Opinion
No. A04-1501.
Filed May 31, 2005.
Appeal from the District Court, Hennepin County, File No. Ct 03-005552.
Stephanie A. Ball, Fryberger, Buchanan, Smith Frederick, P.A., (for respondent).
Phillip R. Krass, Benjamin J. Court, Krass Monroe, (for appellant).
Considered and decided by Hudson, Presiding Judge; Halbrooks, Judge; and Dietzen, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2004).
UNPUBLISHED OPINION
Appellant challenges the district court's denial of his motion for JNOV or a new trial arguing that (1) there was no breach of fiduciary duty when the evidence showed that reimbursements made to him by the corporation were for contemporaneous loans; (2) the evidence did not establish the necessary "badges of fraud" to sustain a fraudulent-transfer claim; (3) the damage award for conversion is excessive and not supported by the evidence; (4) the district court abused its discretion by allowing introduction of evidence speculating as to the amount of the inventory held by Supplee Enterprises, Inc.; and (5) the district court abused its discretion by excluding evidence of financial statements by appellant after it admitted such a statement by respondent. Because there is evidence from which the jury could have reasonably concluded that appellant breached his fiduciary duty, violated the Uniform Fraudulent Transfer Act, and converted respondent's property, and because any evidentiary errors were not prejudicial, we affirm.
FACTS
Supplee Enterprises, Inc., d/b/a Wayzata Rexall (Supplee), was a closely held corporation, wholly owned by appellant Richard W. Gibson. In 1997, Supplee executed a $250,000 note with Beacon Bank, formerly known as First State Bank of Excelsior (bank). Gibson and his wife personally guaranteed this loan. In June 1999, the bank sold the note to the Gibsons for $250,000.
The Gibsons subsequently entered into a loan agreement with Supplee. This agreement authorized additional advances to Supplee from the Gibsons. Gibson testified that additional advances were made to Supplee and that Supplee repaid some of those advances.
Respondent DK Healthcare Resources, Inc. (DK) is a wholesale seller of pharmaceutical products that supplied part of Supplee's inventory. In September 1999, Supplee executed an inventory purchase-money security agreement in favor of DK. DK then perfected its security interest by filing a UCC financing statement with the secretary of state.
Because the Gibsons allowed their transferred security agreement to lapse for a period of time, it became second to DK's security interest.
Supplee began experiencing financial difficulties in the late 1990s. Gibson testified at his deposition, and affirmed at trial, that by 2000, Supplee was having trouble paying its bills as they came due. Charles Levy, DK's vice president of financial services, testified at trial that during the entire time that DK was supplying Supplee, Supplee was "pretty well constantly running late" with its payments. Nonetheless, with one exception, Supplee was able to pay its invoices from DK until March 21, 2003. After Supplee failed to make this payment, DK considered Supplee to be delinquent and stopped shipping to Supplee on March 23.
DK provided Supplee with a notice of default on April 2, 2003. The next day, DK filed a complaint instituting a replevin action against Supplee. DK amended the complaint on April 30, naming Gibson as an additional defendant and alleging conversion and fraudulent transfer. The district court issued an order for prejudgment replevin on May 2. On May 7, Supplee filed for bankruptcy protection. Accordingly, a stay was granted with respect to claims against Supplee, and DK proceeded with its action against Gibson.
The action was tried before a jury, which returned a verdict in favor of DK. The jury found that Gibson breached a fiduciary duty that he owed to DK, fraudulently transferred funds from Supplee in violation of the Minnesota Uniform Fraudulent Transfer Act (UFTA), and converted property belonging to DK. The jury awarded DK damages in the amount of $132,275.43. The district court ordered entry of judgment pursuant to a jury verdict on April 13, 2004. On May 3, Gibson filed a motion for JNOV or, in the alternative, a new trial. The district court denied Gibson's motion. This appeal follows.
Entry of the judgment was stayed for 30 days and the judgment was entered on May 14. On May 21, the district court issued an order for stay of entry of judgment pending resolution of Gibson's motion for JNOV or new trial. On November 18, 2004, the judgment entry of May 14 was vacated pursuant to an affidavit and order signed on May 27, 2004, and filed on November 18, 2004.
DECISION
Gibson argues that the district court erred in denying his motion for JNOV or, in the alternative, a new trial. The decision whether to grant JNOV is a question of law, which we review de novo. Thompson v. Hughart, 664 N.W.2d 372, 376 (Minn.App. 2003), review denied (Minn. Sept. 16, 2003). The district court's denial of a JNOV motion must be affirmed if "there is any competent evidence reasonably tending to sustain the verdict." Pouliot v. Fitzsimmons, 582 N.W.2d 221, 224 (Minn. 1998) (emphasis added) (quotation omitted); see also Hughes v. Sinclair Mktg., Inc., 389 N.W.2d 194, 198 (Minn. 1986) (holding that a jury verdict will be sustained on any reasonable theory based on the evidence). But if "the jury's verdict cannot be sustained on any reasonable theory of the evidence," the moving party is entitled to JNOV as a matter of law. Obst v. Microtron, Inc., 614 N.W.2d 196, 205 (Minn. 2000).
A new trial may be granted when, among other things, the verdict is not supported by the evidence, errors of law occurred at the trial, or the damages awarded are excessive. Minn. R. Civ. P. 59.01. The district court has the discretion to grant a new trial and we will not disturb its decision absent a clear abuse of that discretion. Halla Nursery, Inc. v. Baumann-Furrie Co., 454 N.W.2d 905, 910 (Minn. 1990). We will uphold the denial of a motion for a new trial unless the verdict "is manifestly and palpably contrary to the evidence, viewed in a light most favorable to the verdict." ZumBerge v. N. States Power Co., 481 N.W.2d 103, 110 (Minn.App. 1992), review denied (Minn. Apr. 29, 1992).
I. Breach of Fiduciary Duty
Gibson first contends that the jury's finding that he breached a fiduciary duty to DK constituted an error of law because the evidence established that the payments he received from Supplee were reimbursements for contemporaneous loans. Directors and officers may make loans to their corporations and collect bona fide debts owed to them using the same methods as other creditors. Snyder Elec. Co. v. Fleming, 305 N.W.2d 863, 869 (Minn. 1981). But they may not use their position to gain a preference over other creditors. Id. When it is alleged that a corporate director or officer breached a fiduciary duty by favoring himself or herself over other creditors, "the burden is on the corporate executive to show a payment received was made in good faith and was not a preference." Id.
When a corporation is insolvent, corporate executives may be reimbursed for personally paying current corporate debts, but not for antecedent debts. Id. (stating that "payment or grant of security by an insolvent corporation to its officers and directors for antecedent debts to them is an invalid preference"). Gibson argues that the evidence is uncontroverted that the payments made to him by Supplee were reimbursement for current debt. Testimony indicating that the payments were for current debt was presented to the jury. The jury was then free to believe or disbelieve this testimony. See Bardsley v. IPEC, Inc., 382 N.W.2d 221, 226 (Minn.App. 1986) (stating that "[e]xcept in cases in which certain testimony is patently incredible or unreliable, credibility is a jury issue"). But evidence was also presented of antecedent debt owed to Gibson by Supplee.
Additionally, at Gibson's request, the district court gave the following instruction to the jury:
It is not a preference for an insolvent corporation to reimburse corporate executives for personally paying current but not antecedent corporate debts or expenses. No preference is created when an insolvent corporation assigns, conveys, or encumbers property if it is necessary to secure loans made in good faith from officers or directors where the proceeds are used to pay debts and security is given for the loan.
Here, the burden was on Gibson to prove that the payments he received were not preferences. There was evidence from which the jury could have concluded that the payments were for antecedent, rather than current, debt and the verdict was not "manifestly and palpably contrary to the evidence." ZumBerge, 481 N.W.2d at 110. Thus, the district court did not err in denying Gibson's motion for JNOV or a new trial on the breach of fiduciary duty claim.
II. Fraudulent Transfer
Gibson also argues that the district court's denial of his motion for JNOV or a new trial on the UFTA claim was an error of law because the evidence did not establish the "badges of fraud" necessary to find a fraudulent transfer. Although the aggrieved party normally bears the burden of proving that a transfer was fraudulent, "[t]ransactions involving corporations and their executives . . . are to be regarded with skepticism by the courts and closely scrutinized. . . . [S]uch transactions are presumptively fraudulent and to overcome this presumption the executive must show by clear proof [that] he acted with impartiality and fairness to the corporation." Snyder Elec. Co., 305 N.W.2d at 867.
In Snyder Elec. Co., the supreme court applied the Uniform Fraudulent Conveyances Act (UFCA), which was repealed by the legislature in 1987 and replaced by the UFTA. See Minn. Laws 1987, ch. 19 (repealing the UFCA and enacting the UFTA). But this court has previously applied Snyder Elec. Co. to UFTA claims. See, e.g., New Horizon Enters., Inc. v. Contemporary Closet Design, Inc., 570 N.W.2d 12, 15-16 (Minn.App. 1997) (discussing burden of proof under UFTA in light of Snyder Elec. Co.).
The UFTA states:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor. . . .
. . . .
(b) In determining actual intent under subsection (a)(1), consideration may be given, among other factors, to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor's assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
Minn. Stat. § 513.44 (2004). These eleven "badges of fraud" represent a list of circumstantial factors that may be used to infer fraudulent intent. In re Sholdan, 217 F.3d 1006, 1009 (8th Cir. 2000) (noting that the use of these badges "to infer fraudulent intent in conveyances and transfers is well[-]settled under Minnesota law"). It is not necessary that all of these badges be present in order to find fraudulent intent. See In re Sherman, 67 F.3d 1348, 1354 (8th Cir. 1995) (stating that "[t]he presence of a single badge of fraud is not sufficient to establish actual fraudulent intent; however, the confluence of several can constitute conclusive evidence of an actual intent to defraud, absent significantly clear evidence of a legitimate supervening purpose") (quotations omitted); In re Northgate Computer Sys., Inc., 240 B.R. 328, 360 (Bankr. D. Minn. 1999) (noting that the presence of "several or more" badges of fraud creates a presumption of fraudulent intent). Moreover, under the UFTA, the district court is not limited to the enumerated badges of fraud, "but is free to consider any other factors bearing upon the issue of fraudulent intent. Sholdan, 217 F.3d at 1010 (citing Minn. Stat. § 513.44(b)). Here, the district court included these badges of fraud in its jury instructions and properly advised the jury that "[a]ll eleven factors need not be found in order to prove actual intent."
Gibson admits in his brief that three of the badges of fraud were present, or could have been found to be present, by the jury. He then argues that there was no credible evidence to support finding the presence of any other badges. But evidence was presented that many of the payments made by Supplee to Gibson were deposited into an account for Whitefish Mini-Storage (Whitefish), a storage company owned by Gibson. It is reasonable that the jury could have viewed this as an attempt to conceal the transfer. Consequently, the jury could have found the presence of "several or more" badges. Northgate Computer Sys., 240 B.R. at 360. Furthermore, the jury could have considered other factors indicative of fraud. Sholdan, 217 F.3d at 1009. Thus, there is evidence to support the verdict and the district court did not abuse its discretion in denying Gibson's motion for JNOV or a new trial on the UFTA claim.
Gibson admits that the transfers were to an insider and that the property was retained. He also acknowledges that the jury "could have concluded that" Supplee was insolvent at the time of the transfers.
III. Conversion
Gibson next contends that the district court erred by denying his motion for JNOV or a new trial because the damage award is excessive and not supported by the evidence. He argues that "to the extent that any conversion of funds occurred, the amount of the conversion could only have constituted $17,500.00."
The district court may grant a new trial based on excessive damages where those damages "appear to have been given under the influence of passion or prejudice." Minn. R. Civ. P. 59.01(e); Johnson v. Washington County, 518 N.W.2d 594, 601 (Minn. 1994). The district court has discretion whether to grant or deny a new trial based on excessive damages, and we will not disturb its decision absent an abuse of that discretion. LeDoux v. Northwest Publ'g, Inc., 521 N.W.2d 59, 68-69 (Minn.App. 1994), review denied (Minn. Nov. 16, 1994). "This court will not interfere with the jury's award of damages unless its failure to do so would be shocking or would result in plain injustice." Hughes, 389 N.W.2d at 199. When reviewing a damage award, "we must consider the evidence in the light most favorable to the verdict." Rayford v. Metro. Transit Comm'n, 379 N.W.2d 161, 165 (Minn.App. 1985), review denied (Minn. Feb. 14, 1986).
Conversion is an act of willful interference with personal property that deprives another of its use and possession without lawful justification. DLH, Inc. v. Russ, 566 N.W.2d 60, 71 (Minn. 1997). Specifically, the elements of common-law conversion are (1) deprivation of (2) another's property interest. Lassen v. First Bank Eden Prairie, 514 N.W.2d 831, 838 (Minn.App. 1994), review denied (Minn. June 29, 1994). "The measure of damages in conversion cases is generally the value of the property at the time of the conversion plus interest." Molenaar v. United Cattle Co., 553 N.W.2d 424, 431 (Minn.App. 1996), review denied (Minn. Oct. 15, 1996).
Here, the jury awarded DK damages of $132,275.43. At trial, DK submitted a statement dated March 16, 2004, showing that sum to be the amount owed by Supplee. Gibson did not object to the admission of this evidence. Moreover, in his brief, Gibson admits that this was the "exact amount" Supplee owed DK for the inventory it had shipped to Supplee but which had not been returned.
Gibson suggests that the jury's award is not supported because "the amount of DK inventory physically in the store [as of the date DK provided Supplee with a notice of default], if any, could not possibly have been the amount listed on the" March 16, 2004 statement. But the amount of inventory in the store is not relevant; the proper measure of damages is the value of DK's property at the time of the conversion. Molenaar, 553 N.W.2d at 431. Gibson has admitted that the March 16 statement represents the "exact amount" owed to DK. Thus, it provides sufficient evidence on which the jury could have based its award of damages.
Gibson has not demonstrated that the jury's award was influenced by "passion or prejudice." Minn. R. Civ. P. 59.01(e). Consequently, the district court did not abuse its discretion in denying his motion for JNOV or a new trial based on excessive damages.
IV. Evidentiary Rulings
Finally, Gibson argues that he is entitled to JNOV or a new trial because the district court abused its discretion by allowing DK to introduce opinion testimony regarding the amount of inventory held by Supplee and by refusing to admit financial statements offered by Gibson. "Evidentiary rulings concerning materiality, foundation, remoteness, relevancy, or the cumulative nature of the evidence are within the [district] court's sound discretion and will only be reversed when that discretion has been clearly abused." Johnson, 518 N.W.2d at 601 (quotation omitted). A party is entitled to a new trial based on improper admissions, only if it can "demonstrate prejudicial error." Uselman v. Uselman, 464 N.W.2d 130, 138 (Minn. 1990), superseded by statute on other grounds, Minn. Stat. § 549.21 (1990). An evidentiary error is prejudicial if it might reasonably be said to have altered the result of the trial. Jenson v. Touche Ross Co., 335 N.W.2d 720, 725 (Minn. 1983), superseded in part by rule on other grounds as stated in Lennartson v. Anoka-Hennepin Indep. Sch. Dist. No. 11, 662 N.W.2d 125 (Minn. 2003).
A. Opinion Testimony
Gibson argues that the district court committed reversible error by allowing Charles Levy, DK's vice president of financial services, to provide opinion testimony regarding the approximate amount of DK's inventory possessed by Supplee. Levy testified, over Gibson's objection, that he estimated the value of the inventory held by Supplee to be "about 130 to 150 thousand" dollars at the time that DK made its initial demand for return of that inventory.
The Minnesota Rules of Evidence provide that a lay witness may testify only to matters about which the witness has "personal knowledge." Minn. R. Evid. 602. A lay witness may testify in the form of opinions and inferences only if those opinions and inferences "are (a) rationally based on the perception of the witness and (b) helpful to a clear understanding of the witness' testimony or the determination of a fact in issue." Minn. R. Evid. 701. The competency of a lay witness to give opinion evidence is "peculiarly within the province of the [district court], whose ruling will not be reversed unless it is based on an erroneous view of the law or clearly not justified by the evidence." In re Welfare of M.B.W., 364 N.W.2d 491, 494 (Minn. App. 1985) (quotation omitted).
During the direct examination of Levy, the following exchange occurred:
Q: Now, backing up to the time period when DK made its initial demand for return of the inventory, was that prior to the actual start of the lawsuit?
A: Yes.
Q: At that time, . . . do you have an opinion as to the value of the inventory that would have been, DK's inventory that would have been in place at Supplee?
A: We would —
Appellant's Counsel: Excuse me, Your Honor. I'm going to object to that. There's no foundation that this witness has any information about what was on site at that time.
The Court: Sustained.
Q: Mr. Levy, do you have an understanding, based on your relationship with working with Supplee, as to the approximate value of inventory that they were depleting, in other words selling, and the rate at which they were purchasing from DK healthcare?
A: Well, they were buying 25 to $30,000 a week. Pharmacies usually turn their inventory four to six times, so they probably had about a hundred —
Appellant's Counsel: Excuse me, Your Honor. Probably, this is the speculation I'm objecting to. He doesn't know.
The Court: Sustained.
Q: Are you able to give us an approximate or an estimate as to the value of the inventory that would have been at Supplee when DK made its initial demand?
Appellant's Counsel: Same objection, Your Honor.
The Court: Overruled as to that question.
A: It would be about 130 to 150 thousand.
Although Levy likely had personal knowledge about the purchasing history of Supplee, there is no indication in the record that he had personal knowledge regarding the amount of DK inventory that Supplee had on hand. His assessment of how often pharmacies "usually" turn over their inventory does not indicate adequate perception of Supplee's situation to satisfy the personal knowledge requirement. Accordingly, the district court erred in admitting Levy's opinion testimony on this point.
But to warrant a new trial, Gibson must demonstrate that this error was prejudicial. Uselman, 464 N.W.2d at 138. At trial, a statement indicating the amount owed to DK by Supplee was offered into evidence without objection from Gibson and Gibson's attorney cross-examined Levy regarding this statement. The jury awarded damages in the exact amount indicated on the statement. Thus, Gibson has not demonstrated that he was prejudiced by the admission of Levy's opinion testimony.
B. Financial Statements
Gibson also contends that the district court erred by refusing to admit Supplee's 2001 and 2002 financial statements. DK objected to these statements based on Minn. R. Evid. 1006, which provides:
The contents of voluminous writings, recordings, or photographs which cannot conveniently be examined in court may be presented in the form of a chart, summary, or calculation. The originals, or duplicates, shall be made available for examination or copying, or both, by other parties at a reasonable time and place. The court may order that they be produced in court.
Id. The district court sustained DK's objection and excluded the financial statements. The district court subsequently denied Gibson's motion for a new trial on this issue because "[t]he financial statements were not made available to [DK] before trial."
Gibson asserts that the statements were made available, noting that DK had "twice set the deposition of Michelle Clarine [Gibson's daughter and the manager of Supplee] with a subpoena duces tecum," and that "[t]wice [DK] canceled those depositions." Gibson thus argues that "the documents were indeed made available to [DK]; however, [DK] failed to take advantage of their availability."
We begin by noting that DK properly requested discovery of "copies of all documents which [Gibson] intend[ed] to use at trial . . . including . . . documents which will be introduced into evidence as exhibits." Gibson did not provide DK with the contested statements during discovery. Thus he cannot now complain that DK "failed to take advantage of their availability" at a later date.
Gibson argues that he did not have the documents which were in possession of Clarine, but evidence was presented at trial that Gibson had regular and significant contact with Clarine regarding the day-to-day operations of the corporation.
But even if the district court erred by excluding the financial statements, an evidentiary error necessitates a new trial only if that error was prejudicial. Uselman, 464 N.W.2d at 138. Gibson argues that these statements were necessary to establish that he had made loans to Supplee. But, as the district court noted, "Gibson introduced evidence of the loan in the form of testimony, tax returns and other documentation." Thus, even if the district court had erred, the error was not prejudicial. See Buttz v. Bergeson, 392 N.W.2d 917, 921-22 (Minn.App. 1986) (holding that exclusion of evidence was not prejudicial when other similar evidence had been admitted and excluded evidence would be cumulative).
Gibson also argues that the error was prejudicial because "introduction of the reports would have contradicted [DK's] assertion that Supplee was insolvent for the entire final year of its operation." But Gibson affirmed at trial that by 2000, Supplee was having difficulty paying its bills as they came due. "A debtor who is generally not paying debts as they become due is presumed to be insolvent." Minn. Stat. § 513.42(b) (2004). Thus, there is other sufficient evidence from which the jury could infer Supplee's insolvency. Consequently, if the district court did err by excluding the financial statements, any error was not prejudicial.