Dustin Ward, et al., Appellants,

STATE OF MINNESOTA
IN COURT OF APPEALS
A19-1592

Dustin Ward, et al.,
Appellants,

vs.

El Rancho Manana, Inc., et al.,
Respondents.

Filed May 18, 2020
Affirmed
Connolly, Judge

Stearns County District Court
File No. 73-CV-18-11033

Sarah R. Jewell, Kyle Murray, Franz Hultgren Evenson, P.A., St. Cloud, Minnesota (for
appellants)

Christopher A. Wills, Eric Oelrich, Rajkowski Hansmeier, Ltd., St. Cloud, Minnesota (for
respondents)

Considered and decided by Reilly, Presiding Judge; Connolly, Judge; and Hooten,
Judge.
S Y L L A B U S
Under the doctrine of res judicata, shareholders of a closely held corporation who
bring later derivative claims share privity with different shareholders of the same
corporation that brought an earlier lawsuit alleging derivative claims when the two suits
involve claims arising from the same set of factual circumstances.

2
O P I N I O N
CONNOLLY, Judge
In this dispute between shareholders in a closely held family business , appellants
argue that the district court erred in dismissing their declaratory-judgment action. Because
the district court did not err when it granted respondents’ motions to dismiss and for
summary judgment, we affirm.
FACTS
I. Background Information
In 1998, respondent Richard Ward formed Ward Family, Inc (WFI), with the stated
purpose of giving his 1,200 -acre property (the property) to his seven children while
minimizing gift and estate tax burdens. Blum v. Thompson , 901 N.W.2d 203, 209 -10
(Minn. App. 2017), review denied (Minn. Oct. 25, 2017). 1 Richard2 then transferred his
interest in the property to WFI through a quitclaim deed. Id. at 210. He became WFI’s
sole director and officer, and he gave each child about two percent of WFI’s outstanding
shares. Id. Appellants Dustin, Kayla, and Kelsie Ward own shares in WFI. 3
Richard and his then-wife, Rosemary Ward, had purchased respondent El Ranch o
Manana, Inc. (ERMI) from Rosemary’s parents in the 1960s or 1970s. Id. at 208. ERMI
operates a commercial campground and horse stable on 200 acres of the property. Id.

1 Other shareholders from WFI appealed an adverse grant of summary judgment to this
court. We cite this prior decision to provide relevant factual information and analysis.
2 We use first names for clarity and consistency with the district court’s and parties’ usage.
3 Appellants are the children of Richard’s son, Charles Ward. The record does not explain
when or how they became shareholders in WFI.

3
When Richard and Rosemary divorced in 1985, they agreed that Richard would receive the
entire 1,200-acre property and all shares of ERMI subject to certain restrictions. Id. at 208-
09. After Richard formed WFI, ERMI continued to conduct business on the 200 -acre
portion of the property without a written lease agreement. Id. at 210. His son, respondent
Kevin Ward, began managing ERMI in the 1990s.
Eventually, Richard began rel inquishing more control of WFI to his children. By
2012, Richard owned 50.2% of the outstanding shares while each of his seven children
owned about seven percent. Id. at 211. Also in 2012, the shareholders elected three
directors: Richard and two of hi s daughters, respondents Ann Sullivan and Molly
Thompson. Id.
WFI and ERMI executed a written lease agreement in 2012. Id. at 212. Under this
agreement, ERMI can use the entire property for a 20 -year term and holds the right to
renew for another 20-year term. Id. After that, it may become a year -to-year tenant. Id.
The lease requires ERMI to pay rent in an amount that covers WFI’s administrative and
professional fees, real estate taxes and assessments , mortgage payments, and debt
payments on any fu ture obligations for improvements that ERMI requests. Id. Three
months after the lease’s execution, Kevin purchased ERMI. Id. Upon assuming
ownership, Kevin began restricting other WFI shareholders’ access to the property. Id.
II. Prior Litigation
In February 2014, WFI shareholders Kathryn Ward Blum, Charles Ward, and
Thomas Ward (the plaintiffs) sued Molly, Ann, Richard, Kevin, and WFI (the defendants),
alleging various direct and derivative claims. Id. at 213. The three direct claims were:

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(1) breach of fiduciary duty, (2) oppression of minority shareholders’ rights in violation of
Minn. Stat. § 302A.751 (2018), and (3) a request for litigation costs under Minn. Stat.
§ 302A.467 (2018).4 Id. The four derivative claims asserted on WFI’s behalf against the
individual defendants included (1) breach of fiduciary duty, (2) corporate waste, (3) unjust
enrichment, and (4) requests for litigation costs. Id.
In response to the suit, WFI formed a special litigation committee (the SLC) in 2014
to evaluate the derivative claims. Id. WFI, through the SLC, agreed with Kevin to
“resolve[] . . . allegations against [him] in lieu of commencement of a lawsuit.” Id. Based
on this agreement, WFI renegotiated its lease with ERMI to prevent ERMI from
encumbering WFI’s property without prior approval. Id. And the renegotiated lease
prohibited ERMI from unreasonably restricting WFI shareholders’ access to the property.
Id.
The SLC issued a 21-page report in April 2015 concluding that the defendants did
not br each their fiduciary duties, did not commit corporate waste, and did not act
fraudulently or illegally. Id. As a result, the SLC recommended against WFI pursuing any
of the plaintiff’s derivative claims. Id.
Following a grant of summary judgment to the defendants on the direct and
derivative claims, the plaintiffs appealed. Id. at 213 -14. This court affirmed in part,
reversed in part, and remanded the case. Id. at 223. On remand, a jury and the district

4 We cite the current version of these statutes because they have not been amended since
the plaintiffs brought their lawsuit in 2014. See Interstate Power Co. v. Nobles Cty. Bd. of
Comm’rs, 617 N.W.2d 566, 575 (Minn. 2000) ( recognizing that, generally, “appellate
courts apply the law as it exists at the time they rule on a case”).

5
court ruled against the plaintiffs on t heir breach of fiduciary duty and shareholder -
oppression claims following a bifurcated trial . Blum v. Thompson , A19-0938, 2020 WL
1983218, at *1 (Minn. App. Apr. 27, 2020) (Blum II). After the plaintiffs appealed the
resulting judgment against them, this court affirmed. Id. at *12.
III. This Case
In December 2018, a ppellants brought a declaratory -judgment action against
respondents seeking judicial review of the lease between WFI and ERMI. Count one of
this action alleged that lease paragraph two violated the statutory rule against perpetuities.
That paragraph states that WFI and ERMI’s lease will expire in 2032, but it allows ERMI
to renew the lease for another 20 -year term and to become a year -to-year tenant in 2052
when the potential 40-year term ends.
Count two of the complaint sought a court order declaring lease paragraphs three
and nine invalid as an equitable mortgage. Paragraph three defines ERMI’s rent
obligations, while paragraph nine addresses the part ies’ respective obligations for
improvements to the property. Appellants alleged that the lease constitutes an equitable
mortgage, claiming that WFI is essentially financing ERMI’s purchase of the property over
the lease term.
After answering, respondents moved to dismiss count one for failure to state a claim
and sought summary judgment on count two. In their memorandum of law opposing the
motions, appellants requested addit ional time to conduct discovery . Yet their attached
declarations did not explain why they needed more time to conduct discovery or specify
what evidence they would uncover with additional time.

6
The district court granted respondents’ motions. In doing so, it reasoned that
appellant’s failed to state a claim on count one because they had no interest in the property.
Alternatively, it held that count one presented a nonjusticiable controversy. On count two,
the district court held that res judicata barred appellants’ claim. As alternative reasons for
granting summary judgment on count two, the district court cited laches and held that the
lease did not constitute an equitable mortgage. This appeal follows.
ISSUES
I. Did the district court err in granting respondents’ motion to dismiss count one for
failure to state a claim?
II. Did the district court err in granting respondents’ motion for summary judgment on
count two by applying res judicata?
III. Did the district court err when it denied appellants’ request for a scheduling order
and more time to conduct discovery?
ANALYSIS
I. Dismissal of Count One for Failure to State a Claim

To begin, appellants argue that the district court erred in dismissing count one under
Minn. R. Civ. P. 12.02(e) for failure to state a claim without first converting the motion to
dismiss into a motion for summary judgment. But a district court may consider documents
referenced in the complaint without transforming a motion to dismiss into one for summary
judgment. N. States Power Co. v. Minn. Metro. Council , 684 N.W.2d 48 5, 490 (Minn.
2004).

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Here, appellants attached the lease between WFI and ERMI to their complaint,
which sought judicial review of the lease. Although respondents attached many documents
to the memorandum supporting their motions, they referenced only the lease in arguing for
dismissal of count one. Thus, the district court properly considered the lease without
converting the motion to dismiss into a motion for summary judgment. See In re Hennepin
Cty. 1986 Recycling Bond Litig. , 540 N.W.2d 494, 497 ( Minn. 1995) (upholding district
court’s consideration of contract when deciding motion to dismiss because the complaint
referenced parts of contract).
We turn now to the merits of the decision to dismiss count one. An appellate court
reviews de novo a dis trict court’s dismissal of a claim under Minn. R. Civ. P. 12.02(e).
Bahr v. Capella Univ. , 788 N.W.2d 76, 80 (Minn. 2010). In our review, we accept the
pleaded allegations as true and construe all reasonable inferences in the nonmoving party’s
favor. Walsh v. U.S. Bank, N.A., 851 N.W.2d 598, 606 (Minn. 2014). But legal conclusions
in a complaint do not bind us. Bahr, 788 N.W.2d at 80.
Count one alleged that the lease between WFI and ERMI violated Minnesota’s
statutory rule against perpetuities. Under that statute, “a nonvested property interest is
invalid unless (1) when the interest is created, it is certain to vest or terminate no more than
21 years after the death of an individual then alive; or (2) the interest either vests or
terminates within 90 years after its creation.” Minn. Stat. § 501A.01(a) (2018). This
statutory sec tion supersedes the common -law rule against perpetuities. Minn. Stat.
§ 501A.06 (2018).

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Appellants argue that the lease between WFI and ERMI violates the statutory rule
against perpetuities because their interest in the leased land will not vest within 21 years of
the lease’s creation. Because the complaint does not allege that appellants have individual
interests in the property, we take this allegation to mean that WFI’s int erest in the land is
too unclear under the lease. The lease began on December 31, 2012, and will expire in 40
years unless ERMI declines to renew it automatically. So the year 2052 marks the lease’s
endpoint. After that, ERMI may holdover and become a year-to-year tenant.
But count one never alleged that the claimed interest will fail to vest or terminate
within 90 years after the lease’s execution. See Minn. Sta t. § 501A.01(a)(2). And we
cannot see from the pleaded allegations how the lease would violate this second section.
The lack of factual allegations asserting such a violation makes dismissal proper under
Minn. R. Civ. P. 12.02(e). As a result, we need n ot address the district court’s ruling that
count one presented a nonjusticiable controversy.
II. Summary Judgment on Count Two Under Res Judicata
Appellants’ second argument is that the district court erred in applying res judicata
to grant summary judgment for respondents on count two. An appellate court review s a
district court’s grant of summary judgment de novo. Firefighters Union Local 4725 v. City
of Brainerd, 934 N.W.2d 101, 106 (Minn. 2019). Summary judgment is proper when “the
movant show s that there is n o genuine issue as to any material fact and the movant is
entitled to judgment as a matter of law.” Minn. R. Civ. P. 56.01.

9
The parties focus on the district court’s application of res judicata5 to grant summary
judgment for respondents on count two of appellants’ declaratory -judgment action. A
district court’s application of res judicata is reviewed de novo. Rucker v. Schmidt , 794
N.W.2d 114, 117 (Minn. 2011). The doctrine of res judicata involves facts giving rise to a
claim and bars later litigation, no matter whether a party or its privy litigated a specific
issue or legal theory. Hauschildt v. Beckingham, 686 N.W.2d 829, 840 (Minn. 2004). Res
judicata is a doctrine of finality, and it applies to all claims that could have been litigated
in an earlier action. Id. Courts should invoke res judicata carefully. Wilson v. Comm’r of
Revenue, 619 N.W.2d 194, 198 (Minn. 2000).
Res judicata applies when four elements are met: “(1) the earlier claim involved the
same set of factual circumstances; (2) the 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, 686 N.W.2d at 840. We examine
these elements in turn.6 And because the facts here satisfy all four elements, we conclude
that the district court properly applied res judicata to count two.

5 Minnesota courts use the term “res judicata” to describe claim preclusion. See State v.
Joseph, 636 N.W.2d 322, 326 n.1 (Minn. 2001) (describing the supreme court’s historical
use of this term).
6 In their brief, respondents also argue that collateral estoppel (issue preclusion) bars count
two. But the district court did not rule on this argument , so we decline to address it. See
Hoyt Inv. Co. v. Bloomington Co mmerce & Trade Ctr. Assocs. , 418 N.W.2d 173, 175
(Minn. 1988) (“[A]n undecided question is not usually amenable to appellate review.”).

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A. Same set of factual circumstances
Under the first res judicata prong, we consider whether the later claim involves the
same set of factual circumstances as claims in the prior action. Id. Minnesota courts
prohibit a plaintiff from dividing their causes of action involving the same f actual
circumstances into separate suits. Hauser v. Mealey, 263 N.W.2d 803, 807 (Minn. 1978).
“A claim or cause of action is a group of operative facts giving rise to one or more bases
for suing.” Hauschildt, 686 N.W.2d at 840 (quotation omitted).
While appellants argued in their brief that count two alleged direct harm, their
counsel conceded at oral argument that it was a derivative claim. In a derivative suit, the
shareholder “step[s] into the corporation ’s shoes” and seeks redress that he could n ot
demand for himself. In re UnitedHealth Grp. Inc. S’holder Derivative Litig., 754 N.W.2d
544, 550 (Minn. 2008) (quotation omitted). But if a shareholder shows an injury that the
corporation does not share, the shareholder has a direct claim. In re Med tronic, Inc.
S’holder Litig., 900 N.W.2d 401, 409 (Minn. 2017).
Our analysis of the claim involving the lease in the prior litigation clarifies this
point. There, we held that the other WFI shareholders’ claim about the lease agreement
was derivative when they alleged that the lease harmed WFI. Blum, 901 N.W.2d at 215 -
16. But we also observed that the alleged injury was direct because the shareholders
alleged that the lease agreement caused them individual harm. Id. at 216. Applying that
reasoning here shows that count two of appellants’ action is derivative because it does not
allege that the lease has caused individual harm to appellants. In fact, appellants brought
their action “as shareholders of Ward Family Incorporated.”

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In short, appellants are asserting another derivative claim on WFI’s behalf about its
lease agreement with ERMI. Other WFI shareholders already brought such a claim, which
the SLC investigated. See id. at 213, 215-16. That appellants brought this case seeking a
declaratory judgment does not preclude applying res judicata because appellants have
simply restated the claim from the first suit under a different theory. See Hauschildt, 686
N.W.2d at 840 (explaining that res judicata applies to claims t hat a party could have
asserted in an earlier action).
B. Same parties or their privies
The second res judicata element requires identical parties, or their privies, in the
earlier and later actions. Id. In general, courts will find persons in privity with another
party when (1) they control an action despite not being a named party to it, (2) a party
represents their interests in an action, or (3) they are successors in interest to persons with
derivative claims. Rucker, 794 N.W.2d at 118. But privity may also exist “when a person
is otherwise so identified in interest with another that he represents the same legal right.”
Id. (quotation omitted). Because “privity” carries no prevailing definition for consistent
application, courts must scrutinize the circumstances of each case to determine whether
parties share privity. Margo-Kraft Distribs., Inc. v. Minneapolis Gas Co., 200 N.W.2d 45,
47 (Minn. 1972).
Appellants argue that, because they were not parties in the prior case, res j udicata
cannot apply. In contrast, respondents ask this court to hold that shareholders from a
closely held corporation bringing a later derivative claim share privity with different

12
shareholders from that corporation who brought a similar derivative claim. A review of
Minnesota caselaw reveals that this is an issue of first impression. 7
To start, we note the fundamental nature of a derivative suit. The corporation, rather
than the individual shareholders, represents the real plaintiff in a derivative suit. Ross v.
Bernhard, 396 U.S. 531, 538-39, 90 S. Ct. 733, 738 (1970); In re UnitedHealth Grp., 754
N.W.2d at 550. This principle reveals that WFI represents the real plaintiff in both suits
on any claims alleging harm to it based on the lease with ERMI.
Based on the corporation’s role in a derivative action, we conclude that appellants
shared privity with the other WFI shareholders in the earlier action. Indeed, it seems
evident under Minnesota law that a corporation is bound by the results in a prior derivative
suit in later litigation, even when different shareholders bring the new suit. Our research
reveals that most courts have found that differing shareholders who bring successive
derivative lawsuits on the same corporat ion’s behalf share privity with one another. See,
e.g., Cal. State Teachers’ Ret. Sys. v. Alvarez, 179 A.3d 824, 848-49 (Del. 2018) (collecting
cases).8 The cases collected in Alvarez explain that privity exists between separate

7 The supreme c ourt addressed privity between shareholders and the Securities and
Exchange Commission in McMenomy v. Ryden , 148 N.W.2d 804, 806 -07 (Minn. 1967).
We addressed privity in the res judicata context involving a professional association and
its sole shareholder in Bifulk v. Evans, 353 N.W.2d 258, 261-62 (Minn. App. 1984). And
we considered privity between a corporation and its majority owner in Miller v. Nw. Nat’l
Ins. Co., 354 N.W.2d 58, 62 (Minn. App. 1984). But none of these cases resolves the
privity issue presented here.
8 Although some of the foreign cases collected in Alvarez discuss collateral estoppel in a
demand-futility context, the privity analysis does not differ under res judicata . See
Hauschildt, 686 N.W.2d at 837, 840 (listing the elements for these concepts).

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derivative plaintiffs because they are enforcing the corporation’s right, and the corporation
is the real party in interest. Id.
In sum, appellants are “so identified in interest” with the other WFI shareholders
who brought the prior suit to support finding privity. See Rucker, 794 N.W.2d at 118. Both
suits alleged derivative claims by different groups of shareholders within the same closely
held corporation. While appellants correctly note that they played no individual role in the
prior suit, this does not preclude application of res judicata. See Nathan v. Rowan , 651
F.2d 1223, 1226 (6th Cir. 1981) (“[N]onparty shareholders are bound by judgments if their
interests were adequately represented.”).9
C. Final judgment on the merits
In their brief, appellants conceded that this element was satisfied. But at oral
argument, their counsel argued that there was no final judgment on the merits. We
disagree. First, after a bifurcated trial in the other suit on the two remaining claims, we
affirmed the judgment against the plaintiffs. See Blum II, 2020 WL 1983218, at *12. And
a pending appeal “does not affect the preclusive nature of a judgment,” unless the judgment
is reversed or modified on appeal. Brown-Wilbert, Inc. v. Copeland Buh l & Co. , 732
N.W.2d 209, 220-21 (Minn. 2007).
Second, the supreme court denied review of our prior decision upholding the district
court’s grant of summary judgment on the derivative claims. The supreme court’s denial

9 Appellants do not argue that applying res judicata violates their due-process rights or that
the prior WFI shareholders failed to adequately represent their interests. See Restatement
(Second) of Judgments §§ 41-42, 59 (1984). We thus do not discuss those issues.

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of a petition for review of a decision from this court causes this court’s decision to become
final. Hoyt Inv. Co. , 418 N.W.2d at 176. Thus, there has been a final judgment on all
direct and derivative claims brought in the earlier suit. This element is met.
D. Full and fair opportunity to litigate the earlier case
The last res judicata factor considers “whether there were significant procedural
limitations in the prior proceeding, whether the party had the incentive to litigate fully the
issue, or whether effective litigation was limited by the nature or relationshi p of the
parties.” Joseph, 636 N.W .2d at 328 (quotation omitted). Here, the record reveals no
procedural limitations in the earlier action. And the other WFI shareholders have
extensively litigated that case, which now includes two appeals to this court. Thus, the
final res judicata factor is satisfied.
III. Denial of Appellants’ Request For a Scheduling Order and More Discovery
The final issue is whether the district court abused its discretion by denying
appellants’ request for a scheduling order and for more time to conduct discovery. But, as
respondents observe, appellants do not discuss this issue in the ar gument section of their
brief.
In general, parties forfeit any issues that they do not argue in their brief. Balder v.
Haley, 399 N.W.2d 77, 80 (Minn. 1987). To prevent application of this rule, a party must
at least address an issue in their brief’s argument section. In re Application of Olson for

15
Payment of Servs., 648 N.W.2d 226, 228 (Minn. 2002). Here, appellants failed to argue
this issue in their principal brief.10 As a result, we decline to address it.
D E C I S I O N
Because count one of appellants’ declaratory-judgment action failed to state a claim
alleging a violation of th e rule against perpetuities, the district court did n ot err by
dismissing it. On count two, the district court correctly applied res judicata to grant
respondents’ summary -judgment motion. Appellants shared privity with fellow WFI
shareholders who brought an earlier lawsuit alleging a derivative claim about the lease
between WFI and ERMI. Thus, we affirm the district court in all respects.
Affirmed.

10 In their reply brief, appellants offer a more detailed argument on this issue, contending
that the district court violated their procedural due-process rights. An appellate court may
deem forfeited issues that are argued for the first time in a reply brief . Lund ex rel.
Revocable Tr. of Kim A. Lund v. Lund , 924 N.W.2d 274, 284 (Minn. App. 2019), review
denied (Minn. Mar. 27, 2019). Thus, appellants have forfeited the newly raised arguments
in their reply brief.