Whitney v. The Guys, Inc. et al
MEMORANDUM OPINION AND ORDER. 1) Granting in part and denying in part defendants' 87 Motion for Summary Judgment. Motion is GRANTED to the extent it seeks dismissal of Plaintiff's claims on statute of limitations grounds. Motion is DENIED in all other respects. 2) Granting in part and denying in part plaintiff's 91 Motion for Partial Summary Judgment. Motion is GRANTED to the extent it seeks dismissal of Defendants' counterclaims on statute of limitations grounds. Motion is DENIED in all other respects. (Written Opinion). Signed by Judge John R. Tunheim on September 23, 2014. (DML)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
JOSEPH H. WHITNEY,
Civil No. 10-4296 (JRT/FLN)
THE GUYS, INC., AGORA SOLUTION
CORP., MYBILLINGSERVICES, INC.,
INFO BILLING, INC.,
XYZ, INC. and JOHN R. MORRISON,
MEMORANDUM OPINION AND
ORDER ON CROSS MOTIONS FOR
Mark J. Kallenbach, KALLENBACH LAW OFFICE, 2260 Ridge Drive,
Suite 13, Minneapolis, MN 55416, for plaintiff.
Charlie R. Alden, THOMPSON HALL SANTI CERNY & DOOLEY,
901 Marquette Avenue, Suite 1675, Minneapolis, MN 55402, for
Plaintiff Joseph Whitney brought this action in October 2010 based upon an
alleged oral agreement he made with Defendant John Morrison pursuant to which
Whitney was entitled to one-half of the shares of stock in at least twelve internet-based
Whitney brought various common law and statutory claims
against Morrison and those twelve internet-based companies (“the Corporate
Defendants”), as well as “XYZ, Inc.” a label Whitney uses for defendants that he
characterizes as unknown derivative business entities of the Corporate Defendants.
Whitney’s claims arise out of his allegation that Defendants failed to abide by the oral
agreement and recognize Whitney as a shareholder.
Upon remand from the Eighth Circuit, Whitney’s remaining claims are those for
(1) an accounting, (2) breach of shareholder rights – including right of access to the
Corporate Defendants’ books and records, participation in the Corporate Defendants’
management, and a share in profits, and (3) breach of fiduciary duty – based upon his
contention that Morrison – an officer of some or all of the Corporate Defendants –
breached a fiduciary duty by misappropriating corporate property.
Defendants bring cross motions for summary judgment on these claims. Whitney and
Defendants also bring cross motions for summary judgment on Defendants’
counterclaims against Whitney for conversion, civil theft, unjust enrichment, and fraud,
arising out of Whitney’s alleged misappropriation of funds from one of the Corporate
Defendant entities. Because the Court concludes that the statute of limitations has run on
Whitney’s claims as well as Defendants’ counterclaims, it will grant Defendants’ motion
with respect to Whitney’s claims and Whitney’s motion with respect to Defendants’
counterclaims to the extent those motions seek dismissal of the opposing parties’ claims
on statute of limitations grounds. The Court will thus dismiss all claims currently before
The paucity of record evidence in this case combined with the failure of the
extensive briefs associated with the present motions to connect their presentation of
copious isolated facts to a coherent legal theory makes it difficult to construct a logical
and/or chronological overview of the events underlying Whitney’s claims or otherwise
impose order on what appears to have been nothing short of a business relationship
disaster. In light of this difficulty, the Court begins by briefly outlining Whitney’s
allegations related to his claims as a way of focusing the factual discussion and orienting
the reader to the possible relevance of the various record facts identified by the parties.
In his Second Amended Complaint, Whitney alleges that on April 25, 2005, he
and Morrison formed The Guys, Inc., one of the Corporate Defendants, and agreed that
Whitney and Morrison would each own one half of the outstanding shares in The Guys,
Inc., as well as one half of the outstanding shares in wholly owned subsidiaries of The
Guys, Inc. – Corporate Defendants MySuperLotto, Inc., Agora Solution Corporation, and
MyServiceAndSupport, Inc. (Second Am. Compl. ¶¶ 9-11, Nov. 5, 2010, Docket No. 5.)
Whitney also alleges that in April 2005 he paid $150,000 for one half of the shares in The
Guys, Inc., its wholly owned subsidiaries, and all of the other Corporate Defendants,
which “were created to carry out business ventures contemplated and agreed to by and
between Whitney and Morrison of which Whitney and Morrison were to be equal
owners.” (Id. ¶¶ 13, 14.) Additionally, Whitney claims that in November 2005 he made
a $25,000 capital contribution to Agora Solution Corporation. (Id. ¶ 15.) Whitney
alleges that Defendants “refuse to acknowledge Whitney’s ownership in any of the
Corporate Defendants” and “refuse to permit Whitney’s participation in the Corporate
Defendants’ affairs or profits.” (Id. ¶¶ 16-17.) Whitney contends that as a shareholder of
one-half of the outstanding shares in each of the Corporate Defendants he “is entitled to
an accounting of each of the Corporate Defendants and Derivative Entities’ sales,
expenses, assets, and liabilities.” (Id. ¶ 48.) In support of his breach of shareholder
rights claim, Whitney alleges that his rights as a shareholder have been violated because
“Morrison has refused and continues to deny Whitney access to any of the Corporate
Defendants’, including the Derivative Entities’, books and records, his right to participate
in the Corporate Defendants’ and Derivative En[ti]ties[’] governance or management and
rightful share of their profits.” (Id. ¶¶ 51-52.) Finally, with respect to his breach of
fiduciary duty claim, Whitney argues that Morrison owed Whitney a fiduciary duty “as a
shareholder,” and breached that duty “by misappropriating corporate property.” (Id.
¶¶ 59-60.) With this background in mind, the Court sets forth the record facts bearing
upon Whitney’s claim that he is a shareholder in the Corporate Defendants.
ALLEGED CONTRACT FORMATION
Whitney is a businessman who, among other things, invests in start-up companies.
(Fifth Decl. of Mark J. Kallenbach, Ex. A (Dep. of Joseph A. Whitney (“Whitney Dep.”)
29:7-11, 31:6-32:11), Feb. 21, 2014, Docket No. 94.) He met Morrison in the 1980s, and
the two began doing business together. (Whitney Dep. 21:1-22:10, 23:13-18.)
Whitney testified that in 2004 or 2005 Morrison approached him with an idea for a
business model. (Id. 82:13-83:2.) Morrison proposed to set up a corporation to provide
LEC, or Local Exchange Carrier billing, which is a form of billing for internet-based or
other electronic services where the user is charged through his account with a local
telephone company, rather than directly from the provider of the service. (Id. 83:1884:3.) Whitney testified that he and Morrison worked together to develop the business as
partners explaining, “[s]o we figured out a budget and we funded that budget - - for each
owning 50 percent of the business. And it was clear and - - without any shred of doubt in
our minds, that we were partners.” (Id. 84:3-8.) It is unclear from Whitney’s testimony
whether he believed the alleged agreement in question was for a fifty percent partnership
and a fifty percent share in the profits, or whether the deal was actually to receive fifty
percent ownership of stocks in the various companies that grew out of the business
model. Whitney testified:
So this was just an agreement that you would be equal partners and
you would get half of the profits?
Yes. Well, I mean - ....
He - - he had to gerrymander the companies around a little bit, based
on the payment schedule, but, you know, he gave me 100 percent of
Agora. You know, he had 100 percent of another entity. But, you
know, at the end of the day, yes, it was going to be fifty-fifty on all
moneys made out of the enterprises.
So it wasn’t exactly a deal that you would get stock in companies,
correct? It was just a deal - - let me put it this way. Could the deal
have taken place without a stock transfer?
So stock was not integral to the deal, is that correct?
Okay. So did you feel that because you did not receive certificates for
the companies, demonstrating your stock, that you were not getting
what you had bargained for?
Well, I only got to that when he started playing games on - - on me,
not giving me information on the company that I was a partner in, and,
you know, then I started asking about the stock.
Of course, he said, “Oh, it’s” - - you know - - you know, “You have
shares in this. I have shares in that.” You know, it all washes out in
the end. At the end of the day it’s a fifty-fifty deal, period.
So you’re - - you were really just partners in this endeavor and you
were supposed to get 50 percent of the profits, correct?
Pretty much. I mean, I - - whether it came as a result of my ownership
by stock or by, you know, profits interests . . . . But it was always the
understanding that I had half the deal, whatever that was. One half, 50
percent of the deal.
At some point, Morrison created a document titled “The Organization Structure
We Focus On Internet Marketing.” (Fifth Kallenbach Decl., Ex. H.) Whitney argues that
this document laid out the intended structure of his arrangement with Morrison, and
supports his claim that he holds fifty percent of the shares in the Corporate Defendants.
This document depicts that Whitney’s and Morrison’s “The JWH & JRM Holding
Company” would own one-hundred percent of “The Guys Corp.” which would in turn
own twenty-five percent of each of six companies – three of which are Corporate
Defendants in the present case. (Id.) In a handwritten note, the document indicates that
the remaining seventy-five percent of the six individual companies would be split
“37 1/2% JM” and “37 1/2% JW.” (Id.) Morrison testified that the JHW & JRM
Holding Company and related structure referenced in this document “[n]ever came into
existence” and was just a brainstorm on his part. (Fifth Kallenbach Decl., Ex. B (Dep. of
John R. Morrison (“Morrison Dep.”) 93:17-94:4).)
STOCK OWNERSHIP IN CORPORATE DEFENDANTS
The Corporate Defendants were all incorporated in Delaware. (Fifth Kallenbach
Decl., Ex. F.) The first of the Corporate Defendants to be incorporated was Agora
Solution Corporation on July 1, 2003.
(Id., Ex. F at 5.)1
The Guys, Inc. and
MyTeleservices, Inc. were incorporated on April 25, 2005. (Id., Ex. F at 2, 10-11.)
Whitney and Morrison were named as the initial directors of those two entities. (Id.,
Ex. F at 9; id., Ex. O.)
MyPrizeAwards Corp. and MySuperLotto, Inc. were both
incorporated in 2005. (Id., Ex. F at 24, 26.) The remaining Corporate Defendants were
incorporated in 2006. (Id., Ex. F at 7-8, 13, 15, 20, 22, 28.)
Documentation of Stock Ownership
In connection with the present motion, the parties have presented stock certificates
allegedly indicating the shareholders of some of the Corporate Defendants. This section
describes the stock ownership as represented by the certificates as well as relevant
deposition commentary and a description of other documents that contradict the stock
Agora: A stock certificate indicates that on some unspecified date in 2001, 1500
shares in Agora Solution Corporation – representing all of the authorized shares of that
company – were issued to John R. Morrison. (Third Aff. of Charlie Alden, Ex. E at 7,
Feb. 20, 2014, Docket No. 90.)
Morrison was unable to explain how shares in a
corporation were issued to him two years prior to its incorporation, testifying only that “it
With the exception of depositions, all page number references are to the CMECF
might have been incorporated in 2003, but the corporation was established way before
that.” (Morrison Dep. 131:13-15.)
Minutes from a meeting held by Agora’s board of directors on June 10, 2003, are
inconsistent with the stock certificate produced, and specify that initially John Morrison
and Mildred Morrison were each issued 250 shares and Lee Chung and David Kwok
were each issued 500 shares. (Third Alden Aff., Ex. D at 4-5.) Minutes from a June 9,
2004 meeting of Agora’s board of directors contain a resolution, providing:
RESOLVED that the shares of stock owned by Lee Cheng and David
Kwok will be purchased by John R. Morrison giving John R. Morrison
ownership of 1,250 shares. Mildred B. Morrison retains her 250 shares.
This 1,500 shares represent all Agora Solution outstanding authorized
shares by shareholders.
(Id., Ex. D at 2.)
Minutes from a January 11, 2006 Agora board meeting contain resolutions stating
that “Joseph H. Whitney Chairman of the Board and Geoff Morrison Vice President,
resign as officers and Board of Directors members of Agora Solution Corp.” and “that
Joseph H. Whitney will transfer all rights to Agora Solution stock to John R. Morrison.”
(Id., Ex. J at 2.) January 15, 2006 meeting minutes from a board meeting of another
Corporate Defendant – MyTeleservices Corporation – contain the same resolution “that
Joseph H. Whitney will transfer all rights to Agora Solution Corp. stock to John R.
Morrison.” (Id., Ex. J at 3.)
These later minutes identify a Lee Cheng, although the June 10, 2003 minutes reference
a Lee Chung. (Compare Third Alden Aff., Ex. D at 2, with id., Ex. D at 4-5.)
Morrison testified that Whitney never owned shares in Agora. (Morrison Dep.
60:3-5.) Morrison testified that he put the clause in the meeting minutes which indicated
that Whitney would transfer his Agora stock to Morrison “to make sure that when I
incorporated with him, and et cetera . . . that he didn’t feel that he owned any of the stock
of the company, because no stock had ever been issued to Joe Whitney.” (Id. 68:3-12.)
MyTeleservices: A stock certificate reflects that on April 24, 2005, 1500 shares in
MyTeleservices Corporation were issued to John R. Morrison, representing all of the
authorized shares in the company. (Third Alden Aff., Ex. E at 10.) In minutes of a
MyTeleservices corporate meeting on April 12, 2005 – prior to the date of
MyTeleservices’ incorporation – Agora is listed as the owner of 500 MyTeleservices
shares, with Morrison and Mildred Morrison each owning 500. (Sixth Decl. of Mark J.
Kallenbach, Ex. AA at 2, Mar. 13, 2014, Docket No. 101.) In a December 23, 2005
meeting Morrison resigned as an officer of MyTeleservices “due to the fact that he cannot
be an officer in more than one company billing to phone companies” and sold his shares
in MyTeleservices to Mildred Morrison. (Id., Ex. AA at 5-6.)
Minutes from a December 15, 2006 meeting of MyTeleservices board of directors
state that “Joseph R. Whitney will transfer all rights to MyTeleserveces [sic] stock to
John R. Morrison.” (Fifth Kallenbach Decl., Ex. S.) January 15, 2006 corporate minutes
from MyTeleservices contain the opposite resolution – that “John R. Morrison will
transfer all rights to MyTeleserveces [sic] stock to Joseph H. Whitney.”
Kallenbach Decl., Ex. AA at 10.) This transfer of MyTeleservices stock from Morrison
to Whitney is also reflected in January 11, 2006 minutes of an Agora board meeting.
(Third Alden Aff., Ex. J at 2.) A 2006 tax return for MyTeleservices, prepared by
Morrison’s accountant, lists Whitney as the one-hundred percent owner of the company’s
common stock. (Fifth Kallenbach Decl., Ex. W at 6, 10.) When he was shown this tax
return at his deposition, Morrison testified that he was “shocked to see that.” (Morrison
MyBillingServices: A stock certificate indicates that on February 24, 2006, 1500
shares in MyBillingServices Corporation were issued to Dawn Daniels, representing
ownership of all authorized shares in the company. (Third Alden Aff., Ex. E at 3.)
Daniels is Morrison’s wife’s cousin. (Morrison Dep. 43:8-12.)
LaurenTel: A stock certificate reflects that 1500 shares in LaurenTel Corporation
were issued to Lorraine Treadwell on May 29, 2006, representing all of the authorized
shares for the corporation. (Third Alden Aff., Ex. E at 2.) Treadwell is Morrison’s sister,
(Morrison Dep. 87:24-88:1) and Morrison testified that Treadwell did not actually invest
any money in LaurenTel (id. 88:3-10).
Info Billing: A stock certificate reflects that on May 29, 2006, 1500 shares in
Info Billing Corporation were issued to Morrison’s daughter-in-law, Brenda Morrison,
representing all of the authorized shares for the corporation. (Third Alden Aff., Ex. E at
8; Morrison Dep. 132:7-10.)
YourBillingSolutions: A stock certificate indicates that on May 29, 2006, 1500
shares in YourBillingSolutions Corporation were issued to Melvin Reed, representing all
of the authorized shares for the corporation. (Third Alden Aff., Ex. E at 12.) Reed is
Morrison’s brother. (Morrison Dep. 88:18-20.)
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LowCostBilling: A stock certificate indicates that 1500 shares in LowCostBilling
Corporation were issued to John R. Morrison on July 3, 2006, representing all of the
authorized shares for the corporation. (Third Alden Aff., Ex. E at 9.)
GreenTreeData: A stock certificate indicates that on July 3, 2006, 1500 shares in
GreenTreeData Corporation were issued to Morrison’s sister Carol Deloatch,
representing all of the authorized shares for the corporation. (Third Alden Aff., Ex. E at
4; Morrison Dep. 91:20-21.)
A stock certificate indicates that 1500 shares in
MyServiceAndSupport Corporation were issued to Morrison’s wife Mildred on June 29,
2010, representing all of the authorized shares for the corporation. (Third Alden Aff.,
Ex. E at 11; Morrison Dep. 15:1-2.) Morrison testified that his son, rather than his wife,
might now own the corporation, although no documents regarding such a transfer are in
the record. (Morrison Dep. 136:18-137:2.)
The Guy’s, MySuperLotto, and MyPrizeAwards:
No documentation was
produced by either party regarding shareholder ownership of these remaining three
Morrison’s Understanding of Whitney’s Stock Ownership
Morrison testified that he could not be certain that the stock certificates produced
represented accurate shareholder ownership of the Corporate Defendants explaining that
“anybody could have went into the records and . . . I had lots of records that
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disappeared.” (Morrison Dep. 130:1-12, 132:11-22.)3 Morrison was also unable to
testify from his own recollection as to the true stock ownership of the Corporate
Defendants, explaining “[t]here were a bunch of companies there. I don’t remember who
the hell the owners were.” (Id. 43:3-4.) Morrison could not testify, for example, as to the
ownership or officers of many of the Corporate Defendants or testify as to what the
corporations did. (See, e.g., id. 42-43, 47-49, 86, 92, 140.)
With respect to Whitney in particular, Morrison testified that “Mr. Whitney owned
no stock in any company that I had been involved in” and to the best of his knowledge
Whitney did not own equity in any of the Corporate Defendants. (Id. 64:11-12, 142:213.) But Morrison acknowledged that he did not know what other individuals involved in
the Corporate Defendants may have done, explaining “I did not know if those guys had
transferred some stock or done something with Joe.” (Id. 183:18-24.)
Whitney’s Understanding of Stock Certificate Holders
Defendants rely heavily upon certain comments made by Whitney during his
deposition with respect to stock ownership, which they argue establish that he is not, and
In his briefs filed in connection with the present motions, Whitney discusses at length
the lack of documentation produced by Morrison and the Corporate Defendants, and appears to
insinuate some sort of impropriety or bad faith on the part of Defendants related to that lack of
documentation. Whitney also contends that various documents actually produced by Defendants
are forgeries. Whitney has not, however, provided any indication to the Court of how any such
insinuations should impact the Court’s ruling on these motions, or how the Court could properly
make credibility determinations about the authenticity of certain documents at this summary
judgment stage. In any case, because the Court ultimately dismisses Whitney’s claims and
Defendants’ counterclaims on statute of limitations grounds, neither the lack of documentation
nor the disputed authenticity of the documentation that was produced has any bearing on the
Court’s resolution of these cross motions.
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never was, a shareholder in the Corporate Defendants. Specifically, Whitney testified
that he had no reason to believe that the individuals to whom shares of stock were issued
as identified in the certificates did not actually receive the shares of stock, but also
testified that he “would doubt they did.” (Whitney Dep. 94:25-95:5.) Whitney further
testified that it was his understanding “that these people” – most of whom were relatives
of Morrison – “were what you would refer to as the placeholders for this stock until - - to
avoid the problems of being owned by one entity.” (Id. 97:3-15.)
Whitney also testified that there was never any stock in any of the Corporate
Defendants “that meant anything.” (Id. 98:6-9.) In response to the question “[s]o you’ve
alleged in this action that you’re a shareholder in the companies, but you’ve just said that
there was not any stock that ever meant anything,” Whitney stated “Well, I don’t know - [Morrison] obviously didn’t issue real stock to anybody, but that was just a - - a
formality, as far as I was concerned, that - - the understanding that we operated on, that
clear and unambiguous understanding, was that we were fifty-fifty partners on whatever
came out of this enterprise.” (Id. 98:10-20.)
Whitney’s Contributions to Agora
The parties discuss at length certain payments made by Whitney to Agora.
Whitney seeks to characterize these payments as equity that he invested in Agora, which
he argues shows that he should have been made or might be a shareholder. Defendants
argue, on the other hand, that these payments to Agora were loans, and therefore do not
demonstrate that Whitney made any equity contributions to Agora.
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Whitney testified that he received a loan from Agora sometime in the fall of 2005
in the amount of approximately $140,000.
(Whitney Dep. 54:13-55:23.)
testified that the loan Whitney received from Agora was closer to $120,000. (Morrison
Dep. 56:14-15.) Whitney produced three checks written from his bank account to Agora
Solution, including one for $25,000 on May 26, 2005, one for $80,000 on December 21,
2005, and one for $30,000 on March 10, 2006. (Fifth Kallenbach Decl., Ex. Q.) Both
Whitney and Morrison testified that the $80,000 and the $30,000 checks were repayment
of the loan. (Whitney Dep. 57:5-6, 57:22-25, 58:1-22; Morrison Dep. 105:9-23.)
It is undisputed that Whitney wrote some other checks to Agora in 2005 and 2006
– totaling at least $75,000. (Whitney Dep. 59:18-60:24; Fifth Kallenbach Decl., Ex. J at
2; Morrison Dep. 55:11-22, 56:6-8, 110:1-12, 114:7-19.) Whitney testified that this
money was a capital contribution. (Whitney Dep. 59:18-60:24, 86:4-12.) Morrison
testified that Whitney pressured Morrison to take this money as a loan to run Agora.
(Morrison Dep. 57:7-18.) Neither side produced any documentation of this transaction.
Morrison testified that there was no written evidence of the loan because he viewed
Whitney as a friend, and Whitney told him that a “[h]andshake will do it.” (Id. 95:2596:11, 96:25-97:24.) These loans also did not appear on Agora’s balance sheet because,
Morrison testified, they were “an off-the balance-sheet thing.”
Financial statements from Agora show a line titled “2004 Amount Paid by Joe Whitney”
as $7,481. (Fifth Kallenbach Decl., Ex. I at 4.) There is also a line titled “Joe’s Share
Owed” which is “$158,853 Divide by 2 = $79,426.53.” (Id.) Morrison testified that he
had no idea what that line on the financial statement meant. (Morrison Dep. 198:18-23.)
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DISCOVERY OF WHITNEY’S CLAIMS
On July 20, 2007, Whitney wrote an email to Morrison with the subject
“AGORA.” (Fifth Kallenbach Decl., Ex. E.) In the email, Whitney stated:
John, We need to have a serious talk. I have absolutely NO idea what is
going on at Agora. I have never seen financials. I have never seen a
PENNY FROM THIS ENTITY. Where are the tax returns???? Where is
my K-1? This is no way to run a business, I am feeling that you are
screwing me out of my share. You might already have with this corporate
mish mash. This is not fair to treat me like this. For all I know there is
some tax liability that that [sic] I owe!!! It is time to come clean with your
partner about your intentions. We SHOULD be making a LOT of money.
Are you taking it out???? Where is it if not . . . ? Whenever I ask any
employee I get this stonewall, “talk to John”. I have tried to nicely get info
and you just put me off. Time and time again. I need answers. I want to
set a time next week to have this discussion. It’s time to stop the BS and
talk. . . JOSEPH.
(Id.) Whitney testified that the email’s reference to Agora represented to him “all of the
entities” he and Morrison had together. (Whitney Dep. 142:23-143:3, 143:17-21.)
Whitney also testified that he began asking Morrison for documents about the
Corporate Defendants “[m]onths and months” previous to this email, and probably as
early as March 2007. (Id. 140:1-15.) In March 2007 Whitney had regular meetings with
Morrison to discuss the businesses and inquire about tax returns, which were “clearly
associated with an equity ownership.” (Id. 144:25-147:4.) Whitney testified that “at
some point in time I would suggest that he came up with this idea that since he hadn’t
ever given me any stock, he could cheat me out of my stock and call it a loan” (id. 84:1922), and that he started putting pressure on Morrison “to get financial statements”
because “it looked like he was into cheating me” (id. 85:3-7).
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Whitney forwarded the July 20, 2007 email to an attorney on August 23, 2007,
asking if the attorney would “be a mediator to get [Morrison] to his senses to not pull this
bullshit that it looked like he was pulling.” (Whitney Dep. 173:19-23; see also Fifth
Kallenbach Decl., Ex. E.) Whitney spoke with the attorney several times, but did not
pursue legal action at that point. (Whitney Dep. 175:3-19.)
Defendants’ counterclaims arise out of an incident in September 2007 where
Whitney rerouted funds from BSG – a billing company associated with MyTeleservices –
to an account for an internet enterprise called Implied Services created by Paul Pimental
and Geoff Morrison that Whitney had access to. (Id. 110:21-111:11, 149:21-150:18.)
Rerouting of Funds
Whitney testified that he came to an agreement with Pimental and Geoff Morrison
to reroute the money from BSG “out of cash flow received from MyTeleservices.” (Id.
Whitney testified that the agreement arose when Pimental and Geoff
approached him about getting a return on his investment because “it had become clear
that [Morrison] was screwing” Whitney.
Pimental and Geoff
allegedly told Whitney that he was either the CEO, president, or chairman of the board of
MyTeleservices and therefore the money flowing from BSG to MyTeleservices was
“rightfully” Whitney’s money.” (Id. 152:3-8.) Pimental and Geoff explained that there
was a way to divert money from MyTeleservices and asked Whitney if he would acquire
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the money and then help fund an internet company similar to MyTeleservices. (Id.
Whitney agreed to the arrangement, changed the wiring instructions for funds
coming to MyTeleservices from BSG, and diverted between $190,000 and $212,000 to
an account he controlled.
(Id. 112:10-18, 152:21-23, 157:6-10, 166:15-18; Fifth
Kallenbach Decl., Ex. Z at 2.) Whitney concedes that he never returned the money, but
instead used it to fund the startup of Implied Services.
(Whitney Dep. 165:3-13.)
Whitney testified that he took the money because “I was acting on the authority that I had
and, you know, I was entitled to half of all the money and, you know, I get - - I’m going
to get some of this money. I felt I was entitled to receive compensation. [Morrison] was
screwing me.” (Id. 169:3-10.)
Leadership of MyTeleservices
In connection with the Defendants’ counterclaims arising out of the September
2007 diversion of funds, the parties dispute whether Whitney was authorized to act on
behalf of MyTeleservices at the time he changed the wiring instructions. Several record
documents speak to this issue.
A document from MyTeleservices’ files from its incorporation in Delaware dated
April 25, 2005, reflects that Whitney was named as an initial board member of the
company. (Fifth Kallenbach Decl., Ex. F at 9.) Morrison also testified that Whitney was
the chairman of MyTeleservices board at some point. (Morrison Dep. 201:6-14.) In
MyTeleservices board meeting minutes from January 15, 2006, Morrison resigned from
the position of president and board member and Whitney assumed the positions of
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president and secretary in addition to his existing position as chairman of the board.
(Sixth Kallenbach Aff., Ex. AA at 10.) At that meeting Morrison also transferred his
MyTeleservices stock to Whitney. (Id.)
In minutes from a meeting of the MyTeleservices board on December 15, 2006,
Whitney is referred to as “Chairman of the Board, President and CEO.”
Kallenbach Aff., Ex. R.) The minutes also include a resolution “that Joseph H. Whitney,
Board of Director member of MyTeleservices will sell MyTeleservices to Xtreme
marketing under the conditions that she [sic] remains Chairman of the Board, President
and CEO.” (Id.) There is no documentation that this sale occurred.
A different set of minutes for a December 15, 2006 board meeting of
MyTeleservices states that “Joseph H. Whitney Chairman of the Board Member, resigns
as an officer of MyTeleservices Corp.” and that “John R. Morrison is appointed to the
position of President, CEO and Officer of MyTeleservices Corp.” (Id., Ex. S.) These
meeting minutes also state that “Joseph R. Whitney will transfer all rights to
MyTeleserveces [sic] stock to John R. Morrison” and that “Joseph H. Whitney will
transfer all rights to Agora Solution Corp. stock to John R. Morrison.” (Id.) Whitney
testified that his signature on this version of the meeting minutes was a forgery.
(Whitney Dep. 114:19-115:5.)
Discovery of Counterclaims
On December 21, 2007 an attorney for MyTeleservices, Inc. faxed a letter to
Whitney’s attorney. In the letter, the attorney for MyTeleservices explained that the
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MTI was recently surprised to discover that over $200,000 of its funds were
illegally diverted to a bank account in Mesa, Arizona that is held in the
name of Craig Hull, a former employee of MTI and one of Paul Pimental’s
Two days before Mr. Pimental resigned his employment with MTI, and
while he was still MTI’s primary contact with BSG as its account manager,
a wire-transfer form was directed to BSG, instructing the company to remit
payments belonging to MTI to a bank account at Washington Mutual in
Mesa, Arizona. This document was purportedly signed by Mr. Whitney;
however, the signature on the document appears to be a forgery based on
other examples of Mr. Whitney’s signature. Also, at the time the document
was executed, Mr. Whitney was not an owner, officer or board member of
MTI. As a result of the wire-transfer form, monies from BSG meant for
MTI were not deposited into the proper account at M&I Bank, but were
diverted to the unauthorized account in Arizona. By the time MTI
discovered this scheme, $202,000 had already been illegally transferred.
(Fifth Kallenbach Decl., Ex. Z at 2.) The letter requested the return of the money, in
addition to $10,000 in fees and costs incurred in uncovering the unauthorized transfer and
engaging legal counsel. (Id., Ex. Z at 3.)
Second Amended Complaint
On October 20, 2010, Whitney filed a complaint against Morrison and the
Corporate Defendants as well as an entity known as MyBillingGuys, LLC. (Compl.,
Oct. 20, 2010, Docket No. 1.) In response to an Order directing Whitney to redress
deficiencies in his allegations regarding diversity of citizenship, Whitney filed an
Amended Complaint (Order, Oct. 22, 2010, Docket No. 2; Am. Compl., Nov. 3, 2010,
Docket No. 3) and then a Second Amended Complaint, which removed MyBillingGuys,
LLC, a diversity-destroying entity, as a defendant (Am. Compl. ¶ 5; Second Am.
Compl.). In the Second Amended Complaint Whitney sought a declaratory judgment
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“that he is a one-half (1/2) owner of TGI and each of the Corporate Defendants’
outstanding shares” (Second Am. Compl. ¶¶ 20-24) and brought claims for breach of
contract, promissory estoppel, unjust enrichment, fraud, misrepresentation of intention,
an accounting, breach of shareholder’s rights/receiver/liquidation, breach of fiduciary
duty, and conversion (id. ¶¶ 25-64).
Motion to Dismiss
On December 2, 2010, Defendants brought a motion to dismiss the Second
Amended Complaint, arguing that Whitney’s claims were barred by Delaware’s threeyear statute of limitations and failed to state a claim under Federal Rule of Civil
Procedure 12(b)(6). (Mot. to Dismiss, Dec. 2, 2010, Docket No. 6; Defs.’ Mem. in Supp.
of Mot. to Dismiss, Jan. 5, 2011, Docket No. 18.)4
The Court granted Defendants’ motion to dismiss in its entirety. Whitney v. The
Guys, Inc. (Whitney I), Civ. No. 10-4296, 2011 WL 3648230 (D. Minn. Aug. 17, 2011).
The Court dismissed Whitney’s claims for declaratory judgment, fraud, misrepresentation
of intention, and conversion, concluding that the claims alleged only duties and
obligations contained in Whitney’s contract claims and therefore failed to state
independent tort claims. Id. at *3.
The Court denied both Whitney’s motion to strike the motion to dismiss as untimely
and the accompanying motion for the entry of default judgment, finding that Whitney had not
been prejudiced by the three-day delay in Defendants’ filing of the motion to dismiss. (Order,
Dec. 27, 2010, Docket No. 16.)
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With respect to Whitney’s claims for breach of contract, promissory estoppel, and
unjust enrichment, the Court began by concluding that Delaware law applied to the
claims under the internal-affairs doctrine which is “‘a conflict of laws principle which
recognizes that only one State should have the authority to regulate a corporation’s
internal affairs – matters peculiar to the relationships among or between the corporation
and its current officers, directors, and shareholders.’” Id. at *4 (quoting Atherton v.
FDIC, 519 U.S. 213, 223-24 (1997)). Specifically, the Court concluded that “Whitney’s
contract and quasi-contract claims cannot be separated from the ‘internal affairs’ of the
corporate Defendants” which were all incorporated in Delaware, and that the relief
sought by Whitney could not be granted “without directly impacting and disrupting the
current ownership structure of the corporate Defendants.” Id. at *5. The Court also
concluded that, even in the absence of the internal-affairs doctrine, Delaware law would
apply under Minnesota’s five-factor choice of law analysis.
Id. at *5-6.
Delaware law governed, the Court applied Delaware’s three-year statute of limitations,
and concluded that it barred Whitney’s claims which arose more than three years prior to
October 2010. Id. at *6.
Finally, the Court considered Whitney’s claims for an accounting, breach of
shareholder rights/receiver/liquidation, and breach of fiduciary duty – to which the parties
did not dispute that Delaware law applied. Id. at *7. The Court began by concluding that
it was not clear from the face of the complaint that the claims were time barred, as
Whitney alleged that “Morrison has refused and continues to deny Whitney access to
any of the Corporate Defendants’ books and records, his right to participate in
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governance or management and rightful shares of the profits” and the complaint provided
“no dates when Whitney demanded access or when Morrison allegedly refused.” Id.
(emphasis in original) (alterations and internal quotation marks omitted). But the Court
dismissed the claims finding that they were “insufficiently pleaded under Twombly.” Id.
The Court found the claims to be insufficient because they depended upon
Whitney’s status as a shareholder, whereas portions of Whitney’s claims for breach of
contract were based upon the theory that he was never issued shares. Id. Additionally,
the Court concluded that:
In the Court’s view, these claims are entirely implausible based on the
pleadings. He asks this Court to believe that he agreed to purchase shares
of TGI and various other entities for $150,000, yet he apparently has no
record of this transaction, no record (nor even any knowledge) of whether
he was ever issued the shares he believes he purchased, and, despite being
continually denied the benefits of ownership of the corporations he believed
he bought shares of, he waited more than five years before seeking any
relief. This simply does not pass the “smell test.”
Id. (emphasis in original).
Eighth Circuit Appeal
Whitney appealed from the dismissal of his claims. (Notice of Appeal to Eighth
Circuit, Sept. 16, 2011, Docket No. 37.) The Eighth Circuit affirmed the dismissal of
Whitney’s tort, quasi-contract, and contract claims, but reversed and remanded for further
proceedings with respect to Whitney’s claims for an accounting, breach of shareholder
rights/receiver/liquidation, and breach of fiduciary duty.
(Whitney II), 700 F.3d 1118 (8th Cir. 2012).
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Whitney v. The Guys, Inc.
The Eighth Circuit began by affirming the Court’s determination that Delaware
law applied to Whitney’s claims. Id. at 1123-26. The Eighth Circuit focused on the first
and third factors in Minnesota’s choice of law analysis – predictability of results and
simplification of the judicial task which it determined “merit substantial weight in the
present case and favor the application of Delaware law.”
Id. at 1124.
explained that in the absence of allegations to the contrary
we believe that the parties to this purported commercial transaction must
have expected the duties of the corporate defendants and the relative rights
of purported owners to be defined by Delaware law. Further, it is not at all
clear how a court might grant Whitney the relief he seeks without
addressing matters of Delaware law. As such, the application of Delaware
law represents the simpler (and, potentially, the only feasible) judicial task
and appears to best honor the expectations of the parties to the alleged
transaction involving the creation, ownership, and rights related to
Id. at 1125. Accordingly, the court applied Delaware’s three-year statute of limitations
and found that it barred Whitney’s contract, quasi-contract, and tort claims. Id. at 112628.
With respect to Whitney’s shareholder claims, the Eighth Circuit reversed the
district court’s dismissal, concluding that “Whitney’s pleadings were minimally sufficient
to present a plausible claim.” Id. at 1128. The court first explained that dismissal on the
basis that Whitney provided no documentary evidence was impermissible because
“documentary evidence generally is not required at the pleading stage” and because “[i]n
this circumstance, where the defendants may well possess the very documents the
plaintiff needs to prove the alleged ownership, it would be odd to demand such
documents from the plaintiff before discovery.” Id. at 1128-29. The court also found
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that Whitney’s claims were not implausible on the basis that he had waited five years to
bring his claims, explaining that “arguments regarding timeliness concerns are generally
better left for assessment under statutes of limitations or the doctrine of laches.” Id. at
1129. Specifically, the court explained:
Defendants’ timing-related argument appears to be as follows: a $175,000
investment is so large that no investor would have contributed such an
astounding sum and then sat by idly for five years without raising concerns.
Implicit in such an argument, however, is a value judgment or assumption
concerning the relative value of that particular investment to Whitney and
concerning his trust of Morrison. It is not appropriate to assess plausibility
based upon such assumptions.
Id. The court concluded that “[i]t is at least plausible that Whitney trusted Morrison and
the corporate defendants sufficiently to invest $175,000 without keeping close tabs on his
investment. . . . Simply put, personal investments are not always conducted with the care
and precision of regulated banks. Although this lack of care may ultimately be fatal to
Whitney’s ability to prove his claims, it does not make them implausible.” Id. at 1130.
Finally, the court concluded that dismissal of Whitney’s claims was not appropriate on
the basis that he alleged both that he was denied ownership of shares and also that he was
actually an owner of shares but was being denied benefits of that ownership because
plaintiffs are allowed to plead in the alternative. Id. Accordingly, the court reversed with
respect to the three shareholder claims, and remanded for further proceedings. Id. (see
also USCA J., Nov. 6, 2012, Docket No. 41.)
Answer and Counterclaims
Upon remand, Defendants filed an answer to the Second Amended Complaint
denying the allegations supporting Whitney’s claims for an accounting, breach of
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shareholder rights/receiver/liquidation, and breach of fiduciary duty.
Countercls. (“Countercls.”), Nov. 20, 2012, Docket No. 44.) Defendants also assert
counterclaims for conversion, civil theft under Minn. Stat. § 604.14, unjust enrichment,
and fraud based on the allegation that Whitney wrongfully diverted $202,000 from
MyTeleservices’ bank account. (Countercls. ¶¶ 77, 81, 84, 87, 91-92.)
STANDARD OF REVIEW
Summary judgment is appropriate where there are no genuine issues of material
fact and the moving party can demonstrate that it is entitled to judgment as a matter of
law. Fed. R. Civ. P. 56(a). A fact is material if it might affect the outcome of the suit,
and a dispute is genuine if the evidence is such that it could lead a reasonable jury to
return a verdict for either party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). A court considering a motion for summary judgment must view the facts in the
light most favorable to the non-moving party and give that party the benefit of all
reasonable inferences to be drawn from those facts. Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986).
Summary judgment is appropriate if the
nonmoving party “fails to make a showing sufficient to establish the existence of an
element essential to that party’s case, and on which that party will bear the burden of
proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “To defeat a motion
for summary judgment, a party may not rest upon allegations, but must produce probative
evidence sufficient to demonstrate a genuine issue [of material fact] for trial.” Davenport
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v. Univ. of Ark. Bd. of Trs., 553 F.3d 1110, 1113 (8th Cir. 2009) (citing Anderson, 477
U.S. at 247-49).
WHITNEY’S SHAREHOLDER CLAIMS
The parties agree that each of Whitney’s remaining claims – that he was denied his
rights as a shareholder, that Morrison breached his fiduciary duty as an officer of the
Corporate Defendants, and that he is entitled to an accounting of Corporate Defendants’
finances – require Whitney to show that he was a shareholder of the Corporate
Defendants during the relevant time period. Additionally, all parties agree, and the
Eighth Circuit confirmed in Whitney II that Delaware law applies to these claims.
Defendants argue that Whitney’s claims are barred by Delaware’s three-year
statute of limitations under Del. Code Ann. tit. 10, § 8106. Under Delaware law “[t]he
statute of limitations ‘is calculated from the time of the wrongful act even if plaintiff is
ignorant of the cause of action.’” Lincoln Nat’l Life Ins. Co. v. Snyder, 722 F. Supp. 2d
546, 562-63 (D. Del. 2010) (quoting Krahmer v. Christie’s Inc., 911 A.2d 399, 407 (Del.
Ch. 2006)). Therefore, the first step in ascertaining whether a claim brought under
Delaware law is barred by the statute of limitations is to determine “the date the cause of
action accrued.” Smith v. Whelan, Civ. No. 11-1188, 2013 WL 3169373, at *1 (D. Del.
June 21, 2013) (internal quotation marks omitted). Under Section 8106, if the cause of
action accrued more than three years before the plaintiff filed his lawsuit, the statute of
limitations will bar the claims unless the statute of limitations period was tolled. Lincoln
Nat’l Life Ins. Co., 722 F. Supp. 2d at 562-63. Delaware law recognizes three doctrines
that can toll the statute of limitations: “(1) fraudulent concealment, (2) inherently
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unknowable injury, and (3) equitable tolling.” Eluv Holdings (BVI) Ltd. v. Dotomi, LLC,
C.A. No. 6894, 2013 WL 1200273, at *7 (Del. Ch. Mar. 26, 2013); see In re Tyson
Foods, Inc., 919 A.2d 563, 584-85 (Del. Ch. 2007). “Under any of these theories, a
plaintiff bears the burden of showing that the statute was tolled, and relief from the
statute extends only until the plaintiff is put on inquiry notice.” In re Tyson Foods, Inc.,
919 A.2d at 585. “Inquiry notice exists when ‘persons of ordinary intelligence and
prudence have facts sufficient to place them on inquiry which, if pursued, would lead to
the discovery’ of the injury.” Eluv Holdings, 2013 WL 1200273 at *7 (alterations
omitted) (emphasis in original) (quoting Coleman v. Pricewaterhouse Coopers, LLC, 854
A.2d 838, 842 (Del. 2004)). Therefore “[e]ven if a plaintiff successfully invoked any of
the three tolling doctrines . . . the limitations period is tolled only until the plaintiff
discovers, or by exercising reasonable diligence should have discovered, its injury.” Id.
“[A] cause of action accrues with the occurrence of the wrongful act,” Kaufman v.
C.L. McCabe & Sons, Inc., 603 A.2d 831, 834 (Del. 1992), but in no case “before the
right to institute a suit arises,” Res. Ventures, Inc. v. Res. Mgmt. Int’l, Inc., 42 F. Supp. 2d
423, 437 (D. Del. 1999) (internal quotation marks omitted); see also William A. Graham
Co. v. Haughey, 646 F.3d 138, 146 (3d Cir. 2011) (“[T]he question is whether all of [a
claim’s] elements have come into existence such that an omniscient plaintiff could prove
them in court.
At that point the cause of action is ‘complete,’ and has therefore
accrued.”). Accrual of a cause of action based on a defendant’s wrongful act “is a
general concept that varies depending on the nature of the claim at issue.”
Holdings, 2013 WL 1200273 at *6. In ascertaining when a plaintiff’s claims accrued,
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courts have carefully considered the legal theory and factual basis articulated by the
plaintiffs in support of their claims. Specifically, of relevance to Whitney’s claims here,
courts have examined whether a plaintiff’s claim accrued upon the commission of a
single wrongful act by defendant, or rather is the type of claim that alleges continuing
violations which would either allow a plaintiff to rely on incidents occurring outside the
statute of limitations period to establish ongoing breaches of his rights or establish that a
new cause of action accrued with each continuing wrongful action. See Teachers’ Ret.
Sys. of La. v. Aidinoff, 900 A.2d 654, 666 (Del. Ch. 2006) (examining whether a
complaint challenged a corporation’s original decision to sign certain agreements and
therefore accrued at the time of the signing or rather challenged the decision of
defendants to perpetuate an unfair relationship pursuant to those agreements and accrued
at the time of payments made with respect to that relationship); Kerns v. Dukes, No. Civ.
A. 1999-S, 2004 WL 766529, at *2, *5 (Del. Ch. Apr. 2, 2004) (analyzing claims based
upon the allegedly unlawful creation of a sanitary sewer district and examining whether
the statute of limitations ran from the creation of the district or the later date when
plaintiff’s received allegedly unlawful assessments based on the creation of the district);
see also Welwart v. Dataware Elecs. Corp., 717 N.Y.S.2d 220, 221 (N.Y. App. Div.
2000) (examining plaintiff’s claim for failure to issue shares and conversion of dividends
issued on those shares to determine whether “the causes of action accrued each time
profits were diverted” or at the time “when the defendants allegedly deprived the plaintiff
of his right to the shares and began diverting profits”).
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The Alaska Supreme Court considered a claim similar to Whitney’s in Egner v.
Talbot’s Inc., 214 P.3d 272 (Alaska 2009) and conducted an analysis of when plaintiff’s
claims regarding her shareholder status accrued that provides a useful analogy for this
Court’s analysis of Whitney’s claim. In Egner, the plaintiff, Carol, sued Talbot’s, Inc.
(“Talbot’s”), as well as certain of her relatives that owned shares of Talbot’s stock,
alleging denial of her rights as a shareholder. Id. at 274. Carol’s father was a director
and officer of Talbot’s, and Carol alleged that her father “frequently told her that she
owned stock in Talbot’s; that on at least six occasions before 1978 she was offered the
option of a wage increase or stock [in her position at Talbot’s] and that she chose the
stock; and that on at least three occasions (the last of which was 1968), [her father]
showed her a stock ledger that indicated that she owned shares of Talbot’s stock.” Id. at
275. When Carol’s father died, his wife Jane inherited his shares in Talbot’s, and Jane
told Carol that Carol did not own any Talbot’s stock. Id. In 1980 Carol signed a voting
trust agreement, whereby she agreed to vote Jane’s shares, and acknowledged in the
agreement that Jane owned all of the shares of Talbot’s. Id. at 276. Carol alleged that
she learned in 1986 that Jane had sold Talbot’s – including all of Jane’s shares – to
Carol’s brother-in-law. Id. Carol alleged that in 1995, however, Jane asked her to sign a
document which was a stock certificate made out to Carol representing that she owned at
least 100 shares of Talbot’s stock. Id. In May 2006 Carol brought a lawsuit asserting,
among others, claims for failure to allow inspection of corporate books and records,
failure to allow exercise of various other shareholder rights under Alaska’s corporations
code, breach of fiduciary duty, and misappropriation of corporate funds. Id. at 276-77.
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The defendants moved for summary judgment arguing that all of Carol’s claims were
barred by the applicable six-year statute of limitations. Id. at 277.
The court began by examining when Carol’s cause of action accrued under the
discovery rule – the equivalent of Delaware’s principle of inquiry notice –, by asking
whether, before May 2000, a reasonable person in Carol’s position would have had
“enough information to alert that person that he or she has a potential cause of action or
should begin an inquiry to protect his or her rights.” Id. at 278 (internal quotation marks
omitted). The court found that Carol was on inquiry notice “no later than 1986” because
at that point “[s]he knew Talbot’s had been sold, that she was not considered an owner of
Talbot’s, that her shareholder status was denied or disputed, that she might have a cause
of action, and that she should begin an inquiry to protect her rights.” Id. at 280. As of
1986, the court concluded, “[a] reasonable inquiry would have confirmed one of these
alternative scenarios: (1) Carol was not a shareholder, (2) she was a shareholder, or
(3) there was a dispute about whether she was a shareholder” and Carol could have
initiated an action based on the outcome of that inquiry. Id. at 281. The court explicitly
noted that “[t]he presence of a genuine fact dispute about Carol’s shareholder status does
not create a genuine fact dispute about whether Carol knew enough to put her on inquiry
notice, and thus did not excuse her from making a reasonable inquiry to protect her
Carol argued, however, that the 1995 event reconfirmed her shareholder status,
and supported a continuing violations theory, which permitted her to bring claims for the
violations of her shareholder rights that occurred after May 2000. But the court rejected
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this argument, concluding that the wrongful conduct alleged in Carol’s complaint was
essentially “denial of her alleged shareholder status.” Id. at 283. The court concluded
that this allegation alleged a permanent violation – upon which Carol could sue – as soon
as she knew that she was no longer considered a shareholder, explaining:
The same facts that require a conclusion that Carol was on inquiry notice
no later than 1986 also require a conclusion that a permanent violation
occurred no later than 1986. The 1978 and 1986 events and the 1980
agreement were collectively sufficient to trigger a reasonable person’s
awareness of the alleged wrongful conduct and the need to assert her rights.
The allegedly wrongful conduct was the denial of Carol’s claim that she
was a shareholder. In effect, there was a denial of her alleged shareholder
status. We assume for discussion’s sake that some corporate conduct
related to share ownership might not amount to a permanent violation. For
example, non-permanent violations could account for a continuing failure
to pay annual dividends owed a shareholder. In comparison, non-payment
resulting from the claimant’s removal from the shareholder rolls would
arise out of a permanent change in the claimant’s status. Because in that
situation the continuing failure to pay a dividend would result from the
permanent violation, the continuing violations doctrine would not allow the
claimant to pursue untimely claims accruing out of the permanent violation.
Id. (alterations and internal quotation marks omitted).
Other courts have employed
similar reasoning in the shareholder context to determine whether a plaintiff alleges
continued unlawful acts, or merely continued ill effects from an original violation of his
rights, in which case the cause of action accrues only once, at the time of the original
violation. Fitzgerald v. Pharmacia Corp., 55 F. App’x 589, 589 (2d Cir. 2003) (finding
that a cause of action for “refusal to recognize [plaintiff’s] purported rights as a
shareholder” accrued when the corporation sent plaintiff a letter stating that it determined
it had no further obligation to her because she was not a shareholder); Welwart, 717
N.Y.S.2d at 221 (“The complaint should be dismissed on the basis of the Statute of
Limitations . . . since the causes of action are, essentially, based upon the alleged fraud of
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the defendants in depriving the plaintiff of shares of stock and diverting the profits of the
corporation. Contrary to the plaintiff’s contention that the causes of action accrued each
time profits were diverted, the limitations period is measured from the date of the initial
alleged breach in 1981 when the defendants allegedly deprived the plaintiff of his right to
the shares and began diverting profits, regardless of when the damages began to
accrue.”); State v. Huntington-Cleveland Irrigation Co., 52 P.3d 1257, 1263 (Utah 2002)
(“[T]he four-year statute of limitations commenced to preclude an action on particular
shares with respect to DWR’s claims of reduced voting rights when HCIC specifically
reclassified those shares, thus effectively denying voting rights on those particular shares,
because a cause of action for reduced voting rights accrues when those rights are
Analyzing Whitney’s claims in light of these principles, the Court concludes that
Whitney’s claims fall into the category of claims that allege a single wrong based on the
Corporate Defendants’ refusal to recognize Whitney as a shareholder. In order to be
timely, Whitney’s claims must have accrued no later than October 20, 2007 – or three
years before he filed the present complaint. As explained above, under Delaware law, a
cause of action accrues and the statute of limitations is calculated from the time of the
wrongful act even if the plaintiff is ignorant of his cause of action. But here, the Court
need not decide with precision when Whitney’s causes of action accrued because, based
on the undisputed facts in the record, Whitney was on inquiry notice of his causes of
action in August 2007. Therefore, even if some type of tolling applied to Whitney’s
claims that would have extended the statute of limitations more than three years after the
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date of accrual, under Delaware law that tolling would have ceased when Whitney
became aware of facts which would have alerted a reasonable person that he had a
potential cause of action or should begin an inquiry to protect his rights – which the Court
concludes occurred in August 2007. See In re Fruehauf Trailer Corp., 250 B.R. 168, 189
(D. Del. 2000) (“The statute of limitations ceases to be tolled when the plaintiff is put on
inquiry notice of the alleged wrongs.”).
Whitney testified that he began asking Morrison for corporate documents as early
as March 2007 and had regular meetings to discuss the business and inquire about the tax
returns which related to his equity ownership, because he believed that Morrison was
“cheating” him out stock. (Whitney Dep. 84:19-22, 85:3-7.) In his July 2007 email,
Whitney confirmed that he had never seen any financial statements despite repeated
demands, had “never seen a PENNY FROM THIS ENTITY,” and felt that Morrison was
“screwing” him out of his share in the Corporate Defendants. (Fifth Kallenbach Decl.,
Ex. E.) When this email failed to elicit information from Morrison, Whitney consulted
an attorney in August 2007 in the hopes of mediating his dispute with Morrison over
ownership of the Corporate Defendants. (Id.; Whitney Dep. 173:19-23.) These facts
would have been sufficient to put a reasonable investor on inquiry notice of the claims
Whitney now brings. In other words, at this point, a reasonable investor had sufficient
facts which, if pursued, would have led him to the discovery of his cause of action. See
Eluv Holdings, 2013 WL 1200273 at *10 (“It is undisputed that Plaintiffs never received
stock certificates. In the six years following Eluv’s attempted exercise of the Option,
Plaintiffs did not receive any written material regarding Eluv’s status as a shareholder.
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Plaintiffs received no shareholder reports, financial statements, or notices regarding
Eluv never was asked to vote on any matters regarding
Defendant’s affairs and Plaintiffs never attended a stockholder’s meeting after Eluv’s
purported exercise. Not receiving documents of this sort should have alerted a reasonable
investor to the fact that Dotomi did not consider Eluv a shareholder.” (footnotes
omitted)); see also Egner, 214 P.3d at 280 (noting that once Carol had received several
indications that Talbot’s may not have considered her to be a shareholder she was on
inquiry notice, and should have investigated her shareholder status).
Whitney did not, however, bring the present lawsuit until October 2010 – more
than three years after he had at least inquiry notice of all of the facts a reasonable investor
would have needed – that he was not being treated as a shareholder and was being denied
access to his rights – to bring the present claims or further investigate his rights to
ascertain whether he had a cause of action. As in Egner, Whitney’s claim is based upon a
discrete failure of Defendants to recognize him as a shareholder and provide him with the
rights related to that status, allegedly wrongful conduct of which he knew of no later than
August 2007 when Morrison refused to acknowledge his status as a shareholder and
provide him with access to documents. All of the facts required to either engage in a
reasonable inquiry as to his rights or bring the present claims based on a refusal to
recognize shareholder status were available to Whitney at that time. See Res. Ventures,
Inc., 42 F. Supp. 2d at 437 (concluding that plaintiff’s claims “arise from the Defendants’
refusal to share in the profits of the Joint Venture with the Plaintiff and to distribute a
50% equity interest in SDK to the Plaintiff” and therefore accrued in April 1994 when
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“[t]he Defendants’ refusal became known to the Plaintiff . . . when the Plaintiff’s
Indonesian counsel informed, via letter, the Plaintiff’s U.S. counsel regarding the
Defendants’ decision” not to share profits); see also Egner, 214 P.3d at 281. The fact
that the failure to be recognized as a shareholder may have had continuing effects – such
as that he was continually denied access to corporate records, a role in corporate
management, and what he believed to be his share of profits – does not alter the Court’s
conclusion that Whitney was on inquiry notice of his claims no later than August 2007.
See Marzec v. Nye, 690 S.E.2d 537, 543 (N.C. Ct. App. 2010) (“Marzec made one
request for the records on 23 April 2004. He has not demonstrated how the ongoing
failure to respond to this request constituted continual unlawful acts as opposed to
continual ill effects from the original failure to produce the records.”).
In opposition to Defendants’ motion for summary judgment Whitney makes no
arguments regarding the accrual of his claims or his entitlement to some type of tolling.
Instead Whitney argues that “[t]he Court of Appeals has already determined that
Whitney’s shareholder related claims are not time barred.” (Pl.’s Mem. in Opp’n to
Defs.’ Mot. for Summ. J. at 47, Mar. 13, 2014, Docket No. 100.)
interpretation of the Eighth Circuit’s ruling is simply incorrect. The Eighth Circuit
concluded that dismissal of Whitney’s shareholder claims for their lack of timeliness on
the basis that they were therefore not plausible under Twombly was inappropriate.
Whitney II, 700 F.3d at 1129.
But the Eighth Circuit specifically concluded that
“arguments regarding timeliness concerns are generally better left for assessment under
statutes of limitations.” Id. Therefore, the Eighth Circuit specifically contemplated the
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present posture – that Whitney’s claims would survive a motion to dismiss as alleging
plausible entitlement to relief, but could later be subject to dismissal at the summary
judgment stage because his cause of action accrued more than three years prior to the
commencement of this lawsuit. The only other argument made by Whitney with respect
to the statute of limitations is his contention that “[a]t a minimum, Whitney is entitled to
an accounting for those entities in which he has any ownership interest commencing on
October 20, 2007, which is three years prior to the time that Whitney commenced this
action.” (Pl.’s Mem. in Opp’n to Defs.’ Mot. for Summ. J. at 48.) But this argument is
misplaced because an accounting is a remedy, not an independent cause of action. See
Stevanov v. O’Connor, Civ. No. 3820, 2009 WL 1059640, at *15 (Del. Ch. Apr. 21,
2009) (“A claim for an accounting in the Court of Chancery generally reflects a request
for a particular type of remedy, rather than an equitable claim in and of itself.”); see also
Cox v. Mortg. Elec. Registration Sys., Inc., 794 F. Supp. 2d 1060, 1065 (D. Minn. 2011)
aff’d, 685 F.3d 663 (8th Cir. 2012). Therefore, even if for some reason Whitney’s
accounting claim was not subject to the same statute of limitations analysis explained
above, he could still not receive the remedy of accounting without a viable underlying
cause of action. Because the Court concludes that the statute of limitations has run on
Whitney’s claims it will grant Defendants’ motion for summary judgment to the extent it
seeks dismissal of Whitney’s claims on statute of limitations grounds.5
The Court notes that even if Whitney’s claims were not barred by the statute of
limitations, the record here is likely woefully inadequate to support any of the relief he seeks.
This is not so much a case of disputed facts (although those do exist) but rather one where there
is an utter lack of proof. In other words, the paucity of evidence is such that a reasonable jury
(Footnote continued on next page.)
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The parties also bring cross motions for summary judgment with respect to
Defendants’ counterclaims arising out of Whitney’s alleged misappropriation of
approximately $200,000 from MyTeleservices. As an initial matter, the parties dispute
whether Minnesota’s or Delaware’s statute of limitations applies to Defendants’
counterclaims. Whitney argues that Delaware law applies and Defendants’ counterclaims
are time barred by the three-year statute of limitations under Del. Code Ann. tit. 10,
§ 8106. Defendants argue that Minnesota’s six-year statute of limitations under Minn.
Stat. § 541.05, subd. 1(4), (6) applies.
would likely be unable to make any sort of determination as to the relief Whitney seeks. Here,
Whitney has focused exclusively in his briefs on the argument that he is the sole shareholder of
MyTeleservices and a one-half owner of The Guys, Inc. or, in the alternative that he is the sole
owner of MyTeleservices and that he and Morrison equally own all of the Corporate Defendants.
(Pl.’s Mem. in Supp. of Mot. for Summ. J. at 3, Feb. 21, 2014, Docket No. 93.) But even if the
Court or a jury were to be able to reach a conclusion about shareholder ownership in this case,
Whitney has cited no legal authority that supports his theory of recovery or presented any
evidence regarding the other aspects of his claims. For example, Whitney asks for half of the
Corporate Defendants’ profits – seemingly related to his “breach of shareholder rights” claim,
but does not provide any authority for how the Court could award such relief in light of the fact
that a shareholder’s right to profits generally can be enforced only if dividends have been issued
or through a lawsuit to compel the declaration of dividends. See Knapp v. Bankers Sec. Corp.,
230 F.2d 717, 721 (3d Cir. 1956). But Whitney has made no argument or presented any
evidence regarding dividends in this case. In other words, the mere fact that Whitney might be a
shareholder does not, as he appears to suggest, automatically entitle him to half of the Corporate
Defendants’ profits. Similarly, Whitney moves for summary judgment in his favor on his breach
of fiduciary duty claim against Morrison based on his sole argument that he is a shareholder. But
Whitney has presented no evidence of (a) Morrison was actually an officer or director of all the
Corporate Defendants – and would therefore have owed him a fiduciary duty, see In re Rural
Metro Corp., 88 A.3d 54, 80 (Del. Ch. 2014) (noting that corporate directors owe fiduciary
duties of loyalty and care to the corporation and its shareholders), or (b) what actions Morrison
took that constituted a breach.
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“In a diversity case, a district court sitting in Minnesota applies Minnesota’s
Allianz Ins. Co. of Canada v. Sanftleben, 454 F.3d 853, 855
(8th Cir. 2006). The first step in the present choice of law analysis is to determine
whether there is an actual conflict between the laws of Minnesota and Delaware. See
Jepson v. Gen. Cas. Co. of Wis., 513 N.W.2d 467, 469 (Minn. 1994); see also Prudential
Ins. Co. of Am. v. Kamrath, 475 F.3d 920, 924 (8th Cir. 2007). “‘A conflict exists if the
choice of one forum’s law over the other will determine the outcome of the case.’” Burks
v. Abbott Labs., 639 F. Supp. 2d 1006, 1011 (D. Minn. 2009) (quoting Nodak Mut. Ins.
Co. v. Am. Family Mut. Ins. Co., 604 N.W.2d 91, 954 (Minn. 2000)); see also Christian
v. Birch, 763 N.W.2d 50, 55 (Minn. Ct. App. 2009).
Here, Defendants argue that their counterclaims, which were brought in November
2012, are timely even under Delaware’s statute of limitations – suggesting that no
outcome determinative conflict exists. Specifically, Defendants argue that even if their
claims based upon Whitney’s September 2007 unauthorized rerouting of MyTeleservices
funds are governed by Delaware law, those claims were not discovered until December
2007 and are therefore timely. Defendants’ argument regarding the timeliness of their
counterclaims – which they concede accrued no later than December 2007 – relies upon
the filing date of Whitney’s complaint – October 2010 – not the filing date of the
counterclaims – November 2012. Because the existence of an outcome determinative
conflict is a prerequisite to conducting a choice of law analysis, the Court addresses, as
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an initial matter, whether Defendants’ counterclaims would, in fact, be barred by
Delaware’s statute of limitations.
Under Delaware law, where a counterclaim seeks affirmative relief rather than
acting merely as a defense to a plaintiff’s allegations, it does not relate back to the filing
of the complaint, but must independently satisfy the statute of limitations. Di Norscia v.
Tibbett, 124 A.2d 715, 716 (Del. Sup. Ct. 1956); see also Playtex, Inc. v. Columbia Cas.,
1993 WL 390469, at *3 (Del. Sup. Ct. Sept. 20, 1993). In other words, if a counterclaim
“is a defensive measure concerning matters growing out of the same transaction or
occurrence which was the basis of the opponent’s claim and (is) utilized for the reduction
or extinguishment of the opponent’s claim” it will not be barred by the statute of
limitations if the “main action is timely.” Nalley v. McClements, 295 F. Supp. 1357,
1359 (D. Del. 1969) (internal quotation marks omitted). But counterclaims seeking an
affirmative judgment in defendant’s favor “are regarded as independent causes of action”
and “may not be instituted after the applicable period of the statute of limitations has
expired.” Id. at 1360 (internal quotation marks omitted).
Here, Defendants’ counterclaims seek affirmative relief arising out of a particular,
discrete incident in the course of Whitney’s relationship with the Corporate Defendants
rather than a reduction or extinguishment of Whitney’s own claims.
Defendants allege conversion, civil theft, unjust enrichment and fraud, seeking damages
in excess of $200,000 as well as punitive damages arising out of Whitney’s alleged
misappropriation of MyTeleservices funds. (Countercls. at 7-9.) These are affirmative
counterclaims, not defenses to Whitney’s claims for denial of his shareholder rights. See
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PNC Bank, Del. v. Turner, 659 A.2d 222, 223, 225 (Del. Super. Ct. 1995) (finding a
counterclaim alleging a violation of the Equal Credit Opportunity Act with respect to
certain notes and seeking a monetary award to be an affirmative counterclaim barred by
the statute of limitations in an action where plaintiff alleged default on the payment of
those notes because the counterclaim “is an independent action which is not dependent
upon the plaintiff’s claim. In other words, [defendant] was not required to rely on the
commencement of an action by plaintiff in order to initiate an action of her own.”).
Therefore, the Court concludes that Defendants’ counterclaims, as affirmative causes of
action, are required to satisfy the statute of limitations independently. Because the
counterclaims accrued no later than December 2007, as evidenced by the letter from
MyTeleservices explaining the discovery of the diverted funds, Defendants would have
had to bring their counterclaims by December 2010 to be timely under Delaware’s statute
of limitations. But the counterclaims were not filed until November 2012. Accordingly,
Defendants’ counterclaims are barred under Delaware law, but would still be timely
under Minnesota’s six-year statute of limitations.
Therefore, an actual, outcome
determinative conflict exists between Delaware and Minnesota law with regard to the
statute of limitations, and the Court will proceed to conduct a choice of law analysis.
After determining that an actual conflict exists, Minnesota courts next “consider
whether the rule of each state may be constitutionally applied.” Nodak Mut. Ins. Co., 590
N.W.2d at 672. “‘[F]or a State’s substantive law to be selected in a constitutionally
permissible manner, that State must have a significant contact or significant aggregation
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of contacts, creating state interests, such that choice of its law is neither arbitrary nor
fundamentally unfair.’” Jepson, 513 N.W.2d at 469 (quoting Allstate Ins. Co. v. Hague,
449 U.S. 302, 312-13 (1981)). In making this determination, the Court considers the
nature and number of contacts the state has to the facts of the case.
Petroleum Co. v. Shutts, 472 U.S. 797, 821-22 (1985).
The parties do not dispute that either state’s law could constitutionally be applied
to Defendants’ counterclaims. Indeed, the Eighth Circuit has already found that either
Delaware or Minnesota law could constitutionally be applied to Whitney’s claims, and
the Court concludes that although the allegations in the counterclaims are different from
the allegations underpinning Whitney’s claims, the Eighth Circuit’s analysis of the
constitutionality of applying either state’s law applies with equal force here. The Eighth
Circuit concluded that in light of “the relevancy of Delaware law to determining the
ownership issues inherent in the contract claims, there is nothing ‘arbitrary nor
fundamentally unfair’ about applying Delaware law.” Whitney II, 700 F.3d at 1123-24
(quoting Allstate Ins. Co., 449 U.S. at 313). The Eighth Circuit also found application of
Delaware law to be constitutional because issues regarding ownership and the duties
owed to Whitney would “turn almost entirely on an analysis of Delaware corporate law.”
Id. at 1124. As with Whitney’s claims, resolution of Defendants’ counterclaims would
turn almost entirely on an analysis of Delaware corporate law to ascertain Whitney’s role
in and control over MyTeleservices, and correspondingly, its funds. Therefore, the Court
concludes that application of Delaware law to Defendants’ counterclaims would be
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Choice Influencing Considerations
Where, as here, an actual conflict exists and the law of either state can
constitutionally be applied, the Court must go on to apply five choice-influencing
considerations to determine which law should govern: (1) predictability of result;
(2) maintenance of interstate order; (3) simplification of judicial task; (4) advancement of
the forum’s governmental interest; and (5) application of the better rule of law. Jepson,
513 N.W.2d at 470 (citing Milkovich v. Saari, 203 N.W.2d 408, 412 (Minn. 1973)).
Defendants’ primary argument that Minnesota law should apply under the choiceinfluencing considerations is their contention that the agreement between Pimental, Geoff
Morrison, and Whitney regarding the diverting of funds from MyTeleservices was
conceived in Minnesota and the companies “reside” in Minnesota. But in light of the
procedural history of this matter, the Court finds these arguments unpersuasive.
Defendants advocated strongly at the motion to dismiss stage and on appeal that
Delaware law applied in order to achieve the dismissal of Whitney’s claims on statute of
The Eighth Circuit agreed with Defendants and engaged in a
thorough choice of law analysis to affirm the Court’s determination that Delaware law
applied to all of Whitney’s claims – including ones such as fraud that, like Defendants’
counterclaims, was conceived of and occurred in Minnesota. In particular, the Eighth
Circuit gave “substantial weight” to the factors examining predictability of results and
simplification of the judicial task, to conclude that Delaware law should apply to
Whitney’s claims, explaining:
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[W]e believe that the parties to this purported commercial transaction must
have expected the duties of the corporate defendants and the relative rights
of purported owners to be defined by Delaware law. Further, it is not at all
clear how a court might grant Whitney the relief he seeks without
addressing matters of Delaware law. As such, the application of Delaware
law represents the simpler (and, potentially, the only feasible) judicial task
and appears to best honor the expectations of the parties to the alleged
transaction involving the creation, ownership, and rights related to
Id. at 1125. The same analysis is true for Defendants’ counterclaims. As described in the
background section of this Order, the primary issue discussed by both sides regarding the
counterclaims is whether Whitney was an officer or director of MyTeleservices and
therefore whether he had the authority to reroute the funds to MyTeleservices. Therefore,
in order to decide Defendants’ claims for conversion, unjust enrichment, fraud, and civil
theft, the Court would necessarily be required to address matters of Delaware corporate
law. Additionally, although each of these shell corporations may have been housed at
some point in Minnesota, this was also the case with respect to Whitney’s claims, and
does not alter the fact that Defendants are Delaware corporations that could have
predicted that the rights and duties of their owners or alleged owners would be defined by
Accordingly, the Court concludes that Delaware law applies to
Defendants’ counterclaims, and those counterclaims are barred by the statute of
limitations. Therefore, the Court will grant Whitney’s motion for summary judgment to
the extent it seeks dismissal of Defendants’ counterclaims on statute of limitations
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Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that:
Defendants’ Motion for Summary Judgment [Docket No. 87] is
GRANTED in part and DENIED in part.
The motion is GRANTED to the extent it seeks dismissal of
Plaintiff’s claims on statute of limitations grounds.
The motion is DENIED in all other respects.
Plaintiff’s claims for an accounting (Count VII), breach of
shareholder rights (Count VIII), and breach of fiduciary duty (Count IX) are
DISMISSED with prejudice.
Plaintiff’s Motion for Partial Summary Judgment [Docket No. 91] is
GRANTED in part and DENIED in part.
The motion is GRANTED to the extent it seeks dismissal of Defendants’
counterclaims on statute of limitations grounds.
The motion is DENIED in all other respects.
Defendants’ counterclaims for conversion (Count I), civil theft (Count II),
unjust enrichment (Count III), and fraud (Count IV) are DISMISSED with prejudice.
LET JUDGMENT BE ENTERED ACCORDINGLY.
DATED: September 23, 2014
at Minneapolis, Minnesota.
JOHN R. TUNHEIM
United States District Judge
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