Source: https://mn.gov/law-library-stat/archive/ctapun/9808/2314.htm
Timestamp: 2019-04-18 16:25:53+00:00

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Thomas G. Carlson, et al., Appellants, vs. Norwest Bank Minnesota, N.A., a national bank, Respondent, Murnane, Conlin, White & Brandt, P.A., Respondent. C8-97-2314, Court of Appeals Unpublished, August 4, 1998.
On appeal from a summary judgment, appellants Thomas and Janet Carlson argue that material fact issues exist regarding (1) their misrepresentation and legal malpractice claims against respondent Murnane, Conlin, White & Brandt and (2) their misrepresentation claim against respondent Norwest Bank. The Carlsons also challenge the district court's conclusion that they lacked standing to assert claims on behalf of Accudata, Inc. We affirm.
Thomas and Janet Carlson were the sole owners and shareholders of Accudata, a computer systems sales business. Thomas Carlson (Carlson) acted as chief executive officer (CEO) and president of Accudata and was the person primarily responsible for the company's overall management and direction.
Norwest provided operating funds for Accudata. As president and CEO of Accudata, Carlson negotiated loans and lines of credit with Norwest. As an owner of the company, Carlson signed personal guaranties to cover Accudata's indebtedness to Norwest. Carlson testified that he read the guaranties before signing them and understood their ramifications. He testified that he was aware of and understood a provision in each of the guaranties that stated: "This guaranty may not be waived, modified, amended, terminated, released or otherwise changed except by a writing signed by the undersigned and the Bank."
In 1988 or 1989, Carlson and Accudata's sales manager, Kevin Fluegel (Fluegel), began negotiating a contract to sell Accudata to Fluegel. Because Fluegel did not have the financial ability to pay cash for the stock when the sale closed, Carlson and Fluegel agreed that Fluegel would make installment payments out of Accudata's future revenue.
After agreeing on the basic structure of the sale, Carlson and Fluegel met with attorney Frank Bennett. Bennett was hired to represent Accudata. His role was to draft sale documents based on instructions from Carlson and Fluegel. In October 1989, Bennett sent Carlson and Fluegel initial drafts of a stock purchase agreement, a promissory note, a pledge agreement, and an employment agreement. The documents set forth the basic terms of the proposed sale, including purchase price, default conditions, and that the sale was to be structured as a stock purchase rather than an asset purchase.
After Carlson received the initial drafts from Bennett, Carlson hired John Hirte of Murnane to represent his interests in the sale of Accudata. Hirte's role was to review the documents prepared by Bennett and help in revising them. Another attorney from Murnane, David Altwegg, also worked on the sale.
Carlson informed Hirte that as a condition of the sale, he wanted to be released from his personal guaranties to Norwest. Carlson testified that he also told Hirte or Altwegg that he was concerned about the possibility of Accudata deteriorating as a result of mismanagement or some other problem and wanted some provision for resuming his active involvement in the event of a slowdown or any sign of financial deterioration.
In November 1989, Carlson decided to suspend the sale negotiations due to concerns about Fluegel's ability to manage Accudata. The following year, Carlson renewed the negotiations after seeing an improvement in Fluegel's performance. Carlson and Fluegel agreed to restructure the sale by transferring the stock over a three-year period, 25% on July 1, 1990, 25% on July 1, 1991, and the remaining 50% on July 1, 1992. Carlson favored the staggered stock transfer because retaining part ownership of Accudata would allow him to remain actively involved in its management. After agreeing on the revisions, Carlson and Fluegel had Bennett revise the sale documents.
Carlson met with Hirte before the closing to review the revised documents and discuss the changes that had been made. Hirte addressed the risks inherent in a leveraged buyout, which Carlson testified that he understood. Carlson testified that he and Hirte reviewed all of the default provisions and other security and safety provisions and that Hirte assured him that his interests were protected.
Based on his meeting with Hirte, Carlson brought a list of concerns to the closing. The concerns included the need for a financing contingency if Norwest opted not to continue financing Accudata and "removing [Carlson] from personal guaranties on a basis paced with the transfer of stock." Bennett modified the stock purchase agreement to include a provision allowing either party to rescind the sale agreement if Norwest opted not to continue financing Accudata and Fluegel was unable to obtain adequate financing elsewhere without Carlson's personal guaranties (paragraph 25) and a provision making each party liable under its personal guaranties in a percentage equal to that party's ownership interest and requiring indemnity by the other party if a party paid a higher percentage than its ownership interest (paragraph 26). Carlson testified that he understood that he would continue to be liable on the personal guaranties until the last of the stock was transferred on July 1, 1992.
After the closing, Carlson provided Hirte copies of paragraphs 25 and 26 of the stock purchase agreement. Hirte informed Carlson that the revised documents "appeared in good order." Carlson testified that based on Hirte's assurances, he believed that paragraphs 25 and 26 were consistent with what he wanted to achieve in terms of relating liability to the transfer of stock ownership. Carlson did not have any further contact with Hirte until approximately January 1993.
Following the closing, Fluegel became Accudata's president. Fluegel's responsibilities included negotiating loans and lines of credit with Norwest. Carlson remained as CEO and continued to be actively involved in Accudata's business affairs, including keeping apprised of the company's financial status. Carlson testified that he reviewed the documents relating to Accudata's relationship with Norwest through July 1992.
In 1991, Carlson and Fluegel met with Michael Olson, Norwest's loan officer in charge of Accudata's account, and Olson's branch manager to explain the details of the purchase agreement to Norwest and discuss Norwest's role, including its ability to veto the sale pursuant to the financing contingency in paragraph 25 of the stock purchase agreement. The bank employees acknowledged that for the sale to be completed, Norwest would have to release Carlson from his personal guaranties at the time of the final stock transfer on July 1, 1992.
In November 1991, Accudata renewed its $300,000 line of credit with Norwest. Carlson signed a personal guaranty for the renewed line of credit. The guaranty contained the following provision, which was also in previous guaranties: "This guaranty may not [be] waived, modified, amended, terminated, released or otherwise changed except by a writing signed by the undersigned and the Bank." Carlson testified that when he signed the guaranty, he was aware of and understood the requirement that any modification of or release from the guaranty must be in writing.
In the spring of 1992, the bank requested that Carlson sign a new personal guaranty. Carlson told Olson that he would not sign the new guaranty because the final stock transfer was going to occur in just a few months. Carlson testified that Olson said he would take care of releasing Carlson's guaranties and would have Fluegel pick up the guaranties and secure the debt. Carlson testified that about one month before the final stock transfer, he called Olson, and Olson confirmed that Carlson had been released from his personal guaranties. Carlson did not receive a writing showing that his personal guaranties had been released.
Fluegel sought additional financing for Accudata because he wanted to restructure the company and increase its revenue. Before the final stock transfer, in June 1992, Fluegel contacted Olson about obtaining additional financing for Accudata from Norwest. Olson recommended that Accudata continue its $300,000 line of credit with Norwest and obtain an additional $200,000 Small Business Administration (SBA) loan. On June 26, 1992, Norwest and Accudata executed a new agreement increasing Accudata's line of credit from $300,000 to $400,000. Only Fluegel signed a personal guaranty for the new line of credit.
The $400,000 line of credit was renewed in September 1992. On January 12, 1993, Norwest sent a loan commitment letter to Accudata describing the terms of a Norwest-SBA loan package. The package totaled $700,000, a $300,000 line of credit with Norwest and a $400,000 term loan guaranteed by the SBA.
Both Carlson and Fluegel testified that the Norwest-SBA loan package was necessary for Accudata's survival. Under the sale agreement, payments to the Carlsons depended on Accudata's continuing operation and financial success. Carlson concluded that Accudata receiving the Norwest-SBA loan package would be in his best interests. Norwest conditioned the loan package on the Carlsons signing an agreement subordinating their interests under the stock purchase agreement to Norwest's interests under the new loan documents. As consideration for the subordination agreement, Norwest agreed to release the Carlsons from their personal guaranties.
After learning of Norwest's proposal, Carlson called Hirte to discuss the matter. Carlson told Hirte that he understood the personal guaranties had already been released. Hirte explained to Carlson that any release other than one in writing was invalid. Hirte conducted negotiations with Olson. After Olson informed Hirte that Norwest was not interested in Carlson resuming management of Accudata, Hirte negotiated the terms requested by Carlson for the subordination agreement. Carlson testified that Hirte told him that Norwest had already loaned the entire $700,000 to Accudata and that he could be liable for the entire $700,000 under the personal guaranties. Carlson testified that Olson specifically promised that Norwest would refrain from doing anything that would adversely affect Accudata until at least June 30, 1993.
The Carlsons; Fluegel and his wife, Barbara Fluegel; Accudata; and Norwest executed the subordination agreement on February 10, 1993. The subordination agreement prohibited Carlson from enforcing default provisions in the stock purchase agreement and his security interest in Accudata without Norwest's consent. The subordination agreement allowed Carlson to receive scheduled payments from Fluegel under the stock purchase agreement unless Accudata was in default with Norwest, in which case Carlson would only be allowed to receive payments with Norwest's consent.
Norwest released the Carlsons' personal guaranties and extended to Accudata the credit set forth in the Norwest-SBA loan package, disbursing $150,000 in February 1993 and $150,000 in March 1993. As of April 7, 1993, Accudata had used up the entire $700,000 loan and line of credit from Norwest, and Accudata's checking account with Norwest was overdrawn in the amount of $165,000. Fluegel requested that Norwest treat the overdrafts as a short-term loan, and Norwest agreed to do so. As a condition of treating the overdrafts as a short-term loan, Accudata entered into a letter of understanding with Norwest. The letter of understanding stated that if Accudata did not repay the $165,000 loan within eight days, by April 15, 1993, Accudata would be deemed in default, and Norwest would have the right to demand immediate payment of the entire $865,000 Accudata owed Norwest.
Accudata failed to repay any part of the $165,000 by April 15, 1993. On April 15, 1993, Barbara Fluegel told Carlson that Norwest would be calling in all of Accudata's loans and advised Carlson to bring his attorney to a board of directors meeting scheduled for that afternoon. Carlson consulted with David Anastasi of Murnane.
On April 16, 1993, Norwest served a default notice on Accudata and demanded repayment of the entire $865,000. Carlson unsuccessfully attempted to arrange financing to buy out Norwest's interest in Accudata. Accudata and the Fluegels eventually declared bankruptcy.
On appeal from a summary judgment, this court must review the record to determine whether any genuine issues of material fact exist and whether the district court erred in applying the law. Offerdahl v. University of Minn. Hosps. & Clinics, 426 N.W.2d 425, 427 (Minn. 1988). We must view the evidence in the light most favorable to the nonmoving party. Id.
[S]ummary judgment on a claim is mandatory against a party who fails to establish an essential element of that claim, if that party has the burden of proof, because this failure renders all other facts immaterial.
Lloyd v. In Home Health, Inc., 523 N.W.2d 2, 3 (Minn. App. 1994).
1. The Carlsons allege that Murnane made misrepresentations when it represented Carlson in 1993 and failed to disclose that Norwest was also its client. An element of an intentional misrepresentation claim is damages. M.H. v. Caritas Family Servs., 488 N.W.2d 282, 289 (Minn. 1992). Damages is also an element of a negligent misrepresentation claim. Bonhiver v. Graff, 311 Minn. 111, 122, 248 N.W.2d 291, 298-99 (1976). The Carlsons did not present evidence indicating that Murnane's representation of Norwest affected its advice to Carlson or that another attorney would have advised Carlson differently. Absent such evidence, the evidence was insufficient to establish that any misrepresentation caused any damages, and the district court properly dismissed the Carlsons' misrepresentation claim against Murnane.
(1) the existence of an attorney-client relationship giving rise to a duty; (2) the negligent giving of advice or exercise of judgment on which the client detrimentally relies; and (3) the negligent advice or judgment must be the proximate cause of the damage to the client.
Gustafson v. Chestnut, 515 N.W.2d 114, 116 (Minn. App. 1994).
The Carlsons submitted an affidavit by attorney Jonathan Van Patten opining that Hirte negligently advised Carlson regarding the sale of Accudata. Van Patten explained in detail why he believed the stock purchase agreement was inadequate to protect the Carlsons' interests and how it could have been structured to give them more protection. Van Patten also opined that Hirte was negligent in incorrectly advising Carlson that under his personal guarantee, he could be liable for the entire $700,000 Accudata owed Norwest.
To establish a legal malpractice claim, however, a plaintiff must prove not only negligent advice, but also that the negligent advice proximately caused plaintiff damages. Gustafson, 515 N.W.2d at 116. When a plaintiff understood the implications of his conduct without the attorney's advice and the evidence does not indicate that different advice would have changed the structure of the transaction, the evidence is insufficient to establish proximate cause. See Raske v. Ganid, 438 N.W.2d 704, 706 (Minn. App. 1989) (evidence insufficient to establish fact issue on proximate cause when no evidence indicated that if plaintiff had been advised differently, the other parties would have agreed to structure the transaction differently and evidence indicated that plaintiff understood the implications of his conduct without attorney's advice), review denied (Minn. June 21, 1989).
Carlson argues that he was pressured into signing the subordination agreement as a result of the absence of an enforcement mechanism in the stock purchase agreement to release the Carlsons from their personal guaranties on July 1, 1992, and as a result of Hirte's incorrect advice that Carlson could be liable for Accudata's entire $700,000 debt to Norwest under his personal guaranty. But both Carlson and Fluegel testified that the $700,000 Norwest-SBA loan package was necessary for Accudata's survival. Under the sale agreement, payments to the Carlsons depended on Accudata's continuing operation and financial success. Carlson concluded that Accudata receiving the Norwest-SBA loan package would be in his best interests. The Carlsons did not present evidence that Norwest would have agreed to the $700,000 loan package without the subordination agreement if the Carlsons had in fact already been released from their personal guaranties. The Carlsons did not present evidence that if their personal guaranties had already been released, they would have opted to not sign the subordination agreement and let Accudata go out of business. Regarding Hirte's incorrect advice about Carlson's potential liability under the personal guaranties, the guaranties expressly limited Carlson's liability to $300,000. Carlson testified that he read the guaranties before signing them and understood their terms. Under Raske, the evidence was insufficient to establish a material fact issue as to whether Carlson's continuing liability under the personal guaranties after the final stock transfer and Hirte's advice about the extent of their potential liability proximately caused the Carlsons damages.
The Carlsons also argue that Carlson was pressured into signing the subordination agreement because the stock purchase agreement did not contain an adequate mechanism to allow Carlson access to Accudata's financial records when the debt increased to a certain level. Carlson's contention seems to be that if the stock purchase agreement had contained such a mechanism, he could have prevented the accumulation of debt. But the evidence shows that until the final stock transfer, Carlson remained as Accudata's CEO and continued to be actively involved in Accudata's business affairs, including keeping apprised of the company's financial status. After the final stock transfer, Carlson remained on Accudata's board of directors. Carlson was aware of Fluegel's plans to expand Accudata, knew that expansion required additional financing, and supported the Norwest-SBA loan package. After Carlson signed the subordination agreement, Accudata's board of directors agreed to allow Norwest to share financial information with the Carlsons. Although Carlson alleges that Fluegel thwarted his efforts to review the financial information supporting the Norwest-SBA loan package, Carlson does not specify any information to which he was denied access. Because the Carlsons failed to present evidence specifying any financial information to which Carlson was denied access, the evidence was insufficient to show that the absence of an adequate mechanism to allow Carlson access to Accudata's financial records proximately caused the Carlsons damages.
The Carlsons next argue that Hirte committed malpractice by failing to advise Carlson that he could pursue a claim for oral modification of a contract or misrepresentation against Norwest based on Olson's oral representation that the Carlsons' personal guaranties had been released. "The general rule that contracts within the statute of frauds cannot be modified, contradicted, or altered orally is subject to the exception that an agreement for a substituted method of performance may be shown by parol." Mandel v. Atlas Assur. Co., 230 Minn. 347, 350, 41 N.W.2d 590, 592 (1950). The Carlsons argue that the Fluegels' personal guaranties constituted substituted performance for the Carlsons' guarantees. The Carlsons do not cite any authority indicating that the oral modification exception applies to such a situation. To the contrary, an oral "agreement by a creditor to take certain actions, such as entering into a new credit agreement, forbearing from exercising remedies under prior credit agreements, or extending installments due under prior credit agreements" does "not give rise to a claim that a new credit agreement is created." Minn. Stat. § 513.33, subd. 3 (1996).
The Carlsons also argue that they could have pursued a misrepresentation claim based on Olson's representation. But an element of a misrepresentation claim is "justifiable reliance." Safeco Ins. Co. v. Dain Bosworth, Inc., 531 N.W.2d 867, 870 n.1 (Minn. App. 1995), review denied (Minn. Jul. 20, 1995).
Where there is an inconsistency between oral promises and the written terms of an agreement, the issue is whether there could be reasonable reliance on the promise. We could find that reliance on an oral representation was unjustifiable as a matter of law only if the written contract provision explicitly stated a fact completely contradictory to the claimed misrepresentation.
Johnson Bldg. Co. v. River Bluff Dev. Co., 374 N.W.2d 187, 194 (Minn. App. 1985) (citations omitted), review denied (Minn. Nov. 18, 1995).
Carlson testified that he read all of the personal guaranties he signed and understood their terms including the requirement that any release be in writing. Thus, any reliance by Carlson on Olson's representation was unjustifiable as a matter of law.
Because the Carlsons' oral modification and misrepresentation claims based on Olson's misrepresentation lack merit, Hirte's failure to advise Carlson of these claims was a valid strategic decision. A legal malpractice claim based on an appropriate strategic decision will fail. See Dziubak v. Mott, 503 N.W.2d 771, 776 (Minn. 1993) (legal malpractice claim involving a dispute over a choice of strategies should fail "since honest errors may be made which do not raise to the level of malpractice").
The district court properly granted summary judgment in favor of Murnane on the Carlsons' legal malpractice claims against Murnane.
3. The Carlsons' misrepresentation claim against Norwest is based on Olson's misrepresentation that Carlson's personal guaranties had been released. As addressed in the previous section, an element of a misrepresentation claim is justifiable reliance, and any reliance by the Carlsons on Olson's oral representation was unjustifiable as a matter of law because the representation contradicted the written terms of the personal guaranties.
4. The Carlsons also asserted misrepresentation claims against Norwest on behalf of Accudata. When they brought this action, the Carlsons were no longer employees, directors, or shareholders of Accudata. Accudata's bankruptcy trustee was dismissed from this action pursuant to the parties' stipulation in August 1996. The district court properly concluded that the Carlsons lacked standing to assert Accudata's claims. See Basich v. Board of Pensions of Evangelical Lutheran Church in Am., 493 N.W.2d 293, 296 (Minn. App. 1992) ("Appellants were not members of either nonprofit corporation and thus had no standing to bring a derivative suit.").
 The Carlsons asserted a misrepresentation claim based on Norwest's misrepresentations to the SBA about Accudata's financial status. In their brief, the Carlsons claimed that they personally incurred damages as a result of those misrepresentations. But in their reply brief, the Carlsons conceded that they have no standing to personally assert a claim based on the misrepresentations to the SBA.

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