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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. SYLLABUS A mistake of fact that significantly affects the district court's 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).

OPINION 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 court's 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. FACTS The Minnesota Secretary of State's 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 corporation's 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 state's certificate of incorporation was issued for Manufacturing Out Sourcing Specialists Inc., the corporation's 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

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"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 corporation's name and that M.O.S.S., Inc.'s promotional materials, checks, and invoices--including a framed handout that hung inside M.O.S.S., Inc.'s office--identified 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 employee's time sheets. But the evidence establishes that M.O.S.S., Inc. regularly hired temporary employees from Northland, beginning shortly after the salesman's 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 corporation's 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 $12,901.31 for services provided by Northland's employees. In an affidavit, Tim Turpin states that after M.O.S.S., Inc. ceased its operations he received a call from Northland's 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 3

business and that the Turpins no longer worked for M.O.S.S., Inc. In a counteraffidavit, Northland's general manager states that his only telephone conversation with Tim Turpin between June 2005 and June 2006 was Turpin's telephone call after service of the summons and complaint and was confined to Turpin's 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 state's 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 Turpin's affidavit states that after receiving the summons and complaint, he again called Northland's 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 corporation's debt. The counteraffidavit of Northland's general manager states that this was the conversation that was limited to Turpin's question about whether they had a written contract. Neither Paul nor Tim Turpin submitted an answer to Northland's 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 $13,974.31 on April 7, 2007. The Turpins filed a motion

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to vacate the default judgment on June 2, 2006. The court denied the motion, and this appeal follows. ISSUES I. Do the law and the facts support the determination that the minority shareholders have no reasonable defense on the merits of the action? Do the facts support the determination that the minority shareholders have no reasonable excuse for their failure to submit an answer? 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)? ANALYSIS 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

II.

III.

Vacations, Inc., 370 N.W.2d 424, 426 (Minn. 1985). Significantly, the Hinz decision 5

itself limits the district court's 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 fourth--absence of reasonable excuse-- attorney's neglect was not attributable to defendant). The supreme court has also limited the district court's 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 court's 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, 6

631-32 (Minn. 2004) (evaluating district court's 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 Northland's 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 court's 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 court's analysis on each of these two factors.

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I A reasonable defense on the merits is one that, if established, provides a defense to the plaintiff's 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 corporation's debts. See Minn. Stat.

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