Court Opinion

ID: 9493066
Source: CourtListenerOpinion
Date Created: 2023-08-05 14:57:19.592016+00
Date Added: 2024-06-11T17:55:38.045773
License: Public Domain

BRIGHT, Circuit Judge,
concurring and dissenting.
As judgment creditor of MNVA, the Appellant contends that the Woods, shareholders/officers/directors of MNVA, transferred to themselves as MNVA shareholders “MNVA’s most significant income-producing asset” — ownership of DMVW. Appellant’s Br. at 5. Appellant argues that this asset, but for the transfer to the Woods as shareholders, would have been paid to MNVA’s creditors, and thus the transfer of corporate assets to the Woods was to the detriment of the corporation’s creditors and to the benefit of the Woods as officers and directors of MNVA.
Such a legerdemain in corporate finance is perfectly legitimate under Minnesota corporation law in limited circumstances. A distribution, such as the stock transfer here, is permitted only when “the corporation will be able to pay its debts in the ordinary course of business after making the distribution and the board does not know before the distribution is made that the determination was or has become erroneous.” MINN. STAT. § 302A.511, Subd. 1.
Appellant’s claim, however, was not brought under the Minnesota Business Corporation Act, Minn.Stat. §§ 302A.001-.917. The Appellant instead specifically relies on Minnesota common law for its claim, and on this appeal it raises one issue: Whether the Woods, serving as officers and directors of MNVA, breached their fiduciary duty to the Appellant as creditor when they distributed MNVA’s assets to themselves as majority shareholders to the detriment of MNVA’s creditors. The Appellant asserts that the district court erred in determining as a matter of law the Woods did not breach their fiduciary duty when they transferred all the DMVW stock to themselves.
Neither party cites any case law in which the Minnesota appellate courts have specifically stated that officers and directors, such as the Woods, do or do not have a fiduciary obligation to creditors when the officers and directors make a *1083distribution to shareholders that has the effect of preferring shareholders’ rights to creditors’ rights. Appellant cites to authority wherein the Minnesota appellate courts have held that in the context of extending the corporation a loan, “[w]hen a corporation is insolvent, or on the verge of insolvency, its directors and officers become fiduciaries of the corporate assets for the benefit of creditors.” Snyder Elec. Co. v. Fleming, 305 N.W.2d 863, 869 (Minn.1981). See also Swanson v. Tomlinson Lumber Mills, Inc., 307 Minn. 180, 239 N.W.2d 216, 221 (1976) (stating that the pertinent issue is “whether the directors or officers have secured an advantage to themselves at the expense of corporate creditors solely because of their relation to the corporation”); Honn v. Coin & Stamp Gallery, Inc., 407 N.W.2d 419, 422 (Minn.App.1987) (recognizing that while shareholders, directors and officers are not prohibited from making loans to the corporation, “such transactions are closely scrutinized to insure that they were entered in good faith with a view toward benefiting the corporation and its creditors”).
Although these cases concern loans to a corporation and not the specific transaction at issue here, the principle underlying the rule that officers and directors should not use their unique role to advantage “themselves at the expense of corporate creditors[,]” Swanson, 239 N.W.2d at 221, applies here.
Whether the transaction was a loan or a distribution, when officers or directors act to the detriment of a corporate creditor to benefit themselves, they have breached their fiduciary duty to the creditors. They have used their special role in the corporation to obtain a preference over the creditors. After all, in the ordinary liquidation of a corporation, the creditors get paid before redemption of shares of stock. Here, the transaction put assets into the hands of the stockholders to the ultimate detriment of creditors, thus endowing the officers and directors with an advantage over other creditors.
In this case, a claim of a breach of fiduciary duty may be asserted against the Woods if, at the time of the spin-off, the Woods knew or should have known that the assets of the corporation were insufficient to pay the claims of creditors. As the Swanson court noted:
The relationship between corporate officers and directors and the creditors of a corporation is not altogether clear. While it is said that corporate officers and directors are not trustees for corporate creditors and owe them no fiduciary duty, 3 Fletcher, Cyclopedia Corporations (Rev.vol.1965) § 849, it appears that this statement is subject to the qualification that there be sufficient assets to pay their claims.
Id. at 220. Whether the Woods breached their fiduciary duty to the Appellant is a fact issue to be resolved at trial, not as a matter of law. Thus, the district court properly denied Appellant summary judgment, but on remand it must resolve the issue of the alleged breach of fiduciary duty as a fact issue.
Accordingly, I would affirm the order denying summary judgment to the Appellant. I would reverse, however, the district court’s determination that the Woods are free of any fiduciary duties to the creditor as a matter of law and would remand this case for further proceedings consistent with this opinion.