GREGORY F. KISHEL, Chief Judge.
This is an adversary proceeding for determination of dischargeability of debt,
The Defendant's counsel framed the motion under two alternate theories. The first was that the Defendant is not personally liable to the Plaintiff on an underlying debt. The second was that the Plaintiff could not make out a prima facie case for nondischargeability in any event, under the elements identified in bankruptcy law. As to the latter theory, the Court denied the motion from the bench.
As the dispute was ultimately submitted, it required a two-stage analysis. The first will address the Defendant's framing of the issue: whether, as of the date of the Defendant's bankruptcy filing, the Defendant was liable to the Plaintiff as a guarantor on the debt of a third party, a business entity of which he was the principal. The second arises under the Plaintiff's alternate framing: whether the pleading of the Plaintiff's complaint allows it to maintain a claim against the Defendant on a debt that he owes to it, on legal bases other than contractual liability.
The Defendant has moved for summary judgment under Fed.R.Civ.P. 56, as incorporated by Fed. R. Bankr.P. 7056.
The analysis for a motion under Rule 56, then, is sequential:
The parties to this adversary proceeding have somewhat different notions of the governing law. To some extent, their differences stem from alternate interpretations of the text of the Plaintiff's complaint. The question boils down to how many theories of personal liability are actually in suit under the complaint. To put it most charitably, the text of the complaint is sloppily drafted.
As the Defendant would have it, the Plaintiff has sued out only one basis for personal liability, founded in contract and evidenced (or not) by a promissory note. The Defendant argues that this theory fails as a matter of law under the Statute of Frauds, Minn.Stat. § 513.01. The Plaintiff's rejoinder is that it has sued out that basis for liability, plus two others that are properly before the Court, and none of them are amenable to summary adjudication.
It is best to analyze these approaches separately, each according to its own tenor and on the record presented for this motion.
Certain very basic, backdrop facts are established without controversy by the parties' submissions:
1. In 2008, the Defendant was engaged in several different lines of business. The one material to this lawsuit was the development of a commercial real estate project in Otsego, Minnesota, known as "Main Street Otsego."
2. The Plaintiff is a Minnesota corporation that maintains its principal office in Crystal, Minnesota. The Plaintiff operates as a lender in the commercial sector.
3. On November 6, 2008, the Plaintiff and MSO closed on a loan transaction under which the Plaintiff advanced $500,000.00.
4. The documents for the closing included a "Mortgage Note" and a mortgage instrument. These two documents contained the statement, "Drafted By: Priority Title, Inc." At the time, Priority Title, Inc. was owned in its entirety by "Owners and/or Managers of" the Plaintiff.
5. The Mortgage Note:
6. The mortgage instrument contains a pledge of two named lots and plats described as: "Ostsego [sic] Waterfront East First Addition, Wright County, Minnesota"
7. Neither the Mortgage Note nor the mortgage instrument identify in their text any borrower or mortgagor by name, other than Main Street Otsego, LLC. Neither contains any signatures other than the single one of the Defendant, in the places shown in findings 5 and 6 earlier.
8. MSO did not pay and satisfy the debt per the Mortgage Note, timely or otherwise. It paid interest and late fees to the Plaintiff on a regular (monthly) basis through May, 2009.
9. In early June, 2009, the Plaintiff sued MSO, the Defendant, and LandCor Companies, Inc. (another of the Defendant's business entities) in the Hennepin County District Court. Through its complaint, the Plaintiff asserted that the Defendant and LandCor were personally liable on the debt evidenced by the Mortgage Note, jointly and severally, and that the Defendant was liable on account of a personal guaranty.
10. On July 21, 2009, the Plaintiff obtained an ex parte Order for Prejudgment Attachment against the defendants in the state-court action, on the allegation that they would secrete or dissipate assets that otherwise could be subject to post-judgment execution.
The Defendant's argument on the issue at bar was originally presented in his supporting briefing. The development was less than one page long. In sum, the argument is as follows:
The Defendant then relies on Minnesota's Statute of Frauds, Minn.Stat. § 513.01, which provides in pertinent part as follows:
He does not cite to any case law at all.
The Plaintiff's response to this theory of defense mingles and mumbles several strains of thought in a page and a half of briefing.
The first is apparently under a rubric of judicial estoppel. It is without merit.
The second is that the paragraph noted above at finding 5 constitutes a guaranty by the Defendant in his individual capacity, because it contains a consent "to be jointly and severally bound" on the underlying debt. This provision is the only written undertaking that the Plaintiff offers as a guaranty to meet the Statute of Frauds. However, the wording of the Plaintiff's argument seems to mix in a different theory of direct personal liability, without identifying it as distinct from the notion of a guarantee. The Plaintiff argues that this provision memorializes that the Defendant "had agreed to be named a co-debtor on the Note," reflecting how "[i]t was always understood by [the Defendant] and I [sic], that he would be personally responsible as a co-signor [sic] of the Note. . . ."
These thoughts were first voiced in the Plaintiff's complaint, though in a haphazard and imprecise fashion. The complaint names Robert L. Fields as the sole defendant, and recites:
This argument is a hodgepodge, but it will be construed as the assertion of two separate bases for contractual liability in the Defendant, on the underlying debt.
The first would be direct liability as a joint obligor. This theory has no merit, because of the way that the Plaintiff had the note worded.
The note itself identifies only MSO as the promisor of repayment. The indicium of the Defendant's status as signatory recites a capacity as an officer of MSO, but only that. The text of the note's first paragraph could have identified the Defendant by name as a promisor. The text block below the signature line could have added three words before the abbreviation "CEO"—"individually and as." Either or both of these simple expedients would require a court to characterize the Defendant as a joint obligor, an "other party hereto" under language reflecting a mutual intention to make the Defendant directly liable to the Plaintiff as a promisor. E.g., Norwest Bank Minnesota North, N.A. v. Beckler, 663 N.W.2d 571, 578 (Minn.Ct. App.2003) ("An intent to be contractually bound is determined by the objective manifestations of the parties' words, conduct, and documents, and not by their subjective intent."). Their absence deprives the Plaintiff of that argument.
One could be a bit more charitable to the Plaintiff: the note's wording could be considered as ambiguous, on the basis of the naming of MSO alone as the promisor, in contrast to the imprecise language quoted at finding 5.d. However, such an ambiguity is to be construed against the Plaintiff, as the party that procured the drafting of the note through its related entity. E.g., Hilligoss v. Cargill, Inc., 649 N.W.2d 142, 148 (Minn.2002) (". . . when contract language is reasonably susceptible of more than one interpretation it is ambiguous, and ambiguous contract terms must be construed against the drafter. . . .").
Under either application, there is no basis on which to characterize the Defendant as a joint recipient or direct beneficiary of the loan, or as a promisor in his individual capacity who would be equally and directly responsible for its repayment.
The other basis for imposing liability on the Defendant would be secondary, as guarantor of MSO's debt. This theory is not as directly or briefly analyzed; but in the end it does not avail the Plaintiff either.
But the cleaving line between the two was the Plaintiff's dual and alternate insistence: on the one hand, that the wording of the passage was sufficient to make out an enforceable guaranty; or alternately, that the issue of its sufficiency under the Statute of Frauds could be reached only at trial, given the parties' disagreement over their intent to bind the Defendant personally to MSO's debt. A principled resolution of this dispute requires far more work than either lawyer put into the parties' submissions. But to responsibly address the record, that must be done.
An initial complication is posed by the presence of two different thoughts in relevant Minnesota jurisprudence. It has long been held that Minnesota's Statute of Frauds "must be given a liberal construction," at least as to the sufficiency of a writing's recitation of the consideration for a personal guaranty. Hall v. Oleson, 168 Minn. 308, 210 N.W. 84, 84-85 (1926). See also Bartley v. BTL Enters., Inc., 490 N.W.2d 664, 667-668 (Minn.Ct. App.1992). A combination of separate documents may be considered to satisfy the statute, if given at the same time and if related to the same transaction. Hall v. Oleson, 210 N.W. at 84. On the other hand, the Minnesota courts have recognized the general principle that "a contract of guaranty is strictissimi juris, implying that it must be strictly construed in favor of the guarantor." American Tobacco Co. v. Chalfen, 260 Minn. 79, 108 N.W.2d 702, 704 (1961). See also Federal Deposit Ins. Corp. v. University Anclote, Inc., 764 F.2d 804, 806 (11th Cir.1985); General Elec. Credit Corp. of Tenn. v. Larson, 387 N.W.2d 734, 736 (N.D.1986).
The issue in Hall v. Oleson was whether the writing there satisfied the statute's requirement of "expressing the consideration." That is not the issue here. Nor does this matter involve an ambiguity within a document that is otherwise acknowledged to be a contract of guaranty. The issue at bar is whether the passage in question, in conjunction with the form of the Defendant's signature, sufficiently memorializes a deliberate undertaking on the Defendant's part to stand in his own right for MSO's debt to the Plaintiff—put another way, whether it constitutes his personal promise to repay the contractual obligation of the separate corporate entity. The question is whether there is even a contract of guaranty in the first place. The Plaintiff insists that there is. The Defendant maintains that the cited provisions do not create one expressly, and cannot be read in conjunction with the form of signature to do so.
There is one extant ruling from a Minnesota appellate court on the underlying
The answer is that it does not. Further, the actual function of the text is reasonably evident, albeit in the nature of boilerplate slapped into place by the Plaintiff's own scrivener.
The passage has a specific choice of nouns, verb, and modifiers. Structured as such, the passage clearly does not amount to a knowing, specific undertaking by the Defendant of liability on MSO's debt. That would have been made clear by using the sort of unequivocal verbs, subject, and objects held adequate toward that end in the premises lease at issue in B.J. Johnson Partners:
2009 WL 911012, at *3 (emphasis added). The words of the single sentence in B.J. Johnson Partners set up a straight chain of legal responsibility from the signatory— "the undersigned Guarantor"—to the obligee of the corporate lessee. The text features the customary, lawyerly redundancy in its wording, particularly in its modifiers; but all of this is toward a single, distinct reference point that is unmistakable.
By contrast, the verbiage of the Plaintiff's text is in the alternative, in several different senses. It does not designate specific persons or entities, singly or in the multiple. It scatters out a variety of possible signatory-statuses for the referent party or parties "hereto." Most to the point, the specific covenant does not contemplate a hierarchy or order of liability, as between a primary obligor (here, as most often, a corporate entity) and an additional but secondary party extending an accommodation to the primary (i.e., an individual principal of that corporation). Rather, this text has every semblance of boilerplate, thrown into a form in order to make all of multiple persons who actually signed under designated but different capacities, equally and simultaneously liable in those designated capacities. The text clearly is designed to enable the payee to collect the full amount of the underlying debt from any one of all signatories, in the classic sense of joint and several liability.
But the wording really cannot sustain any function other than that. The choice of noun, verb, and objects simply does not signify a specific "promise" on the part of the Defendant as an individual "to answer for the debt" of MSO. And because the sole signature on the note was by the Defendant in a designated corporate capacity, there was no multi-party execution of the note to trigger this provision. It was mere surplusage—boilerplate, indeed.
Plaintiff relies on this writing alone, and it does not make out a guaranty by the Defendant that is sufficient on its face to satisfy the Statute of Frauds. The Defendant is not individually liable to the Plaintiff on a contractual basis, on account of the Plaintiff's loan advanced to MSO. The consequence is that there was no debt running from the Defendant to the Plaintiff as a matter of contract, and the Plaintiff cannot maintain an action against the Defendant for determination of dischargeability on that theory. The governing law limits the material facts to the face of the relevant documents, which are uncontroverted; and on those admitted facts, the Defendant is entitled to summary judgment against the Plaintiff on that pleaded theory of liability. There is no debt under the note to be subjected to discharge in bankruptcy, or excepted from it.
For her argument on summary judgment, the Defendant's counsel limited the legal theory to the notions of liability as guarantor and the Statute of Frauds, as she had first broached at the scheduling conference. The tactic promised to end
In the Plaintiff's response, its counsel asserted that his client had actually raised other bases for personal liability, and that this adversary proceeding could be maintained on any of them even were the Defendant successful on the focused attack of his motion. Apart from the judicial estoppel argument rejected supra at n.11, the theories are summarized as follows in the Plaintiff's responsive brief:
Under Minnesota law, piercing the corporate veil is akin to an extraordinary remedy. Universal Lending Corp. v. Wirth Companies, Inc., 392 N.W.2d 322, 326 (Minn.Ct.App.1986) ("An officer and shareholder of a corporation cannot be held personally liable for the obligations of the corporation except in certain limited circumstances."); Groves v. Dakota Printing Servs., Inc., 371 N.W.2d 59, 62 (Minn. Ct.App.1985); Anderson v. Benson, 394 N.W.2d 171, 175 (Minn.Ct.App.1986). See also Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., Inc., 283 N.W.2d 509, 512 (Minn.1979) ("Doing business in a corporate form in order to limit individual liability is not wrong; it is, in fact, one purpose for incorporating."); HealthEast v. County of Ramsey, 770 N.W.2d 153, 157-158 (Minn.2009) ("an entity's separate corporate status for tax purposes" will be disregarded "only in limited circumstances"). The remedy of piercing the corporate veil is equitable in nature. West Concord Conservation Club, Inc. v. Chilson, 306 N.W.2d 893, 898 n. 3 (Minn.1981). It involves both factual and equitable considerations. Stoebner v. Lingenfelter, 115 F.3d 576, 579 (8th Cir.1997) (applying Minnesota law).
First, a combination of factual circumstances must be shown, to establish that the individual principal formed or maintained the corporation as his personal alter ego, ignoring the separateness of corporate form. Factors that would support a finding of identity between individual principal and corporation include (1) insufficient capitalization; (2) failure to observe corporate formalities; (3) nonpayment of dividends; (4) insolvency of debtor corporation; (5) siphoning of corporation as a mere facade for individual dealings. Victoria Elevator Co., 283 N.W.2d at 512; Assoc. of Mill and Elevator Mut. Ins. Co. v. Barzen Intern., Inc., 553 N.W.2d 446, 449-450 (Minn.Ct.App.1996). Then, there must be "an element of injustice or a fundamental unfairness," that would result from honoring the nominal separateness of the corporation. Victoria Elevator Co., 283 N.W.2d at 512; Whitney v. Leighton, 225 Minn. 1, 30 N.W.2d 329, 333 (1948); Waterman v. Harold, 1990 WL 92869 *2 (Minn.Ct.App.1990). See also United States v. Scherping, 187 F.3d 796, 802 (8th Cir. 1999) and Minnesota Power v. Armco, Inc., 937 F.2d 1363, 1367 (8th Cir.1991) (both discussing Minnesota law).
Skinner v. Switzer, ___ U.S. ___, 131 S.Ct. 1289, 1296, 179 L.Ed.2d 233 (2011). The Minnesota Supreme Court invoked the same thought, in the specific context of the remedy now at bar. Barton v. Moore, 558 N.W.2d 746, 749-750 (Minn. 1997).
However, this is just a statement of relative lenity as to the abstract legal dimension of a pleading. To withstand dismissal on motion of a defendant, a complaint must recite sufficient "facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 547, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (emphasis added). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, ___ U.S. ___, ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009).
In the specific substantive context at bar, that requirement is met when the plaintiff seeking to pierce the corporate veil "allege[s] numerous facts" going to the factors of identity and the asserted inequity, so as "to provide [the opposing party] with notice of such a theory." Barton v. Moore, 558 N.W.2d at 749-750. The Plaintiff did not do that at all. The relevant text of its complaint (two and a half pages in length) does not even suggest that the Plaintiff was seeking to have individual liability imposed on the Defendant on a pass-through basis, for a debt that it acknowledged as contractually owing only by MSO.
Then there is the Plaintiff's ultimate fallback, to impose liability on the Defendant for inducing the lending that brought about the underlying liability of MSO. This time the predicate corporate liability would sound noncontractually—in fraud— as well as under contract.
Counsel cites a number of decisions, most of them from Minnesota courts but all decided on legal sources of corporate liability that are very different from the one at bar.
It is not necessary to parse out the theories used by the courts that rendered those decisions.
The individual's underlying liability would arise under state tort law, that of fraud or misrepresentation. To the extent that the underlying elements under state law coincided with those under bankruptcy law (11 U.S.C. § 523(a)(2)(A)), or the plaintiff-creditor rounded out the proof as to both, there would be an independent factual basis to attach liability to a defendant-debtor in bankruptcy, and to except that individual's debt from discharge. The Eighth Circuit Court of Appeals has countenanced such a result for over two decades, and recently reaffirmed the approach.
As it turns out, the Plaintiff's complaint does plead a claim against the Defendant individually for misrepresentation under Minnesota law, under which the gravamen is an inducement to the Plaintiff to lend to MSO that was effected by the misrepresentation of MSO's (and other parties') financial status. The Plaintiff alleges in its complaint that:
These factual allegations all go to the recognized elements of fraud under "the dominant consensus of common-law jurisdictions," which underlies both the construction of § 523(a)(2)(A) under Eighth Circuit precedent and the tort of fraudulent misrepresentation under Minnesota law. In re Freier, 604 F.3d at 588 n. 2. Though the Plaintiff's pleading does not request an award of damages for common-law fraud per se, it does not limit its theory of recovery against the Defendant to liability as co-maker or guarantor. Though lacking a differentiated theory, its prayer for an award of damages and entry of a money judgment passes muster as a complaint in tort under Skinner v. Switzer.
The Plaintiff has sued out a request for judgment against the Defendant that is independent of its assertion of guarantor liability. Thus, the Defendant is not entitled to a grant of summary judgment that would fully terminate this adversary proceeding. It will proceed to trial on the theory of liability just described, though on that one alone.
IT IS THEREFORE DETERMINED AND ORDERED:
1. The Defendant is not personally indebted to the Plaintiff under a promissory note in favor of the Plaintiff that was executed by the Defendant in a capacity as CEO of Main Street Otsego, LLC on November 6, 2008, either as a promisor or as a guarantor.
2. In this adversary proceeding, the Plaintiff may not seek to have the Defendant found personally liable to it on the ground that the corporate veil of Main Street Otsego, LLC may be pierced, and that the Defendant therefore is obligated to the Plaintiff on the debt of Main Street Otsego, LLC to the Plaintiff.
3. The Defendant's motion for summary judgment is denied in all other respects.
This seems to be an invocation of judicial estoppel; the Plaintiff would have the Defendant barred from denying personal liability because he included an entry in his bankruptcy schedules for the claim the Plaintiff had previously asserted against him. The argument is absurd. In the first place, the Defendant was required to schedule any and all claims that could have been asserted against him outside of bankruptcy, whether he agreed that they had merit or not. 11 U.S.C. § 521(a)(1)(B)(i) and Fed. R. Bankr.P. 1007(b)(1)(A). A particular entry in a bankruptcy schedule might constitute an "inconsistent position[] in the same or related litigation," Hossaini v. Western Missouri Med. Ctr., 140 F.3d 1140, 1142 (8th Cir.1998), to establish the platform for judicial estopped. See Liberty Mut. Fire Ins. Co. v. Scott, 486 F.3d 418 (8th Cir.2007) (judicial estoppel used to bar holder of fire insurance policy from asserting claim of over $93,000.00 for personal property losses against insurer, where she had valued her personal property at $7,340.00 in asset schedules for her bankruptcy filing "[i]n the year preceding the fire. . . ."). (The Plaintiff's counsel did not cite Scott in briefing or argument.) But, there is no trigger for judicial estoppel in the record for the Defendant's case. The content of the Defendant's filed schedule shows no inconsistency with his current position. The Defendant and his counsel made sure to designate the claim as "Disputed" in the appropriate column of his Schedule F. Such a designation reflects a debtor's formal legal position as to personal liability on a scheduled claim in a bankruptcy case. This one clearly evidences the Defendant's denial of his liability.
