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Trepanier MacGillis Battina P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN 55415 612.455.0500

Stock Transfer to Spouse to Dilute Stock Levied Against by Creditors Violated Minnesota Uniform Fraudulent Transfer Act

The Minnesota Court of Appeals recently affirmed a Ramsey County District Court ruling that a corporate director violated the Minnesota Uniform Fraudulent Transfer Act (“MUFTA”), Minn. Stat. §§ 513.41-.51, when he directed a closely-held corporation to sell newly-authorized company stock to his spouse. The result of the sale was a dilution in the value of the director’s shares of stock that were levied against to satisfy part of a judgment against him. In Antonello v. Reilly, No. 62-CV-13-4405 (Minn. Ct. App. Aug. 18, 2014), the Minnesota Court of Appeals affirmed the district court’s holding that transfers made by corporate directors to spouses are presumptively fraudulent under the MUFTA. The court’s ruling provides guidance on the “badges of fraud” set forth in the MUFTA and their application to transfers made by directors of closely-held corporations.

In Antonello, George Reilly, Meridian Bank, and Thomas Braman (“Respondents”) obtained judgments in excess of $3 million against appellant Michael Antonello, the sole shareholder, director, and officer of Michael J. Antonello Insurance Associates Ltd. (the “Corporation”). On January 2, 2013, the Ramsey County Sheriff served a third-party levy upon the Corporation at the request of Respondents to levy against all shares owned by Antonello in the Corporation. Antonello owned 10,000 shares of capital stock in the Corporation, which at that time comprised all of the Corporation’s issued and outstanding capital stock.

On January 22, 2013, 20 days after the sheriff’s levy, Antonello signed a corporate resolution to amend the Corporation’s articles of incorporation to authorize the issuance of 500,000 total shares of capital stock. The following day, Antonello, in his role as corporate director, issued a certificate in response to the sheriff’s levy stating that he owned 10,000 shares of stock in the Corporation. The Corporation then approved an agreement for Jean Antonello, Antonello’s wife, to purchase 90,000 shares of the Corporation’s stock for $1,000.00. Additionally, the Antonellos together executed a resolution to name themselves as the directors and officers of the Corporation. Antonello remained president and treasurer, while Jean Antonello became vice president.

On January 25, 2013, the Antonellos, as officers of the Corporation, approved an agreement for Jean Antonello to purchase the remaining 400,000 shares of authorized but unissued stock from the Corporation for $100.00. Thus, in the span of three days, Antonello went from holding 100 percent of the shares of the Corporation to holding only two percent, in exchange for Jean Antonello’s $1,100.00.

In April 2013, the Ramsey County Sheriff sold Michael Antonello’s 10,000 levied shares of the Corporation’s stock to Respondents for $10,000 and transferred them by sheriff’s certificate. After the sale, the Antonellos informed Respondents that the 10,000 shares reflected a mere two percent interest in the Corporation. Respondents then sued the Antonellos and the Corporation, seeking to avoid the transfers to Jean Antonello under the MUFTA.
The district court granted Respondents’ motion for summary judgment and voided the Corporation’s transfer of stock to Jean Antonello, making Respondents the sole shareholders. The Antonellos appealed this decision, arguing that Respondents did not have standing to challenge the issuance of shares to Jean Antonello and that the district court improperly granted Respondents’ motion for summary judgment.

Standing as Creditors Under MUFTA
A plaintiff may acquire standing either by suffering some “injury-in-fact” or through some legislative enactment. State by Humphrey v. Philip Morris Inc., 551 N.W.2d 490, 493 (Minn. 1996). As persons having a claim against another, Respondents were creditors and Antonello was a debtor under MUFTA. Minn. Stat. § 513.41(4), (6). The court found that, to frustrate Respondents’ collection attempts, Antonello used his sole authority as corporate director to indirectly transfer assets. Accordingly, it concluded that Respondents, as creditors, had statutory standing to pursue their claim.

“Badges of Fraud” Made Summary Judgment Proper
“The Uniform Fraudulent Transfer Act . . . prohibits a debtor from transferring property with the intent to hinder, delay, or defraud any creditors.” New Horizon Enters., Inc. v. Contemporary Closet Design, Inc., 570 N.W.2d 12, 14 (Minn. App. 1997) (citing Minn. Stat. §§ 513.41-.51 (1996)). A transfer is fraudulent whether the creditor’s claim arose before or after the transfer if the debtor made the transfer with intent to hinder, delay, or defraud any creditor of the debtor. Minn. Stat. § 513.44(a)(1). Liability can be imposed for transfers of property where there is actual or constructive intent to defraud a creditor. New Horizon, 570 N.W.2d at 15.
To determine whether a person fraudulently transferred assets under MUFTA, the Minnesota courts determine whether any of Minn. Stat. § 513.44(b)(1)-(11)’s “badges of fraud” exist. See Citizens State Bank Norwood Young Am. v. Brown, 849 N.W.2d 55, 59 (Minn. 2014). “Badges of fraud” are those “certain suspicious circumstances that frequently accompany fraudulent transfers” including:

  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(b)(1)-(11).
Generally, the creditor bears the burden of proof in establishing a fraudulent conveyance. Snyder Elec. Co. v. Fleming, 305 N.W.2d 863, 867 (Minn. 1981). The burden, however, may be shifted to the debtor based upon the relationship of the parties to a transaction. Due to the nature of their relationship, transfers between spouses are presumptively fraudulent. Citizens State Bank, 849 N.W.2d at 62.

Applying these factors, the Antonello court agreed that ample “badges of fraud” were present to find Antonello fraudulently transferred 98 percent of the Corporation’s ownership to Jean Antonello. The Minnesota Court of Appeals affirmed the district court’s grant of Respondents’ motion for summary judgment which voided the transfer of stock to Jean Antonello.

The take-away from the Antonello decision is that sole directors, officers, and shareholders cannot easily mask fraudulent transfers behind the façade of a closely-held corporation. When a transfer is made to a spouse by a sole owner of a closely-held corporation, such a transfer is presumptively fraudulent. To avoid a violation of the MUFTA, the director must prove the corporation received reasonable equivalent value for the transfer, and that it was not done with actual or constructive intent to defraud creditors.

For advice on corporate stock transfers, complying with or enforcing the Minnesota Uniform Fraudulent Transfer Act, and other issues facing closely-held businesses, contact one of the Minnesota business and commercial litigation attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota commercial litigation attorney James C. MacGillis advises clients on corporate and business law matters such as business entity formation, business transactions, and corporate governance. Jim may be reached at 612.455.0503 or Trepanier MacGillis Battina P.A. is a Minnesota commercial litigation law firm located in Minneapolis, Minnesota.