By Kurt R. Mattson, J.D. LL.M., M.L.I.S.
The Minnesota Supreme Court recently held that the lower courts erred in concluding that a creditor’s claims should have been brought by a receiver because the receiver did not have the power under Minnesota Statute sections 576.29(1)(b)(1) and 576.21(h) to bring a veil-piercing claim. Further, the Court held that the creditor’s claims were not barred as an impermissible collateral attack or by res judicata.
In Aaron Carlson Corp. v. Cohen, the Minnesota Supreme Court held that because state receivership statutes do not provide authority for a receiver to bring claims that do not “relate to” receivership property, a receiver may not bring claims to pierce the corporate veil against shareholders of the corporation whose assets the receiver controls if the district court does not grant such authority. In addition, the Court held that while a receiver may not bring a veil-piercing claim in the receivership action, a subsequent action to recover damages under a veil-piercing theory was not barred by collateral attack or res judicata.
Justice Anne McKeig, writing for the majority of the Court, stated that the case presented a question of first impression: whether a receiver may bring a piercing-the-corporate-veil claim against the shareholders of the corporate entity that the receiver controls.
The case had its origins with the dissolution of LSI, a Minnesota-based subsidiary of HNI Corporation. Defendants Neal Cohen and Darren Chaffee, acting through a series of corporations and finance companies, ended up with millions of dollars of LSI’s debt. After purchasing LSI through LSI Holdings in 2013, the two personally provided “support collateral” for LSI to take out additional loans, but they did not directly put any equity into LSI. Cohen owned CoBe Capital, an LLC and holding company with shares in only CoBe Management. LSI paid management fees to CoBe Management during 2013 and 2014, and Cohen was a “manager” of CoBe Management. Chaffee and Cohen assisted with decision-making at LSI, and CoBe Management and Chaffee helped arranged financing for LSI. Chaffee and Cohen, through another company, purchased those loans from the financier in October 2015.
Chaffee and Cohen contended that they eventually decided that LSI would not be profitable and became concerned about preserving the collateral on the loans. In 2016, they sued LSI, alleging that it owed them $5,044,797.54. At the same time, the parties stipulated to the appointment of a receiver, which the district court ordered.
Aaron Carlson Corporation (“ACC”)—one of more than 160 creditors of the now-defunct LSI Corporation—was informed of the appointment order by LSI’s counsel. ACC then moved to intervene in the receivership action and to enjoin the receivership appointment. The court denied that motion, holding that ACC was an unsecured creditor of LSI and therefore did not have the power to prevent the appointment of a receiver. The court also found that ACC’s interests would be “adequately represented by the receiver.” The receiver sold all LSI’s assets and filed its final report. The district court approved that report and terminated the receivership.
In 2017, ACC brought the instant action, alleging: (1) insufficient capitalization for LSI; (2) a failure to observe corporate formalities; and (3) that Defendants “exercised complete domination of LSI in respect to the transactions by and between LSI and [Aaron Carlson Corp.] and knew of LSI’s insolvency at the time of Aaron Carlson Corp.’s transactions.” Ultimately, ACC argued that Defendants treated the corporation as an alter ego and requested that the court pierce the corporate veil and hold Defendants liable for LSI’s debts to ACC. It sought to recover from Cohen, Chaffee, and CoBe Equities.
At trial, the court granted summary judgment to Defendants, finding that ACC’s claim was an impermissible collateral attack on the court’s order in the receivership action, and that the claim was barred by res judicata. The Minnesota Court of Appeals affirmed, concluding that “the district court did not err by concluding that the receiver had the power to assert [Aaron Carlson Corp.’s] veil-piercing claim.” Because the veil-piercing claim could have been brought in the receivership action, the Court of Appeals reasoned, ACC was barred from bringing it in this subsequent action as an impermissible collateral attack. The court did not address whether the action was barred by res judicata. The Supreme Court thereafter granted review on the question of the limits of a general receiver’s powers.
Before the Minnesota Supreme Court, ACC argued that the Court of Appeals erred in affirming the district court because the receiver did not have the power to bring veil-piercing claims, and thus, its claims against the shareholders didn’t represent an impermissible collateral attack on the receivership and were not barred by res judicata.
The Supreme Court’s Analysis of the Receivership Statute
Justice McKeig noted in her majority opinion that because the district court granted the receiver all the powers authorized by the statute, she would start her analysis with the law itself. The parties agreed that the district court appointed a “general receiver.” Quoting Minnesota Statute section 576.21(h), Justice McKeig explained that a “general receivership” is “a receivership over all or substantially all of the nonexempt property of a respondent for the purpose of liquidation and distribution to creditors and other parties in interest.” The statute empowers the receiver to “assert . . . claims . . . that relate to receivership property.” “Receivership property” in a general receivership is defined as “all or substantially all of the nonexempt property of the respondent.”
Justice McKeig then declared that if a veil-piercing claim against LSI insiders “relates to” LSI’s property, then the receiver had the power to bring such a suit. The Minnesota Supreme Court held that ACC’s veil-piercing claims did “relate to” receivership property for two reasons. First, the claims were those that LSI could not have brought itself. The veil-piercing claim is a creditors’ remedy that does not include LSI as a party—either as a defendant or plaintiff. Second, the Court found that the veil-piercing claims sought to recover property that had always belonged to Cohen and Chaffee.
The purpose of the receiver in this case was to control, liquidate, and distribute respondent LSI’s property to creditors. Even though the veil-piercing claim “relates to” the existence of the corporate entity itself, it does not pursue property that ever belonged to LSI. Expecting the receiver to bring a claim that neither belongs to LSI nor seeks to recover LSI property would stretch the statutory phrase “relating to receivership property” too far.
In addressing Defendants’ arguments, Justice McKeig explained that only one subsection of 576.29 grants a receiver power to pursue claims without limiting that power to certain types of claims. This subsection empowers the receiver to “maintain” a cause of action or suit. The term “maintain,” Justice McKeig explained, “means ‘to keep in an existing state,’ to ‘sustain against opposition,’ or ‘to continue or persevere in.’” She went on to state that the use of the word indicated that a receiver’s unrestricted power to participate in cases or causes of action is limited to cases that were already pending, unless the case “relates to receivership property.” In this case, the veil-piercing claim was not initiated until after the receivership ended. As a result, there was no such claim for the receiver to “maintain.”
The Supreme Court held that the receiver did not have the power to bring a veil-piercing claim because, even though the receiver may bring some claims that belong to creditors, ACC’s attempt to pierce the corporate veil was not sufficiently “related to receivership property.”
Were the Veil-Piercing Claims Barred?
Having determined that the veil-piercing claims in this case could not have been brought by the receiver, the Supreme Court turned its analysis to whether ACC’s claims were barred as an impermissible collateral attack or by res judicata.
A collateral attack, Justice McKeig wrote, is “[a]n attack on a judgment in a proceeding other than a direct appeal.” Where a direct attack on a judgment “attempt[s] to annul, amend, reverse, or vacate a judgment or to declare it void in an appropriate proceeding instituted initially and primarily for that purpose,” an impermissible collateral attack similarly attacks the validity of a judgment, but the attack “is purely secondary or incidental.”
The Minnesota Supreme Court held that because ACC’s claims against the respondents did not “attack” the order in the receivership proceeding either primarily or incidentally, bringing them in a separate proceeding was not a collateral attack on the receivership order.
The Supreme Court concluded that the receiver could not have brought an action to pierce the corporate veil against respondents in the receivership action. Because ACC’s claims could not have been brought in the earlier suit, the claims were therefore not barred by the doctrine of res judicata.
The Supreme Court reversed the decision of the Court of Appeals and remanded the case to the district court for further proceedings on ACC’s veil-piercing claims.
Piercing the corporate veil is a creditors’ remedy. Here, despite the fact that the claim relates to the existence of the corporate entity itself, it did not pursue property that ever belonged to the company in receivership.
 Aaron Carlson Corp. v. Cohen, 933 N.W.2d 63, 72–73 (Minn. 2019).
 Id. at 64.
 Id. at 65.
 Id. at 66.
 Id. at 67.
 Id. at 69.
 Id. at 68 (quoting Minn. Stat. § 576.29 subdiv. 1(a)(3) (2016)).
 Id at 69 (quoting Minn. Stat. § 576.21(r)(1) (2012)).
 Id. (citing Minn. Stat. §§ 576.21(h), (p) (2012)).
 Id. at 70.
 Id. (citing Minn. Stat. § 576.29, subdiv. 1(b)(1) (2016)).
 Id. (citing Merriam-Webster’s Collegiate Dictionary 700 (10th ed. 1993)).
 Id. at 71.
 Id. (citing Collateral Attack, Black’s Law Dictionary (10th ed. 2014)).
 Id. (quoting Stumer v. Hibbing Gen. Hosp., 242 Minn. 371, 65 N.W.2d 609, 612 (1954)).
 Id. at 72.
 Id. at 72–73.