Stacy Demskie, et al., Appellants, vs. U.S. Bank National Association, Respondent.
A22-0777
STATE OF MINNESOTA IN SUPREME COURT
May 8, 2024
Anderson, J. Took no part, Thissen, J.
Joseph W. Anthony, Daniel R. Hall, Anthony Ostlund Louwagie Dressen & Boylan P.A., Minneapolis, Minnesota, for appellants.
Denise S. Rahne, Brendan V. Johnson, Timothy W. Billion, Robins Kaplan LLP, Minneapolis, Minnesota, for respondent.
Justin H. Perl, Mid-Minnesota Legal Aid, Minneapolis, Minnesota, for amicus curiae Mid-Minnesota Legal Aid.
Jeffrey M. Markowitz, Sequoia L. Butler, Arthur, Chapman, Kettering, Smetak
Katherine S. Barrett Wiik, Douglas D. Anderson, Saul Ewing LLP, Minneapolis, Minnesota, for amici curiae Professor Daniel S. Kleinberger and Serene Warren.
SYLLABUS
- Under the Minnesota notice pleading standard, the allegations in the complaint identifying U.S. Bank, N.A. as a shareholder and describing actions taken by U.S. Bank as facts supporting shareholder status were sufficient to survive a motion for judgment on the pleadings.
- Because the court is evenly divided on whether beneficial owners of a closely held corporation may initiate an action for a buy-out of their interests under
Minnesota Statutes section 302A.751 (2022), we affirm the decision of the court of appeals dismissing appellants’ buy-out claim.
Affirmed in part, reversed in part, and remanded.
OPINION
ANDERSON, Justice.
Appellants Stacy, Lue, and Michael Demskie are three co-beneficiaries of a trust established by John Demskie, the founder of Remote Technologies, Inc. (RTI). John Demskie‘s 90 percent ownership interest in RTI is the principal asset of the trust. After his death in 2016, appellants allege that respondent U.S. Bank, N.A. (U.S. Bank), the sole trustee, became the controlling shareholder of RTI and took actions that severely diminished the value of RTI and frustrated their reasonable expectations as owners of beneficial interests in RTI.
Appellants brought claims against U.S. Bank for breach of fiduciary duty and unfairly prejudicial conduct under the Minnesota Business Corporation Act,
Because we conclude that appellants sufficiently pleaded the shareholder status of U.S. Bank under our notice pleading standard, we reverse the dismissal of their breach-of-fiduciary-duty claim. But because the court is evenly divided on the issue of whether owners of beneficial interests in a corporation may, on their own, initiate an action for a buy-out of their interests under
FACTS
In an appeal from a judgment on the pleadings, we accept the allegations set forth in the complaint as true and construe all reasonable inferences in favor of appellants, as the nonmoving parties. Abel v. Abbott Nw. Hosp., 947 N.W.2d 58, 68 (Minn. 2020). The facts stated here are drawn from the complaint.
John Demskie founded Remote Technologies, Inc., a closely held corporation, in 1992.1 He passed away in 2016, leaving his 90 percent ownership interest in RTI in an irrevocable trust. The beneficiaries of this trust included Stacy, Lue, and Michael Demskie—John Demskie‘s sister, mother, and brother, respectively—along with a fourth beneficiary not involved in the action. John Demskie‘s will named U.S. Bank as the sole trustee. U.S. Bank also became special administrator of his probate estate. Most importantly, however, appellants allege that at this point, U.S. Bank became the controlling shareholder of RTI. It was
For example, appellants allege that U.S. Bank charged excessive fees to RTI for consulting services, took over RTI‘s banking services, and delayed a sale of the business despite professional advice that delaying the sale would critically damage the value of the business. A precipitous decline in business value did occur; the business was valued at a minimum of $33.6 million in 2016 following John Demskie‘s death on U.S. Bank‘s estate tax return, but only 3½ years later, the business was effectively sold by U.S. Bank for $100,000, a 99.7 percent decrease in value. In addition, they allege U.S. Bank did not conduct a thorough valuation of the business before the heavily discounted disposition. Appellants also allege that U.S. Bank deprived them of information that they had a right to
receive under
In April 2017, U.S. Bank removed appellants from the board of directors, as well as terminated Stacy Demskie‘s employment, but U.S. Bank did not remove the remaining trust beneficiary, who was not a family member.
Appellants’ complaint asserts two claims against U.S. Bank. First, they claim that U.S. Bank, as the “controlling shareholder” of RTI, breached fiduciary duties owed to them as owners of beneficial interests in RTI. Second, they claim that U.S. Bank “acted fraudulently, illegally and/or in a manner unfairly prejudicial toward” them and violated their reasonable expectations as owners of beneficial interests in RTI. They assert that they are entitled to relief under
U.S. Bank moved for judgment on the pleadings under Minnesota Rule of Civil Procedure 12.03. U.S. Bank argued that appellants’ shareholder claims fail on the pleadings because the complaint does not allege that appellants were “shareholders” as defined in the Minnesota Business Corporation Act. See
The district court granted U.S. Bank‘s motion for judgment on the pleadings on both claims, ruling that appellants cannot bring a shareholder action against U.S. Bank under the Minnesota Business Corporation Act because the allegations in the complaint are not sufficient to establish that either appellants or U.S. Bank were shareholders of RTI. The district court noted that appellants had conceded that “they are not registered as shareholders on RTI‘s corporate books and records” and instead relied on their status as owners of beneficial interests in the corporation. The district court determined, however, that “[o]nly those people who are registered on RTI‘s corporate record books or records can be shareholder owners of the corporation and entitled to bring shareholder claims under Minnesota law.” In addition, the district court determined that appellants’
The court of appeals affirmed the dismissal of both claims. Demskie v. U.S. Bank Nat‘l Ass‘n, No. A22-0777, 2022 WL 17751473 (Minn. App. Dec. 19, 2022). First, the court of appeals upheld the dismissal of the breach-of-fiduciary-duty claim because appellants did not plead sufficient facts to show the shareholder status of U.S. Bank. Id. at *3. Specifically, the court of appeals concluded that the allegation in the complaint that U.S. Bank was the “controlling shareholder” of RTI was a mere “legal conclusion,” and
appellants failed to “allege that U.S. Bank was registered on the books or records as the owner of shares of RTI.” Id. Because the ruling on the shareholder status of U.S. Bank was “dispositive” for the breach-of-fiduciary-duty claim, id., the court of appeals did not address appellants’ argument that they did not need to be shareholders in order for U.S. Bank to owe fiduciary duties to them. Second, the court of appeals held that, under a plain language reading of
We granted appellants’ petition for review on the following issues: (1) whether the court of appeals applied an improper pleading standard by requiring appellants’ complaint to allege facts corresponding to the statutory definition of “shareholder” in
ANALYSIS
I.
We first address the sufficiency of the complaint as it relates to pleading the shareholder status of U.S. Bank. We review de novo whether the complaint sets forth a legally sufficient claim for relief. Abel v. Abbott Nw. Hosp., 947 N.W.2d 58, 68 (Minn. 2020). Resolution of this issue also requires interpretation of the Minnesota Rules of Civil
Procedure, which we review de novo. Glen Edin of Edinburgh Ass‘n v. Hiscox Ins., 992 N.W.2d 393, 397 (Minn. 2023). We examine only the facts alleged in the complaint, taking those facts to be true and drawing all reasonable inferences in favor of the nonmoving party. Abel, 947 N.W.2d at 68. At this stage of the litigation, we construe the complaint to allow the claim “to go forward unless there is no way to construe the alleged facts—and the inferences drawn from those facts—in support” of the claim. Hansen v. U.S. Bank Nat‘l Ass‘n, 934 N.W.2d 319, 326 (Minn. 2019).
In Walsh v. U.S. Bank, N.A., 851 N.W.2d 598, 601–02 (Minn. 2014), we analyzed the history of Minnesota Rule of Civil Procedure 8.01, which establishes pleading requirements in Minnesota state courts. We also analyzed our past decisions
the incident.” Walsh, 851 N.W.2d at 605 (quoting Hansen v. Robert Half Int‘l, Inc., 813 N.W.2d 906, 917–18 (Minn. 2012)).
Although the complaint here describes U.S. Bank as the controlling shareholder of RTI, the court of appeals determined that “labeling U.S. Bank as a controlling shareholder” was a nonbinding legal conclusion. Demskie v. U.S. Bank Nat‘l Ass‘n, 2022 WL 17751473, at *3. The court of appeals cited our decision in Graphic Communications Local 1B Health & Welfare Fund “A” v. CVS Caremark Corp., which explained that “a plaintiff must provide more than mere labels and conclusions.” 850 N.W.2d 682, 692 (Minn. 2014). Because appellants had not alleged “facts sufficient to establish that U.S. Bank is a shareholder“—specifically, allegations that “satisfy the definition of shareholder under the Minnesota Business Corporation Act“—the court of appeals concluded that appellants’ breach-of-fiduciary-duty claim “fails on the pleadings.” Demskie, 2022 WL 17751473, at *3.
Appellants argue that the court of appeals erred by requiring the complaint to include “additional factual enhancement.” We agree. We conclude that the court of appeals’ analysis is inconsistent with our notice pleading standard, which permits “short and general statements of fact” and does not ask for detailed factual allegations. Walsh, 851 N.W.2d at 605. The pleading requirement sought by U.S. Bank resembles the federal standard most commonly associated with Twombly and Iqbal. As to the sufficiency of the complaint here, Walsh controls.
To begin with, the allegation in the complaint that U.S. Bank was a shareholder of RTI is not a mere label. The complaint includes numerous facts supporting the allegation
that U.S. Bank became the controlling shareholder following John Demskie‘s death. For example, the complaint alleges that U.S. Bank called shareholder meetings, selected the members of the board of directors, and “made it a practice of conducting company business at combined Board and Shareholder meetings.” The complaint also alleges that “U.S. Bank directly voted as a shareholder on company actions.” It is difficult to see how these allegations do not give U.S. Bank fair notice of its claimed shareholder status.
The court of appeals concluded, however, that these facts are not sufficient because there is no allegation that “U.S. Bank was registered on the books or records as the owner of shares of RTI” under the statutory definition of “shareholder” in
and the proposed standard might interfere with attempts to ensure compliance with statutory duties owed by controlling shareholders.
We therefore conclude that, for purposes of the motion for judgment on the pleadings, the complaint adequately alleges the shareholder status of U.S. Bank. We remand to the court of appeals for further proceedings on the breach-of-fiduciary-duty claim. On appeal, appellants argued that the district court erred by concluding that (1) because U.S. Bank was a non-shareholder, the Bank did not owe any fiduciary duties to appellants, and (2) as owners of beneficial interests, appellants were not owed any fiduciary duties. The court of appeals concluded that “the issue of whether U.S. Bank is a shareholder is dispositive” for this claim “because U.S. Bank needs to be a shareholder to owe shareholder fiduciary duties.” Demskie, 2022 WL 17751473, at *3. Because we reverse the court of appeals’ conclusion regarding the shareholder status of U.S. Bank, and the court of appeals did not address appellants’ argument that fiduciary duties are owed to beneficial owners, we direct the court of appeals to address this issue on remand.
II.
We turn next to whether the court of appeals correctly concluded that appellants, as owners of beneficial interests in RTI, may not invoke the buy-out remedy under
In an action under subdivision 1, clause (b) . . . the court may, upon motion of a corporation or a shareholder or beneficial owner of shares of the corporation,
order the sale by a plaintiff or a defendant of all shares of the corporation held by the plaintiff or defendant to either the corporation or the moving shareholders, whichever is specified in the motion, if the court determines in its discretion that an order would be fair and equitable to all parties under all of the circumstances of the case.
Appellants’ argument is summarized as follows: Under these circumstances, “shareholder” in
the same subdivision explicitly gives beneficial owners the right to move for a buy-out. Accordingly, the Legislature‘s merging of shareholders and beneficial owners into “moving shareholders” in subdivision 2 supports the interpretation that, in subdivision 1(b), the Legislature also intended the definition of “shareholder” to include beneficial owners. Furthermore, interpreting “shareholder” in subdivision 1 as referring to only a person registered on the books or records of the corporation as a shareholder makes the subsequent references to “beneficial owners” in
U.S. Bank‘s argument is summarized as follows: Based on the plain language of the statute, only a “shareholder” as defined in
incorporates an assumption that beneficial owners cannot be deemed shareholders for the purposes of voting rights except in limited circumstances with the permission of a shareholder, see
Our court is equally divided on this question, and we leave undisturbed the
CONCLUSION
For the foregoing reasons, we affirm the court of appeals on the disposition of the buy-out claim of appellants but reverse on the disposition of the breach-of-fiduciary-duty claim, and remand to the court of appeals for further proceedings consistent with this opinion.
Affirmed in part, reversed in part, and remanded.
THISSEN, J., took no part in the consideration or decision of this case.