This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2004).
IN COURT OF APPEALS
Daniel Ahlberg, et al.,
Timm Medical Technologies, Inc.,
n/k/a Endocare, Inc.,
Filed January 17, 2006
Hennepin County District Court
File No. 02-12068
Thomas P. Malone, Karen K. Kurth, Barna, Guzy & Steffen, Ltd., 200 Coon Rapids Boulevard, 400 Northtown Financial Plaza, Minneapolis, Minnesota 55433 (for appellants)
David Y. Trevor, Dorsey &
Considered and decided by Lansing, Presiding Judge; Hudson, Judge; and Dietzen, Judge.
U N P U B L I S H E D O P I N I O N
appeal from summary judgment in an action by minority shareholders in a close
corporation, appellants argue that the district court: (1) abused its
discretion in determining that appellant’s motion to amend their complaint to
add additional parties was procedurally barred; (2) erred in determining that
appellants’ proposed new claims would not survive summary judgment; and (3) erred
in concluding that Delaware law does not impose a fiduciary duty on a close
corporation to act in the shareholders’ best interests. Because appellants failed to demonstrate good
cause to amend the district court’s scheduling order and because the district
court did not err in its interpretation of
In 1997, Gerald Timm founded Timm Research Company (Timm Research) to develop a urinary-incontinence product. Despite the revenue generated by Timm Research’s other products, by the spring of 1998, the company required additional operating capital. To raise the needed capital, Timm Research offered shares of common stock to 15 private placement investors. In April 1998, appellants purchased 35,000 shares of the common stock offered in the private placement for a total investment of $105,000.
In the fall of 1998, Timm Research exhausted the capital raised through the private placement offering and contacted institutional investors to secure additional funding. Heath Care Capital Partners (HCCP) was willing to invest in order to facilitate Timm Research’s acquisition of a product line from a company called Imagyn Technologies subject to certain conditions: (a) Timm Research would merge with Timm Medical Technologies, Inc. (Timm Medical), a Delaware corporation; (b) HCCP would receive a new series of preferred stock; and (c) HCCP would appoint additional members of Timm Medical’s board. Timm Research merged with Timm Medical and issued a new preferred series of stock, “Series A,” which contained a liquidation preference and preemptive rights.
The acquisition of the Imagyn product lines failed to generate the revenue anticipated, and Timm Medical continued to need capital. In 1999 and 2000, the board of directors approved the issuance of two additional series of preferred stock, “Series B,” and “Series B-1,” which also had liquidation preferences. Timm Medical sold shares of Series B and Series B-1 as a package in conjunction with two warrants for the purchase of common stock. Common stock shareholders were not given notice of the issuance of the preferred shares or the opportunity to invest.
In the summer of 2001, Timm Medical’s need for capital became critical. If the company could not secure additional investment, it would have to declare bankruptcy or otherwise liquidate itself. HCCP, which had undergone a name change to Ferrar, Freeman and Thompson (FFT), indicated a willingness to advance Timm Medical $750,000 in order to sustain the company for a short time, giving it time to locate another investor. FFT conditioned its investment on the simplification of the capital structure.
Timm Medical board adopted a “Plan of Recapitalization” (plan) on October 1,
2001. The plan consolidated all of the
investment represented by the Series B and Series B-1 shares, including the
purchase price of the shares, all the accrued dividends, the warrants, and all
of FFT’s bridge loans and converted this value into a new preferred stock,
“Series B,” which had a liquidation preference and a conversion right to common
stock. The plan also included a reverse
4-to-1 stock split in common stock, to increase the price of the post-split
shares and make the company more attractive to potential investors. The plan was approved between October 1 and
5, 2002, by the written consents of the holders of a majority of shares of each
class of the company’s stock.
Appellants, together with other minority shareholders whose written
consents were not obtained prior to the approval of the plan, were informed of
the recapitalization by letter dated
After Timm Medical implemented the plan in October 2001, Endocare, Inc. (Endocare) approached the company about a possible acquisition for approximately $36 million, paid in a combination of cash and Endocare stock. Timm Medical’s board negotiated the merger, which was later approved by the holders of over 90% of each of the classes of stock. The board allocated the merger proceeds based on the legal rights possessed by each class of stock. Appellants were entitled to receive $24,183.78 as compensation for their shares of Timm Medical common stock.
commenced suit in July 2002, seeking a declaratory judgment that the reverse
stock split was void due to lack of prior notice to the shareholders. Following a successful appeal to this court,
in January 2004, appellants filed an amended complaint, adding a second count
alleging that respondent, through its board of directors and principals,
breached its fiduciary duty of due care, loyalty, and good faith owed to
appellants by reducing their investment without notice and not treating them
openly, honestly, or fairly. The
district court reopened discovery and established formal deadlines for
nondispositive motions, including motions to join additional parties and
motions to amend the pleadings. The
district court’s scheduling order of
filed a motion for summary judgment on
D E C I S I O N
challenge the district court’s decision denying them leave to amend their
complaint to add the individual directors as party defendants, arguing that
their motion to amend was not procedurally barred. The decision whether to permit a party to
amend the pleadings rests within the discretion of the district court and will
not be reversed absent a clear abuse of that discretion. Warrick
v. Giron, 290 N.W.2d 166, 169 (
The district court determined that appellants’ November 2004 motion to amend—which was filed months after the deadline for amending pleadings, at the close of discovery, and after respondent’s motion for summary judgment on the then operative pleading—was untimely. In addition, the district court found that permitting appellants’ motion to amend would result in significant delay, prejudicing both respondent and the unserved potential individual defendants, who had no in-depth knowledge of the pending litigation.
Appellants argue that the district
court’s decision to deny leave to amend was governed by
Appellants argue that there are several factors relevant to the issue of timeliness and good cause in this instance, including: (1) the complexity and volume of discovery, including the production of over 3,000 documents; (2) the production of significant agreements, such as the “Series B” stock purchase agreement and the signed stock subscription warrant agreement, after the deadline for amending the complaint and completing discovery had passed; and (3) the delay in deposing respondent’s witness. Appellants contend that these documents were critical in analyzing the terms of the recapitalization and the specific acts of wrongdoing by the individual directors.
The district court did not abuse its discretion in concluding that appellants presented an inadequate showing of good cause to modify the scheduling order. As respondent notes, appellants alleged in their January 2004 amended complaint that respondent as a corporation, but through its individual directors, breached a fiduciary duty to appellants. Thus, appellants had already concluded that the individual directors’ conduct was blameworthy, but did not seek to add them as parties at that time. While the additional discovery may have been necessary to help appellants piece together respondent’s “warrant scheme,” appellants have not demonstrated how the receipt of these documents was necessary to state a claim against the individual directors. Moreover, the record does not reflect that appellants moved to compel discovery of these documents despite knowledge of the district court’s impending deadline for nondispositive motions.
In addition, the record reflects clear prejudice to respondent if appellants were allowed to modify the scheduling order. The Minnesota Supreme Court has identified several factors to consider when examining whether modification of a pretrial order is appropriate including: “(1) the degree of prejudice to the party seeking the modification; (2) the degree of prejudice to the party opposing the modification; (3) the impact of a modification at that stage of the litigation; and (4) the degree of willfulness, bad faith, or inexcusable neglect on the part of the party seeking modification.” Cotroneo, 343 N.W.2d at 649.
the record reflects that at least two of the proposed individual defendants had
no knowledge that appellants had commenced suit. Granting leave to amend the scheduling order
would have resulted in considerable delay and expense for respondent because,
at a minimum, each new defendant would require an additional deposition and
discovery. Finally, appellants brought
this motion after respondent’s dispositive motion for summary judgment, and roughly
ten months after filing its January 2004 amended complaint. The motion was untimely. See
Cybyske v. Indep. Sch. Dist. No. 196,
347 N.W.2d 256, 264 (
The district court did not abuse its discretion in denying appellants’ leave to amend their complaint. Because we are affirming the district court’s order on procedural grounds, we decline to address the merits of appellants’ claims for breach of fiduciary duty and fraud.
also challenge the district court’s grant of respondent’s motion for summary
judgment, arguing that the district court erroneously concluded that
district court concluded Timm Medical, as a corporation, owed no fiduciary duty
to its shareholders and, thus, cannot breach duties of care, loyalty, or good
faith. The district court’s conclusion
is rooted firmly in existing
argue that this court should create an exception in
 A close corporation is “[a] corporation whose stock is not freely traded and is held by only a few shareholders (often within the same family).” Black’s Law Dictionary 341 (7th ed. 1999).