How to Dissolve a Business And Leave Its Debt Behind

Photo of Kleve, Germany, by Hans Peter Schaefer

Dale and Dennis Kleve acquired control and ownership of Kleve Heating and Air Conditioning Inc. from their dad in the late 1980’s. Then, some time in the first decade of the 2000’s, Dennis Kleve took off with $500,000 of company money. And we all encountered a little economic turbulence around the same time, the recession.

Between “Klepto” Kleve’s earning his nickname (which I just gave him based on what the Minnesota Court of Appeals wrote) and the economy, these were overwhelmingly hard times for Kleve Heating and Air Conditioning Inc. so Dale Kleve sought the counsel of a lawyer, hoping to find a way to avoid bankruptcy.

At the time, Kleve Heating and Air Conditioning Inc. had $1.8 million in secured obligations. Kleve Heating and Air Conditioning Inc. had additional unsecured obligations for warehouse space lease payments and also obligations to make pension payments to the Kleve Heating and Air Conditioning employees’ trust fund of more than $500,000.

Dale Kleve, with a lawyer’s advice and with the cooperation of a new lender and the previous secured lender, hammered out a deal whereby the secured lenders would accept a plan.  Kleve Heating and Air Conditioning Inc. would essentially wind up, the secured creditors would agree to a transaction involving a new successor entity, and Kleve Heating and Air Conditioning’s unsecured creditors would be left in the dust.

Can they get away with that?

Yes.

Plaintiffs in Bigham v. Kleve sought to enforce the company obligations on Dale Kleve personally based on a veil-piercing theory but this approach was correctly rejected by the trial court, a decision that was correctly affirmed on appeal this week.

To those not experienced in debtor/creditor law, this result might seem unjust. But a decision otherwise would have stripped Dale Kleve of the benefits of doing business through a business organization. The whole point of these government-created entities is to encourage people to invest in businesses without fear of putting their entire wealth at risk.

It might feel unfair or unjust to some. In fact, viewed in isolation, maybe it is. But in the grander scheme, in the big picture, maybe Kleve Heating and Air Conditioning (and millions of other small businesses) would not exist were it not for institutions like corporations, limited liability companies, and the like…