901 N.W.2d 203
Minn. Ct. App.2017Background
- Richard Ward received 1,200 acres and ERMI (a campground business) in a 1985 divorce decree that contained provisions limiting disposition of the land and requiring children participation in business decisions.
- In 1998 Richard formed Ward Family Inc. (WFI), transferred the 1,200 acres to WFI, and gradually gifted shares to his seven children; shareholders executed quit-claim deeds to convey their interests to WFI.
- ERMI continued operating on roughly 200 acres; historically there was no written lease and ERMI’s rent covered WFI’s expenses but produced no net profit.
- In December 2012 WFI (represented by Ann and Molly) executed a 20-year lease with ERMI (signed by Richard for ERMI) granting ERMI broad rights over the entire 1,200 acres and rent limited to covering WFI’s expenses; days later Richard completed most share transfers to his children.
- Plaintiffs (three minority children) sued alleging direct claims for breach of fiduciary duty and oppression under Minn. Stat. §302A.751, plus derivative claims on behalf of WFI; the district court granted summary judgment for defendants on direct claims and on derivative claims the court deferred to a special litigation committee (SLC).
- On appeal the court (Minn. App.) held the district court erred denying plaintiffs’ direct claims (breach and oppression insofar as based on certain injuries) but correctly deferred to the SLC and affirmed dismissal of derivative claims; the case was remanded for further proceedings on the surviving direct claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether breach-of-fiduciary-duty claims were direct or derivative | Ward children: some alleged injuries (exclusion from management; loss of personal use rights; sale of ERMI) inflicted direct harm on shareholders | Defendants: injuries (mortgage, lease, sale) are injuries to WFI and therefore derivative | Court: mixed — mortgage and lease-as-to-corp are derivative; but exclusion from decisionmaking, deprivation of individual use rights, and ERMI sale can support direct claims; summary judgment on Count 1 reversed |
| Whether monetary damages are available for breach of fiduciary duty | Plaintiffs: monetary relief available when financial injury or defendant’s gain is shown | Defendants: argued district court correctly barred damages (court had sua sponte ruled damages unavailable) | Court: monetary damages may be awarded for breach where financial injury or disgorgement is shown; district court erred in barring damages and in sua sponte finding no evidence of compensable injury |
| Whether minority-oppression claim under Minn. Stat. §302A.751(b)(3) survives summary judgment | Plaintiffs: directors acted unfairly prejudicially and frustrated reasonable shareholder expectations (including expectations from the divorce decree, quit-claim assurances, and course of dealing) | Defendants: WFI formation and transactions were part of estate-transfer plan; plaintiffs’ expectations to manage ERMI were unreasonable; dissolution decree unenforceable/irrelevant | Court: district court erred—dissolution decree and pre-existing understandings could inform reasonable expectations; summary judgment on Count 2 reversed |
| Whether district court should defer to WFI’s SLC on derivative claims (Counts 4–7) | Plaintiff (Thomas): SLC investigation lacked good faith (no experts, improper counsel influence, joint interviews, missing documents) | Defendants: SLC was independent, investigated thoroughly, interviewed witnesses, reviewed documents, and negotiated remedial addendum to lease; business-judgment rule applies | Court: SLC investigation was adequate and in good faith; deference appropriate; summary judgment for defendants on derivative claims affirmed |
Key Cases Cited
- Advanced Commc’n Design, Inc. v. Follett, 615 N.W.2d 285 (Minn. 2000) (shareholders who participate in management may owe fiduciary duties to one another)
- Gunderson v. Alliance of Computer Prof’ls, Inc., 628 N.W.2d 173 (Minn. App. 2001) (fiduciary duty includes substantive and procedural obligations; reasonable expectations evidence may come from course of dealing)
- Pedro v. Pedro, 463 N.W.2d 285 (Minn. App. 1990) (monetary relief on fiduciary-duty claim depends on proof of financial injury)
- Pedro v. Pedro, 489 N.W.2d 798 (Minn. App. 1992) (damages may be measured by defendant’s gain from breach)
- Skoglund v. Brady, 541 N.W.2d 17 (Minn. App. 1995) (claims challenging corporate-authorized lending/leases treated as derivative)
- In re UnitedHealth Group Inc. S’holder Derivative Litig., 754 N.W.2d 544 (Minn. 2008) (courts defer to SLC under business-judgment rule if SLC was independent and acted in good faith)
- U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363 (Minn. 2011) ("unfairly prejudicial" includes conduct frustrating shareholders’ reasonable expectations)
- Janssen v. Best & Flanagan, 662 N.W.2d 876 (Minn. 2003) (shareholder may pursue derivative suit when corporation fails to do so)