Rebecca J. Adams, John Crudele v. James Koch, Steve Hyland, Erik Ostigaard, Greg Bohnsack

This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2014).

STATE OF MINNESOTA
IN COURT OF APPEALS
A15-0761

Rebecca J. Adams, et al.,
Plaintiffs,

John Crudele, et al.,
Appellants,

vs.

James Koch, et al.,
Defendants,

Steve Hyland,
Respondent,

Erik Ostigaard,
Respondent,

Greg Bohnsack,
Respondent.

Filed April 4, 2016
Affirmed
Connolly, Judge

Hennepin County District Court
File No. 27-CV-11-19418

Christopher P. Parrington, Alissa N. Mitchell, Foley & Mansfield, PLLP, Minneapolis,
Minnesota (for appellants)

Steve Hyland, St. Paul, Minnesota (pro se respondent)

Erik Ostigaard, Savage, Minnesota (pro se respondent)
Paul H. Weig, Jonathan R. Drewes, Drewes Law, PLLC, Minneapolis, Minnesota (for
respondent Bohnsack)

Considered and decided by Connolly, Presiding Judge; Stauber, Judge; and

Bjorkman, Judge.

UNPUBLISHED OPINION

CONNOLLY, Judge

Appellant real estate investors challenge three district court orders: the first vacating

default judgments against respondent Steve Hyland and respondent Gregory Bohnsack; the

second dismissing Bohnsack from the case, with prejudice; and the third dismissing all

claims against respondents Hyland and Erik Ostigaard following a court trial. We affirm.

FACTS

This case arises out of several real estate investments in Giants Ridge Golf Course

& Ski Resort (Giants Ridge), located in Biwabik, Minnesota, and developed by the Iron

Range Resource and Rehabilitation Board (IRRRB). The State of Minnesota developed

ski and golf areas at Giants Ridge and built Giants Ridge Lodge (the Lodge), a hotel and

restaurant at the site. In 2005, real estate developer James Koch purchased the Lodge and

began to sell condos and villas, managing his development through his business entity,

Wayzata Hospitality Group LLC. On January 17, 2007, Koch signed a listing agreement

giving Split Rock Realty the exclusive right to represent his development at Giants Ridge.

Hyland and Ostigaard were real estate agents at Split Rock Realty, and Bohnsack as well

as several others, were employed by Split Rock Realty and marketed units at Giants Ridge.

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 Appellant John Crudele and JC Recreational Properties, LLC

In 2007, appellant John Crudele heard about Giants Ridge and was approached to

purchase units. Crudele met with Split Rock Realty employees, including Hyland, in 2007

to explore a possible investment in real estate. At this meeting, he was informed that he

could purchase a single unit or five units (a five-pack), and that financing would be

provided through American Bank of the North. With either option, he would receive an

18-month leaseback agreement. Crudele alleged at trial that he was told that any occupancy

greater than 50% would cause the investment to be cash-flow neutral, meaning that he

would not have to pay money out of pocket to maintain his investment. Crudele was

informed (it is not clear by whom) that the past occupancy at Giants Ridge was greater than

50% and was projected to eclipse 60%.

Based on the initial meeting, Crudele was interested in learning more. Crudele

testified that Hyland contacted him in July of 2007 and told him that Hyland felt it was best

to hear the story and see the vision of what was possible from the developer, Mr. Koch.

Hyland introduced Crudele to Koch at Koch’s office and Crudele was shown illustrations

of Koch’s proposed future development, including a water park and a new chalet. Crudele

claimed Hyland and Thomas Rosensteel (another named defendant in the district court

case, but not part of this appeal) told Crudele he could earn a 12% return on a five-pack

during the 18-month leaseback. Based upon his understanding and belief that this would

be a good, safe, and lucrative investment, and based upon his desire to add real estate to

his portfolio, Crudele initially purchased a five-pack for $1,255,000, and then a few months

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later he purchased a villa property for $250,000, financing the property through American

Bank of the North. The purchases were made in 2007.

The investment did not go as planned. Crudele claimed at trial that he lost

approximately $289,000 on this investment. Crudele alleged that Hyland was his realtor

and that he expected Hyland to look out for him and that Hyland gave him false

information. At trial, when asked if the losses in the Giants Ridge investment could have

been caused by the collapsing real estate market, Crudele replied that he believed his

investment should have been immune to market forces because he was led to believe that

people would continue to go on vacations even when the economy deteriorated, and

therefore his investment in vacation real estate should have continued to be cash-flow

neutral, regardless of fluctuations in the economy. Crudele testified that Rosensteel, not

Hyland, Ostigaard, or Bohnsack, represented that people actually would start going on

more staycations, instead of flying to destination resorts.

Crudele acknowledged at trial that the marketing materials he received before his

purchase included a disclaimer, stating that “[Split Rock Realty] may not predict

Investment Returns or Profits. All numbers are estimates based upon our best historical

knowledge. We can not offer, nor is anything in this presentation meant to infer the

offering of investment, legal or tax advice.”

Appellants John Olson and Julie Olson

John Olson first heard of Giants Ridge from Ostigaard and Bohnsack of Split Rock

Realty in late 2006. Olson claimed Ostigaard and Bohnsack told him that Giants Ridge

was “a pretty good opportunity” in real estate and that it was a hands-off investment

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property offering a nice return and invited Olson to tour Giants Ridge with his wife Julie.

Olson testified that, during the Giants Ridge tour, Koch did most of the presentation of the

tour but Ostigaard was present and did not correct anything said by Koch. After the tour

of the unit, Olson went to the lobby where he listened to presentations about the units and

discussed occupancy rates, general economic development, and the relationship with the

IRRRB. Olson claimed he was told that the occupancy rates were “in the 50 percentile

range and that they are projecting 60% and possibly consistently 60% going forward.”

Olson was shown a document discussing purchase and pricing amenities. The Olsons

chose to purchase a unit and took out a loan which they expected would be cash-flow

neutral.

The Olsons, like Mr. Crudele, lost money on the Giants Ridge investment. During

the 18-month leaseback period, the investment performed as expected. Olson thought the

leaseback would be renewed after the 18-month period expired, but he did not claim that

either Hyland or Ostigaard promised him that would occur. Mr. Olson testified that without

certain promises and representations regarding the continued returns and leaseback, and

the promises of a new water park and buildings that never came to fruition, he and his wife

would have never invested in Giants Ridge. Olson claimed to have incurred substantial

out-of-pocket expenses in connection with the unit, including the down payment, the

mortgage payments, the homeowner’s association dues, property taxes, insurance, upkeep

and legal expenses. Olson acknowledged that he saw the same marketing materials as

Mr. Crudele and that the materials he received before his purchase included a disclaimer

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stating that investment returns could not be predicted. Olson claims that he and his wife

incurred damages in the total amount of $309,960.

The complaint in this matter was filed on September 22, 2011, and was later

amended on June 6, 2012. While the original complaint alleged many more counts against

other defendants, not before the court here, the only remaining claims against respondents,

forming the basis of this appeal, are fraud, negligent misrepresentation, and promissory

estoppel.

On March 13, 2012, a default hearing was held as a result of Bohnsack and Hyland’s

failure to file an answer to the complaint. Neither Bohnsack nor Hyland appeared. On

March 19, 2012, default judgment was entered against Bohnsack in favor of the Olsons in

the amount of $161,000 and against Hyland in favor of the Olsons in the amount of

$161,000 and in favor of Crudele in the amount of $1,129,500. Both Bohnsack and Hyland

made motions to vacate the default judgment. On June 11, 2012, a hearing was held on the

motions to vacate the default judgments. On August 9, 2012, the district court granted

Bohnsack and Hyland’s motions to vacate the default judgment finding that Bohnsack and

Hyland made an adequate showing in light of our supreme court’s policy of liberally

opening default judgments. See Hinz v. Northland Milk & Ice Cream Co., 237 Minn. 28,

30, 53 N.W.2d 454, 455-56 (1952).

On June 6, 2012, while the motions to vacate were pending, appellants filed an

amended complaint which did not name Bohnsack as a defendant in the caption, nor did it

assert any causes of action against Bohnsack. At a hearing on November 13, 2012, after

the motion to vacate had been granted, the district court judge gave appellants until

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November 14, 2012 to clarify the status of any claims they may have against Bohnsack.

Appellants failed to respond to the district court order. By letter dated November 30, 2012,

Bohnsack’s attorney requested that his client be dismissed from the suit or an order be

issued giving appellants a deadline to further amend the complaint and bring claims against

Bohnsack. Based on the appellants’ failure to clarify Bohnsack’s status as a defendant, on

December 28, 2012, the district court dismissed all claims appellants may have had against

Bohnsack with prejudice. Appellants did not take any steps to amend the complaint to

include any claims against Bohnsack between the time the default judgment was vacated

and the order dismissing Bohnsack with prejudice.

On September 25, 2014, a court trial was held concerning the claims against Hyland

and Ostigaard. Appellants sought a judgment for fraud, negligent misrepresentation, and

promissory estoppel against Hyland and a default judgment against Ostigaard for fraud,

misrepresentation, and promissory estoppel based upon his failure to appear and present a

defense. At trial, Hyland (the only defendant who appeared at trial) expressed his regret

that appellants’ purchases at Giants Ridge had not turned out better but asserted that he

made no misrepresentations in his dealings with either the Olsons or Crudele. Hyland

believed that when he discussed future plans for Giants Ridge, he believed they were

presented as projections, and not as certainties. Hyland believed that the failings in the

investment in Giants Ridge were a product of market forces and the extreme downturn in

the economy and the real estate market in 2008, and not due to any lack of disclosure on

his part.

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 Following the trial, in a December 19, 2014 order the district court, in a thoughtful

and well-reasoned opinion found that the appellants

failed to establish a basis for a claim of fraud against either
Hyland or Ostigaard. [Appellants] were vague about any
specific representations made by Hyland and Ostigaard, other
than to claim the real estate agents led them to believe their
investments in Giants Ridge would be safer, more hands-off,
and more lucrative than they turned out to be.

The district court found that both appellants received and read the disclaimers and the

appellants offered no evidence that Hyland or Ostigaard believed, at the time appellants

purchased their units that the statements they made were untrue. Furthermore, the district

court found that respondents did not commit any negligent misrepresentations because they

did not represent false facts or make material omissions.

DECISION

I. Did the district court abuse its discretion in vacating the default judgment
against Hyland and Bohnsack?

“This court will not overturn a ruling on a motion to vacate a default judgment

unless the district court abused its discretion.” Roehrdanz v. Brill, 682 N.W.2d 626, 631

(Minn. 2004). “[T]he supreme court has held that, ‘if the [district] court has acted under a

misapprehension of the law,’ the decision will be reversed on appeal even though the

opening of a default judgment ‘lies almost wholly within the sound discretion of the

[district] court.’” Northland Temps., Inc. v. Turpin, 744 N.W.2d 398, 402 (Minn. App.

2008) (quoting Sommers v. Thomas, 251 Minn. 461, 469, 88 N.W.2d 191, 196-97 (1958),

review denied (Minn. Apr. 29, 2008)).

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 Respondents filed their motions to vacate pursuant to Minn. R. Civ. P. 60.02(a)

claiming “mistake, inadvertence, surprise, or excusable neglect.” Under Minnesota law,

vacating a default judgment for mistake, inadvertence, surprise, or excusable neglect

requires: (1) the party must have a reasonable defense on the merits; (2) the party must

have a reasonable excuse for his failure to answer; (3) the party must have acted with due

diligence after notice of the entry of judgment; and (4) no substantial prejudice will result

to other parties. Coller v. Guardian Angels Roman Catholic Church, 294 N.W.2d 712, 715

(Minn. 1980); see Hinz, 237 Minn. at 30, 53 N.W.2d at 456. The moving party bears the

burden of proving all four of the elements. Imperial Premium Fin., Inc. v. GK Cab Co.,

603 N.W.2d 853, 857 (Minn. App. 2000) (citing Nelson v. Siebert, 428 N.W.2d 394, 395

(Minn. 1988)). “A strong showing on the other factors may offset relative weakness on

one factor.” Id. (citing Armstrong v. Heckman, 409 N.W.2d 27, 29 (Minn. App. 1987),

review denied (Minn. Sept. 18, 1987)). “Default judgments are to be ‘liberally’ reopened

to promote resolution of cases on the merits.” Id. (citing Galatovich v. Watson, 412

N.W.2d 758, 760 (Minn. App. 1987).

Appellants argue that Hyland and Bohnsack could not possibly demonstrate a

reasonable defense on the merits or a reasonable excuse. At the district court level

appellants conceded that the respondents acted diligently in pursuing vacation of the

default judgment and that the appellants would not be prejudiced by a vacation of the

default judgment.

In granting relief from a default judgment, “[t]he existence of a reasonable defense

on the merits must ordinarily be demonstrated by more than conclusory allegations in

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moving papers.” Imperial Premium Fin., Inc., 603 N.W.2d at 857. To show that

respondents do not have a reasonable defense on the merits, appellants argue that the

district court identified only a single piece of evidence—that Hyland and Bohnsack denied

the claims against them. This was not the only defense that Hyland and Bohnsack, both

representing themselves pro se, presented. The district court found that there was a

significant and material dispute regarding the underlying facts and thus there was a

satisfactory showing that the respondents possessed a defense on the merits. Both

Bohnsack and Hyland submitted affidavits in support of their motions to vacate the default

judgment. In his affidavit Hyland argued that his interactions with the Olsons were very

limited and that he made no misrepresentations during their conversations. Hyland

discussed the claims in detail, disputing appellants’ factual characterization of the events.

Bohnsack’s affidavit and attachments thereto indicated that he believed whole-heartedly in

the project at the time; that he was not an official buyer’s representative; and that he had

extremely limited contact with the Olsons. These facts amount to more than mere

conclusory allegations in moving papers and thus the district court did not abuse its

discretion in finding that respondents had a reasonable defense on the merits.

Next, appellants argue that neither Hyland nor Bohnsack demonstrated a reasonable

excuse for their failure to answer. The district court found that both Hyland and Bohnsack

demonstrated a reasonable excuse for their failure to answer because “even though [they]

did not properly file answers with [appellants] or with the court, each respondent attempted

to participate in his own defense.”

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 Respondents do not dispute that they received the summons and complaint, but both

thought they had answered the summons and complaint, either by e-mailing the answer to

the law firm representing appellants or by participating in settlement negotiations.

Although some accommodations may be made for pro se litigants, pro se litigants are

generally held to the same standards as attorneys and must comply with court rules.

Fitzgerald v. Fitzgerald, 629 N.W.2d 115, 119 (Minn. App. 2001). However, pro se

pleadings are to be liberally construed. State ex rel Farrington v. Rigg, 259 Minn. 483,

483, 107 N.W.2d 841, 841-42 (1961). Because each respondent put forth a diligent effort

to defend himself, and reported difficulty in sustaining a correspondence with opposing

counsel, the district court did not abuse its discretion in finding that the respondents had

reasonable excuses for failing to properly answer.

Because the district court did not abuse its discretion in finding that the respondents

had a reasonable defense on the merits or that the respondents demonstrated a reasonable

excuse for their failure to answer, we affirm the district court order vacating the default

judgment against Bohnsack and Hyland.

II. Did the district court err in granting dismissal of all claims against Bohnsack
with prejudice?

“The court may upon its own initiative, or upon motion of a party, and upon such

notice as it may prescribe, dismiss an action or claim for failure to prosecute or to comply

with these rules or any order of the court.” Minn. R. Civ. P. 41.02 (emphasis added). The

purpose of the rule is to “let the [district] court manage its docket and eliminate delays and

obstructionist tactics by use of the sanction of dismissal. If a party . . . fail[s] to comply

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with . . . an order of the court, the judge may dismiss the case with or without prejudice.”

Lampert Lumber Co. v. Joyce, 405 N.W.2d 423, 425 (Minn. 1987). A district court has

“wide discretion in determining whether dismissals shall be with or without prejudice.”

Falkenstein v. Braufman, 251 Minn. 444, 452, 88 N.W.2d 884, 889 (1958). This court

reviews the district court’s dismissal of a complaint under Minn. R. Civ. P. 41.02(a) for an

abuse of discretion. Bonhiver v. Fugelso, Porter, Simich & Whiteman, Inc., 355 N.W.2d

138, 144 (Minn. 1984).

Bohnsack was a named defendant in the complaint filed on September 22, 2011,

and a default judgment was entered against Bohnsack on March 14, 2012. On May 3,

2012, Bohnsack filed a motion to vacate the default judgment. While the motion was

pending, appellants filed an amended complaint which did not name Bohnsack as a

defendant in the caption. At a hearing on an unrelated matter on November 13, 2012,

Bohnsack’s attorney made an appearance and requested clarification on the status of

Bohnsack in the case. Appellants’ attorney could not provide a definitive answer. The

district court noted the request for clarification and ordered appellants’ attorney to get the

clarification to the court by the next day. No clarification was ever made on behalf of

appellants. By a letter dated November 30, 2012, Bohnsack’s attorney requested that his

client be dismissed from this suit or an order be issued giving appellants a deadline to

further amend the complaint and bring claims against Bohnsack. Appellants’ counsel

alleges that he did not receive a copy of the November 30 letter.

Regardless of whether or not the letter was received, appellants failed to clarify the

status of Bohnsack as ordered by the district court. Although the court only gave

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appellants’ counsel until the following day to clarify the status of the case, the district court

did not grant the order dismissing Bohnsack with prejudice for over a month. At the time

of the order, appellants still had not clarified the status of Bohnsack. Because the appellants

failed to comply with the district court order, the district court did not abuse it’s discretion

in dismissing the case with prejudice.

Additionally, the district court did not err in dismissing claims against Bohnsack

because at that time there were no claims to be dismissed. The amended complaint replaced

the complaint at the time it was filed. This operated as a voluntary dismissal of all claims

against Bohnsack by the appellants. Had the district court chosen not to issue the order

dismissing Bohnsack, or forgotten about Bohnsack, there would have still been no claims

to be brought against Bohnsack at trial. We find no error in the district court’s grant of a

dismissal with prejudice.

III. Did the district court err in dismissing all claims against Hyland and Ostigaard
following a court trial?

Appellants argue that the district court erred in dismissing all claims against Hyland

and Ostigaard following a court trial.

[W]e review the district court’s factual findings for clear error.
That is, we examine the record to see if there is reasonable
evidence in the record to support the court’s findings. And
when determining whether a finding of fact is clearly
erroneous, we view the evidence in the light most favorable to
the verdict. To conclude that findings of fact are clearly
erroneous we must be left with the definite and firm conviction
that a mistake has been made.

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Rasmussen v. Two Harbors Fish Co., 832 N.W.2d 790, 797 (Minn. 2013) (citations

omitted).

The district court held that there was insufficient evidence to support a finding that

either Hyland or Ostigaard made fraudulent misrepresentations to either Crudele or the

Olsons in connection with their purchases at Giants Ridge. Under Minnesota law, the

elements of fraudulent misrepresentation are: (1) there must be a representation; (2) that

representation must be false; (3) it must have to do with a past or present fact; (4) that fact

must be material; (5) it must be susceptible of knowledge; (6) the representor must know

it to be false, or must assert it as of his own knowledge without knowing whether it is true

or false; (7) the representor must intend to have the other person induced to act, or justified

in acting upon it; (8) that person must be so induced to act or so justified in acting; (9) that

person’s action must be in reliance upon the representation; (10) that person must suffer

damage; (11) that damage must be attributable to the misrepresentation, that is, the

statement must be the proximate cause of the injury. Davis v. Re-Trac Mfg. Corp., 276

Minn. 116, 117, 149 N.W.2d 37, 39 (1967).

Appellants argue that Crudele and Olson testified extensively regarding each of

these elements. They allege that Crudele and Olson’s testimony showed that Hyland made

numerous representations regarding planned developments at Giants Ridge, regarding the

safe and hands-off nature of the investment, and regarding certain interest rates, rates of

return and leaseback arrangements, “to name a few.” The key fraud factor in dispute is

whether the representations were false at the time they were made.

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 The district court’s finding that respondents did not make material

misrepresentations regarding planned developments at Giants Ridge was not clearly

erroneous. The district court found that both Crudele and Olson testified that respondents

introduced them to Koch, so that they could make their own inquiries about Giants Ridge

directly to the developer. This evidence is supported by Crudele and Olson’s testimony.

Crudele testified that Hyland “felt it was best to hear it from the developer, hear the story

and see the vision of what was possible.” Olson testified that when he was shown the

property and the future developments were discussed “it was still Jim doing most of the

conversation presentation.”

The district court’s finding that appellants were not misinformed about real estate

purchases they made at Giants Ridge is not clearly erroneous. Crudele testified that he was

told that the 18-month leaseback “was the guarantee, but with the historical occupancy

rates [he] could be assured . . . that would continue going forward,” but he did not testify

that it was Hyland or Ostigaard that said it, only that he discussed it at a meeting with

Rosensteel and Hyland. This meeting was prior to receiving marketing materials and

meeting with the actual developer, Mr. Koch. The marketing materials included a

disclaimer which stated: “[Split Rock Realty] may not predict Investment Returns or

Profits. All numbers are estimates based upon our best historical knowledge. We can not

offer, nor is anything in this presentation meant to infer the offering of investment, legal or

tax advice.” Both Olson and Crudele acknowledged that they had seen the disclosure.

Crudele testified that Hyland told him that “with the historical rates, that anything

over 50% would cash flow the investment, the hands off investment.” Hyland did not

15
represent that the investment was cash-flow or hands-off, but rather if occupancy rates

exceeded 50% then that would cash flow the investment and make it hands off. Hyland

and Ostigaard had reason to believe that occupancy rates exceeded 50%. Testimony of

Koch and material admitted into evidence during Koch’s testimony, indicated that

occupancy rates were 43.63% in 2005, 53.38% in 2006 and increased to 55.29% in 2007.

At the time of the statements, Hyland and Ostigaard had no reason to believe that

occupancy rates would not exceed 50%, even though occupancy rates had not done so prior

to 2006.

The district court found that appellants offered no evidence that Hyland or

Ostigaard believed, at the time appellants purchased their units at Giants Ridge, that such

investments would be unsafe, would require hands-on management, or would lose money.

Appellants have shown nothing in the record that disputes the district court finding. The

district court credited Hyland’s testimony that what happened “had to do with a horrible,

historically horrible real estate market that we all went through.” We agree. The losses at

Giants Ridge were triggered by a general economic downturn, which none of the parties

could foresee at the time appellants purchased their units. Furthermore, the district court

credited Hyland’s testimony that when he discussed plans for Giants Ridge, they were

presented as projections, and not as certainties.

Appellants allege that “[e]ach of these representations was false at the time they

were made” yet appellants can point to no specific point in the record that supports this

proposition. For this reason, appellants’ claims for negligent misrepresentation also fail.

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See Florenzano v. Olson, 387 N.W.2d 168, 173 (Minn. 1986) (“Fraud is distinguished from

negligence by the element of scienter required.”)

Appellants also allege that the district court findings are clearly erroneous in regard

to Ostigaard, because Ostigaard failed to rebut the evidence proffered by appellants at trial.

We conclude that appellants failed to meet the prima facie element for fraudulent

misrepresentation which is to show that the representations were false at the time they were

made. Therefore Ostigaard need not rebut any evidence. Because appellants fail to point

to any evidence in the record to show that the statements were false at the time they were

made, appellants have not shown that the findings of the district court were clearly

erroneous.

Because the district court’s findings that appellants failed to state a claim were not

clearly erroneous, we affirm the district court’s dismissal of all claims against respondents.

Affirmed.

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