Donald Sealock, derivatively on behalf of St. Michael Mall, Inc., Appellant,

This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2016).

STATE OF MINNESOTA
IN COURT OF APPEALS
A17-1441

Donald Sealock, derivatively on behalf of
St. Michael Mall, Inc.,
Appellant,

vs.

John A. Robeck, Michael F. Hosko, Ronald D. Reh,
Julie M. Reh in their capacities as
Officers, directors, and/or shareholders of
St. Michael Mall, Inc., et al.,
Respondents.

Filed April 23, 2018
Affirmed in part, reversed in part, and remanded
Rodenberg, Judge

Wright County District Court
File No. 86-CV-17-2121

Thomas H. Boyd, David A. Davenport, Chri stina Rieck Loukas, Wi nthrop & Weinstine,
P.A., Minneapolis, Minnesota (for appellant)

Jacob T. Erickson, Patrick M. O’Donnell, Michael J. Patera, Smith, Paulson, O’Donnell &
Erickson, PLC, Monticello, Minnesota (for respondents)

Considered and decided by Smith, Trac y M., Presiding Judge; Bjorkman, Judge;
and Rodenberg, Judge.

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U N P U B L I S H E D O P I N I O N
RODENBERG, Judge
Appellant Donald Sealock ch allenges the district court’s application of res judicata
to dismiss his derivative claims on behalf of St. Michael Mall, Inc. (St. Michael). Appellant
argues that the district court erred in applying res judicata because his earlier action did not
involve the same parties or privies, there was no final judgment on the merits in the earlier
action, and appellant did not have an opportunity to fairly and fully litigate these derivative
claims. Because the district court erroneously applied res judicata as a bar to appellant’s
derivative claims, we reverse and remand for further proceedings. In a related appeal,
respondents challenge the district court’s order denying their motion for sanctions and
attorney fees, contending that the district court erred in failing to award them attorney fees.
We affirm the district court’s denial of sanctions and fees.
FACTS
Appellant is a shareholder, and former president of th e board of directors, of
St. Michael, a closely held S-corporation 1 formed for the purpose of purchasing and
operating a mall property in Wright County . Respondents are all current or former
shareholders in St. Michael, and current or former directors of St. Michael. Each
shareholder of St. Michael holds common shares proportionate to the total square footage
of the mall each leases as a mall tenant.

1 An S-corporation is taxed differently than a regular corporation. 20 Minn. Prac. Business
Law Deskbook § 1:7 (2018). S-corporations are subject to pass-through taxation, which
means that any profits are distributed to shareholders, who then pay taxes on the profits as
individuals. Id.

3
The First Action
Disputes arose between appellant and re spondents regarding the management of
St. Michael. St. Michael sued its property-management company, that company’s owner,
and appellant in a lawsuit previous to this one (first action).2 In the first action, St. Michael
alleged breach of fiduciary dut y, conversion, past-due rent , and civil conspiracy, and it
sought equitable remedies based on allegations that the property-management company’s
owner, individually and through his companies, improperly took money from St. Michael
in the role of the mall’s property manager. St. Michael also sued appellant, alleging that
he “engaged in a pattern of misdealing, sel f-dealing, and waste in violation of his duty
owed to the mall.”
Appellant brought third-party claims against respondents and against St. Michael’s
newly contracted property-management company, alleging that respondents violated their
statutory duties, breached their fiduciary duties, and that the board of directors committed
corporate waste and civil conspiracy. Appellant also requested equitable relief. After some
other pleadings amendments, appellant moved for leave to amend his third-party complaint
for a second time to add deri vative claims on behalf of St . Michael and for permissive
intervention to add his wife as a third-party plaintiff. The district court denied both
motions, determining that the newly di scovered evidence on which the proposed
amendments were based was not new, and that the amendments would not “meaningfully
impact the litigation” and would substantially delay and unduly prejudice the other parties.

2 The first action remains pending in district court at the time of this decision.

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The parties brought cross-motions for su mmary judgment. The district court
granted summary judgment for appellant on St. Michael’s claims against him for
conversion, past-due rent, civil conspiracy, and for equitable remedies. It granted summary
judgment for respondents and St. Michae l’s new property-management company on
appellant’s third-party claim for corporate waste. Notably, appellant’s claim for corporate
waste was dismissed because the district court determined that the claim should have been
brought as a derivative claim. The district court denied summary judgment on appellant’s
third-party claims for breach of statutory duties, equitable remedies, breach of fiduciary
duties, and civil conspiracy.
After the district court’s summary-judgment ruling, appellant asked the district court
to reconsider the denial of his motion to amend the complaint. He argued that, because his
direct claim alleging corporate waste was di smissed by the district court based on its
reasoning that it should have been brought as a derivative claim, and the district court had
earlier denied his motion to amend his pleadi ngs to add a derivative claim for corporate
waste, the district court sh ould now allow the amendment denied earlier based on the
reasoning that the amendment would not “meaningfully impact the litigation.” Appellant
specifically argued that allowi ng him to add the derivative corporate-waste claim would
avoid his bringing the very same claim in a second action.
This Action
Appellant commenced this second, derivative suit before the district court acted on
appellant’s request for reconsideration in the earlier case. The district court later declined
to reconsider.

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Appellant’s complaint in this action is styl ed as a derivative suit, and alleges that
respondents violated their statutory and fiduciary duties to St. Michael, and that the board
of directors committed corporate waste. It also requests equitable relief.3 These claims are
based on the same facts as appellant’s third-party complaint in the first action, namely that
some shareholders were paying rent at less-than-the-market rates for their space in the mall,
that rent owed by some of the shareholders wa s not paid to St. Mich ael, that St. Michael
improperly terminated the contract of its in itial property-management company, that two
shareholders improperly sold their shares without honoring the other shareholders’ right of
first refusal and St. Michael e ffectively “subsidized” this sa le to a new shareholder, and
that corporate funds were improperly used to pay attorneys to accomplish these allegedly
wrongful acts.
Appellant’s Motion to Consolidate Actions and Respondents’ Motion
for Judgment on the Pleadings

Appellant moved the district court to consolidate this action with the first action,
under Minn. R. Gen Pract. 113.02. Respondents moved for judgment on the pleadings in
this action, arguing that res judicata and collateral estoppel barred this action.

3 In response to appellant’s filing of this action, respondents notified appellant’s counsel
that they would be seeking rule 11 sanctions and attorney fees if appellants did not
withdraw the derivative suit because it was barred by res judicata and collateral estoppel,
and was brought in bad faith. They later moved for sanctions and attorney fees. The district
court denied respondents’ mo tion. It found that responde nts’ motion was procedurally
sufficient, but that sanctions were not appropriate because the claim was not brought in bad
faith.

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The district court granted respondents’ motion for judgment on the pleadings in this
action. It determined that res judicata ba rred appellant’s derivative claims because the
parties and the causes of action were the same in the two suits. It concluded that the earlier
denial of appellant’s motion to amend his third-party complaint in the first action amounted
to a final judgment on the mer its. It also determined that appellant had a full-and-fair
opportunity to litigate his cl aims, including the derivative claims, and c oncluded that
appellant had participated in discovery and was not procedur ally limited in his ability to
litigate his first action. It further concluded that appellant was fully incentivized to litigate
in the first action the issues raised in this action.
This appeal followed.
D E C I S I O N
Appellant argues that the district court e rred when it applied re s judicata to grant
respondents’ motion for judgment on the pleadings in this action, a derivative suit. He
argues that the district cour t erred when it determined th at he was in privity with
St. Michael, that there was a final judgment on the merits, and that he had a full and fair
opportunity to litigate his derivative claims in the first action.
“On appeal from a grant of a motion for judgment on the pleadings under Minn. R.
Civ. P. 12.03, we consider only the facts alleged in the complaint, accepting those facts as
true and drawing all reasonable inferences in favor of the nonmoving party.” Burt v.
Rackner, Inc., 902 N.W.2d 448, 451 (M inn. 2017) (quotation om itted). We review the
district court’s application of res judicata de novo. Rucker v. Schmidt, 794 N.W.2d 114,
117 (Minn. 2011). The doctrine of res judicata provides that “[a] judgment on the merits

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constitutes an absolute bar to a second suit for the same cause of action, and is conclusive
between parties and privies, not only as to ev ery matter which was actually litigated, but
also as to every matter which might have been litigated therein.” Sundberg v. Abbott, 423
N.W.2d 686, 689 (Minn. App. 1988) (quoting Mattesen v. Packman, 358 N.W.2d 48, 49
(Minn. 1984) (emphasis removed)), review denied (Minn. June 29, 1988). Res judicata, or
claim preclusion, acts as a bar to a subseque nt claim when “(1) the earlier claim involved
the same set of factual circumstances; (2) th e earlier claim involved the same parties or
their privies; (3) there was a final judgment on the merits; [and] (4) the estopped party had
a full and fair opportunity to litigate the matter.” Hauschildt v. Beckingham, 686 N.W.2d
829, 840 (Minn. 2004). For the doctrine to apply, an earlier claim must have been “decided
between the same parties who were actual ly adversaries in the prior litigation.” Nitz v.
Nitz, 456 N.W.2d 450, 452 (Minn. App. 1990) (quotation omitted). If all four elements are
present, a district court may exercise its di scretion in determining whether to apply res
judicata to bar a claim. Dixon v. Depositors Ins. Co. , 619 N.W.2d 752, 757 (Minn. App.
2000).
I. Because the second element, that the ac tions involve the “same parties or their
privies,” is not met on these facts, res judicata does not apply to bar appellant’s
derivative action.

Appellant makes no argument on appeal regarding the first element of res judicata,
but disputes the remaining thr ee elements. Because the second res judicata element, that
res judicata is available only if the two actions involve the same parties or their privies, is
plainly not satisfied on these fa cts, we reverse the district court’s dismissal based on its

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application of res judicata. We do not ad dress appellant’s arguments concerning the
remaining elements, regardless of their merit.
A. The first action and the derivative cl aims in this acti on do not involve
the same parties.

The derivative claims appellant asserts in this second and derivative action belong
to the corporation and not to appellant. “W hen a shareholder asserts a cause of action
belonging to the corporation, the shareholder must seek redress in a derivative action on
behalf of the corporation rather than in a di rect action by the individual shareholder.”
Wessin v. Archives Corp., 592 N.W.2d 460, 464 (Minn. 1 999). A shareholder bringing a
derivative claim “step[s] into the corporation’s shoes.” In re UnitedHealth Grp. Inc.
S’holder Derivative Litig., 754 N.W.2d 544, 550 (Minn. 2008) (quotation omitted). Here,
as a minority shareholder, appellant asserts de rivative claims on beha lf of St. Michael.
Appellant’s third-party claims brought agains t respondents in the first suit were direct
claims. Those direct claims asserted only appe llant’s rights, not those of the corporation.
Because the claims in the second action are derivative and belong to St. Michael, the second
element of res judicata cannot be met. The actions do not involve the same parties.
B. Appellant is not “in privity” with S t. Michael for res judicata purposes.
Appellant and St. Michael were likewise no t “in privity” with one another in the
first action. While there is no overarching definition of privity that can be applied
universally, “[p]rivity is usually a question of fact requiring a case-by-case determination.”
Miller v. Nw. Nat’l Ins. Co. , 354 N.W.2d 58, 62 (Minn. App. 1984). “A privy to a party
may be identified by the privy’s controlling pa rticipation and active self-interest in the

9
original litigation. A privy is so identified with the party in interest as to be affected with
the party by the litigation.” Id. (citation omitted).
Minnesota law establishes that a minority shareholder bringing a derivative action
on behalf of a corporation after a direct action by the shareholder individually and
involving the same issues is not necessarily in privity with the corporation for purposes of
considering whether res judicata bars the later derivative action. In Miller, we reasoned
that it was possible for a majority owner to be so “sufficiently identified” with the interests
of a corporation as “to be said to represen t the corporate concerns in his individual
litigation.” Id. We relied on the Restat ement (Second) of Judgments § 59 (1982) for the
general rule that “[a]n individual who has full ownership of a corporation and is in complete
control of its affairs is presumed to have a sufficient common interest to be in privity with
the corporation.” Id.
In Miller, we also quoted comment (e) to the Restatement § 59, which guides courts
to consider evidence of “conflic t” between the interests of an owner of a closely held
corporation and the interests of the corporation when considering whether the interests of
both were aligned when determining whether the parties are in privity:
When [a] controlling owner is th e party to the litigation, his
opportunity and incentive to litigate issues commonly affecting
him and the corporation is ordi narily sufficient to treat his
participation as being on behalf of the corporation as well. . . .
However, it can happen that a substantial proprietor in a
corporation finds himself in co nflict with the corporation’s
management or with other stockholders . . . [.] The rule of . . .
preclusion should not be applie d in such circumstances, or
where its application would unf airly affect another person
associated with the corporation, or . . . where the interests of
the corporation and its owners were in such potential conflict

10
. . . that it would be unfair to give preclusive effect to the prior
determination.

Id. (quoting Restatement (Second) of Judgments § 59 cmt. e).
Applying Restatement § 59 and our reasoning in Miller here, appellant was certainly
not in privity with St. Michael in the first action. His intere sts were very different than
St. Michael’s in the first action. St. Michael was suing him. In this action, appellant asserts
derivative claims of the corporation by a minority shareholder. As a minority shareholder,
appellant does not exercise significant cont rol over St. Michael. Having been directly
adverse to St. Michael in the first action, wherein he asserted his direct claims, he did not
assert derivative claims on behalf of St. Mich ael. The district court denied his motion to
amend the pleadings in the first action to assert those claims. Appellant cannot be “said to
[have sufficiently] represent[ed] the corporate concerns” in the first action such that we can
conclude that he was in privity with St. Michael for res judicata to bar the derivative claims
he now brings in the current suit. Miller, 354 N.W.2d at 62.
The second element of res judicata is not sa tisfied here. The district court focused
its analysis of the second re s judicata element on whether the cases involved “the same
claims based on the same facts.” The proper focus for the second element is whether the
parties are “the same parties or their privies.” Hauschildt, 686 N.W.2d at 840. Appellant’s
claims as stated in the second complaint ar e derivative and are therefore claims of the
corporation and not of appellant individually. Appellant and St. Michael are not in privity
for res judicata purposes.

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In our view, it is noteworthy that the district court denied appellant’s motion to add
these derivative claims in the first action. The district court dismissed appellant’s
corporate-waste claim at summary judgment b ecause it determined th at appellant should
have brought the claim as a derivative claim; it then applied res judicata and dismissed this
action asserting those very derivative claims. See Wessin, 592 N.W.2d at 462 (recognizing
that minority shareholders may bring a new suit with properly pleaded derivative claims
following the dismissal of their direct claims as improperly plead derivative claims).
Although appellant’s arguments concerning the other elements of res judicata may
also have merit, we need not reach them because the second res judicata element is plainly
not met. We also do not reach the merits of appellant’s derivativ e action; this appeal
concerns only the summary dismissal of the action on res judicata principles. We reverse
the district court’s judgment on the pleadi ngs dismissing appellant’s derivative claims
based on its erroneous application of res judicata, and we remand for further proceedings.
II. The district court did not abuse its di scretion in denying respondents’ motion
for attorney fees.

In the related appeal, respondents challenge the district court’s denial of their motion
for attorney fees pursuant to Minn. R. Civ. P. 11. Respondents’ challenge is premised on
the district court having properly dismissed appellant’s claims in the second action as
barred by res judicata. Respondents argue that appellant’s “second suit was not founded
upon the law, nor a good faith request to extend the law, because the second suit was barred
by res judicata.”

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We review a district court’s ruling on attorney fees for abuse of discretion. Johnson
ex rel. Johnson v. Johnson , 726 N.W.2d 516, 518 (Minn. App. 2007). The district court
concluded that respondents’ motion was procedurally sufficient but that sanctions were not
appropriate because appellant’s claims were not brought in bad faith. The district court
found that appellant brought the derivative claims on behalf of St. Michael as a shareholder
after the previous summary-judgment ruling “held he could not bring [the corporate-waste]
claim individually” and that there was “suffi cient legal authority and facts to support
bringing the [derivative] claim[s].” It further found that “there is no evidence [this action]
was brought to delay the proceedings or for an improper purpose.”
Because appellant’s derivative claims are not barred by res judicata, there is no basis
on this record to conclude that the district court abused its discretion when it denied
respondents’ motion for attorney fees. We therefore affirm the district court on this issue.
Affirmed in part, reversed in part, and remanded.