Narum v. Faxx Foods, Inc.

• Decision Date: 18 March 1999
• Docket Number: No. 980212,980212
• Citation: 590 N.W.2d 454
• Parties: Blue Sky L. Rep. P 74,181, 1999 ND 45 Terry NARUM, Bill Mackinnon, Jerry Hove, Ken Kraft, Orren Anderson, Timothy Wood, James Hatlelid, Roger Spelhaug, Charles Sprenger, and Ted Scherr, Plaintiffs and Appellants, v. FAXX FOODS, INC., a Minnesota corporation, Richard A. Olsen, Roger W. Sweet, Defendants, Robert D. King, Earl A. King, Terry King, James F. Ramsay, Terry DeRoche, and Jerome Schmidt, Defendants and Appellees. Civil
• Court: North Dakota Supreme Court

Page 454

590 N.W.2d 454

Blue Sky L. Rep. P 74,181, 1999 ND 45

Terry NARUM, Bill Mackinnon, Jerry Hove, Ken Kraft, Orren

Anderson, Timothy Wood, James Hatlelid, Roger

Spelhaug, Charles Sprenger, and Ted

Scherr, Plaintiffs and Appellants, v. FAXX FOODS, INC., a Minnesota corporation, Richard A. Olsen, Roger W. Sweet, Defendants, Robert D. King, Earl A. King, Terry King, James F. Ramsay, Terry DeRoche, and Jerome Schmidt, Defendants and Appellees.

Civil No. 980212

Supreme Court of North Dakota.

March 18, 1999.

William C. Kelsch (argued) and Timothy J. Wahlin (appearance), of Kelsch, Kelsch, Ruff & Kranda, Mandan, for plaintiffs and appellants.

Michael C. McCarthy (argued), Minneapolis, MN, and Michael L. Wagner (appearance), of Wheeler Wolf, Bismarck, for defendants and appellees Robert D. King, Earl A. King, Terry King, and Terry DeRoche.

Michael L. Wagner, of Wheeler Wolf, Bismarck, for defendant and appellee James F. Ramsay.

Steven A. Johnson, of Vogel, Weir, Bye, Hunke & McCormick, Ltd., Fargo, for defendant and appellee Jerome Schmidt. Submitted on brief.

VANDE WALLE, Chief Justice.

¶1 Terry Narum, Bill Mackinnon, Jerry Hove, Ken Kraft, Orren Anderson, Timothy Wood, James Hatlelid, Roger Spelhaug, Charles Sprenger, and Ted Scherr appealed from a summary judgment dismissing their action against Robert D. King, Earl A. King, Terry King, James F. Ramsay, Terry DeRoche and Jerome Schmidt ¹ for violations of the Securities Act of 1951, N.D.C.C. ch. 10-04 (Securities Act). We conclude the trial court did not err in ruling the plaintiffs' action was time barred under N.D.C.C. § 10-04-17(1), and the defendants were not equitably estopped from claiming the benefit of the one-year statute of limitations. We also conclude the court did not abuse its discretion in denying the plaintiffs' motion to amend their complaint. We therefore affirm.

I

¶2 Faxx Foods, Inc. (Faxx), was incorporated in Minnesota by Richard A. Olsen and Roger W. Sweet in April 1991 to act as a holding company and distributor for various food preparation and distribution businesses. Olsen, Faxx's president, was looking for investors and was interested in investment opportunities in rural areas. Sweet was also president of Lochmor Investment Services, Inc. (Lochmor), a company engaged in arranging corporate acquisitions. In November 1991, Faxx hired Lochmor to assist in acquiring control of a food services corporation.

¶3 Richard Saunders of Minot was the principal owner of several food distribution companies, including Dakco Distributors, Inc. (Dakco), and its subsidiary, NoDak Distributing, Inc. (NoDak). In late 1991, Saunders contacted Sweet about Lochmor assisting him in selling NoDak. Sweet introduced Olsen to Saunders and to Terry King, Earl King, Robert King, and Terry DeRoche, ² who were directors of Faxx. Faxx was interested in purchasing NoDak, and in early 1992 issued a statement of intent to purchase the company for $1,083,413.

¶4 Olsen began spending time at NoDak's offices to familiarize himself with the business and learn how to increase its sales. Many officers, directors, and employees of NoDak and Dakco became interested in investing in Faxx, which needed to attract investors and lenders to finance the acquisition. On May 8, 1992, Faxx submitted to the North Dakota Securities Commissioner an application for exemption from the registration provisions of the Securities Act. The Commissioner, on May 27, 1992, approved "the use of the limited offeree exemption provided under [N.D.C.C. § 10-04-06(9)(a) ] for an offering of Common Stock issued by the subject issuer to not more than 25 offerees in this State" that was effective for 12 months. Faxx was authorized to offer in North Dakota 300,000 shares of its 500,000 total shares for $1 per share. The minimum amount to be offered any one investor was 5,000 shares. All proceeds from the $300,000 offering would be used as "working capital and for acquisitions," with an estimated cost of the North Dakota offering of $1,000.

¶5 Faxx violated the terms of the limited offeree exemption. Faxx sold 505,000 shares to 24 North Dakota investors for $1 per share. Several persons purchased fewer than 5,000 shares, shares were offered and sold before the Commissioner approved the exemption, and not all of the money was used to purchase NoDak's assets or working capital. In July 1993, Saunders' attorney told several of the plaintiffs about the security law violations during a meeting. Eventually, in August 1995, the Commissioner entered into a consent agreement with Faxx and its officers and directors, agreeing that no charges would be filed and its investigation would be closed.

¶6 Meanwhile, during the acquisition negotiations, Saunders suggested that Faxx acquire Dakco and all of its subsidiaries. On June 26, 1992, Faxx and Dakco entered into a statement of intent for Faxx to purchase Dakco for more than $6,000,000. Although the purchase was scheduled to close on September 1, 1992, Faxx and Dakco spent the next year in negotiations and preparations for the acquisition. However, in July 1993, Saunders informed Faxx he would no longer complete the deal because Faxx failed to provide written proof it had firm financial commitments to close on the purchase of Dakco. The Faxx-Dakco transaction was never consummated.

¶7 Olsen wrote to Faxx shareholders on August 20, 1993, advising them about Dakco developments. Olsen enclosed with the letter a rescission offer and acceptance form regarding the shareholders' investments in Faxx. Shareholders were given the option of either rejecting the rescission offer and remaining Faxx shareholders, or accepting the rescission offer and requesting return of their investments. The letter asked shareholders to "please review all of the enclosed material and discuss it with your advisors before making your decision," and further warned them in underscored letters "IF YOU DO NOT RESPOND WITHIN 30 DAYS OF RECEIVING THIS MATERIAL, YOU WILL HAVE BEEN DEEMED TO HAVE REJECTED THIS RE[S]CIS[S]ION OFFER FOR LEGAL PURPOSES, AND YOU WILL REMAIN AN INVESTOR IN FAXX FOODS, INC." All of the plaintiffs claim they timely accepted this offer except Spelhaug, who said he did not receive it.

¶8 On October 6, 1993, Olsen wrote to Faxx shareholders informing them "Faxx is placing on hold its recently announced re[s]cis[s]ion offer." The letter advised shareholders there was a "recent development" that might affect their decision to rescind and Faxx's decision to put the rescission offer on hold "in no way impairs your rights regarding the ultimate disposition of this re[s]cis[s]ion offer." The letter continued, "[w]hen we are able to conclude definitive parameters around the recent development, they will be explained to you fully. At that time Faxx will initiate a new re[s]cis[s]ion offer for your consideration."

¶9 On January 14, 1994, Olsen sent Faxx shareholders a letter "to re-open the re[s]cis[s]ion offer...." The letter explained, although the capital necessary for Faxx to buy Dakco had "seemed well within the range of possibilities," "Faxx expended all of the equity that it had raised during the investment period on professional fees, bank fees, and other costs associated with the acquisition." Faxx offered 40 percent of each shareholder's investment to be paid back to them in Dakco stock valued at $11.15 per share. If shareholders accepted this offer, they would be required to surrender their Faxx stock and the rescission offer "would be in full and complete settlement of this matter." The plaintiffs took no action on this offer.

¶10 On February 8, 1994, Narum wrote a memorandum to "Dakco Employees/Faxx Investors" to "determine our course of action." Narum asked for the opinions of other shareholders because they "have possible actions both against a corporation as well as against individuals according to the Century Code." All of the other plaintiffs except Hove received the memorandum.

¶11 On February 16, 1994, Faxx's attorney wrote a letter to North Dakota Faxx investors withdrawing the second rescission offer because it did not propose a full return of investment as required by N.D.C.C. § 10-04-17(2). The letter informed investors Faxx's officers were "studying the situation and are attempting to find a resolution that would return as much value to you investors as possible." Faxx's attorney cautioned, however, "I suggest that each of you consult with your own attorneys to assist you in making decisions in regard to this matter, including the protection of your legal rights as investors in the company."

¶12 In April 1994, Faxx sued Saunders and Dakco in a Minnesota federal district court seeking $1,000,000 for breach of an agreement to sell Dakco to Faxx. Faxx informed North Dakota investors about this litigation in June 1994. The federal district court dismissed Faxx's lawsuit, concluding no enforceable agreement had been formed for Faxx's acquisition of Dakco. Faxx appealed to the Eighth Circuit Court of Appeals, which affirmed the decision on June 16, 1995.

¶13 The plaintiffs brought this lawsuit in August 1995 alleging violations of the Securities Act and actual fraud, and seeking $187,000 reimbursement for their stock purchases plus interest. Faxx, Olsen and Sweet did not answer the complaint and a default judgment was entered against them for $274,315.54. The other defendants answered and asserted the plaintiffs' action was barred by the one-year time limitation under N.D.C.C. § 10-04-17(1), and the actual fraud claim was derivative of the plaintiffs' securities law claim and was unsupported by any evidence. The plaintiffs argued the one-year time limitation does not apply in this case and, if it does, the defendants should be estopped from claiming its benefit. The plaintiffs also moved to amend their complaint to include an allegation of constructive fraud. The trial court granted summary judgment in the defendants' favor, concluding the plaintiffs...