DLH, Inc. v. Russ, C2-95-1218

• Decision Date: 19 June 1997
• Docket Number: No. C2-95-1218,C2-95-1218
• Parties: DLH, INC., Petitioner, Appellant, v. David A. RUSS, Mark Cohn, et al., Respondents.
• Court: Minnesota Supreme Court

Page 60

566 N.W.2d 60

DLH, INC., Petitioner, Appellant, v. David A. RUSS, Mark Cohn, et al., Respondents.

No. C2-95-1218.

Supreme Court of Minnesota.

June 19, 1997.

Rehearing Denied Aug. 5, 1997.

Syllabus by the Court

Summary judgment is proper when, after a motion for summary judgment is made and supported, the nonmoving party fails to present specific facts showing that there is a genuine issue of material fact necessitating a trial.

Jerry W. Snider, Gordon B. Conn, Jr., Charles F. Webber, Faegre & Benson, L.L.P., Minneapolis, for appellant.

Mark Cohn and Damark International, Timothy D. Kelly, Wendy A. Snyder, Kelly & Berens, P.A., David A. Russ, David R. Marshall, Terri A. Georgen, Fredrikson & Byron, P.A., Minneapolis, for respondent.

Heard, considered, and decided by the court en banc.

OPINION

ANDERSON, Justice.

This appeal arises from a dispute over title to 1.54 million shares of common stock of Damark International, Inc. (Damark). Appellant DLH, Inc. (DLH) contends that it is entitled to legal ownership of the stock because it purchased the stock from the bankruptcy estate of respondent David Russ. David Russ maintains that he did not own Damark stock when he filed for bankruptcy in 1987, and, further, that at that time Damark stock had only nominal value. Seven years after David Russ filed for bankruptcy, DLH purchased from the bankruptcy estate whatever interest, if any, the estate had in Damark. DLH then brought a conversion action against David Russ, respondent Mark Cohn, and respondent Damark, alleging that David Russ did own 400 shares of Damark at the time he filed for bankruptcy and had concealed such interest. DLH asserted that it was the rightful owner of the Damark shares, which after two stock splits totalled 1.54 million shares. Alternatively, DLH asserted that it was entitled to $46,200,000, which DLH claimed was the present value of the 1.54 million shares.

David Russ, Cohn, and Damark moved for summary judgment. The district court granted the motions on the grounds that DLH had no cause of action for conversion, and, even if DLH had a cause of action, the statute of limitations on the action had expired. DLH moved to amend or vacate the court's order, but the court denied the motion. DLH then appealed to the court of appeals, which affirmed. We affirm.

A summary of the complex background of this case is necessary for a proper understanding of the legal issues to be addressed on appeal. In the early 1980s, respondent David Russ, together with Kirk Westergard, formed a partnership known as Ruwest. The partnership was involved in real estate. David Russ stated that Ruwest was struggling financially, and that on June 1, 1985, the Ruwest partnership was dissolved and the partnership assets were transferred to and the debts assumed by Diane Russ, David Russ' wife. Diane Russ continued to use the Ruwest name, but operated the business as a sole proprietorship. David Russ stated that, after June 1985, his only role in Ruwest was to assist his wife in understanding the business and helping her collect payments or negotiate with the holders of contracts for deed. He stated that he had no control over the individual properties owned by Ruwest.

In April 1985, David Russ formed and became president of International Rubber Supply, Inc. (International Rubber). Mark Cohn was a consultant for International Rubber. International Rubber subsequently experienced financial difficulties and ceased operations in April 1986. David Russ had personally guaranteed approximately $300,000 of International Rubber's obligations.

In 1986, David Russ also worked with Cohn to form Damark, which they intended to be a wholesale distributor of close-out merchandise. The name Damark was derived from a combination of David Russ and Mark Cohn's first names. Damark was incorporated on March 20, 1986. At that time, Cohn became chief executive officer of Damark and was its sole officer and director. Cohn was also Damark's sole shareholder. On June 13, 1986, David Russ signed a two-year employment agreement to act as Damark's sales manager beginning June 13, 1986 and ending June 12, 1988. David Russ subsequently stated in an affidavit that he was not interested in becoming an owner of Damark because he did not want to take on ownership responsibilities. However, Diane Russ' business, Ruwest, did become an owner of Damark.

On June 13, 1986, the same day that David Russ signed his employment agreement with Damark, David and Diane Russ opened a joint checking account in the name of "Russ, Diane M or David A, BBA Ruwest." David Russ' social security number was used as the tax identification number for the account. Also on June 13, 1986, David Russ, Ruwest, Cohn, and an investment company called Central Investment Corporation (Central) entered into a Memorandum of Intent by which Central agreed to purchase 20% of the outstanding shares of Damark for $25,200 and to secure a line of credit for Damark. The parties contemplated that after the transaction, Ruwest and Cohn would each be 40% stockholders of Damark, and that the principals of Central would own 20% of the stock. Accordingly, a stock certificate was issued to Ruwest on June 13, 1986 for 400 shares of Damark. Three days later, a Certificate of Assumed Name for "Ruwest Company" was filed by Diane Russ. On June 17, 1986, Diane Russ signed a $400 check to Damark from Ruwest for "stock--RuWest."

In the fall of 1986, Damark became involved in direct mail catalog sales. David Russ became an officer of Damark in December 1986. Cohn stated that David Russ also became a director of Damark in 1986.

On December 15, 1986, Damark, Ruwest, and an investor named Ronald Wade entered into a Stock Purchase and Revolving Loan Agreement under which Wade agreed to purchase the 20% of the Damark stock owned by the principals of Central and an additional 10% of the Damark stock. Wade also agreed to provide a line of credit to Damark. Wade stated that he was told that Ruwest was a sole proprietorship consisting of Diane Russ and that the ownership of Ruwest was transferred to Diane Russ to protect its assets from lawsuits against David Russ related to International Rubber. The Damark stock register reflects that on December 15, 1986, 400 shares of Damark stock were held by Cohn, 400 shares were held in the name of Ruwest, and 342 shares were held by Wade. In her capacity as "owner" of Ruwest, Diane Russ signed an agreement with Cohn and Wade dated December 15, 1986 to make provision for the disposition of any shareholder's stock in the event of the shareholder's death, disability, or termination of employment. The agreement recited that:

The representative of Shareholder Ruwest Company in the management of the Corporation is David A. Russ. References to death, disability or termination of employment of a Shareholder in this Agreement and with respect to the shares owned by Ruwest Company shall mean the death, disability or termination of employment of David A. Russ.

After the transactions on December 15, 1986, Wade owned 30% of the Damark stock, Cohn owned 35%, and Ruwest owned 35%. However, when Wade prepared Damark's 1986 tax returns, he listed "Dave Russ," rather than Ruwest, as a 35% shareholder of Damark. A Schedule K-1 attached to Damark's 1987 U.S. Income Tax Return for an S Corporation--Form 1120S--prepared by a paid tax preparer in October 1989 for the period beginning January 1, 1987 and ending April 30, 1987 also lists David Russ as a Damark stockholder. The Schedule K-1 indicates that David Russ was a 33 1/3% owner of Damark and the holder of 333 shares. ¹ But on Damark's application to elect S Corporation status, Ruwest is listed as owning 400 shares of Damark. Cohn stated that the preparers of the Schedule K-1 may have incorrectly assumed that David Russ owned the stock because Damark first employed them in mid-1988 and 1989 when David Russ was, in fact, a record shareholder.

In 1986, Damark lost $47,121 on sales of $1,330,777. During the period between January 1, 1987 and April 30, 1987, Damark lost $111,803 on sales of $774,034. In about March 1987, Wade developed an "exit strategy" to leave Damark. In his view, the company had never made any money and he saw no prospects of it doing so. Wade stated that his "exit strategy" was a calculated proposal to limit his loss to $120,000. On March 13, 1987, Wade entered into an Option Agreement with David Russ, Ruwest, and Cohn under which he agreed to sell all of his Damark stock to Damark for the aggregate sum of $1. Concerned about his securities pledged as collateral to the bank, Wade also agreed to pay $50,000 to the bank in exchange for an unsecured promissory note from Damark and release from his guarantee of Damark's liabilities to the bank.

On April 14, 1987, Damark, Ruwest, Wade, and Cohn entered into a Redemption Agreement which provided for the purchase of all of Wade's shares. Simultaneously, Ruwest and Cohn entered into a Stock Purchase and Loan Agreement with a different investor, KMS, Inc. (KMS), under which KMS agreed to purchase Damark stock for $15,000 and to provide financing to Damark. The agreement was signed by Diane Russ as owner of Ruwest. Pursuant to the agreement, KMS purchased 833 new shares from Damark, a 51% interest, and Ruwest and Cohn each retained their 400 shares.

Schedule E of Damark's 1987 U.S. Corporation Income Tax Return--Form 1120--signed on April 4, 1988 by Cohn as president, indicates that David Russ and Cohn were each officers of Damark and each owned 25% of the Damark stock. This return does not list the name of a paid preparer. Because the preparer did not fill in the blanks for the dates the tax year began or ended, presumably the return was meant to cover the entire calendar year of 1987.

Meanwhile, the Ruwest joint checking account opened by David and Diane Russ was closed on January 28, 1987. On April 30, 1987, Diane Russ, as "proprietor" of Ruwest, signed an...