Friday, June 20, 2014

Sixth Circuit Affirms Dismissal of Claim for Piercing the Corporate Veil

Sixth Circuit Affirms Dismissal of Claim for Piercing the Corporate Veil

       Last Friday the Sixth Circuit issued its decision in CNH Capital America LLC v. Hunt Tractor, Inc., affirming the trial court’s summary judgment in favor of the defendants on a claim for piercing the corporate veil.  The Court also discussed an interesting point on the interface of claims for piercing the veil and claims for fraudulent conveyance.   CNH Capital America LLC v. Hunt Tractor, Inc., ___ Fed. Appx.  ___, 2014 WL 2619814 (6th Cir. June 13, 2014). 
        The decision of Judge Simpson, CNH Capital America LLC v. Hunt Tractor, Inc., 2013 WL 1310878 (W.D. Ky. Mar. 26, 2013), was previously reviewed HERE. 

       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.  Scott Hunt was personally liable on that debt consequent to a guarantee thereof, which guarantee was upheld by Judge Simpson.  The validity of the guarantee was not appealed to the Sixth Circuit.
        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, Judge Simpson dismissed both consequent to the plaintiff’s failure to name Commonwealth Bank, the transferee of the funds realized from 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, Judge Simpson 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, Judge Simpson 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.”  Neither of those determinations was appealed.
       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, Judge Simpson 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 district 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.”).
      The Sixth Circuit affirmed the summary judgment on the piercing claim.  Cutting to the chase, the Sixth Circuit found:
Because CNH does not present an injustice beyond the mere inability to collect a debt, the Court will affirm the district court’s grant of summary judgment.  2014 WL 2619814, *6. 
The Court went on to observe that while the funds received from the Kentucky Department of Transportation were transmitted to Commonwealth rather than, as required by contract, to CNH, still “Hunt Tractor paid off a legitimate business debt with the funds it received.” 
            The Sixth Circuit, in reliance upon Waste Conversion Techs., Inc. v. Warren Recycling, Inc., 191 Fed. App’x 429, 434-35 (6th Cir. 2006), agreed with the determination that piercing is the wrong remedy when the alleged claim may be addressed through the law of fraudulent conveyance.  It bears noting that the reference to fraudulent conveyance law does not mean the claim needs to be successful.  Rather, the Sixth Circuit upheld the grant of summary judgment made on CNH’s fraudulent conveyance claim.

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