Wessin v. Archives Corp.

• Decision Date: 14 July 1998
• Docket Number: C3-98-30,Nos. C5-98-28,s. C5-98-28
• Citation: 581 N.W.2d 380
• Parties: George WESSIN, et al., Appellants (C5-98-28), Respondents (C3-98-30), v. ARCHIVES CORPORATION, Respondent (C5-98-28), Appellant (C3-98-30), John D. Jerome, et al., Respondents (C5-98-28), Appellants (C3-98-30).
• Court: Minnesota Court of Appeals

Page 380

581 N.W.2d 380

George WESSIN, et al., Appellants (C5-98-28), Respondents (C3-98-30), v. ARCHIVES CORPORATION, Respondent (C5-98-28), Appellant (C3-98-30), John D. Jerome, et al., Respondents (C5-98-28), Appellants (C3-98-30).

Nos. C5-98-28, C3-98-30.

Court of Appeals of Minnesota.

July 14, 1998.

Review Granted Sept. 30, 1998.

Syllabus by the Court

I. The proper test for distinguishing between direct and derivative claims is whether the shareholder has been injured directly, not whether the shareholder suffered an injury distinct from other shareholders.

II. The derivative pleading requirements of Minn. R. Civ. P. 23.06 do not apply to shareholder actions under Minn.Stat. § 302A.751, subd. 1(b), that involve both direct and derivative claims.

David R. Marshall, Cynthia Jokela, Steven J. Quam, Fredrikson & Byron, P.A., Minneapolis, for George Wessin, et al.

Kay Nord Hunt, Phillip A. Cole, Lommen, Nelson, Cole & Stageberg, P.A., Minneapolis, for Archives Corp.

Vincent D. Louwagie, Fruth & Anthony, Minneapolis, for John Jerome, et al.

Considered and decided by LANSING, P.J., and KLAPHAKE and NORTON, ^* JJ.

OPINION

LANSING, Judge.

Minority shareholders in a closely held corporation sued the corporation, the majority shareholder, and a corporate officer for corporate misconduct. Ruling on a defense motion, the district court entered judgment on the pleadings, dismissed the complaint without prejudice, and denied the minority shareholders' motion to amend the pleadings and vacate the judgment. We reverse the judgment of dismissal, holding that the proper test for distinguishing between a direct and derivative claim is whether the shareholder has been injured directly and that an action under Minn.Stat. § 302A.751, subd. 1, involving overlapping direct and derivative claims does not trigger the derivative pleading requirements of Minn. R. Civ. P. 23.06.

FACTS

Archives Corporation is a closely held corporation in the document storage and retrieval business. When plaintiffs George Wessin and David Wessin brought this suit in January 1995, they collectively held about 11 percent of the corporation's stock. Fellow plaintiffs E.R. Salovich and George O. Holm held about 10.5 percent and 17.5 percent of the stock respectively. Archives' president, chief executive officer, and majority shareholder John Jerome held about 52 percent of the stock. Jerome's wife Sandra was a corporate officer. The suit identified two other minority shareholders, one who lived outside Minnesota and was not closely involved with Archives, and another who owned only a small percentage of stock.

In forming the corporation, John Jerome and Archives entered into loan agreements with shareholders Salovich and Holm. These agreements limited Jerome's compensation and benefits to 50 percent of Archives' net income up to $200,000, plus 20 percent of Archives' net income over $300,000. The minority shareholders alleged that Jerome engaged in misconduct by failing to comply with these loan agreements, failing to complete an accurate accounting of Archives' net profits for 1989-1992, and attempting to avoid the income limitations by paying Sandra Jerome a salary. They also alleged self-dealing, most significantly that Jerome compensated himself and his wife through actual or constructive dividends not paid to other shareholders and that Sandra Jerome accepted compensation for services not performed and failed to monitor John Jerome's alleged misconduct.

The Wessins also charged John Jerome with making a series of misrepresentations to them about his pay, his reimbursement and dividend payments from Archives, and Archives' financial status. They claimed he intended to deceive them and to induce them not to seek dividends or financial information. The Wessins alleged they were deceived by Jerome's misrepresentations and reasonably relied upon them to their detriment.

In February 1996, plaintiffs Salovich and Holm settled their claims and sold their shares back to Archives. The remaining parties, concerned about the cost of continued litigation, attempted to settle. Their negotiations ultimately failed. Archives and the Jeromes (collectively Archives) moved to dismiss or, in the alternative, for judgment on the pleadings, arguing that the Wessins incorrectly pleaded derivative claims as direct claims. The district court granted Archives' motion for judgment on the pleadings and dismissed the following complaints without prejudice:

Count I: Common law fraud and misrepresentation (against J. Jerome)

Count II: Fraud and misrepresentation; breach of Minn.Stat. § 302A.751, subd. 1(b)(2) (against J. Jerome and S. Jerome)

Count III: Unfair prejudice to plaintiff shareholders (against Archives, J. Jerome, and S. Jerome)

Count IV: Breach of fiduciary duties (against J. Jerome and S. Jerome)

Judgment was entered on October 7, 1997. On January 5, 1998, the Wessins moved to modify the order or to amend the pleadings, and to vacate the judgment. The district court denied all motions. Both parties appealed, and this court consolidated the cases. The Wessins appeal the October 7, 1997, judgment and the January 5, 1998, order. Archives contends the court erred by not dismissing all counts with prejudice.

ISSUES

I. Did the district court err in determining that the Wessins incorrectly pleaded derivative claims as direct injuries?

II. Do the derivative action pleading requirements in Minn. R. Civ. P. 23.06 apply to an action under Minn.Stat. § 302A.751 alleging both direct and derivative claims?

ANALYSIS

As a preliminary matter we address Archives' objection to the appealability of the issues raised by the Wessins. They have appealed from a judgment dismissing their claims without prejudice and an order denying their motion to vacate the judgment and amend the pleadings. The Wessins timely filed a notice of appeal from judgment dismissing the claims, and that dismissal is fully reviewable. Minn. R. Civ.App. P. 103.03(a) (party may appeal from judgment entered in district court); Lombardo v. Seydow-Weber, 529 N.W.2d 702, 703 (Minn.App.1995) (reviewing as appealable a judgment dismissing an action without prejudice), review denied (Minn. Apr. 27, 1995).

An order denying a motion to vacate a final judgment is not appealable. Carlson v. Panuska, 555 N.W.2d 745, 746 (Minn.1996). But when an appeal is properly taken from the underlying judgment, this court has discretion to review a subsequent, nonappealable order denying a motion to vacate. See Bush Terrace Homeowners Ass'n v. Ridgeway, 437 N.W.2d 765, 770 (Minn.App.1989), review denied (Minn. June 9, 1989); Minn. R. Civ.App. P. 103.04 (on appeal from judgment, appellate courts "may review any order involving the merits or affecting the judgment"). The issues relating to the subsequent order denying the motion to vacate and the motion to amend the pleadings are reviewable to the extent the issues were addressed on the record in the underlying proceeding. Cf. Sullivan v. Spot Weld, Inc., 560 N.W.2d 712, 716 (Minn.App.1997) (parties cannot supplement district court record after court grants summary judgment), review denied (Minn. Apr. 27, 1997).

I

The Wessins allege that Archives and J. Jerome paid actual or constructive dividends to J. Jerome and did not pay those actual or constructive dividends to the other shareholders, that J. Jerome knowingly misrepresented the nature and extent of the compensation he was receiving, knowingly misrepresented the payment of dividends to himself that were not paid to other shareholders, and knowingly misrepresented the financial status of Archives. The Wessins also allege that as a result of the fraudulent conduct, they did not seek further information on the financial status of the corporation. Archives interposed answers to the complaint before moving to dismiss, and the district court treated their motion as a motion for judgment on the pleadings under Minn. R. Civ. P. 12.03.

When considering a motion for judgment on the pleadings, the court must accept the allegations contained in the pleading under attack as true. State ex rel. City of Minneapolis v. Minneapolis St. Ry. Co., 238 Minn. 218, 223, 56 N.W.2d 564, 567 (1952). All assumptions made and inferences drawn must favor the party against whom the judgment is entered. Northern States Power Co. v. Franklin, 265 Minn. 391, 396, 122 N.W.2d 26, 30 (1963).

The district court, applying Minnesota appellate case law, determined that the Wessins' claims were derivative claims. The district court's summary of the case law demonstrates a variance in the standard for determining whether an action is direct or derivative. Recent decisions by Minnesota courts and federal courts interpreting Minnesota law distinguish between direct and derivative claims by focusing on whether the shareholder's injury is "of the same character" as that of other shareholders. In Northwest Racquet Swim & Health Clubs, Inc. v. Deloitte & Touche, for example, the Minnesota Supreme Court noted that, in distinguishing between direct and derivative claims, courts must "consider whether the injury to the individual plaintiff is separate and distinct from the injury to other persons in a similar situation as the plaintiff." 535 N.W.2d 612, 617 (Minn.1995) ("Northwest ") (citing Seitz v. Michel, 148 Minn. 474, 476, 181 N.W. 106, 106 (1921) ("Seitz II")).

In Skoglund v. Brady, this court first noted that "[a] shareholder may bring a direct action when the shareholder alleges a direct injury to the shareholder that is separate and distinct from the injury to the corporation." 541 N.W.2d 17, 21 (Minn.App.1995), review denied (Minn. Feb. 27, 1996) (citing Arent v Distribution Sciences, Inc., 975 F.2d 1370, 1372 (8th Cir.1992)). But the court continued by quoting the following test, also stated in Arent:

To determine whether a claim belongs to the corporation rather than to its shareholders, the relevant inquiry is 'whether the injury to each...