author: MINGE, Judge.

text:
    EVELYN I. RECHTZIGEL TRUST, by its Trustees Frank RECHTZIGEL and Gene Rechtzigel, Appellant, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY OF NEW YORK, Respondent, Pulte Title Agency of Minnesota, LLC, Respondent.
    No. A07-0645.
    Court of Appeals of Minnesota.
    May 6, 2008.

      Erick G. Kaardal, Mohrman <& Kaardal, P.A., Minneapolis, MN, for appellant.
    Ryan R. Dreyer, Eric Nasstrom, Morrison Fenske & Sund, P.A., Minnetonka, MN, for respondent Fidelity National Title.
    Charles W. Arndt, Kyle J. Hegna, Wilkerson & Hegna, P.L.L.P., Edina, MN, for respondent Pulte Title Agency.
    Considered and decided by MINGE, Presiding Judge; KALITOWSKI, Judge; and CONNOLLY, Judge.
   OPINION

MINGE, Judge.

Appellant purchaser of real property challenges summary judgment dismissal of its claims that respondent title insurer and respondent title insurance agency (1) were liable to cover damages arising out of a preference claim by a bankruptcy trustee; (2) had a duty to defend against that claim; (3) breached their contract; and (4) made negligent misrepresentations. Because we conclude that the district court did not err, we affirm.

FACTS

On February 15, 2000, appellant Evelyn I. Rechtzigel Trust (Rechtzigel) agreed to transfer property in Apple Valley to Pulte Homes Minnesota Corporation (Pulte Homes). In return, Rechtzigel was to receive farmland in Jackson County owned by yet other persons. The transaction was structured as a “like-kind” land exchange pursuant to 26 U.S.C. § 1031 (2000) (1031 exchange). To the extent there is a qualified 1031 exchange, Rechtzigel as a seller does not have to recognize gain on the sale of its land.

Rechtzigel contracted with Like-Kind Exchange Services (Like-Kind), a qualified intermediary for 1031 exchanges, to handle the transaction. In accordance with the contract, Rechtzigel deeded the Apple Valley property to Like-Kind, which in turn deeded the property to Pulte Homes. Pulte Homes paid over $600,000 to Like-Kind. On February 15, 2000, Like-Kind transferred that money to respondent Pulte Title Agency of Minnesota, LLC (Pulte Title), to be paid to the owners of the farmland at closing. At the closing on March 8, 2000, the owners of the Jackson County farmland delivered a deed transferring the farmland directly to Rechtzigel, and Pulte Title distributed the funds to the Jackson County sellers.

Rechtzigel purchased title insurance for the farmland. That insurance policy was issued by respondent Fidelity National Title Insurance Company of New York (Fidelity). In addition to acting as a closing agent for the transaction, Pulte Title was the insurance agent that issued the binder and sold the title insurance. The insurance had an effective date of March 8, 2000. In the binder, Pulte Title represented to Rechtzigel that it would be issued an ALTA Residential Owner’s Policy — 1987 (1987 policy). However, the actual policy issued was an ALTA Owner’s Policy — 1992 (1992 policy).

Unbeknownst to the other parties at the time of this 1031 exchange, Like-Kind was engaged in financially risky practices. It deposited the over $600,000 that it received from Pulte Homes in a common account, and the commingled funds were apparently used to cover Like-Kind’s obligations in earlier transactions. Similarly, Like-Kind’s obligations in this transaction were at least partially paid with funds from other, not-yet-completed transactions. Shortly after closing, Like-Kind’s financing arrangement collapsed, and it filed bankruptcy on April 25, 2000. Although all matters related to the Reehtzi-gel/Pulte Homes/Jackson County farmland transaction had been completed prior to the bankruptcy filing, the bankruptcy trustee contacted Rechtzigel, demanding that Rechtzigel restore to the bankruptcy estate the sum of $602,424.76, representing the funds that had been deposited with and disbursed by Like-Kind on behalf of Rechtzigel. Because Rechtzigel’s transaction closed on March 8, 2000, less than 90 days before the bankruptcy, the bankruptcy trustee initiated challenges to avoid these fund transfers as preferences. See 11 U.S.C. § 547(b)(4)(A) (2000) (stating that a transfer for benefit of a creditor within 90 days of filing a bankruptcy petition may be avoided by the bankruptcy court).

In November 2000, when no settlement was reached, the bankruptcy trustee initiated a preference action against Rechtzigel in United States Bankruptcy Court demanding judgment against Rechtzigel in the amount of $602,424.76. Before and after the trustee’s lawsuit, Rechtzigel filed numerous claims with Fidelity, demanding that pursuant to the title insurance policy Fidelity defend against the bankruptcy trustee’s claims and legal action. Fidelity refused, asserting that the title insurance Rechtzigel purchased did not insure against the monetary demands of the trustee. Rechtzigel eventually settled with the bankruptcy trustee for $102,412.20.

After the bankruptcy settlement, Recht-zigel initiated this action, alleging that Fidelity (1) breached its duty to defend and cover losses under the title insurance contract; (2) made negligent misrepresentations by agreeing to deliver a 1987-form policy, but providing a 1992-form policy; (3) breached its contract by switching policy forms; and (4) acted in bad faith. The parties made cross-motions for summary judgment. The district court denied Rechtzigel’s motion and granted summary judgment to Fidelity and Pulte Title. This appeal follows.

ISSUES

I. Did Fidelity have a duty under the title insurance policy to cover losses sustained by Rechtzigel as a result of the bankruptcy trustee’s preference action?

II. Did Fidelity have a duty under the title insurance policy to defend against the bankruptcy trustee’s preference complaint?

III. Did Fidelity breach its commitment to Rechtzigel to issue the 1987 policy?

IV. By issuing the 1987 policy, did Fidelity make negligent misrepresentations, causing loss?

ANALYSIS

On appeal from a grant of summary judgment, this court determines whether the district court erred in its application of the law and whether there are any genuine issues of material fact. Herrmann v. McMenomy & Severson, 590 N.W.2d 641, 643 (Minn.1999). In reviewing the record for the existence of a genuine issue of material fact, we view the evidence “in the light most favorable to the party against whom summary judgment was granted.” O’Malley v. Ulland Bros., 549 N.W.2d 889, 892 (Minn.1996). But where, as here, all parties move for summary judgment, they tacitly agree that no genuine issue of material fact exists. Am. Family Mut. Ins. Co. v. Thiem, 503 N.W.2d 789, 790 (Minn. 1993); Frey v. United Serv. Auto. Ass’n, 743 N.W.2d 337, 344 (Minn.App.2008). Where there are no genuine issues of material fact, this court reviews the district court’s application of the law de novo. Leamington Co. v. Nonprofits’ Ins. Ass’n, 615 N.W.2d 349, 353 (Minn.2000).

I.

The first issue is whether the title insurance policy covers the claims made against Rechtzigel by the bankruptcy trustee. At the outset, Rechtzigel asserts that it contracted for title insurance coverage under the 1987 policy and that Fidelity’s duty to cover losses arising out of the preference action must be determined on the basis of the terms of that policy. This point is important because the 1992 policy specifically excludes coverage for bankruptcy preference actions. The 1987 policy does not contain that exclusion. The district court ruled that whether the trust purchased the 1987 policy or the 1992 policy was irrelevant because neither policy covered this preference action. We begin our analysis by addressing coverage under the 1987 policy.

Title insurance is intended to protect against all loss or damage which the insured sustains by reason of “(1) existing defects in, or unmarketability of title ...; (2) leases and encumbrances changing the same as of the date of the policy; or (3) defects in title of a mortgagor to the mortgaged estate, or mortgaged interest.” 11 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 159:5 (3d ed.2005). “General principles of contract interpretation apply to insurance policies.” Lobeck v. State Farm Mut. Auto. Ins. Co., 582 N.W.2d 246, 249 (Minn.1998). Interpretation of an insurance policy and application of the policy to the facts of a particular case are questions of law reviewed de novo. Am. Family Ins. Co. v. Walser, 628 N.W.2d 605, 609 (Minn.2001). “When interpreting an insurance contract, words are to be given their natural and ordinary meaning and any ambiguity regarding coverage is construed in favor of the insured.” Id. Likewise, exclusions in the policy are to be construed narrowly. Id.

Fidelity’s obligations to Rechtzigel are governed by the language in the insurance policy. The 1987 policy contains the following relevant coverage and exclusion provisions:

OWNER’S COVERAGE STATEMENT

This policy insures your title to the land....
We insure you against actual loss resulting from:
• any title risks covered by this Policy-up to the Policy Amount
and
• any costs, attorneys’ fees and expenses we have to pay under this Policy
COVERED TITLE RISKS
This Policy covers the following title risks, if they affect your title on the Policy Date.
I. Someone else owns an interest in your title.
3. Forgery, fraud, duress, incompetency, incapacity or impersonation.
8. There are liens on your title, arising now or later, for labor and material furnished before the Policy Date ...
II. Your title is unmarketable, which allows another person to refuse to perform a contract to purchase, to lease or to make a mortgage loan.
14. Other defects, liens, or encumbrances.
EXCLUSIONS
In addition to the Exceptions in Schedule B, you are not insured against loss, costs, attorneys’ fees, and expenses resulting from:
3. Title Risks:
• that first affect your title after the Policy Date — this does not limit the labor and materials lien coverage in item 8 of Covered Title Risks.

(Emphasis added.) Rechtzigel argues that the bankruptcy trustee’s complaint constituted a threat to its title to the farmland that made title unmarketable and that Rechtzigel had to settle with the trustee to eliminate the damages that would flow from the trustee’s action.

A. Preference Action/Threat to the Title to the Farmland.

Claims for unmarketability, liens, and encumbrances are “Covered Title Risks” in the 1987 Policy. We therefore analyze whether the bankruptcy trustee’s claims and action created such title risks with respect to the Jackson County farmland that would be covered by the policy.

1. The Power of the Bankruptcy Trustee

In a preference action, a bankruptcy trustee may avoid “any transfer of an interest of the debtor in property” made within 90 days before the filing of a bankruptcy petition. 11 U.S.C. § 547(b)(4)(A) (2000); In re Gateway Pacific Corp. v. Expeditors Int’l of Wash., Inc., 153 F.3d 915, 917 (8th Cir.1998). Once it is determined that a transfer can be avoided, the bankruptcy trustee may recover any property, or its value, transferred away from the bankrupt entity. 11 U.S.C. § 550(a) (2000). This recovery can be made as against “the initial transferee of such transfer or the entity for whose benefit such transfer was made.... ” Id. § 550(a)(1). But, “[t]he trustee has the burden of proving each of the elements of a preferential transfer.” Brown v. First Nat’l Bank of Little Rock, Ark, 748 F.2d 490, 491 (8th Cir.1984). “One of these elements is that the property transferred must be property of the bankrupt’s estate ... it must be shown that the transfer depleted the debtor’s estate.” Id.

There is no dispute that Rechtzigel’s 1031 exchange took place within 90 days of the bankruptcy filing and that over $600,000 had been transferred by Like-Kind, the bankruptcy debtor, in connection with that transaction. For the bankruptcy trustee to place a lien on or otherwise encumber the farmland or for the bankruptcy to render the title unmarketable, Like-Kind would have to have had a credible interest in the farmland.

2. The Requirements of 1031 Exchange

Rechtzigel argues that as a qualified intermediary in a 1031 exchange, Like-Kind must have had an interest in the farmland and the bankruptcy trustee’s actions constituted a threat to the marketability of title to the farmland.

Rechtzigel does not cite any Internal Revenue Code provision, tax regulations, or caselaw that requires that the qualified intermediary have an interest in the property being acquired in the exchange. We nonetheless examine the relevant provisions. A qualified intermediary is defined as a person who “[e]nters into a written agreement with the taxpayer ... and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer.” Treas. Reg. § 1.1031(k)-1 (g)(4)(iii)(B) (as amended in 2002). However,' the transferring party can “receive money or other property directly from a party to the transaction other than the qualified intermediary” without losing the tax advantage of the 1031 exchange. Id. § 1.1031(k)-l(g)(4)(vii). The Internal Revenue Service has held these provisions to mean that “the transfer of property in a deferred exchange that is facilitated by the use of a qualified intermediary may occur via a ‘direct deed’ of legal title by the current owner of the property to the ultimate owner.” 1 Robert J. Haft & Peter M. Fass, Tax Adv. Sec. Handbook § 2:13[5][P][iv] (2007); Rev. Rul. 90-34, 1990-1 C.B. 154.

Here, the law allowed Rechtzigel and Like-Kind to have the owners of the farmland transfer the farmland directly to Rechtzigel without negative tax consequences to Rechtzigel.

3. The 1031 Exchange in this Case

The nature of the transaction in this case provides very limited support for Rechtzigel’s claim that Like-Kind had an interest in the farmland. Rechtzigel points to the 1031 contract, which provides that Like-Kind undertook the obligation “to purchase [the farmland] ... conditioned upon [Rechtzigel’s] performing all other obligations required.... ” The transaction is summed up in a “Legal Notice” that Like-Kind gave to Rechtzigel that states

[n]otice is hereby given that [Rechtzigel] assign[s] it’s [sic] right to purchase the interest in [the Jackson County farmland] ... to Like-Kind Exchange Services ... in accordance with the terms of the Phase 4 Delayed Exchange & Assignment Agreement....
In order to prevent the duplication of transfer fees, escrow costs, title insurance expenses and the like, title to [the farmland] property is to be transferred directly to [Rechtzigel] in accordance with the provisions of the Agreement.

While the first paragraph of the Legal Notice appears to state that Like-Kind contracted to hold an interest in the farmland, the second paragraph takes the contrary position that the Jackson County owners planned to directly transfer the farmland to Rechtzigel. This second paragraph is in accord with the contract for sale of the farmland, which also states that it is to be transferred directly by its Jackson County owners to Rechtzigel. Most importantly, the deed actually runs directly from those owners to Rechtzigel. Therefore, the district court correctly found that Like-Kind never had any interest in or possession of the Jackson County farmland.

Because Like-Kind never had possession of, or an actual interest in, title to the farmland, we conclude that the bankruptcy trustee could not have included the farmland in the preference action. See 11 U.S.C. §§ 547(b), 550(a).

U. Trustee’s Claims

The bankruptcy trustee’s claims in the preference action are in accord with the foregoing conclusion. Although Rechtzigel contends that the trustee was referring to the fair market value of the farmland when it demanded judgment against Rechtzigel, we disagree. The trustee’s complaint first describes a typical 1031 exchange and Like-Kind’s role in that exchange. As described by the complaint, Like-Kind would typically hold sale proceeds of an “exchangor.” Here, Like-Kind received cash in the amount of $602,424.76 from Pulte Homes, delivered $600,000 to the closing agent to pay for the farmland, and paid the balance to Rechtzigel. The $602,424.76 received by Like-Kind is all that the bankruptcy trustee sought to recover. The trustee never made any claim against the farmland. The farmland had been identified and directly transferred to Rechtzigel from its Jackson County owners before any bankruptcy.

The trustee’s focus was on the money, not the farmland, as shown by the complaint’s explanation of the reason for the preference action. The complaint recites that Like-Kind used Rechtzigel’s money, commingled with proceeds from other exchangers, to pay for the farmland. Ownership of the farmland was never commingled with other properties or assets. The discussion of the commingled funds in the bankruptcy trustee’s complaint indicates that the trustee’s focus was on the sale proceeds of exchanged properties. For that reason, the bankruptcy trustee demanded judgment against Rechtzigel in the amount of $602,424.76 — the amount of money transferred from Like-Kind to purchase the farmland, as well as a small monetary sum transferred to Rechtzigel. It was this monetary transfer that the trustee sought to recover as a preference. Like-Kind held the money, but never owned the farmland and never held the deed in its possession.

5. Conclusion

The title insurance policy provides coverage for title risks that are defects, liens, encumbrances or other conditions that render title unmarketable. Because the bankruptcy trustee did not take any action that would create a lien or encumbrance on the farmland or that otherwise affected the property’s marketability, we conclude that the district court did not err in granting summary judgment to Fidelity, dismissing Rechtzigel’s claim for coverage under the 1987 policy for its losses arising out of the preference action. Because the parties agree that the 1992 policy form does not afford coverage for Rechtzigel’s claims beyond the 1987 policy, we further conclude there is no coverage under the 1992 policy.

B. Title Threats after the Policy Date

Fidelity also points out that this bankruptcy-preference claim is inconsistent with the title insurance theory. Unlike most insurance, which protects against future occurrences, “title insurance is protection against future loss because of past events.” 44 C.J.S. Insurance § 22 (2007). “In essence, the insurance is a state of ownership at a specific point in time.” 11 Couch on Insurance § 159.5. The risk covered is retrospective; only the discovery of the defect is usually prospective. Id. Thus, “title insurance primarily seeks to eliminate risks and losses caused by defects in title arising out of past event[s]; it ... has no relation to liens or encumbrances that arise after issuance of the policy.” Id. § 159.25. These general principles are reflected in the 1987 policy. Its coverage extends only to defects existing on the policy date, and the policy specifically excludes all title risks except labor and material liens arising after that date.

Fidelity argues that because the policy date is March 8, 2000, and Like-Kind filed bankruptcy on April 25, 2000, the bankruptcy was a post-policy-date event and the 1987 policy does not provide coverage. Rechtzigel disputes this argument, pointing out the 90-day look-back nature of a preference action. Because of our determination that this preference action by the bankruptcy trustee did not constitute a threat to Rechtzigel’s title to the farmland and that for that reason there is no coverage, we do not reach this question.

II.

The next issue is whether Fidelity had a duty to defend Rechtzigel against the preference action. The existence of a duty to defend is a legal question reviewed de novo. Franklin v. W. Nat’l Mut. Ins. Co., 574 N.W.2d 405, 406 (Minn.1998). The duty to defend is broader than the duty to indemnify. Id. It “arises when any part of the claim against the insured is arguably within the scope of protection afforded by the policy.” Id. at 406-07. To determine whether Fidelity had a duty to defend requires a comparison of the allegations in the complaint of the preference action with the relevant language in the title insurance policy. See Ross v. Briggs and Morgan, 540 N.W.2d 843, 847 (Minn. 1995). If any part of the claims in the preference action arguably fell within the scope of the insurance policy’s coverage, Fidelity had a duty to defend. Id.

The 1987 policy provision concerning “duty to defend” states that “[w]e will defend your title in any court case as to that part of the case that is based on a Covered Title Risk insured against by this Policy.” As previously discussed, the owners of the farmland conveyed title directly to Rechtzigel. Like-Kind never held the deed for delivery to Rechtzigel, and Like-Kind never possessed any attribute of ownership of the farmland. The bankruptcy trustee was without authority to avoid the transfer of the property from the farmland owners to Rechtzigel and therefore could not include the farmland in the preference action. Neither the trustee’s demand, letter to Rechtzigel nor the preference action challenged Rechtzigel’s ownership of the farmland. Instead, the bankruptcy trustee challenged only the transfer of $602,424.76 and sought to recover that amount from Rechtzigel.

Because the preference action did not arguably fall within the scope of coverage of the 1987 policy, we conclude that Fidelity had no duty to defend Rechtzigel against the preference complaint, and the district court did not err in granting summary judgment on the duty-to-defend issue.

III.

The third issue is whether the issuance of a title insurance policy using the 1992 policy form instead of the 1987 policy form constituted a breach of contract by Fidelity and Pulte Title. A contract does not exist without an offer, acceptance, and consideration. Murray v. MINNCOR, 596 N.W.2d 702, 704 (Minn.App.1999), review denied (Minn. Sept. 28, 1999). But without damages, a breach-of-contract action fails as a matter of law. Jensen v. Duluth Area YMCA, 688 N.W.2d 574, 578-79 (Minn.App.2004).

Here, Pulte Title issued Rechtzigel a commitment to sell a 1987 policy. This constitutes an offer. After receiving that commitment, Rechtzigel paid for title insurance. This action constituted acceptance. It is undisputed that the policy Rechtzigel received was a 1992, not a 1987, policy. As previously stated, the 1992 policy excluded coverage against preference actions by bankruptcy trustees, the very risk encountered by Rechtzigel. For purposes of considering this issue, we assume that this substitution of policy forms was improper. However, because we have determined that the 1987 policy did not cover damages from or impose a duty to defend against the claims in this preference action, we conclude that Rechtzigel suffered no damages as a result of this claimed breach of contract and that the district court did not err in granting summary judgment to Fidelity and Pulte Title on the breach-of-contract claim.

IV.

The last issue is whether summary judgment was appropriate regarding Rechtzigel’s negligent-misrepresentation claim. A negligent-misrepresentation action is defined as follows:

One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

Smith v. Brutger Cos., 569 N.W.2d 408, 413 n. 3 (Minn.1997).

According to Rechtzigel, Pulte Title had a duty of reasonable care in its dealings. Rechtzigel argues Pulte Title made a negligent representation by stating Rechtzigel would receive a 1987 policy and later sending it a 1992 policy. Assuming that this indeed was an otherwise actionable misrepresentation, this claim has the same damages problem as the breach-of-con-traet claim. We conclude that because supplying a 1992 policy instead of a 1987 policy did not cause pecuniary loss, the district court did not err in granting summary judgment to Pulte Title and Fidelity and dismissing the negligent-misrepresentation claim.

DECISION

Because respondents Fidelity and Pulte Title had no duty to cover losses related to or defend against the bankruptcy trustee’s preference claims and because respondents’ actions did not cause damages, the district court did not err when it granted summary judgment in respondents’ favor.

Affirmed.

      . Because the result in this case turns on the language of the 1987 policy, this opinion will generally refer to Fidelity as the respondent, even though all of Rechtzigel’s claims are against both Fidelity and Pulte Title.

      . Parties seeking the tax benefits incident to their transfer of property in a three-way exchange are often advised to use a qualified intermediary to stay within the "safe harbor’’ provisions of Treas. Reg. § 1.1031 (k) — 1 (f)(1), (3) (as amended in 2002). See Michael J. Nathanson, Deferred Like-Kind Exchanges in 20 Easy Steps, 25 Tax’n For Law. 86, 93 (1996).

      . It is doubtful that the bankruptcy trustee would have been able to recover the property in a preference action, or place a lien or encumbrance on the property, even if Like-Kind had held title to the farmland. In another bankruptcy case, the replacement property was actually deeded to the qualified intermediary, but the intermediary had not deeded that property to the exchanging party before the intermediary went bankrupt. In re Nation-Wide Exchange Servs., Inc., 291 B.R. 131 (Bankr.D.Minn.2003). The bankruptcy trustee refused to tender a deed on behalf of the qualified intermediary to the exchangor for the replacement property, despite the fact that the exchangor had complied with all of its contractual obligations. Id. at 153. The bankruptcy court held that the bankruptcy trustee had an obligation to immediately deed the replacement property to the exchangor because the bankruptcy estate succeeded to the position of the bankrupt qualified intermediary, and the intermediary had a duty to perform the contract. Id. at 153-54. As applied here, Exchange Services suggests that even if Like-Kind had been deeded the farmland, the bankruptcy trustee would have been obligated to execute a deed and transfer title to Rechtzigel because Rechtzigel performed all of its obligations under the contract.

      . The exchangor is the person or entity who, like Rechtzigel, would use Like-Kind to sell a parcel of property that it owned originally and to distribute those proceeds when a second parcel is conveyed.

      . We were not presented with a situation in which the bankruptcy trustee pursued the other parties to the 1031 exchange, such as the owners of the farmland, and do not consider whether such a challenge might under some scenario have resulted in a claim that affected marketability of Rechtzigel’s ownership of the farmland.

      . Fidelity disputes the claim that the use of the 1992 policy was a wrongful substitution. Fidelity points out that the 1987 policy form is for insuring one to four family residences, that it is not intended for insuring rural land, that the policy form warns a policy holder that if its property is not such a residential lot, the policyholder should contact the insur-anee company immediately, and that Pulte Title made a clerical error in referring to the 1987 policy form. We also note that Fidelity was not aware of the Like-Kind bankruptcy until after the policy was issued. Because the merits of this defense do not affect the outcome of this case, we do not further consider this aspect of the issue.


source: Caselaw Access Project

author: JOHNSON, Judge.

license: Public Domain

text:
    In the Matter of the REVIEW OF the 2005 ANNUAL AUTOMATIC ADJUSTMENT OF CHARGES FOR ALL ELECTRIC AND GAS UTILITIES.
    No. A07-0653.
    Court of Appeals of Minnesota.
    May 6, 2008.

      Eric F. Swanson, David M. Aafedt, Winthrop & Weinstine, P.A., Minneapolis, MN, for relator CenterPoint Energy Minnesota Gas.
    Lori Swanson, Attorney General, Kari Valley Zipko, Assistant Attorney General, St. Paul, MN, for respondent Minnesota Public Utilities Commission.
    Lori Swanson, Attorney General, Steven H. Alpert, Ronald M. Giteck, Assistant Attorneys General, St. Paul, MN, for respondent Minnesota Office of the Attorney General Residential and Small Business Utilities Division.
    Considered and decided by JOHNSON, Presiding Judge; MINGE, Judge; and COLLINS, Judge.

       Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const, art. VI, § 10.

   OPINION

JOHNSON, Judge.

Due to inadvertence, CenterPoint Energy Minnesota Gas failed to properly account for approximately $28 million in purchases of natural gas that was delivered to Minnesota customers over a five-year period. Although CenterPoint is permitted to recover its gas costs from consumers on a dollar-for-dollar, pass-through basis, Cen-terPoint did not recover that portion of its gas-acquisition costs during the five-year period because of its accounting errors. The Minnesota Public Utilities Commission generally permits a utility to recover pass-through costs for only the most recent prior year. CenterPoint requested a variance from that one-year limitation. The commission denied the request, thus denying CenterPoint recovery of approximately $21 million in gas-acquisition costs incurred in four earlier prior years.

CenterPoint argues that the commission’s decision was inconsistent with the commission’s decisions in response to pri- or, similar requests for variances. We conclude that the commission’s decision was arbitrary and capricious because the commission neither applied the principles it had applied in its prior decisions nor announced new principles concerning variances. Therefore, we reverse and remand to the commission for further proceedings.

FACTS

A. Regulatory Framework

CenterPoint provides natural gas to consumers in Minnesota. As is true with other providers of natural gas, Cen-terPoint is regulated by the Minnesota Public Utilities Commission. The commission is responsible for setting the rates that a utility may charge its customers for natural gas. Minn.Stat. § 216B.23, subd. 1 (2006). The commission does so through procedures set forth in Minn. R. 7825.3100-.3700 (2005). Natural gas utilities are permitted to “adjust rates to reflect changes in the cost of energy delivered to customers from those costs authorized by the commission in the utility’s most recent general rate case.” Minn. R. 7825.2390 (2005) (citing Minn. R. 7825.2390-.2920). To that end, gas utilities must submit monthly reports to the commission summarizing the utility’s adjustments for that month. Minn. R. 7825.2910, subp. 1 (2005).

The commission’s administrative rules also provide for a so-called “true-up” procedure by which a utility reconciles its costs and its recovery of costs for the previous year. The utility does so by filing an “annual automatic adjustment of charges” (AAA) with the commission. Minn. R. 7825.2810, subp. 1, .2910, subp. 4 (2005). This procedure allows a utility to recover (or requires it to refund) the difference between the revenue it has received from consumers and the cost of the gas supplied to those consumers during the previous year. Minn. R. 7825.2700, subp. 7 (2005). These rules were promulgated by the commission pursuant to its rulemaking authority under the statutory purchased-gas-adjustment (PGA) scheme, which allows CenterPoint and other public utilities to recover the cost of natural gas on a pass-through basis. See Minn.Stat. § 216B.16, subp. 7 (2006). Significantly for this case, the true-up process applies only with respect to the prior year. Minn. R. 7825.2700, subp. 7.

The commission also has adopted an administrative rule that allows a utility to request a variance from its regulations. The variance rule requires the commission to grant a variance whenever enforcement of another rule would excessively burden the utility and when the variance would not adversely affect the public interest or violate law. Minn. R. 7829.3200 (2005). The commission may consider the matter in an informal proceeding based on written submissions and an oral presentation before the commission, or the commission may refer the matter to the Minnesota Office of Administrative Hearings for a contested-case proceeding. Minn. R. 7829.1000, .1200, subps. 1, 2 (2005).

B. CenterPoint’s Request for Variance

After filing its AAA in September 2005, CenterPoint informed the commission in January 2006 that its internal accounting processes had overstated sales of natural gas between 2000 and 2005. CenterPoint misstated sales in two ways; it mistakenly recognized sales for gas that was lost, and it mistakenly recognized unbilled sales (i.e., sales that were to be billed to customers in the future). Because CenterPoint allocates its gas costs proportionately to all its sales, and because a portion of Center-Point’s gas costs was allocated to quantities of natural gas that were not actually delivered to customers, CenterPoint missed the opportunity to recover the portion of its gas costs that had been allocated to the overstated amount of gas, which in fact never was delivered to consumers. Approximately 80% of the revenue Center-Point receives from consumers is attributable to the costs incurred in obtaining natural gas from suppliers.

In April 2006, CenterPoint followed up on its earlier notice by filing a request for a variance from the one-year limitation in the true-up rule. In that fifing, Center-Point stated that, in any given month, the amount of unbilled sales was “not sufficiently large to stand out and call for further analysis” but that the accumulated total of unbilled sales grew over time, eventually garnering attention after Cen-terPoint filed its September 2005 AAA filing. In October 2006, CenterPoint filed supplemental comments in which the company stated that the total unrecovered amount for the years 2000 through 2005 was approximately $28 million, of which approximately $21 million was unrecovered between 2000 and 2004.

In an order dated December 6, 2006, the commission denied CenterPoint’s request for a variance, reasoning that CenterPoint had not met the requirements for a variance in rule 7829.3200, subp. 1. The commission also ordered an independent audit to review CenterPoint’s accounting procedures and denied CenterPoint’s request for a contested-case hearing pending the results of the independent audit report.

CenterPoint moved for rehearing and reconsideration. In February 2007, the commission held an open meeting to consider the motion. One commissioner moved to reconsider the earlier decision and to grant a one-year variance, which would allow CenterPoint to recover costs incurred in the 2003-2004 period as well as the 2004-2005 period. The motion failed on a 2-2 vote.

On February 22, 2007, the commission issued an order denying reconsideration and clarifying its December 6, 2006, order. The clarifying order confirmed that the total amount of unrecovered costs is $21 million before taxes, and it affirmed the commission’s rationale for denying the variance. CenterPoint now seeks review of the commission’s denial of its request for a variance.

ISSUE

Did the public utilities commission act arbitrarily and capriciously by denying CenterPoint’s request for a variance in fight of the commission’s prior decisions concerning variances?

ANALYSIS

When the court of appeals reviews the decision of an administrative agency, it seeks to determine whether the agency’s decision is:

(a) in violation of constitutional provisions; or
(b) in excess of the statutory authority or jurisdiction of the agency; or
(c) made upon unlawful procedure; or
(d) affected by other error of law; or
(e) unsupported by substantial evidence in view of the entire record as submitted; or
(f) arbitrary or capricious.

Minn.Stat. § 14.69 (2006). An agency’s ruling is arbitrary and capricious if the agency

(a) relied on factors not intended by the legislature; (b) entirely failed to consider an important aspect of the problem; (c) offered an explanation that runs counter to the evidence; or (d) the decision is so implausible that it could not be explained as a difference in view or the result of the agency’s expertise.

Citizens Advocating Responsible Devel. v. Kandiyohi County Bd. of Comm’rs, 713 N.W.2d 817, 832 (Minn.2006). “Decisions of administrative agencies are presumed to be correct” and will be shown deference by reviewing courts where an agency exercises “expertise and special knowledge in the field of its technical training, education and experience.” In re Petition of N. States Power Gas Util, 519 N.W.2d 921, 923-24 (Minn.App.1994).

A.Variance Rule

According to its own administrative rule, the commission may grant a variance to the one-year limitation in the true-up rule. The variance rule provides:

The commission shall grant a variance to its rules when it determines that the following requirements are met:
A. enforcement of the rule would impose an excessive burden upon the applicant or others affected by the rule;
B. granting the variance would not adversely affect the public interest; and
C. granting the variance would not conflict with standards imposed by law.

Minn. R. 7829.3200 (2005).

The parties have brought to our attention two prior administrative cases in which the commission applied the variance rule to the one-year limitation in the true-up rule. In the commission’s 1994 AAA docket, the commission granted a one-year variance to Northern States Power Company (NSP) that allowed NSP to recover $1.05 million in unrecovered gas costs. In re Review of 1994 Automatic Adjustment of Charges for All Gas & Elec. Utils., MPUC Docket No. G, E-999/AA-94-762, 1995 Minn. PUC LEXIS 66 at *14-15 (July 13, 1995) (NSP). Northern States Power had erroneously continued to apply outdated billing practices for one year after an “internal reporting change.” Id. at *8-9. The commission characterized NSP’s mistake as an “accounting error.” Id. at *8. In granting the variance, the commission noted that $1.05 million was nearly 10% of the return on equity allowed in NSP’s most recent rate case, which the commission found to be an excessive burden. Id. at *14. The commission also found that the variance would not be adverse to the public interest because “if the entire time period covered in this matter is considered, no harm has befallen ratepayers.” Although acknowledging ratepayer mismatch (i.e., the difference between the group of consumers who used the gas and the group of consumers from whom the utility would recover the previously unre-covered costs), the commission found that the mismatch did not outweigh the benefits of allowing full cost recovery. Id. With respect to the third requirement, the commission simply stated that “the vari-anee would not conflict with standards imposed by law.” Id.

Similarly, in ruling on disputed issues related to the commission’s 1997 AAA docket, the commission granted a two-year variance to Interstate Power Company to recover $164,781 in gas storage costs that the company had failed to record and, therefore, had faded to recover. In re Review of 1997 Annual Automatic Adjustment of Charges for All Gas & Elec. Utils., MPUC Docket No. G, E-999/AA-97-1212, 1998 Minn. PUC LEXIS 66 at *8-10 (May 28, 1998) (Interstate). Applying the reasoning from NSP, the commission found that the amount in question imposed an excessive burden. The commission stated, “the $164,781 adjustment is significant and could adversely affect the Company if it is not allowed to recover the expense.” Id. at *9. The commission did not elaborate on how it calculated the economic impact. Under the public interest analysis, the commission analogized the case to NSP, stating, “As in a similar case involving NSP-Gas, the utility’s error was inadvertent and the net impact upon ratepayers was zero.” Id. (footnote omitted). With respect to the third requirement, the commission simply stated, “allowing the requested recovery does not violate any standard imposed by law.” Id. at *10.

B. CenterPoint’s Request for Variance

The commission’s denial of Center-Point’s request for a variance is expressed in its written rulings of December 6, 2006, and February 22, 2007. The commission first found that CenterPoint had not satisfied the first requirement of the variance rule, that “enforcement of the rule would impose an excessive burden upon [Center-Point] or others affected by the rule.” Minn. R. 7829.3200, subp. 1(A). The commission cited CenterPoint’s explanation that, on a monthly basis, the unbilled sales amounts were “insignificant” and “not sufficiently large to stand out and call for further analysis.” The commission further reasoned that CenterPoint had “improperly eompare[d] four years of errors to one year of operating income,” which it deemed “an inappropriate comparison,” and that CenterPoint had failed to recover only 0.5% of its gas costs. The commission initially noted that CenterPoint’s accounting error had an impact of $2.4 million, which the commission found was only 1.6% of CenterPoint’s annual net income, but the commission corrected that figure in its second order by stating that “the cumulative impact of the Company’s errors appears to be approximately $21 million before taxes.”

The commission also found that Center-Point had not satisfied the second requirement of the variance rule, that “granting the variance would not adversely affect the public interest.” Minn. R. 7829.3200, subp. 1(B). The commission identified three reasons for this conclusion. First, the commission relied on its interest in inter-generational equity among ratepayers (i.e., the concept that prices charged to consumers of natural gas are based on the gas costs actually incurred by the utility at the time the consumer uses the gas), which the commission stated was more important than the financial burden borne by Center-Point. Second, the commission reasoned that the public interest is served by utilities being compensated for gas costs, and there was no evidence that CenterPoint had not already been “fully compensated.” Third, the commission explained that a variance would eliminate an incentive for the company to ensure accurate accounting of its costs because CenterPoint’s failure to recover all its costs was due to an error within its control. In its second order, the commission added that “the Company’s accounting errors occurred every month for a five-year period, and were due to Company-initiated changes to its accounting practices.”

Finally, the commission apparently found that CenterPoint had not satisfied the third requirement of the variance rule, that “granting the variance would not conflict with standards imposed by law.” Minn. R. 7829.3200, subp. 1(C). The commission stated that it “finds inadequate support for the Company’s position in the legal analysis offered to justify its request for a variance.” In its second order, the commission stated that the 1994 and 1997 cases “do not provide the requisite support to compel such action.” The commission noted, “Variances are always fact-intensive and situation-specific_”

C. Review of Commission’s Decision

The law that applies to this case has its roots in federal administrative law. Peoples Natural Gas Co. v. Minnesota Pub. Utils. Comm’n, 342 N.W.2d 348, 352-53 (Minn.App.1983) (citing decisions of federal circuit courts), review denied (Minn. Apr. 24, 1984). Under that body of law, an agency that issues written, reasoned decisions that are recognized as precedent is, nonetheless, not absolutely bound by its own precedent; but such an agency “must either conform to its prior norms and decisions or explain the reason for its departure from such precedent.” Id. at 353 (quotation omitted) (citing Hatch v. Federal Energy Regulatory Comm’n, 654 F.2d 825, 834 (D.C.Cir.1981); New Castle County Airport Comm’n v. Civil Aeronautics Bd., 371 F.2d 733, 735 (D.C.Cir.1966)); In re Application of Grand Rapids Pub. Utils. Comm’n, 731 N.W.2d 866, 873 (Minn.App.2007) (reviewing action of Minnesota Public Utilities Commission); see also Richard J. Pierce, Jr., Administrative Law Treatise § 11.5, at 819-21 (2002) (discussing “agency adjudication contexts” of varying degrees of formality). An agency may distinguish its precedent in any given case, provided that it does so “forthrightly” so that courts and applicants may expect consistency in agency actions. Hatch, 654 F.2d at 834-35. But “agencies act arbitrarily and capriciously when they ignore their own relevant precedent” by failing to apply or modify the principles articulated in prior decisions. National Fed’n of Fed. Employees v. Federal Labor Relations Auth., 412 F.3d 119, 121 (D.C.Cir.2005) (quotation omitted).

When “faced with new developments or in light of reconsideration of the relevant facts and its mandate, [an agency] may alter its past interpretation and overturn past administrative rulings and practice.” American Trucking Ass’n. v. Atchison, Topeka & Santa Fe Ry., 387 U.S. 397, 416, 87 S.Ct. 1608, 1618, 18 L.Ed.2d 847 (1967); see also National Cable & Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 981, 125 S.Ct. 2688, 2699-2700, 162 L.Ed.2d 820 (2005). When, however, an agency modifies the principles that guide it with respect to a particular issue, the agency has a “duty to explain its departure from prior norms.” Atchison, Topeka & Santa Fe Ry. v. Wichita Bd. of Trade, 412 U.S. 800, 808, 93 S.Ct. 2367, 2375, 37 L.Ed.2d 350 (1973); see also Fed’n of Fed. Employees, 412 F.3d at 121. As the United States Supreme Court has phrased it:

Though the agency’s discretion is unfettered at the outset, if it announces and follows — by rule or by settled course of adjudication — a general policy by which its exercise of discretion will be governed, an irrational departure from that policy (as opposed to an avowed alteration of it) could constitute action that must be overturned as arbitrary, capricious, or an abuse of discretion within the meaning of the Administrative Procedure Act....

INS v. Yang, 519 U.S. 26, 32, 117 S.Ct. 350, 353, 136 L.Ed.2d 288 (1996) (alterations and quotations omitted). As stated above, this court previously has adopted the federal approach to this specific area of administrative law. See Application of Grand Rapids Pub. Utils. Comm’n, 731 N.W.2d at 873 (citing Peoples Natural Gas, 342 N.W.2d at 353); Peoples Natural Gas, 342 N.W.2d at 352-53 (citing federal cases).

The Minnesota Public Utilities Commission is an agency that issues written, reasoned decisions that constitute a body of precedent. Counsel for the commission acknowledged at oral argument that when it considered CenterPoint’s request, the commission did not intend to depart from its previous interpretations of the variance rule or from the principles articulated in NSP and Interstate. Thus, the central question in this appeal is whether the commission consistently applied its prior decisions in NSP and Interstate when denying CenterPoint’s request for a variance. We will review the commission’s decision by separately analyzing each of the rule’s three requirements.

1. Excessive Burden

The first requirement for a variance is that “enforcement of the rule would impose an excessive burden upon the applicant or others affected by the rule.” Minn. R. 7829.3200, subp. 1(A).

In considering whether a denial of a variance imposes an excessive financial burden on a company, the obvious starting point is the nominal dollar amount. In NSP, the commission reasoned that “[failure to recover over $1 million in gas costs would undoubtedly place a burden upon NSP Gas.” 1995 Minn. PUC LEXIS 66 at *13-14. In Interstate, the commission simply stated that “the $164,781 adjustment is significant and could adversely affect the Company if it is not allowed to recover the expense.” 1998 Minn. PUC LEXIS 66 at *9. Yet in this case, the commission concluded that $21 million in unrecovered costs would not result in an excessive burden. The disparity between the ruling on CenterPoint’s request and the two prior rulings is impossible to reconcile in sheer numerical terms.

In considering the issue of excessive burden, it also may be appropriate to consider the amount of unrecovered costs in the context of the financial condition of the particular company applying for a variance. The commission has done so in the past. In one of the two prior relevant cases, the commission compared the unre-covered costs to the company’s profitability as stated in terms of return on equity. In NSP, the commission reasoned that the $1.05 million in gas costs “would represent almost 10% of the return on equity.” 1995 Minn. PUC LEXIS 66 at *13-14. In Interstate, the commission apparently did not perceive a need to perform this type of proportional financial analysis.

In this case, however, the commission adopted a measurement of the financial burden that it had not previously applied. The commission measured the burden on CenterPoint by expressing the unrecov-ered costs as a percentage of total gas costs for the non-recovery period. The commission reasoned that $21 million was not an excessive burden for CenterPoint because that amount was only 0.5% of CenterPoint’s total gas costs of $4.2 billion for the period at issue. This mode of reasoning fails to recognize any impact on CenterPoint’s profitability due to the unre-covered gas-acquisition costs. Center-Point passes its gas-acquisition costs on to consumers without any mark-up. Thus, the percentage relationship between Cen-terPoint’s unrecovered gas costs and its total costs is, as a practical matter, irrelevant to its profitability.

If the commission had analyzed the burden on CenterPoint in terms of its return on equity (and we agree with the commission that such an analysis should be done on a consistent, annualized basis — either with separate year-by-year comparisons or a single comparison over the entire four-year period), the commission would have found that the impact on CenterPoint’s profitability was significant. In its petition for rehearing and reconsideration, Center-Point persuasively pointed out to the commission that the diminution in its profitability for 2004, 2003, and 2002 would be 13.79%, 14.24%, and 15.31%, respectively, if the $21 million is distributed over the entire period in which the accounting error affected the company’s recovery of costs. Thus, to deny CenterPoint the opportunity to recover its unrecovered gas costs in those years would have a greater proportional impact on CenterPoint than the 10% diminution in profitability that was found to be excessive in NSP.

Thus, the commission’s reasoning and conclusion regarding the burden on Cen-terPoint cannot be reconciled with its decisions in the two prior cases.

2. Public Interest

The second requirement for obtaining a variance is that the applicant must show that “granting the variance would not adversely affect the public interest.” Minn. R. 7829.3200, subp. 1(B). Each of the three reasons given by the commission with respect to the public interest is problematic.

The commissions first and primary consideration with respect to the second requirement is that its interest in inter-generational equity among ratepayers is greater than the financial burden borne by CenterPoint. The principle of “inter-generational equity” is a legitimate public interest and one that the commission has the expertise to implement. See N. States Power Gas Util., 519 N.W.2d at 924. But the commission has not consistently pursued that goal. In NSP, the commission reasoned that “[t]he net effect to ratepayers is $0.” 1995 Minn. PUC LEXIS 66 at *14. The commission acknowledged some inequity but concluded that it did not “outweigh the benefit of allowing the Company full gas cost recovery as contemplated under the PGA rules.” Id. In Interstate, the commission employed similar reasoning and concluded that “the variance would not conflict with the public interest ... because there would be no net impact on ratepayers.” 1998 Minn. PUC LEXIS 66 at *9. In its orders denying CenterPoint’s request for a variance, the commission failed to make any effort to distinguish CenterPoint’s request from the two prior requests, which also implicated multiple-year recovery periods.

It is significant that the commission was not faced with an all-or-none decision. At oral argument, the commission’s counsel conceded that the commission has the discretion to grant the variance in part for a period of fewer than four years. In fact, in moving to reconsider the initial denial of CenterPoint’s request, one commissioner proposed that the commission grant the variance for only one additional year. The commission’s decision to deny a variance with respect to the entire time period led to a result that is inconsistent with its decisions in the two prior cases.

The commission erred with respect to its reasoning that CenterPoint already had been “fully compensated,” an apparent reference to the proceedings in prior years at which CenterPoint’s rates were set. This statement, to the extent it may be deemed a finding, is “unsupported by substantial evidence in view of the entire record as submitted.” Minn.Stat. § 14.69(e). The commission’s own staff briefings and the commission’s appellate brief acknowledge that rate cases generally are not a means for recovering gas costs pursuant to the true-up rule. In addition, it is clear that the accounting errors that required correction had not been detected when Center-Point submitted its earlier rate proposals, and it also is clear that those accounting errors had a real impact on the company’s earnings. CenterPoint’s parent company filed a Form 8-K with the United States Securities and Exchange Commission, stating that the company would be taking a pre-tax charge of $21 million as a result of the commission’s denial of a variance. The purpose of CenterPoint’s request for a variance was to recover costs that were not considered during prior rate-setting proceedings.

The commission also reasoned that a variance would eliminate an incentive for the company to ensure accurate accounting of its costs, noting that CenterPoint’s failure to recover all its gas costs was due to an error within its control. In its second order, the commission buttressed this reasoning by noting that “the Company’s accounting errors occurred every month for a five-year period, and were due to Company-initiated changes to its accounting practices.” These statements imply that the commission considered the existence and degree of CenterPoint’s fault. This type of culpability analysis is not required by the text of the variance rule, and the commission did not employ it in either of the two prior cases. The commission does not explain why CenterPoint is more culpable for its accounting errors than NSP and Interstate were in the two prior cases. The commission characterized NSP’s mistake as an “accounting error,” 1995 Minn. PUC LEXIS 66 at *8, and Interstate’s “error” as an “inadvertent [] omi[ssion],” 1998 Minn. PUC LEXIS 66 at *8-9. It appears that the accounting errors in NSP and Interstate cases were not meaningfully distinguishable from CenterPoint’s accounting error.

Thus, the commission’s reasoning and conclusion regarding the public interest cannot be reconciled with its decisions in the prior two cases.

3. Consistency with Legal Standards

The third and final requirement for a variance is that “granting the variance would not conflict with standards imposed by law.” Minn. R. 7829.3200, subp. 1(C). As noted above, it is unclear whether the commission expressly analyzed the third requirement. The commission made vague statements regarding the “legal analysis offered to justify [CenterPoint’s] request for a variance” and whether NSP and Interstate “provide the requisite support to compel” the commission to grant a variance.

It is unclear whether these statements refer to the third requirement of the variance rule or to the entirety of Center-Point’s legal arguments. It appears most likely that they refer to the ultimate issue whether a variance should be granted. If the statements are’ interpreted as referring specifically to the third requirement, they are inconsistent with prior cases. In the two prior cases, the commission’s decision closely tracked the language of the rule by stating simply that a variance would not conflict with any standards imposed by law. 1995 Minn. PUC LEXIS 66 at *14, 1998 Minn. PUC LEXIS 66 at *10. The statements quoted above appear to ask a different question and fail to consider whether granting a variance would conflict with standards imposed by law. In its arguments to this court, the commission has not identified any other law or legal standard that would be violated by a decision to grant CenterPoint’s request for a variance.

Thus, the commission’s reasoning and conclusion regarding the third requirement cannot be reconciled with its decisions in the prior two cases.

4. Summary

Because the three requirements of the variance rule are stated in the conjunctive, CenterPoint must satisfy all of them. Minn. R. 7829.3200, subp. 1. If CenterPoint has satisfied all three requirements, the commission “shall grant a variance.” Id.

For the reasons explained above, we conclude that the commission improperly analyzed each of the three requirements of the variance rule. The commission did not consistently apply the principles that it articulated and applied in the NSP and Interstate cases. The commission also did not modify those principles or change its interpretation of the variance rule, as permitted by Peoples Natural Gas. Thus, the commission’s decision denying Center-Point’s request for a variance from the true-up rule was arbitrary and capricious. See Peoples Natural Gas Co., 342 N.W.2d at 352-53; Hatch, 654 F.2d at 834-35.

D. Appellate Remedy

Upon a conclusion that an agency has acted arbitrarily and capriciously, a reviewing court may reverse, modify, or “remand the case for further proceedings.” Minn.Stat. § 14.69. In previous cases in which an agency decision was held to be arbitrary and capricious, this court typically has remanded for reconsideration of some type. See Citizens Advocating Responsible Devel. v. Kandiyohi County Bd. of Comm’rs, 713 N.W.2d 817, 838 (Minn. 2006) (remanding for “a new EIS determination process in accordance with the standards set forth in this opinion”); In re Revocation of Family Child Care License of Burke, 666 N.W.2d 724, 728 (Minn.App. 2003) (remanding “for reconsideration of a lesser sanction consistent "with this opinion and with the statutes and rules of’ agency); In re Continental Tel. Co., 358 N.W.2d 400, 408 (Minn.App.1984) (remanding to the PUC for appropriate proceedings to determine certain issues), rev’d in part on other grounds, 389 N.W.2d 910 (Minn.1986).

We remand this case to the commission for further proceedings. Minn.Stat. § 14.69. The commission shall reconsider CenterPoint’s request for a variance in light of this opinion. The commission shall apply the same rule on which Center-Point’s request was based and shall apply the same principles that were applied to the requests for variances in NSP and Interstate. See In re Burke, 666 N.W.2d at 728; PG&E Gas Transmission, Nw. Corp. v. Federal Energy Regulatory Comm’n, 315 F.3d 383, 390 (D.C.Cir.2003) (holding that agency failed to distinguish its precedent and remanding with instructions to “reconsider PG & E’s proposal in light of this opinion and Commission precedent”).

CenterPoint’s request for relief includes a request that we direct the commission to refer the matter to the Minnesota Office of Administrative Hearings for a contested-case proceeding. CenterPoint has not cited a “statute or rule” conferring “a right to a hearing,” and it appears that “all significant issues have ... been resolved.” Minn. R. 7829.1000 (2005). In the applicable section of its brief, CenterPoint requested a contested-case hearing only for the purpose of showing that it has not been “fully compensated,” but we have resolved that issue in favor of CenterPoint. Thus, we decline to require a contested-case hearing or to direct the commission to reconsider whether a contested-case hearing is necessary.

E. Motion to Supplement Record

After oral argument, CenterPoint moved this court to supplement the appellate record with a copy of the independent audit report addressing Cen-terPoint’s accounting errors, which was issued after oral argument. “The papers filed in the trial court, the exhibits, and the transcript of the proceedings, if any, shall constitute the record on appeal in all cases.” Minn. R. Civ. App. P. 110.01. Appellate courts may make exceptions to this rule “when the evidence is documentary evidence of a conclusive nature (uncontroverted) which supports the result obtained in the lower court.” In re Objections & Defenses to Real Property Taxes for 1980 Assessment, 335 N.W.2d 717, 718 (Minn.1983). That exception does not apply in this case because the evidence is being offered to reverse, rather than affirm, the agency’s decision. Center-Point makes other arguments in support of its motion, but each is unpersuasive. In light of our disposition on appeal, it is unnecessary for this court to review the substance of the audit report. We assume that CenterPoint will be permitted to present the audit report to the commission on remand. Thus, we deny the motion.

DECISION

The commission failed to faithfully apply its applicable precedent and did not announce a modification of that precedent when it considered CenterPoint’s request for a variance. Thus, the commission’s denial of CenterPoint’s request for a variance was arbitrary and capricious. We therefore reverse and remand this matter to the commission.

In light of our decision to remand the case for further proceedings, it would be premature to consider CenterPoint’s takings or due process claims. See State v. Hoyt, 304 N.W.2d 884, 888 (Minn.1981) (“We do not decide constitutional questions except when necessary to do so in order to dispose of the case at bar.”).

Reversed and remanded; motion denied.