-WMC Hoot Winc, LLC v. RSM McGladrey Financial et al, No. 3:2008cv01559 - Document 262 (S.D. Cal. 2011)
Court Description: ORDER granting in part and denying in part Defendant's 185 Motion for Partial Summary Judgment.The motion is Granted as to Plaintiffs Fourth Cause of Action for negligent misrepresentation. The motion is Denied as to the remaining causes of action. Signed by Judge Barry Ted Moskowitz on 9/6/11. (ecs)(jrd)
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-WMC Hoot Winc, LLC v. RSM McGladrey Financial et al Doc. 262 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 SOUTHERN DISTRICT OF CALIFORNIA 9 10 HOOT WINC, L.L.C., 11 CASE NO. 08cv1559 BTM(WMc) Plaintiff, ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT v. 12 13 14 RSM McGLADREY FINANCIAL PROCESS OUTSOURCING, LLC, and DOES 1 to 50, inclusive, Defendants. 15 16 RSM McGLADREY FINANCIAL PROCESS OUTSOURCING, LLC, 17 Counterclaimant, 18 19 v. HOOT WINC, LLC, 20 Counterdefendant. 21 22 Defendant RSM McGladrey Financial Process Outsourcing, LLC (“FPO” or 23 “Defendant”) has filed a motion for partial summary judgment on Plaintiff’s tort claims. For 24 the reasons discussed below, Defendant’s motion is GRANTED IN PART and DENIED IN 25 PART. 26 27 28 I. FACTUAL BACKGROUND Plaintiff Hoot Winc, LLC (“Plaintiff” or “Hoot Winc”), is a Kansas limited liability 1 08cv1559 BTM(WMc) Dockets.Justia.com 1 company, with its principal office in Oceanside, California. During the relevant time period, 2 Hoot Winc provided certain management services to approximately 22 Hooters restaurants 3 located in five different states (the exact number of restaurants varied slightly during the 4 contract period). Each restaurant was a separate limited liability company, and each 5 restaurant was under the umbrella of a regional holding company. Hoot Winc refers to the 6 stores and regional holding companies as the “Hoot Winc Franchise Group.” 7 Defendant FPO was a business services outsourcing company organized and existing 8 under the laws of Minnesota. FPO was a wholly owned subsidiary of RSM McGladrey, Inc. 9 (Ofenloch Dep. (Def. Ex. D) 13:17-21.) RSM McGladrey, Inc. was a services firm that 10 provided tax services and consulting services. (Ofenloch Dep. 13:21-24.) 11 Before Hoot Winc engaged FPO’s services, Hoot Winc performed accounting 12 operations for the Hoot Winc Franchise Group. Among other things, Hoot Winc handled 13 payroll, accounts payable, and bank reconciliations. Hoot Winc also prepared profit and loss 14 statements and balance sheets for the individual store locations, roll ups by region, and 15 combined financial statements. (Debisaran Decl. ¶ 3.) According to Plaintiff, the accuracy 16 and timeliness of the financial data contained in these reports were critical to the Hoot Winc 17 Franchise Group’s operational success, its ability to achieve internal growth goals, and its 18 ability to make pro rata distributions to those persons holding an ownership interest in the 19 members of the Hoot Winc Franchise Group. (Debisaran Decl. ¶ 14.) 20 In 2005, Hoot Winc began exploring the possibility of outsourcing its accounting 21 functions. In the fall of 2005, Maureen Debisaran, the CFO of Hoot Winc, attended a 22 National Restaurant and Finance Trade Show in Las Vegas, where Debisaran met Lesley 23 Woodring and Ken Johnson, two of FPO’s Directors of Business Development. (Debisaran 24 Decl. ¶ 6.) 25 outsourcing services FPO could provide Hoot Winc. (Id.) Woodring and Johnson also 26 provided Debisaran with marketing materials. (Spitcaufsky Decl. ¶ 5, Exs. 2,3,4.) Debisaran had a discussion with Woodring and Johnson regarding the 27 According to Debisaran, at the trade show, Woodring and Johnson represented that 28 FPO was a full-service accounting and CPA firm. (Id.) Woodring and Johnson also 2 08cv1559 BTM(WMc) 1 allegedly told Debisaran that the services provided to Hoot Winc would be performed by staff 2 in Chicago and Wisconsin with restaurant-specific experience. (Id. at ¶ 7.) Woodring and 3 Johnson explained that basic data entry would be provided by persons in India but that the 4 substantive work would be done in Chicago and Wisconsin. (Id.) 5 In December 2005, FPO traveled to California to meet with Hoot Winc. At the 6 meeting, FPO gave a PowerPoint presentation. The PowerPoint Presentation represented 7 that “RSM McGladrey” had more then 160 offices in the United States, outsourcing 8 operations were performed at 14 accounting centers in the country, RSM McGladrey had a 9 “national accounting firm culture,” RSM McGladrey had been in the accounting business for 10 75 years, and RSM McGladrey hired and staffed professionals with industry experience. (Pl. 11 Ex. 7.) According to Debisaran, nothing was said about accounting services being provided 12 from India. (Debisaran Decl. ¶ 12.) Debisaran and Larry Spitcaufsky, managing member 13 of the Hoot Winc Franchise Group, recall that Woodring and Johnson again explained that 14 their company was a national accounting firm and that CPAs with restaurant specific 15 experience would be the ones providing accounting services from accounting centers in the 16 United States. (Debisaran Decl. ¶ 12; Spitcaufsky Decl. ¶ 6.) 17 Representatives from FPO also told Debisaran that she would be able to generate her 18 own customized financial reports through the “FRX writer,” which would allow Debisaran to 19 select and organize financial data and generate customized reports. (Debisaran Decl. ¶ 11.) 20 The ability to generate these reports was important to Debisaran because she already had 21 this ability and wished to retain it. (Id.) 22 On December 28, 2005, Hoot Winc and FPO entered into a services agreement 23 (“Services Agreement”) pursuant to which FPO agreed to provide an array of business 24 support services to Hoot Winc and the Hoot Winc Franchise Group including, but not limited 25 to, preparation of financial statements, maintaining and processing payroll, invoice entry, 26 invoice coding, weekly accounts payable and cash requirements, check preparation and 27 mailing, processing of employee expense reports, preparation of 1099 forms, daily cash 28 deposit verification, filing of tax returns, and making tax payments. (Pl. Ex. 6.) In exchange 3 08cv1559 BTM(WMc) 1 for FPO’s business support services, Hoot Winc agreed to pay FPO a fee of $595 per 2 restaurant per period plus an additional $350 per period for accounting services provided to 3 Hoot Winc itself. The total per-period fees amounted to $14,035. 4 A “go-live” date of February 20, 2006 was selected. As of the “go-live” date, Hoot 5 Winc would depend upon FPO for the contracted services. In anticipation of the transition, 6 the in-house accounting staff at Hoot Winc was reduced. (Debisaran Dep. (Pl. Ex. 9) 7 149:11-150:16.) On February 23, 2006, FPO granted eight users in India access to Hoot 8 Winc’s databases in Great Plains. (Pl. Ex. 46.) 9 According to Hoot Winc, there were problems with FPO’s performance from the time 10 of the “go-live” date until the termination of the contract. Hoot Winc claims that FPO made 11 repeated and numerous mistakes, including: failure to deliver timely and accurate financial 12 statements; failure to grant Debisaran access to the FRX reports; making overpayments, 13 duplicate payments, and underpayments on vendor invoices; failure to pay invoices resulting 14 in the shut-off of some utilities; payroll errors; and failure to properly communicate with Hoot 15 Winc and Hooters general managers. (Debisaran Decl. ¶¶ 19, 23, Ex. 1.) 16 On May 9, 2006, at the request of Debisaran, FPO and Hoot Winc met at FPO’s 17 offices in Chicago. At the meeting, FPO made a PowerPoint presentation. (Pl. Ex. 10.) The 18 presentation revealed that more work was being done in India than Hoot Winc realized. The 19 presentation revealed that FPO had two centers in Mumbai with 400 personnel. The 20 presentation also explained how work was coordinated between the India center and the 21 U.S. offices. According to the presentation, after India entered data and the computer 22 system generated certain reports, India “chartered accountants” accessed the website to 23 review management reports and analysis, make any required adjustments at the Business 24 Unit level, and create customized reports from the website. 25 Debisaran was shocked to learn about the level of India’s involvement in Hoot Winc’s 26 account. (Debisaran Dep. (Pl. Ex. 30) 360:7-25.) Prior to the meeting, Hoot Winc believed 27 that India was performing data entry only. (Id.) 28 Hoot Winc claims that after the May meeting, FPO continued to fail to provide 4 08cv1559 BTM(WMc) 1 accurate and timely financial statements. Hoot Winc contends that it never received a timely 2 and accurate financial statement from FPO. (Spitcaufsky Decl. ¶ 10; Debisaran Decl. ¶ 19.) 3 Hoot Winc CEO Fred Glick became increasingly frustrated by the untimely financials. 4 On June 16, 2006, Glick e-mailed FPO, stating, “We do NOT have our store financials (we 5 have 3 out of 23 stores). We do not know where they are or when we will get them. This 6 is fourth period in a row where we are behind on getting financials.” (Pl. Ex. 17.) On June 7 28, 2006, Glick informed FPO: “[O]ur board is unhappy with the results we have seen thus 8 far and is discussing sending a default letter. It is CRITICAL to our company’s success that 9 we receive timely accurate information. We have not had that in the 5 months we have been 10 outsourcing.” (Pl. Ex. 18.) In an e-mail to FPO dated August 31, 2006, Glick wrote “I asked 11 you twice to get your India team some qualified help as I DO believe that both of you (Mike 12 and Mike) clearly understand what needs to be done and I do NOT have confidence that 13 they do. . . . My next communication will be stating that until I am receiving financials that I 14 can use to run my business, I will not be paying a portion of our bill. It is time for all excuses 15 to end and for you to perform.” (Pl. Ex. 37.) In an e-mail dated October 18, 2006, Glick e- 16 mailed Mike Mengarelli, FPO’s Relationship Manager and Vijay Bhatt, an India Team 17 employee: “I am absolutely and utterly fed up with the lack of communication and execution 18 on deadlines from your company. I want to have a conference call with the head of India 19 and America restaurant operations tomorrow to discuss whether or not we can continue our 20 business relationship. When deadlines are missed that are personally given to me I expect 21 direct communications on exactly why they were not met and when I WILL receive the 22 requested necessary contracted data. . . . [Y]our company is not performing the necessary 23 contracted data on a timely and accurate basis and has cost OUR company tens and 24 thousands of dollars in lost opportunity and my time.” (Pl. Ex. 39.) 25 As a result of a conversation between Glick and representatives from FPO on October 26 18, 2006, FPO came up with a Client Service Action Plan (Pl. Ex. 43) to address issues 27 concerning the Hoot Winc account. Action items included having reports reviewed by the 28 Client Account Manager, replacing the Client Account Manager, getting quality support for 5 08cv1559 BTM(WMc) 1 the India team, and reducing the attrition rate in India. (Id.) 2 On October 30, 2006, Tyrone Murray replaced Debisaran as CFO of Hoot Winc. 3 (Murray Dep. (Pl. Ex. 58) 62:16-21.) The first week on his job, Murray received his first set 4 of financial statements. (Id. at 168:8-11.) Murray was concerned about the lack of quality 5 of work reflected in the statements. (Id. at 168:18-20.) In November 2006, Jamie Hogan, 6 FPO’s new Relationship Manager, traveled to California to meet with Murray and Glick and 7 discuss the account. (Hogan Dep. (Def. Ex. II) 104:13-105:2.) According to Murray, Hogan 8 admitted to him that the people in India working on the account did not have degrees. 9 (Murray Dep. 175:3-12.) Murray claims that shortly afterwards, he concluded that he did not 10 have confidence in FPO and that the contract should be terminated. (Id. at 175:18-176:11.) 11 On December 22, 2006, Murray sent a letter to FPO terminating the Services 12 Agreement. (Def. Ex. EEEEE.) 13 14 II. PROCEDURAL BACKGROUND 15 On August 22, 2008, this action was removed from state court. In an order filed on 16 January 21, 2009, the Court granted Plaintiff leave to file a First Amended Complaint 17 (“FAC”). The FAC was filed the same day. 18 In an order filed on August 10, 2009, the Court granted FPO’s motion for partial 19 summary judgment on Plaintiff’s professional negligence claim to the extent that it was 20 based on California law. The Court held that pursuant to the choice-of-law provision in the 21 Service Agreement, Minnesota law governed Plaintiff’s claims and Plaintiff was therefore 22 precluded from pursuing a professional negligence claim under California law. 23 In an order filed on November 12, 2009 (“11/12/09 Order”), the Court granted in part 24 and denied in part Defendant’s motion for partial summary judgment which was premised 25 on the Services Agreement’s limitation-of-liability clause. The Court held that the Services 26 Agreement’s limitation-of-liability clause was enforceable with respect to Plaintiff’s breach 27 of contract claim, negligent representation claim, and professional negligence claim to the 28 extent that it alleges ordinary negligence. The Court further held that under Minnesota law, 6 08cv1559 BTM(WMc) 1 the limitation-of-liability clause does not limit the amount of damages recoverable on 2 Plaintiff’s claim for willful and wanton professional negligence. 3 With respect to Plaintiff’s claim for willful and wanton professional negligence, the 4 Court explained: “Although the FAC is short on facts supporting Plaintiff’s allegations 5 regarding willful and wanton negligence, Defendant did not move to dismiss on this ground. 6 Accordingly, Plaintiff may proceed with its claim for willful and wanton professional 7 negligence, and such claim is not subject to the limitation-of-liability clause.” (11/12/09 Order 8 at 6:3-7.) In a footnote, the Court pointed out that it was unclear whether Plaintiff intended 9 to assert a claim for “reckless misrepresentation” a separate cause of action under 10 Minnesota law. (Id. at 6 n. 3.) The Court stated: “The FAC makes no allegations regarding 11 reckless misrepresentation. If Plaintiff wishes to assert a claim for reckless 12 misrepresentation, Plaintiff can bring a motion for leave to amend.” 13 In an order filed on February 19, 2010, the Court granted Plaintiff leave to file a 14 Second Amended Complaint adding a fifth cause of action for reckless misrepresentation 15 and adding factual allegations and punitive damages allegations in connection with the willful 16 and wanton professional negligence claim. 17 In an order filed on February 22, 2011, the Court denied FPO’s motion for partial 18 summary judgment, which sought to preclude Plaintiff from seeking or recovering damages 19 allegedly sustained by 34 Hooters entities not named as plaintiffs in this lawsuit. The Court 20 ruled that there was a triable issue of fact whether Hoot Winc entered into the Services 21 Agreement as an agent for undisclosed principals (which would allow Hoot Winc to sue in 22 its own name for damages sustained by the 34 Hooters entities as a result of any failure by 23 FPO to perform under the contract). The Court granted Plaintiff leave to file a Third 24 Amended Complaint pleading the agency theory of liability. 25 On March 14, 2011, Plaintiff filed its Third Amended Complaint (“TAC”). The TAC 26 alleges claims of professional negligence, breach of contract, fraud, negligent 27 misrepresentation, and reckless misrepresentation. 28 7 08cv1559 BTM(WMc) 1 III. SUMMARY JUDGMENT STANDARD 2 Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil 3 Procedure if the moving party demonstrates the absence of a genuine issue of material fact 4 and entitlement to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 5 (1986). A fact is material when, under the governing substantive law, it could affect the 6 outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Freeman 7 v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). A dispute is genuine if a reasonable jury could 8 return a verdict for the nonmoving party. Anderson, 477 U.S. at 248. 9 A party seeking summary judgment always bears the initial burden of establishing the 10 absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The moving party 11 can satisfy this burden in two ways: (1) by presenting evidence that negates an essential 12 element of the nonmoving party’s case; or (2) by demonstrating that the nonmoving party 13 failed to establish an essential element of the nonmoving party’s case on which the 14 nonmoving party bears the burden of proving at trial. Id. at 322-23. "Disputes over irrelevant 15 or unnecessary facts will not preclude a grant of summary judgment." T.W. Elec. Serv., Inc. 16 v. Pacific Elec. Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987). 17 Once the moving party establishes the absence of genuine issues of material fact, the 18 burden shifts to the nonmoving party to set forth facts showing that a genuine issue of 19 disputed fact remains. Celotex, 477 U.S. at 314. The nonmoving party cannot oppose a 20 properly supported summary judgment motion by “rest[ing] on mere allegations or denials 21 of his pleadings.” Anderson, 477 U.S. at 256. When ruling on a summary judgment motion, 22 the court must view all inferences drawn from the underlying facts in the light most favorable 23 to the nonmoving party. 24 587 (1986). Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 25 26 IV. DISCUSSION 27 FPO seeks partial summary judgment on Plaintiff’s claims for gross, willful or wanton 28 negligence (First Cause of Action), fraudulent and reckless misrepresentation (Third and 8 08cv1559 BTM(WMc) 1 Fifth Causes of Action), fraudulent concealment (Third Cause of Action), Negligent 2 Misrepresentation (Fourth Cause of Action), and punitive damages. For the reasons 3 discussed below, the Court grants FPO’s motion as to the negligent misrepresentation claim 4 and denies the motion as to the remaining claims. 5 6 A. Gross, Willful or Wanton Negligence 7 8 FPO contends that there is no evidence that FPO’s performance of the contract rises to the level of gross or willful or wanton negligence. The Court disagrees. 9 Under Minnesota law, “gross negligence” is defined as “very great negligence or 10 absence of even slight care, but as not equivalent to wanton and willful wrong.” Ackerman 11 v. American Family Mutual Ins. Co., 435 N.W.2d 835, 840 (Minn. Ct. App. 1989). In 12 contrast, “willful and wanton negligence” is “a failure to exercise ordinary care after 13 discovering a person or property in a position of peril.” Honeywell, Inc. v. Ruby Tuesday, 14 Inc., 43 F. Supp. 2d 1074, 1080 (D. Minn. 1999). A cause of action for willful and wanton 15 negligence arises where there has been “a reckless disregard of the safety of the person or 16 property of another by failing after and not before discovering the peril to exercise ordinary 17 care to prevent the impending injury.” Brannan v. Shertzer, 64 N.W.2d 755, 757 (Minn. 18 1954). 19 Although the evidence may not be sufficient to show that FPO failed to exercise even 20 slight care, there is a triable issue of material fact with respect to whether FPO engaged in 21 willful and wanton negligence.1 There is evidence suggesting that FPO might have known 22 before the “go-live” date that it did not have the resources or ability to perform the Services 23 24 25 26 27 28 1 FPO argues that if there is insufficient evidence that FPO committed gross negligence, Hoot Winc cannot prevail on its willful and wanton negligence claim as a matter of law because willful and wanton negligence requires a “higher degree” of wrong than gross negligence. The Court rejects this argument. The Court has not located any cases holding that if a defendant is not liable for gross negligence, then, a fortiori, the defendant is not liable for willful or wanton negligence. The gross negligence standard focuses on a complete lack of care while the willful and wanton negligence standard focuses on knowledge of peril and failure to exercise care to prevent the impending harm. The standards are different in nature, and it is imprecise to characterize one as “higher” or “lower” than the other. 9 08cv1559 BTM(WMc) 1 Agreement as promised, but nonetheless forged ahead with the transition. 2 In an e-mail dated January 26, 2006, Tracy Dallas (Restaurant Systems Manager at 3 FPO) wrote to Julia Donavant (Director of Transition Services at FPO) and Trinetter Sims 4 (Accounting Transition Manager): 5 Good afternoon, ladies. 6 This database situation, as well as the AP history import request and the GL historical import request for additional years, is a train wreck waiting to happen if you do not push back dates on the project plan and update the contract with adjusted pricing. This cannot be another Houlihan’s nor Nath . . . there are too many databases involved, and too few IT resources available. 7 8 9 (Pl. Ex. 45.)2 10 In her deposition on July 22, 2010, Dallas claimed that her e-mail was referring to 11 specific requests by Hoot Winc to perform additional work, not the contracted services as 12 a whole, and that the issues were resolved before the “go-live” date. (Dallas Dep. (Def. Ex. 13 HH) 190:3-196:10.) However, the e-mail could also be construed as indicating that Dallas 14 was concerned that FPO lacked the resources to properly perform the contracted services 15 because there were so many databases (20+) due to the number of restaurants. Whether 16 Dallas’s deposition testimony is a credible explanation of her prior statement must be 17 determined by the trier of fact. 18 Other evidence can also be interpreted as supporting Hoot Winc’s claim that FPO 19 realized that it lacked the ability to properly provide the contracted services prior to the “go- 20 live” date but went ahead with the transition anyway. In an e-mail dated April 28, 2006, Glen 21 Ofenloch, FPO’s Director of Restaurant Accounting, wrote: 22 23 The Hootwinc contract was signed in December before we initiated the new Restaurant Info. Form which would have potentially identified the complexity of this client before we promised a 4 day turn on F/S. 24 .... 25 We grossly underestimated how long it would take to close 22 separate companies in 4 days given that store manager excel workbooks are the “Bible” for this client. FPO is expected to reconcile 22 company workbooks to the G/L 26 27 2 28 To the extent the Court relies on any evidence in this Order, any evidentiary objections to the evidence are overruled. The Court does not strike evidence submitted in support of motions and therefore denies the parties’ requests to strike evidence. 10 08cv1559 BTM(WMc) 1 each close, answer questions from 22 separate store managers, reprint G/L’s etc. from 22 separate databases, etc. We now think it will take approx. 3-4 accountants in India for 10 days a month (the “close” process) to make this happen in addition to Bill Tracy, the FPO Manager. 2 3 (Pl. Ex. 15.) Although this e-mail was written after the “go-live” date, viewed in conjunction 4 with Dallas’s e-mail, there is a triable issue whether FPO realized that it had “grossly 5 underestimated” how long it would take to close 22 separate companies prior to the “go live” 6 date.3 7 There is also evidence that the contract was under-bid in an effort to get Hoot Winc 8 as a client. Bill Tracy, FPO’s Account Services Manager, told Debisaran that FPO under-bid 9 the contract because Hoot Winc was an important name to add to FPO’s list of clients. 10 (Debisaran Dep. (Pl. Ex. 30) 344:23-345:10.) Tracy indicated that it would be difficult for 11 FPO to continue servicing Hoot Winc because they were losing money. (Id. at 345:7-9.) 12 Similarly, on May 9, 2006, Mike Mengarelli, Relationship Manager, told Debisaran and Rick 13 Campbell, Hoot Winc’s auditor/CPA, that sales sold something that FP “could not deliver” 14 for that fee. (Campbell Dep. (Ex. C to Supp. Durone Decl.) 329:13-19.) 15 If FPO underestimated how much work the account would be and also purposefully 16 underbid the contract, it is possible that by the time of the “go-live” date, FPO found itself 17 in the position where it could not allocate the proper resources to the Hoot Winc account. 18 Notably, FPO went through two rounds of downsizing, the first in January 2006 and the 19 second in May 2006. (Dallas Dep. (Pl Ex. 47) 80:2-84:14.) In the first round, an individual 20 who worked in IT and was involved in the Hootwinc account was laid off. (Id. at 79:16-80:1.) 21 Viewing the evidence in the light most favorable to Hoot Winc, there is a genuine 22 issue of material fact with respect to whether FPO knew, prior to the go-live date, that it 23 lacked the resources to properly perform the Services Agreement. In addition, FPO knew 24 that Hoot Winc had reduced its in-house accounting staff and was relying on FPO to perform 25 the services after the “go-live” date. (Pl. Ex. 1 at 5.) In light of the comprehensive nature of 26 27 3 28 To the extent that FPO argues that Hoot Winc was the cause of FPO’s ultimate failure to deliver timely and accurate financial reports, there is certainly a triable issue of fact regarding who was at fault for FPO’s failure to perform. 11 08cv1559 BTM(WMc) 1 the financial services FPO was to provide, FPO also arguably knew that failure to properly 2 perform such services would result in disruption to the Hoot Winc Franchise Group’s 3 business and cause financial harm. Accordingly, there is a triable issue as to whether FPO 4 is liable for willful and wanton negligence. 5 FPO contends that under Minnesota law, the claim of willful and wanton negligence 6 is limited to personal injury or property damage cases. This Court is not persuaded by this 7 argument. The Court has not located any cases holding that a claim of willful and wanton 8 negligence cannot be brought in cases involving financial harm. Indeed, in American Litho, 9 Inc. v. Imation Corp., 2010 WL 681298 (D. Minn. Feb. 23, 2010), the court held that there 10 was a genuine issue of material fact with respect to whether the defendant, Imation, 11 committed willful or gross negligence in entering into a license agreement with the plaintiff, 12 American Litho. Under the license agreement, American Litho was authorized to use 13 Imation’s patented infra-red dye for developing a near infra-red printing plate. However, 14 Imation had already granted an exclusive license to the patents at issue to Kodak. The court 15 held that there was a fact issue regarding whether Imation was willfully or grossly negligent 16 in failing to investigate whether it had given Kodak an exclusive license to practice its 17 patents. Id. at *7. 18 FPO also argues that Hoot Winc’s willful and wanton negligence claim fails because 19 Hoot Winc cannot establish “precise” knowledge of an “imminent” peril. The Court has 20 reviewed the cases cited by FPO – Waltz v. Life Time Fitness, Inc., 2010 WL 2900139 21 (Minn. Ct. App. July 27, 2010); Hille v. County of Wright, 400 N.W.2d 744 (Minn. Ct. App. 22 1987); Peterson v. Honeywell, Inc., 1994 WL 34200 (Minn. Ct. App. Feb. 8, 1994) – and 23 does not interpret them as requiring that the potential injury be immediate or that the 24 defendant must know exactly how and to what extent the plaintiff will be harmed. The Court 25 finds it sufficient that FPO arguably knew that Hoot Winc and the Hoot Winc Franchise 26 Group were in a position of peril because the failure of FPO to deliver the contracted 27 services would result in the interruption of the Hoot Winc Franchise Group’s business and 28 cause economic loss. FPO’s motion for summary judgment on Hoot Winc’s First Cause of 12 08cv1559 BTM(WMc) 1 Action is denied. 2 3 B. Fraud Claims 4 Hoot Winc asserts a claim of fraud in its Third Cause of Action. Hoot Winc claims that 5 FPO made fraudulent misrepresentations and failed to disclose important material facts that 6 induced Hoot Winc into entering into the Services Agreement and transitioning its in-house 7 accounting operations to FPO. Hoot Winc also asserts a reckless misrepresentation claim 8 in its Fifth Cause of Action. 9 10 The alleged misrepresentations and failures to disclose generally fall into four categories: 11 1. Misrepresentations that FPO was a full-service national accounting and CPA firm, 12 and that CPAs with restaurant-specific experience would be servicing Hoot Winc’s account. 13 2. Failure to disclose that the work was being performed in India by individuals 14 without degrees. 15 3. Misrepresentations regarding the services FPO promised to perform. 16 4. Misrepresentations/failures to disclose regarding the ability of FPO to provide the 17 contracted services.4 18 FPO contends that Hoot Winc’s fraud and misrepresentation claims fail because the 19 statements at issue are (1) related to future performance (2) non-actionable statements of 20 opinion or “puffery” (3) true statements (4) not material, or (5) not justifiably relied upon in 21 light of the terms of the Services Agreement between the parties and/or surrounding facts. 22 Upon review of the alleged misrepresentations, the Court agrees that some of the 23 misrepresentations do not support a claim for fraud or reckless misrepresentation. However, 24 the Court finds that some of the alleged misrepresentations are actionable. 25 With respect to statements regarding future performance – e.g., statements that FPO 26 would provide “financial and operational information that is complete, accurate, and up-to- 27 4 28 The Court declines to separately analyze each alleged misrepresentation/ concealment identified in the TAC and discovery. FPO may bring motions in limine with respect to specific evidence prior to trial. 13 08cv1559 BTM(WMc) 1 date,” would provide a four-day turn around on financial statements, and that Hoot Winc 2 would be able to generate its own customer reports – the Court agrees that such statements 3 are not actionable as fraudulent misrepresentations. The elements of fraud in Minnesota 4 are: (1) There must be a representation; (2) That representation must be false; (3) It must 5 have to do with a past or present fact; (4) That fact must be material; (5) It must be 6 susceptible of knowledge; (6) The representer must know it to be false, or in the alternative, 7 must assert it as of his own knowledge without knowing whether it is true of false; (7) The 8 representer must intend to have the other person induced to act, or justified in acting upon 9 it; (8) That person must be induced to act or so justified in acting; (9) That person’s action 10 must be in reliance upon the representation; (10) That person must suffer damage; (11) That 11 damage must be attributable to the misrepresentation, that is, the statement must be the 12 proximate cause of the injury. Davis v. Re-Trac Mfg. Corp., 149 N.W.2d 37, 38-39 (Minn. 13 1967). It is a “well-settled rule” that “a representation or expectation as to future acts or 14 events is not a sufficient basis to support an action for fraud merely because the represented 15 act or event did not take place.” Belisle v. Southdale Realty Co., 168 N.W.2d 361, 363 16 (Minn. 1969). 17 A fraud claim may be brought if a defendant does not intend to fulfill a promise at the 18 time it is made. Benson v. Rostad, 384 N.W.2d 190, 195 (Minn. Ct. App. 1986). However, 19 “[a] subsequent intention to break the promise or failure to fulfill it does not constitute fraud.” 20 Id. Here, there is no evidence that FPO did not intend to perform the promises at the time 21 they were made. 22 With respect to representations regarding ability to perform – e.g., that FPO was fully 23 capable of providing timely and accurate financial services to Plaintiff’s twenty-three 24 restaurants, that FPO had sufficient staff possessing the necessary competence and 25 restaurant industry experience to deliver the accounting services, and FPO was able to 26 transition in-house accounting operations to FPO in a timely fashion without significant 27 interruption of business operations – the Court finds that these representations are 28 statements of present ability not future performance. If FPO made these representations 14 08cv1559 BTM(WMc) 1 without knowledge of whether they were true of false, Hoot Winc can pursue a claim of 2 reckless misrepresentation, a form of fraud. See Zutz v. Case Corp., 422 F.3d 764, 770 (8th 3 Cir. 2005); Florenzano v. Olson, 387 N.W.2d 168, 177 n.2 (Minn. 1986) (Simonett, J., 4 concurring specially). As previously discussed, there is evidence that the contract was 5 purposefully underbid. In addition, there is evidence that FPO did not adequately investigate 6 what Hoot Winc’s needs were and therefore did not have a full understanding of the 7 complexity of the project and the resources that would be needed to service the account. 8 (Pl. Ex. 15.) Based on this evidence, the Court concludes that there is a genuine issue of 9 matieral fact with respect to whether FPO had a legitimate basis for representing that it was 10 able to properly provide the services at issue. 11 Hoot Winc can also bring a fraudulent concealment claim on the theory that prior to 12 the “go-live” date, FPO realized that it did not have the ability to properly perform the 13 contracted services but failed to disclose these facts to Hoot Winc, thereby inducing it to 14 transition its accounting functions to FPO. As a general rule, a party to a transaction has no 15 duty to disclose material facts to the other. Richfield Bank & Trust Co. v. Sjogren, 244 16 N.W.2d 648, 650 (Minn. 1976). However, “[o]ne who speaks must say enough to prevent 17 his words from misleading the other party,” and “[o]ne who has special knowledge of material 18 facts to which the other party does not have access may have a duty to disclose these fact 19 to the other party.” Id. 20 services at issue and then discovered that it actually lacked the resources to properly 21 perform the work, FPO had an obligation to disclose this material fact to Hoot Winc before 22 Hoot Winc turned over its accounting functions to FPO. If FPO represented that it was fully capable of performing the 23 The Court also finds that Hoot Winc can bring a fraud claim based on representations 24 that (1) FPO was a full-service national accounting and CPA firm, and that (2) CPAs with 25 restaurant-specific experience would be servicing Hoot Winc’s account. In his declaration, 26 Larry Spitcaufsky states that during the December 2005 meeting at Hoot Winc’s offices, 27 FPO’s representatives stated that they were a national accounting firm based in Chicago, 28 Illinois, and that they had been in the accounting business for over 75 years. (Spitcaufsky 15 08cv1559 BTM(WMc) 1 Decl. ¶ 6.) The FPO representatives also stated that they had numerous Certified Public 2 Accountants on their staff who had specific restaurant experience and that CPAs with 3 restaurant specific experience would be the ones providing accounting services to the Hoot 4 Winc Franchise Group. (Id.) Spitcaufsky states that it was important to him to have 5 accounting services for the Hoot Winc Franchise Group performed by a national accounting 6 firm staffed by CPAs with restaurant specific experience and that he relied on what the FPO 7 representatives had said when deciding to direct Debisaran to sign the Services Agreement. 8 (Id. at ¶¶ 7-8.) 9 FPO argues that Spitcaufsky’s declaration is a “sham affidavit” that should be 10 disregarded as contradictory of prior deposition testimony. In his deposition, Spitcaufsky 11 indicated that he never “talked” to anyone at FPO. (Spitcaufsky Dep. (Def. Ex. B) 249:8-9.) 12 However, Spitcaufsky indicated that he did attend a meeting with them. (Id. at 249:3-6.) 13 During his deposition, Spitcaufsky also said, “No,” when asked if he could remember 14 anything that was said either to him or others in his presence by any representative of FPO 15 before the contract was signed. (Spitcaufsky Dep. (Ex. J to Supp. Durone Decl.) 226:1-6.). 16 To avoid gamesmanship by opposing attorneys, the sham affidavit rule “should be 17 applied with caution.” Sch. Dist. No. 1J v. ACandS, Inc., 5 F.3d 1255, 1264 (9th Cir. 1993). 18 Ninth Circuit cases have “emphasized that the inconsistency between a party’s deposition 19 testimony and subsequent affidavit must be clear and unambiguous to justify striking the 20 affidavit.” Van Asdale v. Int’l Game Tech., 577 F.3d 989, 998-99 (9th Cir. 2009). “Variations 21 in a witness’s testimony and any failure of memory throughout the course of discovery create 22 an issue of credibility as to which part of the testimony should be given the greatest weight 23 if credited at all.” Tippens v. Celotex Corp., 805 F.2d 949, 954 (11th Cir. 1986). 24 Here, Spitcaufsky claims that FPO made the representations in question during a 25 meeting, not a one-on-one conversation. Therefore, his deposition testimony that he never 26 “talked” to anyone at FPO is not inconsistent. 27 Spitcaufsky indicated that he did not recall whether anyone at FPO said anything in his 28 presence “before the contract was signed.” The question was ambiguous as to whether 16 Furthermore, during his deposition, 08cv1559 BTM(WMc) 1 “before” was referring to a time immediately before the contract was signed or anytime prior 2 to December 28, 2005. Moreover, Spitcaufsky’s testimony concerned what he recalled at 3 that time. His deposition testimony is not clearly and unambiguously inconsistent with his 4 declaration. Therefore, the Court will not strike Spitcaufsky’s declaration as a sham affidavit. 5 FPO also argues that it was not reasonable for Hoot Winc to rely on any 6 representations regarding FPO being a CPA firm because the Services Agreement provided: 7 The financial reports are intended for internal management use only. It is understood that Client is knowledgeable about the basis of accounting and assumptions used in preparing the financial statements. These statements are not intended for distribution to third parties. RSM is not independent, and will not audit or review the financial statements, nor provide an opinion or any other form of assurance on the financial statements. 8 9 10 (Services Agreement, ¶ 6.5.) The Court is not persuaded by this argument. Even though 11 FPO was not performing CPA work (external auditing), it is plausible that Hoot Winc believed 12 that a CPA firm and CPAs have a higher level of expertise with respect to 13 financial/accounting matters in general. It would not be unreasonable for someone to rely 14 on the “CPA” designation as assurance of a certain level of training and knowledge. 15 FPO points out that their marketing materials made it clear that FPO was a subsidiary 16 of RSM McGladrey, Inc. The last page of one of the brochures given to Debisaran in the Fall 17 of 2005 explains: 18 About Us 19 21 RSM McGladrey Financial Process Outsourcing provides back office outsourcing solutions to retailers. We objectively assess our clients’ needs and provide cost-effective solutions in accounting, management information, bill paying, payroll and tax reporting. 22 .... 23 RSM McGladrey Financial Process Outsourcing is a subsidiary of RSM McGladrey, Inc., which offers a broad array of services, including business and tax consulting, wealth management, retirement resources, payroll services, corporate finance and financial process outsourcing. RSM McGladrey, Inc. is an independent member of RSM International – an affiliation of independent accounting and consulting firms. 20 24 25 26 (Def. Ex. F.) 27 In other marketing materials, however, the distinction between FPO and RSM 28 McGladrey, Inc. was blurred. These materials referred to “RSM McGladrey,” without 17 08cv1559 BTM(WMc) 1 distinguishing between FPO and its parent, and touted the company’s “national accounting 2 firm culture” and its accounting experience (“in accounting business for 75 years”). (Exs. 1, 3 3, & 4 to Spitcaufsky Decl.) Viewing the evidence as a whole, the Court cannot conclude 4 that it was unreasonable as a matter of law for Hoot Winc to rely on explicit representations 5 that FPO was a CPA firm and that CPAs would be servicing the Hoot Winc account. 6 As for FPO’s alleged failure to disclose that more than data entry was being done in 7 India, the Court concludes that any concealment of that fact alone cannot give rise to a fraud 8 claim. The Services Agreement provides: “RSM shall retain the right to delegate, under our 9 supervision, without Client’s consent, any part of its performance to any subcontractor it 10 reasonably deems to be reliable or an RSM International affiliated entity it reasonably deems 11 to be reliable.” (Services Agreement, ¶ 5.2.) The Services Agreement also includes an 12 integration clause, which states: 13 14 15 16 This Agreement . . . shall constitute the entire Agreement between the parties governing the subject matter of this Agreement. RSM shall not be deemed to have made any representations or warranties as to its performance except as expressly set forth in this Agreement. The provisions of this Agreement supersede all prior oral and written promises, representations, communications, Agreements and understanding of the parties in respect to the subject matter of this Agreement. Only both parties agreeing to the amendment in writing may amend this Agreement. 17 (Services Agreement, ¶ 10.0.) 18 Under Minnesota law, reliance on a representation made before entering into a 19 written contract with an integration clause is not reasonable if the contract contains terms in 20 plain contradiction of the prior representation. Thomas W. Lyons, Inc., v. Sonus-USA, Inc., 21 2009 WL 306703, at * 7 (D. Minn. Feb. 9, 2009). As explained by the Minnesota Court of 22 Appeals: 23 24 25 26 27 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. Clements Auto Co. v. Service Bureau Corporation, 444 F.2d 169, 179 (8th Cir.1971) (citing Vint v. Nelson, 267 Minn. 490, 127 N.W.2d 177 (1964) ). When a promise is not in plain contradiction of a contract or, if contradictory, when it is accompanied by misrepresentations of other material facts in addition to the contradictory intent, the question of reasonable reliance is for the trier of fact. General Corporation, 184 F.Supp. at 239. 28 Johnson Bldg. Co. v. River Bluff Dev. Co., 347 N.W.2d 187, 195 (Minn. Ct. App. 1985). 18 08cv1559 BTM(WMc) 1 Here, the contract explicitly gives FPO the right to delegate any part of its 2 performance, without Hoot Winc’s consent, to any subcontractor or RSM International 3 affiliated entity it reasonably deems to be reliable. 4 understood, based on FPO’s presentations and marketing materials, that the accounting 5 work would be done by FPO in the United States, it does not appear that FPO ever 6 represented that it would never subcontract the work to others within the United States or 7 in another country. Even if FPO did make such a promise, it would not have been 8 reasonable for Hoot Winc to rely on it because the terms of the contract are in plain 9 contradiction.5 Although Hoot Winc may have 10 The issue of whether FPO fraudulently concealed that individuals without degrees 11 were performing substantive work on the account is separate and distinct from the issue of 12 where the work was being performed.6 A representation that CPAs with restaurant-specific 13 experience would be servicing the account does not directly contradict the contract language 14 that FPO may delegate any part of its performance to any subcontractor it reasonably deems 15 to be reliable or an RSM International affiliated entity it reasonably deems to be reliable. 16 Considered together with the alleged representation that CPAs with restaurant-specific 17 experience would be servicing the account, the contract language could be interpreted as 18 allowing FPO to subcontract the work as long as the subcontractors are CPAs with 19 restaurant experience. Accordingly, Hoot Winc can base a fraudulent concealment claim 20 on the theory that FPO knew, prior to the “go-live” date, that it was going to assign 21 5 22 23 24 25 26 27 28 Hoot Winc also argues that FPO represented that it would keep Hoot Winc’s information confidential but then failed to disclose that FPO gave the India office access to Hoot Winc’s databases. However, it seems that by agreeing that FPO could delegate performance of the contract without Hoot Winc’s permission, Hoot Winc also consented that FPO could share whatever information would be needed for the third party to perform the subcontracted work. 6 There is a triable issue whether the individuals in India working on the account held degrees and had restaurant expertise. Although FPO claims that the India staff were “chartered” accountants (the equivalent of U.S. Certified Public Accountants) (Hogan Dep. (Def. Ex. II) 55:1-57:22), Hogan allegedly told Murray in November of 2006 that the individuals working on the account did not have degrees. (Murray Dep. (Pl. Ex. 58) 172:1016.) Although Hogan’s alleged statement was not specific as to time, it is sufficient to raise a triable issue regarding the qualifications of the individuals working on the account. 19 08cv1559 BTM(WMc) 1 individuals who were not CPAs to perform substantive work on the account but failed to 2 inform Hoot Winc of that development.7 3 For the reasons discussed above, the Court denies FPO’s motion for summary 4 judgment on Hoot Winc’s claims of fraud (Third Cause of Action) and reckless 5 misrepresentation (Fifth Cause of Action). 6 7 C. Negligent Misrepresentation 8 In addition to claims of fraud and reckless misrepresentation, Hoot Winc asserts a 9 claim of “negligent misrepresentation” (Fourth Cause of Action). This claim fails as a matter 10 of law. 11 Under Minnesota law, a person may be held liable for negligent misrepresentation 12 “when supplying information for the guidance of others in the course of a transaction in which 13 one has a pecuniary interest, or in the course of one’s business, profession, or employment.” 14 Safeco Ins. Co. of America v. Dain Bosworth Inc., 531 N.W.2d 867, 870 (Minn. Ct. App. 15 1995). In contrast, where “adversarial parties negotiate at arm’s length, there is no duty 16 imposed such that a party could be liable for negligent misrepresentations. In these 17 situations, the injured party’s remedy is to sue either in contract or to sue for intentional 18 misrepresentation.” Id. at 871. Thus, Minnesota courts have disallowed claims of negligent 19 misrepresentation in cases where commercial parties, with no special relationship, engaged 20 in a business transaction. See, e.g., Signature Bank v. Marshall Bank, 2006 WL 2865325 21 (Minn. Ct. App. Dec. 20, 2006); Smith v. Woodwind Homes, Inc., 605 N.W.2d 418 (Minn. Ct. 22 App. 2000); La Parilla, Inc. v. Jones Lang LaSalle Americas, Inc., 2006 WL 2069207 (D. 23 Minn. July 26, 2006). 24 25 There was no special relationship between Hoot Winc and FPO: FPO was not providing advice or guidance to Hoot Winc. This lawsuit arises out of an ordinary 26 7 27 28 Although there is evidence supporting a claim of fraudulent concealment with respect to work being done by individuals without degrees, it is less clear whether Hoot Winc can establish fraudulent misrepresentation – i.e., that at the time FPO represented that CPAs with restaurant experience would be servicing Hoot Winc’s account, FPO knew that it would staff the account with individuals without degrees. 20 08cv1559 BTM(WMc) 1 commercial transaction between two sophisticated parties. Therefore, while Hoot Winc can 2 pursue claims of breach of contract and fraud, Hoot Winc cannot sue for negligent 3 misrepresentation. FPO’s motion for summary judgment is granted as to this claim. 4 5 D. Punitive Damages 6 FPO moves for summary judgment on Hoot Winc’s punitive damages claim on the 7 ground that Hoot Winc cannot establish by clear and convincing evidence that FPO acted 8 with “deliberate disregard” of Hoot Winc’s rights. See Minn. Stat. Ann. § 549.20. In light of 9 the Court’s denial of FPO’s motion on Hoot Winc’s claims for fraud, reckless 10 misrepresentation, and willful and wanton negligence, the Court will allow the punitive 11 damages claim to proceed. 12 13 V. CONCLUSION 14 For the reasons set forth above, FPO’s motion for partial summary judgment [Doc. 15 No. 185] is GRANTED IN PART and DENIED IN PART. The motion is GRANTED as to 16 Plaintiff’s Fourth Cause of Action for negligent misrepresentation. The motion is DENIED 17 as to the remaining causes of action. 18 IT IS SO ORDERED. 19 DATED: September 6, 2011 20 21 22 Honorable Barry Ted Moskowitz United States District Judge 23 24 25 26 27 28 21 08cv1559 BTM(WMc)
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