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Corporate veil stands its ground.

Byline: Dan Heilman

The so-called piercing of the corporate veil when courts put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation's actions or debts is usually the result of serious misconduct, and therefore rare.

A decision recently published by the Minnesota Court of Appeals established that such a veil can be a little less penetrable than the slight material in a real veil.

The court affirmed a case in which an appellant challenged a grant of summary judgment based on the District Court's rejection of his argument that a receiver lacked the authority to pierce the corporate veil of a corporation in receivership.

The appellant, Aaron Carlson Corp., is a Minneapolis-based architectural woodworking company that provides custom woodwork for commercial and residential projects. Respondents Neil Cohen (along with Darren Chaffee), and CoBe Capital were part of a group that bought LSI Corp. of America now known as LSI Casework which designs and makes laminate-casework systems, and solid-surface and other interior products.

In June 2013, LSI contracted to purchase custom woodwork from Carlson for one of its projects for a total price of $687,825. Two years later LSI canceled the contract, and not long after, Carlson sued LSI in Hennepin County District Court for account stated and breach of contract.

Meanwhile, Cohen and Chaffee entered into a loan agreement with LSI through which they acquired the right to request appointment of a receiver over LSI. In January 2016, Cohen and Chaffee sued LSI, alleging that the company owed them more than $5 million and seeking appointment of a receiver over LSI.

The District Court granted a general receivership over LSI and appointed BGA Management as receiver. The court granted the receiver "all of the powers and all of the authority" under Minnesota law, including the ability to investigate and settle all claims that LSI might have against a third party. The receiver sent LSI's creditors, including Carlson, a letter notifying them of the receivership.

In March 2016, Carlson, saying it had not received adequate notice, moved to intervene and to enjoin the liquidation of LSI, asking the District Court to void the receivership and any sales of LSI's assets. Denying those motions, the District Court stated that the receiver adequately represented Carlson's interests and said Carlson would get a chance to protest the claims process once the receiver distributed the liquidated funds.

The receiver eventually sold LSI's property, and the District Court approved the receiver's final distribution of the receivership assets.

In the contract action, the District Court granted summary judgment to Carlson for breach of contract and awarded it $444,646 in damages, to which LSI did not object. Carlson later sued Illinois-based Stevens Industries Inc., which had purchased some of LSI's property, alleged that the company was liable for Carlson's judgment against LSI in the contract action under the successor-liability doctrine.

In January 2018, the District Court dismissed Carlson's claim against Stevens and also granted summary judgment to defendant CoBe.

Precedent holds up

The primary issue in Carlson's appeal was whether the District Court erred by granting summary judgment to CoBe on Carlson's veil-piercing claim, and the claim in question belongs to Carlson, not LSI. But as it happens, there's a Minnesota statute with the authority to assert veil-piercing claims against a corporation under receivership.

Carlson asked the Court of Appeals to review the state's receivership statutes, particularly Minn. Stat. 576.21-.53. Part of that statute says that because a duly appointed receiver in a general receivership has the authority to assert a creditor's veil-piercing claims that relate to the receivership property.

The court also disagreed with Carlson's argument that the District Court erred by concluding that its veil-piercing claim constituted an improper collateral attack on the receivership action.

According to First Minn. Bank v. Overby Dev. Inc., a 2010 Court of Appeals case, "a valid judgment may not be collaterally attacked" in other words, attacked in a proceeding other than a direct appeal.

Carlson argued that the District Court erroneously relied on a separate Court of Appeals case, Greer v. Prof'l Fiduciary Inc., in ruling that its veil-piercing claim represented an improper collateral attack. In Greer, a person under a guardianship and conservatorship filed tort claims against her conservator challenging the necessity of expenditures made during her guardianship and conservatorship.

The appellate court ruled that Carlson could have, but did not, ask the receiver to assert a veil-piercing claim in the receivership action making its veil-piercing action an improper collateral attack on the receivership action.

"Because (Carlson)'s veil-piercing claim amounts to an impermissible collateral attack, we conclude that the District Court did not err in granting summary judgment against (Carlson) and in favor of the CoBe defendants," wrote Court of Appeals judge Heidi S. Schellhas in her opinion.

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Publication:Minnesota Lawyer
Geographic Code:1U4MN
Date:Oct 9, 2018
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