This opinion will be unpublished and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.,
Gerald W. Timm, et al.,
Filed June 20, 2006
Hennepin County District Court
File No. MC 05-001918
Thomas P. Malone, Karen K. Kurth, Barna, Guzy & Steffen, Ltd., 400 Northtown Financial Plaza, 200 Coon Rapids Boulevard, Coon Rapids, MN 55433 (for appellants)
David Y. Trevor, Dorsey & Whitney, LLP,
Considered and decided by Hudson, Presiding Judge; Worke, Judge; and Crippen, Judge.[*]
U N P U B L I S H E D O P I N I O N
On appeal from grant of summary judgment, appellants argue that (1) the district court erroneously applied the doctrine of collateral estoppel because the issues were not necessary and essential to the resulting judgment in the prior action and they were denied a full and fair opportunity to be heard; and (2) genuine issues of material fact exist as to whether respondents breached their fiduciary duty, were materially self-interested, and engaged in fraud. We affirm.
In 1998, appellants Daniel Ahlberg and Linda Ahlberg purchased 35,000 shares of common stock in Timm Research Company (Timm Research) for an investment of $105,000. Ferrar, Freeman, and Thompson (FFT)(at the time known as Health Care Capital Partners), then provided Timm Research with the capital to acquire business lines from Imagyn Technologies (Imagyn), a company in which respondent Gerald W. Timm (Timm) had owned stock. FFT’s investment was conditioned on incorporation in Delaware by merging with Timm Medical Technologies, Inc. (Timm Medical); issuance of a new series of preferred stock containing a liquidation preference, common-stock convertibility, and preemptive rights; and FFT appointments to Timm Medical’s board. Appellants declined to invest in the preferred stock.
The acquired Imagyn assets failed to assist Timm Medical financially. In 1999, respondent board of directors approved issuance of a new preferred stock, Series B, which had a liquidation preference. Series B was sold with warrants for the purchase of common stock. In 2000, Timm Medical issued B-1 preferred stock—similar to Series B. Not all common-stock shareholders were notified of the issuance of the preferred shares or given the opportunity to invest.
In 2001, in order to simplify Timm Medical’s capital structure and to make it more attractive to potential investors, respondents approved a recapitalization plan (plan). Investments represented by Series B, and B-1, warrants sold with Series B and B-1, accrued dividends, bridge loans, and accrued interest on the bridge loans were converted into a new Series B preferred stock which had a liquidation preference. The plan also included a 4-to-1 reverse split. The plan was approved by written consent of stockholders owning a majority of each class of stock. By letter dated December 17, 2001, appellants and other stockholders who did not submit written consent were notified of the plan. In 2002, Timm Medical merged with Endocare, Inc. (Endocare). The merger was approved by more than 90% of the holders of each class of stock. Merger proceeds were allocated based on the legal rights of each class of stock. Appellants were entitled to $24,183.78.
In July 2002, appellants sought a
declaratory judgment that the reverse stock split was void for lack of notice (Timm I).
The district court granted summary judgment in favor of Timm Medical,
but this court remanded to permit appellants time for discovery. See
Ahlberg v. Timm Med. Techs., Inc., No. A03-438 (
D E C I S I O N
“On appeal from summary judgment, we
ask two questions: (1) whether there are any genuine issues of material fact
and (2) whether the [district court] erred in [its] application of the law.” State
by Cooper v. French, 460 N.W.2d 2, 4 (
argue that collateral estoppel does not preclude litigation of their claims
against individual directors. The
availability of collateral estoppel is a mixed question of law and fact subject
to de novo review. Falgren v. State, Bd. of Teaching, 545 N.W.2d 901, 905 (
Collateral estoppel applies when the following are met:
(1) the issue must be identical to one in a prior adjudication; (2) there was a final judgment on the merits; (3) the estopped party was a party or was in privity with a party to the prior adjudication; and (4) the estopped party was given a full and fair opportunity to be heard on the adjudicated issue.
Hauschildt v. Beckingham, 686 N.W.2d 829, 837 (
Necessary and Essential
Appellants argue that the adjudicated issue was not necessary and essential to the prior judgment. Appellants contend that in Timm I appellants litigated a motion to amend and the adjudication on the merits of appellants’ breach-of-fiduciary-duty and fraud claims was not necessary to that resulting judgment. Appellants rely on the Restatement (Second) of Judgments § 27 cmt. h. (1982) that states, “[i]f issues are determined but the judgment is not dependent upon the determinations, relitigation of those issues in a subsequent action between the parties is not precluded.” The party against whom these issues were determined is not precluded because the unessential determination has “the characteristics of dicta” and generally cannot be appealed. Restatement (Second) of Judgments § 27 cmt. h.
It is undisputed that the adjudication on the merits did not affect the decision to deny the motion to amend on procedural grounds, and in affirming, this court declined to address appellants’ challenge on the merits. Thus, if collateral estoppel applied, appellants would have no means of appealing the adjudication on the merits. Given that respondents were not named parties in Timm I and are not substantially prejudiced by relitigation, the adverse consequences of applying collateral estoppel outweigh the interest in avoiding the burden of relitigation.
Respondents argue that collateral estoppel was appropriate because the merits of appellants’ claims were “distinctly contested” and “directly determined.” Respondents contend that when a district court identifies two alternative grounds for its decision, both grounds have collateral-estoppel effect so long as the district court specifically determined the issue on which collateral estoppel was based. See In re Trusts Created by Hormel, 504 N.W.2d 505, 510 (Minn. App. 1993), review denied (Minn. Oct. 19, 1993). But respondents mischaracterize the issue here; it is not whether two alternative grounds for one decision on the merits both have preclusive effect, but whether a decision has preclusive effect when the district court deemed it unnecessary to reach the merits because the claim was procedurally improper. Thus, determinations that are not essential to the judgment do not have preclusive effect.
Fully and Fairly Litigated
next argue that they were not afforded a full and fair opportunity to litigate
their claims in Timm I. Ultimately, “collateral estoppel claims are
not determined by measuring the manner in which each party conducted
litigation, but rather according to the opportunity to address an issue.” Williamson
v. Guentzel, 584 N.W.2d 20, 23-24 (Minn. App. 1998), review denied (Minn. Nov. 24, 1998). Whether a party had a full and fair
opportunity to litigate generally focuses on “whether there were significant
procedural limitations in the prior proceeding, whether the party had the
incentive to litigate fully the issue, or whether effective litigation was
limited by the nature or relationship of the parties.” State
v. Joseph, 636 N.W.2d 322, 328 (
Appellants contend that they were denied oral argument on their motion to amend. Appellants suggest that the district court’s refusal to permit oral argument demonstrates bias against appellants. Appellants’ argument fails. First, the claims asserted in the second amended complaint in Timm I raised the identical issues presented here against Timm Medical, which appellants argued owed them a fiduciary duty. Second, appellants had an opportunity to argue on Timm Medical’s motion for summary judgment. As evidence of the alleged breach, appellants submitted documents and deposition testimony reflecting the actions of the individual directors, and appellants argued the propriety of the reverse stock split, warrant cancellation/conversion, acquisition of Imagyn, and recapitalization. Appellants do not dispute that they were afforded an opportunity to present evidence, but suggest that the district court was biased because it did not credit the conclusions of appellants’ forensic accountant. Appellants fail to demonstrate that they were denied a full and fair opportunity to litigate in Timm I. But the district court erred in applying the doctrine of collateral estoppel because the adjudication on the merits was not necessary and essential to the resulting judgment.
Genuine Issues of Material Fact
Appellants argue that the district court erred in granting summary judgment because genuine issues of material fact exist. Appellants contend that issues of fact remain regarding whether respondents breached their fiduciary duty when they converted Series B and B-1 into preferred stock, approved a reverse stock split, maintained a complex capital structure, and acquired Imagyn when respondent Timm possessed an interest in Imagyn.
a shareholder attempts to rebut the rule based on an alleged self-interest, the
shareholders must show a material self-interest and that the self-interested
members controlled or dominated the board, or failed to disclose their interest
when a reasonable board member would have considered the interest
significant. Cinerama, Inc. v. Technicolor, Inc.,
663 A.2d 1156, 1168 (Del. 1995). Whether
a director abandoned his or her duty of loyalty or duty of care is a question
of fact. Cede, 634 A.2d at 360. To survive
summary judgment, appellants have the burden of establishing evidence to
support each essential allegation. Murphy v. Godwin, 303 A.2d 668, 673
Appellants argue that they produced
sufficient evidence that respondents were disloyal by approving recapitalization. Appellants allege that respondents had a
material self-interest in the plan because they either owned old Series B or B-1,
or were beholden to FFT because they invested in FFT or were appointed by FFT. To establish that a director’s independence
was compromised by a financial interest, appellants had to demonstrate that the
interest was of “sufficiently material importance, in the context of the director’s
economic circumstances, as to have made it improbable that the director could
not perform her fiduciary duties” without undue influence. In re
Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617 (Del. Ch. 1999). Appellants’ allegations of self-interest do
not meet the threshold necessary to rebut the presumption of the business-judgment
rule. First, appellants failed
to produce any evidence to suggest that respondents’ actions were motivated by
improper or selfish interests. And appellants
had the initial burden of establishing some credible and direct evidence to
support their essential allegations in order to survive summary judgment. See
Murphy, 303 A.2d at 673. Finally, a director’s fiduciary
duty requires him to advance and protect the interests of all shareholders. Gilbert v. El Paso Co., 575 A.2d 1131,
Here, appellants showed that two board members had a financial interest in the plan as shareholders, but failed to demonstrate how that interest was material and debilitating. Further, appellants’ assertion that FFT-appointed directors were incapable of exercising their duties independently lacks credible evidentiary support. The only evidence appellants introduced was the number of shares the board members and FFT held. Appellants contend that the lack of evidence of financial information is due to Timm Medical’s refusal to permit discovery. But appellants conducted voluminous discovery in Timm I and did not move to compel additional discovery.
Because appellants have not demonstrated a material self-interest and provide no authority for the proposition that a director cannot act impartially because of a financial interest in a transaction, appellants have failed to rebut the presumption of the business-judgment rule. The district court did not err in granting summary judgment.
Appellants next argue that they put forth sufficient evidence of reliance on material misrepresentations in the December 17, 2001 letter to survive summary judgment. Appellants contend that misrepresentations prevented them from identifying the appropriate “wrongdoer” and that they were damaged by litigating Timm I.
To establish a fraud claim under
[*] Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.