Daniel Ahlberg, et al., Appellants, vs. Timm Medical Technologies, Inc., n/k/a Endocare, Inc., Respondent.

Daniel Ahlberg, et al., Appellants, vs. Timm Medical Technologies, Inc., n/k/a Endocare, Inc., Respondent. A05-675, Court of Appeals Unpublished, January 17, 2006.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2004).

 

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A05-675

 

Daniel Ahlberg, et al.,

Appellants,

 

vs.

 

Timm Medical Technologies, Inc.,

n/k/a Endocare, Inc.,

Respondent.

 

Filed January 17, 2006

Affirmed Hudson, Judge

 

Hennepin County District Court

File No. 02-12068

 

Thomas P. Malone, Karen K. Kurth, Barna, Guzy & Steffen, Ltd., 200 Coon Rapids Boulevard, 400 Northtown Financial Plaza, Minneapolis, Minnesota 55433 (for appellants)

 

David Y. Trevor, Dorsey & Whitney, LLP, 50 South Sixth Street, Suite 1500, Minneapolis, Minnesota 55402 (for respondent)

 

            Considered and decided by Lansing, Presiding Judge; Hudson, Judge; and Dietzen, Judge.

U N P U B L I S H E D   O P I N I O N

HUDSON, Judge

            On appeal from summary judgment in an action by minority shareholders in a close corporation, appellants argue that the district court: (1) abused its discretion in determining that appellant's motion to amend their complaint to add additional parties was procedurally barred; (2) erred in determining that appellants' proposed new claims would not survive summary judgment; and (3) erred in concluding that Delaware law does not impose a fiduciary duty on a close corporation to act in the shareholders' best interests.  Because appellants failed to demonstrate good cause to amend the district court's scheduling order and because the district court did not err in its interpretation of Delaware law, we affirm.

FACTS

In 1997, Gerald Timm founded Timm Research Company (Timm Research) to develop a urinary-incontinence product.  Despite the revenue generated by Timm Research's other products, by the spring of 1998, the company required additional operating capital.  To raise the needed capital, Timm Research offered shares of common stock to 15 private placement investors.  In April 1998, appellants purchased 35,000 shares of the common stock offered in the private placement for a total investment of $105,000.  

In the fall of 1998, Timm Research exhausted the capital raised through the private placement offering and contacted institutional investors to secure additional funding.  Heath Care Capital Partners (HCCP) was willing to invest in order to facilitate Timm Research's acquisition of a product line from a company called Imagyn Technologies subject to certain conditions: (a) Timm Research would merge with Timm Medical Technologies, Inc. (Timm Medical), a Delaware corporation; (b) HCCP would receive a new series of preferred stock; and (c) HCCP would appoint additional members of Timm Medical's board.  Timm Research merged with Timm Medical and issued a new preferred series of stock, "Series A," which contained a liquidation preference and preemptive rights.

The acquisition of the Imagyn product lines failed to generate the revenue anticipated, and Timm Medical continued to need capital.  In 1999 and 2000, the board of directors approved the issuance of two additional series of preferred stock, "Series B," and "Series B-1," which also had liquidation preferences.  Timm Medical sold shares of Series B and Series B-1 as a package in conjunction with two warrants for the purchase of common stock.  Common stock shareholders were not given notice of the issuance of the preferred shares or the opportunity to invest.

In the summer of 2001, Timm Medical's need for capital became critical.  If the company could not secure additional investment, it would have to declare bankruptcy or otherwise liquidate itself.  HCCP, which had undergone a name change to Ferrar, Freeman and Thompson (FFT), indicated a willingness to advance Timm Medical $750,000 in order to sustain the company for a short time, giving it time to locate another investor.  FFT conditioned its investment on the simplification of the capital structure.

The Timm Medical board adopted a "Plan of Recapitalization" (plan) on October 1, 2001.  The plan consolidated all of the investment represented by the Series B and Series B-1 shares, including the purchase price of the shares, all the accrued dividends, the warrants, and all of FFT's bridge loans and converted this value into a new preferred stock, "Series B," which had a liquidation preference and a conversion right to common stock.  The plan also included a reverse 4-to-1 stock split in common stock, to increase the price of the post-split shares and make the company more attractive to potential investors.  The plan was approved between October 1 and 5, 2002, by the written consents of the holders of a majority of shares of each class of the company's stock.  Appellants, together with other minority shareholders whose written consents were not obtained prior to the approval of the plan, were informed of the recapitalization by letter dated December 17, 2001. 

After Timm Medical implemented the plan in October 2001, Endocare, Inc. (Endocare) approached the company about a possible acquisition for approximately $36 million, paid in a combination of cash and Endocare stock.  Timm Medical's board negotiated the merger, which was later approved by the holders of over 90% of each of the classes of stock.  The board allocated the merger proceeds based on the legal rights possessed by each class of stock.  Appellants were entitled to receive $24,183.78 as compensation for their shares of Timm Medical common stock. 

Appellants commenced suit in July 2002, seeking a declaratory judgment that the reverse stock split was void due to lack of prior notice to the shareholders.  Following a successful appeal to this court, in January 2004, appellants filed an amended complaint, adding a second count alleging that respondent, through its board of directors and principals, breached its fiduciary duty of due care, loyalty, and good faith owed to appellants by reducing their investment without notice and not treating them openly, honestly, or fairly.  The district court reopened discovery and established formal deadlines for nondispositive motions, including motions to join additional parties and motions to amend the pleadings.  The district court's scheduling order of February 12, 2004, set the deadline for nondispositive motions as August 13, 2004. 

Respondent filed a motion for summary judgment on November 17, 2004, seeking dismissal of both counts of the amended complaint.  On November 19, 2004, appellants filed a motion to amend their complaint again and add the individual members of respondent's board of directors as parties as well as a count alleging fraud.  On February 9, 2005, the district court issued an order granting respondent's motion for summary judgment and denying appellants' motion to amend their complaint.  The court administrator entered judgment that same day.  This appeal follows.

D E C I S I O N

I

            Appellants challenge the district court's decision denying them leave to amend their complaint to add the individual directors as party defendants, arguing that their motion to amend was not procedurally barred.  The decision whether to permit a party to amend the pleadings rests within the discretion of the district court and will not be reversed absent a clear abuse of that discretion.  Warrick v. Giron, 290 N.W.2d 166, 169 (Minn. 1980).  A district court's decision to modify a pretrial order is also reviewed under the abuse-of-discretion standard.  See Cotroneo v. Pilney, 343 N.W.2d 645, 648 (Minn. 1984). 

            The district court determined that appellants' November 2004 motion to amendwhich was filed months after the deadline for amending pleadings, at the close of discovery, and after respondent's motion for summary judgment on the then operative pleadingwas untimely.  In addition, the district court found that permitting appellants' motion to amend would result in significant delay, prejudicing both respondent and the unserved potential individual defendants, who had no in-depth knowledge of the pending litigation. 

            Appellants argue that the district court's decision to deny leave to amend was governed by Minn. R. Civ. P. 15.01, which provides that once a responsive pleading is served, the district court shall freely grant leave to amend a pleading when justice so requires.  But appellants moved to amend past the deadline for nondispositive motions established by the district court's scheduling order.  Consequently, in addition to seeking leave to amend, appellants necessarily sought a modification of the scheduling order.  Minn. R. Civ. P. 16.02 states that a scheduling order "shall not be modified except by leave of court upon a showing of good cause." 

Although no Minnesota court has directly addressed the issue, the Eighth Circuit in interpreting Fed. R. Civ. P. 16(b) has stated that a district court "may properly require that good cause be shown for leave to file an amended pleading that is substantially out of time under that [district court's scheduling] order."  In re Milk Prods. Antitrust Litig., 195 F.3d 430, 437 (8th Cir. 1999).  Accordingly, the issue presented is whether the district court abused its discretion by finding that appellants failed to show good cause to modify the scheduling order under Rule 16.02.  If good cause is shown, then appellants must demonstrate that amendment was proper under Rule 15.01.  See Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 608 (9th Cir. 1992) (noting that a party seeking to amend a pleading after the date specified in the scheduling order must first demonstrate good cause under Fed. R. Civ. P. 16(b) and then demonstrate that amendment was proper under Rule 15(a)). 

Appellants argue that there are several factors relevant to the issue of timeliness and good cause in this instance, including: (1) the complexity and volume of discovery, including the production of over 3,000 documents; (2) the production of significant agreements, such as the "Series B" stock purchase agreement and the signed stock subscription warrant agreement, after the deadline for amending the complaint and completing discovery had passed; and (3) the delay in deposing respondent's witness.  Appellants contend that these documents were critical in analyzing the terms of the recapitalization and the specific acts of wrongdoing by the individual directors. 

            The district court did not abuse its discretion in concluding that appellants presented an inadequate showing of good cause to modify the scheduling order.  As respondent notes, appellants alleged in their January 2004 amended complaint that respondent as a corporation, but through its individual directors, breached a fiduciary duty to appellants.  Thus, appellants had already concluded that the individual directors' conduct was blameworthy, but did not seek to add them as parties at that time.  While the additional discovery may have been necessary to help appellants piece together respondent's "warrant scheme," appellants have not demonstrated how the receipt of these documents was necessary to state a claim against the individual directors.  Moreover, the record does not reflect that appellants moved to compel discovery of these documents despite knowledge of the district court's impending deadline for nondispositive motions.

In addition, the record reflects clear prejudice to respondent if appellants were allowed to modify the scheduling order.  The Minnesota Supreme Court has identified several factors to consider when examining whether modification of a pretrial order is appropriate including: "(1) the degree of prejudice to the party seeking the modification; (2) the degree of prejudice to the party opposing the modification; (3) the impact of a modification at that stage of the litigation; and (4) the degree of willfulness, bad faith, or inexcusable neglect on the part of the party seeking modification."  Cotroneo, 343 N.W.2d at 649.

Here, the record reflects that at least two of the proposed individual defendants had no knowledge that appellants had commenced suit.  Granting leave to amend the scheduling order would have resulted in considerable delay and expense for respondent because, at a minimum, each new defendant would require an additional deposition and discovery.  Finally, appellants brought this motion after respondent's dispositive motion for summary judgment, and roughly ten months after filing its January 2004 amended complaint.  The motion was untimely.  See Cybyske v. Indep. Sch. Dist. No. 196, 347 N.W.2d 256, 264 (Minn. 1984) (affirming the district court's denial of leave to amend under Rule 15.01 when the plaintiff "delayed over a year after filing her complaint, until the eve of the defendants' summary judgment motion, to make her motion to amend," reasoning that the motion was untimely and prejudicial). 

The district court did not abuse its discretion in denying appellants' leave to amend their complaint.  Because we are affirming the district court's order on procedural grounds, we decline to address the merits of appellants' claims for breach of fiduciary duty and fraud.

II

Appellants also challenge the district court's grant of respondent's motion for summary judgment, arguing that the district court erroneously concluded that Delaware law does not permit shareholders to bring a claim for breach of fiduciary duty against a close corporate entity,[1] as opposed to the individual board members.  On appeal from summary judgment, we examine two questions:  "whether there are any genuine issues of material fact and whether the [district] courts erred in their application of the law."  Cummings v. Koehnen, 568 N.W.2d 418, 420 (Minn. 1997).  We review questions of law de novo.  Christensen v. Eggen, 577 N.W.2d 221, 224 (Minn. 1998).  

The district court concluded Timm Medical, as a corporation, owed no fiduciary duty to its shareholders and, thus, cannot breach duties of care, loyalty, or good faith.  The district court's conclusion is rooted firmly in existing Delaware law.  See Arnold v. Soc'y for Sav. Bancorp, Inc., 678 A.2d 533, 539 (Del. 1996) (holding that corporate entities have no fiduciary duty to shareholders and rejecting plaintiff's argument that corporation was vicariously liable for the actions of its directors under principles of respondeat superior); Alessi v. Beracha, 849 A.2d 939, 950 (Del. Ch. 2004) (stating that plaintiff shareholder presented no viable legal theory to hold a corporation liable to remedy the plaintiff's injuries). 

Appellants argue that this court should create an exception in Delaware law, imposing a fiduciary duty on close corporations to shareholders because (a) like partnerships, there is little division between the majority stockholders and the directors and (b) minority shareholders in close corporations cannot easily liquidate their investment if dissatisfied with the direction of the corporation.  But appellants cite to no Delaware authority either approving an exception for close corporations or even entertaining the prospect of any exception to the general rule that corporations do not owe a fiduciary duty to shareholders.  Accordingly, the district court did not err in refusing to interpret Delaware law contrary to Delaware courts.

            Affirmed.

[1] A close corporation is "[a] corporation whose stock is not freely traded and is held by only a few shareholders (often within the same family)."  Black's Law Dictionary 341 (7th ed. 1999).