Potter v. Pohlad

convincing er has shown clear and evidence undergone change has moral such he practice presently

that he is fit to law and

that he has maintained the skills and knowl-

edge necessary practice, to resume petition-

IT IS HEREBY ORDERED that be, is, Anthony

er M. Marick and the same practice

reinstated to the of law the State immediately.

of Minnesota effective

BY THE COURT: Page Alan C.

/s/ Page

Alan C. Associate Justice

/s/ POTTER, A.

James as Trust Administra- Liquidating

tor of the MEI Estates cre-

ated under the Amended Plan of Reor-

ganization of the Official Committee of

Unsecured Creditors for MEI Diversi-

fied, Inc., Corp., MEI Salon Essanelle Glemby Company, Inc.,

Salon Beauty Salons, Inc., Sophia

Maxim’s

Beauty (N.Y.), Inc., Glemby Salons Int’l

Washington, Inc., Glemby Missouri, Int’l Service, Inc., Appellant, Salon POHLAD, al., Respondents.

Carl R. et

No. C5-96-1921. Appeals

Court of of Minnesota.

March Wahl,

Craig Gagnon, T. Peter W. Edward Bisio, Donnelly, Oppenheimer Wolff & R. Minneapolis, Appellant. for Fried, Frank, Harris, Gregory Joseph, P. Jacobson, City, for & New York Shriver Respondents. Pearson, Boyd, H.

David P. Thomas Win- Paul, Weinstine, Respon- throp for & St. dents. LANSING, and decided

Considered MANSUR, P.J., and JJ.* PETERSON * Const, VI, court, pursuant § judge serving to Minn. art. pointment Retired of the district as judge Appeals by ap- of the Minnesota Court of alleging fraud in

OPINION connection with Regis’s management LANSING, Judge. corporation. the new In 1993 MEI filed against brought administrator suit A trust bankruptcy reorganization and its alleging violation of three proved appointed in 1994. Potter was as fiduciary corporation duties after the their trust of liquidating administrator the assets bankrupted by and acquisition a failed brought against and this lawsuit MEI’s cor- granted joint The district court venture. porate on behalf of officers the creditors and officers, summary judgment in favor of the equity security holders of MEI. Potter they by ruling protected the busi- peals summary judgment the district court’s judgment rule. affirm. ness We dismissing his claims. FACTS ISSUES dispute arises out of a ac- This (a) 1. in- apply Did court eventually quisition that is faulted for bank- that, determining correct in as a standard MEI, acquiring corporation. rupting the law, respondent matter of the not officers did corporation a Delaware formed in MEI is duty violate their of care? Respondents Donald 1986. Carl Pohlad and are of Benson officers as well as directors (b) correctly apply district court Did the solely Respondent is MEI. James Cesario that, determining the the facts in as a law to Appellant an officer of MEI. James respondent the matter of officers did representing the trust administrator the duty of violate their care? of pursuant interests MEI’s creditors apply 2. Did the district court incorrect reorganization bankruptcy. MEI’s after determining in law that the claim for breach Myron In MEI officers Ku- 1989 met with duty of faith was meritless? possible a nin Paul Finkelstein to and discuss failing 3. the district court in Did err industry. in beauty the investment salon claim address for breach of of the majority Regis Kunin was the shareholder candor? Corporation. also Beau- He owned Maxim’s Salons, Inc., and, ty through Regis, was the ANALYSIS

majority shareholder in Salon Co. Essanelle family’s was a shareholder in his Finkelstein fiduciary corpora The duties of a business, Glemby which Company, also generally and tion’s officers directors are beauty operated salons. Finkelstein was also governed by incorpo the law of the state of Regis. in president of and a shareholder Fletcher, 3 ration. See William Meade Cyclopedia Fletcher the Law Private joint as a The was structured (1994). § Corporations, 840 Dela MEI is a venture between MEI and which corporation, fiduciary and the obli ware Maxim’s, Essanelle, Glemby and would be corporation’s gations a Delaware officers corpora- acquired and combined into a new by application are determined directors tion, MEI-Regis, by run which would be Jewelry Kay law. Weiss v. Delaware Kunin, Regis. Finkelstein and The deal was (D.C.Cir. Stores, Inc., 1259, 470 F.2d 1268 on approved MEI’s board of directors 1972). corporation’s recommendation August 1990. challenging corporate practices Cases rule, a year began losing money implicate one MEI business Within acquisition, Regis’s principle and it common that functions terminated law 1992, management presumption contract. In 1991 and insulate the directors brought Glemby corporation judicial against MEI lawsuits officers1 of from both extent, er, may great liability § be governing supra, 991. But an officer's duties 1. "To the rules expansive since same whether the is a di- more than those of a director are the officer sued may rely presi- management or some on the decisions rector other officer such as directors * * * dent, president, secretary, vice 3 of officers. See id. Fletch- and recommendations Having in become so corporate decisions. available to them. their evaluation Fletcher, formed, requisite § swpra, must then act with 3A generally See mainly in discharge lies Aron for the rule of their duties.” The rationale care equipped (Del.1984). ill assumption Lewis, that courts are son decisions of second-guess the business gross judged under a This of care is v. Telex corporate professionals. Roberts, Solash Id.; Kahn v. negligence standard. (CCH) Fed.See.L.Rep. Corp., (Del. 1987-88 *4 No. C.A. WL ¶ 93,608, 97,727, 1988 WL 3587 1995), Dec.6, sub nom. Kahn ex. aff'd 1988). Ch. Jan. Roberts, Corp. v. rel. DeKalb Genetics in eval The court’s role A.2d powerful presump posits rule “a objective uating provide is to “an the with a court will not interfere tion” that by process officers] which [the review by loyal a and informed made decisions * * * .” the decision under review reached Technicolor, Inc., & Co. v. board. See Cede (citation 745056, Kahn, at *4 omit 1995 WL 345, (Del.1993), modified, 636 A.2d 361 634 ted). (Del.1994). It is the claimant’s A.2d 956 presumption with evi burden to rebut this acknowledged courts have The Delaware directors, reaching in their chal dence “that “gross lack of a clear articulation of the the decision, any of lenged breached one the corporate negligence” in the con- standard faith, fiduciary duty good triads of their — See, e.g., Philip Rabkin v. A Hunt text. omitted). (citations loyalty or due care.” Id. (Del.Ch.1986) 963, Corp., 547 A.2d 970 Chem. burden, plaintiffs If meet their then the the (citing Yeasey E. E. Norman & William apply, judgment rule will not and business Manning, Harbor Standard —Safe Codified the will have to show the “entire directors 919, or 35 Bus.Law. 928 Unchartered Reef? challenged to the fairness” of the transaction (1980)). (citations plaintiffs. Id. shareholder/creditor omitted). i.e., apply, If if the the rule does uncertainty, Despite this Delaware by to have made a decision is found been gross negli repeatedly courts have defined board, loyal informed then the decision gence indifference to or a delib as “reckless by it not be overturned the courts unless will disregard body of erate of the whole stock any cannot “rational busi be attributed or actions that are “without the holders” omitted). (citations purpose.” ness Id. v. Van Gor bounds of reason.” See Smith that MEI breached Potter claims officers kom, (Del.1985); 858, n. 13 488 A.2d 873 (1) fiduciary duty of three of their duties: Thiokol, Fed. Tomczak v. Morton 1990 (2) (3) faith; care; duty good of ¶ (CCH) 95,327, 96,585, Sec.L.Rep. at 1990 duty of candor. (Del. Rabkin, 5, 1990); Apr. WL 42607 Ch. Duty I. of Care Cos., Inc., 970; Signal v. 547 A.2d Gimbel appeal that Potter asserts on 599, (Del.Ch.1974), 316 316 A.2d 615 aff'd applied court an incorrect standard evalu- (Del.1974); (citing Allaun v. Con A.2d 619 ating duty care claim. But we con- his of (Del.Ch. 257, Oil 147 A. solidated that the district court discerned the clude 1929). from recent Delaware It is evident correct standard from Delaware cases con- very high. standard is See In cases care, struing and we further Litig., re Int’l Inc. Derivative No. Caremark correctly ap- conclude that the district court *12, 13670, 1996 WL 549894 C.A. plied this standard to the evidence. 1996) Sept. at *25 LEXIS “possi (describing of care as duties, breach fiduciary part As of their bly theory corporation the most difficult corporate “have a to inform might hope to win themselves, upon plaintiff law which a prior making a deci business sion, reasonably judgment.”). of all material information a allegedly inquiry including defective con- judicial of fidu- whether the

believe that into level ciary duty necessarily owed is affected duct was that of an officer or a director. arises, dispute which the circumstances under plaintiffs urges adopt the defini- cause have failed to establish self this court faith, gross negligence dealing found in Jardel tion of Co. or breach of must Hughes, In prove grossly actions defendants’ Supreme anal- that case the Delaware Court negligent in presump- order to overcome the ogized gross negligence statutory to the defi- judgment tion of the rule. business Gross But negligence. nition of criminal Jardel negligence is the ‘reckless indifference to or plaintiff which a involved a tort claim in disregard body deliberate the whole punitive damages. inappropriately awarded or actions which are stoekholder[s’] ‘without Under Delaware “recklessness” rather the bounds of reason.’” We believe this required “gross negligence” than mere accurately construes law. Delaware dictum, damages. punitive Id. In recover challenge concept gross disputes Potter’s “[t]he the court noted that second application district negligence application gross negli continues to find court’s recovery corporate gence threshold in eases of di- standard to facts. When review liability ing summary judgment rector under the business a motion for we con omitted). (citations But light rule.” Id. the Jar- sider the most evidence favorable purport gross del court to define Bellomo, did non-moving party. to the Fabio v. negligence purposes (Minn.1993). director 504 N.W.2d But even liability. adopt to a And we decline standard true, accepting allegations Potter’s as we overwhelming on ma- based Jardel when agree with court that the district the MEI construing gross jority negligence eases behavior, undoubtedly impru officers’ while accept parameters context not, in hindsight, dent as a matter of did (“reckless of Allaun indifference” and “delib- gross negligence. rise to the level of (“without disregard”) erate Gimbel alleges gave Potter that MEI officers Re- reason”). a bounds As result the district gis responsibility diligence full to conduct due selecting court did not err in this standard to deal, inappropriately for the relied on Finkel- apply to the evidence. representations stein and Kunin’s about the alternatively Potter asserts that the dis- industry, businesses and the salon and failed applied higher trict court even an standard Regis’s diligence to monitor or evaluate due gross negligence than a standard. Potter projec- efforts and and Kunin’s Finkelstein argument rests this on one sentence in the delegation tions. But such a duties and district court’s “In memorandum: this investigative allocation of resources is not plaintiff Court’s view cannot establish that “without reason” and does not the bounds of approving Regis defendants’ actions amount to to the “reckless indifference” acquisition any without rational taken Indeed, pellant’s informed “[a]n interests. added.) (Emphasis purpose.” business We task as much an delegate decision to a are not certain that such standard would be judgment any exercise of business as other.” incorrect Delaware law on assessment Oil, Co., Getty Rosenblatt v. Int’l, Gagliardi the issue. v. See Trifoods (Del.1985) Aronson, (citing 943 473 A.2d at (Del.Ch.1996) A.2d 813). Further, of information “the amount (“[Wjhere independent a director is and dis- is-prudent that it before a decision is to have interested, liability no corpo- there can for be * * * .” made is itself a business loss, rate unless the facts are such that no Litig., In re Shareholders RJR Nabisco v. person possibly such a could authorize trans- ¶ (CCH) 94,194, Fed.Sec.L.Rep. 1988-89 attempting if action he or she were 19, 1989), 91,714 May appeal dis- duty.” (citing faith to v. meet their Saxe missed, 556 A.2d 1070 (Del.Ch.1962))). Brady, 184 A.2d 602 But operational delegation due dili- MEI’s purpose” even if the “rational business stan- gence Regis without reason. Re- was not higher dard were than the incorrect expertise standard, gis operational had the and the gross negligence an effective financial incentive to undertake analysis application court’s reflects Regis expe- investigation into had gross the deal. negligence standard as we have de- industry; MEI beauty rience in the salon scribed it. The court wrote: “Be- district Third, that joint Potter contends MEI officers structured as a had none. The deal was the board of directors of failed to inform venture, in the allotting equity a 20% interest facts about the before material Regis. It was not resulting corporation to argues that the the board’s decision. Potter rely officers to on the due reckless for MEI apprise obligation had an light by Regis in diligence conducted efforts opera- of their reliance on board joint part- Regis, venture of duties Regis’s diligence, reliance on tional due their (Those ner, MEI. duties formed the owed to profes- on projections, and their reliance involving litigation these basis for earlier and Kunin. sional abilities of Finkelstein manage- parties.) In addition warrants and give officers, deal to agents ment bonuses were built into the agree as including Kunin and Finkel- Regis managers, obligation to disclose corporation, have an stein, every ability incentive to effect a turnaround board’s information material to the major MEI-Regis regarding failing in the salons and make make an informed decision Corp. profitable company. acquisitions. See Science Accessories Summagraphics Corp., 425 A.2d Second, significance places much on (an (Del.1980) “duty agent has the to disclose that, a memorandum he as- the existence of information that is relevant the affairs serts, the officers knew that Finkel- shows him.”); agency entrusted to Mills cf. representations and Kunin’s were based stein Maximilian, Inc., 559 A2d Acquisition Co. v. investigations. parties inadequate (Del.1989) (corporate directors admissibility of dispute the the memorandum material informa have to disclose “all not resolve the ad- into evidence. We need approval). seeking tion” when shareholder missibility purposes dispute, but assume for plentiful But the record contains evidence analysis of our that the document is admissi- that MEI’s outside directors knew what document, prepared in ble. The June 1992 joint voting they approved when Yoch, in by records a conversation Steven Regis. venture with attorney reported to Yoch that which an living All of the outside directors now filed Gottesman, two MEI’s outside counsel Joel attesting understanding their of affidavits earlier, years had told one of the defendant prior acquisition. to the After re- the deal proceed that the deal should not officers affidavits, viewing these we are confident diligence that he had concerns about the due that MEI officers did not violate their obli- that had been conducted. gation to disclose material information to out- Each outside director was side directors. agree We that this memorandum is the per- that MEI had relied on aware puts sup- in strongest evidence Potter forth operational diligence and that Re- form due assuming port of his claim. But even that gis projections. One out- had calculated and be- the memorandum is both admissible separately with Finkelstein side director met lievable, it does not establish “reckless indif- subsequently to evaluate the transaction disregard” ference” or “deliberate of the recommended the deal to the board. The shareholder and creditor interests. directors, experienced outside all business- that memorandum at most establishes they information had had all the perspns, intentionally disregarded warning necessary requested to make an and believed attorney that had from one deal been regarding acquisition. informed decision insufficiently And researched. the evidentia- expected Directors are not to have “detailed ry suggestion strength of even this is under- aspects operation of the information about all remaining by the text mined memorandum’s Caremark, enterprise.” In re misgivings in which about the Yoch records 125, 549894, *12, at *41. WL 1996 LEXIS attorney’s truth “It is statements: * * * interesting that I Finally,- charges to note reviewed that Potter virtually all of Mr. Gottesman’s notes from an affidavit submitted court did not consider any by expert transactions and never saw indi- that concludes that the [I] his witness inadequate diligence grossly cation that Mr. Gottesman believed the due efforts were “grossly negligent and and the officers were transactions were flawed.” managing diligence. faith. in the due We decline to extend Delaware reckless” law expert conelusory of an But the statements when the Delaware courts themselves have Potter’s claim. See Giammal cannot sustain not commented. Co., 12842, Mining v. No. C.A.

vo Sunshine showing Bad faith is evidenced that (Del.Ch. Jan.31, 30547, at n. 10 1994 WL *9 “knowingly deliberately the directors or 1994) expert’s (stating that con reliance withheld information knew to be materi- gross negli misplaced is because clusions purpose misleading al for the sharehold- “contemplate not gence standard does Berlin, ers.” Emerald v. Partners No. C.A. hind-sight evidence” to show submission (Del.Ch. 1995 WL at *7 incorrect), aff'd, that board was 651 A.2d 787 1995). Sept.22, provide Potter has failed to circumstances, we Under these any deliberately evidence that MEI officers expert’s opinion conclude that the does not information from withheld board members precluding summary judg create a fact issue agree order to mislead or deceive them. We 56.03; Hayes Doug ment. Minn.R.Civ.P. with the district court that Potter’s claim of (1st Dynamics, F.3d las Cir. bad faith must fail. 1993) (concluding expert’s affidavit Duty III. of candor “conelusory contain more than a asser must To the extent that a legal candor tion about ultimate issues” to defeat — denied, separate exists from the summary judgment), cert. duties care and U.S. (1994). faith, -, good obligation it entails the 128 L.Ed.2d 863 disclose S.Ct. all material information to shareholders when conclude that the evidence does not seeking approval. Acqui shareholder Mills provide a sufficient basis on which a reason- sition 1280. The transaction person MEI able could determine the offi- challenges did involve shareholder grossly negligent. cers were The district Therefore, approval. we do not believe the correctly court determined that the officers alleged violation of a of candor states a summary judgment were entitled to Rather, separate claim under Delaware law. matter of law. candor, i.e., obligation Duty II. faith information, implied material disclose is showing A of a the directors relationship the officer’s to the board which corporation acted bad faith will rebut the charged making with informed decisions. presumption judgment of the business rule. believe that this claim and its attendant Cede & 634 A.2d 361. Delaware allegations only analyzed can be in the con analyzing generally courts claims of bad faith text of the officers’ of care. In that inquire into the motives of the board mem context, Potter has failed to demonstrate that See, e.g., Corp., bers. Zim v. VLI any failure MEI officers to inform the (Del.1996) (finding 1061-62 lack of mo board of material information amounted to stockholders); tive to deceive or mislead Van gross negligence. Gorkom, (noting A.2d at 873 because faith, allegations there were no of bad consid DECISION ease); erations of motive were irrelevant Because the district court did not err in its Citron v. Fairchild Camera & Instrument interpretation of law and because Delaware ¶ (CCH) 93,- Corp., Fed.Sec.L.Rep. 1988-89 insufficient, as a the evidence was matter 90,102, May 1988 WL 53322 alleged support violations of cor- 1988) (noting that determination of bad duties, fiduciary summary porate officers’ motives). requires inquiry faith into board’s appropriate. was urges showing that a of bad faith Affirmed. motive, ought require not evidence of but rather is satisfied with evidence reckless- MANSUR, (concurring Judge MARTIN J. ness. But he concedes that no Delaware specially). directly cases address the issue of whether separate- recklessly opinion act with I concur in the and write officers who connection acquisition ly of the standard this court breach their duties of on the issue apply determining respondents disregard.” if must indifference” and “deliberate Allaun, See 147 A. at 261. breached their of care under Delaware law. argue

Appellants respondent’s that the al-

leged breach of should have been con- gross negligence, under a standard

sidered is, respondent’s diligence

“that was due

gross deviation from the standard of conduct person that a reasonable would have ob- Craig BRANDT, Appellant, Appellants served.” believe that the follow- ing genuine conduct creates issues of materi- (1) precluding summary judgment: al fact HALLWOOD MANAGEMENT COM- diligence MEI’s counsel considered due lack- PANY, corporation, a Delaware (2) ing against purchase; and advised Respondent, respondents exclusively Regis relied on (3) operational diligence; due MEI’s access Royal Company, Inc., Electric Glemby’s personnel information and was corporation, a Minnesota (4) restricted; Glemby deliberately withheld Respondent. (5) MEI; material information from No. CX-96-1557. having was financial difficulties that MEI (6) investigate properly; Regis, failed to Appeals Court of of Minnesota. MEI, prepared projections the financial March premised which the was and MEI verify projections independently; failed to

(7) respondents background failed to do (8) Finkelstein; Kunin

checks on due

diligence would have revealed the “turn profitability

around” based on the of Essa- (9) illusory;

nelle and Maxims respon- proposed

dents failed to determine if the cuts merged companies overhead of the would company capable

leave a viable generating (10)

cash; projections regarding financial Re- unrealistic; (11)

gis were respondents failed fully investigate Regis’s overwhelming

debt and the conflict involving of interest

Regis, Kunin and Finkelstein.

The affidavits filed MEI’s directors do deny allegations, merely these but state

that their behavior past was consistent with

practices employed in acquisition of other

business entities and that the directors

proved purchase knowing in- the risks

volved. applied

If urged upon we the standard us

by appellants, allegations regarding re-

spondents’ may genuine behavior create is-

sues of material fact. required But we are

apply standard, the Delaware requires which

proof respondents acted with “reckless

Case Details

Case Name: Potter v. Pohlad

Court Name: Court of Appeals of Minnesota

Date Published: Mar 4, 1997

Citation: 560 N.W.2d 389

Docket Number: C5-96-1921

Court Abbreviation: Minn. Ct. App.