#25957-a-JKK 2011 S.D. 96 IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA * * * * RONALD STEINEKE and SHERYL STEINEKE, Plaintiffs and Appellants,

v. ROSS O. DELZER and BARBARA T. DELZER, Defe ndants and Appellees, and BOB GERKIN d/b/a TRI-STATE REALTY, INC., Defendant and Third Party Plaintiff and Appellee, v. PATRICK L. DONAHUE; JEB HUGHES; WESTERN PROPERTIES, INC. d/b/a UNITED COUNTRY/WESTERN PROPERTIES, INC., and/or UNITED COUNTRY REAL ESTATE, Third Party Defendants and Appellees. * * * * APPEAL FROM THE CIRCUIT COURT OF THE FOURTH JUDICIAL CIRCUIT BUTTE COUNTY, SOUTH DAKOTA * * * * THE HONORABLE JOHN W. BASTIAN Judge * * * * CONSIDERED ON BRIEFS ON NOVEMBER 14, 2011
OPINION FILED 

### 12/28/11BRAD A. SCHREIBER of The Schreiber Law Firm, Prof. LLC Pierre, South Dakota and JOHN R. FREDERICKSON of Frederickson Law Office Deadwood, South Dakota Attorneys for plaintiffs and appellants. KENNETH E. BARKER of Barker Wilson Law Firm Belle Fourche, South Dakota Attorneys for defendants and appellees Delzers. GREGORY J. ERLANDSON SARAH E. BARON HOUY of Bangs, McCullen, Butler, Foye & Simmons, LLP Rapid City, South Dakota A ttorneys for defendant and third party plaintiff and appellee Gerkin/Tri-State Realty. JAMES S. NELSON REBECCA L. MANN of Gunderson, Palmer, Nelson & Ashmore, LLP Rapid City, South Dakota Attorneys for third party defendants and appellees Donahue, Hughes and Western Properties, Inc.-1- #25957 KONENKAMP, Justice [¶1.] In this contract dispute, we co nclude that the Restatement (Second) of Torts § 552B sets the proper measure of damages in a negligent misrepresentation claim. Background [¶2.] Ross and Barbara Delzer owne d a ranch in Butte County, South Dakota. In 2004, they hired Bob Gerkin, a real estate agent with Tri-State Realty, Inc., to list the ranch for sale. They ga ve Gerkin general information about the property, including the water system. Ronald and Sheryl Steineke expressed interest in the ranch. Their agents, Pa trick Donahue and Jeb Hughes of Western Properties, Inc., had Gerkin show them the dams, the dugouts, and the well. According to the Steinekes, Gerkin repr esented that the well would produce “as much water” as they would need for th eir farming and ranching operation. [¶3.] In April 2005, the parties complete d the sale of the ranch. Almost two years later, the Steinekes sued the Delzer s and their agent, Gerkin, who in turn sued the Steinekes’ agents. Among other things, the Steinekes alleged a negligent misrepresentation claim, maintaining that that they were misled about the condition of the well and its potential to meet their farming and ranching needs. They sought $513,000 in damages: the estima ted cost of instal ling a new well. [¶4.] With the Steinekes’ only proffe red evidence of damages being the cost of a new well, the Delzers moved to prohib it any such evidence. The circuit court granted the motion. It ruled that Restat ement (Second) of Torts § 552B sets forth the proper measure of damages: the Steine kes may recover only their “out-of-pocket#25957

-2- loss” plus “the difference betw een what [they] paid for the property and what [they] should have paid absent the alleged negligent misrepresentation.” 1 The court found that the cost of a new well was not a re coverable “pecuniary loss” and would be misleading, confusing, and prejudicial. [¶5.] The circuit court also prohibited the Steinekes from testifying on the cost of the well as a means of provin g the devaluation of their property. Alternatively, the court found that the Steinekes failed to establish that they possessed “sufficient specializ ed knowledge” to testify as experts about the cost of drilling a new well or to offer an opin ion that a new well would “generate the amount of water allegedly promised by [the Delzers’ agent].” [¶6.] These pretrial rulings effectively excluded the Steinekes’ only evidence of damages on their negligent misrepresentation claim. For this reason, the parties stipulated to the entry of final judgment against the Steinekes. On appeal, the Steinekes challenge the court’s rulings on damages. Damages – Negligent Misrepresentation [¶7.] We must decide whether the Rest atement (Second) of Torts sets forth the proper measure of damages in South Da kota for negligent misrepresentation.

1. Restatement (Second) of Torts § 552B(1) (1977) provid es in full: The damages recoverable for a ne gligent misrepresentation are those necessary to compensate the plaintiff for the pecuniary loss to him of which the misrep resentation is a legal cause, including the difference between the value of what he has received in the transaction and its purchase price or other value given for it[ ] and [the] pecuniary loss suffered otherwise as a consequence of the plaintiff’s reliance upon the misrepresentation.#25957

-3- “Questions requiring the application of a legal standard are reviewed as are questions of law

— de novo.” Voeltz v. John Morrell & Co. , 1997 S.D. 69, ¶ 9, 564 N.W.2d 315, 316. “We give no deference to the circuit court under this standard of review.” Id. And the court’s evidentiary rulings, “are presumed correct and will not be reversed unless there is a clear abuse of discretion.” Wilcox v. Vermeulen , 2010 S.D. 29, ¶ 7, 781 N.W.2d 464, 467. [¶8.] In 2008, Federal District Court Judge Karen Schreier predicted that this Court would “follow the provisions relating to damages for negligent misrepresentation as set forth in the Restatement [(Second) of Torts].” O’Daniel v. Stroud NA , 604 F. Supp. 2d 1260, 1263 (D.S.D. 2008). In accord with this prediction, Judge Schreier ruled that Restatement (Second) of Torts § 552B precluded the plaintiff from introducin g evidence of his lost profits. Id. at 1263. The Eighth Circuit Court of Appeals also predicted that this Court would adopt Restatement (Second) of Torts § 552B. Karas v. Am. Family Ins. Co. , 33 F.3d 995 (8th Cir. 1994). 2 [¶9.] The Steinekes argue that the circuit court erred in applying the Restatement (Second) of Torts § 552B because SDCL 21-3-1 sets the proper standard for tort actions and no other stat ute expressly provides for the measure of damages for negligent misrepresentation. 3 Although this argument was not

2. The parties concede that these federal decisions are not binding on this Court. 3. SDCL 21-3-1 provides the general measure of damages for breach of a noncontractual obligation: “For the brea ch of an obligation not arising from contract, the measure of damages, exce pt where otherwise expressly provided (continued . . .)#25957

-4- preserved for appeal because it was neve r made below, we elect to address it. Simply put, the Restatement (Second) of Torts § 552B does not violate SDCL 21-3-1 because that statute merely addresses th e general measure of damages for tort actions and does not foreclose establishi ng a specific measure of damages for a particular tort. [¶10.] Under the Restatement (Second) of Torts § 552B, damages recoverable for a negligent misrepresentation claim do not include the benefit of the plaintiffs’ contract with the defendant. “This position is consistent with . . . [the] general rule [of] no liability for merely negligent conduc t that interferes with or frustrates a contract interest or an expectancy of pecuniary advantage.” Id. at cmt. b. “The considerations of policy that have led the courts to compensate the plaintiff for the loss of his bargain in order to make the deception of a deliberate defrauder unprofitable to him, do not apply when th e defendant has had honest intentions but has merely failed to exercise reasonable care in what he says or does.” Id. [¶11.] The Restatement (Second) of Torts § 552B approach to damages is consonant with our prior reliance on § 552 in considering negligent misrepresentation jurisprudence. See , e.g. , Bayer v. PAL Newcomb Partners , 2002 S.D. 40, ¶ 11, 643 N.W.2d 409, 412; see also Fisher v. Kahler, 2002 S.D. 30, ¶ 10, 641 N.W.2d 122, 126; Meyer v. Santema , 1997 S.D. 21, ¶ 9, 55 9 N.W.2d 251, 254; Pickering v. Pickering , 434 N.W.2d 758, 762 (S.D. 1989). We have not, however,

__________________ (. . . continued) by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.”#25957

-5- specifically addressed “the amount of damages a plaintiff may recover for a negligent misrepresentation claim.” O’Daniel , 604 F. Supp. 2d at 1262. Because we are persuaded that the standard in Restat ement (Second) of Torts § 552B properly governs the measure of damages in a negligent misrepresentation claim, the circuit court did not err in applying it. A plaintiff asserting such a claim may recover “damages . . . necessary to co mpensate the plaintiff for th e pecuniary loss to him of which the misrepresentation is a legal ca use.” Restatement (Second) of Torts § 552B. This includes “the difference betwee n the value of what he has received in the transaction and its purchase price or other value given for it[ ] and the pecuniary loss suffered otherwise as a cons equence of the plaintiff’s reliance upon the misrepresentation.” Id. In sum, plaintiffs asserting negligent misrepresentation claims may recover reliance damages but not expectation damages. Accordingly, the Steinekes’ evid ence of the estimated cost for a new well was properly excluded. Landowner Valuation [¶12.] The Steinekes argue that the ci rcuit court abused its discretion in precluding them from testifying on thei r land’s value. Although owners are generally permitted to give an opinion on the value of their real estate, the Steinekes’ methodology — valuing the land as diminished by the cost of a new well — was merely a backdoor way to assert their expectation damages. A landowner’s method of valuation is subject to th e same standards as other experts. City of Sioux Falls v. Johnson , 1999 S.D. 16, ¶ 13, 588 N.W.2d 90 4, 908. It was not admissible#25957

-6- under Restatement (Second) of Torts § 552B . The Steinekes’ remaining arguments lack sufficient merit for discussion. [¶13.] Affirmed. [¶14.] GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and WILBUR, Justices, concur.