2011 Minnesota Case Law and
Statutory Update
Thomas A. Jensen
David C. Jenson
May 10, 2012
Watkins Inc. v. Chilkoot Distributing, Inc.
Watkins
commissions & discounts
CDI
sales receipts
•Watkins and CDI operated for almost 20 years
under same agreement (1988 Dealer Agreement)
•CDI’s commissions and discounts are based on
its own sales and the sales of other sellers it has
recruited for Watkins
•Lambert Group was recruited by CDI and is a
top seller
Lamber
t
Group
Other
Sellers
• Watkins sends CDI the 2006 Agreement
 Accompanied by confusing letter
 Follow-up phone call
 Unclear to CDI whether this is a new contract
or merely an information form
 CDI signs and returns the 2006 Agreement
• 2006 Agreement allows Watkins to make
unilateral changes
• Watkins reclassifies the Lambert Group,
significantly reducing commissions and discounts
to CDI
Watkin
s
Lamber
t
Group
commissions & discounts
CDI
sales receipts
Other
Sellers
• CDI sues Watkins for breach of the 1988
Dealer Agreement
 Watkins argues the 2006 Agreement governs
 Was a new agreement intended?
 Signature of CDI = objective manifestation of
intent?
• Is this the wrong result?
 Not a consideration on the merits; only denial
of summary judgment
• Takeaways
 Objective manifestation of intent, but
informed by surrounding facts and
circumstances
 Don’t be sneaky
• SCI Minnesota Funeral Serv. Inc. v.
Washburn-McReavy Funeral Corp.
 Minnesota Supreme Court case
 Affirmed Court of Appeals decision
Crystal Lake Stock
SCI
Washburn
$1 Million
100%
Crystal Lake
3 Funeral Homes/
Cemeteries
Real Estate –
$2 Million
(MN/CO)
Known
Not Known
• No rescission
 Mutual mistake
 Form of transaction, not value or quality
 Lack of mutual assent
 Under objective standard, purchase agreement
clearly evidenced mutual assent
• No reformation
 Clarifies different remedy than rescission
 Not a mutual mistake
 Not a unilateral mistake and fraud or
inequitable conduct
 Here, just a unilateral mistake
• Takeaways
 Stock transaction really does mean all
assets and liabilities
 Absent fraud or inequitable conduct,
can’t clear this up later.
 Diligence and proper representations
and warranties key
• BOB Acres, LLC v. Schumacher Farms,
LLC
 Court of Appeals case
 False recital of consideration
 Specific performance
• Purchase Agreement to buy land recited
Seller’s receipt of $500 in earnest money
• Closing within 60 days; did not close
• Parties continued to negotiate and
exchange drafts
• Earnest money never paid
• Buyer sued for specific performance
• Consideration?
 Promise for a return promise is
consideration
 False recital of earnest money does
not change this
 Promise to sell land in exchange for
promise to purchase – not relying on
earnest money itself
• Did Seller waive right to enforce closing
deadline (i.e., to cancel the purchase
agreement)?
 Waiver standard is clear and can be
shown by behavior alone
 “Intentional relinquishment of a known
right”
 Here, Seller clearly
 Never objected to non-payment of
earnest money
 Proceeded with easement arrangements
 Sent abstract of title to BOB’s attorney
 Asked township board to split property
• Takeaways
 Non-payment of earnest money is not
necessarily fatal to contract formation
 Can’t have it both ways
 Provide for remedies by contract, don’t
leave to court
Provell, Inc. v. JetChoice I, LLC
• JetChoice I and JetChoice II, related
companies, operate a private jet service
• Provell, Inc. considers purchasing a
membership in 2008
• After initial talks, Provell begins due
diligence investigation
• Provell’s due diligence investigation
 Includes outside counsel and uncovers
recent “slowpay” incidents
 JetChoice II’s financials show a $1.5M
loss as of September 2008
 Nearly all of JetChoice II’s assets
consist of a receivable from JetChoice
 JetChoice refuses to provide JetChoice
I financials
 Provell CFO expresses concern about
financial stability of JetChoice entities
• Provell has “assurances” from JetChoice
executives regarding their financial health
• Provell closes on the purchase of a
membership for $2.25M, including $1.25M
paid at closing
• Within several months, JetChoice files for
bankruptcy
• Provell sues on a fraud claim to recover
the purchase price; claims JetChoice
made “numerous misrepresentations”
about financial stability
• Can Provell prove fraud?
 False representation of fact susceptible
of knowledge
 Made with knowledge of falsity or
ignorance of truth
 Intended by JetChoice to induce
reliance
 Provell in fact reasonably relied upon
representation
 Provell suffered monetary damage as a
result
• Summary judgment for JetChoice
 Failure to establish an essential
element = mandatory summary
judgment
 Whether reliance is “reasonable” is
evaluated in the context of a party’s
intelligence, experience, and
opportunity to investigate
 An independent inquiry into the
accuracy of a representation may bar a
party from relying on the representation
unless the investigation is not
“adequate to disclose the falsity”
• Summary judgment for JetChoice
 Provell argues that some of the
representations made by JetChoice could not
be independently verified
 Court responds that it doesn’t matter; the
facts that Provell did uncover were such that
they should have doubted any representation
relating to the financial stability of JetChoice
• Takeaways
 Whether a party’s reliance is “reasonable” for
purposes of a fraud claim depends on the
party’s intelligence, business sophistication,
experience, and opportunity to investigate
 An opportunity to investigate will bar a fraud
claim where the investigation demonstrated
that representations were false or uncovered
information that should have led the party to
doubt the truth of representations
Quinn v. Elite Custom Transporters and
Motorcoaches, LLC
• Elite’s business was suffering
 All tangible assets and intangible
assets relating to the tangible assets
are encumbered pursuant to bank
loans
 Assets exceed liabilities, which include
$600k owed to the IRS for delinquent
payroll taxes
• The Quinns order a custom motor
home for $875k and pay up front
 Elite never delivers the motorhome and
never returns the money or personal
property
 Quinns sue Elite for breach of contract
and conversion
 Elite fails to respond, and the Quinns
obtain a default judgment in the
amount of $1M
 After judgment is entered against it,
Elite transfers all of its assets to a new
company
• New company is Elite Custom Transporters and
Motorcoaches, LLC
• Assets transferred include all tangible and
intangible assets and goodwill
Homer
Bruggeman
Gretchen
Bruggeman
$120 / 60%
Brenda
Bruggeman
$80 / 20%
Jim
Bruggeman
Assets
Elite
Assumed liabilities
Elite #2
Jim
Bruggeman
• After the transfer, Elite #2 operates the
same business that Elite had operated
• Since the Quinns can’t recover their
judgment against Elite, they sue Elite #2
 fraudulent transfer in violation of the
Minnesota Uniform Fraudulent Transfer Act
(FTA)
 seek to hold Elite #2 liable under a successor
liability theory
• Threshold question: has any
“transfer” occurred for purposes of
FTA?
 Encumbered assets are not “assets”
under the FTA
 The only thing transferred by Elite to
Elite #2 that hadn’t been encumbered
was goodwill
 Open question under MN law whether
goodwill can be an “asset” under FTA
• Court says that goodwill CAN be an
asset for purposes of FTA, remands
for determination of the value of the
goodwill
Court can’t determine summary
judgment on FTA claims
 whether transfer was fraudulent
depends in part on the value of the
goodwill
• Court reaffirms unpublished 2009
decision, Schwartz v. Virtucom
 Exception to statute against successor
liability (302A.661) for transfers that
violate the FTA
 Can’t determine summary judgment
because can’t yet determine whether
the FTA has been violated
• Takeaways
 Goodwill can be an asset for purposes
of FTA (if it’s unencumbered)
 There is an exception to the general
rule against successor liability for
transactions that violate the FTA
• Staehr v. Western Capital Resource, Inc.
• U.S. District Court
• Pleading requirements in derivative
claims when new Board has been elected
and obligation to make demand on new
Board
Blackstreet
Δ
Πs/Minority
Shareholders
LOI
Assets
Common
Stock Purchase
Agreement
WERCS
Δs/Majority SH
of Western
Preferred and Common
Western
Western Directors
and Officers
Δs
• Old Western Board (pre-closing)
 Majority interested (WERCS)
• New Western Board (post-closing)
 Only one WERCS director
• Litigation begins – no derivative claims
made
• Blackstreet transaction closes (March
2010)
• New Western Board elected (Blackstreet
controls company)
• Defendants file motion to dismiss (October
2010)
• Plaintiffs file Amended Complaint
• First time derivative claim filed but plaintiffs
did not first make demand on new Board
regarding derivative claim
• FRCP 23.1: Pleading requirements for
shareholder derivative claims
 Complaint must state with
“particularity” efforts to get desired
action from the directors
 Defendants say plaintiffs did not plead
the futility of making a demand on the
new Board
 Plaintiffs say that futility excuses their
failure to make a demand because
board was engaged in bad conduct
 By filing the derivative complaint for the first
time in the amended complaint, coupled with
the fact that there was a new, independent
board, plaintiffs were required to make a
demand on the new board
 None of the exceptions applied
• Takeaways:
 Creates new MN law by adopting DE’s
Braddock standard
 MN courts continue to look to DE law for
precedent
Thank You
Thomas A. Jensen
(612) 335-1809
tom.jensen@leonard.com
David C. Jenson
(612) 335-1464
david.jenson@leonard.com
http://www.leonard.com
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