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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
http://www.leonard.com
© 2012, Leonard, Street and Deinard Professional Association.Leonard, Street and Deinard and the Leonard, Street and Deinard logo are registered trademarks.
Thank You
Thomas A. Jensen(612) [email protected]
David C. Jenson(612) [email protected]