Opinion
No. A05-1407.
Filed May 30, 2006.
Appeal from the District Court, Hennepin County, File No. MC04-015307.
Kevin J. Dunlevy, Michael E. Kreun, Beisel Dunlevy, P.A., (for respondent)
David K. Nightingale, Marvin A. Liszt, Sarah L. Krans, Bernick Lifson, P.A., (for appellants)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2004).
UNPUBLISHED OPINION
Appellants challenge the district court's interlocutory order appointing a permanent receiver, arguing that (1) the district court abused its discretion in appointing a permanent receiver before establishing respondent's legal ownership of Wara Real Estate, Inc. and (2) the evidence does not support the appointment of a permanent receiver. Because we conclude that the district court has not abused its discretion, we affirm.
FACTS
This litigation involves transactions among various entities controlled by some or all of the 27 heirs of Mohammed Rafie Husain Marafie (the heirs) and transactions among appellant entities controlled by appellant Amir Marifie (A.M.), who is one of the heirs. Respondent Wara Real Estate Co., K.S.C.C., (Wara Kuwait) is a closely held Kuwaiti corporation owned by the heirs. Appellant Real Estate Inc. (Wara MN) was incorporated in Minnesota in 1985 to develop Minnesota real estate. At its inception, Wara MN issued 3,500 shares of stock and transferred all of the stock to Wara Kuwait in exchange for real property valued at $1,141,764. A.M. came to Minnesota in 2000 for medical treatment and remained as president and CEO of Wara MN. The remaining appellant entities are all businesses created by A.M. that respondent alleges have received assets of Wara MN through fraudulent transfers.
These other entities include appellant entities Arima, LLC; Ravia Real Estate, LLC; and Aravia Group, Inc.
When Iraq invaded Kuwait, Wara Kuwait transferred legal ownership of the Wara MN shares to a blind trust for no consideration, claiming that the transfer was necessary to prevent extortion and misappropriation during the occupation of Kuwait by Iraq. In reconstructing its business and records after the liberation of Kuwait from Iraq, Wara Kuwait overlooked reacquisition of legal title to the Wara MN stock until after it had started this lawsuit. When Wara MN challenged Wara Kuwait's ownership, the blind trust quitclaimed any interest it had in Wara MN back to Wara Kuwait. In 1992, Wara Kuwait transferred legal ownership of the stock of Wara MN to other entities controlled by the heirs. Evidence in the record demonstrates that at all times relevant, Wara Kuwait has continued to exercise operational control over Wara MN.
The district court found that Wara Kuwait established standing to pursue this litigation as a creditor of Wara MN and as the beneficial owner of Wara MN. The district court also found that there are outstanding fact issues related to the legal ownership of the stock of Wara MN.
A "beneficial owner" is one "recognized in equity as the owner of something because use and title belong to that person, even though legal title may belong to someone else." Black's Law Dictionary 1130 (7th ed. 1999).
The record reveals that A.M., as president and CEO of Wara MN, transferred property owned by Wara MN to the other appellant and to non-appellant entities for less than fair market value. The significant transfers are summarized in the following table:
Date Property Transfer from Transfer to Consideration
$1,641,937 of this amount was transferred to Ravia, and Wara MN recorded that this amount was due from Ravia. Ravia used $260,489 of the proceeds to acquire Texas property in its name. Ravia then sold the Texas property and paid debts on the property and to creditors of "related entities." When Ravia merged with AraviA, Ravia's debt to Wara MN was converted to non-voting stock in AraviA.
Wara MN purchased this property for $813,332 with a loan made to Amir Marafie by the State Bank of Long Lake. The property was not recorded on Wara MN's general ledger.
By affidavit of Wara Kuwait's chairman of the board of directors and managing director, Wara Kuwait asserts that neither Wara Kuwait nor the heirs, nor any other entity controlled by the heirs, including the board of directors of Wara MN, approved the transfers. Wara Kuwait asserts that it has transferred approximately $8,800,000 to Wara MN since Wara MN's incorporation, which Wara Kuwait considers a debt owed by Wara MN. Wara Kuwait further asserts that since September 2000, Wara MN has failed to provide corporate and financial information to Wara Kuwait and has not paid dividends or distributions to Wara Kuwait except for $1,555,943 paid in February 2003.
In November 2001, Wara Kuwait resolved to liquidate all real estate owned by Wara MN and transfer the resulting revenue to Kuwait. A.M. was directed to take the necessary actions and to complete the directive by December 2003. A.M. failed to follow the directive, and Wara Kuwait initiated this litigation. The district court initially appointed a temporary receiver at Wara Kuwait's request. Wara MN did not challenge the appointment of the temporary receiver, who was not given authority to liquidate assets.
In May 2005, on Wara Kuwait's motion, the district court appointed a permanent receiver with broad authority to liquidate appellant entities' assets, after finding, in part, that (1) respondent has standing to bring this suit; (2) that appellant Wara MN has fraudulently conveyed assets to other entities owned, operated, or controlled by A.M., to respondent's detriment; and that appellants are insolvent, their assets are subject to waste; and (3) it is uncertain whether their assets will be sufficient to pay creditor's claims as they come due. This appeal followed.
DECISION
Appellants argue that the district court abused its discretion by appointing a permanent receiver because Wara Kuwait failed to present clear-and-convincing evidence of inadequate security, insolvency, or waste and because Wara Kuwait has not established ownership of Wara MN. Wara Kuwait argues that the evidence and the pleadings establish that the appointment of the receiver was warranted under common law, the Uniform Fraudulent Transfers Act, the Minnesota Business Corporations Act, and Minnesota's general receivership statute; and that Wara Kuwait has standing as a creditor and beneficial owner of Wara MN.
The appointment of a receiver while litigation continues is an equitable remedy, and the decision to grant or deny this remedy falls within a district court's discretion. Mut. Benefit Life Ins. Co. v. Frantz Klodt Son, Inc., 306 Minn. 244, 246, 237 N.W.2d 350, 352 (1975). "[O]ur sole inquiry in reviewing fact issues is whether there is any evidence in the record reasonably tending to sustain the conclusion reached by the trier of fact." House v. Anderson, 197 Minn. 283, 284, 266 N.W. 739, 740 (Minn. 1936). On appeal from an order appointing a receiver pending litigation, we apply the rule that a view of the evidence most favorable to the prevailing party must be adopted. Bliss v. Griswold, 222 Minn. 494, 502-03, 25 N.W.2d 302, 307-08 (1946) (citing Pierce v. Grand Army of the Republic, 220 Minn. 552, 556, 20 N.W.2d 489, 492 (1945), for the proposition that when "the affidavits in support of and in opposition to the motion upon which the order from which the appeal is taken was based conflict in certain respects, . . . the view most favorable to the prevailing party in the trial court must be taken").
I. Nature of Wara Kuwait's claim
Initially, appellants argue that Wara Kuwait's claims are derivative claims and that Wara Kuwait failed to follow the pleading requirements of Minn. R. Civ. P. 23.06 (2005).
Minn. R. Civ. P. 23.06 was renumbered to Minn. R. Civ. P. 23.09, effective Jan. 1, 2006. The text has not changed.
Minnesota Rule of Civil Procedure 23.06 governs derivative actions brought by a shareholder to enforce the rights of a corporation. Rule 23.06 provides:
In a derivative action brought by one or more shareholders or members to enforce a right of a corporation . . ., the corporation . . . having failed to enforce a right which may properly be asserted by it, the complaint shall allege that the plaintiff was a shareholder . . . at the time of the transaction of which the plaintiff complains. . . . The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders . . ., and the reasons for the plaintiff's failure to obtain the action or for not making the effort.
. . . .
Minnesota has long adhered to the general principle that an individual shareholder may not directly assert a cause of action that belongs to the corporation. When a shareholder asserts a cause of action belonging to the corporation, the shareholder must seek redress in a derivative action on behalf of the corporation rather than in a direct action by the individual shareholder.
Wessin v. Archives Corp., 592 N.W.2d 460, 464 (Minn. 1999) (quotation and citations omitted). The district court did not address this claim, finding only that Wara Kuwait "has provided sufficient evidence to establish, for purposes of standing and jurisdiction, that it is a creditor of and beneficial owner of the stock of [Wara MN]." Wara Kuwait has not addressed this claim on appeal, other than to assert that it has the right to bring the action as Wara MN's creditor. Because we conclude that the evidence supports the district court's determination that Wara Kuwait has standing as a creditor of Wara MN, we do not reach the issue other than to note that, in the district court, Wara Kuwait argued that it substantially complied with Rule 23.06 in its amended complaint and the district court did not find to the contrary.
II. Wara Kuwait's standing as beneficial owner and creditor of Wara MN
Appellants argue that the district court erred in finding that Wara Kuwait established that it is a creditor and beneficial owner of Wara MN because the district court also found that outstanding fact questions remain about the legal ownership of Wara MN's stock. But there is evidence in the record to support the district court's finding that Wara Kuwait consistently exerted control over Wara MN, advanced $8,800,000 to Wara MN, and considers that sum a debt. Wara MN has not disputed Wara Kuwait's control and admits that Wara Kuwait is a creditor, although it disputes the amount of its claim. The district court did not, therefore, err in determining that Wara Kuwait is the beneficial owner of and a creditor of Wara MN.
III. Appointment of receiver
Although the district court did not specify the authority under which it was appointing a receiver in this matter, we agree with respondent that the district court implicitly made the appointment under Minn. Stat. § 513.47 (a)(3)(ii) and (iii) (2004), which provide, respectively, that in an action for relief against a fraudulent transfer, subject to some limitations not relevant in this case, a creditor may obtain the appointment of a receiver to take charge of the asset transferred or of other property of the transferee, and the court may grant "any other relief the circumstances may require." Id. We reach this conclusion because the district court specifically found that Wara MN fraudulently conveyed assets to other entities owned, operated, or controlled by A.M. and concluded that Wara Kuwait "has established as a matter of law that it is entitled to the appointment of a permanent receiver to prevent economic waste, fraud, and insolvency, the later defined by Minn. Stat. § 513.42(b)."
Minn. Stat. § 513.42 provides: "(a) A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets, at a fair valuation. (b) A debtor who is generally not paying debts as they become due is presumed to be insolvent."
Appellants argue that they cannot be insolvent because they presented evidence that their aggregate real property is worth $18,794,000 and the aggregate mortgage liability on the property is only $10,683,905, leaving a net value of more than $8,000,000. Appellants assert that $8,000,000 exceeds the alleged amount of outstanding foreclosure notices, mechanic's liens, and real-estate taxes by more than $6,000,000. Appellants argue that the presumption of insolvency under Minn. Stat. § 513.42(b), because of their admitted failure to pay debts when due, is rebutted by the evidence that their assets exceed their debts. Appellants do not cite any authority that the presumption of insolvency is rebutted by such evidence.
Wara Kuwait points to evidence that Wara MN was insolvent, as shown by Wara MN's 2003 and 2004 balance sheets; that fraudulent conveyances occurred in both years; and that Wara MN was not paying its debts as they came due, as evidenced by mechanic's liens in the record. Wara Kuwait also points to the temporary receiver's statement that "there are debts that are coming due. There are mortgages that are in arrears and in default, and the ability to cure those and bring them out of foreclosure is very — it's very unclear to me that based on that they'll be about to in fact make that appear." Additionally, appellants ignored all but $2,145,990 of the $8,800,000 unsecured debt asserted by Wara Kuwait, which, when considered, results in appellants' aggregate negative equity. We conclude that the evidence, viewed most favorably to Wara Kuwait, supports the district court's finding of insolvency.
Appellants have not cited any authority for consideration of the aggregate net worth of the transferor and transferee of fraudulently conveyed property for determination of insolvency under the fraudulent-transfers act. The record contains clear-and-convincing evidence, and counsel for Wara MN conceded at oral argument, that Wara MN is without assets to pay even the portion of the debt it acknowledges it owes to Wara Kuwait.
Wara MN argues that if appointment of a receiver under Minn. Stat. § 513.47 is appropriate before final judgment, it would require that the common-law standards for appointment of a receiver, as set forth in Mutual Benefit Life Ins. Co., 306 Minn. at 246-47, 237 N.W.2d at 352, and Brown v. Muetzel, 358 N.W.2d 725 (Minn.App. 1984), be met. Without reaching the issue of whether or not Wara MN is correct in this assertion, we nonetheless conclude that in this case, those standards have been met.
In Mutual Benefit, the supreme court explained that:
This court has repeatedly said that courts will proceed with great caution in granting an application for a receiver to take possession of property pendente lite; that such application is addressed to the discretion of the trial court and will not be granted in a doubtful case; that the showing must be clear, strong, and convincing; and that the application will be granted only under circumstances requiring summary relief or where the court is satisfied that there is imminent danger of loss and where there is no adequate remedy at law.
306 Minn. at 246-47, 237 N.W.2d at 352 (quotation omitted). Years later, in Brown v. Muetzel, this court relied on Mutual Benefit and stated that:
In order to show an imminent danger of loss and an inadequate remedy at law, the moving party must show by clear and convincing evidence that (1) the person in possession is insolvent, (2) the person in possession is committing waste, and (3) the value of the security is inadequate to protect the debt.
358 N.W.2d 725, 728 (Minn.App. 1984) (citing Mutual Benefit Life Ins. Co., 306 Minn. at 249, 237 N.W.2d at 353-54).
Because Wara Kuwait is an unsecured creditor, there is no security to protect its debt, and as discussed above, the evidence viewed in favor of Wara Kuwait supports the finding of insolvency. As to waste, Wara MN points to evidence that, to date, none of the property transferred has been lost as a result of foreclosure and that there were no outstanding judgments from a mechanic's-lien action at the time of the hearing, despite the receiver's testimony about the long history of foreclosures, liens, and unpaid taxes concerning the transferred property. But there is evidence that Wara MN committed waste when it transferred the property for less than its value, and there is evidence that the property is at risk of waste because of appellants' insolvency and the existence of mortgage foreclosures and mechanic's liens.
The district court entered a detailed order setting out the findings that support the appointment of a receiver and delineating the powers of the receiver. At oral argument, for the first time appellants objected to specific powers granted to the receiver. Because those issues were not briefed, we decline to consider them. See Melina v. Chaplin, 327 N.W.2d 19, 20 (Minn. 1982) (stating that issues not briefed on appeal are waived). Based on the record, we cannot conclude that the district court abused its discretion in appointing a permanent receiver in this matter.