Court Says Company Issuance of New Stock To Dilute Debtor’s Shares is Fraudulent Transfer

A creditor may have the Sheriff levy upon stock in a corporation held in the debtor’s name. One debtor thought he could effectively protect his stock by causing the corporation to issues substantial amounts of new stock to his wife for a nominal amount of money thereby diluting and devaluing the stock he owned subject to levy.

The creditor levied upon the debtor’s stock certificate. After the levy, the debtor informed the creditor that the shares levied upon no longer represented 100% of the stock but that after the newest stock issues amounted to but 2% of the outstanding stock. The creditor sued the debtor and his spouse for fraudulent transfer arguing that the corporation’s stock issuance to the debtor’s spouses was a device to defeat the creditor even though the stock issuance was permitted by the corporation’s bylaws. The debtor responded that he transferred none of his stock certificates to his wife and that the corporation’s issuance of new stock is not a “transfer.”

The issues was heard by a Minnesota appellate court. The court held that the term “transfer” for fraudulent transfer law is a broadly defined term which includes what this debtor did to protect his company stock. The court said that the company’s issuance of new stock was an improper attempt to manipulate the corporation to dilute the value of the stock levied upon and sold by the Sheriff.

I found out about this case from an article written by attorney Jay Adkisson. Adkisson suggests that stock dilution could be effective asset protection if, prior to a creditor claim, a non-debtor investor obtained for fair value stock warrants that when exercised could dilute the percentage and value of the debtor stockholder’s corporate stock. Of course, the best solution is to operate businesses in an LLC so that the creditor remedy is limited to a charging lien against distributions.

Last updated on May 22, 2020

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