any event, respondent would not be liable to appellant because, under Minn. Stat. § 336.3-415(a), appellant was neither entitled to enforce the check nor a subsequent endorser who paid the check.
In addition, appellant's argument that respondent is personally liable for Century Design's debt to Bandal because he endorsed and deposited the check in the corporation's account was rejected by the Minnesota Supreme Court in Leininger v. Anderson, 255 N.W.2d 22 (Minn. 1977). In that case, the court rejected a similar argument that, although a bank had taken no part in any negotiations to form a contractual relationship, the bank was liable solely by virtue of endorsing a check and accepting funds. See id. at 27-28. Appellant argues that Leininger is distinguishable because respondent is not a holder in due course since he was aware of the loan, endorsed the check, and did not give value. Although the Leininger court spent several pages discussing the status of the bank as a holder in due course, the court expressly stated that status as a "holder in due course" was irrelevant for determining the effect of the endorsement on liability for the underlying agreement. Id. at 27-30, 31.
The Minnesota Supreme Court has also held that the endorsement of a check, without more, is insufficient to give rise to liability for breach of contract of a promise to convey land. See Dvorak v. Maring, 285 N.W.2d 675, 677 (Minn. 1979). In that case, the court reasoned that since the check was given in ordinary form and did not refer to any of the essential terms of the contract of sale, it did not constitute a contract or give rise to liability for breach. Id. at 677. Similarly, in this case, the loan check was given in ordinary form and endorsed by the co-payees, but did not include any fundamental terms of the underlying loan transaction. Moreover, appellant's complaint does not allege that respondent took any part in the negotiation or formation of the loan transaction. Therefore, the Dvorak case refutes appellant's argument that respondent's mere endorsement established the requisite elements to form a contract or give rise to liability for its breach.
B. Promissory Estoppel
Appellant also argues that the averments in the complaint sufficiently state a claim for promissory estoppel. A successful claim for promissory estoppel requires
[a] promise which the promisor should reasonably expect to induce action or forbearance * * * on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.
Gorham v. Benson Optical, 539 N.W.2d 798, 801 (Minn.App. 1995); (quoting Restatement of Contracts § 90 (1932); quoting Grouse v. Group Health Plan, Inc., 306 N.W.2d 114, 116 (Minn. 1981)). The Minnesota Supreme Court has separated the promissory estoppel doctrine into three prongs: promise, reliance, and injustice. Faimon v. Winona State Univ., 540 N.W.2d 879, 882 (Minn.App. 1995), review denied (Minn. Feb. 9, 1996). The promise must be clear and definite to trigger the promissory estoppel analysis. Id. at 882. The promise must reasonably be expected to induce the promisee's action or forbearance. Id. (explaining that the supreme court considers the reasonableness of a promisee's reliance a fact question). Additionally, a promisee cannot rely on a "promise" or conduct that occurred after the action allegedly induced thereby. See Rien v. Cooper, 211 Minn. 517, 527, 1 N.W.2d 847, 853 (1942); Nilsen v. Farmers State Bank, 178 Minn. 574, 577, 228 N.W. 152, 153 (1929). In determining whether injustice can only be avoided by enforcing the promise, courts should consider whether the promisee's reliance was reasonable and whether enforcing the promise will enforce the bargain and prevent unjust enrichment. Faimon, 540 N.W.2d at 883 (stating that the injustice determination is a question of law).
Appellant argues that respondent is liable for promissory estoppel because he caused information regarding his personal residence, social security number, and the loan to be transmitted to appellant's office. In this case, respondent made no promises reasonably expected to induce action or forbearance by appellant. Although appellant claims that the information transmitted about the breakdown of the loan proceeds and Cohen's residence and social security number was an affirmative act intended to induce the loan, nothing in the complaint suggests that respondent was responsible for either communication or that either action induced the making of the loan. Instead, the complaint specifically states that appellant loaned the money to the corporation based on statements made by Baldwin rather any conduct by respondent or Century Design. In addition, the Minnesota Supreme Court has held that the promissory estoppel analysis is not triggered unless there is a "clear and definite" promise. Id. at 882. Since the complaint fails to specify any promise made by respondent, the promissory estoppel analysis is not triggered.
Nevertheless, appellant argues that Baldwin's statements and Century Design's actions impute promissory estoppel liability on respondent. Specifically, appellant contends that respondent's affirmation of Baldwin's promises and loan repayments support the promissory estoppel claim. Minnesota law requires that the conduct allegedly inducing the action or inaction occur before the action occurred. Rien, 211 Minn. at 527, 1 N.W.2d at 853. It is not surprising that an action cannot be induced by conduct or statements yet to occur at the time of that action. Since the only direct contact or communication between respondent and appellant in this case occurred three months after the loan had been made, respondent's subsequent actions could not induce the making of the loan and cannot give rise to liability under a promissory estoppel theory.
However, appellant also contends that Cohen's endorsement of the check occurred prior to the loan and gives rise to liability for promissory estoppel. Appellant argues that, without respondent's endorsement, the bank would not have honored the check and the loan would not have been made. Since appellant essentially made the loan when he issued the cashier's check and delivered it to Baldwin, he was not induced by the prospect of respondent's potential endorsement. Moreover, the complaint specifically stated that the loan was made in response to Baldwin's requests. There can be no liability where respondent made no promises and only communicated with appellant after the loan was made. While injustice may result in allowing a loan to remain unpaid, appellant must live by the insufficiency of the complaint and seek redress from the responsible party.
C. Fraudulent Misrepresentation
Appellant argues that the district court erred in dismissing the fraudulent misrepresentation claim. In order to prove fraudulent misrepresentation, appellant must prove that respondent:
(1) made a representation (2) that was false (3) having to do with a past or present fact (4) that is material (5) and susceptible of knowledge (6) that the representor knows to be false or is asserted without knowing whether the fact is true or false (7) with the intent to induce the other person to act (8) and the person in fact is induced to act (9) in reliance on the representation (10) that the plaintiff suffered damages (11) attributable to the misrepresentation.
Gorham, 539 N.W.2d at 802 (quoting M.H. v. Caritas Family Servs., 488 N.W.2d 282, 289 (Minn. 1992)). Allegations reciting the elements for a claim of fraud must be pled with particularity. Minn.R.Civ.P. 9.02; Stubblefield v. Gruenberg, 426 N.W.2d 912, 914 (Minn.App. 1988) (explaining that although rule 9.02 does not specify what constitutes sufficient particularity, the Minnesota Supreme Court requires that each element of a cause of action for fraud be recited in the pleading). Moreover, fraud cannot be based on representations occurring after the action that was allegedly induced by such representations. Rien, 211 Minn. at 527, 1 N.W.2d at 853; Nilsen, 178 Minn. at 577, 228 N.W. at 153 ("It is elementary that to recover damages for false representations the plaintiff must show that he relied upon them to his injury."). A claim for fraud cannot be premised on a representation of expectation as to future acts since such representations are not material assertions of a past or existing fact. Cady v. Bush, 283 Minn. 105, 109, 166 N.W.2d 358, 361 (1969).
In this case, the complaint alleges that Baldwin and respondent acted together in representing that the loan documents would be executed, would be secured by a first security interest on the equipment and equipment leases, and would be repaid in full at the agreed upon interest rate. The complaint alleged that these representations were false because the documents were never delivered, the loan could not be secured by a first security interest, and the loan was not repaid. Additionally, it was alleged that Baldwin and respondent knew these representations were false and intended them to induce the loan at the time they were made. Finally, the complaint alleged that appellant was damaged in the amount of $54,508.28, plus per diem interest accumulating on and after September 15, 1998.
Although appellant's complaint includes some general conclusory allegations concerning respondent, the allegations were not pled with particularity and are contradicted by more direct and specific allegations in the complaint. The allegations recited above suggest that Baldwin and respondent acted together, but the complaint never sets forth any particular representations or conduct by respondent occurring prior to the loan. Moreover, the allegations do not state particular facts showing such representations were knowingly or recklessly false, involved past or present facts, or were intended to induce the loan transaction.
With regard to respondent's conduct, the complaint only mentions respondent's affirmation of Baldwin's promises and Century Design's subsequent payments on the loan before default. Since both of those actions occurred after the loan, neither could have induced the loan. Therefore, the complaint fails to state sufficient facts to hold respondent liable for fraudulent misrepresentation. Moreover, Minnesota law clearly requires that causes of action for fraud be pleaded with particularity. Minn.R.Civ.P. 9.02. Since appellant's complaint included only conclusory allegations concerning respondent, dismissing appellant's fraudulent misrepresentation claim was appropriate.
Nevertheless, appellant argues that respondent induced the loan because, without his endorsement, the bank would not have honored the check and no loan would have been made. However, appellant's loan was not contingent upon the prospect of respondent's potential endorsement. Instead, the complaint affirmatively stated that the loan was made in response to requests and statements made by Baldwin. Regardless of the precise timing of the loan and although it may have given effect to the loan, respondent's endorsement did not induce the loan. Since a successful claim for fraudulent misrepresentation requires pleading particular facts showing that statements, conduct, or silence induced reliance, the district court correctly dismissed appellant's fraudulent misrepresentation claim.
II. Rule 11 Sanctions
This court reviews a district court's decision to impose rule 11 sanctions under the abuse of discretion standard. Cole v. Star Tribune, 581 N.W.2d 364, 370 (Minn.App. 1998). The determination of whether to award fees and costs under Minn. Stat. § 549.211 (1998) and Minn.R.Civ.P. 11 lies within the district court's discretion. Id. Rule 11 is meant to provide relief to parties who are victims of bad pleading and abuse of process. State Bank of Young Am. v. Fabel, 530 N.W.2d 858, 863 (Minn.App. 1995), review denied (Minn. June 29, 1995); see Uselman v. Uselman, 464 N.W.2d 130, 140, 145 (Minn. 1990) (suggesting that awarding rule 11 sanctions requires a finding that an attorney acted in bad faith). Whether a party acted in bad faith is essentially a credibility determination and appellate courts defer to the district court's credibility determination. Sefkow v. Sefkow, 427 N.W.2d 203, 210 (Minn. 1988); Tonka Tours, Inc. v. Chadima, 372 N.W.2d 723, 728 (Minn. 1985).
Although the district court did not discuss its rationale for imposing sanctions, this court will only overturn an award of rule 11 sanctions upon a finding that the district court abused its discretion. The district court explained that rule 11 provides sanctions when an attorney signs a pleading that is not well-grounded in fact, existing law, or warrants an alteration of existing law and when the lawsuit has an improper purpose. Furthermore, the district court found that despite numerous communications by respondent's attorney advising voluntary withdrawal of the suit because it was groundless and warranted sanctions, appellant's counsel "unwisely continued to prosecute a suit without any colorable merit." Although the district court did not specifically address whether appellant's counsel acted in bad faith, the district court's statement that the suit lacked colorable merit strongly suggests bad faith, improper motive, and frivolous litigation.
Since Minnesota caselaw suggests that an appellate court should defer to the credibility and good-faith determinations of the district court, the award of sanctions should only be reversed upon a finding that the district court abused its discretion. Cole, 581 N.W.2d at 370. In this case, despite warnings that the complaint did not state valid claims, appellant's counsel repeatedly refused to heed those warnings and continued to pursue a "meritless" action. Respondent also contends that appellant's counsel refused to stay discovery pending the motion to dismiss, issued an unauthorized memorandum to the district court, and attempted to reassert the previously dismissed claims against respondent at the rule 16 conference. As a result, respondent argues that he spent $9,616.90 to address and defend appellant's frivolous claims, unauthorized submissions, and litigious conduct in this case.
This court may only overturn rule 11 sanctions upon a finding that the district court abused its discretion. Id. Therefore, the propriety of an award of attorney fees as rule 11 sanctions depends on the validity of the district court's conclusion that all three claims lacked colorable merit. Since the district court was correct in concluding that appellant's claims lack any cognizable legal merit, the district court did not abuse its discretion in awarding attorney fees in the amount of $750 as rule 11 sanctions.