In 2017, Philip Keithahn formed Minnesota Medical University to establish an osteopathic medical school in a small town one hour southwest of Minneapolis. Heritage Construction was engaged in 2018 to serve as General Contractor.
MMU planned to finance construction primarily by issuing bonds. Part of the financing – the “pre-condition” amount of $9 million – was available immediately after closing. The remainder of the bonds were contingent on MMU’s progress toward pre-accreditation.
The owner of Heritage called Keithahn in January 2019, to confirm that all funds necessary would be available at the bond closing. Philip assured him that $7 million, net, would be available.
In April 2019 Heritage learned that the bond funding had closed. However, the $9 million “pre-condition” amount was reduced by insurance costs ($4.6 million) and Philip’s draw requests ($3.1 million). This left $1.2 million to pay MMU’s construction and operational costs pending pre-accreditation.
Construction commenced and Heritage received the $1.2 million payment within a few weeks. But thereafter MMU had no remaining funds to pay Heritage for its continuing construction.
MMU’s pre-accreditation application was denied 10 days later. MMU advised Heritage that MMU was insolvent in June. Heritage suspended construction, terminated its contract with MMU, and could not pay its subcontractors.
Subcontractors likely filed liens and were paid by Heritage’s surety. When the surety sued Heritage for indemnity, Heritage sued Keithahn and MMU.
Trial proceeded on claims for breach of contract, indemnity, negligent misrepresentation, and fraud. The jury found MMU and Keithahn liable on almost all claims.
Philip and MMU appealed, claiming that Philip’s statement before the pre-accreditation meeting (that the project would be funded and $7 million available after closing), did not amount to a negligent misrepresentation.
The Court of Appeals evaluated Philip’s statement and determined that the representation was not a conjectural promise. Instead, Philip presented his view of facts susceptible of his knowledge at that time. Philip further argued that his misrepresentations were not negligent, because he honestly believed them to be true.
The Court concluded that a misrepresentation is made negligently when measured against an objective standard of reasonable care or competence. The inference is that Philip, due to his position with MMU, should have known that his statement – adequate funding would be available after closing – was not only untrue, but also could have induced Heritage into executing the contract and commencing construction.
Further, at least under Minnesota law as reported by this Court of Appeals, negligent misrepresentation constitutes fraud. Most States have laws that allow punitive damages for fraudulent conduct.
Judgment is affirmed for Heritage. See Selective Insurance Company v. Heritage Construction Companies v. Keithahn and Minnesota Medical University; Case No. 24-233; US Court of Appeals, 8th Circuit; February 2, 2026: https://ecf.ca8.uscourts.gov/opndir/26/02/242333P.pdf.
My thought: Let’s assume that Philip Keithahn truly believed that proceeds would be available in amounts necessary to pay for construction. Let’s further assume that Philip made an honest mistake, a miscalculation, when he told Heritage of what he thought to be a fact.
At least under Minnesota law, Philip is personally liable for the damages caused by his statement, although there is no evidence in this Opinion that Heritage attempted to obtain third-party verification of Philip’s statement.
How often do builders, developers, buyers, tenants, lessors, bankers, brokers, vendors, and others claim that financing is available for a project, and that statement is either wholly or partially untrue even if the individual making the statement earnestly believes it is accurate?
My answer: To quote President Reagan, “Доверяй, но проверяй”; https://en.wikipedia.org/wiki/Trust,_but_verify.
Stuart A. Lautin, Esq.*
* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York