Opinion
Civ. No. 96-1177 (JEL/JGL)
March 20, 2003
Robert M. Lewis, Esq., and Judith A. Rogosheske, Esq., Best Flanagan LLP, for Plaintiffs Popp Telcom, Inc., and Washington Sharecom, Inc., James E. Dorsey, Esq., and Emily E. Duke, Esq., Fredrikson Byron, P.A., for Plaintiffs Humbird Securities Company and Northern Securities Company.
Timothy R. Thornton, Esq., and Richard G. Mark, Esq., Briggs Morgan, P.A., appeared for Defendants American Sharecom, Inc., Steven C. Simon, James J. Weinert, and William J. King.
ORDER
Popp Telcom, Inc., Humbird Securities Company, Northern Securities Company, and Washington Sharecom, Inc. (collectively, Plaintiffs) are former stockholders of American Sharecom, Inc. (Corporation). The Plaintiffs brought this action against the Corporation, Steven C. Simon, James J. Weinert, and William J. King (collectively, Defendants), alleging several claims under federal and state law based on conduct that occurred before, during, and after a freeze-out merger. The matter is before the Court on the Defendants' Motion for Summary Judgment. For the reasons set forth below, the Court grants the motion.
I. BACKGROUND
For a detailed recitation of the events in this case, see Popp Telcom, Inc. v. American Sharecom, Inc., 210 F.3d 928, 931-34 (8th Cir. 2000). Briefly, in 1992, the Corporation's Board of Directors approved a freeze-out merger with Sharecom Holdings, Inc., a corporation owned by Simon and Weinert. The Plaintiffs opposed the merger and exercised their rights under Minnesota law to challenge the proffered payment per share. The merger became effective on May 8, 1992. The Corporation paid all shareholders except the Plaintiffs, and filed a petition for determination of value. The valuation proceeding revealed the stock had been undervalued, and the Corporation was ordered to compensate the Plaintiffs accordingly. Approximately five months after the state court determined the fair value of the Plaintiffs' shares, Rochester Telephone Corporation (RTC) announced that it was purchasing the Corporation for approximately $190 million in RTC stock. Based on this sale and additional investigation, the Plaintiffs concluded the Defendants had defrauded the state court during the valuation proceeding.
Before the valuation proceeding was concluded, the Plaintiffs commenced this action in state court by serving a complaint on the Defendants. In November 1996, the Plaintiffs amended the complaint and filed it. The Defendants removed the action to federal court the next month. In 1997, the Defendants' motion to dismiss was granted in part, and in 1998, the Defendants' motion for summary judgment was granted. The Eighth Circuit reversed and remanded. Id. at 931.
The Plaintiffs assert a claim under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961-1968 (2000), and state law claims for fraud, unjust enrichment, breach of fiduciary duty, unfairly prejudicial conduct, violation of the Minnesota Securities Act, Minn. Stat. ch. 80A (2002), violation of the Minnesota Consumer Fraud Act, Minn. Stat. §§ 325F.68-.70 (2002), theft, and transfer of stolen property. The Defendants now move for summary judgment.
II. DISCUSSION
Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party "always bears the initial responsibility of informing the district court of the basis for its motion," and must identify "those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party satisfies its burden, Rule 56(e) requires the nonmoving party to respond by submitting evidentiary materials that designate "specific facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In determining whether summary judgment is appropriate, a court must look at the record and any inferences to be drawn from it in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
A. RICO
On December 22, 1995, the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub.L. No. 104-67, § 107, 109 Stat. 737, 758 (1995), took effect. The PSLRA amended 18 U.S.C. § 1964(c), to provide that "no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of [RICO]." According to the Defendants, the PSLRA bars the Plaintiffs' RICO claim because it is predicated on fraud in connection with the sale of the Corporation's stock, and because the Plaintiffs first asserted it after the PSLRA took effect. The Plaintiffs do not contest that the RICO claim is based on securities fraud. Instead, they argue the PSLRA does not bar the RICO claim because the alleged predicate acts took place before the PSLRA's enactment, and because they commenced the action before the PSLRA's effective date.
To determine whether the PSLRA bars the Plaintiffs' RICO claim, the Court will apply the framework set forth in Landgraf v. USI Film Products, 511 U.S. 244, 280 (1994):
When a case implicates a federal statute enacted after the events in suit, the court's first task is to determine whether Congress has expressly prescribed the statute's proper reach. If Congress has done so, of course, there is no need to resort to judicial default rules. When, however, the statute contains no such express command, the court must determine whether the new statute would have retroactive effect, i.e., whether it would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed. If the statute would operate retroactively, our traditional presumption teaches that it does not govern absent clear congressional intent favoring such a result.
The PSLRA does not expressly prescribe the temporal reach of the amendment to section 1964(c). See Kolfenbach v. Mansour, 36 F. Supp.2d 1351, 1353 n. 7 (S.D.Fla. 1999) (collecting cases). The Court therefore must determine whether application of the PSLRA to the Plaintiffs' RICO claim would have retroactive effect. The amendment to section 1964(c) neither increases a party's liability for past conduct nor imposes new duties with respect to transactions already completed. Accordingly, the Court considers whether it impairs rights a party possessed when he acted. Several courts have addressed this issue in the context of complaints filed after the PSLRA took effect based on conduct that occurred before its enactment. E.g., Scott v. Boos, 215 F.3d 940 (9th Cir. 2000); Fla. Evergreen Foliage v. E.I. Du Pont de Nemours Co., 165 F. Supp.2d 1345 (S.D.Fla. 2001); Columbraria LTD v. Pimienta, 110 F. Supp.2d 542 (S.D.Tex. 2000).
Kolfenbach noted the difference between retroactive application and retroactive effect: "The term `retroactive effect' refers not to the actual application of a new statute to previous conduct, but rather whether such application would have substantive effect, i.e., impermissibly impair rights, increase liability, or impose new duties." 36 F. Supp.2d at 1353 n. 6.
In Scott, the Ninth Circuit concluded that the amendment to section 1964(c) has retroactive effect, 215 F.3d at 947, reasoning that the amendment impairs the rights a party possessed when he acted:
It appears that the PSLRA has retroactive effect because prior to the PSLRA a plaintiff had a RICO claim based on a defendants' [sic] alleged securities fraud, while afterwards a plaintiff does not. In other words, prior to the amendment, the legal consequences of violation of the securities laws included liability under the securities laws and under RICO, while after the amendment, the legal consequences only include liability under the securities laws.
Scott, 215 F.3d at 944-45 (footnote and citation omitted).
Florida Evergreen rejected Scott in favor of Kolfenbach, an earlier decision from the Southern District of Florida. Florida Evergreen, 165 F. Supp.2d at 1359. In Kolfenbach, the plaintiff argued that he possessed a right to bring a civil RICO claim when the conduct underlying the claim occurred, and that retroactive application of section 1964(c) would impair that right. 36 F. Supp.2d at 1353. Kolfenbach distinguished between "extinguishing some amorphous possibility of bringing a claim, and the right to pursue a claim once brought." Id. Assuming a right existed in a securities fraud-based civil RICO action, "it was only the right to pursue a claim that had already been filed before the [PSLRA] came into effect." Id. at 1354; see Columbraria, 110 F. Supp.2d at 548 (rejecting argument that application of PSLRA to RICO claim based in part on conduct that occurred before PSLRA took effect would impair rights plaintiff possessed when it acted).
The Court finds the reasoning of Kolfenbach persuasive and therefore declines to follow Scott. "A statute does not operate `retrospectively' merely because it is applied in a case arising from conduct antedating the statute's enactment or upsets expectations based in prior law." Landgraf, 511 U.S. at 269. Furthermore, "it has long been recognized that `no person has a vested right in any general rule of law or policy of legislation entitling him to insist that it remain unchanged for his benefit.'" ABF Capital Mgmt. v. Askin Capital Mgmt, L.P., 957 F. Supp. 1308, 1320 (S.D.N.Y. 1997) (quoting Chicago Alton R.R. v. Tranbarger, 238 U.S. 67, 76 (1915)). In this case, whatever right the Plaintiffs had to assert a RICO claim based on securities fraud expired upon the enactment of the PSLRA.
The Plaintiffs attempt to avoid the consequence of this conclusion by relying on Fed.R.Civ.P. 15(c)(2), which provides that "[a]n amendment of a pleading relates back to the date of the original pleading when the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading[.]" Before the PSLRA took effect, the Plaintiffs commenced this action by serving a complaint on the Defendants in May 1994. See Minn.R.Civ.P. 3.01. Almost one year after the PSLRA took effect, the Plaintiffs first asserted the RICO claim by amending the complaint. The Plaintiffs argue that the amended complaint relates back to May 1994, and that the RICO claim therefore precedes the PSLRA. The PSLRA therefore cannot, the Plaintiffs argue, bar the RICO claim. See Mathews v. Kidder, Peabody, Co., 161 F.3d 156, 157 (3d Cir. 1998) (holding PSLRA does not apply to securities-based RICO claim pending on date of PSLRA's enactment). Courts typically consider whether an amended complaint should relate back to the date of the original complaint in the context of statutes of limitation, Sunkyong Int'l, Inc. v. Anderson Land Livestock Co., 828 F.2d 1245, 1252 (8th Cir. 1987), but courts have applied the relation back doctrine in other contexts, Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1543 (8th Cir. 1996) (citing cases applying the doctrine to measure back pay, to cure defective service of process, and to confer retroactive jurisdiction on district court). The Court is not aware of any case that has applied the relation back doctrine to avoid application of the PSLRA to a RICO claim first asserted after the PSLRA took effect, and is convinced that application of the doctrine in this case is not warranted. According to the Plaintiffs, the commencement of their action in 1994 preserved their claims for RICO and other violations based on the same course of conduct.
In essence, the Plaintiffs assert a right to freeze RICO at the time of their original complaint. As discussed above, no such right exists. See ABF Capital Mgmt., 957 F. Supp. at 1320. Because the Plaintiffs first asserted their RICO claim after the PSLRA eliminated the possibility of establishing a RICO violation based on securities fraud, the Court grants the motion on this claim.
Having dismissed the RICO claim, the only claim over which the Court has original jurisdiction, the Court would ordinarily decline to exercise supplemental jurisdiction over the remaining claims and remand the action to state court. See 28 U.S.C. § 1367(c)(3) (2000). Given that this action has been in federal court since 1996, the Court will exercise its supplemental jurisdiction over the remaining claims. Cf. Lindsey v. Dillards, Inc., 306 F.3d 596, 599 (8th Cir. 2002) ("[A] court is not required to remand state law claims when the only federal claim has been dismissed. Instead, the district court maintains discretion to either remand the state law claims or keep them in federal court.").
B. Fraud
The Plaintiffs assert fraud claims against the Defendants. The Eighth Circuit summarized the claims as follows:
The crux of the [Plaintiffs'] fraud allegations, broadly stated, is that Simon and Weinert "stole control" of the Corporation through a series of fraudulent schemes. Among these allegedly unlawful activities were strawman purchases, misleading tender offers, underpriced stock options, a fraudulent stock split, the freeze-out merger, and material omissions and fraudulent misrepresentations during the valuation proceeding. The [Plaintiffs] argue that, through these assorted scams, Simon and Weinert were able to eliminate every other shareholder and reap a huge profit after selling off the Corporation.
Popp Telcom, 210 F.3d at 933.
Under Minnesota law, the elements of a cause of action for fraud are: (1) there must be a representation; (2) that representation must be false; (3) it must have to do with a past or present fact; (4) that fact must be material; (5) it must be susceptible of knowledge; (6) the representer must know it to be false, or in the alternative, must assert it as of his own knowledge without knowing whether it is true or false; (7) the representer must intend to have the other person induced to act, or justified in acting upon it; (8) that person must be so induced to act or so justified in acting; (9) that person's action must be in reliance upon the representation; (10) that person must suffer damage; (11) that damage must be attributable to the misrepresentation, that is, the statement must be the proximate cause of the injury. Davis v. Re-Trac Mfg. Corp., 149 N.W.2d 37, 38-39 (Minn. 1967) (quoting Hanson v. Ford Motor Co., 278 F.2d 586, 591 (8th Cir. 1960)). Concealment of a material fact can also constitute fraud. Karlstad State Bank v. Fritsche, 392 N.W.2d 615, 618 (Minn.Ct.App. 1986).
The Plaintiffs' first fraud claim is based on the Defendants' conduct before the freeze-out merger. According to the Plaintiffs, the Defendants omitted material facts, made material misrepresentations, and made statements of fact that were misleading by their incompleteness in connection with the strawman purchases and tender offers. The Plaintiffs acknowledge they did not sell their shares in the strawman purchases and tender offers. Thus, they did not rely on the Defendants' omissions, misrepresentations, and misleading statements. Because the Plaintiffs did not rely on the Defendants' alleged fraud that occurred before the merger, the Court grants the Defendants' motion on this claim.
The Plaintiffs' other fraud claim is that the Defendants procured the valuation order by fraud. According to the Plaintiffs, they would have retained their shares had the Defendants not engaged in the strawman purchases and fraudulent tender offers. The strawman purchases and tender offers resulted in sales by other shareholders; the Plaintiffs held their shares until the freeze-out merger. In the absence of the strawman purchases and fraudulent tender offers, the Plaintiffs argue, neither the freeze-out merger nor the valuation proceeding would have taken place. Thus, the valuation order was procured by fraud. The Defendants assert the Plaintiffs lack standing to make this claim.
In 1998, the district court concluded the Defendants were entitled to summary judgment on the Plaintiffs' claim for fraud in the valuation proceeding. The district court concluded the claim constituted a collateral attack on the valuation judgment. Popp Telcom, 210 F.3d at 934. In addition, the district court rejected the claim on the basis that it would have had no effect on the valuation of the stock itself. Id. The Eighth Circuit reversed, holding the claim did not constitute a collateral attack on the valuation judgment. Id. at 942. The Eighth Circuit did not take issue with the district court's conclusion that the alleged fraud during the valuation proceeding would have had no effect on the share valuation. Id. Instead, the Eighth Circuit interpreted the claim as one that alleges the valuation order was procured by fraud. Id.
The Eighth Circuit did not consider the third-party standing rule as applied to the Plaintiffs' fraudulent procurement claim. See Popp Telcom, 210 F.3d at 942. The Plaintiffs' contention that the Minnesota Court of Appeals "specifically endorsed [their] common law fraud claims under the fraud exception to the dissenters' rights statute" is not well-founded. The Minnesota Court of Appeals made no mention of Minn. Stat. § 302A.471, subd. 4 (2002), in stating the Plaintiffs could bring an action for common law fraud. Am. Sharecom, Inc. v. LDB Int'l Corp., 553 N.W.2d 433, 434 (Minn.Ct.App. 1996). Section 302A.471, subdivision 4, states:
The shareholders of a corporation who have a right under this section to obtain payment for their shares do not have a right at law or in equity to have a corporate action described in subdivision 1 set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation.
In this case, the Plaintiffs do not seek to set aside or rescind the merger. See Popp Telcom, 210 F.3d at 942 n. 14. Thus, the fraud exception in section 302A.471, subdivision 4, does not apply.
The third-party standing rule "normally bars litigants from asserting the rights or legal interests of others to obtain relief from injury to themselves." Warth v. Seldin, 422 U.S. 490, 509 (1975); see Int'l Ass'n of Firefighters v. City of Ferguson, 283 F.3d 969, 973-74 (8th Cir. 2002), cert. denied, 121 S.Ct. 871 (2003); Ben Oehrleins Sons Daughters, Inc. v. Hennepin County, 115 F.3d 1372, 1378-79 (8th Cir. 1997). To assert a claim on behalf of a third party, the litigant must show that the third party is unable to protect its own interests. Johnson v. Missouri, 142 F.3d 1087, 1090-91 (8th Cir. 1998).
The Plaintiffs rely on International Association of Firefighters to argue the third-party standing rule does not bar their fraudulent procurement claim. In that case, a husband and wife challenged a provision in a city charter prohibiting some city employees from engaging in activities associated with campaigns for mayor or city council. 283 F.3d at 971. The provision applied to the husband; the wife was not a municipal employee. Id. at 972. The district court dismissed the wife for lack of standing and the Eighth Circuit reversed. Id. at 972-73. Under the municipality's interpretation of the provision, the husband would be subject to discipline if the wife engaged in political activities. Id. The Eighth Circuit reasoned the wife's claim asserted her own rights, even though her hesitation to engage in political activities resulted from the city's threatened discipline of her husband. Id. at 973. As to the third-party standing rule, the Eighth Circuit noted that the wife sought to protect her own rights to engage in political activities as well as her own personal and economic status. Id. at 973-74. The case at bar is readily distinguishable.
As already noted, the Plaintiffs held their shares until the freeze-out merger. Other shareholders sold in the strawman purchases and tender offers. Unlike the wife in International Association of Firefighters, the Plaintiffs are not asserting their own interests. Their fraudulent procurement claim essentially asserts the fraud claims of other shareholders. The Plaintiffs' personal and economic status does not depend of the fortunes of the other shareholders. Cf. id. at 975 ("The effect on [the wife's] life and economic status from the firing of her husband is . . . quite substantial, and can be catastrophic."). For these reasons, the Court finds the Plaintiffs' reliance on International Association of Firefighters misplaced.
The Defendants rely on Ben Oehrleins to argue the third-party standing rule bars the Plaintiffs' fraudulent procurement claim. In that case, waste generators and waste haulers challenged the constitutionality of a county ordinance regulating the flow and disposal of solid waste. 115 F.3d at 1376. The Eighth Circuit held the waste generators — the customers of the waste haulers — did not have standing based on the third-party standing rule. Id. at 1381. The waste generators claimed they paid higher garbage bills because the waste haulers passed on the costs incurred by complying with the county ordinance. Id. The waste generators were essentially asserting the claim of the waste haulers. Id. The waste generators and waste haulers had an "incidental congruity of interest," but the relationship between waste generator and waste hauler was not one such that the waste generators could assert the claim of the waste haulers. Id.
Moreover, the waste haulers were capable of protecting their own interests; they had brought suit more than one year before the waste generators. Id. For these reasons, Ben Oehrleins held the third-party standing rule deprived the waste generators of standing. Id.
Although Ben Oehrleins is more similar to the case at bar than International Association of Firefighters, the Court concludes that Ben Oehlreins is also distinguishable. Unlike the waste generators who were not subjected directly to the county ordinance, 115 F.3d at 1379 n. 6, the Defendants' alleged fraudulent scheme was directed at all shareholders. Thus, the Court is not persuaded that Ben Oehrleins necessarily indicates the Plaintiffs do not have standing.
The Court's determination of whether the third-party standing rule bars the Plaintiffs' fraudulent procurement claim turns on two considerations: first, whether the Plaintiffs and the other shareholders have a close relationship; and second, whether the other shareholders are able to assert their own rights. See Powers v. Ohio, 499 U.S. 400, 410-11 (1991) (citing Singleton v. Wulff, 428 U.S. 106, 114-16 (1976)). The Court is not aware of any cases holding that stockholders share the type of relationship that permits a subset of them to assert the rights of others. Cf. Lindell v. City of Waconia, 71 F. Supp.2d 955, 958-59 (D.Minn. 1999) (collecting cases regarding lawyer raising claim on behalf of potential client in context of due process right to legal representation, professional fundraiser raising claim on behalf of charity in context of First Amendment, and doctor raising claim to constitutional right to abortion on behalf of patient). In addition, there is no reason to believe that the shareholders defrauded by the strawman purchases and tender offers are unable to protect their own interests. To the contrary, shareholders other than the Plaintiffs have filed suit to vindicate their own rights. See, e.g., Winn v. Simon, No. CX-98-428, 1998 WL 865749 (Minn.Ct.App. Dec. 15, 1998). For these reasons, the Court concludes that the third-party standing rule bars the Plaintiffs' claim for fraudulent procurement of the valuation order.
C. Unjust Enrichment
The Plaintiffs claim the Defendants were unjustly enriched. The Court concludes that the fact that the Defendants paid the Plaintiffs the fair value of the shares, see Popp Telcom, 210 F.3d at 942, disposes of this claim. See ServiceMaster of St. Cloud v. GAB Bus. Servs., Inc., 544 N.W.2d 302, 306 (Minn. 1996) (no enrichment when party "paid dollar-for-dollar for what it got").
D. Breach of Fiduciary Duty
The Plaintiffs allege the Defendants breached their fiduciary duties to the Plaintiffs by receiving unauthorized stock options, approving the freeze-out merger, squeezing the Plaintiffs out of the Corporation, and failing to investigate purchases of the Corporation by third parties. Generally, a shareholder may not individually assert a cause of action that belongs to a corporation. Northwest Racquet Swim Health Clubs, Inc. v. Deloitte Touche, 535 N.W.2d 612, 617 (Minn. 1995). To determine whether a claim is direct or derivative, a court must focus on the alleged injury. Wessin v. Archives Corp., 592 N.W.2d 460, 464 (Minn. 1999). "Where the injury is to the corporation, and only indirectly harms the shareholder, the claim must be pursued as a derivative claim." Id. A plaintiff must be a shareholder when a derivative suit is commenced. Vista Fund v. Garis, 277 N.W.2d 19, 22-23 (Minn. 1979). To assert a direct action, a plaintiff must have experienced an injury separate and distinct from injuries experienced by other shareholders. See Northwest Racquet, 535 N.W.2d at 617-18.
The Plaintiffs' allegations about the options, and the failure to investigate purchases by a third party assert derivative claims because the Plaintiffs did not experience injuries separate and distinct from those experienced by other shareholders. Because the Plaintiffs were no longer shareholders when they asserted these claims, the claims must be dismissed.
The Plaintiffs contend their allegations about the stock options and the Defendants' failure to explore sales to third parties do not assert derivative claims. Instead, the Plaintiffs characterize these allegations as part of the proof of the Defendants' intent to defraud the Plaintiffs. The Court has addressed the Plaintiffs' fraud claims in a separate section. For present purposes, the Court assumes the Plaintiffs have not abandoned their claims based on the stock options and the failure to explore a sale of the Corporation to third parties. These claims are derivative.
The Plaintiffs argue the Defendants breached their fiduciary duties by approving the merger and squeezing out the Plaintiffs. According to the Plaintiffs, the Defendants effectuated the merger so as to avoid exercising their options and incurring taxes. Instead, the Defendants took control of the Corporation via the freeze-out merger, thereby imposing taxes on the other shareholders. The Plaintiffs contend that by conducting the merger so as to avoid taxes, the Defendants breached their fiduciary duties. The Court does not find the Plaintiffs' argument persuasive.
The Plaintiffs concede there is nothing different about how taxes were imposed as a result of the freeze-out merger in this case as opposed to other freeze-out mergers. Acceptance of the Plaintiffs' argument would lead to the absurd conclusion that every freeze-out merger, a procedure authorized by the Minnesota Statutes, constitutes a breach of fiduciary duty. In short, "it is not a breach of fiduciary duty for the majority to use a freeze-out merger simply to eliminate minority shareholders in a public corporation." Sifferle v. Micom Corp., 384 N.W.2d 503, 508 (Minn.Ct.App. 1986).
E. Unfairly Prejudicial Conduct
The Plaintiffs allege Simon, Weinert, and King wasted and misappropriated the Corporation's assets by engaging in fraudulent, illegal, or unfairly prejudicial conduct. Waste and misappropriation of corporate assets are traditional derivative claims. Wessin, 592 N.W.2d at 465. The Plaintiffs' invocation of Minn. Stat. § 302A.751, subd. 1 (2002), to assert the unfairly prejudicial conduct claim does not excuse them from the derivative pleading requirements. See Wessin, 592 N.W.2d at 465. Because the Plaintiffs were no longer shareholders when they asserted their claim for unfairly prejudicial conduct, the claim must be dismissed. See Vista Fund, 277 N.W.2d at 22-23.
F. Minnesota Securities Act
The Plaintiffs allege the Defendants violated Minn. Stat. § 80A.01 (2002). Section 80A.01 provides:
It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:
(a) to employ any device, scheme or artifice to defraud;
(b) to make any untrue statement of a material fact or to omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or
(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Minnesota Statutes § 80A.23, subd. 2 (2002), provides that "[a]ny person who violates section 80A.01 in connection with the purchase of sale of any security shall be liable to any person damaged thereby." To state a claim under section 80A.01, a plaintiff "must allege a misstatement or omission in connection with his own decision to purchase or sell a security."
Davis v. Midwest Disc. Sec., Inc., 439 N.W.2d 383, 388 (Minn.Ct.App. 1989). In this case, the Plaintiffs did not decide to sell their shares. Instead, they objected to the freeze-out merger. The Corporation terminated their interests in a procedure that left the Plaintiffs with no decision to make. The Defendants are therefore entitled to summary judgment on this claim.
G. Minnesota Consumer Fraud Act
The Plaintiffs allege the Defendants violated the Minnesota Consumer Fraud Act (MCFA), Minn. Stat. §§ 325F.68-.70. Under Minnesota law, any person injured by a violation of the MCFA may bring a civil action and recover damages. Minn. Stat. § 8.31, subd. 3a (2002). The MCFA provides in relevant part:
The act, use, or employment by any person of any fraud, false pretense, false promise, misrepresentation, misleading statement or deceptive practice, with the intent that others rely thereon in connection with the sale of any merchandise, whether or not any person has in fact been misled, deceived, or damage thereby, is enjoinable as provided herein.
Minn. Stat. § 325F.69, subd. 1. "`Sale' means any sale, offer for sale, or attempt to sell any merchandise for any consideration." Minn. Stat. § 325F.68, subd. 4.
Because the Defendants in this case purchased the shares from the Plaintiffs and other shareholders, the Court finds the Plaintiffs' claim an unwarranted and unsupported use of the MCFA. See Group Health Plan, Inc. v. Phillip Morris, Inc., 68 F. Supp.2d 1064, 1069 (D. Minn. 1999) (MCFA claim fails without allegations that defendant's statements made in connection with sale). The MCFA protects consumers, not sellers. See Ly v. Nystrom, 615 N.W.2d 302, 308 (Minn. 2000). The Court therefore grants the Defendants' motion on this claim.
H. Civil Liability for Theft
The Plaintiffs assert the Defendants stole their stock, and claim the Defendants are liable for the theft pursuant to Minn. Stat. § 604.14, subd. 1 (2002). Section 604.14, subdivision 1, provides in part: "A person who steals personal property from another is civilly liable to the owner of the property for its value when stolen plus punitive damages of either $50 or up to 100 percent of its value when stolen, whichever is greater." A conviction is not a prerequisite to liability. Id., subd. 4. Minnesota defines "theft" to include obtaining property from another person by swindling, whether by artifice, trick, device, or any other means. Minn. Stat. § 609.52, subd. 2(4) (2002). "No single definition can cover the range of possibilities" for what constitutes swindling, but the "gist of the offense is the cheating and defrauding of another by deliberate artifice." State v. Ruffin, 158 N.W.2d 202, 205 (Minn. 1968).
The Defendants first argue that there is no stolen property in this case because the Plaintiffs received the judicially determined fair value of their shares. The Court does not find this argument persuasive. See State v. Lone, 361 N.W.2d 854 (Minn. 1985). In Lone, the defendant was the president of a waterproofing company. Id. at 855. In its presentation to potential customers, the company made various misrepresentations, including that the presence of water in a basement was evidence of structural damage. Id. at 857-58. A jury found the defendant guilty of theft by swindle. Id. at 856. On appeal, the defendant argued the trial court erred by instructing the jury that the victim's receipt of something of value is not a defense to a charge of theft by swindle. Id. at 857. The Minnesota Supreme Court affirmed. Id. at 855. The Minnesota Supreme Court quoted with approval the following passage from United States v. Rowe, 56 F.2d 747, 749 (2d Cir. 1932) (Hand, J.):
A man is none the less cheated out of his property, when he is induced to part with it by fraud, because he gets a quid pro quo of equal value. It may be impossible to measure his loss by the gross scales available to a court, but he has suffered a wrong; he has lost his chance to bargain with the facts before him. That is the evil against which the statute is directed.
Lone, 361 N.W.2d at 860. Thus, "[i]n theft by swindle, value becomes irrelevant." Id. The victims were cheated without regard to whether they received a functioning water removal system because the company's misrepresentations deprived them of the opportunity to bargain on the basis of the true condition of their houses. Id. Because the victim's receipt of something of value does not constitute a defense to theft by swindle under Minnesota law, the Court concludes that the Plaintiffs' receipt of the judicially determined fair value of their shares does not rule out the possibility that the Defendants engaged in theft by swindling.
The Defendants next argue that there is no stolen property in this case because Plaintiffs' interests in the Corporation were terminated pursuant to a freeze-out merger. Plaintiffs counter that a swindle's resemblance to a legitimate business transaction "may obscure its true nature, but not prevent it from constituting a swindle." State v. Wells, 121 N.W.2d 68, 69 (Minn. 1963). Thus, the issue is whether the freeze-out merger constituted a swindle.
According to the Plaintiffs, the Defendants swindled them by directing their scheme at all shareholders, acquiring shares from shareholders other than the Plaintiffs, and acquiring the Plaintiffs' shares in the freeze-out merger. That they had to surrender their shares in the freeze-out merger, a process authorized by Minnesota law, is of no consequence, the Plaintiffs argue, because theft by swindle does not require reliance by a victim on misrepresentations made by a defendant. The Plaintiffs rely on State v. Kramer, 441 N.W.2d 502 (Minn.Ct.App. 1989), to support their assertion that direct reliance by the victim on the defendant's misrepresentations is not necessary. The Court finds the Plaintiffs' reliance on Kramer misplaced.
The swindle in Kramer involved the sales of contracts to grow artichokes. Id. at 503. Growers received artichoke seeds in exchange for cash, and the company selling the contracts agreed to market the crop. Id. Although the defendant in Kramer did not personally make the sales pitch, id. at 507, the defendant was "deeply involved" in the company's sales effort and the diversion of company assets, id. at 506. The defendant participated in the swindle by continuing to sell the investment, knowing of massive withdrawals, mismanagement, minimal marketing efforts, and continued misrepresentations to the growers. Id. at 507. Kramer therefore stands for the unremarkable proposition that liability for theft by swindle extends beyond those who actually make the misrepresentations upon which a victim relies; persons acting in concert with those who make the misrepresentations are also liable. Kramer does not stand for the broad proposition for which the Plaintiffs cite it — that is, that theft by swindle does not require any reliance on the part of the victim.
In this case, the Corporation terminated the Plaintiffs' interests in a freeze-out merger authorized by Minnesota law. That other shareholders may have been defrauded by the Defendants has no bearing on whether the Plaintiffs were swindled. The Plaintiffs had no choice but to surrender their shares in the freeze-out merger. Thus, the Defendants did not engage in theft by swindle. Because there is no stolen property in this case, the Court grants the Defendants' motion on this claim.
I. Civil Liability for Transfer of Stolen Property
The Plaintiffs also allege the Defendants are liable under Minn. Stat. § 609.53, subd. 4 (2002), which states in relevant part: "Any person who has been injured by a violation of subdivision 1 . . . may bring an action for three times the amount of actual damages sustained by the plaintiff or $1,500, whichever is greater, and the costs of suit and reasonable attorney's fees." Section 609.53, subdivision 1, provides that "any person who receives, possesses, transfers, buys or conceals any stolen property . . . knowing or having reason to know the property was stolen . . . may be sentenced in accordance with the provisions of section 609.52, subdivision 3." For the reasons set forth in the discussion of the Plaintiffs' theft claim, the Court concludes there is no stolen property in this case. The Court therefore grants the Defendants' motion on this claim.
III. CONCLUSION
Based on the files, records, and proceedings herein, and for the reasons stated above, IT IS ORDERED THAT:
1. The Defendants' Motion for Summary Judgment [Docket No. 140] is GRANTED.
2. Claim II of the Plaintiffs' Fourth Amended Complaint is DISMISSED for lack of standing. All other claims are DISMISSED.
LET JUDGMENT BE ENTERED ACCORDINGLY.