Elling v. Cai ( 2022 )


Menu:
  • Appellate Case: 21-2045     Document: 010110647802       Date Filed: 02/22/2022     Page: 1
    FILED
    United States Court of Appeals
    UNITED STATES COURT OF APPEALS                          Tenth Circuit
    FOR THE TENTH CIRCUIT                         February 22, 2022
    _________________________________
    Christopher M. Wolpert
    Clerk of Court
    JOHN ELLING,
    Plaintiff - Appellant,
    v.                                                           No. 21-2045
    (D.C. No. 1:20-CV-00306-JHR-JFR)
    HONG CAI; ROBERT BRUCE CARY,                                  (D. N.M.)
    a/k/a R. Bruce Cary, a/k/a Robert Cary;
    MESA BIOTECH INC.; MESA TECH
    INTERNATIONAL, INC.,
    Defendants - Appellees.
    _________________________________
    ORDER AND JUDGMENT *
    _________________________________
    Before McHUGH, MORITZ, and ROSSMAN, Circuit Judges.
    _________________________________
    John Elling appeals from a district court order that granted the defendants’ motion
    for judgment on the pleadings and dismissed his shareholder lawsuit on the basis of claim
    preclusion. Exercising jurisdiction under 
    28 U.S.C. § 1291
    , we affirm.
    *
    After examining the briefs and appellate record, this panel has determined
    unanimously that oral argument would not materially assist in the determination of
    this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore
    ordered submitted without oral argument. This order and judgment is not binding
    precedent, except under the doctrines of law of the case, res judicata, and collateral
    estoppel. It may be cited, however, for its persuasive value consistent with
    Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
    Appellate Case: 21-2045     Document: 010110647802          Date Filed: 02/22/2022     Page: 2
    BACKGROUND
    Mr. Elling and Defendants Hong Cai and Robert Bruce Cary founded Mesa Tech
    International, Inc. (MTI), a molecular diagnostics company in Los Alamos, New Mexico.
    In 2010, Mr. Elling resigned from MTI, but he retained shares of MTI’s common stock
    “represent[ing] 8.9% of the company.” Aplt. App., Vol. II at 17.
    In 2015, Ms. Cai and Mr. Cary merged MTI into Mesa Biotech, Inc. (“Mesa”), a
    California business that “designs, develops, manufactures and commercializes next
    generation molecular diagnostic immunoassay tests for various infectious diseases.” 
    Id.,
    Vol. I at 36. As a result of the merger, MTI ceased to exist, and Mr. Elling became a
    minority shareholder in Mesa.
    In August 2018, Mesa notified Mr. Elling that it had “twice amended its certificate
    of incorporation to increase its total number of shares, amended its bylaws, adopted a
    new equity incentive plan, increased its number of directors, and entered into unspecified
    indemnification agreements with all of its directors.” 
    Id.,
     Vol. II at 17. In response,
    Mr. Elling wrote Mesa, raising concerns with the merger, the amendments to the
    company’s articles of incorporation and bylaws, the company’s relocation, and the
    “changes to its stock plan.” 
    Id. at 18
    . Also, Mr. Elling asked to inspect the company’s
    books and records. Mesa declined to address Mr. Elling’s concerns and refused to allow
    an inspection.
    In May 2019, Mr. Elling sued Mesa, MTI, Ms. Cai, and Mr. Cary in New Mexico
    state court. Elling v. Mesa Biotech, Inc., D-101-CV-2019-1269 (1st Jud. Dist. Ct. N.M.
    filed May 7, 2019) (Elling I). As relevant here, he alleged the defendants breached their
    2
    Appellate Case: 21-2045     Document: 010110647802         Date Filed: 02/22/2022     Page: 3
    fiduciary duties by not notifying him about, or allowing him to vote on, the merger and
    the changes to the certificate of incorporation, bylaws, and stock plan. Mr. Elling also
    alleged that the defendants committed shareholder oppression by diminishing his
    ownership interest in the company. Further, he alleged the defendants committed breach
    of contract and breach of the covenant of good faith and fair dealing “by virtue of [the]
    merger, issuance of additional stock, and changing stock plans.” Aplt. App., Vol. II at
    19. Finally, he protested the defendants’ refusal to allow him to inspect Mesa’s books
    and records. The defendants removed the case to federal court, citing diversity
    jurisdiction. See Elling v. Mesa Biotech, Inc., No. 1:19-cv-00547-LF-SCY (D.N.M.
    removed June 13, 2019).
    In September 2019, Mesa provided Mr. Elling a “capitalization table,” which
    showed that Ms. Cai and Mr. Cary had received stock options from Mesa in January 2014
    and March 2018. 
    Id.,
     Vol. II at 136; see also 
    id. at 239
    . When Mr. Elling obtained the
    table, “it was apparent that there had been two interested transactions” that “reduced the
    economic value and voting power of [his] shares by approximately one third.” 
    Id. at 136
    .
    Discovery in December 2019 gave Mr. Elling access to Mesa’s books and records.
    Mr. Elling did not, however, seek leave to file an amended complaint to include any
    newly discovered instances of alleged wrongdoing.
    In March 2020, the defendants moved for summary judgment on all of
    Mr. Elling’s claims. Mr. Elling opposed summary judgment, but limited his arguments to
    the defendants’ failure to hold a merger vote and provide corporate books and records.
    3
    Appellate Case: 21-2045      Document: 010110647802         Date Filed: 02/22/2022      Page: 4
    In April 2020, while the defendants’ summary-judgment motion was still pending,
    Mr. Elling filed a new lawsuit in federal court against the same defendants. See Elling v.
    Cai, No. 1:20-cv-00306-JHR-JFR (D.N.M. filed Apr. 3, 2020) (Elling II). He alleged
    that Ms. Cai and Mr. Cary had “reduced the cash value and the voting power of [his]
    interest in MTI” by giving themselves “an additional 2,000,000 options in MTI” stock in
    January 2014 and again in March 2018, each time without independent board approval
    and conformity with the operative equity-incentive plan. Aplt. App., Vol. I at 19, 20. He
    complained that Ms. Cai and Mr. Cary’s “self-dealing diluted the value of [his] . . . shares
    of common stock by approximately one third.” 
    Id. at 22
    . He also complained that the
    defendants did not notify shareholders of, or hold a vote on, MTI’s merger with Mesa.
    Mr. Elling claimed the defendants were liable for breach of fiduciary duty, aiding and
    abetting each other in those breaches, and shareholder oppression.
    Next, Mr. Elling moved to voluntarily dismiss Elling I or, alternatively, to
    consolidate it with Elling II. But the district court denied the motion, ruling that
    dismissal or consolidation would prejudice the defendants by requiring that they
    recommence their defense in a new lawsuit, despite completing discovery and moving for
    summary judgment in the original case, and “would deprive Defendants of any preclusive
    effect a ruling on the motion for summary judgment might have.” 
    Id.,
     Vol. II at 182. On
    the same day, the district court also granted the defendants’ summary-judgment motion,
    ruling that Mr. Elling failed to show any injury, including to the valuation of his shares,
    from MTI’s merger with Mesa or his lack of access to corporate books and records.
    4
    Appellate Case: 21-2045       Document: 010110647802         Date Filed: 02/22/2022      Page: 5
    Armed with that summary-judgment ruling, the defendants moved in Elling II for
    judgment on the pleadings due to claim preclusion. They argued that in the new case,
    Mr. Elling “set[ ] the same factual backdrop . . . as [Elling I], continue[d] to complain
    about the merger and level of information he . . . received from the company since his
    resignation, and set[ ] forth an identical shareholder oppression claim.” 
    Id.,
     Vol. I at 43.
    Mr. Elling opposed the motion, arguing that when he filed Elling I, he was unaware of
    the 2014 and 2018 option transactions because the defendants had concealed the
    company’s records, and therefore, he lacked a full and fair opportunity to litigate those
    claims in Elling I.
    Meanwhile, back in Elling I, Mr. Elling moved under Federal Rule of Civil
    Procedure 60(b) to set aside the district court’s judgment. He argued that if the
    defendants were successful in obtaining a judgment on the pleadings in Elling II, he
    would not have a forum in which to litigate the 2014 and 2018 options transactions. The
    district court denied Mr. Elling’s motion, stating that his decision to contest those
    transactions in a new lawsuit, Elling II, rather than to include them in Elling I as part of
    an amended complaint, was a “calculated litigation strategy.” 
    Id.,
     Vol. II at 247.
    Mr. Elling did not appeal.
    Finally, roughly six months later in Elling II, the district court granted the
    defendants’ motion for judgment on the pleadings. The district court reasoned that
    Mr. “Elling’s claims are barred [by the doctrine of claim preclusion] because both suits
    arise out of a common nucleus of operative fact involving Defendants Cai and Cary’s
    alleged mishandling of company affairs from 2010 to the present.” 
    Id.,
     Vol. I at 105.
    5
    Appellate Case: 21-2045      Document: 010110647802         Date Filed: 02/22/2022      Page: 6
    The district court rejected Mr. Elling’s assertion that he lacked a full and fair opportunity
    to litigate the 2014 and 2018 options transactions because “he became aware of the basis
    of the new claims before the end of discovery in Elling I yet he failed to ask that Court to
    find good cause to allow him to amend his pleadings.” 
    Id. at 107
    .
    DISCUSSION
    I. Standards of Review
    We review de novo a district court’s grant of a motion for judgment on the
    pleadings brought under Federal Rule of Civil Procedure 12(c). Crane v. Utah Dep’t of
    Corr., 
    15 F.4th 1296
    , 1302 (10th Cir. 2021). To withstand a Rule 12(c) motion, the
    “complaint must contain sufficient factual matter, accepted as true, to state a claim to
    relief that is plausible on its face.” 
    Id. at 1302-03
     (internal quotation marks omitted).
    II. Claim Preclusion
    To determine “the claim-preclusive effect of a federal diversity judgment,” we
    “adopt the law that would be applied by state courts in the State in which the federal
    diversity court sits.” Hartsel Springs Ranch of Colo., Inc. v. Bluegreen Corp., 
    296 F.3d 982
    , 986 (10th Cir. 2002) (internal quotation marks omitted). Thus, we follow New
    Mexico law, but “New Mexico does not diverge from federal law with respect to [claim
    preclusion].” Sandel v. Sandel, 
    463 P.3d 510
    , 518 (N.M. App. 2020). 1
    1
    New Mexico uses the terms claim preclusion and res judicata “interchangeably.”
    Fed. Nat’l Mortg. Ass’n v. Chiulli, 
    425 P.3d 739
    , 744 (N.M. App. 2018). “For purposes
    of clarity[,] this court employs the term claim preclusion instead of res judicata.”
    Johnson v. Spencer, 
    950 F.3d 680
    , 693 n.3 (10th Cir. 2020) (brackets and internal
    quotation marks omitted).
    6
    Appellate Case: 21-2045      Document: 010110647802         Date Filed: 02/22/2022      Page: 7
    Claim preclusion “promote[s] efficiency and finality by giving a litigant only one
    full and fair opportunity to litigate a claim and by precluding any later claim that could
    have, and should have, been brought as part of the earlier proceeding.” Potter v. Pierce,
    
    342 P.3d 54
    , 55 (N.M. 2015). “A party asserting . . . claim preclusion must establish that
    (1) there was a final judgment in an earlier action, (2) the earlier judgment was on the
    merits, (3) the parties in the two suits are the same, and (4) the cause of action is the same
    in both suits.” 
    Id. at 57
    . 2 Mr. Elling does not dispute that claim-preclusion elements (1),
    (2), and (3) are met. Instead, he argues that the causes of action in Elling I and Elling II
    are not the same. We disagree.
    2
    Mr. Elling contends the district court erred by granting the defendants’
    motion for judgment on the pleadings based on claim preclusion because the
    defendants did not plead claim preclusion in their answer. The defendants respond
    that when they filed their answer, Elling I had not progressed to a final judgment, so
    the affirmative defense of claim preclusion was not yet ripe.
    “As a general rule, a defendant waives an affirmative defense by failing to
    plead it.” Burke v. Regalado, 
    935 F.3d 960
    , 1040 (10th Cir. 2019). But a defendant
    may raise “an affirmative defense for the first time in a post-answer motion if the
    defense is raised in sufficient time that there is no prejudice to the opposing party
    merely because of the delay.” Ahmad v. Furlong, 
    435 F.3d 1196
    , 1201 (10th Cir.
    2006) (internal quotation marks omitted).
    Mr. Elling does not argue he was prejudiced by the defendants’ failure to plead
    claim preclusion in their Elling II answer. Nor could he. The defendants first raised
    claim preclusion in their opposition to Mr. Elling’s motion to voluntarily dismiss
    Elling I or consolidate it with Elling II. Specifically, they objected that Mr. Elling
    was attempting “to avoid the potentially preclusive effect the Court’s ruling in this
    case could have in his second case.” Aplt. App., Vol. II at 149. And in Elling II, the
    defendants moved for judgment on the pleadings based on claim preclusion. Mr.
    Elling fully addressed that defense in his opposition brief and was not prejudiced.
    See, e.g., Johnson v. Johnson, 
    385 F.3d 503
    , 516 n.7 (5th Cir. 2004) (“The
    defendants raised the [affirmative defense] in their motion for judgment on the
    pleadings, and here it does not appear that [the plaintiff] was surprised in any way, as
    might happen when a party waits until shortly before trial to raise a new defense.”).
    7
    Appellate Case: 21-2045      Document: 010110647802         Date Filed: 02/22/2022      Page: 8
    “Both the Tenth Circuit and New Mexico have adopted the transactional approach
    in analyzing the single-cause-of-action element of [claim preclusion].” 
    Id.
     “The causes
    of action need not be identical in the sense that they raise the same claims based on the
    same facts.” Hatch v. Boulder Town Council, 
    471 F.3d 1142
    , 1151 (10th Cir. 2006)
    (internal quotation marks omitted). Rather, “[t]he transactional approach considers all
    issues arising out of a common nucleus of operative facts as a single cause of action.”
    Potter, 342 P.3d at 57 (internal quotation marks omitted); see also Lenox MacLaren
    Surgical Corp. v. Medtronic, Inc., 
    847 F.3d 1221
    , 1240 (10th Cir. 2017) (“[A] cause of
    action includes all claims or legal theories of recovery that arise from the same
    transaction, event, or occurrence.” (internal quotation marks omitted)). “The facts
    comprising the common nucleus should be identified pragmatically, considering (1) how
    they are related in time, space, or origin, (2) whether, taken together, they form a
    convenient trial unit, and (3) whether their treatment as a single unit conforms to the
    parties’ expectations or business understanding or usage.” Potter, 342 P.3d at 57 (internal
    quotation marks omitted).
    Two matters are at the core of both Elling I and Elling II: the dilution of
    Mr. Elling’s stock ownership and the merger of MTI into Mesa. Those matters present
    nearly identical allegations surrounding corporate governance, fiduciary duties, and
    transparency in both cases. Indeed, all the actions challenged in Elling II appear to have
    occurred before the 2019 filing of Elling I. The stock options were issued in 2018 and
    2014, and the merger occurred in 2015. Although Elling II provides more specificity
    regarding the precise manner in which Mr. Elling’s stock shares were allegedly diluted
    8
    Appellate Case: 21-2045       Document: 010110647802         Date Filed: 02/22/2022      Page: 9
    (issuance of stock options to Ms. Cai and Mr. Cary on two occasions), the stock-related
    allegations in both cases are related in time, space, and origin. In particular, Elling I was
    prompted by Mesa’s notification to Mr. Elling in August 2018 that it had “twice amended
    its certificate of incorporation to increase its total number of shares, amended its bylaws,
    adopted a new equity incentive plan, increased its number of directors, and entered into
    unspecified indemnification agreements with all of its directors.” Aplt. App., Vol. II at
    17 (emphases added). The fact that Mr. Elling became aware of the method and amount
    of stock dilution only after filing Elling I does not change the fact that Elling II originated
    from the same common nucleus of operative facts as Elling I. And given that
    commonality, Mr. Elling’s stock-dilution allegations formed a single, convenient trial
    unit that was available to be litigated in Elling I. In short, Elling II involved the same
    series of contested transactions as Elling I. 3
    3
    Mr. Elling asserts that “Elling I was a books and records action designed to
    get a court order compelling the inspection of corporate records, which would then
    form the basis of substantive claims against Defendants.” Aplt. Opening Br. at 34.
    That assertion overlooks the multiple allegations and claims in Elling I targeting the
    merger and dilution of his stock ownership. See Aplt. App., Vol. II at 18-19 (breach
    of fiduciary duty by not “allow[ing] him to vote on the merger” and “failing to
    inform him or hold a vote on the changes to the company’s . . . stock plan”); id. at 19
    (shareholder oppression by “diminish[ing] . . . and destroy[ing] [his] minority
    interests in the company”); id. (breach of contract/covenant of good faith “by virtue
    of [the] merger, issuance of additional stock, and changing stock plans”).
    Mr. Elling also asserts that his “claims relating to the 2014 and 2018”
    stock-option grants “did not accrue until after [he] filed Elling I.” Aplt. Opening Br.
    at 19. The import of this assertion is unclear. First, the assertion is based on the
    accrual of claims for purposes of New Mexico’s statute of limitations—a matter that
    is not at issue here. Second, when applying the transactional approach, “we focus on
    the underlying facts rather than the legal theories relied on in the first action.”
    Pielhau v. State Farm Mut. Auto. Ins. Co., 
    314 P.3d 698
    , 701 (N.M. App. 2013).
    9
    Appellate Case: 21-2045       Document: 010110647802          Date Filed: 02/22/2022       Page: 10
    But even if all the claim-preclusion elements are met, the doctrine will not apply if
    the plaintiff did not have a full and fair opportunity to litigate in the prior action. Potter,
    342 P.3d at 59; accord Lenox MacLaren Surgical Corp., 847 F.3d at 1243 (“[E]ven
    where the requisite elements of claim preclusion are present, its application is
    inappropriate if the party seeking to avoid preclusion did not have a full and fair
    opportunity to litigate the claim in the prior suit.” (internal quotation marks omitted)).
    Citing, among other things, this court’s decision in Lenox MacLaren Surgical
    Corp., Mr. Elling argues he lacked a full and fair opportunity in Elling I to litigate the
    stock-option grants. He argues the defendants had concealed Mesa’s corporate records
    and did not provide the company’s capitalization table until five months after he filed the
    case. He appears to acknowledge he could have sought to amend the complaint to ensure
    the option grants were included in Elling I, but he argues that the court’s deadline to
    amend pleadings had passed and nothing required him to seek leave to amend. The law
    is more nuanced, however.
    “[A] plaintiff cannot avoid [amending] his complaint with facts that are part of the
    same transaction asserted in the complaint, in the hope of bringing a new action arising
    out of the same transaction on some later occasion.” Lenox MacLaren Surgical Corp.,
    Inc., 847 F.3d at 1245 (brackets and internal quotation marks omitted). “A subsequent
    lawsuit will be allowed only if the facts discovered mid-litigation give rise to new and
    independent claims, not part of the previous transaction.” Id. at 1244-45 (internal
    quotation marks omitted).
    10
    Appellate Case: 21-2045       Document: 010110647802           Date Filed: 02/22/2022       Page: 11
    Here, the stock options sued upon in Elling II were issued to Ms. Cai and Mr. Cary
    before Elling I was filed, and Mr. Elling discovered their existence just five months after
    he filed Elling I. Mesa’s issuance of those stock options in 2014 and 2018 did not create
    new and independent claims. Indeed, the claims in Elling I covered “changes to [Mesa’s]
    stock plan” and its “issuance of additional stock,” Aplt. App., Vol. II at 18, 19, and were
    prompted by Mesa’s notification in August 2018 that it had twice increased the total
    number of shares and adopted a new equity-incentive plan.
    “Critically, . . . if the plaintiff discovers facts during the litigation that stem from
    the same underlying transaction, it must [amend] its complaint with any new theories
    those facts support.” Lenox MacLaren Surgical Corp., 847 F.3d at 1244. Mr. Elling’s
    failure to seek leave to amend his complaint to specifically include the option grants, and
    his decision to instead plead them in a separate lawsuit, results in a classic application of
    claim preclusion.
    We are not persuaded otherwise by Mr. Elling’s assertion that, given the
    expiration of the amendment deadline, he “would have been required to show good cause
    and obtain the [district] [c]ourt’s approval to amend his complaint,” leaving him “at the
    mercy of forces outside his control,” Aplt. Opening Br. at 28-29. The latter portion of
    this contention is incorrect. “After a scheduling order deadline, a party seeking leave to
    amend” can show good cause for modifying the scheduling order where, for example,
    that party “learn[ed] new information through discovery” and acted diligently. Gorsuch,
    Ltd., B.C. v. Wells Fargo Nat’l Bank Ass’n, 
    771 F.3d 1230
    , 1240 (10th Cir. 2014); see,
    e.g., Mason Tenders Dist. Council of Greater N.Y. v. Phase Constr. Servs., Inc., 318
    11
    Appellate Case: 21-2045      Document: 010110647802          Date Filed: 02/22/2022      Page: 
    12 F.R.D. 28
    , 38 (S.D.N.Y. 2016) (finding good cause for plaintiffs’ post-deadline
    amendment where they lacked “sufficient evidence to state a claim . . . until after they
    received [certain] tax returns . . . and concluded . . . depositions”). Further, an appeal
    following a final judgment is available to correct any abuse of discretion that occurs
    when a district court denies leave to amend after expiration of a scheduling order’s
    deadline. See Gorsuch, Ltd., B.C., 771 F.3d at 1240.
    CONCLUSION
    We affirm the district court’s judgment. We grant Mr. Elling’s motion for leave to
    file two appendices and take judicial notice of the Elling I documents. See United States
    v. Ahidley, 
    486 F.3d 1184
    , 1192 n.5 (10th Cir. 2007) (observing that this court may
    judicially notice publicly filed records from “other courts concerning matters that bear
    directly upon the disposition of the case at hand”).
    Entered for the Court
    Veronica S. Rossman
    Circuit Judge
    12