Blohm v. Kelly, No. A08-1157.

• Decision Date: 12 May 2009
• Docket Number: No. A08-1157.
• Parties: D. Randall BLOHM, Appellant, v. Bruce D. KELLY, et al., Respondents.
• Court: Minnesota Court of Appeals

765 N.W.2d 147

D. Randall BLOHM, Appellant, v. Bruce D. KELLY, et al., Respondents.

No. A08-1157.

Court of Appeals of Minnesota.

May 12, 2009.

John D. Hagen, Jr., Minneapolis, for appellant.

Timothy P. McCarthy, Chestnut & Cambronne, P.A., White Bear Lake, for respondents.

Considered and decided by ROSS, Presiding Judge; HALBROOKS, Judge; and JOHNSON, Judge.

OPINION

JOHNSON, Judge.

BNK, Inc., is a closely held corporation that previously owned a small business. Bruce D. Kelly, the sole officer and director, owns 80 percent of the shares; D. Randall Blohm owns 20 percent of the shares. After BNK sold all of its corporate assets for approximately $112,200, Kelly caused BNK to distribute $2,400 of the proceeds to Blohm. Blohm sued Kelly and BNK, alleging that Kelly misappropriated some of the proceeds of the sale. BNK established a special litigation committee (SLC) to investigate Blohm's claims against Kelly. The SLC recommended that BNK not pursue those claims. The district court granted summary judgment to BNK and Kelly on all of Blohm's claims. We conclude that Kelly is entitled to summary judgment on Blohm's claim concerning events occurring before the sale of corporate assets but not on Blohm's claim concerning events occurring after the sale. We also conclude that Kelly and BNK are not entitled to summary judgment on Blohm's claim that he was denied access to corporate records. Therefore, we affirm in part, reverse in part, and remand.

FACTS

From 1991 to 2005, BNK owned and operated an automobile service station located in the city of St. Paul. In November 2004, Blohm learned that Kelly was considering a sale of the service station. Blohm requested financial records of the corporation from Kelly. Blohm had difficulty obtaining some records and was completely unsuccessful in obtaining other records.

In January 2005, Kelly sold all of BNK's assets to the long-time manager of the service station. Kelly states that the sale price was approximately $112,200. Blohm did not object to the terms of the sale. In May 2005, Kelly sent Blohm a check, paid from BNK, for $2,400, which represented Blohm's share of the proceeds of the sale of the corporation's assets, after the settling of accounts with creditors.

In January 2006, Blohm commenced this action against Kelly and BNK. Blohm's allegations can be grouped into three claims. First, Blohm alleges that, before the sale of BNK's assets, Kelly paid himself excessive compensation and commingled BNK's funds with his personal assets and with the assets of another company partially owned by Kelly. Blohm argues that Kelly breached fiduciary duties imposed by the common law, see Pedro v. Pedro, 489 N.W.2d 798, 801 (Minn.App. 1992), review denied (Minn. Oct. 20, 1992), and the Minnesota Business Corporation Act, see Minn.Stat. §§ 302A.251, subd. 1, .361 (2008).

Second, Blohm alleges that, after the sale of BNK's assets, Kelly used the proceeds of the sale to pay personal debts and distributed an excessive amount of the remaining proceeds to himself. Specifically, Blohm alleges that Kelly made approximately $58,300 in "questionable distributions" using BNK checks. Blohm relies on the same legal theories that apply to his first claim. Third, Blohm alleges that Kelly and BNK denied him access to corporate records. See Minn.Stat. § 302A.461 (2008).

The parties engaged in discovery and other pre-trial activities for approximately a year and a half. In October 2007, the district court stayed further proceedings, at Kelly and BNK's request, to allow an SLC to investigate Blohm's claims against Kelly. In January 2008, the SLC, which consisted of a single attorney in private practice, completed its investigation and issued a report that concluded as follows:

Because there appear to be no potentially viable claims against Kelly based on the allegations of Blohm, the costs of pursuing any such claims would be significant in comparison to the potential of no recovery. Thus, the Committee recommends that the Company refrain from instituting any legal action against Kelly.

In February 2008, BNK and Kelly moved for summary judgment. Kelly argued that Blohm's claims for relief against him are derivative in nature and that the district court should reject them based on the SLC's investigation and report. The district court granted the motion, reasoning that the claims are derivative and that the SLC's determination is entitled to deference. The district court also reasoned that BNK and Kelly are entitled to summary judgment on Blohm's claim concerning access to corporate records because Blohm could not prove damages. Blohm appeals.

ISSUES

I. Is Kelly entitled to summary judgment on Blohm's claim of breach of fiduciary duties as it relates to events that allegedly occurred before the corporation's sale of assets?

II. Is Kelly entitled to summary judgment on Blohm's claim of breach of fiduciary duties as it relates to events that allegedly occurred after the corporation's sale of assets?

III. Are BNK and Kelly entitled to summary judgment on Blohm's claim that they denied him access to BNK's corporate records?

ANALYSIS

A motion for summary judgment shall be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that either party is entitled to a judgment as a matter of law." Minn. R. Civ. P. 56.03; see also MacRae v. Group Health Plan, Inc., 753 N.W.2d 711, 716 (Minn.2008). A genuine issue of material fact exists if a rational trier of fact, considering the record as a whole, could find for the party against whom summary judgment was granted. Frieler v. Carlson Mktg. Group, Inc., 751 N.W.2d 558, 564 (Minn.2008). On review of a grant of summary judgment, we determine "whether there are any genuine issues of material fact and whether the district court erred in its application of the law." City of Morris v. Sax Invs., Inc., 749 N.W.2d 1, 5 (Minn.2008) (quotation omitted).

I.

Blohm first argues that the district court erred by granting summary judgment to Kelly on the first claim, which concerns events allegedly occurring before the sale of BNK's assets, based solely on the SLC's determination that BNK not pursue the claims against Kelly.

A. Direct or Derivative

The threshold inquiry with respect to Blohm's first claim is whether it should be characterized as a direct claim (i.e., a claim belonging to the shareholder) or a derivative claim (i.e., a claim belonging to the corporation). As a general rule, "an individual shareholder may not assert a cause of action that belongs to the corporation." Northwest Racquet Swim & Health Clubs, Inc. v. Deloitte & Touche, 535 N.W.2d 612, 617 (Minn.1995). A shareholder, however, may pursue a cause of action if the corporation has failed to take action on its own behalf. Janssen v. Best & Flanagan, 662 N.W.2d 876, 882 (Minn.2003). "A shareholder derivative suit is a creation of equity in which a shareholder may, in effect, step into the corporation's shoes and seek in its right the restitution he could not demand in his own." In re UnitedHealth Group Inc. S'holder Derivative Litig., 754 N.W.2d 544, 550 (Minn.2008) (quotation omitted). When a shareholder has alleged a derivative claim, the board of directors may, by resolution, form a "special litigation committee consisting of one or more ... independent persons to consider legal rights or remedies of the corporation and whether those rights and remedies should be pursued." Minn.Stat. § 302A.241, subd. 1 (2008); see also In re UnitedHealth Group, 754 N.W.2d at 550. Under the business judgment rule, a court should defer to an SLC's conclusions if the SLC was independent and if it conducted its investigation in good faith. In re UnitedHealth Group, 754 N.W.2d at 559. The independence of SLCs from boards of directors thus permits dismissal or settlement of derivative actions "despite a conflict of interest on the part of some or all directors." Id. at 550-51.

In determining whether a claim is direct or derivative, the central inquiry is "whether the complained-of injury was an injury to the shareholder directly, or to the corporation." Wessin v. Archives Corp., 592 N.W.2d 460, 464 (Minn.1999). "Where the injury is to the corporation, and only indirectly harms the shareholder, the claim must be pursued as a derivative claim." Id. at 464; see also Seitz v. Michel, 148 Minn. 80, 87, 181 N.W. 102, 105 (1921). A district court's decision as to whether a claim is direct or derivative is subject to a de novo standard of appellate review. See Wessin, 592 N.W.2d at 463-64.

Blohm has alleged that Kelly abused his position in the corporation by paying himself excessive compensation and by using corporate assets to discharge personal debts and debts of another business. If true, the alleged conduct reduced the assets of the corporation in the first instance. Corporate assets "do not belong to the stockholders, but to the corporation." Seitz, 148 Minn. at 87, 181 N.W. at 105. The alleged conduct, if it occurred, also reduced the capital distributions to Blohm, but only indirectly. Blohm's alleged injury is not separate, distinct, and independent from the corporation's injury. See Wessin, 592 N.W.2d at 464. Thus, the alleged injury is primarily an injury to the corporation. See id.; Stocke v. Berryman, 632 N.W.2d 242, 247 (Minn.App.2001), review denied (Minn. Sept. 25, 2001); Skoglund v. Brady, 541 N.W.2d 17, 21-22 (Minn.App.1995), review denied (Minn. Feb. 27, 1996). In this situation, a minority shareholder may bring suit against the majority shareholder only "`in a representative capacity for the benefit of the corporation, and not for damages to him individually.'" Wessin, 592 N.W.2d at 464 (quoting Seitz, 148 Minn. at 87, 181 N.W. at 105).

Blohm argues that his claim, to the extent it addresses pre-sale events, is direct rather than derivative because...