Case Credit Corporation, a Delaware corporation, Respondent, vs. Magnum Resources, Inc., a Delaware corporation, et al., Defendants (A03-1735), Power Equipment Corporation, et al., Appellants (), Hydra-Mac, Inc., et al., Appellants (A03-1735).

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2002).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A03-1734

A03-1735

 

 

Case Credit Corporation,

a Delaware corporation,

Respondent,

 

vs.

 

Magnum Resources, Inc.,

a Delaware corporation, et al.,

Defendants (A03-1735),

Power Equipment Corporation, et al.,

Appellants (A03-1734),

Hydra-Mac, Inc., et al.,

Appellants (A03-1735).

 

 

Filed September 13, 2004

Affirmed

Anderson, Judge

 

Pennington County District Court

File No. C5-02-60

 

Michael C. Mahoney, Julianne L. Emerson, Mahoney & Emerson, Ltd., 415 Indian Mound East, Wayzata, MN  55391 (for appellants)

 

Daniel A. Haws, David H. Grounds, Murnane, Conlin, White & Brandt, 444 Cedar Street, Suite 1800, St. Paul, MN  55101 (for respondent)

 

            Considered and decided by Anderson, Presiding Judge; Peterson, Judge; and Parker, Judge.*

 

U N P U B L I S H E D  O P I N I O N

 

G. BARRY ANDERSON, Judge

 

            Respondent brought an action against Power Equipment Corporation and its officer, Jerome Kutil, for fraudulent transfer and another action against the remainder of the appellants for declaratory judgment.[1]  Kutil and Power Equipment Corporation failed to raise the defense of insufficiency of service of process in their joint answer in the fraudulent transfer action.  The other appellants did raise this defense in the companion action but subsequently moved to dismiss the case for failure to state a claim rather than insufficiency of service of process.  After three of the appellants filed for bankruptcy and the automatic stay was lifted, the district court held a hearing, at which none of the appellants appeared.  The district court granted default judgment in favor of respondent.  We affirm.

FACTS

This is a debt collection action involving multiple parties, multiple and interconnected corporations and a factual and procedural posture that is, at best, confusing. 

Appellant Magnum Resources, Inc. (MRI) is the parent corporation of appellant Hydra-Mac International, Inc. (HMII) and perhaps of D & E Machining, Inc. (D & E) as well.  The ownership of appellants Power Equipment Corporation (PEC), Hydra-Mac, Inc. (HMI), Hydra-Mac Holding Company (HMHC), and Power Equipment LLC (Power LLC), is not clear; what is clear is that they are very closely connected with MRI, HMII, and D & E.  A number of the corporations, including PEC, operate out of one building, owned by either HMI or MRI.  Kutil is in charge of all of the corporations operating in that building; his title or titles are unclear but appear to include CEO, president, and member of the board. 

            In 1998, MRI and HMII each obtained loans from respondent Case Credit Corporation (Case Credit) by pledging their inventories and having the other corporation and D & E guarantee the loans; the loans were authorized on behalf of MRI, HMII, and D & E by John Luoma, then-president of all three companies.  When MRI, HMII, and D & E defaulted on these loans and refused to make good on the guarantees, Case Credit obtained summary judgment in its favor in Ramsey County.  

Case Credit then filed suit in Ramsey County against MRI, HMII, PEC, and Kutil alleging that all four had fraudulently transferred the property of MRI and HMII to PEC with the intent to defraud Case Credit.  This case was subsequently transferred to Pennington County.  In 2002, Case Credit filed a declaratory judgment action in Pennington County against MRI, HMI, M & H, PEC, and Power LLC, among others, arguing that MRI owned the real property in which all manufacturing appears to take place and that Case Credit had the senior lien on the property and thus was entitled to collect on its earlier Ramsey County judgment. 

On April 25, 2001, counsel (also an appellant) for appellants, Mahoney and Hagberg (M & H)[2] obtained a default judgment in Hennepin County against MRI, HMI, D & E, and PEC for legal fees in the amount of $375,156.84.  Since 1992, shares of PEC and D & E owned by MRI had been pledged to M & H as security for MRI's legal bills.  On July 21, 2001, M & H foreclosed on the shares and entered into an agreement with MRI and Power, LLC, that Power, LLC would purchase the shares from MRI with the proceeds to go to M & H to pay for MRI's debts.  The purchase price was $425,000.      M & H covenanted not to execute its judgment against the companies so long as they did not default.  

            In Pennington County, MRI, HMI, M & H, PEC, and Power LLC filed a joint answer to the declaratory judgment complaint that alleged, inter alia, insufficiency of process.  In February 2002, Case Credit amended its complaint in the fraudulent transfer action to name PEC and Kutil as the only defendants in that action but continued to allege a fraudulent transfer, conversion of D & E's property, and conversion of the rent and property of HMII and MRI while adding a claim for breach of contract against PEC.  In July 2002, PEC and Kutil filed a joint answer to the fraudulent transfer action alleging 10 affirmative defenses, none of which included insufficiency of process; that answer was filed by, among others, Peder K. Davisson from M & H. 

            Some time after the original loans were made, D & E, either with Kutil's knowledge or at his direction, transferred inventory that it owned to PEC, despite the fact that Case Credit had demanded this inventory in a previous garnishment action.  Prior to October 2000, HMII had a lease with MRI for the real property in Pennington County, Minnesota, that required HMII to pay MRI $12,183 per month for rent.  Since October 16, 2000, PEC has had the exclusive use and possession of this real property but has failed to make any rent payments or purchase the property.  HMII or MRI provided PEC with all of the goodwill and other necessary property, tangible and intangible, to operate the business without receiving any compensation.  At all of the times in question, Kutil was in charge of D & E, HMII, MRI, and PEC. 

            At some point, Case Credit bought the senior lien on the real property at issue, foreclosed on the property, and successfully bid on the property.  HMI, apparently unsuccessfully, attempted to redeem. 

            In September 2002, M & H, as an appellant in the declaratory judgment action, moved to dismiss on the grounds that the suit was an impermissible collateral attack on Case Credit's earlier Ramsey County judgment and that Case Credit's foreclosure conclusively established that HMI owns the real property.  This motion was denied.  Since the declaratory judgment action was initiated, appellants have exhibited an unwillingness to engage in discovery; appellants have refused to answer interrogatories and questions in depositions and have been sanctioned (and reminded that they had been sanctioned when all of the sanctions were not paid) for some of their actions. 

On June 5, 2002, the district court issued a scheduling order; it expressly set a date of March 11, 2003, for the pretrial/settlement conference.  This order was sent to Peder K. Davisson.  After appellants failed to appear for the March 11, 2003 hearing, the district court awarded default judgment to Case Credit.  This order was subsequently stayed to comply with Minn. R. Gen. Prac. 125.  Appellants then asked for the judgment to be vacated arguing, inter alia, that they had mistakenly believed, based on Case Credit's representations, that the hearing had been continued for at least a month.  The district court granted appellants' motion and vacated the order. 

Sometime in or around May 2003, HMI, PEC, and Power, LLC filed for bankruptcy.  On June 12, 2003, the district court filed an order staying the proceedings and rescheduling the pretrial/settlement hearing for September 8, 2003; one copy of a notice of the filing of this order was sent to Michael C. Mahoney as counsel on the fraudulent transfer action and one copy to Peder K. Davisson as counsel on the declaratory judgment action.  At the September 3, 2003 bankruptcy hearing to lift the automatic stay, the bankruptcy judge stated, "I am granting the requested motion by Case Credit Corporation for relief from the automatic stay in the case of Power Equipment Company, LLC, Hydra-Mac, Inc., and in the case of Power Equipment Corp."[3]

On September 8, 2003, the pretrial/settlement hearing was held; appellants did not appear.  Based on counsel for Case Credit's representation that the bankruptcy judge had orally lifted the stay, the district court reinstated the default judgment granted on March 14, 2003, in favor of Case Credit.  On September 9, 2003, the bankruptcy court entered the written order lifting the stay, previously orally announced on September 3.[4]  This appeal followed.

D E C I S I O N

 

1.  Sufficiency of Service

Appellants in the declaratory judgment action and Kutil and PEC in the fraudulent transfer action challenge sufficiency of service of process before this court.  The defense that there was insufficient service of process "is waived (1) if omitted from a motion in the circumstances described in Rule 12.07, or (2) if it is neither made by motion pursuant to this rule nor included in a responsive pleading or an amendment thereof."  Minn. R. Civ. P. 12.08(a).  The supreme court has ruled that the defense of insufficiency of service of process may, in addition to rule 12.08, be waived by implication.  Patterson v. Wu Family Corp., 608 N.W.2d 863, 868 (Minn. 2000).  "[A] party who takes or consents to any step in a proceeding which assumes that jurisdiction exists or continues" waives the defense of insufficiency of service of process.  Galbreath v. Coleman, 596 N.W.2d 689, 691 (Minn. App. 1999) (quotation omitted).  A party that takes "some affirmative step" waives the defense; examples of actions constituting such a waiver "include (1) obtaining extensions of time within which to move or answer; (2) filing a motion to compel
arbitration; (3) appealing a denial of a motion; and (4) obtaining court approval of a bond."  Igo v. Chernin, 540 N.W.2d 913, 914 (Minn. App. 1995) (quotation omitted).

            In Patterson, the supreme court stated, "Where the party protected by a procedural rule consciously chooses to not assert the rule-based defense in an effort to avoid a determination of the issue, however, the rules do not serve their protective function," and thus waives the procedural protection.  608 N.W.2d at 867-68.  The supreme court continued that merely "participating in litigation through discovery and responding to an opposing party's motions are not sufficient to waive the defense," but "moving for a decision on the merits of part of a claim invites the court to exercise its authority on behalf of the moving party and implicitly acquiesces to the court's exercise of jurisdiction over that party."  Id. at 869.  Therefore, the supreme court "conclude[d] that once a defendant affirmatively invokes the court's power to determine the merits of all or part of a claim, the defendant cannot then deny the court's jurisdiction over him based on defective service."  Id.

The appellants in the declaratory judgment action affirmatively invoked the district court's jurisdiction by making a motion to dismiss and thus waived the defense of insufficient service of process.  While participating in discovery and responding to Case Credit's motion for partial summary judgment does not constitute a waiver, see id. (stating that merely participating in litigation and responding to motions is insufficient to find a waiver), we conclude that, just as a motion to compel arbitration constitutes a waiver, moving to dismiss constitutes a waiver as well because both motions seek dismissal of the action.  See Igo, 540 N.W.2d at 914 (stating that moving to compel arbitration constitutes a waiver).  In making the motion, appellants asked the district court to determine whether the complaint, if true, alleged sufficient facts to prove their claims; thus, it asked for a decision on the merits, and the motion thus implicitly acknowledged the district court's jurisdiction.

As to the fraudulent transfer action, Case Credit correctly points out that neither the appellants' joint answer nor any motion filed in the district court regarding that action alleged insufficiency of service of process.  Therefore, appellants Kutil and PEC waived this defense.  See Minn. R. Civ. P. 12.08(a) (requiring that the defense of insufficiency of service of process be raised in a motion or a pleading).

2.  Automatic Stay

In light of the decision from the bankruptcy appellate panel for the Eighth Circuit concluding that the stay had been lifted prior to the September 8 pretrial/settlement hearing, we conclude that there was not an automatic stay in place when the September 8 hearing was held and that the district court had jurisdiction to hold the hearing and render a decision.

3.  Default judgment

            Appellants argue that the district court erred when it reinstated the default judgment.  Rule 16.06 states that a party who fails to appear for a pre-trial/settlement conference may be subjected to any of the sanctions described in rule 37.02.  Minn. R. Civ. P. 16.06.  Rule 37.02 permits the district court to grant a default judgment.  Minn. R. Civ. P. 37.02(b)(3).  The standard of review applied by this court is that we reverse only when the district court abused its discretion.  See Petrich v. Dyke, 419 N.W.2d 833, 835 (Minn. App. 1988) (stating that review of a denial of a motion to vacate a default judgment is limited to an abuse of discretion standard).  "To . . . vacat[e] the default judgment, appellant must show (1) a reasonable defense on the merits; (2) a reasonable excuse for his failure or neglect to act; (3) that he has acted with due diligence after notice of entry of default judgment; and (4) that no substantial prejudice will result to [respondent]."  Id. 

            In Breza v. Schmitz, a pro se plaintiff refused to answer interrogatories or appear for a deposition.  331 Minn. 236, 236, 248 N.W.2d 921, 922 (1976).  The district court dismissed the case under rule 37.02, and the plaintiff, apparently, filed an appeal without moving to vacate the judgment.  Id.  The supreme court reviewed the record and concluded that the plaintiff was attempting to delay the trial and therefore affirmed the district court.  Id. at 237, 248 N.W.2d at 922. 

            Here, appellants have been sanctioned for refusing to comply with discovery orders, reminded of the sanctions when they neglected to pay the full sanction amount, and failed to appear at two pretrial/settlement conferences.  Appellants claim that they had no notice of either conference.  But the district court found, and the record reflects, that notice of the order setting September 8, 2003, as the date of the hearing was sent to Michael Mahoney and Peder K. Davisson.  Although appellants claimed in an affidavit that Davisson was no longer working on the case, Mahoney was and is.  On this record, the district court did not abuse its discretion in concluding that appellants had notice of the hearing.

Nor does the four-part Petrich test provide a vehicle for reversal of the default judgment granted by the district court.  Appellants failed to file a motion to vacate the default judgment, do not offer a reason for nonattendance at the summary judgment hearing (other than lack of notice), and make no attempt to argue that Case Credit will suffer no prejudice if the default judgment is vacated.  On this record, we cannot say the district court abused its discretion in granting a default judgment.

4.  Kutil's liability

            The district court held that Kutil was personally liable for converting Case Credit's property.  Kutil argues that he is protected by the business judgment rule.  The district court's determination is a question of law and is reviewed de novo.  Modrow v. JP Foodservice, Inc., 656 N.W.2d 389, 393 (Minn. 2003).  Although a corporate officer is normally "not liable to [the corporation's] creditors for corporate debts," Paynesville Farmers Union Oil Co. v. Ever Ready Oil Co., 379 N.W.2d 186, 188 (Minn. App. 1985), review denied (Minn. March 14, 1986), an officer can be held personally liable for corporate torts, especially conversion, "if the officer actually participated or acquiesced in [the conversion]."  State by Humphrey v. Alpine Air Prods., Inc., 490 N.W.2d 888, 897-98 (Minn. App. 1992), aff'd 500 N.W.2d 798 (Minn. 1993); Universal Lending Corp. v. Wirth Cos. 392 N.W.2d 322, 326 (Minn. App. 1986); Holzer v. Tonka Bay Yachts & Marine Sales, Inc., 386 N.W.2d 285, 287 (Minn. App. 1986), review denied (Minn. June 30, 1986).

Appellants' argument that Kutil is protected by the business judgment rule fails.  The business judgment rule is irrelevant to the question of whether Kutil is liable for conversion because that rule is designed to protect officers and directors "against shareholder claims that . . . unprofitable business decisions" were made.  Janssen v. Best & Flanagan, 662 N.W.2d 876, 882 (Minn. 2003).  That is far different from the circumstances here; the claim here is that Kutil participated in and helped commit an intentional tort.

There is no disagreement with the district court's conclusion in its default judgment that Kutil participated in the sale of the property knowing that Case Credit had an interest in the property.  Therefore, assuming that Kutil converted Case Credit's property, Kutil is personally liable.

Kutil argues that this is not conversion, even though he does not contest the finding that PEC converted Case Credit's property.  Kutil argues in his reply brief that there was no conversion because Case Credit merely had a lien on the inventory.  He cites no authority for this proposition, and, indeed, the law does not support his argument.  In Wangen v. Swanson Meats, Inc., this court concluded that, when a creditor had a security interest in the debtor's inventory, a third-party purchaser of the inventory committed conversion by selling the inventory and retaining the proceeds of the sale.  541 N.W.2d 1, 4 (Minn. App. 1995), review denied (Minn. Jan. 25, 1996).  Kutil makes no argument to distinguish this case or any other case holding that conversion occurs where property is sold despite a creditor's lien on the property; Kutil merely argues that a lien on inventory is per se insufficient to constitute a sufficient ownership interest for conversion to occur.  The district court did not err in concluding that Kutil was personally liable for conversion of Case Credit's property.

5.  Satisfaction

Appellants also argue that the district court abused its discretion in concluding that M & H's judgment has been satisfied.  We disagree.

In First Bank National Ass'n. v. Northside Mercury Sales & Service, Inc., a law firm placed two liens on its client's property to secure its attorney fees.  458 N.W.2d 424, 426 (Minn. App. 1990), review denied (Minn. Sept. 28, 1990).  The law firm then "elected to foreclose on the mortgages which secured its attorney fees."  Id. at 428.  This court concluded that, because the value of the property exceeded the amount of attorney fees, the law firm's lien for attorney fees was satisfied.  Id.

Here, M & H obtained a judgment against its clients.  M & H then foreclosed on stock owned by MRI, stock that was worth more than the firm's judgment, that had been pledged as collateral to secure payment of the M & H judgment.  This is indistinguishable from First Bank National Ass'n; in both cases, law firms foreclosed on non-cash property with a value exceeding the secured debt to obtain payment for attorney fees.  See id. (stating that the law firm foreclosed on a piece of property in order to be compensated for its attorney fees).  The district court did not abuse its discretion in concluding that the M & H judgment was satisfied.

6.  Mootness

Case Credit argues that the issue concerning ownership of the real property is moot because Case Credit foreclosed on the senior lien and maintains that appellants have not redeemed.   

The district court did not explicitly adjudicate the ownership of the property but implicitly concluded that MRI is the owner of the real property.  An issue is not moot if this court may order effective relief.  Hous. and Redevelopment Auth. ex rel. City of Richfield v. Walser Auto Sales, Inc., 641 N.W.2d 885, 888 (Minn. 2002).  The court may grant effective relief in this case because all possible owners of the real property are parties to this case.  Thus, this issue is not moot.

            Affirmed.

* Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.

 

[1] Appellants refer to the fraudulent transfer action as the "Kutil Action" and the declaratory judgment action as the "Magnum Action." 

[2] The firm has since changed its name to Mahoney & Emerson.

[3] Although the bankruptcy court transcript is included in appellants' appendices, it does not appear to be part of the record.

[4] There is some dispute in the record about when the automatic stay was lifted but the bankruptcy appellate panel for the Eighth Circuit concluded the stay was lifted effective September 3.