Aaron Carlson Corp. v. Cohen

• Decision Date: 11 September 2019
• Docket Number: A18-0100
• Citation: 933 N.W.2d 63
• Parties: AARON CARLSON CORPORATION, Appellant, v. Neal COHEN, Darren Chaffee, CoBe Equities, L.L.C. a/k/a CoBe Capital, L.L.C., Respondents.
• Court: Minnesota Supreme Court

933 N.W.2d 63

AARON CARLSON CORPORATION, Appellant,

v.Neal COHEN, Darren Chaffee, CoBe Equities, L.L.C. a/k/a CoBe Capital, L.L.C., Respondents.

A18-0100

Supreme Court of Minnesota.

Filed: September 11, 2019

Brandon M. Schwartz, Michael D. Schwartz, Schwartz Law Firm, Oakdale, Minnesota, for appellant.

Terrance J. Wagener, Messerli & Kramer P.A., Minneapolis, Minnesota, for respondents.

OPINION

McKEIG, Justice.

This appeal presents a question of first impression: whether a receiver may bring a piercing-the-corporate-veil claim against the shareholders of the corporate entity that the receiver controls. Appellant Aaron Carlson Corporation, one of about 160 creditors of the now-defunct LSI Corporation of America, Inc. (LSI), seeks to pierce the LSI corporate veil and recover from respondents Neil Cohen, Darren Chaffee, and CoBe Equities, L.L.C. The district court and court of appeals concluded that these claims should have been brought by a receiver that had been appointed in a lawsuit that respondents had filed against LSI, in which the receiver sold LSI’s assets and repaid some of LSI’s creditors. In this appeal, Aaron Carlson Corp. argues that the court of appeals erred in affirming the district court because the receiver did not have the power to bring veil-piercing claims, and thus, its claims against the shareholders do not represent an impermissible collateral attack on the receivership and are not barred by res judicata. We agree and, therefore, reverse the court of appeals and remand to the district court for further proceedings consistent with this opinion.

FACTS

This dispute began with the dissolution of LSI, a Minnesota-based subsidiary of HNI Corporation that designed and manufactured laminate casework. Cohen and Chaffee, acting through a series of corporations and finance companies, came to possess millions of dollars of LSI’s debt. Cohen and Chaffee own LSI Holdings, which bought LSI in 2013. After purchasing LSI through LSI Holdings, Cohen and Chaffee personally provided "support collateral" for LSI to take out additional loans, but they did not put any equity into LSI directly. Cohen owns CoBe Capital, which is a limited liability company and holding company with shares in only one company: CoBe Management. LSI paid management fees to CoBe Management during 2013 and 2014. Cohen is a "manager" of CoBe Management. Chaffee and Cohen assisted with decision-making at LSI. And CoBe Management and Chaffee helped arrange financing for LSI. Chaffee and Cohen, through another company (Cocha Finance, LLC), purchased those loans from the financer in October 2015.

Chaffee and Cohen maintain that they eventually came to the conclusion that LSI would not be profitable and became concerned about preserving the collateral on the loans. On January 15, 2016, Cohen and Chaffee sued LSI in Hennepin County District Court, alleging that it owed them $5,044,797.54. That same day, the parties stipulated to the appointment of a receiver, and the district court ordered such appointment. Aaron Carlson Corp. received a copy of the appointment order via email from LSI’s counsel in Aaron Carlson Corp.’s separate suit against LSI (discussed below) in January 2016. About three months later, Aaron Carlson Corp. moved to intervene in the receivership action and to enjoin the receivership appointment. The district court denied that motion, in part because Aaron Carlson Corp. was an unsecured creditor of LSI and therefore did not have the power to prevent the appointment of a receiver. The district court also found that Aaron Carlson Corp.’s interests would be "adequately represented by the receiver." The receiver sold all of LSI’s assets, then filed its final report on April 8, 2016, and the district court approved that report and terminated the receivership on May 6, 2016. Aaron Carlson Corp. did not appeal from any of the district court’s decisions or orders in the receivership action.

In 2013, LSI and Aaron Carlson Corp. contracted for Aaron Carlson Corp. to do work for LSI on a medical center. Allegedly, Aaron Carlson Corp. fully performed on the contract, but LSI cancelled it without making payment. On July 22, 2015, Aaron Carlson Corp. sued LSI in Hennepin County District Court, asserting breach of contract claims. The district court stayed this case during the pendency of the Cohen-LSI receivership action.¹ Aaron Carlson Corp. subsequently filed a motion to amend its complaint to add veil-piercing claims against respondents; the motion was denied. In denying the motion, the district court noted that, upon the expected default judgment, "[Aaron Carlson Corp.] may in a separate lawsuit sue these named putative defendants and attempt to pierce the corporate veil with the evidence they have proffered to this Court for this motion." LSI did not respond to Aaron Carlson Corp.’s discovery requests or motion for summary judgment, and judgment of $444,646.48 was entered on October 21, 2016.

On January 17, 2017, Aaron Carlson Corp. filed the complaint in this case, alleging insufficient capitalization for LSI, a failure to observe corporate formalities, and that Cohen, Chaffee, and CoBe "exercised complete domination of LSI in respect to the transactions by and between LSI and [Aaron Carlson Corp.]" and knew of LSI’s insolvency at the time of the Aaron Carlson Corp. transactions. Ultimately, Aaron Carlson Corp. alleged that Cohen and Chaffee treated the corporation as an alter ego and requested that the district court pierce the corporate veil and hold Cohen, Chaffee, and CoBe liable for LSI’s debts to Aaron Carlson Corp.

The district court granted summary judgment to Cohen, Chaffee, and CoBe on the grounds that Aaron Carlson Corp.’s claim was an impermissible collateral attack on the district court’s order in the receivership action, and that the claim was barred by the doctrine of res judicata. The court of appeals affirmed in a published decision. Aaron Carlson Corp. v. Cohen , 919 N.W.2d 831 (Minn. App. 2018). It concluded that "the district court did not err by concluding that the receiver had the power to assert [Aaron Carlson Corp.’s] veil-piercing claim." Id. at 837. Because the veil-piercing claim could have been brought in the receivership action, the court of appeals reasoned, Aaron Carlson Corp. was barred from bringing it in this subsequent action by the doctrine of impermissible collateral attacks. Id. at 840. The court of appeals did not address whether the action was barred by res judicata. Id. We granted review on the question of the limits of a general receiver’s powers.

ANALYSIS

"When reviewing a grant of summary judgment, we review the record to determine: (1) whether there are any genuine issues of material fact for trial; and (2) whether the trial court erred in its application of the law." Hoyt Props., Inc. v. Prod. Res. Grp., L.L.C. , 736 N.W.2d 313, 317 (Minn. 2007) (citation omitted) (internal quotation marks omitted). In this case, the parties do not dispute any material facts relating to the reasons that summary judgment was granted. The parties present questions of law which we review de novo. Laymon v. Minn. Premier Props., LLC , 913 N.W.2d 449, 452 (Minn. 2018).

This case requires us to decide, first, whether a receiver may bring a piercing-the-corporate-veil claim against shareholders of the corporation in receivership. Second, we must determine whether Aaron Carlson Corp.’s claims are barred by the doctrines of collateral attack or res judicata. We address each issue in turn.

I.

Many sources of authority define the powers and duties of receivers. In general, those powers and duties stem from Minn. Stat. §§ 576.21 –.53 (2018); this court’s case law; and the order appointing the receiver. See Minn. Stat. § 576.29. Receiverships have been part of the judicial system for centuries, with the power to appoint a receiver coming from a court’s "general equity powers." Asleson v. Allison , 188 Minn. 496, 247 N.W. 579, 580 (1933). We will first describe the principles of receiverships. Then, we turn to the question of whether the receiver in this case had the power to pierce the corporate veil against respondents.

A.

We begin with a description of the background on the law of receiverships. A "receiver" is "a person appointed by the court as the court’s agent, and subject to the court’s direction, to take possession of, manage, and, if authorized by this chapter or order of the court, dispose of receivership property." Minn. Stat. § 576.21(p). "[T]he purpose of a receivership is to preserve the property which is the subject of the litigation and to provide full protection to the parties' rights to the property until a final disposition of the issues ...." 75 C.J.S. Receivers § 4 (2019). "The appointment of a receiver is made by a court of equity, and its purpose is to accomplish, as far as practicable, complete justice for the parties before it.... A receiver is not to be appointed when the moving party has an adequate remedy at law." Asleson , 247 N.W. at 580.

A receiver may be appointed by the court when a corporation is in danger of insolvency or is insolvent. Minn. Stat. § 576.25, subd. 4. Receivers' duties are determined by "statute, rule, or order of the court." Minn. Stat. § 576.29, subd. 2. Unless specifically limited by statute, a "court may modify the powers and duties of a receiver." Minn. Stat. § 576.29, subd. 3. Receivers have the power to exercise control over the receivership property, to "incur and pay expenses" in the course of performing their duties, to "assert rights, claims, causes of action, or defenses that relate to receivership property," and to request and receive instruction from the court on "any matter." Minn. Stat. § 576.29, subd. 1(a). A receiver also has the power to:

(i) assert, or when authorized by the court, to release, any rights, claims, causes of action, or defenses of the respondent to the extent any rights, claims, causes of action, or defenses are receivership property; (ii)

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