Daniel Ahlberg, et al., Appellants, vs. Gerald W. Timm, et al., Respondents.

Daniel Ahlberg, et al., Appellants, vs. Gerald W. Timm, et al., Respondents. A05-1638, Court of Appeals Unpublished, June 20, 2006.

This opinion will be unpublished and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

A05-1638

 

Daniel Ahlberg, et al.,

Appellants,

 

vs.

 

Gerald W. Timm, et al.,

Respondents.

 

Filed June 20, 2006

Affirmed Worke, Judge

 

Hennepin County District Court

File No. MC 05-001918

 

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

 

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

 

            Considered and decided by Hudson, Presiding Judge; Worke, Judge; and Crippen, Judge.[*]

U N P U B L I S H E D   O P I N I O N

WORKE, Judge

            On appeal from grant of summary judgment, appellants argue that (1) the district court erroneously applied the doctrine of collateral estoppel because the issues were not necessary and essential to the resulting judgment in the prior action and they were denied a full and fair opportunity to be heard; and (2) genuine issues of material fact exist as to whether respondents breached their fiduciary duty, were materially self-interested, and engaged in fraud.  We affirm.

FACTS

In 1998, appellants Daniel Ahlberg and Linda Ahlberg purchased 35,000 shares of common stock in Timm Research Company (Timm Research) for an investment of $105,000.  Ferrar, Freeman, and Thompson (FFT)(at the time known as Health Care Capital Partners), then provided Timm Research with the capital to acquire business lines from Imagyn Technologies (Imagyn), a company in which respondent Gerald W. Timm (Timm) had owned stock.  FFT's investment was conditioned on incorporation in Delaware by merging with Timm Medical Technologies, Inc. (Timm Medical); issuance of a new series of preferred stock containing a liquidation preference, common-stock convertibility, and preemptive rights; and FFT appointments to Timm Medical's board.  Appellants declined to invest in the preferred stock. 

The acquired Imagyn assets failed to assist Timm Medical financially.  In 1999, respondent board of directors approved issuance of a new preferred stock, Series B, which had a liquidation preference.  Series B was sold with warrants for the purchase of common stock.  In 2000, Timm Medical issued B-1 preferred stocksimilar to Series B.     Not all common-stock shareholders were notified of the issuance of the preferred shares or given the opportunity to invest.

In 2001, in order to simplify Timm Medical's capital structure and to make it more attractive to potential investors, respondents approved a recapitalization plan (plan). Investments represented by Series B, and B-1, warrants sold with Series B and B-1, accrued dividends, bridge loans, and accrued interest on the bridge loans were converted into a new Series B preferred stock which had a liquidation preference.  The plan also included a 4-to-1 reverse split.  The plan was approved by written consent of stockholders owning a majority of each class of stock.  By letter dated December 17, 2001, appellants and other stockholders who did not submit written consent were notified of the plan.  In 2002, Timm Medical merged with Endocare, Inc. (Endocare).  The merger was approved by more than 90% of the holders of each class of stock.  Merger proceeds were allocated based on the legal rights of each class of stock.  Appellants were entitled to $24,183.78. 

In July 2002, appellants sought a declaratory judgment that the reverse stock split was void for lack of notice (Timm I).  The district court granted summary judgment in favor of Timm Medical, but this court remanded to permit appellants time for discovery.  See Ahlberg v. Timm Med. Techs., Inc., No. A03-438 (Minn. App. Nov. 18, 2003).  In January 2004, appellants moved to amend the complaint, alleging that Timm Medical, through its board and principals, breached its fiduciary duty of care, loyalty, and good faith by reducing appellants' investment without notice and by not treating them openly, honestly, or fairly.  In February 2005, the district court granted summary judgment in favor of Timm Medical and denied appellants' motion to amend the complaint, ruling that the motion was untimely and prejudicial.  The district court ruled that Timm Medical owed no fiduciary duty to appellants.  This court affirmed the district court's grant of summary judgment and denial of appellants' motion on procedural grounds, but did not address the merits of appellants' claims against individual directors.  See Ahlberg v. Timm Med. Techs., Inc., No. A05-675 (Minn. App. Jan. 17, 2006).  While the motions were pending in Timm I, appellants commenced this action.  The district court granted summary judgment in favor of respondents, ruling that the doctrine of collateral estoppel barred appellants' claims. 

D E C I S I O N

            "On appeal from summary judgment, we ask two questions: (1) whether there are any genuine issues of material fact and (2) whether the [district court] erred in [its] application of the law."  State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990).  No genuine issue of material fact exists when "the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party[.]"  DLH, Inc. v. Russ, 566 N.W.2d 60, 69 (Minn. 1997).  No genuine issue of material fact exists when collateral estoppel precludes relitigation of an issue.  State Farm Mut. Auto. Ins. Co. v. Spartz, 588 N.W.2d 173, 175 (Minn. App. 1999), review denied (Minn. Mar. 30, 1999). 

Collateral Estoppel

Appellants argue that collateral estoppel does not preclude litigation of their claims against individual directors.  The availability of collateral estoppel is a mixed question of law and fact subject to de novo review.  Falgren v. State, Bd. of Teaching, 545 N.W.2d 901, 905 (Minn. 1996). 

Collateral estoppel applies when the following are met:

(1) the issue must be identical to one in a prior adjudication; (2) there was a final judgment on the merits; (3) the estopped party was a party or was in privity with a party to the prior adjudication; and (4) the estopped party was given a full and fair opportunity to be heard on the adjudicated issue.

 

Hauschildt v. Beckingham, 686 N.W.2d 829, 837 (Minn. 2004).  Collateral estoppel bars relitigation of issues identical with previously litigated issues that were necessary and essential to the prior judgment.  Id.  Thus, "[t]he issue must have been distinctly contested and directly determined in the earlier adjudication for collateral estoppel to apply."  Id.at 837-38.

Necessary and Essential

Appellants argue that the adjudicated issue was not necessary and essential to the prior judgment.  Appellants contend that in Timm I appellants litigated a motion to amend and the adjudication on the merits of appellants' breach-of-fiduciary-duty and fraud claims was not necessary to that resulting judgment.  Appellants rely on the Restatement (Second) of Judgments § 27 cmt. h. (1982) that states, "[i]f issues are determined but the judgment is not dependent upon the determinations, relitigation of those issues in a subsequent action between the parties is not precluded."  The party against whom these issues were determined is not precluded because the unessential determination has "the characteristics of dicta" and generally cannot be appealed.  Restatement (Second) of Judgments § 27 cmt. h.

It is undisputed that the adjudication on the merits did not affect the decision to deny the motion to amend on procedural grounds, and in affirming, this court declined to address appellants' challenge on the merits.  Thus, if collateral estoppel applied, appellants would have no means of appealing the adjudication on the merits.  Given that respondents were not named parties in Timm I and are not substantially prejudiced by relitigation, the adverse consequences of applying collateral estoppel outweigh the interest in avoiding the burden of relitigation. 

Respondents argue that collateral estoppel was appropriate because the merits of appellants' claims were "distinctly contested" and "directly determined."  Respondents contend that when a district court identifies two alternative grounds for its decision, both grounds have collateral-estoppel effect so long as the district court specifically determined the issue on which collateral estoppel was based.  See In re Trusts Created by Hormel, 504 N.W.2d 505, 510 (Minn. App. 1993), review denied (Minn. Oct. 19, 1993).  But respondents mischaracterize the issue here; it is not whether two alternative grounds for one decision on the merits both have preclusive effect, but whether a decision has preclusive effect when the district court deemed it unnecessary to reach the merits because the claim was procedurally improper.   Thus, determinations that are not essential to the judgment do not have preclusive effect. 

Fully and Fairly Litigated

Appellants next argue that they were not afforded a full and fair opportunity to litigate their claims in Timm I.  Ultimately, "collateral estoppel claims are not determined by measuring the manner in which each party conducted litigation, but rather according to the opportunity to address an issue."  Williamson v. Guentzel, 584 N.W.2d 20, 23-24 (Minn. App. 1998), review denied (Minn. Nov. 24, 1998).  Whether a party had a full and fair opportunity to litigate generally focuses on "whether there were significant procedural limitations in the prior proceeding, whether the party had the incentive to litigate fully the issue, or whether effective litigation was limited by the nature or relationship of the parties."  State v. Joseph, 636 N.W.2d 322, 328 (Minn. 2001) (quoting Sil-Flo, Inc. v. SFHC, Inc., 917 F.2d 1507, 1521 (10th Cir. 1990) (other citation omitted)).  An additional factor is whether it was foreseeable during the initial litigation that the issue would arise in a subsequent action.  See Restatement (Second) of Judgments § 28(5)(b) (1982). 

            Appellants contend that they were denied oral argument on their motion to amend.  Appellants suggest that the district court's refusal to permit oral argument demonstrates bias against appellants.  Appellants' argument fails.  First, the claims asserted in the second amended complaint in Timm I raised the identical issues presented here against Timm Medical, which appellants argued owed them a fiduciary duty.  Second, appellants had an opportunity to argue on Timm Medical's motion for summary judgment.  As evidence of the alleged breach, appellants submitted documents and deposition testimony reflecting the actions of the individual directors, and appellants argued the propriety of the reverse stock split, warrant cancellation/conversion, acquisition of Imagyn, and recapitalization.  Appellants do not dispute that they were afforded an opportunity to present evidence, but suggest that the district court was biased because it did not credit the conclusions of appellants' forensic accountant.  Appellants fail to demonstrate that they were denied a full and fair opportunity to litigate in Timm I.  But the district court erred in applying the doctrine of collateral estoppel because the adjudication on the merits was not necessary and essential to the resulting judgment.

Genuine Issues of Material Fact

Fiduciary Duty

Appellants argue that the district court erred in granting summary judgment because genuine issues of material fact exist.  Appellants contend that issues of fact remain regarding whether respondents breached their fiduciary duty when they converted Series B and B-1 into preferred stock, approved a reverse stock split, maintained a complex capital structure, and acquired Imagyn when respondent Timm possessed an interest in Imagyn. 

Under Delaware law, directors have an unyielding fiduciary duty to protect the interests of the corporation and the shareholders.  Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993).  The business-judgment rule creates "a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company."  Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).  A shareholder challenging a board decision bears the burden to rebut the rule's presumption by providing evidence that the directors breached their fiduciary duties.  Cede, 634 A.2d at 361.  If the shareholder fails to rebut the presumption, the business-judgment rule protects the decision.  Id.  If the rule is rebutted, the burden shifts to the directors to prove that the transaction was entirely fair to the shareholder.  Id.

            When a shareholder attempts to rebut the rule based on an alleged self-interest, the shareholders must show a material self-interest and that the self-interested members controlled or dominated the board, or failed to disclose their interest when a reasonable board member would have considered the interest significant.  Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1168 (Del. 1995).  Whether a director abandoned his or her duty of loyalty or duty of care is a question of fact.  Cede, 634 A.2d at 360.  To survive summary judgment, appellants have the burden of establishing evidence to support each essential allegation.  Murphy v. Godwin, 303 A.2d 668, 673 (Del. Super. Ct. 1973).

            Appellants argue that they produced sufficient evidence that respondents were disloyal by approving recapitalization.  Appellants allege that respondents had a material self-interest in the plan because they either owned old Series B or B-1, or were beholden to FFT because they invested in FFT or were appointed by FFT.  To establish that a director's independence was compromised by a financial interest, appellants had to demonstrate that the interest was of "sufficiently material importance, in the context of the director's economic circumstances, as to have made it improbable that the director could not perform her fiduciary duties" without undue influence.  In re Gen. Motors Class H S'holders Litig., 734 A.2d 611, 617 (Del. Ch. 1999).  Appellants' allegations of self-interest do not meet the threshold necessary to rebut the presumption of the business-judgment rule.  First, appellants failed to produce any evidence to suggest that respondents' actions were motivated by improper or selfish interests.  And appellants had the initial burden of establishing some credible and direct evidence to support their essential allegations in order to survive summary judgment.  See Murphy, 303 A.2d at 673.  Finally, a director's fiduciary duty requires him to advance and protect the interests of all shareholders.  Gilbert v. El Paso Co., 575 A.2d 1131, 1147-48 (Del. 1990) (stating that in attempting to fulfill fiduciary duties, "directors may have to make difficult decisions involving the competing interests of various shareholder groups).

Here, appellants showed that two board members had a financial interest in the   plan as shareholders, but failed to demonstrate how that interest was material and debilitating.  Further, appellants' assertion that FFT-appointed directors were incapable of exercising their duties independently lacks credible evidentiary support.  The only evidence appellants introduced was the number of shares the board members and FFT held.  Appellants contend that the lack of evidence of financial information is due to Timm Medical's refusal to permit discovery.  But appellants conducted voluminous discovery in Timm I and did not move to compel additional discovery.

Because appellants have not demonstrated a material self-interest and provide no authority for the proposition that a director cannot act impartially because of a financial interest in a transaction, appellants have failed to rebut the presumption of the business-judgment rule.  The district court did not err in granting summary judgment.

            Fraud

Appellants next argue that they put forth sufficient evidence of reliance on material misrepresentations in the December 17, 2001 letter to survive summary judgment.  Appellants contend that misrepresentations prevented them from identifying the appropriate "wrongdoer" and that they were damaged by litigating Timm I. 

To establish a fraud claim under Delaware or Minnesota law, appellants must plead with sufficient particularity (1) a material misrepresentation, (2) made with knowledge or belief that the representation was false, or with reckless indifference to the truth, (3) with intent to induce appellants' action or inaction, (4) appellants' reliance, and (5) resulting damage.  Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983); Davis v. Re-Trac Mfg. Corp., 276 Minn. 116, 117, 149 N.W.2d 37, 38-39 (1967).  Appellants' claim lacks merit.  Assuming the letter contained material misrepresentations intending to induce reliance, appellants fail to demonstrate how their reliance caused them to bring an action against the corporation as opposed to against the individual directors. 

            Affirmed.

[*] Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.