Business Law

Aaron Carlson Corporation v. Cohen (Minn.) – Creditor’s Veil-piercing Claim Not Barred by Prior Receivership.

The following is a case update written by Christopher V. Hawkins, a member of the ad hoc group of the California Lawyers Association’s (CLA) Business Law Section, analyzing a recent decision of interest:

SUMMARY:

The Minnesota Supreme Court held that a creditor’s veil-piercing claim against a corporation’s insiders was not barred by the corporation’s prior receivership, because under Minnesota law, the veil-piercing claim could not have been brought by the receiver. Aaron Carlson Corporation v. Cohen, 933 N.W.2d 63 (2019)

Facts: This was a case of first impression for the Minnesota Supreme Court. Through a complicated series of transactions, several “insiders” came to own a company (indirectly, through a holding company). They also held millions of dollars of the company’s debt.

Several years later, the insiders decided that the company would never be profitable, so they filed a lawsuit against the company and obtained the appointment of a receiver to liquidate the company’s assets.

At the time of the receivership, a creditor of the company had a breach-of-contract lawsuit pending against the company. That lawsuit was stayed during the receivership. The creditor moved to intervene in the receivership, but was denied. The creditor did not appeal this or any other order in the receivership.

Following the receiver’s liquidation of the company’s assets and termination of the receivership, the creditor attempted to add the insiders as defendants to its breach-of-contract suit via veil-piercing claims. The court denied this relief but provided the creditor with some guidance, which the creditor promptly followed – taking a default judgment against the now-liquidated corporation and then filing a new lawsuit against the insiders alleging veil-piercing claims.

The insiders argued that the creditor’s new veil-piercing lawsuit was an impermissible attack on the receivership action and that the new lawsuit was barred by res judicata. The insiders prevailed on summary judgment, and again on appeal, with the appellate court finding that the lower court was correct in concluding that the receiver had the power to assert the creditor’s veil-piercing claim (but did not do so). Because the veil piercing claim could have been brought in the receivership (but was not), the creditor was barred from bringing it in a subsequent action as an impermissible collateral attack. The court of appeals did not address the res judicata issue.

Reasoning: The Minnesota Supreme Court granted review on the question of the limits of a general receiver’s power.

It first addressed the question of whether the receiver could have brought the veil-piercing claim against the insiders. In answering that question, the court focused on a variety of statutory sections, including the following:

Minn. Stat. 576.21(h) – a “general receivership” is a “receivership over all or substantially all of the nonexempt property of a respondent for the purpose of liquidation and distribution to creditors and other parties in interest.”

Minn. Stat. 576.29 subd. (1)(a)(3) – a receiver has the power to “assert claims… that relate to receivership property.”

Minn. Stat. 576.21(r)(1) – “Receivership property” in a general receivership is defined as “all or substantially all of the nonexempt property of the respondent.”

The court then framed the issue before it as follows: If a veil-piercing claim against the insider “relates to” property of the defunct company now in receivership, then the receiver had the power to bring the claim.

The court analyzed the nature of veil-piercing claims under Minnesota law generally and focused on the fact that piercing the corporate veil is “generally a creditor’s remedy used to reach an individual who has used a corporation as an instrument to defraud creditors.” It found that the creditor’s claims did not “relate to” receivership property for two reasons:

“First, [creditor’s] claims are those that [company] could not have brought itself. [Creditor’s] veil-piercing claim is a creditors’ remedy that does not include [company] as a party, either as a defendant or plaintiff. Second, the veil-piercing claims seek to recover property that has always belonged to [the insiders].The purpose of the receiver in this case was to control, liquidate, and distribute [company’s] property to creditors. Minn. Stat. §§ 576.21(h)(p). Even though the veil-piercing claim “relates to” the existence of the corporate entity itself, it does not pursue property that ever belonged to [company]. Expecting the receiver to bring a claim that neither belongs to [company] nor seeks to recover [company] property would stretch the statutory phrase ‘relating to receivership property’ too far.”

The insiders and the appellate court had relied on an earlier decision of the Minnesota Supreme Court, Minn. Thresher Mfg. Co. v. Langdon, 46 N.W. 310 (1890). There, the court had held that receivers were authorized to bring fraudulent transfer claims.  The later-enacted Minnesota fraudulent transfers statute provided the same. Minn. Stat. § 576.29, subd. 1(b)(2). The Minnesota Supreme Court distinguished the Aaron case before it, writing: “Voidable transactions, also known as fraudulent transfers, involve property that once belonged to the corporation but was fraudulently or improperly transferred. See generally Minn. Stat. § 513.44-45 (2018). Claims to recover such property are “related to” the receivership property because the fraudulently transferred property would have been part of the receivership property in the absence of the improper transfer. We decline to read Thresher Manufacturing to extend beyond the claims that it discussed….”

Once the court had reached this conclusion, it easily dispensed with the collateral attack and res judicata issues, finding that the two doctrines posed no bar to the creditor’s new lawsuit, since the claims could not have been brought by the receiver.

Author’s Comment: I struggled with this case. The fraudulent transfer remedy is designed to protect creditors. The remedy can be used initially by any creditor, and then passes to a receiver (or bankruptcy trustee) if one is appointed. Shouldn’t the result be the same with the veil-piercing remedy? It too is designed to protect creditors. But perhaps the “related to” language in the Minnesota receivership statute was simply too much for the court to get over. Not all states have such a restriction on receiver’s powers (my home state of California does not). So this outcome of this issue could vary from state to state.

These materials were written by members of the California Lawyers Association Business Law Section for the Commercial Finance Newsletter, published weekly on Westlaw. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them.  This material may not be further distributed without the consent of Thomson Reuters.

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