Susan Schneider, Appellant,

This opinion is nonprecedential except as provided by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
A22-1305

Susan Schneider,
Appellant,

vs.

Max Schmidt, et al.,
Respondents,
KMAX Paradise Pork, LLC, a Minnesota limited liability company,
Respondent.

Filed July 31, 2023
Affirmed in part, r eversed in part, and remanded
Reyes, Judge

Mower County District Court
File No. 50-CV-15-1757

Matthew C. Berger, Gislason & Hunter, L.L.P., New Ulm, Minnesota (for appellant)

Terrence J. Fleming, Sandra Smalley-Fleming, Christopher D. Pham, Devin T. Driscoll,
Sarah J. Theisen, Fredrikson & Byron, P.A., Minneapolis, Minnesota (for respondents Max
Schmidt, et al.)

Adam J. Ho uck, Adams, Rizzi & Sween, P.A., Austin, Minnesota (for respondent and
cross-appellant KMAX Paradise Pork, LLC)

Considered and decided by Bjorkman, Presiding Judge; Ross, Judge; and Reyes,
Judge.

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NONPRECEDENTIAL OPINION
REYES, Judge
In this shareholder dispute, a ppellant Susan Schneider asserts that the district court
erred by dismissing as derivative her claims that respondents KMAX Farms LLC and Max
Schmidt engaged in (1) unfairly prejudicial conduct ; (2) breach of fiduciary duty; and
(3) breach of a member-control agreement. By notic e of related appeal, respondent and
cross-appellant KMAX Paradise Pork LLC (Paradise Pork) challenges the district court’s
damages award on Schneider’s claim that Paradise Pork failed to provide statutorily
required notice of the sale of its assets and of Schneider’s dissenter’s rights . We reverse
and remand on Schneider’s claims against KMAX Farms and Schmidt and affirm on
Schneider’s claim against Paradise Pork.
FACTS
Undisputed facts and background
Paradise Pork became duly incorporated and formed in June 2013 by KMAX Farms,
Schmidt, Schneider, and Jennifer Harris. The members of Paradise Pork certified Schmidt,
Schneider, Harris, and Duane Boderman as governors of Paradise Pork. The members also
elected Schneider as president and chief manager and Schmidt as secretary, treasurer, and
chief financial manager.
The following month, Schneider and Schmidt entered into a promissory note and
loan agreement ( the note) with Farm Credit Services of America for $800,000 to fund
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Schneider’s capital contribution and buy into Paradise Pork. 1 T he next year , Schneider
acquired Harris’s ownership interest in Paradis e Pork , which resulted in the following
ownership interests: K MAX Farms owning 48.15%, Schneider owning 33.33% , and
Schmidt owning 18.52% . Schmidt, however, owned more than 90% of the shares in
KMAX Farms. As a result, it is undisputed that Schmidt personally controlled a 66.7%
membership interest in Paradise Pork.
Paradise Pork served as a sow unit facility which mainly operated as a cost center,
making little to no profit. On October 20, 2013, Paradise Pork’s sow unit became
contaminated with porcine reproductive and respiratory syndrome. Then, in 2014, Paradise
Pork had its first outbreak of porcine epidemic diarrhea virus in its uni t, and no pigs were
weaned during that time. Schneider and Schmidt differed on the cause of the outbreak and
on how to manage operations at Paradise Pork to prevent a future outbreak. Paradise Pork’s
problematic farming operations continued throughout 2014 and into 2015, resulting in
financial losses.
In June 2015, Schmidt and KMAX Farms decided that Paradise Pork needed to be
dissolved and its property and assets sold. The members and governors of Paradise Pork
met on June 22, 2015, to discuss the dissolution of Paradise Pork. Before the meeting ,
Schmidt sent the following notice to members and governors:

1 Schneider and Schmidt are both identified as “Borrowers” on the note , and Schneider is
identified as “the primary borrower/payer of the record on this loan.” While the record is
not clear on Schmidt’s characterization as a party to the note, there is no dispute that
Schmidt had to pay the outstanding balance of the note as either a borrower or guarantor.
There is also no dispute that Paradise Pork was not a party to the note.
4
The purpose of this meeting is to consider the dissolution of
KMAX Paradise Pork, LLC as the operation is not cash-
flowing and is creating additional debt. Further, the members
would consider an orderly li quidation including the sale of
assets to possible purchasers.

At the meeting, Schmidt , Boderman, Schneider, and Paradise Pork’s counsel Paul
Sween were present. Schmidt proposed that Paradise Pork proceed with the “orderly
liquidation of its assets by trying to sell the assets to prospective purchasers” because of its
financial condition. Despite Schneider’s opposition, the board of governors adopted the
resolution. There were no other votes take n during this meeting nor were there any other
meetings held by the Paradise Pork board members. In July 2015, Schmidt sold Paradise
Pork to Son- D Farms LLC for $2,919,046. Schmidt used funds from that sale to pay off
the note that he had co-signed for S chneider in the amount of $633,727.33 without
Schneider’s consent.
Procedural history
On August 3, 2015, Schneider filed suit against Schmidt , KMAX Farms
(collectively respondents), and Paradise Pork , asserting claims in her individual capacity.
Related to this appeal, she alleged the following four counts : (1) unfairly prejudicial
conduct under Minn. Stat. § 322B.833 (2014) ; (2) breach of fiduciary duties ; (3) failure to
comply with notice requirements under Minn. Stat . §§ 322B.77, subd. 2, 322B.386, subd.
2 (2014); and (4) breach of contract for both the Paradise Pork operating agreement and
member-control agreement.2 Respondents moved for summary judgment to dismiss count

2 In 2014, the legislature replaced the Minnesota Limited Liability Company Act
(MLLCA), Minn. Stat. §§ 322B.01-.975 (2014), with the Minnesota Revised Uniform
5
I, count II, and count IV, arguing that these claims were derivative and should be dismissed
for failure to make a presuit demand on Paradise Pork.
After the summary-judgment hearing, the district court determined that the
following count I claims of unfairly prejudicial conduct were derivative:
(b) Engaged in self-dealing to the detriment of [ Schneider]
and Paradise Pork;
(c) Disregarded the governance structure of Paradise Pork;
(d) Consistently ignored and disregarded the business
opinions of [Schneider];
(e) Acted in excess of their authority with regard to the
property and assets of Paradise Pork;
(h) Frustrated [Schneider’s] reasonable expectation that
[respondents] would permit [Schneider] to manage
Paradise Pork in accordance with generally accepted
industry standards;
(l) Improperly attempted to dissolve Paradise Pork; and
(m) Attempted to sell assets and property of Paradise Pork
for a price far below fair value and without proper
notice.

It also determined that the following count II claims of breach of fiduciary duties ,
which mirror the count I claims, were derivative:
(a) Engaged in self-dealing to the detriment of [ Schneider]
and Paradise Pork;
(b) Disregarded the governance structure of Paradise Pork;
(c) Consistently ignored and disregarded the business
opinions of [Schneider];
(d) Acted in excess of their authority with regard to the
property and assets of Paradise Pork;
(g) Frustrated [Schneider’s] reasonable expectation that
[respondents] would permit Schneider to manage

Limited Liability Company Act, Minn. Stat §§ 322C.0101-.1205 (2022). See 2014 Minn.
Laws ch. 157, art. 1. Because the events pertinent to this litigation all took place before
January 1, 2018, when the revised act took effect for preexisting LLCs, we apply the
MLLCA. See Minn. Stat. § 322C.1204 (2022).
6
Paradise Pork in accordance with generally accepted
industry standards;
(k) Improperly attempted to dissolve Paradise Pork; and
(l) Attempted to sell assets and property of Paradise Pork
for a price far below fair value and without proper
notice.

Finally, the district court determined that th e count IV claims of breach of contract
of both the Paradise Pork operating agreement and the member-control agreement were
also derivative. Consequently, t he above claims that the district court determined as
derivative were dismissed without prejudice for failure to make a demand upon Paradise
Pork pursuant to Minn. R. Civ. P. 23.09. The district court determined that Schneider’s
remaining claims of counts I and II were direct claims and denied respondent s’ motion for
summary judgment on those claims. Following this, Schneider made a demand upon
Paradise Pork to appoint a special litigation committee ( SLC) to investigate the derivative
claims.
Schmidt and Boderman appointed attorney Douglas Elsass as Paradise Pork’s SLC
over Schneider’s objection. In his report, Elsass determined that “it [was] not in Paradise
Pork’s best interest to pursue any of the derivative claims. Rather, pursuit of these claims
would be to [Paradise Pork’s] detriment.” Based on Elsass’s recommendation, respondents
moved to dismiss the derivative claims. Following a hearing to dismiss the derivative
claims, the district court found that “the thoroughness of the SLC’s investigation, including
its procedures and methodologies, were adequate and appropriate, and also that the SLC
pursued its investigation and made its determination[] in good f aith.” The district court
ultimately dismissed Schneider’s derivative claims with prejudice.
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On January 19, 2021, the district court held a hearing on Schneider’s motion for
summary judgment on count III for Paradise Pork’s failure to (1) provide notice of the sale
to Son-D Farms under Minn. Stat. § 322B.77, subd. 2, and (2) give Schneider notice of her
dissenters’ rights under Minn. Stat § 322B.386, subd. 2. After the hearing, the district court
determined that Paradise Pork “violated all notice requirements . . . with respect to
[Schneider’s] dissenters’ rights and the sale to Son-D Farms.” It therefore granted
Schneider’s motion for summary judgment regarding Paradise Pork’s liability but denied
Schneider’s motion for summary judgment on damages because there were “genuine issues
of material fact with respect to the valuation of [Paradise Pork] and the amount owed to
[Schneider ].” The district court then held a court trial on damages and awarded Schneider
$931,327.77 plus costs and disbursements.
Schneider appeals the summary judgment in favor of respondents, challenging the
district court’s determination that count I (unfairly prejudicial conduct), count II (breach
of fiduciary duties ), and count IV (breach of the member -control agreement) were
derivative claims instead of direct claims . By notice of related appeal, Paradise Pork
challenges the district court’s order granting summary judgment in favor of Schneider on
count III , arguing that the district court erred by failing to apply the business-judgment rule
and in calculating damages.

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DECISION
I. The district court erred by determining that Schneider’s count I claims of
unfairly prejudicial conduct, count II claims of breach of fiduciary duty, and
count IV claims of breach of the member -control agreement were derivative
claims rather than direct claims.

Schneider argues that the district court erred by granting respondents’ motion for
summary judgment because her claims of unfairly prejudicial conduct, breach of fiduciary
duty, and breach of the member -control agreement were direct claims belonging to her
rather than derivative claims belonging to Paradise Pork. 3 Her argument is persuasive.
“We review the grant of summary judgment de novo to determine whether there are
genuine issues of material fact and whether the district court erred in its application of the
law.” Montemayor v. Sebright Prod., Inc., 898 N.W.2d 623, 628 (Minn. 2017) (citation
and quotation omitted). “The determination of whether shareholder claims are direct or
derivative presents a question of law subject to de novo review.” In re Medtronic, Inc.
S’holder Litig., 900 N.W.2d 401, 405 (Minn. 2017) .
While the Minneso ta limited -liability-company statute does not expressly address
derivative suits, we look to the law governing claims involving corporations for guidance.
See Haley v. Forcelle, 669 N.W.2d 48, 56 (Minn. App. 2003) (“The relationship between
shareholders of a closely held corporation is analogous to the relationship between partners
in a partnership.”) , rev. denied (Minn. Nov. 25, 2003) . “As an entity distinct from its
stockholders, a corporation holds the separate right to sue in its own nam e.” In re

3 Schneider’s counts I, II, and I V claims were against respondents only and not against
Paradise Pork.
9
Medtronic, Inc. S’holder Litig., 900 N.W.2d at 406. For derivative claims, “Minnesota has
long adhered to the general principle that an individual shareholder may not assert a cause
of action that belongs to the corporation, but instead must sue in a representative capacity
on behalf of the corporation if asserting a claim alleging an injury to the corporate entity.”
Id. (quotation omitted). In contrast, a direct claim “alleges an injury to the shareholder
rather than an injury to the corporation.” Id. In determining whether a claim is direct or
derivative, courts consider two issues: (1) who suffered the injury alleged and (2) who
would receive the benefit of any recovery. Id . at 408. For that reason, “we look not to the
theory in which the claim is couched, but instead to the injury itself.” Blohm v. Kelly, 765
N.W.2d 147, 154 (Minn. App. 2009) (quotation omitted) .
A. The district court erred by granting summary judgment based on its
determination that the claims in counts I and II w ere derivative claims.

Schneider argues that t he district court erred by granting summary judgment to
respondents by determining that the count I claims of unfairly prejudicial conduct and
count II claims of breach of fiduciary duty were derivative claims, when she suffered a
direct injury with regard to the liquidation and distribution of the sale proceeds of Paradise
Pork. We agree.
The Minnesota Supreme Court case Young v. Blandin is particularly instructive for
our case. 9 N.W.2d 313 ( Minn. 1943). In Young, a majority shareholder made
unauthorized investments with the funds of the corporation during liquidation. Id. at 315.
A minority shareholder directly sued the majority shareholder for impr operly liquidating
and distributing the assets of the company. Id. The supreme court affirmed the district
10
court’s award of damages in favor of the minority shareholder and held that the majority
shareholder violated his fiduciary duty to the shareholder s by failing to liquidate and
distribute the assets of the corporation properly. Id. at 317.4 Applying the principles from
Young and viewing the evidence in the light most favorable to Schneider, she has alleged
sufficient facts that respondents engaged in unfairly prejudicial conduct and breached their
fiduciary duties to Schneider at the time of the liquidation and distribution of Paradise
Pork’s assets. During liquidation and distribution, respondents unilaterally used a portion
of the sale proceeds to pay off Schneider’s note from Farm Credit in the amount of
$633,727.33. Schneider never approved the use of the sale of Paradise Pork’s assets to pay
off the note and no meeting of the members or governors of Paradise Pork was held.
Moreover, Paradise Pork did not authorize the note payment, nor did it grant respondents
any authority to make the payment. Further, at the time of liquidation and distribution of
assets, Paradise Pork no longer had an independent interest in the assets and therefore could
not be directly injured by the misuse of those assets because Paradise Pork’s only

4 We also considered in Ashbach v. Peterson whether legal-malpractice claims brought by
an appellant shareholder arising out of another shareholder’s mismanagement of corporate
property to himsel f were direct or derivative. No. A20-0771, 2021 WL 562347, at *1
(Minn. App. Feb. 12, 2021), rev. denied (Minn. Apr. 28, 2021). In that case, the appellant
argued that he was directly harmed when a shareholder conveyed a 40 -acre property to
himself without authorization several years before the dissolution. Id. at *2. The appellant
relied on Young to support his argument. Id. at *5. We rejected appellant’s argument and
clarified that “[i]n Young, the only injury that occurred took place during the liquidation
and distribution process.” At that point, it was only the shareholders who were injured by
the majority shareholder’s misconduct because the terminated corporation no longer had
an interest in the assets.” Id. at *5. We note that Aschbach is a nonprecedential opinion
but is cited for its persuasive authority. See Minn. R. Civ. App. P. 136.01, subd. 1(c)
(stating that nonprecedential opinions are not binding authority but may be cited as
persuasive authority).
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remaining task was to distribute the rest of the assets to the shareholders of Paradise Pork.
Much like the majority shareholder who made the unauthorized investments with company
funds in Young, respondents made unauthorized payments with the funds from Paradise
Pork. And like the minority shareholder in Young, Schneider alleged direct harm when
respondents improperly liquidated and distributed the assets of Paradise Pork by paying off
a personal loan.
We conclude that the district court erred by granting summary judgment on
Schneider’s claims of count I (unfairly prejudicial conduct ) and count II (breach of
fiduciary duty) because they are direct claims not shared by Paradise Pork. As a result, we
reverse and remand for a trial to address those claims only to the extent that they relate to
the liquidation and distribution of the sale proceeds and assets.
B. The district court erred by granting summary judgment based on its
determination that the claims in count IV (breach of the member-control
agreement) were derivative claims.

Schneider also argues that the district court erred by granting summary judgment by
determining that all the claims in count IV were derivative when respondents, not Paradise
Pork, violated the member-control agreement with regard to the liquidation and distribution
of the sale proceeds of Paradise Pork . We agree.
Under Minnesota Statutes section 322B.37, subdivisions 1 and 2 (2014), a limited -
liability company may enter into a member -control agreement on the business and affairs
of that company, including the declaration and payment of distributions and liquidation of
the limited -liability company . The statute also provides that a valid member -control
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agreement “is enforceable by persons who are parties to it.” Minn. Stat. § 322B.37, subd.
3 (2014).
Schneider argues that respondents violated section 10.2 of the member -control
agreement which “imposed specific requirements for dissolution and liquidation of
Paradise Pork, including application and distribution of the company’s assets.” Here,
Paradise Pork was not a party to this agreement, but rather was “the Company” formed by
the parties. The agreement imposed certain obligations and rights on the members
themselves. Thus, the members themselves, and not Paradise Pork, were the parties to this
agreement and only the members had a right to enforce the requirements under Minn. Stat.
§ 322B.37, subd. 3. As a result, the district court erred by granting summary judgment.
Schneider also alleged sufficient facts that respondents breached the agreement by
failing to follow the required procedures of liquidation and distribution of Paradise Pork’s
assets. As stated above, respondents used a portion of the sale of assets to pay off a personal
loan without the consent of Schneider. We conclude that the district court erred by granting
summary judgment on Schneider’s count IV claims. We reverse and remand on th ese
claims for a trial to address the claims only to the extent that they relate to the liquidation
and distribution of the sale and proceeds.

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II. The district court did not err by declining to apply the business-judgment rule
or in its calculation of damages.

A. The district court did not err by not applying the business -judgment
rule.

Paradise Pork argues that the district court should have applied the business -
judgment rule and deferred to the SLC’s findings . Paradise Pork’s argument is not
persuasive.5
The sale of a limited liability company’s assets under Minn. Stat. § 322B.77, subd.
2, requires that “[w]ritten notice of the meeting must be given to all members whether or
not they are entitled to vote at the meeting.” “In Minnesota, a board of directors may create
[an SLC] consisting of one or more independent directors or other independent persons to
consider legal rights or remedies of the corporation and whether those rights and remedies
should be pursued.” In re UnitedHealth Grp. Inc. S’holder Derivative Litig., 754 N.W.2d
544, 550 (Minn. 2008) (quotation omitted). SLCs “enable a corporation to dismiss or settle
a derivative suit despite a conflict of interest on the part of some or all directors.” Id. at
550-51. A court only defers to a n SLC’s decision under the business-judgment rule on a
derivative claim. Id. at 547.
“Under the business judgment rule, so long as a disinterested director makes an
informed business decision, in good f aith, without an abuse of discretion, he or she will not
be liable for corporate losses resulting from his or her decision.” Id. at 551 (quotation
omitted). “Although courts defer to the business judgment of an independent SLC that

5 Because this was also a summary -judgment order, the same de novo standard of review
applies.
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conducts a good -faith investigation into a claim, no deference is due to the extent that the
SLC does not investigate and analyze a claim.” Blohm, 765 N.W.2d at 157.
Here, the dist rict court determined that Schneider’s count III claim on Paradise
Pork’s failure to (1) provide notice of the sale to Son- D Farms and (2) give Schneider
notice of her dissenters’ rights before the meeting constituted a direct claim. Paradise Pork
does not challenge the district court’s determination of liability on count III. Instead,
Paradise Pork appears to argue that the district court erred by “failing to defer to the
findings of the SLC regarding Paradise Pork’s treatment of its own debts and obligations,”
including the loan that respondents paid on behalf of Schneider. Paradise Pork’s argument
fails for two reasons.
First, the business-judgment rule does not apply here becau se this is a direct claim.
Courts only defer to an SLC’s decision, under the business-judgment rule, on a derivative
claim. See In re UnitedHealth Group Inc . S’holder Derivative Litig., 754 N.W.2d at 547.
Second, the SLC report specifically noted in a footnote that the “statutory issues relating
to the notice and approval of the asset sale itself [(count III)] are not before the SLC , but
are being addressed by the [c]ourt in Schneider’s dissenters’ rights claim.” Because the
SLC never analyzed this specific claim and made it clear that the district court would
address count III, its findings referenced above do not pertain to count III, and we have
stated that “no deference ” is given to the SLC when it does not investigate and analyze a
claim. See Blohm, 765 N.W.2d at 157. The district court therefore did not err by declining
to apply the business-judgment rule and not deferring to the SLC’s findings.

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B. The district court did not err in calculating Schneider’s damages.

Paradise Pork alternatively argues that the district court erred by shifting the burden
to Paradise Pork and its calculation of Schneider’s damages. We are not persuaded.
Appellate courts “ review the district court ’s factual findings for clear error.
Rasmussen v. Two Harbors Fish Co., 832 N.W.2d 790, 797 (Minn. 2013) . “That is, we
examine the record to see if there is reasonable evidence in the record to support the court’s
findings.” Id. “[W]hen determining whether a finding of fact is clearly erroneous, we view
the evidence in the light most favorable to the verdict.” Id. (quotation omitted). “To
conclude that findings of fact are clearly erroneous we must be left with the definite and
firm conviction that a mistake has been made. ” Id. (quotation omitted). But we review a
district court’s application of the law de novo. Id. “In an ordinary civil action, the plaintiff
has the burden of proving damages caused by the defendant by a fair preponderance of the
evidence.” Canada By & Through Landy v. McCarthy , 567 N.W.2d 496, 507 (Minn.
1997). Under the dissenters’ rights statute:
The court shall determine the costs and expenses of a
proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the
court, and shall assess those costs and expenses against the
limited liability company, except that the court may assess part
or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to
be arbitrary, vexatious, or not in good faith.

Minn. Stat. § 322B.386, subd. 8 (2014).

Paradise Pork first argues that the district court erred as a matter of law when it
shifted the burden of proof from Schneider to Paradise Pork. Paradise Pork’s argument is
16
misguided. The party asserting dissenter ’s rights does not have the burden of proof.
Instead, the court determines the cost and expenses. The district court did not err as a
matter of law.
Next, Paradise Pork argues that the district court erred in its determination of
damages. But the record shows differently. The district court first found the asset
approach, used when a company is not operated to maximize profit but is primarily
operated for some other purpose, to be the most appropriate in evaluating Paradise Pork
because Paradise Pork “never operated as a n independent business entity which sought to
maximize its profits or even make a profit .” Based on the asset approach, t he district court
found that “the fair market value of Paradise Pork’s assets at the time of the sale to be
$2,793,983.32.”
Paradise Pork argues that there were certain liabilities that should have been
deducted from Paradise Pork’s assets, including alleged feed obligations and other alleged
debts. But the district court addressed Paradise Pork’s alleged liabilities. First, for the feed
obligations, the district court found that it received “no reliable evidence in the form of
testimony or documentation showing that [Paradise Pork] agreed to pay such feed debts or
owed such feed debts.” Second, for Paradise Pork’s owed legal fees, veterinary bills, and
fees related to an audit for the sale to Son -D Farms, the district court again found that it
had not received any “reliable evidence in the form of testimony or documentation
establishing such debts.” Paradise Pork cannot show error on the district court’s findings
of the alleged liabilities if it did not provide supporting evidence or documentation.
17
Finally, Paradise Pork argues that the district court’s order is not fair and equitable
because it does not account for Paradise Pork’s unauthorized payment of Schneider. The
district court addressed this issue by stating:
[Paradise Pork] was obligated to pay [Schneider], and let her
decide whether to use that money to pay the Note with Farm
Credit. Finally, Mr. Schmidt admitted in his deposition that he
paid off the debt to maintain his “integrity,” which obviously
is a reference to his financial integrity because he was also
personally obligated to pay the Note. Mr. Schmidt did not pay
the Note to satisfy any debt [Paradise Pork] owed to
[Schneider]; he did it solely for his personal benefit, and again
without any approval of [Paradise Pork].

The district court carefully analyzed the assets and liabilities of Paradise Pork and came to
a just and equitable determination. It therefore did not err in its calculation of damages.
Affirmed in part, reversed in part, and remanded.