We have written about the fiduciary duties owed by directors and officers to company shareholders, and the duties shareholders owe to each other, but one recent Minnesota Court of Appeals decision deals with yet another fiduciary relationship - that of company officers/directors to creditors. See Alerus Financial v. The Martin Holdings, et al., File no. 62-CV-11-1664 (Minn. Ct. App. Dec. 9, 2013) (Alerus Financial).
The Alerus Financial decision is noteworthy in how it elaborates on the duties of directors and officers to creditors. The Court stated, “The directors and officers of a corporation that is insolvent or on the verge of insolvency are ‘fiduciaries of the corporate assets for the benefit of creditors.'” Id. at *12; citing Snyder Elec. Co. v. Fleming, 305 N.W.2d 863, 869 (Minn. 1981). This fiduciary duty prevents such directors and officers, even ones with legitimate antecedent debts, from using “their special position [to] treat themselves to a preference over other creditors.” Snyder Elec. Co. at Id.
In Alerus Financial, the appellant assumed control of a company formed by her ex-husband in connection with her claims in divorce. The company was a co-guarantor, with other borrowers, on certain bank loans with Alerus Financial. The company owned valuable property on Selby Avenue in St. Paul. The appellant sold the Selby Avenue property and kept the proceeds, which exceeded the amount of her pre-existing claim by about $261,000.00.
Alerus Financial filed suit against the appellant alleging, among other things, breach of fiduciary. The trial court agreed that the appellant's conduct amounted to a breach of fiduciary duty relative to the Alerus loans. The court ruled that the appellant breached her fiduciary duty when she “favored herself over other creditors” and had “not presented evidence of good faith” to rebut the presumption that she breached this duty.
The lesson of the Alerus Financial case is to be sure to consider the potential claims of any other creditors when disposing of corporate assets in an insolvency situation. The consequences could be severe.
If your company is in a similar situation, contact Hance Law Firm, Ltd. for a free consultation. We are centrally located in Downtown Wayzata and service clients throughout Minneapolis, St. Paul and the Greater Twin Cities area.
We invite you to comment with your thoughts on this recent decision.