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

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Presentation on theme: "2011 Minnesota Case Law and Statutory Update Thomas A. Jensen David C. Jenson May 10, 2012."— Presentation transcript:

1 2011 Minnesota Case Law and Statutory Update Thomas A. Jensen David C. Jenson May 10, 2012

2 Watkins Inc. v. Chilkoot Distributing, Inc. WatkinsCDI Other Sellers sales receipts Watkins and CDI operated for almost 20 years under same agreement (1988 Dealer Agreement) CDIs 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 Lamber t Group

3 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

4 2006 Agreement allows Watkins to make unilateral changes Watkins reclassifies the Lambert Group, significantly reducing commissions and discounts to CDI Watkin s CDI Lamber t Group Other Sellers commissions & discounts sales receipts

5 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

6 Takeaways Objective manifestation of intent, but informed by surrounding facts and circumstances Dont be sneaky

7 SCI Minnesota Funeral Serv. Inc. v. Washburn-McReavy Funeral Corp. Minnesota Supreme Court case Affirmed Court of Appeals decision

8 SCI Washburn Crystal Lake 3 Funeral Homes/ Cemeteries Real Estate – $2 Million (MN/CO) 100% Crystal Lake Stock $1 Million KnownNot Known

9 No rescission Mutual mistake Form of transaction, not value or quality Lack of mutual assent Under objective standard, purchase agreement clearly evidenced mutual assent

10 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

11 Takeaways Stock transaction really does mean all assets and liabilities Absent fraud or inequitable conduct, cant clear this up later. Diligence and proper representations and warranties key

12 BOB Acres, LLC v. Schumacher Farms, LLC Court of Appeals case False recital of consideration Specific performance

13 Purchase Agreement to buy land recited Sellers 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

14 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

15 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 BOBs attorney Asked township board to split property

16 Takeaways Non-payment of earnest money is not necessarily fatal to contract formation Cant have it both ways Provide for remedies by contract, dont leave to court

17 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

18 Provells due diligence investigation Includes outside counsel and uncovers recent slowpay incidents JetChoice IIs financials show a $1.5M loss as of September 2008 Nearly all of JetChoice IIs assets consist of a receivable from JetChoice JetChoice refuses to provide JetChoice I financials Provell CFO expresses concern about financial stability of JetChoice entities

19 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

20 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

21 Summary judgment for JetChoice Failure to establish an essential element = mandatory summary judgment Whether reliance is reasonable is evaluated in the context of a partys 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

22 Summary judgment for JetChoice Provell argues that some of the representations made by JetChoice could not be independently verified Court responds that it doesnt matter; the facts that Provell did uncover were such that they should have doubted any representation relating to the financial stability of JetChoice

23 Takeaways Whether a partys reliance is reasonable for purposes of a fraud claim depends on the partys 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

24 Quinn v. Elite Custom Transporters and Motorcoaches, LLC Elites 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

25 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

26 New company is Elite Custom Transporters and Motorcoaches, LLC Assets transferred include all tangible and intangible assets and goodwill EliteElite #2 Jim Bruggeman Brenda Bruggeman $80 / 20% Gretchen Bruggeman $120 / 60% Homer Bruggeman Jim Bruggeman Assets Assumed liabilities

27 After the transfer, Elite #2 operates the same business that Elite had operated Since the Quinns cant 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

28 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 hadnt been encumbered was goodwill Open question under MN law whether goodwill can be an asset under FTA

29 Court says that goodwill CAN be an asset for purposes of FTA, remands for determination of the value of the goodwill Court cant determine summary judgment on FTA claims whether transfer was fraudulent depends in part on the value of the goodwill

30 Court reaffirms unpublished 2009 decision, Schwartz v. Virtucom Exception to statute against successor liability (302A.661) for transfers that violate the FTA Cant determine summary judgment because cant yet determine whether the FTA has been violated

31 Takeaways Goodwill can be an asset for purposes of FTA (if its unencumbered) There is an exception to the general rule against successor liability for transactions that violate the FTA

32 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

33 Western Πs/Minority Shareholders WERCS Δs/Majority SH of Western Common Preferred and Common Blackstreet Δ Stock Purchase Agreement LOI Assets Western Directors and Officers Δs

34 Old Western Board (pre-closing) Majority interested (WERCS) New Western Board (post-closing) Only one WERCS director

35 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

36 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

37 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

38 Takeaways: Creates new MN law by adopting DEs Braddock standard MN courts continue to look to DE law for precedent

39 © 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) David C. Jenson (612)

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