NSE, Inc., et al., Appellants,

This opinion is nonprecedential except as provided by
Minn. R. Civ. App. P. 136.01, subd. 1(c).

STATE OF MINNESOTA
IN COURT OF APPEALS
A21-1389

NSE, Inc., et al.,
Appellants,

vs.

C. G. H., Corp., et al.,
Respondents.

Filed May 23, 2022
Affirmed
Ross, Judge

Hennepin County District Court
File No. 27-CV-20-4895

Arthur G. Boylan, Philip J. Kaplan, Ryan M. Lawrence, Anthony Ostlund Louwagie
Dressen & Boylan P.A., Minneapolis, Minnesota (for appellants)

Donald R. McNeil, Elizabet h Ridley Scott, Heley, Duncan & Melander, PLLP,
Minneapolis, Minnesota (for respondents)

Considered and decided by Ross, Presid ing Judge; Worke, Judge; and Larkin,
Judge.
NONPRECEDENTIAL OPINION
ROSS, Judge
This dispute arose after husband-and-wife entrepreneurs and their corporation began
operating a coupon-production business they purch ased for $1.5 milli on and some of the
business’s clients stopped using the coupon se rvice. The district court granted summary
judgment, dismissing the business purchaser s’ various claims that its seller had
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misrepresented or omitted facts bearing on the purchase. Because the purchasers on appeal
have identified no material fact dispute suppor ting their theory that the seller materially
misrepresented or omitted facts about the usefulness and value of the product, about profit
margins, about shipping, about the amount of competition the bu siness faced, about the
health of the business’s client relationships, or about the financial outlook of the business,
we affirm the district court’s summary judgment decision.
FACTS
Vickie Johnson owned C.G.H. Corpora tion, which operated under the name
Refrigerator Media Advertising (RMA), and which produced periodically released
coupons attached to refrigerator magnets. Th e corporation’s clients paid RMA to include
their coupons advertising client mercha ndise on the RMA magnets, which RMA
distributed to the clients’ potential consumers.
Johnson wanted to retire from her RMA business ownership, and she engaged a
broker to market RMA and facilitate its sale. The broker compiled a business profile based
on RMA’s patent- and trademark-protected refrigerator-magnet product and based on
financial information that Johnson provided . In June 2019 husband-and-wife business
partners Scott and Katherine Engstrom pr oposed purchasing RMA for $1.7 million.
Johnson accepted the preliminary offer.
In the months following the proposal, the Engstroms condu cted a due-diligence
investigation into the potential purchase. They requested information about RMA’s active
customers, and they interviewed Johnson in -person and in a conference call. Johnson
provided the Engstroms with the requested information about RMA’s customers. She listed
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all the customer sales in 2019, including th e dollar value for each sale, and she included
the data for pending sales and scheduled projects. She answered the Engstroms’ questions
about RMA, including questi ons about marketing RMA’s coupon service, scheduling
services with customers, consistency of customer projects, and seasonal trends. The
Engstroms also relied on their lender’s apprai sal of RMA’s value. The lender considered
information that Johnson provided, RMA’s tax returns, financial statements, and detailed
information about the economy and direct-mail marketing businesses in general. The
lender determined that RMA’s fair market value was $1.51 million.
The Engstroms negotiated the purchase pr ice down to $1.5 million based on the
appraisal, memorialized the deal in an ex ecuted purchase agreemen t under the name of
NSE Inc., and financed the purchase with a co mbination of a loan and seller financing.
They began operating the business in September 2019.
RMA sold its coupon services to clients on a project-to-project basis, and none of
its clients were contractually obligated to continue with future projects. After NSE and the
Engstroms took control of RMA, some clients continued with coupon projects with RMA.
But in October 2019 one longstanding RMA client opted not to continue with a new coupon
project, and another client did the same in February 2020. One month later, the Engstroms
defaulted on their loan obligation to pay Johnson and C.G.H.
The Engstroms then sued Johnson and C.G.H. in March 2020, alleging that Johnson
materially breached the representations and wa rranties in the purchase agreement. After
discovery, Johnson and C.G.H. moved for summary judgment. The Engstroms opposed the
motion, raising six theories of recovery th at differed from the theories acknowledged in
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their answers to discovery requests defining th eir claims. Over Johnson’s objection, the
district court’s summary-judgment order addressed the new theories in addition to the ones
expressly asserted, reasoning that the theori es were within the possible reach of the
allegations in the complaint. The district court granted summary judgment favoring
Johnson and C.G.H., dismissing all claims raised by the Engstroms and NSE.
This appeal follows.
DECISION
The Engstroms and NSE, whom we refer to collectively as the Engstroms, challenge
the district court’s summary-judgment decisi on favoring Johnson and C.G.H., whom we
refer to collectively as Johnson. We first address the scope of our review considering the
Engstroms’ responses to discovery requests directed at defining their claims under specific
theories of liability. We then turn to the merits of the claims under those theories. For the
following reasons, we conclude that no fact dispute prevents summary judgment on the
Engstroms’ theories.
I
We need not limit the scope of our review on appeal in the manner that Johnson
urges. Johnson supports the merits of the district court’s decision but argues that the district
court unnecessarily considered theories of liability that were foreclosed by the Engstroms’
responses during discovery. On e of Johnson’s interrogatories asked the Engstroms to
specify all the instan ces that Johnson materially breac hed the purchase agreement. The
Engstroms answered identifying five specific circumstances of alleged breach. But in
opposing Johnson’s summary- judgment motion, the Engstr oms raised six arguments.
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Johnson contends the Engstroms therefore impermissibly expanded their theory of
breach-of-contract liability beyond those circumstances. The contention fails.
The Engstroms responded to Johnson’s interrogatory asking the Engstroms to “state
in detail every instance that [the Engstroms] contend that [Johnson] materially breached
the Asset Purchase Agreement,” by specifying their allegation that (1) “[Johnson] failed to
disclose material information about the status of its customer relationships,” (2) Johnson
failed to provide true and correct business re cords that “fairly presented the financial
condition of [RMA], and did not omit any inform ation that would have a material [effect
on RMA],” (3) Johnson did not disclose that “being underbid had become a substantial
problem,” (4) Johnson knew that the coupon magnets “no longer provid[ed] a good return
on investment,” and (5) “Johnson failed to meet delivery deadlines.” Responding to
Johnson’s urging not to consider any of the Engstroms’ arguments supporting a theory that
exceeded the Engstroms’ interr ogatory response, the distri ct court reasoned that the
Engstroms had left “enough room in the comp laint for their current arguments.” It then
thoroughly addressed those arguments. A si de-by-side comparison of the Engstroms’
discovery response and their brief opposing summary judgment reveals that the Engstroms
also left enough room in their interrogatory response on the expanded theories.
We therefore consider if there are fact disputes about whether Johnson materially
misrepresented or omitted facts about the usefulness and value of RMA’s refrigerator
magnets, about RMA’s diminishing profit ma rgins, about timely shipping, about the
amount of competition RMA faced, about the he alth of her customer relationships, and
about RMA’s financial outlook.
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II
The Engstroms argue that the district court erred by granting summary judgment
favoring Johnson on their breach-of-contract claim. We review de novo the district court’s
grant of summary judgment, and we will reverse if the record contains a genuine issue of
material fact or if the district court erred applying the law. Montemayor v. Sebright Prods.,
Inc., 898 N.W.2d 623, 628 (Minn. 2017). We cons true any disputed f acts in favor of the
party against whom the district court entered summary judgment. Minn. Laborers Health
& Welfare Fund v. Granite Re, Inc. , 844 N.W.2d 509, 513 (Mi nn. 2014). The record
reveals no legal error or fact disputes that would prevent summary judgment.
We first consider the Engstroms’ argumen t that the district court erroneously
imposed on them a duty to investigate. We ha ve explained that, although some situations
require a party suspecting fraud to investigate, “a party is under no duty to investigate a
fraud it has no reason to suspect.” Jane Doe 43C v. Diocese of New Ulm, 787 N.W.2d 680,
685 (Minn. App. 2010). We do not read the district court’s analysis as imposing a duty to
investigate. The district court observed that the Engstroms had the o pportunity to inquire
further about information that Johnson provided them if they wanted more detail. This
observation is better understood as recognizi ng the Engstroms’ choice not to investigate
the business’s value more thoroughly. The Engstroms’ argument misinterprets the district
court’s reasonable and undisputedly accurate description of the circumstances during
negotiations as a legal duty to investigate. The argument is therefore unpersuasive.
The Engstroms next argue that they presented a genuine issue of material fact about
whether the 13-year-old coupon-redemption statistics included in the confidential business
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profile materially affected the value of RMA. The confidential business profile included a
statement that the average rate of coupon redemption with RMA’s product ranges from
8 percent to 13 percent. The Engstroms contend that they “would have seen RMA as less
valuable” had they known that these data we re outdated and based on only a single client
profile. But a general averment is not enough to create a dispute of material fact. See DLH,
Inc. v. Russ, 566 N.W.2d 60, 69 (Minn. 1997) (requi ring the nonmoving party to respond
to a summary-judgment motion with specific facts). And th e Engstroms cite no evidence
suggesting that the redemption-rate range was inaccurate as to the single client involved,
was inconsistent with the redemption-rate range for other clients at the time, or was an
inaccurate estimate of the redemption-rate range for all clients contemporaneous with the
sale negotiations. Having identified no evid ence showing that the data were false or
misleading, the Engstroms fail to support their assertion that the data create a fact issue
bearing on the usefulness or value of RMA.
The Engstroms contend that Johnson failed to disclose that RMA’s profit margins
were shrinking. They point to an email Johnson sent to the printer complaining about her
inability to profitably process smaller coupon projects and about the profit margin on a
project she completed for a large client. But th ey point to no eviden ce that RMA’s profit
margins generally were shrinking. Indeed, th e confidential business profile shows that
RMA’s profits were increasing, not decreasi ng. The Engstroms point us to no evidence
creating a genuine issue of material fact as to whether Johnson materially misrepresented
RMA’s profit-margin record.
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The Engstroms also argue that Johnson did not inform them that RMA experienced
shipping issues that caused late deliveries and damaged RM A’s client relationships. But
they identify no evidence s howing that any tardy deliveri es ever materially damaged
RMA’s client relationships, ever caused any client to cease using RMA’s products, or ever
impacted RMA’s value. The Engstroms point to an email from Jo hnson to her coupon
printer that RMA had been “put on notice” by a client in 2019 due to shipping issues. The
email includes an extract from the client’s response to Johnson, in which the client
expressed dissatisfaction with a late delivery. The client’s email stated, “Not much we can
do now but this can’t happen again.” Johnson, not the cu stomer, characterized the
customer’s response as being “put on noti ce,” and there is no evid ence of any resulting
client loss or value reduction. The evidence does not reveal a fact dispute over whether
RMA’s shipping issues harmed customer rela tionships or otherwis e had any significant
bearing on the company’s value.
The Engstroms then argue that Johnson mi srepresented the amount of competition
there is for RMA’s business and how much advertising would be necessary to make RMA
successful. But the record refl ects that the Engstroms were apprised multiple times that
RMA faced significant competition and needed to engage heavily in advertising to succeed.
Even apart from the self-evident and obviously increasing reach of digital marketing in
competition with printed coupon marketing, the appraiser’s valuation and the confidential
business profile elaborated on substantial digital competition. The valuation explained that
the direct-mail advertising industry revenue is e xpected to continue to decline at a rate of
1.6% over the following five years resulting from digital advertising, and the confidential
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business profile cautioned that any form of prin t, visual, or electronic advertising should
be viewed as competition with RMA’s product. The valuation also stated that Johnson has
had to “warn off a few potential competitors who have attempted a ‘work around’ the patent
to compete” with RMA’s mailers. The Engs troms had ample notice that RMA faced
competitors, and they identify no genuine issue of material fact as to whether Johnson
materially misrepresented the amount of competition RMA faced.
The Engstroms were also in formed about the amount of marketing necessary for
RMA to succeed after their purchase. The confidential business profile stated that Johnson
had expanded RMA by networking, conferences, mailings, referrals, and repeat business.
The business profile recommended company growth opportunities, including that the new
owner consider networking, joining more industry associations, marketing via direct mail,
and engaging in more targeted marketing. In response to the Engstroms’ specific questions
about growing RMA, Johnson outlined the ways she increased her customer base,
including searching out new trade organiza tions, attending trade shows, releasing
marketing mailers to targeted areas, cold calling, following up with retailers who contacted
her at various functions, contacting prior clients, and posting a video on her website. This
evidence belies the Engstroms’ a ssertion that Johnson concealed the fact that they would
need to “aggressively pound the pavement.” We can spot no genuine issue of material fact
showing that Johnson misrepresented the am ount of marketing necessary for RMA to
remain profitable.
We next address the Engstroms’ argument that Johnson failed to disclose that there
were “specific and significa nt problems with RMA’s key customer relationships”
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materially affecting the health of RMA. They cite no evidence that RMA had any
significant problems with client relationships, let alone evid ence that any client ceased
RMA services after the business purchase be cause of a problem with the RMA-client
relationship. Before consummating the sale, Johnson responded to the Engstroms’ inquiry
about whether any clients showed signs of consistent declining business by revealing that
one client had been on the schedule for the fi rst five months of 2018 but not in 2019. She
explained RMA’s customer scheduling and revealed that only three customers had
provided their yearly schedule . She emphasized that the clients were not contracted for
ongoing services by RMA. And one of the clients who ended his business relationship with
RMA testified that his decision to cease working with RMA was “based solely on
marketing strategy” and did not reflect a ny dissatisfaction with RMA’s product. No
evidence suggests that any client had informed Johnson before the sale that it would cease
doing business with RMA.
The Engstroms argue finally that Johns on materially misrepresented RMA’s
financial standing in two ways. They argue specifically that Johnson should have disclosed
that she became RMA’s sole owner by purchasi ng her partner’s share of the business in
2013 for $225,000 and that Johnson provided inaccur ate financial projections. Neither
argument prevails. The Engstroms do not explain how Johnson’s failing to detail her
cofounder’s 2013 share sale to Johnson rend ers inaccurate or incomplete the disclosed
information bearing on RMA’s 2019 fair market value. And the Engstroms could not have
reasonably relied on Johnson’s supposed revenue-and-cost projection through 2024, which
anticipated that RMA’s revenue could increase by three percent each year. The Engstroms
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knew that the projection was offered by th e broker, not Johnson, and that Johnson
responded to the Engstroms’ request for financial predictions by clarifying that she would
provide only the financial projections for projects already on the schedule. She explained
that “she just isn’t comfortable forecasting.” No record evidence supports the Engstroms’
argument that Johnson materially misrepresented RMA’s financial outlook.
In sum, the Engstroms identify no basis for us to reverse the district court’s
well-reasoned summary judgment decision.
Affirmed.