BMO Harris Bank N.A. v. Kuskie

Background

BMO Harris Bank N.A. loaned money to Capitol Sales Company, Inc. BMO alleged that Capitol Sales owed more than $3.2 million when BMO filed this case and that the company was insolvent or nearly insolvent between January 2018 and July 2021. BMO sued Capitol Sales’ shareholders—Kenneth Kuskie, John Stedman, and Susan Stedman—and its former president and chief financial officer, Curtis A. Hayes.

BMO alleged that Capitol Sales paid $435,000 to Kuskie, $355,000 to John Stedman, and $355,000 to Susan Stedman during that period. BMO sought recovery under Minnesota’s Uniform Voidable Transactions Act and alleged that the shareholders breached fiduciary duties owed to BMO. BMO also sought recovery of $998,309.44 in compensation paid to Hayes and alleged that Hayes falsified sales, inventory, assets, and financial records to make Capitol Sales appear more solvent and obtain financing.

Hayes sought indemnification and advancement of legal fees from Capitol Sales and the shareholders. Indemnification is reimbursement for certain legal costs or liabilities after the relevant conditions are met; advancement is payment of legal expenses before the underlying proceedings end.

Legal standard

The shareholders and Capitol Sales moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough specific facts to state a legally plausible claim. The court generally must accept well-pleaded factual allegations as true at this stage, but need not accept bare legal conclusions.

BMO’s claims against the shareholders

The court held that the payments to the shareholders were “distributions” under the Minnesota Business Corporation Act because they were transfers by a corporation to its shareholders in connection with their shares. The statute’s definition did not require the payments to be proportional to share ownership or approved by the board.

The court further held that the Business Corporation Act displaced the Minnesota Uniform Voidable Transactions Act for corporate shareholder distributions. Although the Business Corporation Act provides a way to recover improper distributions, that remedy allows recovery by the corporation, its receiver, certain people winding up its affairs, or a director—not by a creditor such as BMO. The court therefore dismissed Counts I through IX, BMO’s fraudulent-transfer claims against the shareholders, with prejudice.

The court explained that Minnesota law recognizes a limited fiduciary duty to corporate creditors when a corporation is insolvent or nearly insolvent. That duty applies to officers and directors who use their positions to favor themselves over other creditors. The court declined to decide at the dismissal stage that this principle could not extend to self-preferencing distributions by officers or directors.

However, the amended complaint did not clearly allege that Kuskie, John Stedman, or Susan Stedman were officers or directors. BMO described them as shareholders and “insiders” and used group allegations and “and/or” language. The court held that shareholder status alone does not create the relevant fiduciary duty under Minnesota law, and that BMO’s allegations were too ambiguous and conclusory to make officer-or-director status plausible.

The court therefore dismissed Count X against the shareholders with prejudice to the extent it was based on shareholder status alone. It dismissed the claim without prejudice to the extent it might be based on the shareholders’ alleged status as officers or directors, allowing BMO to refile if it can make sufficient allegations consistent with the federal pleading rules.

Hayes’s indemnification and advancement claims

The court dismissed Hayes’s indemnification claims under Minnesota Statutes § 181.970 with prejudice. That statute excludes employees and employers governed by the corporate indemnification provisions in Minnesota Statutes § 302A.521. Because Hayes served Capitol Sales as an officer, the court concluded that § 302A.521 governed his claims.

The court did not dismiss Hayes’s indemnification claim against Capitol Sales under § 302A.521. That statute’s indemnification requirements could not be finally assessed while the underlying legal proceedings were ongoing, so the court denied Capitol Sales’ motion to dismiss that claim.

The court dismissed Hayes’s § 302A.521 indemnification claims against the shareholders because he did not adequately plead grounds to disregard Capitol Sales’ separate corporate identity and hold the shareholders liable as the company’s alter egos. His allegations merely repeated legal factors such as inadequate capitalization, failure to follow corporate formalities, inadequate records, and siphoning of funds, without supporting facts. The dismissal of those claims was without prejudice.

For advancement of legal fees under § 302A.521, Hayes had supplied the required written affirmation and undertaking by, at the latest, July 14, 2022. Capitol Sales therefore had 60 days to respond. The court concluded that this period had passed and that the defendants’ only stated defense was no longer available. It denied Capitol Sales’ motion to dismiss Hayes’s advancement claim and granted Hayes the relief he sought. The order also granted the shareholders’ motions to dismiss Hayes’s crossclaims against them.

Disposition

The court granted Susan Stedman’s, Kenneth Kuskie’s, and John Stedman’s motions to dismiss BMO’s amended complaint. It granted each shareholder’s motion to dismiss Hayes’s amended crossclaims. It denied Capitol Sales’ motion to dismiss Hayes’s third-party complaint.

The claims remaining were BMO’s fiduciary-duty claim against Hayes; BMO’s fraudulent-transfer, fraud, conversion, and civil-theft claims against Hayes; and Hayes’s indemnification and advancement claims against Capitol Sales.