This summary was computer-generated without any editorial revision. It is not official, has not been checked for accuracy, and is NOT citable.
Facts
The Plaintiff obtained a judgment against a corporation (FDC Corporation) in 1986 for $54,134.00 plus costs. While the lawsuit was pending, the corporation liquidated its assets, ceased operations, and did not initiate formal dissolution proceedings. The Plaintiff later discovered that the corporation was insolvent. The Defendant, a director, officer, and sole shareholder of the corporation, paid himself $62,601.39 as a creditor during the liquidation, which the Plaintiff alleged constituted an impermissible preference (paras 1-2, 5).
Procedural History
- Smith v. FDC Corp., 109 N.M. 514, 787 P.2d 433 (1990): The Plaintiff's judgment against FDC Corporation was affirmed on appeal (para 1).
- District Court of San Juan County: The trial court dismissed the Plaintiff's complaint against the Defendant with prejudice for failure to state a claim upon which relief could be granted (para 2).
Parties' Submissions
- Plaintiff-Appellant: Argued that the Defendant's payment to himself as a creditor during the corporation's liquidation constituted an impermissible preference under common law principles. The Plaintiff also contended that the Defendant failed to comply with New Mexico's dissolution statutes and sought the imposition of a trust on the distributed assets (paras 2-4).
- Defendant-Appellee: Asserted that New Mexico should adopt the minority position allowing insolvent corporations to prefer their directors if they are bona fide creditors and argued that no fraud or bad faith was involved. The Defendant also claimed that the Plaintiff's pending lawsuit did not constitute a final corporate obligation requiring payment (paras 7, 10-12).
Legal Issues
- Whether the Defendant's payment to himself as a creditor during the liquidation of an insolvent corporation constituted an impermissible preference under common law principles.
- Whether the Plaintiff's pending lawsuit against the corporation constituted a corporate obligation requiring provision for payment during liquidation.
Disposition
- The Supreme Court of New Mexico reversed the trial court's dismissal of the Plaintiff's complaint and remanded the case for further proceedings (para 13).
Reasons
Per Baca J. (Montgomery and Frost JJ. concurring):
The Court held that the Defendant's payment to himself as a creditor during the liquidation of the insolvent corporation constituted an impermissible preference under common law principles. The Court emphasized that corporate directors and officers, as fiduciaries, cannot use their positions to secure preferential payments for themselves at the expense of other creditors. The majority rule prohibits such preferences to prevent fraud and promote fair dealing (paras 6-9).
The Court rejected the Defendant's argument that fraud or bad faith must be proven to establish an impermissible preference. Instead, the burden of proof lies with the corporate insider to demonstrate that the payment was proper and not preferential (para 10).
The Court also found that the Plaintiff's pending lawsuit constituted a contingent corporate obligation, and the Defendant, as a fiduciary, was required to make adequate provisions for its payment during liquidation. The Defendant's failure to do so violated his fiduciary duty (paras 12-13).