NO. A17-0690

January 3, 2018

State of Minnesota

In Supreme Court John S. Drewitz, Petitioner,

vs.

Motorwerks, Inc., a Minnesota Corporation, R. Jack Walser, Paul M. Walser, and Andrew D. Walser, Defendants, and R. Jack Walser, Respondent. ___________________________

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

Paul W. Chamberlain (#16007) Ryan R. Kuhlmann (#0387775) CHAMBERLAIN LAW FIRM 1907 Wayzata Blvd., Suite 130 Wayzata, MN 55391 (952) 473-8444

Michael H. Streater (#106331) BRIGGS AND MORGAN, P.A. 2200 IDS Center 80 South Eighth Street Minneapolis, MN 55402 (612) 977-8400

Attorneys for Petitioner John S. Drewitz

Attorneys for Respondent R. Jack Walser

2018 – BACHMAN LEGAL PRINTING – FAX (612) 337-8053 – PHONE (612) 339-9518 or 1-800-715-3582

Petitioner John S. Drewitz requests Supreme Court review of the December 4, 2017 decision of the Court of Appeals on the following grounds: 1. Statement of legal issue and its resolution by the Court of Appeals. The lower courts have eroded the legal standard for punitive-damages claims under Minn. Stat. §§ 549.191-.20 (2016) by conflating the statute’s requirements with the discretionary test for amending pleadings under Minn. R. Civ. P. 15, and Supreme Court oversight is needed to clarify the law. Under Minn. Stat. §§ 549.191-.20, when no statute of limitation or scheduling order has been violated, is a party who brings a motion for punitive damages entitled to a judicial determination of whether there is prima facie evidence of deliberate disregard of the rights of another? In this case, the lower courts held Respondent R. Jack Walser breached a fiduciary duty by siphoning $17 million of corporate funds during litigation, yet the courts denied Drewitz’s motion to claim punitive damages without applying the statute’s standard. Sections 549.191-.20 prohibit claiming punitive damages in a complaint and require a later motion and a prima facie showing of deliberate disregard for the rights of others in order to seek punitive damages. Drewitz followed this procedure and provided the required supporting evidence. Without applying the statutory standard to the evidence, however, the district court concluded Drewitz’s claim was untimely, would delay the case, and would prejudice Walser even though no limitation or scheduling order was violated. The Court of Appeals affirmed. Both courts failed to apply the statute’s legal standard.

2. Statement of the criteria of the rule relied upon to support the petition. This petition is based on Minn. R. Civ. App. P. 117, subd. 2 (a), (c) and (d)(1-3). 3. Statement of the case (facts and procedural history). Motorwerks and its controlling shareholder-director, Walser, deprived Drewitz of $3.9 million of dividend payments that accrued from 1999 through 2005. Rather than paying Drewitz his rightful 30% share, worth $3.9 million, Walser and his sons took all of Motorwerks’ dividends—$13 million in total—for themselves. Drewitz sued for the dividends in May 2004. For the next ten years, Motorwerks and Walser fought tooth and nail in a concerted effort to avoid paying Drewitz. On July 24, 2013, after an arduous, near-decade-long legal battle, the district court entered judgment of $7.9 million, with interest, for Drewitz and against Motorwerks. But the case did not end there as it should have. Rather than providing for Drewitz’s claim, Walser took deliberate actions while the case was still pending to place all of Motorwerks’ multi-millions in available assets beyond Drewitz’s reach—so that no judgment could ever be satisfied by the corporation. Walser liquidated Motorwerks in a $33 million asset sale in 2006, and then secretly drained Motorwerks of its liquidated assets. After providing for all corporate creditors other than Drewitz, Walser self-distributed $17 million so that he would have the money in his own bank account and Drewitz could not reach it with a corporate judgment. Walser took the $17 million in 2006 even though—or perhaps because—the Court of Appeals had just recently issued a December 13, 2005 holding that Drewitz was entitled to claim his share of the dividends. See Drewitz v. Motorwerks, Inc., 706 N.W.2d 773,

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780–82 (Minn. App. 2005), aff’d in part, rev’d in part, 728 N.W.2d 231 (Minn. 2007). By the time Drewitz obtained his judgment against Motorwerks in July 2013, after several years of legal wrangling by Walser in the courts, Walser had taken Motorwerks’ many millions and, in his own words, turned the corporation into “just a shell.” Drewitz moved to amend the pleadings to add judgment-enforcement claims against Walser, individually, including a claim of breach of fiduciary duty. The district court granted his motion on December 31, 2013, but later denied his claims on summary judgment, which also had the effect of preventing Drewitz from moving to claim punitive damages at that time. In 2015, the Court of Appeals reversed and ordered summary judgment in favor of Drewitz. In a published decision, the Court of Appeals determined: “Jack Walser’s decision to ignore Drewitz’s pending claim and siphon corporate funds without benefitting the corporation” is an “egregious” breach of fiduciary duty. Drewitz v. Motorwerks, Inc., 867 N.W.2d 197, 207 (Minn. App. 2015) (emphasis in original). The Court of Appeals remanded for the fashioning of equitable relief by the trial court. Id. at 210. On remand, Drewitz immediately moved to claim punitive damages, as well as for an award of attorney fees and amendment of his judgment to add Walser as a joint judgment debtor. The court denied Drewitz’s motion to claim punitive damages on grounds it was untimely, would delay the case, and would prejudice Walser. (Order Granting in Part and Denying in Part Plaintiff’s Motion Following Remand, Jan. 11, 2016.) The court also stayed entry of summary judgment, set a discovery schedule, and later held a bench trial to determine equitable remedies for Walser’s breach of fiduciary duty. Drewitz’s

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punitive-damages claim could have been litigated in that time, but it was disallowed by the earlier order. After the bench trial many months later, the trial court ordered entry of an amended judgment adding Walser as a joint debtor of Drewitz’s $7.9 million judgment. (Order for Equitable Relief, Dec. 5, 2016.) The court also awarded Drewitz attorneys’ fees on the ground Walser acted arbitrarily, vexatiously, or otherwise not in good faith. (Id.) Walser appealed from the award of fees, and Drewitz cross-appealed from the denial of his motion to seek punitive damages. The Court of Appeals affirmed the trial court’s decision on both issues. Drewitz now seeks review of the decision to deny his punitivedamages claim. 4. Argument in support of petition. “Punitive damages have long been a part of traditional state tort law.” Silkwood v. Kerr–McGee Corp., 464 U.S. 238, 255 (1984). The legislature codified the law and procedure to claim punitive damages in 1978 by enacting Minn. Stat. §§ 549.191-.20. Now, by statute, punitive-damages claims are allowed in civil actions only on clear and convincing evidence that the acts of the defendant show deliberate disregard for the rights of another. Minn. Stat. § 549.20, subd. 1(a). By statute, a party cannot claim punitive damages in its complaint. Instead, a party must make a later motion to amend the pleadings to claim punitive damages. Minn. Stat. § 549.191. “At the hearing on the motion, if the court finds prima facie evidence in support of the motion, the court shall grant the moving party permission to amend the pleadings to claim punitive damages.”

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Id. (emphasis added). “For purposes of tolling the statute of limitations, pleadings amended under this section relate back to the time the action was commenced.” Id. Since codification of the law in 1978, there have been few Supreme Court cases analyzing the statute, and none with in-depth analysis since 2001. See Jensen v. Walsh, 623 N.W.2d 247 (Minn. 2001). Most recently, in a single paragraph of a 2017 decision, the Supreme Court briefly discussed the punitive-damages statute, stating that under the statute, “the moving party must establish a prima facie case by clear and convincing evidence, which consists only of producing evidence that will ‘reasonably allow’ a conclusion of willful indifference, much like a summary-judgment standard.” Leiendecker v. Asian Women United of Minnesota, 895 N.W.2d 623, 637 (Minn. 2017). Other than this paragraph, the Court did not provide further guidance on the application of the statutory standard. As shown by the instant case, however, guidance on the applicable standard is needed. The lower courts are not applying the punitive-damages standard like a summaryjudgment standard. As happened here, instead of applying the statutory standard to the evidence, the lower courts tend to conflate the legal standard of Sections 549.191-.20 with the discretionary standard for motions to amend the pleadings under Minn. R. Civ. P. 15. In conflating Rule 15 and the punitive-damages statute, the courts did not make any determination whether the evidence here establishes a prima facie claim. The courts did not consider the evidence at all—a total departure from the applicable legal standard. In addition to ignoring the evidence and failing to apply the statutory standard, the lower courts also overlooked the statute’s relation-back provision for tolling limitations

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in concluding Drewitz’s claim was untimely and prejudicial. While prejudice to the opposing party may be a consideration in deciding motions to amend under Rule 15, it is not a factor under Minn. Stat. §§ 549.191-.20, which provide a special procedure and unique standard for punitive-damages claims. The Court of Appeals decision—in this high-profile case which involves a 2007 Supreme Court ruling, as well as multiple published Court of Appeals decisions—creates a statewide conundrum for plaintiffs who may be entitled to punitive damages: the claim cannot be alleged in the complaint, yet a later motion under the statute could be rejected as untimely and prejudicial even if no statute of limitation or scheduling order is violated. Under this state of the law, statutory language is disregarded, merit does not matter, and arbitrariness rules the day. Ignoring evidence and imposing an unwritten, discretionary limitation also defeat the statute’s legislative intent. “The purpose of punitive damages is to both punish and deter according to the gravity of the act giving rise to a punitive damage award.” Molenaar v. United Cattle Co., 553 N.W.2d 424, 429 (Minn. App. 1996) (citations and internal quotations omitted); see also Evans v. Blesi, 345 N.W.2d 775, 781 (Minn. App. 1984) (imposing individual liability for punitive damages for breach of fiduciary duty). Absent punitive damages, there is no deterrent of intentionally interfering with the rights of others, because the only civil consequence would be returning the property to its proper owner. Molenaar, 553 N.W.2d at 429. Even the remedy of returning property to its owner must be discounted by the possibility the owner will not seek legal recovery or will not prevail. Id.

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Here, merely requiring Walser to pay back stolen trust funds with interest and fees does not punish him or deter others across the state from doing the same thing. An unscrupulous corporate insider like Walser, or any trustee for that matter, might see no real deterrent to stealing trust funds if the worst that could happen is having to give the money back with interest and potentially pay some legal fees—if he gets caught at all. And, even if he gets caught, the creditor or beneficiary might lack the financial means to pursue recovery. Clarifying the law on punitive-damages claims would have statewide impact, encourage ethical handling of trust funds, and generally improve the state of the law. The alternative—as it sits now—allows a corporate insider or trustee to conclude that although stealing trust funds may be wrong, there is no meaningful deterrent or risk of punishment. A definitive ruling is needed from this Court on when and how punitive damages may be claimed, including whether trial courts should continue to apply Rule 15 to motions to claim punitive damages under Sections 549.191-.20. As long as a motion to seek punitive damages complies the procedure set forth in Minn. Stat. §§ 549.191-.20, and does not violate any statute of limitation or scheduling order, a decision on whether prima facie evidence has been established should be made by the trial court.

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5. Conclusion For the above reasons, Drewitz respectfully requests an order granting review of the decision of the Court of Appeals on the issue of a litigant’s right to seek punitive damages under Minn. Stat. §§ 549.191-.20 (2016).

Dated: January 3, 2018

/s/Paul W. Chamberlain Paul W. Chamberlain, No. 16007 Ryan R. Kuhlmann, No. 387775 CHAMBERLAIN LAW FIRM 1907 Wayzata Blvd., Suite 130 Wayzata, MN 55391 Tel: (952) 473-8444 Email: [email protected] Attorneys for Petitioner John S. Drewitz

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CERTIFICATE OF DOCUMENT LENGTH This petition complies with the length limits of Minn. R. Civ. App. P. 117, subd. 3. This petition was prepared using Microsoft Word 2010, and it contains 1,926 words, exclusive of the caption, signature block, and addendum.

Dated: January 3, 2018

/s/Paul W. Chamberlain Paul W. Chamberlain, No. 16007 Ryan R. Kuhlmann, No. 387775 CHAMBERLAIN LAW FIRM 1907 Wayzata Blvd., Suite 130 Wayzata, MN 55391 Tel: (952) 473-8444 Attorneys for Petitioner John S. Drewitz

ADDENDUM Order Granting in Part and Denying in Part Plaintiff’s Motion Following Remand from the Court of Appeals, Jan. 11, 2016………………..…ADD1-12 Order for Equitable Relief, Dec. 5, 2016……………………………………….ADD13-24 Decision of the Court of Appeals, Dec. 4, 2017………………………………..ADD25-36