Murphy v. Country House, Inc.

• Court: Minnesota Supreme Court
• Writing for the Court: GOUGLAS K. AMDAHL
• Citation: Murphy v. Country House, Inc., 307 Minn. 344, 240 N.W.2d 507 (Minn. 1976)
• Decision Date: 05 March 1976
• Docket Number: No. 45491,45491
• Parties: Jerold E. MURPHY, Appellant, v. COUNTRY HOUSE, INC., et al., Respondents.

Page 507

240 N.W.2d 507

307 Minn. 344

Jerold E. MURPHY, Appellant, v. COUNTRY HOUSE, INC., et al., Respondents.

No. 45491.

Supreme Court of Minnesota.

March 5, 1976.

Syllabus by the Court

1. Error in admitting corporate record book in evidence was harmless where such book was merely cumulative evidence.

2. Date of allotment of shares, not date of knowledge of allotment, is effective date under Minn.St. 301.15, subd. 5, and 301.16, subd. 4, which limit the time for bringing an action based on inadequacy of consideration for the issuance of stock.

3. Where a deponent, pursuant to Rule 30.05, Rules of Civil Procedure, makes changes in deposition testimony after examining the transcription of the deposition, the trier of fact must determine the accuracy of the transcription and the validity of the changes.

4. The existence of a fiduciary relationship and the determination of when fraud was or reasonably should have been discovered are questions of fact.

Ronald O. W. Ylitalo, St. Paul, for appellant.

Lawson, Ranum & Raleigh and Albert E. Ranum, Stillwater, for respondents.

Heard by OTIS, SCOTT, and AMDAHL, JJ., and considered and decided by the court en banc.

GOUGLAS K. AMDAHL, Justice. ^*

Plaintiff, Jerold E. Murphy, a stockholder, officer, and director of defendant corporation, appeals from a summary judgment in favor of defendants, entered August 5, 1974, pursuant to an order of the Washington County District Court. The complaint sought damages attributable to inadequacy of consideration in a stock transaction occurring on July 23, 1963, and a stock transaction occurring on June 28, 1965; alleged fraudulent misrepresentation of the legal significance of the 1963 transaction and requested a declaratory judgment regarding the effect of that transaction on Murphy's proportional ownership interest in the corporation; and petitioned for involuntary dissolution of the corporation. The trial court held that under the applicable statute of limitations and the doctrine of laches the action was barred.

Murphy and the individual defendants, Kenneth H. Johnson, Myron W. Scullen, and Donald F. Wolf, incorporated Country House, Inc., in July 1963. Each contributed $5,000, and each received 50 shares of stock representing a one-quarter interest in the corporation. Each was named as a director of the corporation, and each became a corporate officer. Johnson became president; Scullen became vice president; Wolf became secretary; and Murphy became treasurer. Each continued to hold his respective corporate office until immediately preceding the commencement of this action by Murphy.

A meeting of the board of directors was held July 23, 1963. Murphy attended this meeting, as he did all directors' meetings. The minutes of the July 23 meeting set forth the following action:

'Kenneth H. Johnson reported that he owned certain franchises and trade names depicting and using Country House, Inc. and also that he had developed various retail outlets for Dairy products, customers, etc. That he offered to sell and transfer such franchises, etc. to the Corporation in exchange for $25,000.00 worth of stock. Upon motion duly made, seconded and carried the offer of Kenneth H. Johnson was accepted and the President and Secretary of the Company were instructed and authorized to issue him a stock certificate representing 250 shares in the Company upon receipt from him of an instrument conveying to the Company such franchise, trade marks, and customer accounts now established by him and identified as Country House, Inc.'

The legal effect of issuing the additional shares was to reduce the ownership interest represented by Murphy's 50 shares from one-fourth to one-ninth. Murphy claims he did not discover that his interest had been so reduced until March 30, 1971.

The transaction occurring on June 28, 1965, was the transfer by Johnson to his son, Gregory, of 50 shares of Johnson's own stock. It is obvious that if Gregory had paid any consideration for the 50 shares, it would have been paid to Johnson personally rather than to the corporation. Murphy was not damaged by the 1965 transaction, and his claim in that respect has no merit and will not be further considered here.

The issues before us are:

(1) Did the trial court commit prejudicial error in admitting the corporate record book containing the minutes of the July 23, 1963, meeting into evidence?

(2) Is the applicable 3-year limitation period of Minn.St. 301.15, subd. 5, and 301.16, subd. 4, an absolute bar to Murphy's claim of inadequacy of consideration for the 250 shares issued to Johnson on July 23, 1963?

(3) To be entitled to a trial on the claim of fraudulent misrepresentation of the legal effect of the July 23, 1963, transaction, Murphy must establish genuine issues as to two material facts. First, did Johnson make misrepresentations? Second, did a fiduciary relationship exist between Murphy and Johnson?

(4) Assuming a cause of action for fraudulent misrepresentation of the legal effect of the stock transaction, did Murphy create any genuine issue as to when he knew or should have known of the fraud, so as to preclude application of laches by the trial judge?

1. The error in admitting the corporate record book in evidence was harmless error. Murphy argues that the record book was not admissible in evidence because it was presented to the court by counsel without foundation by a witness under oath. However, Murphy, while denying that he had any recollection of such meeting, quotes the minutes in paragraph III of his second amended complaint. Thus, the trial court had sufficient evidence to find that the minutes were in fact as quoted above without considering the corporate record book and such book was merely cumulative evidence. Furthermore, this does not mean that the trial court relied upon the minutes as conclusive evidence of what happened at the July 23, 1963, directors' meeting, but only that the trial court found that the minutes did exist in the corporate record in the form quoted by Murphy.

2. The cause of action based on inadequacy of consideration is barred by the statute of limitations. Although Murphy's complaint does not allege a basis for the cause of action, no cause of action exists unless it is based on Minn.St. 301.15 or 301.16, which create liability for improper allotment of stock. The applicable period of limitations is 3 years 'from the date on which such allotment was made.' In contrast, the statute applicable to actions based on fraud provides explicitly that the cause of action 'shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.' Minn.St. 541.05(6). Comparison demonstrates that where the legislature intends the limitation period to be contingent upon the knowledge of the aggrieved party, it has so provided. The 3-year period in Minn.St. 301.15, subd. 5, and 301.16, subd. 4, is by its terms an absolute bar regardless of Murphy's knowledge. This interpretation is strengthened and made reasonable by the statutory requirement that corporate records be available. Murphy claimed by affidavit that the transaction was never made known to him prior to March 30, 1971, 'either expressly or through corporate records Readily made available.' (Italics supplied.) However, he could have enforced his statutory right of inspection even if Johnson were attempting, as alleged, to conceal the records from him.

3--4. Murphy has established genuine issues as to material facts which would support a cause of action for fraudulent misrepresentation of the legal effect of the stock transaction.

In paragraph IV of his complaint, Murphy alleges that Johnson 'fraudulently represented that the action taken at the said meeting of July 23, 1963, did not affect or change plaintiff's one-quarter interest in the corporation.' However, on a motion for summary judgment, Murphy may not rely upon his pleadings to create a fact issue. 2 Hetland & Adamson, Minnesota Practice, Civil Rules Ann., p. 572, citing A & J Builders Inc. v. Harms, 288 Minn. 124, 179 N.W.2d 98 (1970); Lundeen v. Cordner, 8 Cir., 354 F.2d 401, motion to amend judgment denied, 356 F.2d 169 (8 Cir. 1966). The only evidence relating to the allegation of affirmative misrepresentation was the affidavit of Murphy's wife, in which she stated:

'That on July 23, 1963, defendant Donald F. Wolf and plaintiff Jerold E. Murphy entered Affiant's house and told of a meeting of the corporation in which management control was placed in the hands of Kenneth H. Johnson but each shareholder retained his one-fourth (1/4) interest in the corporation.'

Even if it is assumed that a misrepresentation was made, the affidavit does not identify Johnson as the source. Furthermore, to the extent such statement...