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Northstar Industries, Inc. v. Merrill Lynch & Co., Inc.: US District Court : CONTRACT | FRAUD - no fiduciary duty; no good faith dealing breach; no fraud damages

Civil No. 07-4282(DSD/SRN)
Northstar Industries, Inc.,
a Minnesota corporation,
Merrill Lynch & Co., Inc. and
Merrill Lynch Global Private
Equity, Inc., f/k/a Merrill
Lynch Global Partners, Inc.,
foreign corporations, and
Robert F. End, individual,
Paul Egtvedt, Esq. and Egtvedt Law Firm, 2915 Wayzata
Boulevard, Minneapolis, MN 55405, counsel for plaintiff.
Robert L. Schnell, Esq., Jana M. Viramontes, Esq. and
Faegre & Benson, 2200 Wills Fargo Center, 90 South
Seventh Street, Minneapolis, MN 55402, counsel for
This matter is before the court upon defendants motion to
dismiss. Based upon a review of the file, record and proceedings
herein, and for the following reasons, the court grants defendants
This business dispute arises from an agreement between
plaintiff Northstar Industries, Inc. (Northstar) and defendant
Merrill Lynch Global Private Equity, Inc. (MLGPE). Northstar is
a Minnesota corporation that provides services related to mergers
and acquisitions. MLGPE is an investment firm incorporated in
Delaware with its principal place of business in New York. It is
a subsidiary of defendant Merrill Lynch & Co., Inc. (Merrill
In January 2004, Northstar entered into a fee agreement (the
Stonington agreement) with Stonington Partners, Inc.
(Stonington), a private equity firm. Under that agreement,
Stonington agreed to pay Northstar a fee in the event that
Northstar provided the name of a business that led to an
acquisition or investment by Stonington. Specifically, Stonington
would pay Northstar two percent of the first 0 million in
transaction value and one percent of the value thereafter.
In late 2004 or early 2005, Northstar learned that Gene
Bicknell (Bicknell), chairman of NPC International, Inc. (NPC),
was interested in selling one of his companies. Northstar brought
the information to Stonington, which referred Northstar to MLGPE as
a potential NPC purchaser. As a result, on March 4, 2005,
Northstar and MLGPE entered into a fee agreement of their own that
adopted the terms of the Stonington agreement and provided that if
MLGPE purchased NPC, MLGPE would pay Northstar any fees due under
the Stonington agreement. Northstar participated in an
introductory meeting between Bicknell and MLGPE managing director
Robert End (End) in March 2005 but then, upon instruction from
MLGPE, played no role in the lengthy negotiations between NPC and
By October 2006, negotiations had stagnated after NPC
requested a higher purchase price than MLGPE was willing to pay.
In an attempt to end the stalemate, MLGPE looked to cut costs
associated with the purchase. To that end, MLGPE contacted
Northstar and requested that it reduce its finders fee from the
anticipated .1 million to .5 million to enable MLGPE to
complete the deal. Northstar alleges that during conversations
about reducing Northstars fee, End asserted that the fees of other
companies involved in the deal would be reduced pro rata.
Northstar initially refused the reduction, counter-offering with a
request for .6 million in fees and other consideration. End
responded to Northstar by email that his request was a
nonnegotiable last stab at the deal and that based on Northstars
refusal to reduce its fee the deal [was] dead. (Def. App. at 7-
Ends email ultimately prompted Northstar to agree to the .5
million finders fee, and on November 1, 2005, Northstar and MLGPE
entered into a revised fee agreement (the November agreement)
reflecting that amount. The November agreement provided that in
no case shall [MLGPE] be obligated to pay any Fee in excess of
[.5 million] and noted that it was the sole and entire
agreement between the parties [with] no modification ... binding
unless attached ... and signed by each party to the agreement.
(Id. at 1, 10.) MLGPE and NPC completed a stock-purchase deal in
March 2006.
In March 2007, Northstar reviewed NPCs press release and its
Securities and Exchange Commission filings and concluded that the
other companies involved in the NPC acquisition had not reduced
their fees pro rata. Accordingly, on October 17, 2007, it filed
this action alleging that Merrill Lynch, MLGPE and End breached
certain fiduciary duties, breached their duty of good faith and
fair dealing and engaged in fraud and misrepresentation. On
December 20, 2007, defendants moved to dismiss all claims.
Pursuant to Federal Rule of Civil Procedure 8(a)(2), a
complaint must contain a short and plain statement of the claim
showing that the pleader is entitled to relief. This statement
does not require detailed factual allegations so long as it
give[s] the defendant fair notice of what the ... claim is and the
grounds upon which it rests. Conley v. Gibson, 355 U.S. 41, 47
(1957). However, a court will dismiss a complaint pursuant to
Federal Rule of Civil Procedure 12(b)(6) for failing to state a
claim upon which relief can be granted if, after taking all facts
alleged in the complaint as true, those facts fail to raise a
right to relief above the speculative level. Bell Atl. Corp. v.
Twombly, 127 S. Ct. 1955, 1965 (2007).
I. Defendants Fiduciary Duty to Northstar
Northstar argues that defendants breached the fiduciary
relationship that existed between the parties. Specifically,
Northstar alleges that Ends instruction to cease talking to NPC
gave defendants greater access to the facts surrounding the
transaction and produced a fiduciary relationship. Defendants
maintain that the arms length negotiations engaged in with
Northstar - a sophisticated businesses - created no fiduciary
relationship between the parties.
In Minnesota, the existence of a fiduciary duty is a question
of fact. See Toombs v. Daniels, 361 N.W.2d 801, 809 (Minn. 1985);
Burgmeier v. Farm Credit Bank of St. Paul, 499 N.W.2d 43, 51 (Minn.
Ct. App. 1993). A fiduciary relationship exists when
confidence is reposed on one side and there is
resulting superiority and influence on the
other; and the relation and duties involved in
it need not be legal, but may be moral,
social, domestic, or merely personal ....
Disparity of business experience and invited
confidence could be a legally sufficient basis
for finding a fiduciary relationship.
Toombs, 361 N.W.2d at 809 (internal citations and quotations
omitted). However, special circumstances must be present in a
relationship between parties in order to establish a fiduciary
relationship. St. Paul Fire & Marine Ins. Co. v. A.P.I., Inc., 738
N.W.2d 401, 406 (Minn. Ct. App. 2007). Thus, ordinary business
relationships may involve reliance on a professional, a degree of
trust, and a duty of good faith, and yet not fall within the class
of fiduciary relationships. Id. Relationships that involve
competing interests and often generate litigation are not
compatible with the concept of a fiduciary. Cherne Contracting
Corp. v. Wausau Ins. Cos., 572 N.W.2d 339, 343 (Minn. Ct. App.
1997). Accordingly, the arms-length negotiation of a contract
does not give rise to a fiduciary relationship. See Shema v.
Thorpe Bros., 67 N.W.2d 86, 91 (Minn. 1953).
In this case, both MLGPE and Northstar are sophisticated
business entities who were adequately prepared to negotiate the
November fee agreement at arms length. Northstar chose to rely on
and trust End, but that decision alone did not create a fiduciary
duty. See A.P.I., 738 N.W.2d at 406. Nor did defendants request
that Northstar cease communication with NPC increase defendants
relative superiority or influence so as to create a fiduciary
relationship. That request coupled with Ends insistence on
Northstars fee reduction illustrated the competing interests at
play in the transaction despite the parties mutual desire to
complete the NPC deal. For these reasons, Northstars allegations
are legally insufficient to establish a fiduciary relationship
between the parties, and the court dismisses Northstars breach of
fiduciary duty claim.
II. Defendants Duty of Good Faith and Fair Dealing
Northstar contends that defendants breached the implied duty
of good faith and fair dealing when negotiating the November
agreement. Under Minnesota law, every contract includes an
implied covenant of good faith and fair dealing requiring that one
party not unjustifiably hinder the other partys performance of
the contract. In re Hennepin County 1986 Recycling Bond Litig.,
540 N.W.2d 494, 502 (Minn. 1995) (quoting Sobel & Dahl Constr. v.
Crotty, 356 N.W.2d 42, 45 (Minn. 1984)). The implied covenant
does not extend to actions beyond the scope of the underlying
contract. Id. Indeed, Minnesota does not recognize a claim for
breach of the implied covenant of good faith and fair dealing
separate from an underlying breach of contract claim. See
Medtronic, Inc. v. Convacare, Inc., 17 F.3d 252, 256 (8th Cir.
Here, Northstar does not argue that defendants interfered with
performance of any contract provisions. More important, Northstar
does not allege that defendants breached the November agreement.
By definition, therefore, defendants did not breach the implied
duty of good faith and fair dealing. Accordingly, the court
dismisses that claim against defendants.
III. Fraud and Misrepresentation
Northstar alleges that defendants engaged in fraud when End
purportedly told Northstar that all parties were taking pro rata
cuts in order to reach a deal with NPC and that the deal would be
dead without the reduction. To establish fraudulent
misrepresentation in Minnesota, a plaintiff must demonstrate that:
(1) there was a false representation by a
party of a past or existing material fact
susceptible of knowledge; (2) made with
knowledge of the falsity of the representation
or made as of the partys own knowledge
without knowing whether it was true or false;
(3) with the intention to induce another to
act in reliance thereon; (4) that the
representation caused the other party to act
in reliance thereon; and (5) that the party
suffered pecuniary damage as a result of the
Hoyt Props., Inc. v. Prod. Res. Group, L.L.C., 736 N.W.2d 313, 318
(Minn. 2007) (citing Specialized Tours, Inc. v. Hagen, 392 N.W.2d
520, 532 (Minn. 1986)).
A. Reliance
Defendants challenge Northstars reliance on Ends alleged
promise, arguing that Northstar cannot claim fraudulent inducement
by promises that are directly contradicted by the November
agreement. See Prod. Credit Assn of E. Cent. Wis. v. Farm Credit
Bank of St. Paul, 781 F. Supp. 595, 605-06 (D. Minn. 1991) ([A]
party may not claim fraudulent inducement by promises that are
directly contradicted by a subsequently executed agreement, absent
some factor justifying the partys reliance.). Whether a partys
reliance is reasonable is ordinarily a fact question for the jury
unless the record reflects a complete failure of proof. Hoyt, 736
N.W.2d at 321. A party may rely on a representation unless the
falsity of the representation is known or obvious to the listener.
See Speiss v. Brandt, 41 N.W.2d 561, 566 (Minn. 1950). Further,
the listener is under no obligation to conduct an investigation so
long as it is not known by the listener that a representation is
false and it is not obviously false. Id. However, where an oral
representation completely contradicts a written contract provision,
reliance on the oral representation is unjustifiable as a matter of
law. Boyd v. DeGardner Realty & Constr., 390 N.W.2d 902, 904
(Minn. Ct. App. 1986) (citing Johnson Bldg. Co. v. River Bluff Dev.
Co., 374 N.W.2d 187, 194 (Minn. Ct. App. 1985)).
Here, the November agreement states that MLGPE will in no
case pay Northstar more than .5 million. (Def. App. at 10.)
While it would preclude reliance on a statement promising further
compensation after the deal, such contract language does not
contradict Ends alleged promises about pro rata reductions and the
potential death of the deal. Indeed, the November agreement
contains no reference to pro rata reductions or deal saving
actions, and without explicit mention of these matters, there can
be no complete contradiction. Moreover, although the integration
clause prevented the alleged pro rata promise from becoming part of
the agreement, it does not foreclose the possibility that the
promise induced Northstar to enter into the deal. For these
reasons, defendants have not demonstrated that as a matter of law
Northstar could not rely on Ends purported statements.
B. Damages
Defendants argue that the court should dismiss Northstars
fraud claim because Northstar cannot establish properly recoverable
damages. The general measure of damages for fraud is out-of-pocket
losses. See Noske v. Friedberg, 713 N.W.2d 866, 876 (Minn. Ct.
App. 2006) (citing B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d
180, 182 (Minn. 1988)). That is, where fraud induces a
transaction, the measure of damages is the difference between what
is given and what is received. See Jensen v. Peterson, 264 N.W.2d
139, 142 (Minn. 1978).
A limited exception may apply, however, allowing a plaintiff
to recover the difference between the value of the property
received and the value it would have had if the representation had
been true, if out-of-pocket damages would not make the party whole.
B.F. Goodrich, 430 N.W.2d at 182-83. Courts have recognized this
exception sparingly - primarily in situations where the primary
damages are sweeping and general, such that out-of-pocket damages
would have failed entirely to compensate the plaintiffs, Vesta
State Bank v. Independent State Bank of Minnesota, No. 96-1115,
1996 WL 653967, at *6 (Minn. Ct. App. Nov. 12, 1996), or where the
strict application of an out of pocket damage rule would fail to do
substantial justice, Jensen, 264 N.W.2d at 143. See, e.g., B.F.
Goodrich, 430 N.W. 2d at 182-83 (where plaintiffs entire business
lost because of misrepresentations, benefit-of-bargain damages
proper); Lewis v. Citizens Agency of Madelia, Inc., 235 N.W.2d 831,
835-36 (Minn. 1975) (where insurance agent misrepresented that
plaintiff had life insurance policy rather than annuity, plaintiff
recovered value of proceeds rather than merely premiums); Hanks v.
Hubbard Broad., Inc., 493 N.W.2d 302, 310-11 (Minn. Ct. App. 1992)
(where misrepresentations severely damaged anchors career,
benefit-of-bargain damages proper); Brooks v. Doherty, Rumble &
Butler, 481 N.W.2d 120, 128-29 (Minn. Ct. App. 1992) (where
misrepresentations damaged attorneys career, benefit-of-bargain
damages appropriate). The rule crafted by the Minnesota courts
thus lies somewhere between a strict application of the out-ofpocket
rule and the more liberal benefit-of-the-bargain rule. At
the same time, Minnesota courts have consistently emphasized that
the point is to compensate actual losses, not prospective gains.
Commercial Prop. Invs., Inc. v. Quality Inns Intl, Inc., 61 F.3d
639, 648 (8th Cir. 1995).
Northstar maintains that it suffered a loss of approximately
.6 million due to defendants misrepresentations, arriving at
that number by subtracting the .5 million it received from the
.1 million originally agreed upon. Northstars calculations,
however, fail to account for the contingent nature of each fee
agreement. Northstar could receive no finders fee if MLGPE and
NPC did not complete a deal, a reality Northstar accepted by
agreeing to reduce its fee in order to facilitate the ultimate
sale. In this context, Northstars alleged damages cannot be
actual losses. Rather, Northstar seeks hypothetical prospective
gains that are not cognizable damages in this case. Accordingly,
Northstars fraud claim fails as a matter of law.
Therefore, IT IS HEREBY ORDERED that defendants motion to
dismiss [Doc. No. 19] is granted.
Dated: June 5, 2008
s/David S. Doty
David S. Doty, Judge
United States District Court


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