Elling v. Cai

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 This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and collateral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.
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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
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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.
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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.
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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.
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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).
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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.”).
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“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
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(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).
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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).
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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
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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
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