Ross v. Dianne's Custom Candles, LLC

William M. Ross, Appellant, v. Dianne's Custom Candles, LLC, et al., Respondents.

No. A20-1543

Court of Appeals of Minnesota

August 30, 2021

This opinion is nonprecedential except as provided by Minn. R Civ. App. P. 136.01, subd. 1(c).

Hennepin County District Court File No. 27-CV-20-1

Darron C. Knutson, New Brighton, Minnesota (for appellant)

Steven M. Cerny, Santi Cerny, PLLC, Minneapolis, Minnesota (for respondents)

Considered and decided by Connolly, Presiding Judge; Reyes Judge; and Florey, Judge.

FLOREY, JUDGE

In this appeal from a summary judgment, appellant, a member of a limited-liability corporation (LLC), argues that the district court erred by (1) dismissing as derivative his claims challenging payments to other members; (2) dismissing other claims as barred by a six-year statute of limitations and declining to apply the continuing-violation doctrine; (3) dismissing his claims that respondents frustrated his reasonable expectations for his ownership interest in the company or otherwise engaged in oppressive conduct toward him; and (4) declining to amend the scheduling order to allow for additional discovery. We affirm.

FACTS

Respondent Dianne's Custom Candles, LLC, (Candles) is a Minnesota-based company that manufactures, distributes, and sells custom-made candles. Respondent Dianne's Fundraising, LLC, (Fundraising) is a Minnesota-based company that helped nonprofit organizations raise money by supplying them with candles and other merchandise for sale in fundraising campaigns. Fundraising became inactive in 2007. Respondent Alan Lenzen held the majority interest and was a governing member of both businesses. Appellant William M. Ross owned a 35 percent share of Fundraising and was also a governing member. From 2004 to approximately early 2007, Ross's involvement with Fundraising was sales-focused. He was not involved in management activities during that time.

In late 2006 or early 2007, Lenzen approached Ross about the prospect of subsuming Fundraising's business into Candles. Ross alleges that Lenzen assured him he would receive increased earnings, to replace those lost when Fundraising became inactive, and would share in Candles's profitability and growth. Ross agreed, and in early 2007 exchanged his 35-percent ownership in Fundraising for a ten-percent ownership in Candles, where he began working as an employee in sales. According to the Candles Member Control Agreement, Lenzen owned 66 percent, Ross owned ten percent, and two other members had 19- and five-percent interests. In 2008, Candles redeemed the five- percent ownership interest, which increased Ross's ownership interest to ten and a half percent.

In January 2007, Ross learned that Fundraising would be reporting 2006 taxable income attributed to him. He asked Lenzen to distribute enough cash from Fundraising to compensate him for his tax liability, but Lenzen declined. Ross signed a $52, 662 promissory note, drafted by his accountant and payable to Fundraising, to offset his taxable income from Fundraising. Ross alleges that he and Lenzen orally agreed that Ross would never have to pay the note, but he has no documents, communications, or notes to support this allegation, and Lenzen does not recall any agreement to that effect. Ross has never paid Fundraising any principal or interest on the note.

Ross worked at Candles from 2007 to June 2010 as vice president of sales. After ending his employment, Ross returned his company computer, which he used to send company emails and store company price lists and product information, with a new hard drive. The record is unclear as to whether Ross ever returned the original hard drive. Ross also had paper copies of product lists, pricing lists, customer lists, and potential client lists that he stated he either returned or threw away. Ross explained that any retained client information after his resignation was "not on purpose to undermine [Candles]," but rather because there is "a lot of crossover" when working in the business for a long period of time.

Following Ross's separation from Candles in 2010, Lenzen demanded that Ross pay the promissory note in full. Ross refused to pay, referring to the prior agreement he made with Lenzen that he would not be required to pay. Ross began working in Galveston, Indiana, as an independent contractor for a similar company, and also dealt directly with a professional-athletic-organization-licensed-merchandise supplier to make sales to Boy Scout organizations, an opportunity Candles had been actively pursuing for three years prior. Subsequently, from 2011-2018, Ross ran a division of a company that sold food products and candles for charitable fundraising.

Ross did not participate in the management or affairs of either Fundraising or Candles after his employment ended. Candles's governing documents state that profits and losses would be allocated to the members based on each member's ownership percentage each year. From 2008-2018, Ross paid for his tax liability based on his ownership interest in Candles, but received no disbursements or cash to cover the tax liabilities. Ross alleges that Lenzen provided other members of Candles sufficient funds to cover their tax liabilities through "salary or wages, interest payments on alleged loans to Candles, expense reimbursements, or profit distributions," and that respondents did this intentionally, in order "to inflict financial injury upon Ross and thereby force him to surrender his ownership interests in Candles and Fundraising." Neither Candles's nor Fundraising's corporate records and governing documents require them to make distributions to members or state that members are entitled to annual distributions.

Ross requested that respondents provide him information concerning the business affairs of Candles and Fundraising beyond the K-1 tax forms he received annually, but respondents failed to do so. In February 2018, Ross sent respondents two letters demanding "documentation and information concerning the organization documents, financial results, insider transactions, distributions and payments of profits and other items bearing on the value of Ross's ownership interests in Candles and Fundraising and the rights and claims Ross may have arising from those ownership interests." Respondents state that they did not receive those letters.

In April 2018, Ross commenced an action (the first lawsuit) to compel respondents to provide documents and information on Fundraising and Candles going back 16 years. After filing a joint answer and counterclaim refusing to provide the requested information, respondents eventually produced some of the requested records, but denied having others. Respondents also declined to produce some documents based on their belief that Ross would use the information to compete with Candles and Fundraising and divert business away from them. The parties settled the first lawsuit in February 2019, although Ross contends that respondents did not provide complete information and documentation as required by the settlement agreement.

In December 2019, Ross commenced the present action, asking that the companies be dissolved or ordered to buy out his interest based on oppressive conduct under Minn. Stat. § 322C.0701, subds. 1, 2 (2020), or that he be awarded damages for breach of the fiduciary duty of good faith and fair dealing. Respondents moved for dismissal pursuant to Minn. R. Civ. P. 12.02(e). The district court dismissed all claims arising prior to November 18, 2013, as barred by the statute of limitations, as well as claims relating specifically to inappropriate or excessive amounts of company funds distributed to Lenzen and other members as improperly pleaded derivative claims.

Respondents moved for summary judgment on all remaining claims, which the district court granted. The district court denied Ross's motion to amend the scheduling order to extend the discovery completion date. This appeal follows.

DECISION

I. The district court did not err in dismissing as derivative Ross's claims challenging payments to other members.

This case requires us to review an order dismissing a complaint pursuant to Minn. R. Civ. P. 12.02(e) (stating that a complaint must be dismissed if it fails to state a claim upon which relief can be granted). We review de novo the district court's decision on a motion to dismiss, considering "only the facts alleged in the complaint, [and] accepting those facts as true." Sipe v. STS Mfg., Inc., 834 N.W.2d 683, 686 (Minn. 2013) (citation and internal quotation marks omitted). The determination of whether shareholder claims are direct or derivative also presents a question of law subject to de novo review. See, e.g., Nw. Racquet Swim &Health Clubs, Inc. v. Deloitte &Touche, 535 N.W.2d 612, 617 (Minn. 1995) (explaining that the question was "whether the trial court erred in concluding as a matter of law" that the investor's claims "are nonderivative").

As an entity distinct from its shareholders, a corporation holds a separate right to sue in its own name. Singer v. Allied Factors, Inc., 13 N.W.2d 378, 380 (Minn. 1944). Thus, "Minnesota has long adhered to the general principle that an individual shareholder may not assert a cause of action that belongs to the corporation." Nw. Racquet, 535 N.W.2d at 617.

If a shareholder asserts a cause of action belonging to the corporation, the shareholder must seek redress in a "derivative" action on behalf of the corporation. Wessin v. Archives Corp., 592 N.W.2d 460, 464 (Minn. 1999). By doing so, the shareholder, in effect, steps into the corporation's shoes and seeks restitution that the shareholder could not demand as an individual. In re UnitedHealth Grp. Inc. S'holder Derivative Litig. 754 N.W.2d 544, 550 (Min...