Opinion
No. A05-2466.
Filed October 10, 2006.
Appeal from the District Court, Stearns County, File No. C0-03-5027.
J. Poage Anderson, Nichols Kaster Anderson, Pllp, (for respondent)
Christopher W. Harmoning, Kelly W. Hoversten, Gray, Plant, Mooty, Mooty Bennett, P.A., (for appellant)
Considered and decided by Shumaker, Presiding Judge; Kalitowski, Judge; and Worke, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2004).
UNPUBLISHED OPINION
On appeal from the district court's order in a garnishment proceeding, appellant argues that the district court (1) exceeded its authority by addressing the issue of appellant's liability to respondent, and (2) erred in its decision that respondent was entitled, under the theory of successor liability, to garnished funds owed to appellant. We affirm.
FACTS
In 2002, respondent David A. Sweeter began working for American Lenders Service Company of St. Cloud (ALSC), repossessing automobiles. ALSC is an unincorporated franchise licensed by American Lenders Service Company, a Texas corporation. John Fulgham was the general manager, sole shareholder, officer, and director of Power Industries, Inc. Fulgham, individually and through Power Industries, did business as ALSC. Respondent also worked for St. Cloud Auto Transport, another company managed by Fulgham.
In 2003, respondent was injured in a work-related accident and sought workers' compensation. Fulgham terminated respondent, who then sued ALSC, Power Industries, St. Cloud Auto Transport, and John Fulgham (judgment debtors), alleging that he was fired in retaliation for filing a workers' compensation claim.
John Fulgham and his mother, Louise Fulgham, each owned one half of St. Cloud Auto Transport. After respondent sued John Fulgham and his companies, Louise Fulgham tendered her shares in St. Cloud Auto Transport back to the corporation. During discovery in respondent's lawsuit, Louise Fulgham incorporated similarly named St. Cloud Auto Transfer (later renamed Midwest Auto Carriers) and appellant Paradigm Industries, Inc. Louise Fulgham was the sole owner, officer and director of these companies; John Fulgham was the general manager, as he had been for his corporations. All corporations owned by Louise Fulgham and John Fulgham had the same address.
In August 2004, Louise Fulgham submitted a W-9 to the IRS for appellant, d/b/a ALSC. John Fulgham/Power Industries then voluntarily terminated operation of ALSC, but he did not sell the franchise back to the franchisor or to a third party. Shortly thereafter, Louise Fulgham/appellant acquired ALSC from the franchisor; however, she did not purchase the franchise, rather, she was charged only an initial start-up fee.
John Fulgham's father owned Seal Enterprises, which was incorporated after respondent filed his lawsuit. Seal Enterprises was located at the same address as Louise and John Fulgham's corporations. Seal Enterprises purchased or leased vehicles and office equipment that were previously owned or leased by John Fulgham's corporations. Seal Enterprises then leased the vehicles and office equipment to Louise Fulgham's corporations, including appellant. After filing for bankruptcy, John Fulgham continued to manage ALSC at the same address, with essentially the same equipment and vehicles, and with the same employees he had before terminating his franchise.
In November 2004, the district court issued a judgment in favor of respondent for approximately $190,000 against the judgment debtors. Among its findings, the district court found that John Fulgham had told an employee that respondent would not get anything from Fulgham's companies because Fulgham had hidden assets and "did not exist on paper." In January 2005, respondent served a garnishment summons on the judgment debtors and on General Motors Acceptance Corporation (GMAC), a client of ALSC. GMAC received claims from respondent and appellant for approximately $18,000 that GMAC owed to ALSC for services it performed for GMAC after appellant began operation.
After appellant received the garnishment summons that was served on ALSC, Louise Fulgham told GMAC that she had formed appellant for the sole purpose of operating ALSC. Louise Fulgham apologized to GMAC "for allowing our son's misfortunes to cloud the working relationship" and expressed her desire to continue the same working relationship with GMAC. She explained to GMAC that she now owned the same company that had been successfully doing business with GMAC for more than three years, that there had been no change in business practices, and that the transition was minor because the company had kept the same fee structure, key personnel, and insurance policies.
GMAC petitioned the district court, under Minn. R. Civ. P. 67.02, to accept custody of the funds and relieve GMAC from further liability. The district court accepted the funds. Respondent and appellant submitted cross-motions for the district court to determine their respective rights to the money. Concluding that the Fulgham family was fraudulently attempting to avoid debts by allowing John Fulgham to continue operating ALSC under the name of a different corporation owned by his mother, the district court decided that respondent was entitled to the funds. This appeal follows.
DECISION
Garnishment Proceeding
Appellant argues that the district court exceeded its authority by addressing issues of successor liability in a garnishment proceeding, and that the district court erroneously ordered that respondent was entitled to the garnished funds. "A party to a garnishment proceeding aggrieved by an order or final judgment may appeal as in other civil cases." Minn. Stat. § 571.88 (2004). "[G]arnishment is a statutory remedy which may not be enlarged or extended by implication to cover cases which are not clearly within both its letter and spirit." Henderson v. Nw. Airlines, Inc., 231 Minn. 503, 510, 43 N.W.2d 786, 791 (1950). Interpretation and application of the garnishment statute is a question of law, and we do not defer to the district court's conclusions. B B Floor Covering Co. v. Country View Builders, Inc., 504 N.W.2d 272, 274 (Minn.App. 1993), review denied (Minn. Oct. 19, 1993).
"A creditor may serve a summons on a garnishee to obtain any money or property of the debtor that is within the garnishee's possession or control." Nordstrom v. Eaton, 652 N.W.2d 79, 82 (Minn.App. 2002); see also Minn. Stat. § 571.73, subd. 3(2) (2004). "`Debtor' means a party against whom the creditor has a claim for the recovery of money in the civil action. . . ." Minn. Stat. § 571.712, subd. 2(b) (2004). A claim includes "the unpaid balance of the creditor's judgment against the debtor." Id., subd. 2(d) (2004).
Respondent served the garnishment summons on the judgment debtors and GMAC. Respondent did not have a judgment against appellant, and the action was not one for prejudgment garnishment against appellant. See Minn. Stat. § 571.93, subd. 1 (2004) (prejudgment garnishment requires creditor to have already filed civil complaint seeking judgment). The district court's judgment for respondent in the workers' compensation retaliation lawsuit was issued three months after appellant began doing business as ALSC. Appellant had notice of that judgment through its operation of ALSC, but it did not challenge the judgment or intervene when respondent served the garnishment summons on ALSC. See Minn. Stat. § 571.83 (2004) (a non-party claiming an interest in money that is the subject of the garnishment proceeding may join as a party and be bound by the judgment). Instead, appellant waited more than seven months after receiving the garnishment summons to move the court for a determination of its rights to the garnished funds.
During the motion hearing, appellant was able to argue and submit evidence that it was not liable for the debts of the judgment debtors. The district court, having presided over the workers' compensation retaliation lawsuit, was already familiar with many of the facts. Appellant voluntarily chose to litigate the issues in the garnishment proceeding, and cannot now claim that the proceeding was an inadequate forum to address the liability issue just because its strategy failed. Based on the facts and procedural history here, the district court did not exceed its authority by addressing appellant's liability in the garnishment proceeding.
Successor Liability
Appellant argues that even if the garnishment proceeding was an appropriate forum to determine appellant's liability, the district court erred by deciding that appellant was liable under the theory of successor liability. We view the record in the light most favorable to the district court's judgment and uphold the district court's findings unless they are clearly erroneous. Rogers v. Moore, 603 N.W.2d 650, 656 (Minn. 1999). But a reviewing court is not bound by and need not give deference to a district court's decision on a purely legal issue. Modrow v. JP Foodservice, Inc., 656 N.W.2d 389, 393 (Minn. 2003) (citing Frost-Benco Elec. Ass'n v. Minn. Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn. 1984)).
Generally, when "one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor[.]" J.F. Anderson Lumber Co. v. Myers, 296 Minn. 33, 37, 206 N.W.2d 365, 368 (1973). But there are four exceptions:
(1) where the purchaser expressly or impliedly agrees to assume such debts;
(2) where the transaction amounts to a consolidation or merger of the corporation;
(3) where the purchasing corporation is merely a continuation of the selling corporation; and
(4) where the transaction is entered into fraudulently in order to escape liability for such debts.
Id. at 37-38, 206 N.W.2d at 368-69. Because there are no district court findings regarding the first three exceptions — or evidence to support such findings — they do not apply here. See Niccum v. Hydra Tool Corp., 438 N.W.2d 96, 99 (Minn. 1989) (stating that the mere-continuation exception refers mainly to a reorganization of original corporation, usually accomplished under federal bankruptcy law or state statute).
Under the fourth exception, appellant can be held liable for the debts and liabilities of the judgment debtors if the debtors' assets were transferred fraudulently or for inadequate consideration to appellant so that the debtors could escape liability. See J.F. Anderson Lumber Co., 296 Minn. at 37-38, 206 N.W.2d at 368-69. Under Minnesota's fraudulent transfers act, a transfer is fraudulent if the debtor made the transfer "with actual intent to hinder, delay, or defraud" a creditor. Minn. Stat. § 513.44(a)(1) (2004). "`Transfer' means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance." Minn. Stat. § 513.41(12) (2004). In determining intent, a court may consider whether:
(1) the transfer . . . was to an insider;
(2) the debtor retained possession or control of the property . . .;
(3) the transfer . . . was disclosed or concealed;
(4) before the transfer was made . . ., the debtor had been sued or threatened with suit;
. . .
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred . . .;
(9) the debtor was insolvent or became insolvent shortly after the transfer . . .;
(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(b) (2004). If the debtor is an individual, "insider" includes a relative of the debtor or a corporation of which the debtor is a director, officer, or a person in control. Minn. Stat. § 513.41(7)(i)(A), (D) (2004). If the debtor is a corporation, "insider" includes a director, officer, or person in control of the corporation, or a relative of a director, officer, or person in control of the corporation. Id. (ii)(A), (B), (C), (F).
The district court found that when John Fulgham terminated his franchise, he effectively reinstituted his business under the ownership of his mother while he continued to run the new company, appellant Paradigm Industries, as its general manager. John Fulgham's mother formed appellant during the discovery phase of the underlying workers' compensation retaliation lawsuit. In that case, the district court found that John Fulgham had manifested an intention to hide assets so that respondent could not collect anything from him. In the garnishment proceeding, the district court found that in operating ALSC, appellant employed the same people that Power Industries had employed, had the same franchise agreement, and conducted the same business, at the same location, with John Fulgham acting in the same capacity. The record supports the district court's findings.
Several of the fraudulent transfers statutory factors support the district court's conclusion that the Fulghams acted with fraudulent intent to avoid a legal debt to respondent. First, the franchise itself is an asset, and the manner in which it passed from John Fulgham/Power Industries to Louise Fulgham/appellant is reasonably viewed as a transfer to an insider. Appellant is an "insider" under the fraudulent transfers act because it is a corporation of which John Fulgham, debtor, could be deemed to be in control, as general manager and son of the owner. Louise Fulgham is also an "insider" because she is the mother of debtor John Fulgham, an individual, and John Fulgham, director, officer and person in control of debtor Power Industries. Second, John Fulgham was able to retain control of the franchise. Third, the transfer was not disclosed; respondent was apparently not aware of appellant's existence until after he had served the garnishment summons on GMAC and the judgment debtors. Fourth, the transition of control from judgment debtor Power Industries to appellant occurred while the workers' compensation lawsuit was underway. Fifth, there is evidence in the record that appellant did not pay adequate consideration for ALSC; Louise Fulgham did not purchase the franchise, she merely paid a nominal initial start-up fee. Also, John Fulgham's father's corporation appears to have functioned merely as a straw man by transferring office equipment and vehicles, on paper, from the judgment debtors to Louise Fulgham's companies, including appellant, without meaningful consideration. Finally, John Fulgham was either insolvent or he became insolvent around the time he effectively transferred control of ALSC to appellant. Because of the family's maneuvers, John Fulgham was able to continue his business operation virtually without change.
Given the support in the record for the district court's conclusion that the Fulghams acted fraudulently to avoid a legal debt to respondent, the fourth exception to the general rule against successor liability has been met. The district court did not err in ordering that respondent was entitled to the garnished funds.