Court Opinion

ID: 2798358
Source: CourtListenerOpinion
Date Created: 2015-05-04 21:05:26.692588+00
Date Added: 2024-06-11T11:29:27.400517
License: Public Domain

This opinion will be unpublished and
                          may not be cited except as provided by
                          Minn. Stat. § 480A.08, subd. 3 (2014).

                               STATE OF MINNESOTA
                               IN COURT OF APPEALS
                                     A14-0793

                                         Joy Folie,
                                        Respondent,

                                             vs.

                                Aging Joyfully, Inc., et al.,
                                       Appellants.

                                    Filed May 4, 2015
                                        Affirmed
                                      Reyes, Judge

                              Hennepin County District Court
                                 File No. 27CV1221883

Gary L. Huusko, Dakota Law, P.L.L.C., Lakeville, Minnesota (for respondent)

John M. Mulligan, John F. Mulligan, Mulligan & Bjornnes, P.L.L.P., Minneapolis,
Minnesota (for appellant)

       Considered and decided by Bjorkman, Presiding Judge; Hudson, Judge; and

Reyes, Judge.

                         UNPUBLISHED OPINION

REYES, Judge

       This appeal arises from a shareholder dispute in which respondent obtained

judgment against appellants for wrongful termination, breach of fiduciary duty, and

unfairly prejudicial conduct under Minn. Stat. § 302A.751 (2014). Appellants assert that

the district court abused its discretion by (1) awarding equitable relief to respondent;
(2) awarding attorney fees; and (3) holding individual appellants personally liable. We

affirm.

                                            FACTS

          Over the course of eight years, respondent Joy Folie and appellant Joy Hansen

worked together at the Veterans Administration hospital. Based on their good working

relationship, the two began plans to open their own residential-care facility for seniors.

Joy Hansen’s husband, appellant Ken Hansen, approached his brother and sister-in-law,

appellants John and Rahkel Hansen, his mother, appellant Myrt Hansen, and his aunt and

her husband, appellants Merna and Howard Smith, to invest in the start-up business.

          On January 17, 2006, respondent and the individual appellants formed appellant

Aging Joyfully Incorporated (AJI). Respondent invested $75,000 and received 20,000

shares for a 20% ownership stake. The remaining 80,000 shares were divided equally

among the following four investor groups, which each invested $75,000: (1) Ken and Joy

Hansen; (2) John and Rahkel Hansen; (3) Myrt Hansen; and (4) Merna and Howard

Smith. Howard Smith passed away in 2011, and his shares were transferred to his

surviving spouse, Merna Smith. Respondent was the only person unrelated to the

Hansens with any ownership stake in AJI.

          At AJI’s initial shareholders meeting, respondent and all the individual appellants

were elected to the board of directors. Joy Hansen was elected as president and secretary,

and respondent was elected as vice-president and treasurer. From the outset of AJI’s

operations, respondent was employed as AJI’s administrator and Joy Hansen was

                                                2
employed as a registered nurse. Both women were involved in the day-to-day

management of AJI.

       AJI’s bylaws require a minimum of 10 days’ notice to every shareholder before

any shareholder meeting. The bylaws specify that waiver of the notice requirement shall

be provided in writing or by attendance at the meeting. The bylaws also provide that a

quorum only exists if a shareholder meeting is attended by “[a]ll of the outstanding shares

of the Corporation entitled to vote, represented in person or by proxy.” Absent

attendance by all shareholders, no quorum exists and no official business can be

transacted. Similarly, the bylaws require 10 days’ notice of any board meeting to all

directors and the presence of all directors for a quorum. The board of directors can only

act upon the majority vote of the directors taken at a meeting when a quorum is present.

The bylaws allow for the removal of a director upon a shareholder vote, but only at a duly

called special meeting or annual meeting, both of which require a 10-day notice and a

quorum to take any action.

       In February 2006, respondent and the individual appellants met with AJI’s

corporate counsel to discuss the terms of a Buy-Sell Agreement governing the

redemption of shares from AJI’s shareholders. An agreement was circulated to the

parties but was not signed.

       Since its formation, AJI has owned and operated a 10-bed assisted-living facility.

In 2009, the working relationship between respondent and Joy Hansen began to

deteriorate. The conflict persisted, and during a July 2011 shareholder and director

                                            3
meeting, it was suggested that the two mediate their dispute. The parties participated in

mediation but failed to resolve their conflict.

       At a board meeting held on July 30, 2011, Ken Hansen informed all of the

shareholders that they had never signed the Buy-Sell Agreement presented in 2006. Ken

Hansen presented the 2011 Buy-Sell Agreement, representing that it was the same as the

2006 version except for a change relating to the purchase of shares by a surviving spouse

in the event of a death. But the two agreements contained other significant differences,

including the addition of section 5.3.3., which allows the termination of a shareholder’s

employment upon the unanimous agreement of the other shareholders and states that such

termination can occur with or without cause.

       AJI held an annual shareholder meeting on March 25, 2012. During that meeting,

appellants discussed the deteriorating relationship between respondent and Joy Hansen.

The minutes of the meeting read:

              All agreed a change is required.        With no feasible
              alternatives, the following three options were identified:
              1) Find a buyer and sell the business; 2) Joy Hansen end
              employment; or 3) Joy Folie end employment.

              Note: Ending employment does not require [AJI] shares to be
              sold.

              Joy Folie suggested ending her employment would be
              appropriate. She requested time to think about the decision.
              She agreed the end of April was enough time.

On April 21, 2012, Ken Hansen emailed copies of the minutes to all the shareholders.

Respondent responded the next day and stated, “To clarify the Personnel Issue, I said I

would consider a buy-out. I have no intention of being a passive investor.” On

                                              4
May 8, 2012, respondent sent a second email to appellants, again asserting that she did

not offer to resign at the March 25 meeting and inquiring as to whether appellants were

trying to terminate her employment. The next day, respondent sent a third email

explaining that she had not resigned but would be willing to do so if there was an

agreement regarding the redemption of her shares. Two days later, respondent offered to

redeem her 20% stake in AJI for $255,800. Ken Hansen, on behalf of appellants, rejected

this offer and made a counter-offer of $53,625, which respondent rejected.

       On May 24, 2012, the individual appellants and AJI’s corporate attorney held a

meeting that was not called in accordance with AJI’s bylaws. Respondent was not given

notice of the meeting, and she did not attend or send a proxy. During this meeting,

appellants determined that respondent had resigned during the March 25 meeting. The

minutes made no mention of respondent’s emails to the contrary. The following day,

respondent was escorted from AJI’s facility.

       Respondent commenced this action in November 2012. In February 2013,

respondent filed a motion for equitable relief under Minn. Stat. § 302A.751. In March

2013, appellants filed a motion for redemption of respondent’s shares under Minn. Stat.

§ 302A.751. The district court ordered the parties to seek appraisal of respondent’s

shares. In September 2013, the district court received confirmation that the parties had

resolved the portion of the case regarding the valuation of the shares and appellants paid

respondent $42,445.50 for her 20% stake. An evidentiary hearing was held, and the

district court awarded respondent lost compensation plus interest from the period of May

25, 2012 to September 30, 2013. The district court also awarded attorney fees to

                                               5
respondent. Appellants filed a motion for a new trial or amended findings, which was

denied. In May 2014, the district court issued an order for judgment awarding

$83,342.03 in damages for lost compensation. This appeal follows.

                                       DECISION

       Appellants argue that the district court abused its discretion by (1) determining

that respondent was entitled to equitable relief under section 302A.751; (2) awarding

attorney fees; and (3) holding the individual appellants jointly and severally liable. We

discern no error.

I.     Equitable relief

       “This court will reverse a district court’s equitable remedy only if the district court

abuses its discretion. A district court abuses its discretion if its decision is against the

facts in the record or if its ruling is based on an erroneous view of the law.” State ex rel.

Swan Lake Area Wildlife Ass’n v. Nicollet Cnty. Bd. of Cnty. Comm’rs, 799 N.W.2d 619,

625 (Minn. App. 2011) (citations and quotations omitted). A district court’s “findings of

fact shall not be set aside unless clearly erroneous,” and when reviewing the district

court’s findings, “this court is limited to deciding whether the findings are clearly

erroneous.” Pedro v. Pedro, 489 N.W.2d 798, 801 (Minn. App. 1992) (quotation

omitted), review denied (Minn. Oct. 20, 1992) (Pedro II). “Clearly erroneous means

manifestly contrary to the weight of the evidence or not reasonably supported by the

evidence as a whole.” Id. (quotation omitted). In Minnesota, “[w]hether a shareholder’s

reasonable expectations have been frustrated is essentially a fact issue.” Gunderson v.

Alliance of Computer Prof’ls, Inc., 628 N.W.2d 173, 184 (Minn. App. 2001), review

                                               6
granted (Minn. July 24, 2001), appeal dismissed (Minn. Aug. 17, 2001). “[W]e review

the district court’s factual findings for clear error. . . . To conclude that findings of fact

are clearly erroneous we must be left with the definite and firm conviction that a mistake

has been made.” Rasmussen v. Two Harbors Fish Co., 832 N.W.2d 790, 797 (Minn.

2013) (quotations and citations omitted).

       Appellants argue that the district court abused its discretion by determining that

respondent was entitled to equitable relief under section 302A.751. The Minnesota

Business Corporation Act (MBCA) provides, in relevant part, that a district court “may

grant any equitable relief it deems just and reasonable in the circumstances” if it is

established that the “directors or those in control of the corporation” have acted (1) in a

manner “unfairly prejudicial” or (2) in breach of their fiduciary duty to act in an “honest,

fair, and reasonable manner in the operation of the corporation and the reasonable

expectations of all shareholders.” Minn. Stat. § 302A.751, subd. 1(b)(3), 3a.

       A.      Unfairly prejudicial manner

       Unfairly prejudicial conduct is “conduct that frustrates the reasonable expectations

of all shareholders.” Gunderson, 628 N.W.2d at 184 (Minn. App. 2001). The district

court ruled both that appellants acted in a manner unfairly prejudicial because respondent

had a reasonable expectation of continued employment and that appellants failed to deal

openly, honestly, fairly, and in good faith with respondent. Appellants allege that they

could not act in a manner unfairly prejudicial because respondent did not have a

reasonable expectation of continued employment. Appellants argue that the district

court’s ruling is inconsistent with the record because the 2011 Buy-Sell Agreement

                                                7
removes any expectation for continued employment: “A Shareholder may not be

terminated from an employment position with the Company unless all other Shareholders

agree unanimously to do so. Such termination may be with or without cause.” (Emphasis

added.)

       Shareholder-employees of a closely held corporation “commonly have an

expectation of continuing employment” and, therefore, discharge of a shareholder-

employee may be grounds for equitable relief. Gunderson, 628 N.W.2d at 189. In

determining whether an expectation of continued employment exists and is reasonable,

“courts may rely on written or oral agreements among shareholders or between

shareholders and the corporation” Id. at 185. Written agreements “carry great weight in

determining a shareholder’s reasonable expectations.” Regan v. Natural Res. Group,

Inc., 345 F. Supp. 2d 1000, 1012 (D. Minn. 2004) (applying Minnesota state law); see

also Minn. Stat. § 302A.751, subd. 3a (“[A]ny written agreements . . . between or among

shareholders . . . are presumed to reflect the parties’ reasonable expectations.”).

       Despite the “great weight” usually accorded to written agreements, Regan 345
F. Supp. 2d at 1012, we have also held that they “are not dispositive of shareholder

expectations in all circumstances,” and that shareholder expectations often “arise from

understandings that are not expressly stated in the corporation’s documents.” Gunderson,
628 N.W.2d at 186. We have further noted that, in a closely held corporation, the “nature

of the employment” can create a reasonable expectation that the employment is not

terminable at will. Pedro v. Pedro, 463 N.W.2d 285, 289 (Minn. App. 1990), review

denied (Minn. Jan. 24, 1991) (Pedro I). Such is the case here.

                                              8
       Ken Hansen’s own minutes indicate that respondent did not agree to terminate her

employment at the March 25 meeting and instead reflect that she needed time to consider

that option. Respondent sent three follow-up emails reiterating her stance that she was

not terminating her employment. In addition, it is undisputed that the subsequent May 24

meeting was not called in accordance with the bylaws. Without providing notice to

respondent and without respondent’s presence or proxy, appellants held a meeting where

they determined, on their own, that respondent had resigned on March 25, 2012. But

because respondent was not given proper notice and was not afforded the opportunity to

send a proxy according to the bylaws, no quorum was present, and no official business

could take place. Moreover, appellants’ reliance on the 2011 Buy-Sell Agreement is

undercut by the stipulation that “Ken Hansen presented the Buy-Sell Agreement to the

shareholders as the same as the 2006 Buy Sell Agreement version except for a change to

section 4.1 relating to the purchase of shares by a surviving spouse in the event of death.”

As respondent points out, the language of section 5.3.3 on which appellants rely—“[s]uch

termination may be with or without cause”—only appears in the 2011 version and not the

2006 version.1 Accordingly, the district court did not clearly err in finding that appellants

frustrated respondent’s reasonable expectation of continued employment. See Fletcher v.

St. Paul Pioneer Press, 589 N.W.2d 96, 101 (Minn. 1999) (“If there is reasonable

1
  The 2011 version contained changes to other provisions of the agreement as well.
Sections 5.1 and 5.2 of the 2006 version were deleted from the 2011 version. In addition,
section 5.3 was heavily modified, including the removal of the shareholder’s obligation to
buy out a terminated shareholder’s shares and replacing it with an option to purchase
those shares.

                                             9
evidence to support the [district] court’s findings of fact, a reviewing court should not

disturb those findings.”).

       Appellants next argue that the district court committed clear error by failing to

acknowledge the parties’ 2011 Buy-Sell Agreement. While it is true that the 2011 Buy-

Sell Agreement goes unmentioned in the district court’s final order, the agreement was

extensively discussed in the parties’ briefs to the district court and during the hearing.

The district court had a variety of evidence before it as to whether respondent was an at-

will employee or had a reasonable expectation of continued employment. The fact that it

found respondent’s evidence more persuasive does not constitute clear error. Fletcher,
589 N.W.2d at 101 (“It is not the province of this court to reconcile conflicting evidence.

On appeal, a [district] court’s findings of fact are given great deference, and shall not be

set aside unless clearly erroneous.”).

       We note that, while more discussion on the 2011 Buy-Sell Agreement might have

been beneficial, such a discussion was not necessary because the 2011 Buy-Sell

Agreement was not implicated in this matter. It is true that section 5.3.3 of the 2011 Buy-

Sell Agreement allows for shareholder termination upon unanimous agreement of the

other shareholders. Moreover, section 13.14 of the agreement allows for the provisions

of the 2011 Buy-Sell Agreement to supersede the provisions of the bylaws when the two

conflict. But here, there is no conflict between the two. The 2011 Buy-Sell Agreement is

silent on the required procedures prior to taking any corporate action. Those procedures

are instead laid out in AJI’s bylaws, which state that official business can only be

conducted after 10 days’ notice to every shareholder and when a quorum is present, and a

                                             10
quorum is present only if the meeting is attended by “[a]ll of the outstanding shares of

[AJI] entitled to vote, represented in person or proxy.” Therefore, before any action

under the Buy-Sell Agreement on termination can take place, the bylaws first dictate that

such action can only occur if a quorum is present and proper notice has have been

provided. It is undisputed that those procedures were not followed.

       B.     Fiduciary duty

       The fiduciary duty that exists between shareholders of a close corporation is based

both in statute and the common law. Berreman v. West Publ’g Co., 615 N.W.2d 362, 369

(Minn. App. 2000), review denied (Minn. Sept. 26, 2000) (concluding that the common-

law fiduciary duty between shareholders exists separately and distinctly from the

requirements of the MBCA). The MBCA describes the fiduciary duty in section

302A.751, subdivision 3a, which states that when “determining whether to order

equitable relief,” the district court must:

              take into consideration the duty which all shareholders in a
              closely held corporation owe one another to act in an honest,
              fair, and reasonable manner in the operation of the
              corporation and the reasonable expectations of all
              shareholders as they exist at the inception and develop during
              the course of the shareholders’ relationship with the
              corporation and with each other.

Minn. Stat. § 302A.751, subd. 3a. The common law has also described this duty,

reasoning that because the relationship among shareholders in closely held corporations

is analogous to that of partners, “the law imposes upon them highest standards of

integrity and good faith in their dealings with each other.” Prince v. Sonnesyn, 222
Minn. 523, 535, 25 N.W.2d 468, 472 (1946) (quotation omitted); see also Westland

                                              11
Capitol Corp. v. Lucht. Eng’g Inc., 308 N.W.2d 709, 712 (Minn. 1981) (describing a

close corporation as “a partnership in corporate guise”). Thus, under the common law,

shareholders have “a fiduciary duty to deal openly, honestly and fairly with other

shareholders.” Evans v. Blesi, 345 N.W.2d 775, 779 (Minn. App. 1984), review denied

(Minn. June 12, 1984). The common-law fiduciary duty between shareholders is

frequently referred to as a “duty of good faith and fair dealing.” Gunderson, 628 N.W.2d

at 185; see also Pedro II, 489 N.W.2d at 801 (“In a fiduciary relationship the law

imposes upon [shareholders the] highest standards of integrity and good faith in their

dealings with each other.”) (quotation omitted). “Whether a fiduciary duty has been

breached generally is a question of fact.” Berreman, 615 N.W.2d at 367.

       The district court’s findings show that under either the statutory or the common-

law definition, the appellants breached their fiduciary duty. Appellants deny that they

breached any fiduciary duty to respondent, and instead argue that respondent breached

her fiduciary duty to appellants. Specifically, appellants argue that it was not “fair and

equitable” for respondent to propose a redemption price of $255,800. We disagree. In

2011, AJI hired an appraiser who calculated AJI’s “going concern value” as $1,279,000.

The Minnesota Supreme Court has held that “fair value, in ordering a buy-out under the

[MBCA], means the pro rata share of the value of the corporation as a going concern.”

Advanced Commc'n Design, Inc. v. Follett, 615 N.W.2d 285, 290 (Minn. 2000). Because

respondent’s initial figure of $255,800 reflected 20% of the going concern value provided

by AJI’s own appraiser, it cannot be said that respondent breached any fiduciary duty of

good faith and fair dealing.

                                             12
       It is undisputed that appellants failed to follow the notice requirements mandated

by the bylaws. Moreover, appellants failed to respond to any of respondent’s emails

regarding her employment status even though appellants’ own meeting minutes indicate

that respondent still believed she was employed. And, as discussed previously,

appellants’ reliance on the 2011 Buy-Sell Agreement is unsupported. Accordingly, the

district court’s finding that appellants breached their fiduciary duty is not “manifestly

contrary to the weight of the evidence” and therefore not clearly erroneous. Lyon, 304
Minn. at 201, 229 N.W.2d at 524.

II.    Attorney fees

       Appellants next argue that the district court abused its discretion with regard to the

award of attorney fees. In awarding attorney fees, the district court stated that appellants

acted arbitrarily when they failed to follow corporate formalities and wrongfully

terminated respondent. The MBCA allows the district court to award attorney’s fees “[i]f

the [district] court finds that a party to a proceeding brought under this section has acted

arbitrarily, vexatiously, or otherwise not in good faith.” Minn. Stat. § 302A.751, subd. 4.

In awarding attorney fees, the district court must find that: (1) there was a breach of a

fiduciary duty and (2) the breaching party acted “arbitrarily, vexatiously, or otherwise not

in good faith.” See Pedro I, 463 N.W.2d at 290. Because we have already determined

that the district court’s first finding that appellants breach their fiduciary duty to

respondent was not clearly erroneous, this section will focus solely on the second issue.

       Appellants contend that they did not act “arbitrarily, vexatiously, or otherwise not

in good faith” because: (1) their May 2012 redemption offer was higher than what was

                                               13
later determined to be the worth and (2) the bulk of the fees were incurred in arguing

about the value of the shares. Neither argument is relevant to whether appellants acted

arbitrarily when they failed to follow their own bylaws. Because appellants have offered

no explanation as to why the bylaws were not followed during the May 24 meeting, the

district court was well within its discretion in concluding that their actions were arbitrary

and otherwise not in good faith. See id (“The Minnesota Supreme Court has stated often

that the allowance of attorney fees rests within the trial court’s discretion.”).

III.   Joint and several liability

       Lastly, appellants argue that the district court abused its discretion when it held

that the individual appellants were jointly and severally liable. Our opinion in Pedro II is

instructive on this issue. In Pedro II, we acknowledged that appellant had waived the

opportunity to challenge the joint- and several-liability issue, but noted that, “[i]n any

event, Minn. Stat. § 302A.751 allows a trial court to grant any equitable relief it deems

just and reasonable under the circumstances. Appellants cite no authority that prohibits a

trial court’s ability to order joint and several[] liability.” 489 N.W.2d at 803. The same

can be said here. This conclusion is further supported by Minn. Stat. § 302A.251, subd.

4(b) (2014), which allows directors to limit their personal liability to shareholders for

monetary damages resulting from a breach of fiduciary duty, except for “acts or

omissions not in good faith.” As we have previously discussed, appellants have breached

their duty of good faith and fair dealing and thus Minnesota’s personal liability

limitations do not apply. Because district court has “broad equitable powers in

                                              14
fashioning relief,” it did not abuse its discretion in determining that the individual

appellants are jointly and severally liable. See Pedro II, 489 N.W.2d at 803.

       Affirmed.

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