Tuesday, June 18, 2013

Court Addresses Kitchen Sink Complaint, Largely Dismisses Claims Against Corporation’s Shareholder

Court Addresses Kitchen Sink Complaint, Largely Dismisses
Claims Against Corporation’s Shareholder


      Judge Simpson of the Western District of Kentucky has recently addressed and largely dismissed a kitchen sink complaint a corporate shareholder, it being apparent that he was the only “deep pocket” from which a secured creditor might be made whole.  While the Court upheld the liability of the corporate debtor and the guarantor of that debt, it dismissed in toto this effort to hold a shareholder personally liable on those obligations.  CNH Capital America LLC v. Hunt Tractor, Inc., 2013 WL 1310878 (W.D. Ky. Mar. 26, 2013). 
      Briefly, Hunt Tractor was a dealer for Case Equipment, with equipment financing provided by CNH Capital America, LLC (“CNH”).  At the times relevant to this dispute, Scott Hunt was the President and majority shareholder of Hunt Tractor.  His father-in-law, Pagano, was a minority shareholder.  Scott Hunt had personally guaranteed the corporation’s obligation to CNH.  Pagano had guaranteed certain obligations of Hunt Tractor to Commonwealth Bank, which provided Hunt Tractor with a term loan and a line-of-credit.
      Skipping over a variety of financial transactions and problems that Hunt Tractors was having in meeting various obligations (not, undoubtedly, occasioned by the credit crisis that began in 2008), Hunt Tractors liquidated a significant block of inventory to the Kentucky Department of Transportation.  Those funds were in turn tendered to Commonwealth Bank in order to close out the existing term loan and line-of-credit.  Hunt Tractor then defaulted on the balance of his obligations to CNH.  CNH sold the collateral, leaving a $2 million deficiency.  Suit was then brought against Hunt Tractors, Steve Hunt, individually, and Pagano.
      Initially, the Court found that Hunt Tractor was liable on the indebtedness, and that Scott Hunt was liable thereon pursuant to his guaranty of the company’s obligation.  Two defenses had been raised to this liability.  First, it was asserted that CNH did not undertake  a commercially reasonable sale of the collateral.  The Court found that an assertion that the collateral had not been sold on a commercially reasonable basis constituted an affirmative defense under the Federal Rules of Civil Procedures, and as that defense had not been adequately pled, it was barred.  As to the Scott Hunt’s guaranty of the company’s obligations, it of itself did not comply with the Kentucky guaranty statute, KRS § 371.065(1), but the guaranty agreement itself provided it would be governed by Wisconsin law.  Undertaking an extensive review of Kentucky law as to choice of law, the Court found that the doctrine set forth in Wallace Hardware would in this case be applied.  Scott Hunt was deemed to be a sophisticated business man, and he either would have appreciated or had opportunity to come to appreciation of the impact of the choice of law provision.  The parties having contractually agreed that the validity of the guaranty would be determined under the law of Wisconsin, and as the guaranty was viable under that law, it was enforced against Scott Hunt.

      No doubt believing that both Hunt Tractors and Scott Hunt would have insufficient assets to satisfy its claim, CNH brought a variety of claims against Pagano seeking to hold him personally liable on the open amount.  With respect to a pair of assertions based upon preferential conveyance and fraudulent conveyance, both were dismissed consequent to the plaintiff’s failure to name Commonwealth Bank, the transferee of the funds realized from the asset sale to the Kentucky Department of Transportation, as a party.  Noting that Kentucky’s fraudulent conveyance law is different in several respects from the Uniform Fraudulent Transfer Act, the Court found that a fraudulent or preferential conveyance claim must name the transferee of the assets in that the claim is essentially one for rescission of the transfer.  Having not named Commonwealth Bank, those claims failed.  With respect to an assertion that Pagano breached a fiduciary duty to CNH, the Court was able to easily dismiss same, finding there was no fiduciary duty of Pagano to CNH, a fiduciary duty that would have required Pagano to put the interests of CNH “ahead of his own.”
      CNH also brought a claim against Pagano based upon the theory of piercing the veil, a claim that the Court disposed of on interesting grounds.  After reciting the test for piercing set forth by the Kentucky Supreme Court in Inter-Tel Technologies, the Court focused upon the fact that CNH could have achieved the same result of a successful piercing claim by a successful action for fraudulent conveyance.  Essentially, the availability for a claim for fraudulent conveyance eliminates the possibility of the “injustice” element of piercing.  The Court wrote that:
In light of the fact that Hunt Tractor [sic CNH] had an available remedy for the supposedly improper conveyance from Hunt Tractor to Commonwealth Bank, there would be no injustice in declining to pierce the corporation veil in this case.  See 1 William Mead Fletcher, Fletcher Cyclopedia on the Law of Private Corporations, § 41.34 (1999) (“Where attempted transfers of corporate assets may be avoided as fraudulent conveyances, disregarding the corporate entity is unnecessary.”).


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