Opinion
No. C5-96-574.
Filed July 30, 1996.
Appeal from the District Court, Goodhue County, File No. C68531584.
David S. Holman, (for appellant).
Charles J. Lee, (for respondents).
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (1994).
UNPUBLISHED OPINION
Appellant Wilson Oil Company challenges the trial court's order, arguing that the trial judge erred in failing to hold respondent Michael Anderson personally liable for the debts of his corporation due to his breach of a fiduciary duty and failure to comply with corporate formalities. Appellant also argues that the trial court erred in failing to hold Midway Auto, Inc.'s successor corporation liable for the debts of its predecessor. We affirm.
DECISION
1. In support of its breach of fiduciary duty claim, appellant maintains that Snyder Electric Co. v. Fleming , 305 N.W.2d 863 (Minn. 1981), is similar to and dispositive of this case. In Snyder , the court noted that when a corporation becomes insolvent, its directors become fiduciaries of the corporate assets for the benefit of creditors and, as such, they cannot, by reason of their special position, treat themselves to a preference over other creditors. Id. at 869.
The court stated:
[P]ayment or grant of security by an insolvent corporation to its officers and directors for antecedent debts to them is an invalid preference. Similarly, it is an impermissible preference for an insolvent corporation's officers or directors to seek exoneration of corporate debts on which they are secondarily liable to the prejudice of other creditors.
Id. (citations omitted).
The court went on to hold:
[I]t is evident Fleming breached his fiduciary duty to creditors on several occasions after 1973. On one occasion, * * * Fleming took an assignment of accounts receivable from Fleming Metals in payment for previous "wages due officer and note due officer," and, again, when the assets of Fleming Metals were sold in 1975, the proceeds were applied to a note which Robert Fleming had signed personally. * * * It should be kept in mind that the claim here does not seek to pierce the corporate veil. It is not claimed that transfers had inadequate consideration or that they were motivated by fraudulent intent. The claim is that the transfers are impermissible preferences.
Id.
Appellant Wilson maintains that, in this case, Anderson similarly took an impermissible preference by entering into the loan workout agreement with Norwest Bank on behalf of Midway Auto, Inc., for a loan under which he was secondarily liable. The trial court, however, made no finding of prejudice to Wilson Oil, and the record before us does not support such a finding. See id. (an impermissible preference must prejudice other creditors).
In his memorandum, the trial judge stated:
There has been no showing that [Anderson] disposed of the assets of Midway Auto, Inc., in such a way as to harm its creditors or the corporation itself. Norwest Bank took all of its assets, leaving it with nothing to pay to its other creditors.
In this case, it is crucial that Norwest Bank was secured by Midway Auto, Inc.'s inventory, equipment, and receivables. Because Norwest was secured, it already had priority over Wilson's claim. All of Midway Auto, Inc.'s assets were depleted in satisfying its loan obligation to Norwest. Thus, the fact that Anderson was incidentally released did not prejudice Wilson, who would have received nothing regardless of whether Anderson had been released.
Snyder is applicable to cases in which a corporate director prefers a creditor, to whom he is secondarily liable, over a similarly secured creditor to whom he is not secondarily liable:
By "preference" we here mean generally a transfer or encumbrance of corporate assets made while the corporation is insolvent or verges on insolvency, the effect of which is to enable the director or officer to recover a greater percentage of his debt than general creditors of the corporation with otherwise similarly secured interests.
Id. at 869.
We conclude that Wilson Oil failed to prove a breach of fiduciary duty at trial. The trial court found no breach, and the record does not mandate such a finding.
2. Appellant next argues that the trial judge should have pierced Midway Auto, Inc.'s corporate veil in order to hold Anderson personally liable.
[A] person who does not treat his corporation as a separate entity may not hide behind it to avoid liability.
Id. at 868 (citing Victoria Elevator Co. v. Meriden Grain Co. , 283 N.W.2d 509 (Minn. 1979)).
To determine whether piercing is appropriate, a court should determine the presence of the following indicators: insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely a facade for individual dealings.
Id. at 868 n. 1.
Disregard of the corporate entity requires not only that a number of these factors be present, but also that there be an element of injustice or fundamental unfairness.
Victoria Elevator Co. , 283 N.W.2d at 512 (citing DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co. , 540 F.2d 681, 687 (4th Cir. 1976)).
In Victoria Elevator , the defendant's disregard of the corporate entity was significantly more egregious than it is in the present case:
[W]e have an individual who did not clearly distinguish between property owned by himself as an individual and property owned by the corporation. He combined the tax returns of the corporation and his sole proprietorship, using the wrong forms for both. He allowed the corporation to take deductions for depreciation on property not owned by the corporation. The corporation paid no rent for its use of property owned by defendant as an individual. He misrepresented corporate assets to state and federal agencies. Defendant withdrew funds (allegedly as wages) from the corporation at a time when the corporation was in financial trouble.
Id. at 512-13 (footnotes omitted). In the present case, there appears to have been some disregard of corporate formalities. The findings, however, would not support a conclusion that many of the relevant indicators were present, and those that were do not require a piercing of the corporate veil to avoid injustice. Appellant points out that the trial court mentioned in its memorandum "an element of unfairness." That statement, however, was directed toward the issue of successor liability and did not address Anderson's personal liability.
3. Finally, Wilson Oil argues that Sea Wing, Inc., should be held liable for Midway Auto's debts because it is a successor corporation. Wilson cites a supreme court case which stated:
The general rule is that where one company sells or otherwise transfers all its assets to another company, the purchasing company is not liable for the debts and liabilities of the transferor.
J.F. Anderson Lumber Co. v. Myers , 296 Minn. 33, 37, 206 N.W.2d 365, 368 (1973). The Anderson court recognized, however, that the general rule does not apply (1) where the transferee agrees to assume the debts; (2) the transaction amounts to a merger; (3) the purchaser is merely a continuation of the seller corporation; or (4) the transaction was fraudulently entered into in order to escape liability for such debts. Id.
The trial court did not find that any of the four circumstances justifies an exception to the general rule. We recognize that the record in this case might support an inference that Sea Wing is merely a continuation of Midway Auto, Inc., or that the transformation was orchestrated in order to escape liability for Midway Auto, Inc.'s debts. It is important, however, that the trial judge explicitly found that Midway Auto, Inc., had no significant assets to transfer to Sea Wing. The trial judge stated that the signage actually belonged to Anderson and that no evidence was presented to prove that Midway Auto, Inc.'s goodwill had any value. Finally, the informal, unwritten lease that Midway Auto, Inc., had with Anderson was not proven to have any value.
In Anderson , the court held:
In the absence of a transfer of assets without adequate consideration, the alternative basis for the decision, appearing to rest on continuity of business, name, and management alone, is not, we think, sufficient basis for holding a transferee liable for the debts of the transferor.
* * *
[T]he motive of Leekley and his wife in forming the second corporation was to avoid paying the debts of the first corporation, particularly the judgment in question. However, such a motive no more forms the basis for requiring the second corporation to assume the debts of the first corporation than it serves as a basis for an objection to a discharge in bankruptcy.
Id. at 40, 206 N.W.2d at 370. In this case, the record does not compel a conclusion that the trial court erred by failing to find a transfer for inadequate consideration. Although the judge mentioned an element of unfairness, we think it is significant to note that Midway Auto, Inc., lost its entire inventory and Anderson lost his legal title to the business premises. We cannot say that the trial court erred in failing to hold Sea Wing liable as a successor corporation.
4. The trial court made no finding of a breach of a fiduciary duty, and the evidence does not unequivocally compel such a finding. Although there appear to be some indicators present that would support a piercing of the corporate veil in this case, those indicators are not overwhelming and do not compel piercing. The record does not establish that Anderson's loan workout agreement with Norwest Bank impermissibly favored Anderson personally. Finally, although there was some failure to distinguish Sea Wing, Inc., from Midway Auto, Inc., the effect does not appear to have prejudiced Wilson Oil, and the findings do not support a conclusion that Sea Wing should be liable for Midway Auto, Inc.'s debts as a successor corporation. The trial court's order is therefore affirmed.