Court: Walser bled dealership to hurt business partner

The Minnesota Court of Appeals today provided a fascinating glimpse into a two-decade fight inside the Walser family business.

It ruled  in the case of John Drewitz (.pdf), a salesman at Walser’s BMW Motorwerks, who rose to general manager and — through stock offerings — a 30 percent owner in the company.

When family scion Jack Walser brought sons Paul and Andrew Walser into the operation in 1996, both purchased a 15 percent stake in Motorwerks. Two years later, Paul Walser fired Drewitz, who sued for a fair settlement.

During the litigation, the Walsers split up the company, Jack Walser and Peter Hasselquist agreeing to take ownership of Motorwerks and two other Walser dealerships without Drewitz knowing, while Paul and Andrew Walser would control all remaining Walser businesses.

Paul and Andrew Walser transferred all their shares of Motorwerks stock to Jack Walser. Hasselquist acquired a 20 percent stake in Motorwerks, leaving Jack Walser as the majority shareholder with 80 percent of the outstanding stock.

In 2006, Walser and Hassequist sold Motorwerks. Tax records show that $21.3 million was distributed to the two, with Jack Walser receiving over $17 million. He also got a $70,000 BMW convertible in connection with the sale.

After the 2006 distribution, Motorwerks retained only $225,000 in cash, which dwindled to $169,108 by the end of 2006, and the valuation of its assets dropped from nearly $20 million to $690,657, according to the Court of Appeals.

Motorwerks made further distributions in 2007, 2010, and 2012, totaling nearly $600,000. As majority shareholder, Jack Walser received distributions in the amount of $325,600 in 2007, $80,000 in 2010, and $59,083 in 2012, leaving the corporation with no funds.

Drewitz? He got nothing, apparently.

Since then, the case has gone through the Court of Appeals, the Minnesota Supreme Court, back to a district court, and again to the Court of Appeals, back to a district court and now back to the Court of Appeals on the question of whether the Walser’s had made a legitimate offer to buy out Drewitz’ shares.

In 2013, a lower court ruled ordered Motorwerks to pay the former salesman $7.9 million, before a judge dismissed the case, rejecting Drewitz’ claim that “Jack Walser, as a director of Motorwerks, breached his fiduciary duty to Drewitz by draining substantially all the corporate assets by paying himself several shareholder distributions while the parties litigated Drewitz’s
claim for his share of prior shareholder distributions,” according to court documents.

Today — in its third intervention in the dispute — the Court of Appeals reinstated the order to pay. Judge Carol A. Hooten wrote:

Jack Walser knew of Drewitz’s claim and found it sufficiently credible to shield others from it—he agreed to split any liability associated with Drewitz’s lawsuit with his two sons and indemnified both the purchaser of Motorwerks’ assets and Peter Hasselquist from liability.

Motorwerks undertook a contractual obligation to pay Drewitz shareholder distributions, and Drewitz filed suit in 2004 seeking to vindicate his right to those payments.

Drewitz’s belated receipt of a judgment was mainly due to the incredibly protracted litigation in this case, much of which was due to adverse district court rulings that he three times successfully appealed.

The judge called Walser’s plan “egregious.”

It is undisputed that, in 2006, Jack Walser caused Motorwerks to sell nearly all of its assets, cease operating as a car dealership, and then distribute $21.3 million to himself and Hasselquist. While it no longer sold BMW vehicles, Motorwerks retained its corporate registration and maintained funds that were used to pay other creditors.

Yet, it continued to make distributions to its remaining shareholders, Jack Walser and Hasselquist, resulting in the complete depletion of these funds by 2012.

But, while Jack Walser made provision for other creditors and himself and Hasselquist as shareholders, he made none for Drewitz and his pending claim.

Respondents assert that Drewitz’s claim to a 30% share of Motorwerks’ distributions between 1999 and 2005 was “readily ascertainable” at nearly $4 million by simply applying Drewitz’s ownership percentage to the yearly distributions. By selling the car dealership and distributing the proceeds, respondents depleted Motorwerks of the assets to satisfy Drewitz’s share, let alone the preverdict interest on any resulting judgment.

And that is what happened—Motorwerks could not satisfy the $7.9 million judgment due to the distributions caused by its directors.

By ignoring a “readily ascertainable” claim, Jack Walser engaged in preferential dealing that rendered Motorwerks unable to pay its debts in the ordinary course of business after making the distributions, causing Motorwerks’ insolvency.

Judge Hooten ordered the district court to find in favor of Drewitz, and order Walser to pay the nearly $8 million he’s owed.