2011 Minnesota Case Law and Statutory Update Thomas A. Jensen David C. Jenson May 10, 2012.

2011 Minnesota Case Law and Statutory Update

Thomas A. JensenDavid C. JensonMay 10, 2012

Watkins Inc. v. Chilkoot Distributing, Inc.

Watkins

CDI

OtherSellers

sales receipts

•Watkins and CDI operated for almost 20 years under same agreement (1988 Dealer Agreement)

•CDI’s commissions and discounts are based on its own sales and the sales of other sellers it has recruited for Watkins

•Lambert Group was recruited by CDI and is a top seller

commissions & discounts

Lambert

Group

• Watkins sends CDI the 2006 Agreement

Accompanied by confusing letter

Follow-up phone call

Unclear to CDI whether this is a new contract or merely an information form

CDI signs and returns the 2006 Agreement

• 2006 Agreement allows Watkins to make unilateral changes

• Watkins reclassifies the Lambert Group, significantly reducing commissions and discounts to CDI

Watkins

CDI

Lambert

Group

OtherSellers

commissions & discounts

sales receipts

• CDI sues Watkins for breach of the 1988 Dealer Agreement

Watkins argues the 2006 Agreement governs

Was a new agreement intended?

Signature of CDI = objective manifestation of intent?

• Is this the wrong result?

Not a consideration on the merits; only denial of summary judgment

• Takeaways

Objective manifestation of intent, but informed by surrounding facts and circumstances

Don’t be sneaky

• SCI Minnesota Funeral Serv. Inc. v. Washburn-McReavy Funeral Corp.

Minnesota Supreme Court case

Affirmed Court of Appeals decision

SCI Washburn

Crystal Lake

3 Funeral Homes/ Cemeteries

Real Estate – $2 Million(MN/CO)

100%

Crystal Lake Stock

$1 Million

Known Not Known

• No rescission

Mutual mistake

Form of transaction, not value or quality

Lack of mutual assent

Under objective standard, purchase agreement clearly evidenced mutual assent

• No reformation

Clarifies different remedy than rescission

Not a mutual mistake

Not a unilateral mistake and fraud or inequitable conduct

Here, just a unilateral mistake

• Takeaways

Stock transaction really does mean all assets and liabilities

Absent fraud or inequitable conduct, can’t clear this up later.

Diligence and proper representations and warranties key

• BOB Acres, LLC v. Schumacher Farms, LLC

Court of Appeals case False recital of consideration Specific performance

• Purchase Agreement to buy land recited Seller’s receipt of $500 in earnest money

• Closing within 60 days; did not close

• Parties continued to negotiate and exchange drafts

• Earnest money never paid

• Buyer sued for specific performance

• Consideration?

Promise for a return promise is consideration

False recital of earnest money does not change this

Promise to sell land in exchange for promise to purchase – not relying on earnest money itself

• Did Seller waive right to enforce closing deadline (i.e., to cancel the purchase agreement)? Waiver standard is clear and can be

shown by behavior alone “Intentional relinquishment of a known

right” Here, Seller clearly

Never objected to non-payment of earnest money

Proceeded with easement arrangements

Sent abstract of title to BOB’s attorney Asked township board to split property

• Takeaways

Non-payment of earnest money is not necessarily fatal to contract formation

Can’t have it both ways

Provide for remedies by contract, don’t leave to court

Provell, Inc. v. JetChoice I, LLC

• JetChoice I and JetChoice II, related companies, operate a private jet service

• Provell, Inc. considers purchasing a membership in 2008

• After initial talks, Provell begins due diligence investigation

• Provell’s due diligence investigation

Includes outside counsel and uncovers recent “slowpay” incidents

JetChoice II’s financials show a $1.5M loss as of September 2008

Nearly all of JetChoice II’s assets consist of a receivable from JetChoice

JetChoice refuses to provide JetChoice I financials

Provell CFO expresses concern about financial stability of JetChoice entities

• Provell has “assurances” from JetChoice executives regarding their financial health

• Provell closes on the purchase of a membership for $2.25M, including $1.25M paid at closing

• Within several months, JetChoice files for bankruptcy

• Provell sues on a fraud claim to recover the purchase price; claims JetChoice made “numerous misrepresentations” about financial stability

• Can Provell prove fraud?

False representation of fact susceptible of knowledge

Made with knowledge of falsity or ignorance of truth

Intended by JetChoice to induce reliance

Provell in fact reasonably relied upon representation

Provell suffered monetary damage as a result

• Summary judgment for JetChoice

Failure to establish an essential element = mandatory summary judgment

Whether reliance is “reasonable” is evaluated in the context of a party’s intelligence, experience, and opportunity to investigate

An independent inquiry into the accuracy of a representation may bar a party from relying on the representation unless the investigation is not “adequate to disclose the falsity”

• Summary judgment for JetChoice

Provell argues that some of the representations made by JetChoice could not be independently verified

Court responds that it doesn’t matter; the facts that Provell did uncover were such that they should have doubted any representation relating to the financial stability of JetChoice

• Takeaways

Whether a party’s reliance is “reasonable” for purposes of a fraud claim depends on the party’s intelligence, business sophistication, experience, and opportunity to investigate

An opportunity to investigate will bar a fraud claim where the investigation demonstrated that representations were false or uncovered information that should have led the party to doubt the truth of representations

Quinn v. Elite Custom Transporters and Motorcoaches, LLC

• Elite’s business was suffering All tangible assets and intangible

assets relating to the tangible assets are encumbered pursuant to bank loans

Assets exceed liabilities, which include $600k owed to the IRS for delinquent payroll taxes

• The Quinns order a custom motor home for $875k and pay up front Elite never delivers the motorhome

and never returns the money or personal property

Quinns sue Elite for breach of contract and conversion

Elite fails to respond, and the Quinns obtain a default judgment in the amount of $1M

After judgment is entered against it, Elite transfers all of its assets to a new company

• New company is Elite Custom Transporters and Motorcoaches, LLC

• Assets transferred include all tangible and intangible assets and goodwill

Elite Elite #2

Jim Bruggeman

Brenda Bruggeman$80 / 20%

Gretchen Bruggeman$120 / 60%

Homer Bruggeman

Jim Bruggeman

Assets

Assumed liabilities

• After the transfer, Elite #2 operates the same business that Elite had operated

• Since the Quinns can’t recover their judgment against Elite, they sue Elite #2

fraudulent transfer in violation of the Minnesota Uniform Fraudulent Transfer Act (FTA)

seek to hold Elite #2 liable under a successor liability theory

• Threshold question: has any “transfer” occurred for purposes of FTA?

Encumbered assets are not “assets” under the FTA

The only thing transferred by Elite to Elite #2 that hadn’t been encumbered was goodwill

Open question under MN law whether goodwill can be an “asset” under FTA

• Court says that goodwill CAN be an asset for purposes of FTA, remands for determination of the value of the goodwill

Court can’t determine summary judgment on FTA claims whether transfer was fraudulent

depends in part on the value of the goodwill

• Court reaffirms unpublished 2009 decision, Schwartz v. Virtucom

Exception to statute against successor liability (302A.661) for transfers that violate the FTA

Can’t determine summary judgment because can’t yet determine whether the FTA has been violated

• Takeaways

Goodwill can be an asset for purposes of FTA (if it’s unencumbered)

There is an exception to the general rule against successor liability for transactions that violate the FTA

• Staehr v. Western Capital Resource, Inc.

• U.S. District Court

• Pleading requirements in derivative claims when new Board has been elected and obligation to make demand on new Board

Western

Πs/Minority Shareholders WERCS

Δs/Majority SH of Western

CommonPreferred and Common

BlackstreetΔ

Stock Purchase Agreement

LOIAssets

Western Directors and Officers

Δs

• Old Western Board (pre-closing)

Majority interested (WERCS)

• New Western Board (post-closing)

Only one WERCS director

• Litigation begins – no derivative claims made

• Blackstreet transaction closes (March 2010)

• New Western Board elected (Blackstreet controls company)

• Defendants file motion to dismiss (October 2010)

• Plaintiffs file Amended Complaint

• First time derivative claim filed but plaintiffs did not first make demand on new Board regarding derivative claim

• FRCP 23.1: Pleading requirements for shareholder derivative claims

Complaint must state with “particularity” efforts to get desired action from the directors

Defendants say plaintiffs did not plead the futility of making a demand on the new Board

Plaintiffs say that futility excuses their failure to make a demand because board was engaged in bad conduct

By filing the derivative complaint for the first time in the amended complaint, coupled with the fact that there was a new, independent board, plaintiffs were required to make a demand on the new board

None of the exceptions applied

• Takeaways:

Creates new MN law by adopting DE’s Braddock standard

MN courts continue to look to DE law for precedent

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Thank You

Thomas A. Jensen(612) [email protected]

David C. Jenson(612) [email protected]