Shareholder Appeal | Reasonable Expectation | Derivative Suit | Unjust enrichment

Can I as a Shareholder appeal in courts of appeal to get a reasonable expectation?

No, if you were to look at a newly released decision by the Minnesota Court of Appeals, a reminder that litigants cannot even count on the appeals process or reasonable expectation to get things right. See Gates, et al. v. Macken, et al., Court of Appeals Case No. A15-1289 (May 9, 2016) (“Gates v. Macken”).

What does this derivative suit entail?

In Gates v. Macken, Mr. Gates and Mr. Macken co-owned some hunting land. Mr. Macken was the sole shareholder of Macken Plumbing, Inc. In 2007, as a favor to Mr. Macken, Mr. Gates allowed a mortgage against the land securing a $100,000 loan owed by Macken Plumbing, Inc. At the time, Mr. Gates believed there was about $200,000 equity in the land and that the $100,000 mortgage only effected Mr. Macken’s half interest.

Macken Plumbing, Inc. later encountered financial difficulties and the parties agreed to sell the land. Mr. Gates was surprised however, at the closing when out of $158,971 available proceeds, $113,971 went to pay off the loan to Macken Plumbing, Inc. and only $45,052 went to Mr. Gates. Mr. Gates believed he should have received half of the $158,971 and he sued Mr. Macken to recover the difference on a claim of unjust enrichment.

How do you prove unjust enrichment | lack of reasonable expectation?

To succeed on a claim of unjust enrichment a plaintiff must prove that the defendant received a benefit under circumstances that are unjust relative to the plaintiff. The concept of unjust means illegal or morally wrong.

Mr. Gates alleged that Mr. Macken received a benefit in getting the loan paid off using part of Mr. Gates equity in the land. He argued it was unjust because Mr. Gates himself was not a borrower on the loan. The trial court agreed with Mr. Gates and ordered Mr. Macken to pay $34,433 for the amount of equity lost by Mr. Gates as a result of the transaction.

In Gates v. Macken, what was the outcome in court of appeals?

Unfortunately this seemingly straight forward outcome got messed up at the Court of Appeals. On appeal, the majority reversed and remanded the case for more specific findings on how Mr. Macken himself benefited from the loan payoff, since he was only a shareholder of Macken Plumbing, Inc. The majority added that “… [Mr.] Macken’s guarantee of the corporate obligation, or his signature in a personal capacity on the note secured by the mortgage” might be relevant on the question of whether Mr. Macken benefitted personally from the payoff.

To Peters Law Firm, this reasoning by the majority completely ignores the significance the payoff would have had on the value of Mr. Macken’s status as sole shareholder of the company. In his dissent Judge Schellhas, we believe, suitably points out the absurdity of the majority decision. Judge Schellhas writes:

Mr. Macken was the sole shareholder of Macken Plumbing, Inc. From Mr. Gates’s share of real-estate proceeds . . . $34,433 was used to pay Macken Plumbing, Inc.’s indebtedness. Even if Mr. Macken had no personal liability on the indebtedness . . . the payment . . . increased the book value of Mr. Macken’s stock.

Isn’t it self-evident that the value of Mr. Macken’s company goes up when company debt is paid down by an outside asset? Unfortunately for Mr. Gates however, Judge Schellhas’ common sense reasoning did not carry the day.

What lesson can you learn even where justice seems like reasonable expectations / common sense should prevail?

This decision is a good reminder that the outcome(s) and/or the cost of litigation is very difficult to predict, even where justice seems like it should be common sense. For Mr. Gates, this appellate decision likely guarantees that he will spend more than $34,433 trying to secure a judgment against Mr. Macken, for that amount, even if he never recovers a dime.

Timothy Peters