Dissolving a Company With a Pending Lawsuit

What Happens to a Pending Lawsuit When a Minnesota Company Dissolves?

The lawsuit continues, subject to the creditor-claim procedures. A dissolving Minnesota corporation keeps existing for winding up, and its notice of intent to dissolve does not affect remedies against it except through the creditor-claim procedures. A dissolved Minnesota LLC continues for the purpose of winding up, which includes defending lawsuits.

For a corporation that has outstanding shares, the shareholders approve the dissolution first. Under Minn. Stat. § 302A.721 subd. 2, written notice goes “to each shareholder, whether or not entitled to vote,” in the time and manner set for notice of shareholder meetings. Approval takes “the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote.” The corporation then files a notice of intent to dissolve with the Secretary of State under Minn. Stat. § 302A.723 subd. 1. Under Minn. Stat. § 302A.723 subd. 2, “The corporate existence continues to the extent necessary to wind up the affairs of the corporation until the dissolution proceedings are revoked or articles of dissolution are filed with the secretary of state.” Subdivision 3 of the same section provides that the notice of intent “does not affect any remedy in favor of the corporation or any remedy against it or its directors, officers, or shareholders in those capacities, except as provided in sections 302A.727, 302A.7291, and 302A.781.” Those three sections are the creditor-claim procedures discussed below.

For an LLC, Minn. Stat. § 322C.0702 subd. 1 provides that “the company continues after dissolution only for the purpose of winding up.” Under subdivision 2, a winding-up LLC may “prosecute and defend actions and proceedings, whether civil, criminal, or administrative.” The filing steps themselves are covered in how to dissolve a Minnesota LLC.

How Does a Pending Lawsuit Change the Steps to Dissolve a Corporation?

A pending lawsuit shapes what a Minnesota corporation’s articles of dissolution must say. On either dissolution path, the articles must state that there are no pending proceedings of the kind that path describes, or that adequate provision has been made for any judgment that may be entered. The two paths describe those proceedings differently.

After filing the notice of intent, the board must proceed under Minn. Stat. § 302A.725 subd. 1, “Except as provided in sections 302A.727, 302A.7291, and 302A.781, to pay or make provision for the payment of all known debts, obligations, and liabilities of the corporation according to their priorities.” Under subdivision 3, only the property “remaining after the discharge of, or after making adequate provision for the discharge of, the debts, obligations, and liabilities of the corporation” goes to shareholders. A claim the company is defending in court is known to it, even when the company disputes the claim.

The corporation then chooses one of two paths, and each requires its own statement about pending proceedings:

1. With notice to creditors. Under Minn. Stat. § 302A.727 subd. 5, the articles must state “that there are no pending legal, administrative, or arbitration proceedings by or against the corporation commenced within the time provided in subdivision 3, paragraph (b), or that adequate provision has been made for the satisfaction of any judgment, order, or decree that may be entered against it in a pending proceeding.”
2. Without notice to creditors. Under Minn. Stat. § 302A.7291 subd. 2, the articles must state “that there are no pending legal, administrative, or arbitration proceedings by or against the corporation, or that adequate provision has been made for the satisfaction of any judgment, order, or decree that may be entered against it in a pending proceeding.”

Options a board may weigh before making the adequate-provision statement include settling the claim, holding back money for a judgment, and confirming what insurance will cover. I suggest that the board record how it sized any reserve and the financial information it relied on. Under Minn. Stat. § 302A.551 subd. 2, a determination that the corporation will be able to pay its debts in the ordinary course of business after the distribution “is presumed to be proper if the determination is made in compliance with the standard of conduct provided in section 302A.251 on the basis of financial information prepared in accordance with accounting methods, or a fair valuation or other method, reasonable in the circumstances.” The other filing steps appear in the full corporate dissolution process.

How Do Creditor Notices Work Against a Claim Already in Litigation?

Minnesota lets a dissolving company send creditor notices that bar claims not presented on time. A corporation may send its notice to known and unknown claimants, and a claimant who receives it and fails to file a claim by the procedures and date it sets is barred, except as § 302A.781 provides. An LLC’s known-claim notice that meets the statute’s content rules bars a claim “not received by the specified deadline,” unless the liability was contingent on the date of dissolution.

A corporation’s notice is optional. Under Minn. Stat. § 302A.727 subd. 1, “the corporation may give notice of the filing to each creditor of and claimant against the corporation known or unknown, present or future, and contingent or noncontingent.” Notice is given by publication and by written notice to known creditors. Subdivision 3 provides that a claimant “who fails to file a claim according to the procedures set forth by the corporation on or before the date set forth in the notice is barred from suing on that claim or otherwise realizing upon or enforcing it, except as provided in section 302A.781.” Under subdivision 3, the corporation accepts or rejects each timely claim “by giving written notice to the person submitting it; a claim not expressly rejected in this manner is deemed accepted.” Each step runs on a short statutory timetable, and I suggest reading the current text of § 302A.727 before relying on any date.

The bar has a release valve. Under Minn. Stat. § 302A.781 subd. 2, for a limited period after the articles are filed, “a creditor or claimant who shows good cause for not having previously filed the claim may apply to a court in this state to allow a claim.” That claim reaches the corporation’s undistributed assets first and then shareholders, as the next sections explain.

An LLC uses two different notices:

1. Known claims. Under Minn. Stat. § 322C.0703 subd. 2, “A dissolved limited liability company may in a record notify its known claimants of the dissolution.” Subdivision 4 limits that tool: “This section does not apply to a claim based on an event occurring after the effective date of dissolution or a liability that on that date is contingent.” Chapter 322C does not define contingent, so whether a claim still in litigation counts can itself become a dispute.
2. Published notice. Under Minn. Stat. § 322C.0704 subd. 1, the LLC “may publish notice of its dissolution and request persons having claims against the company to present them according to the notice.” Subdivision 3 then bars several groups of claimants, including “a claimant whose claim is contingent at, or based on an event occurring after, the effective date of dissolution,” unless the claimant sues within the period the statute sets.

Both LLC bars depend on the notice. Under § 322C.0703 subd. 3, a known-claim notice bars a claim only “if the requirements of subdivision 2 are met,” which include stating the deadline and “that the claim will be barred if not received by the deadline.” The published-notice bar in § 322C.0704 subd. 3 applies only if the company “publishes a notice according to subdivision 2.”

The content and delivery rules for LLC notices are covered in notice requirements for LLC dissolution.

What Claims Survive Dissolution Regardless of Notice?

For a Minnesota corporation, claims for injury to a person, including death, and statutory warranty claims under section 327A.02 against a vendor or home improvement contractor are not affected by dissolution. A creditor notice does not bar them.

Minn. Stat. § 302A.781 subd. 5 provides that “all other statutory and common law rights of persons who may bring claims of injury to a person, including death, are not affected by dissolution under this chapter.” Subdivision 4 of the same section provides: “The statutory warranties provided under section 327A.02, and any contribution or indemnity claim arising from the breach of those warranties, are not affected by the dissolution under this chapter of a vendor or home improvement contractor.”

These protections matter for a company being sued for injury to a person, or sued as a vendor or home improvement contractor on the “statutory warranties provided under section 327A.02, and any contribution or indemnity claim arising from the breach of those warranties.” For those claims, dissolution procedure does not reduce the exposure, and the pending claim should be resolved or covered before anything goes to the owners. Both subdivisions are in chapter 302A. Chapter 322C has no matching subdivision, so an LLC owner facing an injury or warranty claim should read the LLC claim sections, §§ 322C.0703 and 322C.0704, with those claims in mind.

Why Do Distributions to Owners Create Personal Liability During a Lawsuit?

Paying money to owners while a lawsuit is pending can make the people who approved the payment, and in some cases the people who received it, personally liable. Before any distribution, a Minnesota corporation’s board must determine that the company “will be able to pay its debts in the ordinary course of business after making the distribution and the board does not know before the distribution is made that the determination was or has become erroneous.” In dissolution, property goes to shareholders only after the discharge of, or adequate provision for, the corporation’s debts, obligations, and liabilities.

For a corporation, the board must first apply the solvency test in Minn. Stat. § 302A.551 subd. 1: the board may cause a distribution “only if the board determines, in accordance with subdivision 2, that the corporation will be able to pay its debts in the ordinary course of business after making the distribution and the board does not know before the distribution is made that the determination was or has become erroneous.” The consequences of a distribution that fails that test fall on two groups:

1. Directors who approve it. Under Minn. Stat. § 302A.559 subd. 1, a director who is present and “fails to vote against, or who consents in writing to, a distribution made in violation of section 302A.551, subdivision 1, paragraph (a), or 4,” and who fails to meet the director standard of conduct, is liable to the corporation for the excess.
2. Shareholders who receive it. Under Minn. Stat. § 302A.557 subd. 1, a shareholder who receives such a distribution is liable “but only to the extent that the distribution received by the shareholder exceeded the amount that properly could have been paid under section 302A.551.”

A separate rule covers debts the company takes on while winding up. Under Minn. Stat. § 302A.781 subd. 3, “All known contractual debts, obligations, and liabilities incurred in the course of winding up the corporation’s affairs shall be paid or provided for by the corporation before the distribution of assets to a shareholder.” A creditor left unpaid on those debts may pursue the officers and directors “who are responsible for, but who fail to cause the corporation to pay or make provision for payment of the debts, obligations, and liabilities.”

When a claim is later allowed under § 302A.781 subd. 2, a shareholder’s share is capped: “in no event may a shareholder’s liability exceed the amount which that shareholder actually received in the dissolution.”

For an LLC, the rules run in parallel. Under Minn. Stat. § 322C.0707 subd. 1, “In winding up its activities, a limited liability company must apply its assets to discharge its obligations to creditors, including members that are creditors.” Under Minn. Stat. § 322C.0405 subd. 1, the company may not make a distribution if afterward “the company would not be able to pay its debts as they become due in the ordinary course of the company’s activities,” or if afterward “the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the company were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those of persons receiving the distribution.”

Under Minn. Stat. § 322C.0406 subd. 1, a consenting member, manager, or governor who breaches the statutory standards of conduct “is personally liable to the company for the amount of the distribution that exceeds the amount that could have been distributed without the violation of section 322C.0405.” Subdivision 3 adds that a person who receives a distribution “knowing that the distribution to that person was made in violation of section 322C.0405 is personally liable to the limited liability company” for the excess. After dissolution, a surviving claim reaches a member “to the extent of that person’s proportionate share of the claim or of the assets distributed to the member or transferee after dissolution, whichever is less,” under Minn. Stat. § 322C.0704 subd. 4.

These statutory routes are separate from a claim to disregard the company entirely, discussed in piercing the corporate veil.

How Does Minnesota’s Voidable Transactions Act Treat Asset Transfers During a Lawsuit?

Minnesota’s Uniform Voidable Transactions Act lets a creditor undo a transfer made to hinder, delay, or defraud it, and a plaintiff with a pending claim is a creditor under the act. A transfer made after the company was sued is one of the listed signs of that intent.

The act covers disputed claims. Under Minn. Stat. § 513.41, “"Claim" means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” A creditor is a person that has a claim.

Minn. Stat. § 513.44 makes a transfer voidable when made “with actual intent to hinder, delay, or defraud any creditor of the debtor,” and in other circumstances involving inadequate value. In deciding intent, a court may consider factors that include whether “the transfer or obligation was to an insider” and whether, “before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.” The remedies in Minn. Stat. § 513.47 include “avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim” and “an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property.” Under Minn. Stat. § 513.48, a transfer is not voidable for actual intent “against a person that took in good faith and for a reasonably equivalent value given the debtor.”

Two entity-specific points follow. For a corporation, Minn. Stat. § 302A.551 subd. 3 provides that “the provisions of sections 513.41 to 513.51 do not apply to distributions made by a corporation governed by this chapter,” so distributions to shareholders are tested under chapter 302A instead. That exclusion reaches only distributions. A sale of assets is still subject to chapter 513, even though Minn. Stat. § 302A.725 subd. 2 lets the directors of a dissolving corporation sell substantially all assets “without a vote of the shareholders.” For an LLC, chapter 322C has no exclusion like § 302A.551 subd. 3. The buyer’s side of these claims appears in fraudulent transfer claims against business buyers.

What Happens When the Company Is Left to Lapse Instead?

A Minnesota corporation that stops filing its annual renewal is administratively dissolved, but it loses the claim-bar protections of formal dissolution, and a later renewal can bring it back retroactively. An LLC is administratively terminated and can be reinstated the same way.

Under Minn. Stat. § 302A.821 subd. 4, the Secretary of State dissolves a corporation that has not filed its renewal, and “A corporation dissolved in this manner is not entitled to the benefits of section 302A.781.” The same subdivision ties shareholder liability to the illegal-distribution rule in § 302A.557. Filing the renewal and fee later “returns the corporation to good standing as of the date of the dissolution.”

For an LLC, Minn. Stat. § 322C.0705 provides that “A domestic limited liability company that has not filed a renewal pursuant to this section is administratively terminated.” Under Minn. Stat. § 322C.0706, filing a renewal “returns the limited liability company to active status as of the date of the administrative termination.”

Letting the company lapse skips every step that orders payment to creditors before owners. I suggest fixing a lapse rather than relying on it to close a company with a pending case, because an administratively dissolved corporation gets none of the claim-bar benefits of § 302A.781 and its shareholders remain subject to § 302A.557.

When Does Court-Supervised Dissolution Fit a Disputed Claim?

Court supervision fits when the owners, or the company and a claimant, cannot agree on how much to reserve or who gets paid. Minnesota lets a dissolving corporation, a shareholder, or a creditor ask a district court to supervise the dissolution, and lets an LLC member ask for court supervision of winding up.

Under Minn. Stat. § 302A.741, after the notice of intent is filed and before a certificate of dissolution issues, “the corporation or, for good cause shown, a shareholder or creditor may apply to a court within the county in which the registered office of the corporation is situated to have the dissolution conducted or continued under the supervision of the court as provided in sections 302A.751 to 302A.781.” Under Minn. Stat. § 302A.781 subd. 3, the officer and director liability for unpaid winding-up debts “does not apply to dissolution under the supervision or order of a court.”

For an LLC, Minn. Stat. § 322C.0702 subd. 5 lets a court order judicial supervision of winding up “on application of a member, if the applicant establishes good cause,” including the appointment of a person to wind up the company. Court supervision adds cost and time. It also moves contested decisions about reserves and payment order to a judge, which can protect owners who would otherwise make those decisions alone.

What Steps Reduce the Risk of Winding Down During a Case?

The steps that lower risk are the ones that keep the company able to answer the case and keep money in the company until the claim is resolved or provided for. They are practical and can be taken before the notice of intent is filed.

1. Who handles the case. Under Minn. Stat. § 302A.783, “After a corporation has been dissolved, any of its former officers, directors, or shareholders may assert or defend, in the name of the corporation, any claim by or against the corporation.” In Nicollet Restoration, Inc. v. Turnham, 486 N.W.2d 753 (Minn. 1992), the Minnesota Supreme Court reaffirmed “that a corporation must be represented by a licensed attorney when appearing in district court.” The Minnesota Court of Appeals applies the same rule to LLCs. In 301 Clifton Place L.L.C. v. 301 Clifton Place Condominium Ass’n, 783 N.W.2d 551 (Minn. App. 2010), the court agreed that the rule “extends beyond business corporations and applies to LLCs.” An LLC in winding up may “prosecute and defend actions” and “settle disputes by mediation or arbitration” under Minn. Stat. § 322C.0702 subd. 2. I suggest naming that person in the board or member resolution, because the court’s deadlines keep running after the company stops operating. The early stages of a case are covered in the first steps after your company is served.
2. Insurance notice. A liability policy may pay for the defense and any judgment, and its coverage is one option the board can weigh before making the adequate-provision statement the articles require. An insurer’s duty to defend is set by the policy, so I suggest that the company give notice under each policy that may apply before it stops operating.
3. Records. The lawsuit continues, and so do the company’s obligations as a party to it. I suggest a written plan for preserving evidence, including email accounts and accounting files, before systems are shut down.
4. Settlement or reserve. A settlement fixes the number. Without one, the board can weigh a reserve sized to the claim and the cost of defense before making the statements chapter 302A requires.
5. Federal government claims. Under 31 U.S.C. § 3713(b), “A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.” Subsection (a) gives the federal claim priority when the debtor is insolvent and other listed conditions apply. Subsection (a)(1) reaches any “claim of the United States Government,” not only taxes. I suggest that a company that owes the federal government and cannot pay everyone check this statute before paying the plaintiff or other creditors, because a representative who pays other debts first “is liable to the extent of the payment for unpaid claims of the Government.”

Next Steps for Owners Considering Dissolution

A Minnesota company with a pending lawsuit can begin dissolving, but the notice of intent does not by itself end the case, and the articles of dissolution must still address pending proceedings. Before filing anything, I suggest answering four questions. Who will defend the case after operations stop? How large a reserve, or what insurance, will cover a judgment? Which owners and directors will approve distributions, and on what financial information? Are any planned asset sales at a fair price to a buyer outside the company’s owners?

Those answers bear on whether the company can make the statements its articles of dissolution require and whether the owners keep what they receive. More on Minnesota business litigation is on the practice page. If you would like me to analyze whether a planned dissolution provides for a pending lawsuit and protects what the owners receive, email [email protected] with a short description of the case and the company’s assets and debts. I will run an intake and conflict check before you send any confidential documents.