Thought Leadership

The perils of suing and being sued for fraud in commercial cases in Minnesota

As commercial litigation attorneys, a healthy percentage of the complaints which we initiate or respond to contain a claim that one or both of the parties involved committed fraud.  For a variety of reasons, it has become almost standard practice for such claims to be included in complaints primarily involving contracts or business-related torts.  While there can be sound factual and strategic reasons for bringing fraud claims, there can be a certain degree of risk involved in essentially accusing the other party of lying.  This article will provide the basic contours of a fraud claim under Minnesota law, and will describe how to judiciously assert and defend against such claims when they are made against you.

I.     What is “fraud?”

Under long-standing Minnesota law, 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., 276 Minn. 116, 117, 149 N.W.2d 37, 38-39 (Minn. 1967).

Boiled down to essentials, fraud exists where you have been intentionally lied to by the other party about something important, and where you reasonably and foreseeably relied upon that lie to your detriment.  If you cannot meet your burden of proof on each one of these elements, you cannot prevail on your fraud claim.

II.     Why are fraud claims so common?

Fraud claims offer several advantages to the civil litigant over other claims commonly brought in commercial disputes, such as breach of contract or unjust enrichment.  First and foremost, claims for fraud can allow parties to avoid the onerous terms of otherwise enforceable contracts.  This can have a very high strategic value in litigation.  For instance, many commercial contracts contain strict limitations on consequential damages or require the parties to arbitrate their dispute in a distant, inconvenient forum.  By asserting, if true, that you were fraudulently induced into entering into the contract in question, you can under most circumstances avoid limiting clauses in the contract (which would be effective and enforceable in a suit for breach of contract) and thereby gain a key advantage in the litigation.

Another reason to assert fraud is to reach the individual owner or owners of a sham entity, and thereby “pierce the corporate veil.”  Under most circumstances, if you do business with an entity, your remedy if things go wrong is to sue that entity for damages.  If the entity has no money, you are out of luck – the corporate veil will generally prevent you from collecting from the personal assets of the entity’s owners.  However, if you assert that the entity’s owner or owners personally made fraudulent misrepresentations to you and thereby caused you damage, you can sue those owners personally for your losses.  This ability to reach individual owners can be crucial if you find yourself in the all-too-common circumstance of attempting to collect from a seriously underfunded entity.

Third, if you ultimately prevail in your fraud claim, any judgment you obtain is not generally dischargeable in bankruptcy.  This is not true of contract claims and many tort claims, where you might win the case only to see the other party retreat into bankruptcy and discharge the judgment you have obtained, leaving you with pennies on the dollar or even nothing for your trouble.  If, however, you obtain a judgment arising out of a fraud claim, a bankruptcy court cannot discharge it – this means that you can potentially collect on your judgment ahead of other creditors, or wait until the other party recovers financially before engaging in collection efforts.

Finally, asserting fraud claims against a publicly-traded company can be particularly effective because of the requirement that such claims be reported to the SEC.  This can sometimes have the strategic benefit of encouraging such companies to quickly settle the claim to avoid the negative effect that reporting such a claim can have on share prices.

III.     Strategies for defending against fraud claims.

For the reasons stated above, fraud claims have become popular in commercial disputes.  However, this popularity does not change the fact that very few fraud claims are ultimately successful.  The most obvious reason for this is the extreme difficulty of proving each and every element of your fraud claim.  This becomes most difficult in the context of proving that the other party intentionally lied to you – absent a confession or some other piece of “smoking gun” evidence, proving intent can be very challenging.  The other party can always claim that they did not know the representation was false, a claim which, even if untrue, can be impossible to disprove.  If you are the party being accused of fraud, and you can truthfully say that you did not know your statement was false, your statement to that effect can be an effective defense.

Fraud claims can also run into a variety of technical problems, which can be aggressively raised if you engage an attorney to defend fraud claims against you.  For instance, a special provision of the Rules of Civil Procedure requires that fraud claims be pleaded with “particularity” in the plaintiff’s complaint.  For almost any other claim, the allegations in the complaint can be vague and general.  For fraud, however, the law requires that the allegations in the complaint be very specific as to what the misrepresentation was, why the party believes it to be false, and exactly how and why the party relied upon it to their detriment.  Meeting this particularity requirement can be a difficult hurdle under many circumstances.  Challenging a fraud claim against you for lack of particularity should almost always be a part of your legal counterattack.

Another common, technical method of countering a fraud claim where there is a written contract involved is to assert that the other party could not have reasonably relied upon the supposed misrepresentation that you made.  Minnesota law generally holds that if the alleged misrepresentation is directly contradicted by the written agreement signed by the parties, the party asserting fraud cannot, as a matter of law, have reasonably relied upon that misrepresentation.  In this context, as in many other contexts in the law, the written contract is king – if you as a fraud defendant have the written contract on your side, you stand a good chance of getting the fraud claim dismissed.

In the end, if you are sued for fraud, the best weapon you can deploy to defend yourself is to hire an experienced and competent attorney.  Fraud claims are very difficult to pursue even under the best of circumstances.  A good attorney will be able to identify the potential holes in the claim and exploit them.  A strong legal response will hopefully disabuse the other side of the notion that you are an easy target, and will make them rethink their serious accusations of fraud against you.


Brian N. Niemczyk
Phone: 952-460-9245