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Northland Temporaries, Inc. v. Turpin: CIVIL PROCEEDURE | CORPORATION - mistake of fact, law regarding vacating default; remand; corporate form

STATE OF MINNESOTA
IN COURT OF APPEALS
A06-2201
Northland Temporaries, Inc.,
Respondent,
vs.
Anthony Turpin, et al.,
Appellants.
Filed February 5, 2008
Reversed and remanded
Lansing, Judge
Anoka County District Court
File No. C6-06-2509
Daniel E. Kelly, Marnie E. Fearon, Felhaber, Larson, Fenlon & Vogt, P.A., Suite 2200,
220 South Sixth Street, Minneapolis, MN 55402 (for respondent)
Bradley A. Kletscher, Susan E. Sheely, Barna, Guzy & Steffen, Ltd. 400 Northtown
Financial Plaza, 200 Coon Rapids Boulevard, Coon Rapids, MN 55433 (for appellants)
Considered and decided by Dietzen, Presiding Judge; Lansing, Judge; and Ross,
Judge.
S Y L L A B U S
A mistake of fact that significantly affects the district courts exercise of discretion
in determining whether to vacate a default judgment requires remand for reconsideration
of the factors set out in Hinz v. Northland Milk & Ice Cream Co., 237 Minn. 28, 53
N.W.2d 454 (1952).
2
O P I N I O N
LANSING, Judge
The district court denied the motion of two minority shareholders of an inactive
corporation to vacate a default judgment, entered against them individually, for money
that the corporation owed to a temporary-services agency. Because the district courts
determination that the minority shareholders did not have a reasonable defense on the
merits relies on an error of law and because the determination that the minority
shareholders did not have a reasonable excuse for their failure to submit a timely answer
relies on a factual error, we reverse and remand.
F A C T S
The Minnesota Secretary of States office issued a certificate of incorporation for
Manufacturing Out Sourcing Specialists, Inc. on June 22, 1999. Paul Anthony (Paul)
Turpin and Tim Turpin are minority shareholders of the corporation; each brother owns
twenty-three percent of the corporations stock. Their father, David Turpin, is the
majority shareholder and owns fifty-four percent of the stock. In this action to recover
money for temporary services performed for the corporation, Northland Temporaries,
Inc., named only Paul and Tim Turpin as defendants.
Although the secretary of states certificate of incorporation was issued for
Manufacturing Out Sourcing Specialists Inc., the corporations promotional materials,
checks, and invoices, refers to the corporation as M.O.S.S., Inc. and sometimes
MOSS, Inc. In some places, Manufacturing Out Sourcing Specialists is spelled out
under the abbreviated version of the name, but in other places MOSS, Inc. or
3
M.O.S.S., Inc. stands alone. The record indicates that the shareholders of M.O.S.S.,
Inc. always used the corporate designation Inc. in referring to the corporations name
and that M.O.S.S., Inc.s promotional materials, checks, and invoicesincluding a
framed handout that hung inside M.O.S.S., Inc.s officeidentified M.O.S.S. as a
corporation.
In the summer of 2000 or 2001, a salesman from Northland visited the office of
M.O.S.S., Inc., made an oral presentation, and offered M.O.S.S., Inc. the opportunity to
hire temporary employees through Northland. The Northland salesman initiated the
contact. During his visit, the salesman did not present anyone at M.O.S.S., Inc. with a
written contract or discuss the terms of M.O.S.S., Inc.s potential relationship with
Northland other than rates. The record does not contain a written agreement for services
other than the conditions that are listed on the reverse side of the employees time sheets.
But the evidence establishes that M.O.S.S., Inc. regularly hired temporary employees
from Northland, beginning shortly after the salesmans presentation and continuing until
November 2005. The invoices that Northland mailed to M.O.S.S., Inc. are addressed to
M.O.S.S. at the corporations address. The timesheets that Northland used to generate
its invoices identify the client as Moss, Inc. or as Moss.
M.O.S.S., Inc. ceased its operations in January 2006. At that time, M.O.S.S., Inc.
owed Northland ,901.31 for services provided by Northlands employees. In an
affidavit, Tim Turpin states that after M.O.S.S., Inc. ceased its operations he received a
call from Northlands general manager asking about payments on the outstanding bill.
The affidavit states that he told the general manager that M.O.S.S., Inc. was out of
4
business and that the Turpins no longer worked for M.O.S.S., Inc. In a counteraffidavit,
Northlands general manager states that his only telephone conversation with Tim Turpin
between June 2005 and June 2006 was Turpins telephone call after service of the
summons and complaint and was confined to Turpins question of whether Northland had
a contract for services with the Turpins.
In preparing to file suit against M.O.S.S., Inc., counsel for Northland checked with
the secretary of states office and was unable to find a Minnesota corporation registered
under the name M.O.S.S., Inc. Northland therefore filed a complaint against Anthony
Turpin and Tim Turpin, d/b/a M.O.S.S. Northland did not include M.O.S.S., Inc. as a
defendant.
Tim Turpins affidavit states that after receiving the summons and complaint, he
again called Northlands general manager. He states that he told the general manager that
M.O.S.S., Inc. was a subchapter S corporation and that he and his brother were therefore
not personally liable for the corporations debt. The counteraffidavit of Northlands
general manager states that this was the conversation that was limited to Turpins
question about whether they had a written contract.
Neither Paul nor Tim Turpin submitted an answer to Northlands complaint. On
January 24, 2006, the Turpins registered a corporation entitled MOSS, Inc. with the
secretary of state.
The district court entered a default judgment against Paul and Tim Turpin, jointly
and severally, in the amount of ,974.31 on April 7, 2007. The Turpins filed a motion
5
to vacate the default judgment on June 2, 2006. The court denied the motion, and this
appeal follows.
I S S U E S
I. Do the law and the facts support the determination that the minority shareholders
have no reasonable defense on the merits of the action?
II. Do the facts support the determination that the minority shareholders have no
reasonable excuse for their failure to submit an answer?
III. What is the remedy if the district court relies on an error of law or fact when
applying the factors in Hinz v. Northland Milk & Ice Cream Co., 237 Minn. 28, 53
N.W.2d 454 (1952)?
A N A L Y S I S
A district court may vacate a final judgment for reasons of [m]istake,
inadvertence, surprise, or excusable neglect. Minn. R. Civ. P. 60.02(a). Minnesota
courts analyze motions seeking relief from orders and judgments under Minn. R. Civ. P.
60.02 by applying a four-factor test that was established in Hinz v. Northland Milk & Ice
Cream Co., 237 Minn. 28, 30, 53 N.W.2d 454, 456 (1952). The Hinz factors require
consideration of whether the movant has (1) a reasonable defense on the merits; (2) a
reasonable excuse for the failure or neglect to answer; (3) acted diligently after notice of
entry of the judgment; and (4) demonstrated that no prejudice will occur to the judgment
creditor. Id.
The district court has broad discretion in deciding whether to grant or deny a rule
60.02 motion. Kosloski v. Jones, 295 Minn. 177, 180, 203 N.W.2d 401, 403 (1973). But
broad discretion does not mean that the discretion is unlimited. Spicer v. Carefree
Vacations, Inc., 370 N.W.2d 424, 426 (Minn. 1985). Significantly, the Hinz decision
6
itself limits the district courts discretion by specifically holding that [i]n the exercise of
sound judicial discretion . . . it is the duty of the trial court . . . to grant a motion to open a
default judgment and permit a party to answer if the party in default shows that it has
met each of the requirements in the four-factor test. Hinz, 237 Minn. at 30, 53 N.W.2d at
455-56. The supreme court reaffirmed that requirement in Finden v. Klaas, 268 Minn.
268, 271-73, 128 N.W.2d 748, 750-51 (1964) (reversing denial of motion to vacate
because defendant met three factors and, on fourthabsence of reasonable excuse
attorneys neglect was not attributable to defendant).
The supreme court has also limited the district courts discretion in deciding
motions under rule 60.02 by requiring that the moving party must demonstrate a
reasonable defense on the merits before the district court may grant a motion to open a
default judgment. See Vrooman Floor Covering Inc. v. Dorsey, 267 Minn. 318, 322, 126
N.W.2d 377, 380 (1964) (reversing an order to reopen judgment when movant failed to
show reasonable defense on merits); see also Hengel v. Hyatt, 312 Minn. 317, 319, 252
N.W.2d 105, 106 (1977) (If no affidavit of merit or other proof of a valid defense is
provided, the motion to vacate will be denied.).
Finally, the supreme court has held that, if the trial court has acted under a
misapprehension of the law, the decision will be reversed on appeal even though the
opening of a default judgment lies almost wholly within the sound discretion of the trial
court. Sommers v. Thomas, 251 Minn. 461, 469, 88 N.W.2d 191, 196-97 (1958).
Similarly, when the district courts reasons are based on facts not supported by the
record, the determination will not be sustained. See Roehrdanz v. Brill, 682 N.W.2d 626,
7
631-32 (Minn. 2004) (evaluating district courts discretionary ruling on motion to vacate
default judgment); Duenow v. Lindeman, 223 Minn. 505, 518, 27 N.W.2d 421, 429
(1947) (reversing order denying motion to vacate because plain and decisive facts were
entirely overlooked by the trial judge).
In the original complaint, Northland alleged that Paul and Tim Turpin, doing
business as M.O.S.S., breached their contract to pay for Northlands temporary services
and, because Northland had provided M.O.S.S. with invoices, Paul and Tim Turpin were
liable under an account-stated theory. At the hearing on the motion to vacate, Northland
argued that the Turpin brothers were liable because they did not file for a certificate of
assumed name.
In denying the Turpins motion to vacate, the district court applied the four Hinz
factors and concluded that the Turpins had demonstrated two of the four factors. The
record supports the district courts decision on these factors. First, the district court
concluded that they had acted with due diligence after receiving notice of entry of
judgment against them. Second, the district court concluded that the Turpins had
demonstrated that a vacation of the default judgment results in no substantial prejudice
to Northland. On the remaining two Hinz factors, the district court concluded that the
Turpins had not demonstrated that they had a reasonable excuse for failure to answer and
that they had not shown that they had a reasonable defense on the merits. We therefore
turn to the district courts analysis on each of these two factors.
8
I
A reasonable defense on the merits is one that, if established, provides a defense to
the plaintiffs claim. Finden, 268 Minn. at 271, 128 N.W.2d at 750. Specific information
that clearly demonstrates the existence of a debatably meritorious defense satisfies this
factor. Charson v. Temple Israel, 419 N.W.2d 488, 492 (Minn. 1988).
The Turpins defense is based on the general rule that the employees and
shareholders of a corporation are not personally liable for the corporations debts. See
Minn. Stat. 302A.425 (2006) (limiting shareholder liability). Northland advances two
theories under which this general rule does not apply. We conclude, however, that the
Turpins still have a reasonable defense under either of Northlands theories.
Northlands first theory is that the Turpin brothers are liable for the debts of the
corporation because they were agents acting for an undisclosed or partially disclosed
principal. The district court accepted this argument and determined that the Turpins had
acted on behalf of M.O.S.S., Inc., a partially disclosed principal. For two reasons, we
conclude that the Turpins have a reasonable defense on the merits against this first
theory.
First, the evidence in the record does not show that the Turpins personally
contracted with Northland on behalf of M.O.S.S., Inc. Cf. Haas v. Harris, 347 N.W.2d
838, 840 (Minn. App. 1984) (stating person is liable on contract he executes on behalf of
partially disclosed principal). The record suggests that the salesman reached an
agreement with someone at M.O.S.S., Inc. before sending temporary employees, but
9
nothing in the record indicates that Paul or Tim Turpin personally contracted with
Northland or were personally involved in reaching an agreement with Northland.
Second, the facts in the record weigh against Northlands claim that M.O.S.S., Inc.
was an undisclosed or a partially disclosed principal. An agent acts on behalf of a
disclosed principal if, when an agent and a third party interact, the third party has notice
that the agent is acting for a principal and has notice of the principals identity.
Restatement (Third) of Agency 1.04(2) (2006). Northland does not dispute that it knew
that Paul and Tim Turpin acted on behalf of an entity identified as M.O.S.S., Inc. And
Northland does not claim that knowing M.O.S.S., Inc.s full name was necessary to
assess its creditworthiness or its ability to perform duties under the contract. See
Restatement (Third) of Agency 6.02 cmt. b (2006) (stating that when principal is
disclosed, third party can assess principals reputation, assets, and other indicia of
creditworthiness as well as its ability to perform duties under contract).
To the contrary, the record indicates that Northland had notice of M.O.S.S., Inc.s
corporate identity. Northlands salesman sought out M.O.S.S., Inc. as an entity with
which it was interested in doing business. In addition to knowing that M.O.S.S., Inc. was
incorporated, Northland knew the location of M.O.S.S., Inc. and the names of M.O.S.S.,
Inc.s owners. Furthermore it is reasonable to assume that, after visiting with people at
M.O.S.S., Inc., Northlands salesman had notice of M.O.S.S., Inc.s basic purpose and
structure. Because the record demonstrates that Northland had notice of facts reasonably
sufficient to assess M.O.S.S., Inc.s creditworthiness and ability to perform duties under
the contract, Northland has not conclusively shown that M.O.S.S., Inc. was an
10
undisclosed or only partially disclosed principal. Cf. Haas, 347 N.W.2d at 840 (holding
that agent acted on behalf of partially disclosed principal because third party did not have
notice that principal was incorporated).
Northlands second theory is that the Turpins do not have a reasonable defense on
the merits because they failed to file a certificate of assumed name. Under this second
theory, Northland claims that the Turpins are personally liable because they violated
Minn. Stat. 333.01 (2006), which prohibits a person from conducting business under an
assumed name unless such person shall file in the Office of the Secretary of State, a
certificate setting forth the name and business address under which the business is
conducted or transacted. Under Minn. Stat. 333.065 (2006), a person who violates
Minn. Stat. 333.01 is subject to penalties and remedies provided in Minn. Stat. 8.31
(2006) as well as remedies or penalties otherwise available. And according to Minn. Stat.
8.31, subd. 3(a), any person who is injured by a violation of Minn. Stat. 333.01 may
bring a civil action and recover damages, together with costs and disbursements . . . and
receive other equitable relief as determined by the court.
The Turpins, however, have a reasonable defense on the merits against this
assumed-name theory. Northland has offered no support for its claim that an acronym
is an assumed name under Minn. Stat. 333.01, and we find no basis for concluding as a
matter of law that, unless a corporation wishes to expose its shareholders to personal
liability for corporate debt under Minn. Stat. 333.01, it cannot refer to itself by an
acronym reasonably drawn from its name. Furthermore, Northland has not alleged that
the Turpins caused injury to Northland by using an acronym. If Northland is able to
11
recover from M.O.S.S., Inc. it will suffer no injury, and, even if it is unable to recover
from M.O.S.S., Inc., the Turpins use of the acronym has not been linked to Northlands
inability to recover for breach.
Because the Turpins have a reasonable defense on the merits against each of
Northlands theories, we return to the fundamental principle that, in the absence of an
agreement to guarantee corporate debt, shareholders and employees are not liable to
creditors for debts incurred by the corporation. Minn. Stat. 302A.425. Because
Northland has not conclusively shown that this principle does not apply, the district court
misapprehended the law when it determined that the Turpins did not meet the
requirements of the first Hinz factor.
II
The district court also based its decision to deny the Turpins motion on the
second Hinz factor, determining that the Turpins do not have a reasonable excuse for
their failure or neglect to answer the complaint. The Turpins, by affidavit, assert that
they did not answer because the complaint alleged that M.O.S.S. had breached its
contract by failing to pay Northland and that they were not personally liable for
M.O.S.S., Inc.s debts. They believed that Tim Turpins telephone call to the general
manager telling him that they were incorporated would resolve the matter because
Northland was also a corporation and would understand that the Turpins were not
personally liable. See Guillaume & Assocs., Inc. v. Don-John Co., 371 N.W.2d 15, 19
(Minn. App. 1985) (recognizing that lay persons failure to answer in some circumstances
may not be unreasonable).
12
The district court concluded that the Turpins failure to answer was inexcusable
because they intentionally disregarded not only the summons and complaint, but also
ignored the district courts order for disclosure, which made it clear that some type of
paper must be filed with the court. In reaching this conclusion, the district court relied on
the reasoning of Black v. Rimmer, 700 N.W.2d 521 (Minn. App. 2005). In Black, the
court issued an order requiring an informational statement in July 2003 and entered a
default judgment one year later, in July 2004. Id. at 527-28. The court reasoned that
although a non-lawyer might not understand the language in a summons, the order for an
informational statement makes it clear to anyone that some type of paper must be filed
with the court and the failure to respond to that requirement was unreasonable. Id. at
527. In drawing a parallel to Black, the district court apparently overlooked the fact that
the courts order to the Turpins to provide financial disclosure was not issued until May
16, 2006, more than a month after it entered the default judgment against the Turpins.
Consequently, unlike the circumstances of Black, the courts order for disclosure did not
give the Turpins additional timely notice that they needed to file papers with the court.
The only other notice evidenced in the record was Northlands notice of request
for a hearing to determine attorneys fees. This notice was not served on the Turpins
personally but was served by mail to M.O.S.S., Inc.s business address on February 1,
2006. M.O.S.S., Inc. ceased its operations in January 2006. The evidence in the record
does not indicate whether the Turpins received the notice or that any failure to respond
was intentional. Because the district courts decision on the second Hinz factor was
13
significantly based on facts not supported by the record, the district courts decision
cannot be sustained.
III
When appellate courts reverse the district courts exercise of discretion under rule
60.02, we typically conclude that further proceedings are unnecessary. See Charson, 419
N.W.2d at 492 (remanding only for vacation of judgment and dismissal); Hinz, 237
Minn. at 32, 53 N.W.2d at 457 (reversing); Guillaume, 371 N.W.2d at 19 (ordering
default judgment vacated). In this case, however, the district courts decision was based
in part on a factual error. For two reasons we conclude that it is, therefore, appropriate to
remand for a reevaluation of the Hinz factors. First, it is within the province of the
district court to resolve factual disputes in testimony and affidavits. Roehrdanz, 682
N.W.2d 630, 631-32; Roe v. Widme, 191 Minn. 251, 252-53, 254 N.W. 274, 275 (1934).
And, second, it is generally for the district court to determine whether a litigants excuse
for not having answered in time is a reasonable excuse. Standard Oil Co. v. King, 238
Minn. 81, 83, 55 N.W.2d 710, 712 (1952).
We note that the district court, relying again on Black, stated that [t]o obtain
relief under rule 60.02, all four of the [Hinz] factors must be present. Although this is an
accurate statement of the standard of review in Black, an element of caution is necessary
in its application. As a basis for this holding, Black cites Charson, 419 N.W.2d 491.
Charson, in reviewing the district courts denial of a motion to vacate a dismissal, applied
a rule 60.02 analysis. 419 N.W.2d at 490-92. The supreme court concluded that Charson
had satisfied three of the Hinz factors and then stated that before relief will be granted
14
from a final order or judgment, the moving party must also establish to the satisfaction of
the court that it possesses a meritorious claim. Id. at 491. As authority for this point,
the Charson court relied on Hengel, 312 Minn. at 319, 252 N.W.2d at 106. Other
appellate decisions have similarly cited Charson for this review standard. See, e.g.,
Nguyen v. State Farm Mut. Auto. Ins. Co., 558 N.W.2d 487, 490 (Minn. 1997) (citing
Charson for conclusion that [a]ll four of the [Hinz] factors must be satisfied in order to
justify relief under [rule 60.02]).
Charson, however, does not say that all four factors must be met to allow a district
court to exercise its discretion and grant relief under rule 60.02. Read carefully, it only
states that a litigant seeking relief under rule 60.02 must show a meritorious claim or a
reasonable defense on the merits. Charson, 419 N.W.2d at 491. This reading is
confirmed by the authority it citesHengel, which states that a motion to vacate will be
denied if the movant fails to show a meritorious defense. Hengel, 312 Minn. at 319, 252
N.W.2d at 106. Hengel, in turn, refers to Vrooman, 267 Minn. at 322, 126 N.W.2d at
380, which also states that a motion to vacate will be denied if the movant has not
demonstrated a reasonable defense on the merits. Hengel, 312 Minn. at 319, 252 N.W.2d
at 106.
It is important to note that Hinz and Finden do not limit the district courts
discretion to grant relief under rule 60.02; they limit the district courts discretion to deny
relief. Hinz, 237 Minn. at 30, 53 N.W.2d at 455-56; Finden, 268 Minn. at 271, 128
N.W.2d at 750. Satisfaction of all four Hinz factors requires that relief from judgment
must be granted. Id. Consequently, these factors provide a relevant framework for the
15
district court in the exercise of its affirmative discretionary power. But we find no solid
authority for saying that the district court may only grant relief under rule 60.02 when all
four factors have been fully met.
On this record, the facts and the law establish that the Turpins have a reasonable
defense based on the general rule that the employees and shareholders of a corporation
are not personally liable for the corporations debts. On the remaining factorthe
reasonableness of the Turpins excuse for failing to respondwe remand to the district
court for further consideration. The district court may exercise its discretion to determine
whether the motion for relief should be granted, but it is not precluded from granting
relief even if it determines that the Turpins excuse was not reasonable. We also reverse
and remand to the district court the determination on attorneys fees, recognizing that it is
within the district courts discretion to condition relief from judgment on the payment of
costs associated with the default proceedings. Finden, 268 Minn. at 272, 128 N.W.2d at
751.
D E C I S I O N
Because the district courts determinations that the Turpins failed to show that
they have a reasonable defense on the merits and failed to establish that they have a
reasonable excuse were significantly affected by mistakes of law and fact, we reverse and
remand for reconsideration of the factors set out in Hinz v. Northland Milk & Ice Cream
Co., 237 Minn. 28, 53 N.W.2d 454 (1952).
Reversed and remanded.
 

 
 
 

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