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TCI Business Capital, Inc. v. Five Star American Die Casting, LLC

Court of Appeals of Minnesota

January 23, 2017

TCI Business Capital, Inc., Appellant,
v.
Five Star American Die Casting, LLC, et al., Defendants, Brian T. Flynn, Respondent.

         Dakota County District Court File No. 19HA-CV-14-2708

         Affirmed in part, reversed in part, and remanded

          Sonia Miller-Van Oort, Robin M. Wolpert, Sapientia Law Group, PLLC, Minneapolis, Minnesota (for appellant)

          Carl E. Christensen, Christensen Law Office PLLC, Minneapolis, Minnesota (for respondent)

          Considered and decided by Johnson, Presiding Judge; Reyes, Judge; and Tracy M. Smith, Judge.

         SYLLABUS

         The district court erred by granting summary judgment to respondent on appellant's claims of fraudulent misrepresentation and breach of fiduciary duty. Appellant has established respondent's liability on those two claims. The amount of appellant's damages is to be determined by a factfinder at trial.

          OPINION

          JOHNSON, Judge

         An officer of a corporation falsified company records to show that a customer's debt to the corporation was approximately $250, 000 less than what the customer actually owed. The corporation was unaware of the inaccuracy of its records when it entered into a settlement agreement with the customer that resolved the debt for less than what was owed and less than what the corporation believed was owed. The corporation later discovered the false records created by the officer, who since had left his employment. The corporation sued the former officer for conversion, civil theft, fraudulent misrepresentation, and breach of fiduciary duty. The district court denied the corporation's motion for summary judgment and granted summary judgment in favor of the former officer on all four claims. We affirm in part with respect to the claims of conversion and civil theft, reverse in part with respect to the claims of fraudulent misrepresentation and breach of fiduciary duty, and remand for trial on the issue of damages with respect to the latter two claims.

         FACTS

         TCI Business Capital, Inc., is a commercial factoring company. It provides financing to companies and assists in the collection of accounts receivable. From September 2010 to March 2013, Brian T. Flynn was employed by TCI as its chief risk officer. In that capacity, Flynn oversaw the credit, collections, legal, and external audit functions of TCI. Flynn reported to TCI's CEO.

         During Flynn's employment, Five Star American Die Casting, LLC, was a customer of TCI. In June 2010, TCI and Five Star entered into a factoring agreement in which TCI agreed to advance funds to Five Star while seeking payments from Five Star's debtors, and Five Star agreed to pay a fee to TCI and to remain responsible for accounts that were uncollectible. Five Star's owner provided TCI with a personal guaranty of Five Star's obligations. TCI provided funding to Five Star for nearly two years. In March 2012, when Five Star owed TCI $342, 998.49, TCI exercised its contractual rights by seizing Five Star's equipment, in which TCI had a security interest. Flynn assumed responsibility for overseeing the liquidation of Five Star's equipment.

         By September 2012, Five Star's debt to TCI had increased to $446, 879.27. TCI's CEO directed Flynn to arrange for Five Star's equipment to be sold at an auction. Flynn believed that TCI could obtain greater proceeds by selling Five Star's equipment in individual sales rather than at a single auction. Without discussing the matter with anyone at TCI, Flynn unilaterally decided to not organize an auction but, rather, to sell Five Star's equipment piece by piece. He concealed his plan from others and informed TCI management and other co-workers that he was working to arrange an auction and that an auction had been scheduled.

         On December 17, 2012, Flynn credited Five Star's account by $250, 378.40. He represented to TCI management and other co-workers that this amount was the proceeds of an auction of Five Star's equipment. In reality, no auction was held. Rather, Flynn created a somewhat elaborate series of false transactions involving another TCI customer, which we will call Company X. Flynn created false invoices, purchasing orders, packing lists, and bills of lading, which suggested that Company X had sent products worth $313, 048 to a retailer. Flynn sent documents to Company X to indicate that TCI would purchase the receivable from Company X. Flynn directed TCI's finance department to wire $250, 378.40 to an agent of Company X, which purportedly represented the amount for which TCI would purchase the receivable. A day later, Flynn contacted Company X's agent and said that TCI's treasury department had made a mistake and that the agent should wire the money back to TCI, with a notation referring to Flynn and Five Star, and the agent did so. Flynn told employees in TCI's treasury department that the funds received from Company X were the proceeds of the auction of Five Star's equipment. TCI treasury employees received a wire transfer of $250, 378.40 and applied the funds to Five Star's account. The credit to Five Star's account appeared to reduce the amount of Five Star's debt to TCI in TCI's accounting system. At the same time, TCI's records showed that Company X owed the same amount to TCI, but Flynn falsified Company X's monthly reports so that Company X would be unaware that TCI was recognizing such a debt. Flynn testified candidly in deposition to the details of his scheme. He testified that he devised and implemented the scheme because his job was at risk due to the company's concerns about his performance and that he wanted to exceed expectations with respect to the Five Star account in order to improve the company's perception of his performance and thereby increase the probability that he would keep his job.

         TCI terminated Flynn's employment on March 18, 2013, before he was able to complete his scheme by selling Five Star's equipment piece by piece and adjusting TCI's accounting records. TCI terminated him for reasons that are unrelated to Five Star or the underlying facts of this case. In fact, when it decided to terminate Flynn, TCI was unaware of Flynn's scheme involving Five Star, Company X, and the retailer. Furthermore, upon being terminated, Flynn did not advise TCI of the scheme. TCI provided Flynn with $35, 000 in severance pay in connection with his termination.

         TCI later engaged in settlement negotiations with Five Star concerning Five Star's debt. TCI's accounting records showed that Five Star owed TCI $213, 238.01. Because of the false $250, 378.40 credit, Five Star's debt to TCI actually was $468, 616.41. In early May 2013, TCI and Five Star entered into a settlement agreement by which Five Star agreed to pay $84, 262.50 to resolve all claims TCI had against Five Star and its owner.

         TCI discovered Flynn's scheme in June 2013. Thereafter TCI adjusted Company X's account to reflect that Company X did not owe $250, 378.40 to TCI. The record does not reflect the ultimate disposition of the equipment that TCI seized from Five Star pursuant to its security interest.

         In September 2014, TCI commenced this action against Five Star, its owner, and Flynn. TCI later voluntarily dismissed its claims against Five Star and its owner. TCI's amended complaint alleged four claims against Flynn: (1) conversion, (2) civil theft, (3) fraudulent misrepresentation, and (4) breach of fiduciary duty. After discovery, TCI moved for summary judgment in its favor on all four claims. In August 2015, the district court issued an order in which it denied TCI's motion for summary judgment and granted summary judgment in favor of Flynn on all four of TCI's claims. TCI appeals.

         ISSUES

         I. Did the district court err in its ruling on TCI's claim of conversion?

         II. Did the district court err in its ruling on TCI's statutory claim of civil theft?

         III. Did the district court err in its ruling on TCI's claim of fraudulent misrepresentation?

         IV. Did the district court err in its ruling on TCI's claim of ...


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