The New Jersey Appellate Court recently ruled that directors of a corporation were not personally responsible for the corporation's debts based upon an estimated $25 million cash distribution to the shareholders/directors approximately 14 months before the corporation became insolvent. G.S. Partners, L.L.C. v. Venuto, et al., A-4176-12T4 (App. Div. April 28, 2014).
G.S. Partners L.L.C. ("G.S. Partners") acquired a franchise from Hollywood Tanning Systems, Inc. ("Hollywood Tanning") in December 2006. In April 2007, Hollywood Tanning sold most of its assets to another company, Tan Holdings L.L.C. ("Tan Holdings") for $40 million in cash, 25% of the outstanding preferred units of Tan Holdings, and certain earned payouts over time.
Nearly two months after the asset sale, Hollywood Tanning distributed roughly $25 million to the Hollywood Tanning shareholders who were also the defendant/directors of the corporation. Hollywood Tanning became insolvent and stopped transacting business in the summer of 2007.
G.S. Partners subsequently obtained a default judgment against Hollywood Tanning for almost $1 million. After learning about the large cash distribution to the shareholders/directors, G.S. Partners filed a new action alleging personal liability of the directors for the default judgment against Hollywood Tanning.
N.J.S.A. 14A-6-12 provides for personal liability of directors who "vote for" or "concur in" certain corporate activities. Under this statute, a director can be liable for "distribution of assets to stockholders during or after dissolution of the corporation" if the corporation has not adequately provided for its known debts and liabilities.
Applying a strict interpretation of the statute, the Appellate Court ruled that N.J.S.A. 14A:6-12(1)(c) was not applicable because the distribution to shareholders did not "occur during or after dissolution." The Court noted that Hollywood Tanning officially never dissolved and that the corporation technically continued to exist. Based on the facts as presented, the Court rejected G.S. Partners' argument that the cash distribution was a "constructive" dissolution. The Appellate Court noted that Hollywood Tanning continued to transact some aspects of its business for more than a year after the cash distribution.