Opinion ID: 768509
Heading Depth: 3
Heading Rank: 2

Heading: Duplicitous Damages

Text: 24 ASI also seeks to invoke the election of remedies doctrine by arguing that the damages sought in this fraud action are duplicitous of damages awarded in the valuation proceeding. In determining damages in fraud and misrepresentation actions, Minnesota follows the out-of-pocket rule. See B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d 180, 182 (Minn. 1988). The out-of-pocket rule calculates damages as the difference between the actual value of the property received and the price paid for the property, along with any special damages naturally and proximately caused by the fraud prior to its discovery . . . . Mesabi, 430 N.W.2d at 182. See also Commercial Property Investments, Inc. v. Quality Inns Int'l, Inc., 61 F.3d 639, 647 (8th Cir.1995) (defining the out-of-pocket rule as 'the difference between what the defrauded party paid and what he or she actually received, together with other damages proximately caused by the fraud . . . .') (quoting Nave v. Dovolos, 395 N.W.2d 393, 398 n.1 (Minn. Ct. App. 1986)). ASI opines that the application of the out-of-pocket rule to this case leads to the conclusion that the Dissenters have already recovered any damages resulting from the alleged fraud through the appraisal judgment. It thus argues that allowing the fraud claim to proceed would result in a duplicitous recovery. 25 Minnesota courts have taken a broad approach to the concept of out-of-pocket damages, upholding the recovery of consequential damages proximately caused by the fraud or misrepresentation. See Commercial Property, 61 F.3d at 647. Furthermore, in Estate of Jones v. Kvamme, 449 N.W.2d 428 (Minn. 1989), the Minnesota Supreme Court recognized that there are situations where an unyielding application of the out-of-pocket rule fails to fully compensate victims of fraud. A prime example of this, albeit from another circuit, is Janigan v. Taylor, 344 F.2d 781 (1st Cir. 1965). The plaintiffs in Janigan were former stockholders who sued the corporation's president in connection with an alleged misrepresentation the president made regarding material changes in the affairs of the company. The shareholders claimed the president unlawfully purchased virtually all of the company's outstanding stock and sold it two years later at a tremendous profit. In discussing the appropriate damages, the court made a distinction between cases where one is fraudulently induced to buy and those where one is fraudulently induced to convey property. In the former case, the court found that damages are to be calculated simply as the difference between the value of the property at sale and the price paid for it, plus interest and other damages legitimately caused by the defendant's conduct. [T]he expected fruits of an unrealized speculation are not included as damages for the fraudulent inducement to buy, however. Janigan, 344 F.2d at 786 (citation omitted). Alternatively, 26 if the property is not bought from, but sold to the fraudulent party, future accretions not foreseeable at the time of the transfer even on the true facts, and hence speculative, are subject to another factor, viz., that they accrued to the fraudulent party. It may, as in the case at bar, be entirely speculative whether, had plaintiffs not sold, the series of fortunate occurrences would have happened in the same way, and to their same profit. However, there can be no speculation but that the defendant actually made the profit and, once it is found that he acquired the property by fraud, that the profit was the proximate consequence of the fraud, whether foreseeable or not. It is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them. 27 Id. The court relied on principles of simple equity to fashion a remedy for fraud that went beyond simple out-of-pocket loss. Id. It is altogether possible that the district court could follow the same course of action in the case at bar. While it may be too late for the Dissenters to rescind the merger (given the fact that the Dissenters have not held ASI stock for several years), it is not too late for them to seek consequential damages proximately caused by ASI's allegedly fraudulent activities. Indeed, the interpretation of the out-of-pocket rule in Minnesota expressly permits such damages. 28 We note that the principle underlying the election of remedies doctrine is the prevention of prejudice to the defendant. See Medcom, 984 F.2d at 229. In fact, this court has refused to apply the doctrine in situations where the defendant has not been substantially prejudiced. See Lear, 798 F.2d at 1134. Here, it is difficult to see how ASI is prejudiced by the Dissenters' assertion of their common law fraud claims. It already paid the Dissenters the value of their stock, which it would have had to do if the fraud claims were brought first (assuming they were successful). Further, ASI has known from the inception of this dispute that the Dissenters' alleged fraudulent conduct on the part of the controlling shareholders to effectuate the merger. 12 Thus, the prevention of prejudice to ASI is not a serious consideration in this case. 29 Additionally, the Dissenters note that 302A.471(4), the Minnesota statute regulating Dissenters' rights, provides that dissenting shareholders do not have a right at law or in equity to have a corporate action . . . set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation. MINN. STAT. 302A.471(4) (emphasis added). In Sifferle v. Micom Corp., 384 N.W.2d 503, 506 (Minn. Ct. App. 1986), the Minnesota Court of Appeals stated that the appraisal right of a frozen-out shareholder is his exclusive remedy unless the merger is 'fraudulent' to him or the corporation. Moreover, the court found that [i]t is generally held that there is no bar to instituting an appraisal proceeding in addition to challenging the merger in an equitable proceeding on the grounds of fraud. Sifferle, 384 N.W.2d at 509. The Dissenters rely on this language as support for the propriety of pursuing their present fraud action. ASI states that this language permits nothing more than the simultaneous assertion of inconsistent claims until the claimant recovers on one or the other. It urges, however, as we have previously indicated, once the appraisal suit is completed and the judgment satisfied, there can be no further recovery for fraud. At least as to the common law action for fraud presently before us, this position is directly refuted by the Court of Appeals' statements in Sharecom II, 553 N.W.2d 433. 30 Both sides rely on Cede & Co. v. Technicolor, Inc., 542 A.2d 1182 (Del. 1988), for support. In that case, Cede & Co. dissented from a cash-out merger of the minority shareholders of Technicolor. Cede & Co. first brought an appraisal action and later filed a fraud action. Similar to the present case, Cede & Co. brought the subsequent fraud action only after unearthing evidence of wrongdoing in connection with the merger, which was determined during the course of appraisal discovery. Technicolor moved to dismiss the fraud claim and the trial court ruled that the claimant would have to choose between the two suits after completing discovery on both. 31 The Delaware Supreme Court reversed, stating that the actions should be consolidated for trial and, if Cede & Co. was successful, the court could determine and award the appropriate remedies at that time. The court stated that the election of remedies had no application in the case, as Cede & Co.'s alternative causes were not inconsistent claims for relief based on the same facts. The Delaware court qualified its holding, however, stating: 32 During the consolidated proceeding, if it is determined that the merger should not have occurred due to fraud, breach of fiduciary duty, or other wrongdoing on the part of the defendants, then [Cede & Co.'s] appraisal action will be rendered moot and [Cede & Co.] will be entitled to receive rescissory damages. If such wrongdoing on the part of the defendants is not found, and the merger was properly authorized, then [Cede & Co.] will be entitled to collect the fair value of its Technicolor shares pursuant to statutory appraisal and its fraud action will be dismissed. Under either scenario, [Cede & Co.] will be limited to a single recovery judgment. 33 Cede, 542 A.2d at 1191 (emphasis added). 34 In the present case, the Dissenters argue that Cede supports their position because it shows that an appraisal action is not the exclusive remedy of frozen-out shareholders. ASI, in turn, argues that this case substantiates the argument that the appraisal proceeding trumps the fraud action where the former comes to judgment before the latter. We disagree with ASI on this point, and we do not feel that the above-quoted language compels us to find otherwise. The argument that a successful fraud action moots a subsequent appraisal proceeding does not necessarily mean a successful appraisal proceeding moots a subsequent fraud action. To restate, the plaintiffs would be entitled to at least the fair value of their shares regardless of the form of recovery, assuming they were successful. To allow the claimants to collect on the fair value in the fraud action and then again in the appraisal action would be double recovery, since the only recovery available in an appraisal proceeding is the fair value of the shares. The opposite is not necessarily the case, however, as a successful fraud action may entitle the claimant to more than fair value under Minnesota's consequential damages provision of the out-of-pocket rule. Hence, one could potentially recover the fair value in the appraisal proceeding, bring a fraud claim, and recover fair value plus consequential damages. As long as the court offsets the previously awarded fair value, there can be no double recovery. 35 The language in Cede is based on the assumption that the existence of fraud has been considered and rejected, thereby necessitating the dismissal of the fraud action. 36 We do not read this language as saying once an appraisal action is brought and won, a fraud action is necessarily dismissed. Rather, the express language provides that the Dissenters are still entitled to an appraisal proceeding once a fraud action is proven untenable. In this case, we do not know if fraud is out of the picture because the issue has never been tried; hence, the language in Cede does not support the assertion that the appraisal necessarily moots the fraud action in this situation. 37 Finally, we urge ASI to keep in mind that any and all of the Dissenters' alleged damages must be sufficiently connected to ASI's behavior so as to pass the requirements of causation under the law. Our decision is not intended to speak to the issue of causation, which is a factual question beyond the scope of this court's review. See Peter v. Jax, 187 F.3d 829, 834 (8th Cir. 1999). The issue facing this court is whether the election of remedies doctrine bars the Dissenters' fraud claims, and we find it does not.