In a recent decision by the Minnesota Court of Appeals, TCI Business Capital, Inc. v. Five Star American Die Casting, LLC, No. A16-0741 (Jan. 23, 2017), the Court analyzed the elements of several causes of action commonly asserted in civil litigation as applied to unusual facts. Brian Flynn was employed by TCI Business Capital (“TCI”) as its Chief Risk Officer. TCI entered into an agreement with Five Star American Die Casting (“Five Star”) whereby it advanced financing to Five Star. Five Star’s debt to TCI eventually totaled approximately $446,879 and it was unable to satisfy its obligation. His scheme was complicated, but it is undisputed that Flynn falsified internal TCI documents to show that the debt was only $213,238 so that he could pretend an auction occurred and secretly proceed with his intention of seizing and eventually selling Five Star’s equipment to pay off the debt to TCI’s favor. Before he could act on his intention, however, he was fired for unrelated reasons and did not disclose the inaccurate records. After his termination, and relying on the records showing the lower amount being owed, TCI settled the claim against Five Star for payment of about $84,262. After later learning of the falsified records, TCI sued Flynn and Five Star. The claims against Flynn included conversion, civil theft, fraudulent misrepresentation, and breach of fiduciary duty. The district court dismissed all four counts on summary judgment and TCI appealed.
The appellate court affirmed dismissal of the conversion claim, noting that the tort of conversion is the act of intentional “interference with the personal property of another, done without lawful justification, by which any person is deprived of use and possession.” The Court of Appeals first found that all opinions of the Minnesota Supreme Court on the subject of conversion concerned “tangible personal property” and questioned whether a conversion claim can ever lie based on “money in an intangible form.” It declined to rule on this specific question, however, because it found that Flynn did not “intend” to interfere with the property of TCI, rather he intended that the money would eventually be recovered.
The Court of Appeals also affirmed dismissal of the statutory civil theft claim under Minn. Stat. Section 604.14, which allows for double damages when a person steals personal property from another. The appellate court noted that this statute appeared to be intended primarily for recovery of merchandise stolen from a retail store. Relying on the definition of “steals,” it held again that TCI did not have evidence that Flynn took TCI’s property with intent to keep or use it.
The Court did, however, reverse the district court’s decision to dismiss the claims of fraudulent misrepresentation and breach of fiduciary duty. Regarding the misrepresentation claim, it held that Flynn intended to induce TCI to rely on his misrepresentations because he intended to induce TCI to credit Five Star’s account, to believe that an auction of the equipment had occurred, and to continue to employ him. Flynn contended he only intended to maximize TCI’s return on its business relationship with Five Star but was prevented from doing so when he was terminated. TCI argued that it was induced to settle the debt for less than it would have based on the false records. Citing the Restatement (Second) of Torts, the Court found that “one who believes that another is substantially certain to act in a particular manner as a result of a misrepresentation intends that result, although he does not act for the purpose of causing it and does not desire to do so.” It therefore found that there was a misrepresentation, intent, reliance, causation and damages. The Court also found that as an officer of the company, Flynn failed to meet his fiduciary duty of honesty and good faith to act “with the care an ordinary prudent person in like position would exercise under similar circumstances” citing Minn. Stat. Section 302A.361. The question of damages on the misrepresentation and breach of fiduciary duty claims was remanded to the trial court for determination.
The TCI decision shows that careful pleading and selection of civil claims is necessary when seeking relief in situations where a party caused harm through dishonesty but did not personally benefit. Whereas straightforward claims of conversion and theft were not successful under these facts, the more elastic tort of misrepresentation prevailed, even when the consequence of the representation was not necessarily intended by the defendant, because it was foreseeable. The breach of fiduciary duty claim also prevailed because of the broad and elevated duty owed by corporate officers. The case also suggests, somewhat surprisingly, that conversion may not be an appropriate claim for cases involving embezzlement or theft of money.
V. John Ella is a Minnesota fraud and misrepresentation law attorney and has written several articles and book chapters on common law fraud.