Total Auctions & Real Estate, LLC v. South Dakota Department of Revenue & Regulation

#27804-a-SLZ
2016 S.D. 95

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

****
TOTAL AUCTIONS AND REAL
ESTATE, LLC, a South Dakota Limited
Liability Company, ANDREW HARR
and JASON BORMANN, Plaintiffs and Appellants,

v.

SOUTH DAKOTA DEPARTMENT OF
REVENUE & REGULATION, SOUTH
DAKOTA DEPARTMENT OF MOTOR
VEHICLES, PEGGY LAURENZ, individually
and in her official capacity as an employee
and Director of the South Dakota Department
of Motor Vehicles, and RONALD RYSAVY,
individually and in his official capacity as an
employee and agent of the South Dakota
Department of Motor Vehicles, Defendants and Appellees.

****
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
LINCOLN COUNTY, SOUTH DAKOTA
****
THE HONORABLE JOHN SOGN
Judge

****

CASEY W. FIDELER
CHRISTOPHER L. FIDELER of
Christopherson, Anderson,
Paulson & Fideler, LLP
Sioux Falls, South Dakota Attorneys for plaintiffs
and appellants.

****
ARGUED ON
NOVEMBER 8, 2016

OPINION FILED 12/14/16
JAMES E. MOORE
JOEL E. ENGEL III of
Woods Fuller Shultz & Smith, PC
Sioux Falls, South Dakota Attorneys for defendants
and appellees.
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ZINTER, Justice

[¶1.] Total Auctions and Real Estate, LLC (Total Auctions) planned to

conduct automobile auctions in Lincoln County. Part of its business plan included

the sale of vehicles consigned from automobile dealers not located in Lincoln

County. A Division of Motor Vehicles dealer agent advised Total Auctions on how to

comply with the applicable law. After incurring expenses setting up its business,

Total Auctions was informed by a Division supervisor that state law prohibited

auctioning vehicles consigned from dealers outside Lincoln County. Total Auctions

and its members sued the Division agent, the Division, its director, and the

Department of Revenue and Regulation on theories of negligence and negligent

supervision. The circuit court dismissed the complaint for failure to state a claim

upon which relief could be granted. We affirm.

Facts and Procedural History

[¶2.] Because this is an appeal from a dismissal for failure to state a claim,

we restate the facts alleged in the complaint. Total Auctions is a South Dakota

limited liability company with its principal place of business in Lincoln County. It

is a licensed automobile dealer that intended to hold automobile auctions that

would be open to the public.

[¶3.] The members of Total Auctions—Andrew Harr and Jason Borman

(hereafter collectively referred to as “Total Auctions”)—met with Ronald Rysavy on

July 11, 2014, to discuss Total Auctions’ business plan. Rysavy was a “dealer agent”

employed by the South Dakota Division of Motor Vehicles (DMV), a division of the

South Dakota Department of Revenue and Regulation (DRR). According to the

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complaint, dealer agents are “responsible for answering dealer business questions,

providing training and instruction on compliance and procedures, enforcing laws

and regulations, investigating complaints and violations, and conducting

inspections.”

[¶4.] Total Auctions informed Rysavy that it intended to auction vehicles

consigned from dealers outside Lincoln County. Rysavy provided forms required by

the DMV to complete vehicle consignments and advised Total Auctions on

compliance with South Dakota law. He also instructed a dealer outside Lincoln

County regarding the necessary consignment paperwork for the auctions. The

complaint alleged that “it was [Rysavy’s] professional opinion that Total Auctions’

business complied with South Dakota law.” Total Auctions followed Rysavy’s

instructions and began preparing for its first auction. It also met with Rysavy on

additional occasions, including at the location of the auction, to ensure Total

Auctions was in compliance with the law. However, Rysavy failed to inform Total

Auctions that state law did not permit it to auction vehicles consigned from dealers

outside Lincoln County, the county of Total Auctions’ place of business.

[¶5.] The day before the first auction, Rysavy informed Total Auctions for

the first time that there was a problem with the out-of-county consignments. Peggy

Laurenz, the Director of the DMV, informed Total Auctions that under South

Dakota law, it could not sell vehicles from dealers outside Lincoln County. Director

Laurenz allowed the noncompliant auction to proceed but indicated that such sales

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would be prohibited in any future auction. 1 Total Auctions alleged that because it

could not sell vehicles from dealers outside Lincoln County, its inventory for future

auctions “was drastically reduced,” causing substantial damages and the failure of

the business.

[¶6.] Total Auctions subsequently sued the DRR, the DMV, Director

Laurenz, and Rysavy (Defendants). Count I of the complaint alleged negligence,

claiming that Rysavy breached a “duty to follow the established Department of

Motor Vehicles Protocols before issuing an opinion on the application of South

Dakota law to Total Auctions’ business.” Count II alleged negligent supervision,

claiming that Director Laurenz failed to adequately supervise Rysavy to ensure that

he followed DMV protocols and provided accurate information regarding compliance

with South Dakota law. Both claims incorporated allegations in the complaint

claiming that Rysavy had given erroneous advice on the law.

[¶7.] Defendants moved to dismiss the complaint for failure to state a claim

upon which relief could be granted. See SDCL 15-6-12(b)(5). Relying on this

Court’s decision in Meyer v. Santema, 1997 S.D. 21, ¶ 13, 559 N.W.2d 251, 255, the

circuit court ruled that the alleged negligent conduct was predicated on a

nonactionable misrepresentation of law, and it dismissed all claims. Total Auctions

appeals. 2

1. Total Auctions claimed that 34 of the 114 vehicles in its inventory for the first
auction were consigned from dealers outside Lincoln County.

2. Total Auctions briefed the issue of sovereign immunity in the circuit court
and in this appeal, but the defendants did not. The circuit court declined to
rule on the issue because it was not raised by the defendants’ motion to
(continued . . .)
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Decision

[¶8.] We review the dismissal of a complaint for failure to state a claim de

novo. Nooney v. StubHub, Inc., 2015 S.D. 102, ¶ 9, 873 N.W.2d 497, 499. “We . . .

accept the material allegations as true and construe them in a light most favorable

to the pleader to determine whether the allegations allow relief.” Sisney v. Best

Inc., 2008 S.D. 70, ¶ 8, 754 N.W.2d 804, 809. “A complaint need only contain a

short plain statement of the claim showing the pleader is entitled to relief and a

demand for judgment for the relief to which the pleader deems himself entitled.”

Nooney, 2015 S.D. 102, ¶ 9, 873 N.W.2d at 499 (citing SDCL 15-6-8(a); Gruhlke v.

Sioux Empire Fed. Credit Union, Inc., 2008 S.D. 89, ¶ 17, 756 N.W.2d 399, 409).

Detailed factual allegations are not required, but the complaint “must contain more

than labels and conclusions and a formulaic recitation of the elements of a cause of

action.” Id. (citing Gruhlke, 2008 S.D. 89, ¶ 17, 756 N.W.2d at 409). Ultimately,

“where the allegations show on the face of the complaint there is some insuperable

bar to relief, dismissal under Rule 12(b)(5) is appropriate.” Sisney v. State,

2008 S.D. 71, ¶ 8, 754 N.W.2d 639, 643.

[¶9.] Total Auctions first argues that the circuit court erred in

characterizing its negligence claim as one for negligent misrepresentation. It

concedes that it does not have a valid claim for negligent misrepresentation because

________________________
(. . . continued)
dismiss. We do not consider the sovereign immunity issue for the same
reason.

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misrepresentations of law are generally not actionable. 3 See Meyer, 1997 S.D. 21,

¶ 13, 559 N.W.2d at 255. It contends, however, that the complaint states a valid

claim for other negligent acts. Specifically, it contends that its complaint pleaded

facts sufficient to state a claim that Rysavy owed Total Auctions a duty to follow

established DMV protocols before issuing an opinion on compliance with South

Dakota law; that Rysavy breached that duty; and that Rysavy’s breach caused Total

Auctions’ damages.

[¶10.] Total Auctions correctly points out that negligence and negligent

misrepresentation are separate claims. Although these torts have different

elements, 4 and although ordinary negligence does not require a negligent

misrepresentation, the circuit court correctly noted that the underlying factual

premise for the negligence claim here is negligent misrepresentation. All of Total

Auctions’ theories are ultimately premised on the claim that its damages were

caused by Rysavy’s failure to give correct advice about the law; i.e. that the law

prohibited Total Auctions’ sale of vehicles consigned from dealers outside Lincoln

County. Total Auctions may not, in resisting the motion to dismiss, simply ignore

3. Neither party disputes that incorrect legal advice was given. We express no
opinion on the matter.

4. A negligence claim requires a plaintiff to show “duty, breach of that duty,
proximate and factual causation, and actual injury.” Johnson v. Hayman &
Assocs., Inc., 2015 S.D. 63, ¶ 13, 867 N.W.2d 698, 702. Negligent
misrepresentation requires a plaintiff to show that “one party makes (1) a
misrepresentation, (2) without reasonable grounds for believing the
statement to be true, (3) with the intent to induce a particular action by
another party, and the other party (4) changes position with actual and
justifiable reliance on the statement, and (5) suffers damage as a result.”
Fisher v. Kahler, 2002 S.D. 30, ¶ 10, 641 N.W.2d 122, 126-27.

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its central pleaded fact that “Rysavy never addressed and failed to discuss, mention,

express any concern, raise any issues, or in any way indicate to Total Auctions that

obtaining consignments from dealers outside of Lincoln County was not permissible

and prohibited under South Dakota law.”

[¶11.] Total Auctions, however, insists that its complaint should not be

dismissed because the pleaded negligent conduct (failure to follow established

protocols before giving an opinion) is not the same as a negligent misrepresentation

of law. But, as just explained, the negligent misrepresentation of law is also a

central pleaded fact of causation in the failure to follow protocol claim. Total

Auctions concedes the point in its brief. It argues that “Rysavy was required, at a

minimum, to [use the protocols to] verify that the guidance, direction, and

instruction he provided to Total Auctions was researched, accurate, [and] verified.”

Appellant’s Brief 19 (emphasis added). Thus, the only reasonable inference to be

drawn from the pleaded facts is that Total Auctions’ complaint for negligence, no

matter what duty was allegedly breached, is ultimately premised on the claim that

its damages were caused by the misrepresentation of law.

[¶12.] In sum, Total Auctions’ claim for negligence is premised on the

allegation that a misrepresentation of law caused its damages. Total Auctions

cannot avoid that fact by relabeling the name of its claim. Because

misrepresentations of law are not actionable, Meyer, 1997 S.D. 21, ¶ 13, 559 N.W.2d

at 255, “the allegations show on the face of the complaint there is some insuperable

bar to relief, [and] dismissal under Rule 12(b)(5) is appropriate.” See Sisney v.

State, 2008 S.D. 71, ¶ 8, 754 N.W.2d at 643.

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[¶13.] Total Auctions also argues that its complaint states a claim for

professional negligence. 5 However, the only difference between negligence and

professional negligence is the nature of the duty. See Johnson v. Hayman &

Assocs., Inc., 2015 S.D. 63, ¶¶ 13, 22-23, 867 N.W.2d 698, 702, 705. And as

explained above, Total Auctions’ central underlying allegation is that its damages

were caused by a nonactionable misrepresentation of law. Therefore, the complaint

also fails to state a claim for professional negligence. 6

[¶14.] Finally, Total Auctions argues that its complaint states an

independent claim for negligent supervision by Director Laurenz. However, this

claim is also premised on providing incorrect advice concerning South Dakota law.

Total Auctions pleaded that Director Laurenz failed to adequately supervise Rysavy

to ensure that he followed DMV protocols and that “the laws of South Dakota were

correctly applied” to Total Auctions’ business. (Emphasis added.)

[¶15.] Moreover, “negligent supervision [requires] that the employer failed to

exercise reasonable care in supervising (managing, directing, or overseeing) its

employees so as to prevent harm to other employees or third persons.” Iverson v.

NPC Int’l, Inc., 2011 S.D. 40, ¶ 23, 801 N.W.2d 275, 282 (emphasis added). Failing

5. Total Auctions did not plead but did argue before the circuit court and on
appeal that its complaint also supports a claim for professional negligence.

6. Professional negligence claims are typically asserted against professionals
such as physicians, accountants, and attorneys. Total Auctions cites no
authority supporting its claim that a government-motor-vehicle-licensing
agent is such a professional. Additionally, this claim is simply a recast
negligent misrepresentation claim. Therefore, we do not address the parties’
arguments whether a dealer-agent is a “professional” for purposes of
professional negligence.

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to “prevent harm” necessarily assumes an underlying wrong; i.e. the commission of

a tort by an employee. Thus, a negligent supervision claim requires that an

employee commit an underlying tort. Schoff v. Combined Ins. Co. of Am.,

604 N.W.2d 43, 53 (Iowa 1999) (“[A]n employer cannot be held liable for negligent

supervision . . . where the conduct that proper supervision and training would have

avoided is not actionable against the employee.”); Schieffer v. Catholic Archdiocese

of Omaha, 508 N.W.2d 907, 913 (Neb. 1993) (“[A]n underlying requirement in

actions for negligent supervision . . . is that the employee is individually liable for a

tort or guilty of a claimed wrong against a third person . . . .”). Because Total

Auctions’ complaint fails to state an actionable tort claim against Rysavy, it also

fails to state a claim against Director Laurenz for negligent supervision. 7

[¶16.] The central pleaded fact underlying all of Total Auctions’ claims is the

allegation that Rysavy gave incorrect legal advice, which caused Total Auctions’

damages. No matter what tort is asserted, Total Auctions’ claimed damages were

caused by Rysavy’s alleged misrepresentation of law. Because that fact creates an

insuperable bar to relief on all claims, we affirm.

7. Total Auctions also argues that the complaint states a claim against Rysavy’s
employer under a respondeat superior theory. However, respondeat superior
is simply a means of imposing vicarious liability on an employer for an
employee’s torts committed within the scope of employment; it is not an
independent tort claim against an employer. See Bernie v. Catholic Diocese of
Sioux Falls, 2012 S.D. 63, ¶ 8, 821 N.W.2d 232, 237 (quoting Bass v. Happy
Rest, Inc., 507 N.W.2d 317, 320 (S.D. 1993)) (“Respondeat superior is ‘a legal
fiction designed to bypass impecunious individual tortfeasors for the deep
pocket of a vicarious tortfeasor.’”); see also Rehm v. Lenz, 1996 S.D. 51, ¶ 21,
547 N.W.2d 560, 566 (noting an employer may be vicariously liable for
“negligent acts of their employees under a respondeat superior theory” as
well as directly liable for the independent tort of negligent supervision).

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[¶17.] GILBERTSON, Chief Justice, SEVERSON and KERN, Justices, and

KONENKAMP, Retired Justice, concur.

[¶18.] KONENKAMP, Retired Justice, sitting for WILBUR, Justice,

disqualified.

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