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STATE OF MINNESOTA IN SUPREME COURT A10-1854 Court of Appeals Hardin County Savings Bank, et al., Appellants, vs. Housing and Redevelopment Authority of the City of Brainerd, et al., Defendants, James H. Bedard, Inc., Respondent. Filed: September 19, 2012 Office of Appellate Courts Anderson, Paul H., J.

________________________ Thomas J. Radio, Best & Flanagan, LLP, Minneapolis, Minnesota; and Stanley J. Thompson, Davis Brown Law Firm, Des Moines, Iowa, for appellants. Michael T. Feichtinger, Cally R. Kjellberg, Quinlivan & Hughes, P.A., Saint Cloud, Minnesota, for respondent. ________________________ SYLLABUS A party pleading fraud in its complaint may, under Minn. R. Civ. P. 10.03, incorporate into its fraud count facts and allegations that appear elsewhere in the party's complaint.

A party pleaded a negligent misrepresentation claim with particularity under Minn. R. Civ. P. 9.02 when that party pleaded facts underlying each element of the claim. Reversed and remanded. OPINION ANDERSON, Paul H., Justice. This case requires us to determine whether the appellants, six banks, pleaded a negligent misrepresentation claim with particularity under Minn. R. Civ. P. 9.02. The Banks allege that the negligent misrepresentation of the respondent, James H. Bedard, Inc., caused them to be damaged when the Housing and Redevelopment Authority of the City of Brainerd defaulted on bonds held by the Banks. More specifically, in November 2003 the Banks purchased $3.3 million in bonds from the City of Brainerd. The

bonds helped finance a residential and commercial development project in Brainerd. In deciding to purchase the bonds, the Banks relied on an appraisal and feasibility study prepared by Bedard. The Banks alleged that Bedard's appraisal and feasibility study overstated the value of the project and the rate at which the land would sell. The Banks further alleged that those overstatements constituted negligent misrepresentation. The Banks commenced an action against Bedard and others in Crow Wing County District Court based on the foregoing allegations. The district court dismissed the action,

concluding that the Banks failed to plead their negligent misrepresentation claim against Bedard with particularity. A divided panel of the court of appeals affirmed. We reverse the court of appeals and remand.

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In October 2001 a private developer purchased approximately 40 acres of land in Brainerd, Minnesota. The developer sought to develop the land into single-family home lots, and approached the City of Brainerd to request the City's participation by having the City provide tax increment financing (TIF). The City agreed to participate in the project and in December 2002 the City established a TIF district for 20 single-family homes. But the developer failed to make any improvements to the land. In response to this failure, the City approved a resolution to issue $1,085,000 in General Obligation Improvement Bonds 1 for improvements to the land. The Housing and Redevelopment Authority of the City of Brainerd (HRA) then took over the project from the developer. At that point, the project involved preparing 96 residential lots for sale and building two model homes. The HRA intended to issue taxable revenue bonds 2 ("bonds") and use the proceeds of the bond sale to acquire and make the improvements to the land.

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State General Obligation Revenue Bonds are usually sold "into the market place. The proceeds from the sale of the bonds are used to pay the cost" of approved buildings and improvements. State General Obligation Revenue Bonds, Minn. Mgmt. & Budget, http://www.mmb.state.mn.us/bonds-home/118-118 (last visited Sept. 6, 2012). The complaint describes taxable revenue bonds as follows: Taxable revenue bonds are commonly sold by municipal entities, such as the HRA, to the public to finance private projects that serve public needs. These bonds are then repaid from funds generated by a dedicated revenue stream from the issuer's project financed with the proceeds of the bond and the issuer's taxing power are oftentimes secured by the underlying Project real estate. In this circumstance, the principal revenue stream was expected to be from the sale of lots and not from HRA's taxing power. 3

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To aid in the issuance of the bonds, the HRA hired underwriter Dougherty & Company, LLC. The HRA asked Dougherty to prepare a Private Offering Memorandum ("POM"), which, with the HRA's approval, would provide the details of an offer to sell $3.3 million in bonds. The HRA and Dougherty then hired respondent James H. Bedard, Inc., to prepare an appraisal and feasibility study of the project. Bedard appraised the project--which now included 94 residential lots, two commercial lots, and two model homes--at $4,127,670, and valued each residential lot at $43,386. In its feasibility study, Bedard estimated that the HRA would sell all of the lots within a seven-year period (otherwise known as the "absorption rate") by selling approximately 14 lots per year. Dougherty included Bedard's appraisal and feasibility study in its POM. The record indicates that Dougherty then approached appellant-bondholders Hardin County Savings Bank, Walworth State Bank, Eitzen State Bank, Northern National Bank, Kindred State Bank, and First National Bank (collectively, the "Banks") to initiate discussions about the Banks purchasing the bonds. Dougherty provided the Banks with the POM. Dougherty also informed the Banks that while the bonds likely would mature before a sufficient number of lots were sold to pay off the bonds, "the City would not allow HRA to default on the Bonds because it would harm the City's ability to issue bonds in the future." On November 18, 2003, the Banks bought all of the $3.3 million of bonds issued by the HRA and did so in reliance on the POM and their discussions with Dougherty. It is undisputed that the project development did not live up to Bedard's projections. In 2004 two model homes were built on the land, but no lots were sold. In 4

2005 one model home was built on the land, and only one lot was sold. In 2006 one lot was sold. By the end of 2006, 83 lots remained unsold. The bonds matured on December 1, 2006. Ten days later, on December 11, 2006, the Banks made a "call" on the bonds. In response, the City approved expanding the TIF district within the project and authorized the issuance of another $4,925,000 of General Obligation Bonds, which would serve in part to repay the nearly $2.74 million the HRA owed to the Banks. But before the City issued the General Obligation Bonds, it called a public hearing to discuss the matter. That hearing was set for April 16, 2007. In the meantime, the City requested that a second appraisal of the project be prepared. On April 12, 2007, William R. Ludenia completed the second appraisal. In his appraisal, Ludenia estimated that the total value of the 83 remaining lots was $530,000. Four days after receiving Ludenia's appraisal, the City held the public hearing on the issuance of an additional $4,925,000 of General Obligation Bonds. After this hearing, the City rejected the issuance of the additional bonds. On November 16, 2007, the HRA defaulted on the bonds purchased by the Banks. Following this default, the Banks commenced legal actions against several parties. In April 2008 the Banks commenced an action against the City of Brainerd, Dougherty, and Bedard, Inc., in the United States District Court for the Northern District of Iowa. 3 The Banks asserted several claims under federal securities law, and Iowa and

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Hardin County Savings Bank is an Iowa corporation with a principal place of business in Eldora, Iowa.

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Minnesota law. The federal district court concluded that the Banks failed to sufficiently plead their federal securities claims and dismissed those claims with prejudice. The court then dismissed the remaining state law claims without prejudice. Following the federal district court's dismissal of their claims, the Banks commenced this action in Crow Wing County District Court against the HRA, Dougherty, two Dougherty employees, and Bedard. The Banks' complaint included three claims against Bedard: a state securities fraud claim under Iowa law (Count VIII), a state securities fraud claim under North Dakota law 4 (Count IX), and a claim for negligent misrepresentation (Count X). All of the Banks' claims against Bedard arose from the allegation that Bedard's appraisal stated that it "took into account the improvements such as streets, utilities, sidewalks, [and] plantings" (emphasis omitted) when estimating the value of the project and the value of individual lots, but that in reality the appraisal did not take into account the $1,085,000 in improvements. Thus, while Bedard valued the individual lots at

$43,386 per lot, the City had to charge an additional "special assessment" to the individual lot buyers in order to recoup the $1,085,000 it spent on improvements. To recoup the money spent on improvements, the City spread the special assessment cost equally among the lots by raising the cost to buyers to $54,688 per lot, $11,302 more per lot than the value Bedard used in his appraisal. Consequently, Bedard's estimate that the project was worth $4,127,670 "overstated the value of the collateral by, at least,
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Kindred State Bank is a North Dakota bank with its principal place of business in Kindred, North Dakota. 6

$1 million."

The Banks also alleged that Bedard's feasibility study "restated the

erroneous lot value from the Appraisal and [therefore] failed to properly take into account the special assessment cost on the price of a lot to reach a seven-year absorption rate." The Banks alleged that the result of Bedard's erroneous appraisal and feasibility study was that the lot prices--which were based on the estimates in Bedard's appraisal-- were too high for potential buyers, explaining why only three lots sold. The failure to sell the remaining lots resulted in insufficient revenue to pay the bonds, causing the HRA to default on the bonds. Specifically, in support of Count VIII, a claim under Iowa law against Bedard, the Banks alleged the following facts: 160. Bedard, Inc. made omissions of material fact and representations to Bondholders as follows:

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