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

Citations: 890 N.W.2d 423; 2017 WL 279571; 2017 Minn. App. LEXIS 13Docket: A16-741

Court: Court of Appeals of Minnesota; January 22, 2017; Minnesota; State Appellate Court

Original Court Document: View Document

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The Minnesota Court of Appeals affirmed in part, reversed in part, and remanded the case involving TCI Business Capital, Inc. and Brian T. Flynn. The district court erroneously granted summary judgment to Flynn regarding TCI's claims of fraudulent misrepresentation and breach of fiduciary duty. TCI demonstrated Flynn's liability for these claims, with damages to be determined at trial.

Flynn, as TCI's chief risk officer, falsified records to indicate that Five Star American Die Casting, LLC owed approximately $250,000 less than the actual debt. This inaccuracy led TCI to enter into a settlement for less than the owed amount. After discovering the falsified records following Flynn's departure, TCI sued him for conversion, civil theft, fraudulent misrepresentation, and breach of fiduciary duty. The district court granted summary judgment in favor of Flynn on all claims except conversion and civil theft.

TCI, as a commercial factoring company, had a factoring agreement with Five Star, which involved advancing funds and collecting debts. Flynn oversaw the liquidation of Five Star’s equipment after TCI seized it due to outstanding debt. Instead of holding an auction as directed, Flynn sold the equipment individually without informing TCI management, falsely reporting auction proceeds to them.

Flynn created fraudulent financial documents to falsely indicate that Company X had shipped products worth $313,048 to a retailer. He arranged for TCI to wire $250,378.40 to Company X's agent, supposedly for a receivable purchase, but later instructed the agent to return the funds, citing a mistake. Flynn misled TCI’s treasury staff by claiming the funds were from an auction of Five Star’s equipment, which allowed him to apply the funds to Five Star's account, inaccurately reducing its debt in TCI’s records. 

Despite TCI’s records showing a debt from Company X to TCI, Flynn falsified reports to conceal this from Company X. He admitted during deposition that he orchestrated this scheme to secure his job due to performance concerns. TCI terminated Flynn on March 18, 2013, unaware of his fraudulent activities, and provided him with $35,000 in severance. 

Subsequently, TCI discovered the scheme, which inflated Five Star's debt from $213,238.01 to $468,616.41 due to the false credit. TCI entered into a settlement with Five Star for $84,262.50 in May 2013. In September 2014, TCI sued Flynn and, after dismissing claims against Five Star, alleged conversion, civil theft, fraudulent misrepresentation, and breach of fiduciary duty against Flynn. The district court granted summary judgment in favor of Flynn on all claims, leading TCI to appeal, raising questions about the court's rulings on each of the four claims.

TCI argues that the district court incorrectly denied its summary judgment motion and granted summary judgment in favor of Flynn. Under Minnesota law, a summary judgment motion must be granted if the evidence shows no genuine issue of material fact and that a party is entitled to judgment as a matter of law. A genuine issue exists if a rational trier of fact could find for the nonmoving party. The court reviews legal conclusions on summary judgment de novo, favoring the evidence for the party opposing the motion.

Regarding the conversion claim, TCI asserts that the district court erred by ruling that Flynn did not willfully interfere with TCI's property. The tort of conversion is defined as an act of interference without lawful justification, depriving the rightful owner of use and possession. TCI claims that evidence shows Flynn caused money to be transferred and manipulated accounting entries, which interfered with TCI’s property rights. However, the court highlighted that TCI's argument relies on the characterization of money in an intangible form as property, a position lacking precedent in Minnesota law. Minnesota Supreme Court definitions of conversion traditionally pertain to tangible personal property, and only limited precedential opinions address conversion in terms of intangible money transfers.

The plaintiff’s claim of conversion was rejected based on the understanding that money qualifies for conversion only when it is identifiable and kept separate from other funds. Specifically, conversion is applicable to tangible money forms, such as specific rolls of coins or stacks of bills. The court did not need to address TCI's first argument regarding interference with property interests since TCI could not succeed on its second argument about Flynn's intent. The necessary intent for conversion liability requires merely an intention to act with the chattel that results in dispossession, not an intention to commit a known trespass or conversion. The evidence showed that Flynn acted with the intent to return TCI’s funds and reverse accounting entries, which did not permanently deprive TCI of its property. Therefore, the intent required for conversion was absent, leading to the affirmation of the district court's ruling in favor of Flynn.

Regarding the civil theft claim, TCI argued that the district court erred by concluding that Flynn did not steal property. Under Minnesota law, civil liability arises for stealing personal property, allowing recovery of its value plus punitive damages. The court determined that TCI failed to prove its claim, as Flynn did not personally steal anything but merely facilitated transfers and accounting entries. TCI contended that Flynn’s actions constituted theft since he transferred TCI's money to benefit himself, but Flynn argued that he did not dispossess TCI of its funds. The district court's reasoning hinged on the statutory definition of "steals," which remains undefined, thus necessitating reliance on its ordinary meaning.

The plain meaning of the word 'steals' in legal context refers to the wrongful and surreptitious taking of another’s property with the intent to keep or use it. Dictionary definitions emphasize that 'to steal' involves taking property without right and with wrongful intent. In this case, TCI failed to provide evidence that Flynn intended to keep or use TCI’s property, as he merely facilitated wire transfers and accounting entries to manipulate the appearance of Five Star’s debt. The definitions indicate that transferring property without intent to retain or use it does not constitute theft. Consequently, Flynn did not commit civil theft against TCI, and the court upheld the summary judgment in favor of Flynn.

Regarding TCI's claim of fraudulent misrepresentation, the court established that TCI could not meet the necessary criteria to prove its case, which includes demonstrating that Flynn made a false representation knowingly, intended to induce reliance, and caused TCI to suffer damages as a result. TCI's lack of sufficient evidence for each element of the fraud claim led the court to deny their motion and grant summary judgment for Flynn. TCI is appealing these rulings, challenging the court's reasoning on the adequacy of the evidence presented.

Flynn intended to induce TCI to rely on his misrepresentations regarding Five Star’s account, aiming to have TCI credit the account and to believe an auction had occurred. TCI argued that Flynn's actions would foreseeably compromise its position during the settlement with Five Star. Although Flynn claimed his intent was to maximize TCI's returns, evidence indicated he knowingly misled TCI, expecting it to rely on false internal records. The Restatement (Second) of Torts clarifies that intent to induce is met if the defendant expected the plaintiff to act based on misrepresentations. Flynn's deposition confirmed that he understood TCI's practices regarding outstanding debts, suggesting he anticipated TCI would act on his misrepresentations.

Regarding reliance, TCI demonstrated that it acted on Flynn's misrepresentations when crediting Five Star’s account and utilizing internal records during settlement discussions. An affidavit from a TCI employee indicated reliance on internal records that inaccurately showed Five Star owed $218,238.01, significantly less than the actual debt of $468,616.41. Flynn did not dispute TCI's reliance evidence, leading to a conclusion that TCI indeed relied on his fraudulent claims.

TCI also asserted it suffered financial harm due to Flynn's misrepresentations, as it settled with Five Star for less than the actual debt owed and less than what TCI believed was owed. Under Minnesota law, damages for misrepresentation are limited to the actual out-of-pocket losses incurred as a direct result of the fraud and reliance. The evidence supports TCI's claims of financial injury due to Flynn's actions.

Evidence supports the inference that TCI suffered financial injury due to Flynn’s fraudulent misrepresentations, although the specific extent of damages related to TCI’s settlement with Five Star remains unresolved and must be determined at trial. The district court incorrectly granted summary judgment in favor of Flynn regarding the claim of fraudulent misrepresentation, as TCI has established sufficient evidence of Flynn's intent to induce reliance on his misrepresentations and TCI's actual reliance. However, a genuine issue of material fact exists regarding the damages resulting from this misrepresentation.

In the claim of breach of fiduciary duty, TCI asserts that the district court erred in its ruling. To succeed in such a claim, TCI must demonstrate duty, breach, causation, and damages. Although Flynn believed he was acting in TCI's best interests, he failed to act in good faith, engaging in dishonesty and creating false accounting records. This conduct resulted in TCI being unaware of a significant debt discrepancy, which establishes Flynn's breach of fiduciary duty.

Flynn argues that TCI cannot claim damages since he did not profit from the breach, but no legal authority supports this assertion. Evidence indicates that TCI suffered damages analogous to those incurred from Flynn's fraudulent misrepresentation, specifically in the reduced settlement amount with Five Star. The extent of damages related to the breach of fiduciary duty also remains a genuine issue for trial determination.

The decision reaffirms that the district court did not err in denying TCI's summary judgment motions or in granting summary judgment in favor of Flynn concerning claims of conversion and civil theft, while also denying TCI's motions on the claims of fraudulent misrepresentation and breach of fiduciary duty.

The district court's grant of summary judgment in favor of Flynn regarding TCI’s claims of fraudulent misrepresentation and breach of fiduciary duty was erroneous. Consequently, the decision is affirmed in part, reversed in part, and remanded for a trial on damages related to these claims. Judge Reyes concurs with some sections of the majority opinion but dissents on the handling of TCI’s civil-theft claim. He asserts that the district court wrongly denied TCI’s motion for summary judgment and incorrectly granted summary judgment to Flynn. According to common definitions, Flynn's actions constituted civil theft under Minn. Stat. 604.14, subd. 1, as he appropriated TCI's property without right. The court's interpretation focused on the internal transfer of funds, concluding that Flynn did not steal since he did not take possession. However, under the civil theft statute, liability exists regardless of the victim's pecuniary loss once they part with their money based on false representations. The term "steals" is not explicitly defined in the statute, necessitating reliance on its ordinary meaning. Additionally, while federal court opinions are not binding, they are persuasive and should be considered in this context. The dissent emphasizes the need for clarity in the definitions of "theft" and "steal," as the common understanding supports the claim of civil theft in this case.

The majority references definitions from Merriam-Webster and Black’s Law Dictionary regarding the term "steal," highlighting its broad interpretation as taking property without right or leave with the intent to use it wrongfully. The definitions emphasize that "steal" encompasses appropriating property unlawfully, including money, without requiring evidence of spending or investing the stolen funds. Flynn is identified as having appropriated $250,378.40 from TCI without permission, under the pretense of conducting an auction directed by TCI's CEO, which he did not execute. Instead, he falsified documents to create the illusion of an auction and misdirected funds to Company X, misleading TCI about the transaction's legitimacy. This conduct meets the criteria for civil theft under Minnesota law, making Flynn liable to TCI for the amount stolen, plus punitive damages. The remaining issue is the determination of damages, which is to be addressed by a factfinder upon remand. The conclusion recommends reversing the district court's decision in favor of Flynn and granting summary judgment to TCI on the civil theft claim.