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Brekke v. THM Biomedical

July 01, 2004

JOHN H. BREKKE, PAGE, J. AND ANDERSON, RUSSELL A., J. RESPONDENT,
v.
THM BIOMEDICAL, INC., APPELLANT.



Heard, considered, and decided by the court en banc.

SYLLABUS BY THE COURT

1. An officer, director and shareholder of a closely held corporation is an "employee," and the salary that is due to such an employee is "wages," within the meaning of Minn. Stat. § 181.79 (2002).

2. The affirmative defenses of waiver and estoppel have not been abrogated or superceded by the penalty provisions of section 181.79.

3. The district court erred in not addressing the defenses of waiver and estoppel where the record contained factual support of each of those defenses.

The opinion of the court was delivered by: Hanson, Justice.

Concurring in part, dissenting in part, Gilbert, J.,

Reversed and remanded.

OPINION

Respondent employee, Dr. John H. Brekke, brought an action against appellant employer, THM Biomedical, Inc. (THM), under Minn. Stat. § 181.79 (2002) for a statutory penalty based on THM's unauthorized deduction from Dr. Brekke's salary of the principal of a debt owed by Dr. Brekke to THM. The district court ruled that the deduction violated Minn. Stat. § 181.79 and awarded Dr. Brekke twice the amount deducted. The court of appeals affirmed the district court. Brekke v. THM Biomedical, Inc., 667 N.W.2d 452 (Minn. App. 2003). We reverse and remand.

In November 1990, a group of individuals formed THM Biomedical, Inc., to commercialize patents on medical devices that had been developed by Dr. Brekke. Although Dr. Brekke had developed the patents, he no longer owned them at the time that THM was formed. In fact, he had exhausted his capital in the failed efforts of two predecessor companies.

Dr. Brekke received 15 percent of THM common stock for services to be performed pursuant to the terms of an employment agreement with THM.*fn1 Under the terms of his employment agreement, Dr. Brekke was obligated to perform such services as directed by the president of THM and was entitled to receive wages or salary. Section Fourteen of the employment agreement obligated Dr. Brekke to disclose to THM all pertinent information he acquired before or during his employment with THM, stating in part:

Employee shall communicate and channel to Employer all knowledge, business, and customer contacts and any other matters of information that could concern or be in any way beneficial to the business of Employer, whether acquired by Employee before or during the term of this Agreement.

In addition, Dr. Brekke served on THM's board of directors and as Vice President of Research and Development.*fn2

In August and October of 1991, THM made loans to Dr. Brekke and issued promissory notes in the amounts of $10,000 and $55,000, respectively. Although the original expectation was that Dr. Brekke would repay the notes in 1991, he was unable to do so. On April 28, 1993, Dr. Brekke repaid $5,000 on the notes. Thereafter, the $60,000 balance of the notes remained outstanding, was regularly listed as a receivable on THM's balance sheets and was annually acknowledged by Dr. Brekke to THM's auditors.

THM adopted the practice of only paying employee salary if it could do so from current cash flow. For the 6-year period from 1993 through 1998, a portion of Dr. Brekke's salary was accrued but unpaid. As Dr. Brekke's counsel acknowledged at oral argument, this practice was uniform for all employees and Dr. Brekke acquiesced in it. The THM balance sheet dated June 30, 2000, showed that Dr. Brekke's accrued unpaid salary had accumulated to a total of $188,872.98.

In the summer of 2000, while negotiating a possible sale of its assets to Kensey Nash Corporation, THM received $950,000 in settlement of a licensing dispute with a third party. As a prerequisite to any transaction with Kensey Nash, THM was required to "clean up its balance sheet" by collecting its assets and paying off its liabilities. Dr. Brekke's notes to THM were part of the assets that were to be collected and his accrued salary was one of the liabilities that was to be paid.

Thomas Maas testified that, at a meeting of THM's board of directors on June 14, 2000, he informed Dr. Brekke that the amount of his notes would be deducted from his accrued unpaid salary. At a meeting on July 11, 2000, between William Maas and Dr. Brekke, Maas reported that, after deducting taxes, loan principal and interest, Dr. Brekke would net about $20,000 from his accrued salary. Dr. Brekke objected to the deduction and asked that the loans and the accompanying interest be forgiven as an honorarium for his service with THM. The board refused. On July 13, 2000, Dr. Brekke was presented with a "pro forma check," which showed a deduction for the loan principal, but not for interest. Dr. Brekke said that he preferred to be paid the full value of the accrued salary and that he would separately pay his notes to THM, to create a better documented record of the transactions. The board declined this request and, on July 14, 2000, issued a net check for $59,700.71, which reflected Dr. Brekke's accrued salary less tax withholdings and a $60,000 deduction in loan principal.*fn3

After receiving the pro forma check but before receiving the actual check, Dr. Brekke consulted with his attorney and was informed that there was the possibility that THM's proposed method of payment would expose it to liability for a statutory penalty of $120,000 under section 181.79. Dr. Brekke did not communicate that information to THM, but accepted and cashed the check from THM for $59,200.71, representing full payment of his accrued salary after deduction of his $60,000 debt and tax withholdings. At the time Dr. Brekke accepted the check, he knew that the satisfaction of his debt to THM was essential to completing the proposed sale to Kensey Nash, from which he stood to gain substantially.

As the negotiations with Kensey Nash proceeded, Dr. Brekke was required to make positive representations to Kensey Nash about the accuracy of THM's balance sheet, which by then did not reflect any unpaid liability to Dr. Brekke. As an essential step to completing the sale to Kensey Nash, Dr. Brekke signed an officer's certificate that represented that THM had no undisclosed liabilities. As a consequence of signing that certificate and not disclosing the potential liability for a statutory penalty, Dr. Brekke caused THM to breach its disclosure obligations to Kensey Nash, with the consequence that Kensey Nash would later deny any obligation to THM to assume THM's liability to Dr. Brekke.

When the sale to Kensey Nash was complete, Dr. Brekke received just over $2 million for his shares of THM. Within 60 days of the closing, he commenced this action to recover a $120,000 penalty from THM under Minn. Stat. § 181.79. THM denied any liability and asserted the affirmative defenses of waiver and estoppel.

The district court concluded that THM wrongfully deducted $60,000 from Dr. Brekke's wages, in violation of Minn. Stat. § 181.79, and awarded Dr. Brekke $120,000 in damages, twice the amount of the deduction. The district court did not make findings on or otherwise address THM's waiver and estoppel defenses, except to conclude that Dr. Brekke's position as an officer, director and shareholder did not disqualify him from relying on section 181.79 and that none of his actions or inactions provided consent to the deduction. The court of appeals affirmed the judgment in favor of Dr. Brekke. Brekke, 667 N.W.2d at 452.

I.

We first address whether section 181.79 applies to Dr. Brekke's accrued unpaid salary. That section provides:

No employer shall make any deduction, directly or indirectly, from the wages due or earned by any employee, who is not an independent contractor, for lost or stolen property, damage to property, or to recover any other claimed indebtedness running from employee to employer, unless the employee, after the loss has occurred or the claimed indebtedness has arisen, voluntarily authorizes the employer in writing to make the ...


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