Snyder Elec. Co. v. Fleming

• Decision Date: 29 May 1981
• Docket Number: No. 51237.,51237.
• Citation: 305 NW 2d 863
• Parties: SNYDER ELECTRIC CO., Appellant, v. Robert J. FLEMING, Respondent, and ACE MANUFACTURING, INC., Appellant, v. FLEMING SHEET METAL CO., et al, Respondents.
• Court: Minnesota Supreme Court

305 N.W.2d 863 (1981)

SNYDER ELECTRIC CO., Appellant, v. Robert J. FLEMING, Respondent, and ACE MANUFACTURING, INC., Appellant, v. FLEMING SHEET METAL CO., et al, Respondents.

No. 51237.

Supreme Court of Minnesota.

May 29, 1981.

Davis & Racette, St. Louis Park, for appellants.

John L. Prueter, Minneapolis, for respondents.

Considered and decided by the court en banc without oral argument.

SIMONETT, Justice.

Two creditors of an insolvent corporation sued its sole stockholder and chief officer to recover on their money judgments against the corporation. The trial court ruled in favor of the defendant officer-stockholder. We reverse.

Defendant Robert J. Fleming was the president and sole stockholder of Fleming Sheet Metal Company (Fleming Metals), a heating and ventilating business incorporated in 1965. The stated capital of the corporation was $5,000. No dividends were ever paid and earnings were retained to provide operating capital. Additional operating capital was obtained from Fleming's personal loans to the corporation, corporate debts personally satisfied by Fleming, and declared salary and bonuses Fleming left in the corporation. Initially the corporation prospered, but by 1970 it was showing a loss and in 1973 it became insolvent.

Plaintiff Snyder Electric obtained a judgment against Fleming Metals in January 1977 for $15,500, for supplies and service purchased to June 1973. Plaintiff Ace Manufacturing, Inc., supplied materials to Fleming Metals on open account to October 1974 and, in July 1978, obtained a judgment against the corporation for $17,000. Efforts to collect on the judgments were unsuccessful, so plaintiffs sued Mr. Fleming personally. Plaintiffs asserted three theories of recovery: (1) that certain transactions between Fleming Metals and other creditors were fraudulent conveyances; (2) that Fleming Metals was an "alter ego" of Mr. Fleming and the corporate entity should be disregarded; and (3) that Fleming breached a fiduciary obligation to plaintiffs by favoring himself as a creditor over them. The trial court rejected all three theories.

To understand plaintiffs' claims, the relationship between Fleming Metals, Mr. Fleming, and two other corporations owned by Fleming needs to be considered. In 1969 Fleming acquired the Guy C. French Company, a roofing business, through purchase of all its stock. In 1970 he purchased the Foo Chu Cafe, Inc., with another person whose interest he soon bought out. Financing for these two corporations was the same as for Fleming Metals, that is, rather than sell additional stock, Fleming would advance money through loans, retained salary or payment of corporate debts; and these advances were reflected on an "officer's due" account.

The three businesses shared office space and expenses. Often one corporation would pay salaries or debts of another, provide services or sell items to another, and pay debts for or receive income due another. These transactions were recorded in "intercompany accounts" and the debts from one corporation to another balanced periodically. Uncontroverted testimony from defendant's accountant established the handling of funds through these "officer's due accounts" and "intercompany accounts" was standard accounting practice.

Like Fleming Metals, the Guy C. French Company became insolvent around 1973. Both corporations continued to operate until 1975, when their tangible assets were sold, and thereafter, both were inactive. Bankruptcy was never filed. Dissolution proceedings never occurred. Fleming Metals' sole remaining assets are some uncollectable accounts receivable.

Fleming's third business, Foo Chu, however, prospered until the cafe was destroyed by fire in late 1979. The assets of Foo Chu — from which plaintiffs seek recovery of their debts — consist of a fire insurance claim and the property site. Another loss of the cafe fire was much of Fleming's business records for his three businesses, and this complicated proof at trial.

1. Appellants first contend the trial court was clearly erroneous in finding there were no fraudulent conveyances here. We disagree.

Minnesota's version of the Uniform Fraudulent Conveyances Act provides that conveyances are a fraud on creditors when made without fair consideration by either an insolvent corporation or a corporation which will thereby be rendered insolvent. So, too, are conveyances made with actual intent to hinder, delay or defraud creditors. See Minn.Stat. §§ 513.20 to 513.32 (1980). "Fair consideration" is fair equivalent exchanged in good faith. Minn.Stat. § 513.22 (1980).

Appellants argue that, in finding they failed to prove their case, the trial court allocated the burden of proof to the wrong parties. In this, we partly agree. On their claim that Fleming transferred assets with actual intent to defraud them, appellants bear the burden of proof, since the statute involved, Minn.Stat. § 513.26 (1980), provides creditors are to be unaided by "intent presumed in law." However, on the claim that conveyances were made by Fleming Sheet Metal Company to Fleming or his two other companies without fair consideration, the onus of proof is not appellants' alone.

The aggrieved creditor ordinarily bears the burden of proving a conveyance is fraudulent, but the relationship between the parties to a transaction may shift this burden to varying degrees. Cf. Neubauer v. Cloutier, 265 Minn. 539, 544 n. 4, 122 N.W.2d 623, 628 (1963) ("Transfers between husband and wife are presumptively fraudulent * * *. * * * They are not so considered between parent and child, although scrutinized.") Transactions involving corporations and their executives or corporations under the common control of the same officers and directors are to be regarded with skepticism by the courts and closely scrutinized. See Swanson v. Tomlinson Lumber Mills, Inc., 307 Minn. 180, 190 n.3, 239 N.W.2d 216, 221 (1976). As in all cases of claimed self-dealing or conflict of interest against corporate officers and directors, such transactions are presumptively fraudulent and to overcome this presumption the executive must show by clear proof he acted with impartiality and fairness to the corporation. Savage v. Madelia Farmers' Warehouse Co., 98 Minn. 343, 347, 108 N.W. 296, 298 (1906); 15A W. Fletcher, Cyclopedia of the Law of Private Corporations § 7412 (rev. perm. ed. 1967); W. Knepper, Liability of Corporate Officers and Directors § 2.14 (2d ed. 1973).

Here it is evident the trial court did closely scrutinize the challenged transactions, but its findings on their propriety are mixed; for some adequate consideration was found, for others the lack of adequate consideration was deemed unproven. Since appellants are aided by a presumption of lack of consideration for any transaction they can prove occurred between Fleming Sheet Metal Company and Fleming or his other corporations, they need only prove lack of fair consideration if Fleming produced evidence rebutting that presumption. It is unclear whether the court proceeded with this understanding.

Because the trial judge's findings rested exclusively on business records and undisputed oral testimony concerning them, we need not defer to the trial court's assessments of the evidence and may substitute factual findings of our own on appeal as we deem appropriate. Fidelity Bank & Trust Co. v. Fitzimons, 261 N.W.2d 586, 589 (Minn.1977). Perusing the exhibits in this case, we find that those transactions, records of which survived the cafe fire, are adequately supported by consideration and entered in good faith. Therefore, even though Fleming had the burden of proof, that burden was met. Presumptions of fraud on Fleming's part are rebutted and the trial court's dismissal of the fraudulent conveyance claims is affirmed.

2. Appellants next claim the corporate entity must be disregarded. They argue Fleming Metals was simply an "alter ego" of Mr. Fleming under the doctrine of Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509 (Minn.1979), and that Mr. Fleming should be personally liable for the corporate debts.

Victoria Elevator holds that a person who does not treat his corporation as a separate entity may not hide behind it to avoid personal liability. Whether the corporation is a separate entity or not depends on a number of factors.¹ The trial court carefully considered the evidence in light of these various factors and concluded piercing the corporate veil was not warranted. We agree.

The stated capital of the corporation at all times was $5,000. It appears, however, that total equity (stated capital plus shareholder loans plus retained earnings) kept pace with corporate liabilities until the drastic losses starting in 1970. As the trial court observed, "Any business which fails can probably be said to have been undercapitalized." Available corporate minutes end in 1972. Fleming testified directors' meetings were held annually but the records were lost in the fire. There was no contrary testimony. Dividends were never paid, but this should be no complaint where the sole shareholder put all earnings back into the business. The last items received on open account with the plaintiffs occurred in the fall of 1973, and the proof does not establish to what extent, if any, the debts to plaintiffs were incurred after insolvency. No siphoning of assets occurs if the transactions are for fair consideration, as appears to be the case. Fleming actively functioned as president and director of the corporation. This was a closed corporation and the fact the other two directors — Fleming's wife and his attorney — had a passive role is not inconsistent with this kind of corporation. Corporate tax returns were filed through 1977. A corporate book was maintained, as well as other corporate and bookkeeping records.

Nor can it be said the corporation was a mere facade. Fleming's practice of personally paying some corporate debts, especially when the corporation was financially...