September 27, 2017

STATE OF MINNESOTA IN SUPREME COURT A16-2048

CorVascular Diagnostics, LLC, Petitioner,

Date of Filing of Court of Appeals Decision: August 28, 2017

vs. Michael Talcott, et al., Respondents.

PETITION FOR REVIEW OF DECISION OF THE COURT OF APPEALS AND ADDENDUM

Sharon L. Van Dyck (#0183799) Fafinski Mark & Johnson, P.A. Flagship Corporate Center 775 Prairie Center Drive, Suite 400 Eden Prairie, MN 55344 Telephone: 952.995.9500 [email protected] Timothy W. Fafinski (#0209147) Corporate Counsel, PA 3411 Brei Kessel Road Independence, MN 55359 Telephone: 952.944-9500 [email protected] Attorneys for Petitioner CorVascular Diagnostics, LLC

Mark R. Bradford (#0335940) Steven M. Sitek (#0300901) Bassford Remele, P.A. 100 South Fifth Street, Suite 1500 Minneapolis, MN 55402 Telephone: 612.333.3000 [email protected] [email protected] Attorneys for Respondents, Michael Talcott, CorVascular MI, LLC, and William Beymer

TO: THE SUPREME COURT OF THE STATE OF MINNESOTA:

Petitioner CorVascular Diagnostics, LLC requests Supreme Court review of the August 28, 2017 Court of Appeals decision on the following issues for the reasons set forth below. STATEMENT OF THE CASE Petitioner CorVascular Diagnostics, LLC (“CorVascular”) is a Minnesota limitedliability company.

[CAP-Add.6]1

Spencer Lien and Michael Talcott formed

CorVascular in 2013. When CorVascular was formed, Lien owned sixty percent of the membership units, and functioned as the Chief Manager. [CAP-Add.8] Talcott, through his company CorVascular MI, LLC (CVM), owned the remaining forty percent. Talcott was Vice President of Sales, and was tasked with building a commissioned sales force. In December, 2013, CorVascular entered into a long-sought Distribution Agreement with Viasonix, Ltd. [CAP-Add.9] The agreement appointed CorVascular the exclusive U.S.-distributor of an advanced-vascular-diagnostic system called the “Falcon.” Under the terms of the agreement, CorVascular’s right to be the exclusive distributor of the Falcon was conditioned on meeting a defined sales quota of 90 Falcons for the year 2015. [CAP-Add.6-7] The only product line CorVascular distributed through 2014 and most of 2015 was the Falcon. [Id.]

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The citation form “CAP-Add.#” refers to the page in the addendum filed with the Appellants’ brief at the Court of Appeals. 1

During 2014—CorVascular’s first operative year—Lien funded as well as managed the company. Talcott recruited and trained a sales force that included William Beymer and Carl Tisdal. [CAP-Add.8] By mid-2015, disagreements and tensions had built up between Lien and Talcott about Talcott’s compensation. Talcott threatened to quit and join a competitor, and began soliciting CorVascular’s other independent sales representatives to join him. [Id.] The relationship between Lien and Talcott continued to deteriorate throughout 2015.

Talcott left CorVascular in February, 2016.

Two weeks later, CorVascular

commenced suit against Talcott and CVM. The Complaint “alleges the Defendants have breached contractual and fiduciary duties by, among other things, misusing and improperly disseminating confidential, proprietary information, misappropriating corporate opportunities and converting corporate equipment and other assets.” [Add.11] Talcott and CVM deny wrongdoing, and “have counterclaimed for failure to pay sales commissions, breach of contract, unjust enrichment and breach of duty of good faith and fair dealing. [Id.] On May 26, 2016, Talcott and CVM demanded that CorVascular indemnify them and advance their defense expenses pursuant to Minn. Stat. § 322B.699, subd. 3. The demand included an affirmation by Talcott stating he had acted in good faith, received no improper benefits, and reasonably believed he was acting in CorVascular’s best interests with respect to all of the conduct at issue. [CAP-Add.14] The affirmation included a written promise to repay all advanced amounts if it is ultimately determined the criteria for indemnification have not been satisfied. [Id.] 2

CorVascular did not respond within the statutorily mandated 60 days. See Minn. Stat. § 322B.699, subd. 6(5). Talcott and CVM filed a motion with the district court requesting an order directing CorVascular to advance their litigation–related expenses, including attorney fees.2 All parties filed detailed affidavits in connection with the motion. Talcott, CVM, Beymer and Tisdal denied the allegations made in the Complaint. CorVascular provided a detailed description of misconduct. [Add.11] The district court denied the motion. Evaluating the evidence before her, the district court concluded the procedural criteria had been met. [Add.14] Moving to the substantive requirements, the district court considered whether “the facts then known” “would not preclude indemnification.” [Id.] Examining allegations in the Complaint and the substance of the affidavit evidence, the district court concluded the evidence presents “a raging dispute” regarding the factual requirements for statutory indemnification. [Id.] The district court concluded it could not reach an independent determination of eligibility for advancement on the existing record, because “[t]he affidavit testimony creates fact issues that would require credibility determinations to resolve.” [Id.] “In the absence of any way for this Court to assess credibility at this stage of the case, the moving party has failed to meet its burden,” [Id.] The motion for advancement was, therefore, denied. Talcott, CVM, and Beymer appealed. On August 28, 2017 the Court of Appeals reversed. [Add.9] The Court of Appeals noted that the only “known facts” described the founding of the company and the existence of allegations made in the complaint. [Add.8]

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Beymer and Tisdal, who were added to the lawsuit by an Amended Complaint, joined the motion, arguing they were also entitled to statutory advancement. 3

It held the district court’s attempt to consider the “disputed facts” in the submitted affidavits, when conducting an “independent determination” of eligibility for advancement, was error. [Id.] Based on its own case law addressing similar language in a parallel statutory scheme, and the minimal uncontested facts, the Court of Appeals held advancement was mandated because “there are no known facts that preclude indemnification” [Id.], and remanded the case for a determination of the amount of expenses and fees to be advanced. [Add.9] STATEMENT OF LEGAL ISSUES 1. In the context of a lawsuit brought by an LLC against its member for breach of fiduciary duty or other bad acts, does Minnesota’s LLC-indemnity-advancement statute, Minn. Stat. § 322B.699,3 require the company to advance the defense costs of the member it sued? Relying on its decision in Asian Women United v. Leiendecker, 789 N.W.2d 699 (Minn. App. 2010), which addressed the same question in the context of not-forprofit corporations governed by Chapter 317, the Court of Appeals held the mandatory provisions of the LLC-indemnity-advancement-statute apply to lawsuits brought by an LLC against its own member, thus an LLC can be mandated to advance the defense costs of a member it has sued for bad-faith conduct.

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On January 1, 2018, Minn. Stat. § 322B.699 will be replaced with Minn. Stat. § 322C.048. The pertinent language of these two statutes is identical. 4

2. If Minn. Stat. § 322B.699’s mandatory indemnity advancement provisions do apply to litigation brought by an LLC against a member for bad acts, what standard is the district court to apply to make “a determination” that the “facts then known” “do not preclude indemnification,” thereby triggering mandatory advancement? The district court was unable to determine whether the factual requirements for advancement were met because the pre-discovery record consisted of a “raging dispute” about “whether [the members] are entitled to indemnification.” [Add.14]. Accordingly, the district court held the moving parties—the members seeking advancement—had failed to meet their burden, and declined to order advancement.

The Court of Appeals reversed. Though acknowledging “the

relevant statutory provisions are not a model of clarity” [Add.4], the Court of Appeals held the district court may only consider “facts then known,” which does not permit the weighing of allegations or contested facts. Since the only “known facts” pre-discovery consisted of a description of the company’s founding and a complaint making allegations of bad conduct, no “known facts” precluded indemnification, making the LLC’s advancement of the members’ defense costs mandatory. CRITERIA AND ARGUMENT [Minn. R. Civ. App. P. 117, subd. 2(a), (d)] In the first appellate decision interpreting and applying Minnesota’s mandatory indemnity advancement provisions to a limited liability company under Minn. Stat. § 322B.699, subdivision 3, a panel of the court of appeals held a district court used the incorrect legal standard when it denied advancement of attorneys’ fees and expenses to

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the appellant LLC member because he failed to meet the requisite burden of proof. [Add.2, 7]. The court of appeals’ decision is problematic for two reasons. First, it is based in part on its own, earlier decision in Asian Women United of Minn. v. Leiendecker, 789 N.W.2d 688 (Minn. 2010), which held an indemnification-advance statute governing a non-profit corporation4 is mandatory when the statutory requirements of an advance have been met, even when the advance is sought in a proceeding the corporation brought against the person seeking the advance. Id. at 693. The Court of Appeals treated Leiendecker as binding authority, holding that Section 322.699’s advancement provisions are properly applied to an LLC that sues one of its members for bad acts—conduct for which statutory indemnification is not available. [Add.5-6, 7-8] The LLC can, therefore, be mandated to advance defense costs to the very member it sued. This result is at odds with the intent of the uniform act from which the language originated, at odds with legislative intent, and at odds with common sense. Left undisturbed, this published decision will serve as precedent not only for LLCs, but also for the multiple other entity types governed by similar statutory language—including corporations and not-for-profit corporations. Definitive resolution of this issue across the several statutes in which the identical statutory language is utilized will clarify the law in multiple statutory contexts, and has significance to litigants far beyond the parties to this case.

4

The indemnity advancement provisions in the statutory schemes governing not-forprofit corporations (Chapter 317) and corporations in general (Chapter 302B) are nearly identical to those governing LLCs. 6

Second, the Court of Appeals held a district court is mandated to make factual findings, even when the only “known facts”—which it defined to be undisputed facts— are limited to the company’s formation, because all evidence pertinent to a good faith determination is disputed. [Add.7] Considering the statute’s negative standard—the factual evaluation mandates the court to determine whether “facts then known” preclude indemnification—the Court of Appeals’ decision has the practical effect of mandating district courts, faced with early motions for advancement, to order LLCs to advance defense costs to the former members the LLC has sued for malfeasance on a routine basis, even when an alleged lack of good faith is the central issue in the litigation. This court has not spoken on the meaning of the phrase “facts then known,” and has never addressed the standard district courts are to apply to determine if those facts preclude indemnification advancement. It has never addressed the nature of “the burden of establishing that the person is entitled to” an indemnification advance. Minn. Stat. § 322.699, subd. 6. If suits brought by a company against an owner for bad faith and malfeasance are properly the subject of statutory-indemnity advancement, a proposition that makes little logical sense, the district courts in this state need this court to articulate a practical, understandable standard for them to use to make the statutorily mandated determination. CONCLUSION For these reasons, Petitioners request an order granting review of the August 28, 2017 decision of the Court of Appeals.

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FAFINSKI MARK & JOHNSON , P.A.

Dated: September 27, 2017

By:

s/ Sharon L. Van Dyck Sharon L. Van Dyck (#0183799) Flagship Corporate Center 775 Prairie Center Drive, Suite 400 Eden Prairie, MN 55344 Tel: (952) 995-9500 [email protected]

Timothy W. Fafinski (#0209147) Corporate Counsel, PA Independence, MN 55359 Tel: 952-944-9500 [email protected] Attorneys for Petitioner Diagnostics, LLC

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CorVascular

CERTIFICATE OF DOCUMENT LENGTH The undersigned certifies that this Petition complies with the typeface requirements of Rule 132.01, subd., 1 and the length requirements of Rule 117, subd. 3 of the Minnesota Rules of Civil Appellate Procedure.

It was prepared in 13-point,

proportionately spaced typeface, using Microsoft Word 2010 software, and contains 1,721 words based on a word processing count obtained from Microsoft Word 2010 software. FAFINSKI MARK & JOHNSON , P.A. Dated: September 27, 2017

By:

s/ Sharon L. Van Dyck Sharon L. Van Dyck (#0183799) Flagship Corporate Center 775 Prairie Center Drive, Suite 400 Eden Prairie, MN 55344 Tel: (952) 995-9500 [email protected]

Timothy W. Fafinski (#0209147) Corporate Counsel, PA Independence, MN 55359 Tel: 952-944-9500 [email protected] Attorneys for Petitioner Diagnostics, LLC

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CorVascular