This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2012).
STATE OF MINNESOTA
IN COURT OF APPEALS
A13-2023
Capital Midwest Fund, LP, et al.,
Appellants,
vs.
Douglas E. Johnson, et al.,
Respondents,
Steven Quay, et al.,
Respondents.
Filed July 14, 2014
Affirmed as modified
Stauber, Judge
Hennepin County District Court
File No. 27CV132296
Vytas M. Rimas, Rimas Law Firm, P.L.L.C., Minneapolis, Minnesota (for appellants)
William P. Donohue, Tracy M. Smith, Timothy J. Pramas, Office of the General Counsel,
University of Minnesota, Minneapolis, Minnesota (for respondents Johnson and
University of Minnesota)
Kevin M. Decker, Briggs and Morgan, P.A., Minneapolis, Minnesota (for respondents
Quay, Troup, and Wagner)
Considered and decided by Larkin, Presiding Judge; Stauber, Judge; and
Klaphake, Judge.*
*
Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to
Minn. Const. art. VI, § 10.
UNPUBLISHED OPINION
STAUBER, Judge
Appellant-investors challenge the district court’s dismissal of their claims arising
out of respondents’ allegedly fraudulent inducements to invest in an entity with which the
University of Minnesota had, but subsequently terminated, a patent-licensing agreement.
Appellants assert that the district court erred by (1) considering documents outside the
pleadings on a rule 12.02(e) motion and (2) determining that they had not sufficiently
pleaded claims for (a) unlawful trade practices under Minn. Stat. § 325D.13 (2012), (b)
promissory estoppel; (c) fraud; and (d) negligent misrepresentation. We affirm as
modified.
FACTS
This appeal follows the district court’s grant of respondents’ motion to dismiss.
Appellants Capital Midwest Fund, LP, a group of investors in a now-defunct start-up
company that was marketing a medical technology developed by respondent University
of Minnesota, argue that the university and the directors of the company made
misrepresentations about the quality of the investment, which resulted in appellants’
pecuniary losses.
According to the complaint, VitalMedix, Inc. (VMX) was incorporated in
Delaware in February 2008 for the purpose of commercializing a drug and therapy to
treat hemorrhagic shock. The university was the majority shareholder in the corporation,
and respondent Douglas Johnson, an employee of the university, was charged with
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recruiting VMX’s management and board of directors. Johnson was later appointed the
“Treasurer and/or Director of VMX.”
On May 7, 2008, the university entered into an Exclusive Patent License
Agreement with VMX, which permitted VMX to commercialize the university’s drug.
On that same date, the university entered into a Subscription Agreement and Letter of
Investment Intent with VMX, and VMX issued 2,300,000 shares of stock to the
university.
In April 2009, the VMX Board of Directors agreed to retain Einhorn Associates,
Inc. (EAI) to assist them in obtaining additional financing. Appellants allege that “in or
about July and August 2009,” one or more respondent-directors of VMX and Johnson
represented to EAI, which then represented to appellants, that the respondents would
invest $100,000 in VMX if EAI raised at least $500,000 from appellants. Appellants also
allege that these same individuals represented to EAI, which then represented to
appellants, that these funds would be used for “a pivotal scientific pig study.” Appellants
assert that, in reliance on these representations, and on “the good standing and long
duration of the University-VMX Patent License Agreement, [and] VMX’s Business
Plan,” appellants were induced to invest in VMX. Appellants together invested $839,000
in VMX. In November 2009, appellants were issued VMX stock certificates.
Two months later, the university unilaterally terminated the University-VMX
Patent License Agreement, stating that VMX was insolvent. VMX filed for Chapter 7
bankruptcy in February 2010. Appellants allege that on April 29, 2010, Johnson
promised EAI that Johnson and the university would “take care of [appellants],” and as a
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consequence appellants chose not to file claims against VMX in bankruptcy court.
Appellants further allege that none of the respondents invested money in VMX, and none
of appellants’ money went toward funding “a pivotal scientific pig study.”
On February 6, 2013, appellants filed a complaint against respondents alleging
various shareholder-derivative claims, as well as direct claims including breach of
fiduciary duty, intentional and reckless fraud, negligent misrepresentation, promissory
estoppel, unjust enrichment, unlawful trade practices, and successor liability against the
university. Respondents filed a motion to dismiss for failure to state a claim under Minn.
R. Civ. P. 12.02(e), appending a copy of the Subscription Agreement between appellants
and VMX, VMX’s Business Plan, and other documents.
Following a hearing on respondents’ motion to dismiss, the district court
dismissed appellants’ complaint entirely and with prejudice. This appeal followed;
appellants assert that the district court erred by dismissing appellants’ direct claims under
the Minnesota Unlawful Trade Practices Act (MUTPA), and for fraud, negligent
misrepresentation, and promissory estoppel.
DECISION
This court “review[s] de novo the district court’s grant of a motion to dismiss
under Minn. R. Civ. P. 12.02(e).” Sipe v. STS Mfg., Inc., 834 N.W.2d 683, 686 (Minn.
2013). “We have said that a pleading will be dismissed only if it appears to a certainty
that no facts, which could be introduced consistent with the pleading, exist which would
support granting the relief demanded.” Bahr v. Capella Univ., 788 N.W.2d 76, 80 (Minn.
2010) (quotation omitted). “The reviewing court must consider only the facts alleged in
4
the complaint, accepting those facts as true and must construe all reasonable inferences in
favor of the nonmoving party.” Bodah v. Lakeville Motor Express, Inc., 663 N.W.2d
550, 553 (Minn. 2003).
I. Documents extrinsic to the pleadings
Appellants first argue that the district court erred by considering the Subscription
Agreement and Business Plan on respondents’ motion to dismiss because these
documents were extrinsic to the pleadings. “Generally, the court may not consider
extrinsic evidence on a motion to dismiss pursuant to Minn. R. Civ. P. 12.02(e).” In re
Hennepin Cty. 1986 Recycling Bond Litigation, 540 N.W.2d 494, 497 (Minn. 1995).
If, on a motion asserting the defense that the pleading fails to
state a claim upon which relief can be granted, matters
outside the pleading are presented to and not excluded by the
court, the motion shall be treated as one for summary
judgment and disposed of as provided in Rule 56, and all
parties shall be given reasonable opportunity to present all
material made pertinent to such a motion by Rule 56.
Minn. R. Civ. P. 12.02(e).
In some circumstances, however, the district court may consider extrinsic
documents without converting the motion to a rule 56 motion for summary judgment.
For instance, the district court may consider documents that are “incorporated by
reference into the pleadings.” Marchant Inv. & Mgmt. Co. v. St. Anthony W.
Neighborhood Org., Inc., 694 N.W.2d 92, 95 (Minn. App. 2005). “[C]onversion to a
Rule 56 motion is not necessary when the ‘court only considers an authenticated copy of
a key document upon which . . . the complaint is premised.’” Johnson v. State, 536
N.W.2d 328, 332 (Minn. App. 1995) (quoting 1 David F. Herr & Roger S. Haydock,
5
Minnesota Practice § 12.9, at 87 (Supp. 1995)), rev’d on other grounds, 553 N.W.2d 40
(Minn. 1996). This exception is most frequently applied where the extrinsic document is
included by the plaintiff as part of the plaintiff’s complaint, and not when it is submitted
by the moving party. Compare Hardin Cnty. Sav. Bank v. Hous. And Redev. Auth., 821
N.W.2d 184, 192 (Minn. 2012) (four exhibits attached to plaintiff’s complaint could be
considered on motion to dismiss), with N. States Power Co. v. Minn. Metro. Council, 684
N.W.2d 485, 490-91 (Minn. 2004) (affidavit submitted by the moving party on a motion
to dismiss converted the motion to one for summary judgment because the affidavit was
not referenced in the pleadings).
In this case, respondents submitted the Subscription Agreement and Business Plan
along with their motion to dismiss, which normally would require that the motion be
converted to a motion for summary judgment. But respondents argue that the district
court correctly concluded that these documents were “key documents,” and that
appellants should not be permitted to avoid these documents merely by not referring to
them in the complaint. See 1 David F. Herr & Roger S. Haydock, Minnesota Practice
§ 12.9, at 369 (5th ed. 2009) (stating that a district court’s consideration of an
authenticated key document does not convert the motion to a summary-judgment motion
because “a plaintiff with a legally deficient claim could survive a motion to dismiss
simply by failing to attach a dispositive document on which it relied” (quotation
omitted)). We agree. Appellants are unable to demonstrate that the Business Plan and
Subscription Agreement are inauthentic or do not govern their investments in VMX, and
in fact they frequently refer to the Business Plan in their arguments to this court.
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But appellants argue that the motion should have been treated as one for summary
judgment, and as a consequence they were entitled to a continuance in order to conduct
discovery. The district court has wide discretion to issue discovery orders and, absent a
clear abuse of that discretion, its discovery orders will not be disturbed. In re Comm’r of
Pub. Safety, 735 N.W.2d 706, 711 (Minn. 2007). “The granting of a continuance is a
matter within the discretion of the [district] court and its ruling will not be reversed
absent a showing of clear abuse of discretion.” Dunshee v. Douglas, 255 N.W.2d 42, 45
(Minn. 1977). Appellants argue that the district court’s refusal to grant an extension and
order discovery was an abuse of discretion because “[d]iscovery was required to
determine, which documents were signed by which of the nine Plaintiffs, and what other
events occurred pertinent to these transactions.” But respondents argue that no discovery
was needed for appellants to figure out which contracts they signed. See Abbott v.
Comm’r of Pub. Safety, 760 N.W.2d 920, 927 (Minn. App. 2009) (“The applicable law
does not require discovery of evidence that is neither relevant nor in the other party’s
possession.”), review dismissed (Minn. May 19, 2009); see also Minn. R. Civ. P. 34.01
(permitting discovery of evidence “in the possession, custody or control of the party upon
whom the request is served”). We agree. And because appellants do not state how they
were prejudiced by the failure to grant a continuance or additional discovery, the district
court did not abuse its discretion by denying appellants’ request. See Real Estate Equity
Strategies, LLC v. Jones, 720 N.W.2d 352, 358 (Minn. App. 2006) (quotation omitted)
(stating that “the test for whether an abuse of discretion occurs is whether a denial of a
continuance would prejudice the outcome” (quotation omitted)).
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II. MUTPA
Appellants next argue that the district court erred by dismissing their claim under
the MUTPA when it concluded that the MUTPA “does not apply to the transactions that
are the subject of this suit.” 1 The MUTPA provides that “[n]o person shall, in
connection with the sale of merchandise, knowingly misrepresent, directly or indirectly,
the true quality, ingredients or origin of such merchandise.” Minn. Stat. § 325D.13
(2012). The MUTPA does not define “merchandise.” See Minn. Stat. § 325D.10 (2012).
Interpretation of a statute is reviewed de novo. Lee v. Lee, 775 N.W.2d 631, 637 (Minn.
2009). A statute is ambiguous when it is subject to more than one reasonable
interpretation. Am. Family Ins. Grp. V. Schroedl, 616 N.W.2d 273, 277 (Minn. 2000).
When a statute is ambiguous, we may look to the purpose of the statute to determine the
legislature’s intent. Ittel v. Pietig, 705 N.W.2d 203, 207 (Minn. App. 2005).
Respondents assert that the purpose of the MUTPA is not to protect investments
undertaken by sophisticated persons. We agree. The MUTPA states that it is designed to
protect “labor,” “employment,” and “workers,” and to prevent “consumers” from being
misled “into believing that they are buying merchandise at prices substantially below
1
Appellants rely on an unpublished federal case from the district of Minnesota. See Blue
Cross & Blue Shield of Minn. v. Wells Fargo Bank, N.A., No. 11-2529, 2012 WL
1343147 (D. Minn. Apr. 18, 2012). Unpublished cases are not precedential, and federal
court interpretations of state law are not binding on state courts. Minn. Stat. § 480A.08,
subd. 3(c) (2012); State ex rel. Hatch v. Emp’rs Ins. of Wausau, 644 N.W.2d 820, 828
(Minn. App. 2002), review denied (Minn. Aug. 6, 2002). Moreover, we decline to follow
the conclusions reached in this case because the federal district court did not analyze
whether the MUTPA would encompass sales of investments but instead applied the
definition of merchandise found within the Minnesota Consumer Fraud Act (CFA). See
Minn. Stat. § 325F.68, subd. 2 (2012) (defining “merchandise” under the CFA).
8
regular retail prices” or from being misled as to the “ingredients and origin” of products.
See Minn. Stat. § 325D.09 (2012). These terms do not evoke sophisticated investors
engaged in the purchase of securities. Moreover, respondents point out that appellants
were required to certify that they are “accredited investors” under the Securities Act of
1933. An “accredited investor” is defined as “any person who, on the basis of such
factors as financial sophistication, net worth, knowledge, and experience in financial
matters, or amount of assets under management qualifies as an accredited investor under
rules and regulations which the Commission shall prescribe.” 15 U.S.C. § 77b(15)(ii)
(2012) (emphasis added).
But appellants argue that the definition of “merchandise” contained within the
CFA should be applied to the MUTPA, and that their investments fall within this
definition because they are “loans.” The CFA defines “merchandise” as including
“loans.” Minn. Stat. § 325F.68, subd. 2. Appellants, somewhat ironically, base their
argument that their investments were actually “loans” on the Subscription Agreement,
which they say the district court erred by considering. The Subscription Agreement
states that “[t]he undersigned accredited investor . . . hereby irrevocably subscribes for a
convertible note.” (Emphasis added.) Arguing that Delaware law applies here,
appellants cite a Delaware case which held that holders of warrants for stock did not have
the rights of stockholders until the warrants were converted to stock. See Aspen Advisors
LLC v. United Artists Theatre Co., 861 A.2d 1251, 1263 (Del. 2004). But appellants’
loans were converted to stock, and there is no dispute that at the time they purchased
these investments the intention was that they would become shareholders of VMX.
9
Therefore, even under the CFA definition of merchandise, appellants’ investment does
not fall under the MUTPA.
Because we conclude that appellants have failed to successfully plead a MUTPA
claim, we do not consider respondents’ alternative arguments.
III. Promissory estoppel
Appellants also argue that the district court erred by dismissing their promissory-
estoppel claim. Appellants alleged in the complaint that respondents made promises
regarding the “good standing and long duration” of the patent-license agreement, the
“experience and suitability of VMX’s management,” an intent to “invest [the
respondents’] own money,” and to use funds “for scientific studies.” Appellants also
alleged that, following VMX’s failure, the defendants promised “to make [them] whole.”
Promissory estoppel is an equitable doctrine that “impl[ies] a contract in law
where none exists in fact.” Grouse v. Grp. Health Plan, Inc., 306 N.W.2d 114, 116
(Minn. 1981). “A promise which the promisor should reasonably expect to induce action
or forbearance . . . on the part of the promisee and which does induce such action or
forbearance is binding if injustice can be avoided only by enforcement of the promise.”
Id. (quoting Restatement of Contracts § 90 (1932)). “[T]he promise must be clear and
definite.” Cohen v. Cowles Media Co., 479 N.W.2d 387, 391 (Minn. 1992). “[A]n
express contract covering the same subject matter will preclude the application of
promissory estoppel.” Greuling v. Wells Fargo Home Mortg., Inc., 690 N.W.2d 757, 761
(Minn. App. 2005).
10
Appellants argue that respondents’ extra-contractual promises should be enforced
in equity because they were not “oral” promises. But appellants misconstrue the law as
stating that only oral promises fail to make a claim for promissory estoppel when a
written contract exists. Minnesota caselaw clearly states that the existence of any extra-
contractual promise fails to state a claim for promissory estoppel when an express written
contract exists. See id.; see also Lunning v. Land O’Lakes, 303 N.W.2d 452, 459 (Minn.
1980) (stating that the only exception permitting a promissory-estoppel claim when a
written contract exists is for a promise to reduce a contract to writing). Therefore,
whether the promises were oral or written is irrelevant.
Appellants also argue that the Subscription Agreement’s terms were not
established because the agreement was not included in the complaint and there were
multiple Subscription Agreements. But the complaint makes reference to the
Subscription Agreement between VMX and the university. That agreement was included
with respondents’ motion to dismiss, as was a separate Subscription Agreement between
VMX and the “accredited investor.” It is clear from the terms of these two agreements
which one was entered into by the university and which one was entered into by
appellants as investors. Appellants do not deny that the investor Subscription Agreement
submitted by respondents is the true agreement governing the parties’ dealings. Rather,
they argue that discovery was needed to determine whether the agreement was authentic.
But it is unclear why discovery would be necessary to uncover documents in appellants’
possession. See Abbott, 760 N.W.2d at 927 (“The applicable law does not require
discovery of evidence that is neither relevant nor in the other party’s possession.”); see
11
also Minn. R. Civ. P. 34.01 (permitting discovery of evidence “in the possession, custody
or control of the party upon whom the request is served”).
We conclude that the Subscription Agreement between appellants and VMX bars
appellants’ promissory-estoppel claim. Both the Subscription Agreement and the
Business Plan expressly disclaim any promises extrinsic to the contract and state that
“forward-looking statements” are not guarantees. Because appellants do not deny the
existence of these written agreements, and in fact in some cases rely upon them for their
arguments, their reliance on extrinsic promises and forward-looking statements is
unreasonable as a matter of law. See Lunning, 303 N.W.2d at 459. Reasonable reliance
is not a jury issue when a written contract exists. See Lunning, 303 N.W.2d at 459
(deciding that the evidence was insufficient to create a jury question on the issue of
promissory estoppel where a written contract existed); see also Nicollet Restoration, Inc.
v. City of St. Paul, 533 N.W.2d 845, 848 (Minn. 1995) (concluding that the record did not
support a finding of reasonable reliance on summary judgment where promises were
made by one lacking authority to bind the promisor).
IV. Fraud
Appellants also argue that the district court erred by dismissing their fraud claim
for failure to plead with sufficient particularity. “In all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be stated with particularity.” Minn. R.
Civ. P. 9.02. “[T]he circumstances required to be pled with particularity under Rule
[9.02] are the time, place, and contents of the false representations, as well as the identity
of the person making the misrepresentation and what he obtained thereby.” Baker v. Best
12
Buy Stores, LP, 812 N.W.2d 177, 184 (Minn. App. 2012) (quotation omitted), review
denied (Minn. Apr. 25, 2012). “Particularity” is “construed to mean the who, what,
when, where, and how: the first paragraph of any newspaper story.” Id. (quotation
omitted). Appellants were required to plead the “ultimate facts—or facts underlying each
element” of their fraud claim. Hardin Cnty. Sav. Bank, 821 N.W.2d at 194. There is a
“high threshold of proof for [a fraud] claim.” Martens v. Minn. Mining & Mfg. Co., 616
N.W.2d 732, 747 (Minn. 2000).
The elements of a claim of fraud are:
(1) there was a false representation by a party of a past or
existing material fact susceptible of knowledge; (2) made
with knowledge of the falsity of the representation or made as
of the party’s own knowledge without knowing whether it
was true or false; (3) with the intention to induce another to
act in reliance thereon; (4) that the representation caused the
other party to act in reliance thereon; and (5) that the party
suffer pecuniary damage as a result of the reliance.
Specialized Tours, Inc. v. Hagen, 392 N.W.2d 520, 532 (Minn. 1986).
In their complaint, appellants stated that respondents made numerous false
representations of fact regarding the “good standing and long duration” of the patent-
license agreement, the stock ownership of the company, investments in future scientific
studies, and respondents’ promise to invest in the company. And they argue that the
Subscription Agreement and Business Plan support their claim that the venture was of
“long duration” because it describes “milestones” achieved from 2008 through 2009 and
research beginning in 2005, and states that “investing in [VMX] pursuant to the terms of
this . . . Agreement is an appropriate and suitable investment.”
13
But these statements purporting to represent the duration of the venture and
suitability of investment are not stated as promises but demonstrate general statements of
good will toward what were then prospective investors. See Kennedy v. Flo-Tronics,
Inc., 274 Minn. 327, 332, 143 N.W.2d 827, 830 (1966) (no fraud where “the prophecy or
prediction of future value or profits is made in good faith and without a misrepresentation
of fact”). In fact, the statements appellants cite as supporting their claims are not
misrepresentations at all but true statements of historical fact, such as “[t]he technology is
owned by [the University], which has granted [VMX] an exclusive license,” and “[s]ince
2005, research for the technology has been conducted by [the University] through $3.0
million in funding from the Defense Advanced Research Projects Agency (DARPA) and
licensed to [VMX].” “It is axiomatic that fraud cannot be predicated on the truth.”
Franklin Theatre Corp. v. City of Minneapolis, 293 Minn. 519, 522, 198 N.W.2d 558,
560 (1972) (emphasis added) (quotation omitted).
Appellants also argue that they sufficiently pleaded fraud with regard to the
promise that respondents would invest in VMX and would put money toward scientific
studies because they stated who made the misrepresentations (the “University” and
“Defendant Douglas Johnson”), what was misrepresented (“VMX Board of Directors
would invest $100,000 if EAI raised at least $500,000 from investors” and “any of the
money raised by EAI from investors [would go] for a pivotal scientific pig study”), and
when the misrepresentations were made (“in or about July and August 2009”). But
statements regarding future scientific studies are not actionable as a matter of law
because they are statements of future intent. “Where a representation regarding a future
14
event is alleged, as here, an additional element of proof is [required] that the party
making the representation had no intention of performing when the promise was made.”
Martens, 616 N.W.2d at 747. Appellants allege that they sufficiently pleaded that
respondents never intended to perform this promise in paragraph 82 of the complaint, but
that paragraph only states that “[s]aid [respondents] knew that these representations were
false or made these representations as of their own knowledge without knowing whether
they were true or false.” Martens states that the falsity or recklessness of the
misrepresentation is an element of all fraud claims, but a claim based on a future promise
requires “an additional element,” which is that “the promisor had no intention to perform
at the time the promise was made.” 616 N.W.2d at 747 (emphasis added). Therefore,
because appellants did not plead this additional element, appellants’ fraud claim based on
future actions was not pleaded with adequate particularity.
Appellants further allege in the complaint that respondents’ promise to invest in
VMX induced appellants to purchase stock in the first place. Even so, respondents argue
that reliance on this promise to invest was unreasonable given the existence of a written
contract—the Subscription Agreement—disclaiming all extra-contractual promises.
Based upon the limited record before us, we agree. “[E]stablishing the reasonableness of
the reliance is essential to any cause of action in which detrimental reliance is an
element.” Nicollet Restoration, Inc., 533 N.W.2d at 848. And, as previously explained,
appellants’ reliance on extra-contractual promises was unreasonable as a matter of law
due to the existence of the written agreement. Cf. Veit v. Anderson, 428 N.W.2d 429,
433-34 (Minn. App. 1988) (reversing summary judgment where oral representations did
15
not expressly contradict the written agreement and where one party was less sophisticated
than the other).
V. Negligent misrepresentation
Appellants also argue that the district court erred by dismissing their claim of
negligent misrepresentation. Negligent misrepresentation is defined as:
One who, in the course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the guidance
of others in their business transactions, is subject to liability
for pecuniary loss caused to them by their justifiable reliance
upon the information, if he fails to exercise reasonable care or
competence in obtaining or communicating the information.
Williams v. Smith, 820 N.W.2d 807, 815 (Minn. 2012) (quoting Restatement (Second)
Torts § 552 (1976)). We conclude that, for all the reasons previously recited, appellants
failed to plead negligent misrepresentation with the required particularity and failed to
show justifiable reliance upon extra-contractual statements, and therefore appellants’
negligent misrepresentation claim fails as a matter of law.
VI. Amending the complaint
Appellants argue that if this court finds that their claims were not sufficiently
pleaded that we should remand to allow appellants to amend their complaint. We review
a district court’s denial of leave to amend a complaint for abuse of discretion. Benson v.
Nw. Airlines, Inc., 561 N.W.2d 530, 540 (Minn. App. 1997), review denied (Minn. June
11, 1997). But appellants did not move the district court to amend the complaint in
response to respondents’ motion to dismiss. See St. James Capital Corp. v. Pallet
Recycling Assocs. of N. America, Inc., 589 N.W.2d 511, 516-17 (Minn. App. 1999)
16
(concluding that appellants were not entitled to amend their complaint when they failed
to properly bring a motion to amend, and because their claims failed as a matter of law).
And appellants do not assert what additional facts they could plead that would make the
complaint withstand a motion to dismiss.
Affirmed as modified.
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