A Sixth Circuit opinion demonstrates how a heavily indebted family of farmers could form new corporations to avoid payment of a $15 million judgment, without filing bankruptcy.
Three generations in a family used a complex of closely held corporations to farm 100,000 acres. The family owned 20,000 acres and leased the remainder.
One bad year ruined them financially. Rather than file bankruptcy, they allowed lenders and owners to repossess most of the equipment and land subject to leases and security interests. A distributor of agricultural supplies obtained a $15 million judgment against some of the individuals and some of the corporations.
A mother and her son were not liable on the judgment and had not been officers or owners of corporations that were. They formed new corporations designed to farm some of the land that the family had previously leased. They leased equipment from family corporations that were not liable for the judgment.
To obtain crop insurance and credit to lease the land and equipment, they used the land’s production history.
On learning about the new corporations, the judgment creditor sued the mother and son under the Michigan Uniform Fraudulent Transactions Act, alleging that they created “sham” companies to avoid the $15 million judgment.
The district court granted summary judgment in favor of the mother and son, dismissing the suit. The judgment creditor appealed to the Sixth Circuit, to no avail.
One by one, Circuit Judge Jeffrey S. Sutton rejected the creditor’s theories in a February 10 opinion. Judge Sutton had clerked on the Supreme Court and recently has written several erudite opinions reported by ABI. To read some of those stories, click here and here.
The creditor argued that the equipment and land leases were fraudulent and should be avoided. The theory did not hold water, Judge Sutton said, because the transfers were not made by judgment debtors. In other words, the lessors had to be liable for the debt before the MUFTA would kick in.
Next, the creditor contended that using the land’s production history meant there was a fraudulent transfer.
Rejecting the theory, Judge Sutton said that no one owns crop-production histories. Even if someone could own them, there was no transfer because none of the judgment debtors had transferred the production histories.
Similarly, there was no successor liability, a “narrow” theory under Michigan law.
To establish successor liability, there must be common ownership, Judge Sutton said. The mother and son were neither owners nor managers of the judgment debtors. Even though the son had worked on the family farm since age 14, Judge Sutton said that “the debts of the father do not become debts of the son.”
The creditor’s corporate veil-piercing theory fared no better.
To succeed, the plaintiff must show that the new corporation was a “mere instrumentality” of the debtor, that the new corporation was used to commit a wrong and that the wrong caused the plaintiff to suffer a loss.
The mother and son “created their companies on their own,” Judge Sutton said. In the process, they “respected the corporate formalities.”
Judge Sutton found no evidence that the new companies “failed to follow any statute or regulation or that they misused the actual production histories assigned to them.” Consequently, the new companies were not “used to commit a wrong” against the judgment creditor.
“We have long since left the time when a woman’s property became her husband’s upon marriage . . . . A wife is not liable for the debts of her husband, Mich. Comp. Laws § 557.21, and each is allowed to own separate companies,” Judge Sutton said.
Judge Sutton upheld dismissal. “No injustice arises from allowing the unencumbered members of a family to move on and to start a new family business, even one that involves the same trade and skill set,” he said.
A Sixth Circuit opinion demonstrates how a heavily indebted family of farmers could form new corporations to avoid payment of a $15 million judgment, without filing bankruptcy.
Three generations in a family used a complex of closely held corporations to farm 100,000 acres. The family owned 20,000 acres and leased the remainder.
One bad year ruined them financially. Rather than file bankruptcy, they allowed lenders and owners to repossess most of the equipment and land subject to leases and security interests. A distributor of agricultural supplies obtained a $15 million judgment against some of the individuals and some of the corporations.
A mother and her son were not liable on the judgment and had not been officers or owners of corporations that were. They formed new corporations designed to farm some of the land that the family had previously leased. They leased equipment from family corporations that were not liable for the judgment.
To obtain crop insurance and credit to lease the land and equipment, they used the land’s production history.
On learning about the new corporations, the judgment creditor sued the mother and son under the Michigan Uniform Fraudulent Transactions Act, alleging that they created “sham” companies to avoid the $15 million judgment.
The district court granted summary judgment in favor of the mother and son, dismissing the suit. The judgment creditor appealed to the Sixth Circuit, to no avail.
One by one, Circuit Judge Jeffrey S. Sutton rejected the creditor’s theories in a February 10 opinion. Judge Sutton had clerked on the Supreme Court and recently has written several erudite opinions reported by ABI. To read some of those stories, click here and here.
The creditor argued that the equipment and land leases were fraudulent and should be avoided. The theory did not hold water, Judge Sutton said, because the transfers were not made by judgment debtors. In other words, the lessors had to be liable for the debt before the MUFTA would kick in.