Title: CRUTCHFIELD v. MARINE POWER ENGINE CO.

State: oklahoma

Issuer: Oklahoma Supreme Court

Document:

CRUTCHFIELD v. MARINE POWER ENGINE CO.  CRUTCHFIELD v. MARINE POWER ENGINE CO. 2009 OK 27 209 P.3d 295 Case Number: 103342 Decided: 05/05/2009 THE SUPREME COURT OF THE STATE OF OKLAHOMA STEVE CRUTCHFIELD, Plaintiff/Garnishor/Appellee, v. MARINE POWER ENGINE COMPANY, Defendant, and TIGE BOATS, INC., Garnishee/Appellant, and MARINE POWER HOLDING, L.L.C., Appellant. CERTIORARI TO THE COURT OF CIVIL APPEALS, DIVISION IV Honorable Robert G. Haney, Trial Judge ¶0 A year after Steve Crutchfield was hired by Marine Power Engine, Inc. (MP Engine), all of its assets were purchased by Hirel Holdings, Inc. (Hirel). A few months later, Crutchfield was terminated and given a severance package which included unreimbursed expenses and medical benefits. After some of the severance package remained unpaid, he brought an action against MP Engine. Subsequently, a portion of Hirel's assets were purchased by Marine Power Holding, L.L.C. (MP Holding), and Crutchfield and MP Engine entered an agreed judgment. After the judgment remained unpaid, Crutchfield filed a garnishment affidavit against MP Engine and Tige Boat, Inc. (Tige), a debtor of MP Holding. MP Holding and Tige each filed answers. The trial court determined that MP Holding and Tige were liable, and they moved for a new trial. The trial court denied the motion, and MP Holding and Tige appealed. The Court of Civil Appeals reversed and remanded. On certiorari, we reverse and hold that: 1) in order to establish the liability of a successor corporation once-removed, each corporation along the chain of succession must meet one of the exceptions to liability found in Pulis v. United States Elec. Tool Co., CERTIORARI PREVIOUSLY GRANTED; COURT OF CIVIL APPEALS OPINION VACATED; TRIAL COURT REVERSED AND CAUSE REMANDED. Steven R. Hickman, Tulsa, Oklahoma, for Plaintiff/Appellee. Joe M. Fears, Tulsa, Oklahoma, for Defendants/Appellants. KAUGER, J.: ¶1 The first impression issue presented is whether Marine Power Holding, L.L.C. (MP Holding), a successor company once-removed from Marine Power Engine, Inc. (MP Engine), is liable for a judgment taken against MP Engine. As a general rule, when one company sells or otherwise transfers all its assets to another company, the successor is not liable for the debts and liabilities of the seller. There are exceptions to the rule. In Pulis v. United States Elec. Tool Co., 1) an agreement exists to assume such debts or liabilities; 2) the corporations are consolidated or merged; 3) the transaction was fraudulent; or 4) the purchasing corporation is a mere continuation of the selling company. The trial court found that the mere continuation exception was applicable and that MP Holding was liable for the judgment. For the "mere continuation" exception, the test is not whether there is a continuation of business operations, but whether there is a continuation of the corporate entity. We hold that: 1) in order to establish the liability of a successor corporation once-removed, each corporation along the chain of succession must meet a Pulis exception to liability; 2) because there was insufficient evidence of a continuation of the corporate entity along the chain of corporate succession, the trial court erred by finding that MP Holding was a "mere continuation" of MP Engine; 3) FACTS ¶2 On February 1, 1996, Steve Crutchfield (Crutchfield) was hired as vice-president of sales by MP Engine, a manufacturer of boat engines domiciled in Ponchatoula, Louisiana. Crutchfield's employment contract designated his employer as Marine Power Engine Company, a name under which MP Engine did business. MP Engine was incorporated in 1984. ¶3 Crutchfield's employment contract was signed by Walter E. Allbright, Jr. (Allbright), president and sole director of MP Engine. In February 1997, MP Engine's assets were purchased in exchange for stock by Hirel Holdings, Inc. (Hirel). Hirel was a publicly-held Delaware corporation traded on the NASDAQ exchange and based in Pompano Beach, Florida. ¶4 On July 1, 1997, as a result of Hirel's new sales priorities, Crutchfield was terminated, and his employer agreed to pay him four months severance, including payment for medical insurance and outstanding expenses. On November 7, 1997, Crutchfield, a resident of Oklahoma, filed a petition in Delaware County District Court alleging that he was owed $10,163.97 in unreimbursed expenses and unpaid medical insurance premiums. Marine Power Engine Company, Hirel, and Allbright were named as defendants. On April 4, 1998, the trial court dismissed Hirel and Allbright as defendants for lack of personal jurisdiction. ¶5 At some time in late 1997, Hirel notified Allbright that it was approaching insolvency. In order to preserve operations, Allbright located John Benton Smallpage, Jr. (Smallpage), an investor. Smallpage formed MP Holding to purchase certain of Hirel's assets. On December 31, 1997, MP Holding agreed to pay $300,000 in cash and assume $2.4 million of Hirel's liabilities in order to purchase the engine manufacturing operation in Louisiana, facilities in California, Washington, and New Jersey, several accounts receivable, and the rights to several trademarks, copyrights, and patents. MP Holding expressly declined to assume any of Hirel's liabilities other than those catalogued in the purchase agreement. ¶6 On April 3, 2001, Marine Power Engine Company made an offer of judgment to Crutchfield in the amount of $10,163.47. Crutchfield accepted the offer without amendment, and on April 11, 2001, the trial court entered the agreed judgment. ¶7 On August 15, 2005, Crutchfield filed a garnishment affidavit against Tige Boat, Inc. (Tige) and Marine Power Engine Company. Tige, a customer of MP Holding, owed MP Holding approximately $20,000. MP Holding filed an answer on August 15, 2005, and Tige filed an answer on August 17, 2005. Each corporation argued that it owed no money to Crutchfield. Crutchfield filed an election to take issue with each answer, and a hearing was held on December 7, 2005. At the hearing, the trial court found that because it was a mere continuation of MP Engine, MP Holding was liable for the judgment and Tige was liable as garnishee. The trial court also awarded $600 in attorney fees to Crutchfield. On February 7, 2006, the final garnishment order was filed, and MP Holding and Tige filed a joint motion to reconsider. ¶8 The cause was assigned to the Court of Civil Appeals on December 18, 2006. On March 9, 2007, the Court of Civil Appeals reversed the findings of the trial court and remanded the cause. In its opinion, the Court of Civil Appeals determined that: 1) the evidence did not support that MP Holding was a mere continuation of MP Engine; 2) although MP Holding was entitled to an award of attorney fees and costs incurred at trial, it was not entitled to an award of appeal-related attorney fees and costs. ¶9 On March 29, 2007, Crutchfield filed a petition for certiorari. Later that same day, MP Holding and Tige filed a motion with the Court of Civil Appeals to reconsider the denial of appeal-related attorney fees and costs. On April 4, 2007, we issued an order recasting the motion to reconsider as a petition for rehearing in the Court of Civil Appeals. ¶10 In a garnishment action, when a judgment creditor takes issue with a garnishee's answer, the issue stands for trial as a civil action and is in the nature of an equitable proceeding. I. ¶11 IN ORDER TO ESTABLISH THE LIABILITY OF A SUCCESSOR CORPORATION ONCE-REMOVED, EACH CORPORATION ALONG THE CHAIN OF SUCCESSION MUST MEET AN EXCEPTION TO THE GENERAL RULE OF NON-LIABILITY. ¶12 As a general rule, when one company sells or otherwise transfers all its assets to another company, the successor is not liable for the debts and liabilities of the seller.11 The four exceptions to this rule are when: 1) there is an agreement to assume such debts or liabilities; 2) there is a consolidation or merger of the corporations; 3) the transaction was fraudulent in fact; or 4) the purchasing corporation is a mere continuation of the selling company.12 In Collinsville Nat. Bank v. Esau, Can parties managing a corporation contract debts and obligations in its name, then by some legerdemain of high financing denude the corporation of all its property and assets by transferring them to a new corporation which the same parties manage, and thereby render it powerless to pay under the mere guise of a sale? Under such circumstances, A. controlled the corporation, the corporation owed the debt; but by the transfer A. still controls the corporation, but the corporation owes no debts, therefore A. owes nothing. The law has no toleration for such jugglery. It is a fraud both in fact and in law. ¶13 This cause differs from our prior decisions on successor liability because MP Holding is a successor once-removed from MP Engine. The liability of a once-removed successor corporation is an issue of first impression, ¶14 According to the teaching of Collinsville Nat. Bank, supra, the exceptions to the general rule of successor non-liability exist to prevent the shareholders, officers, and directors of a corporation from eluding its debts and liabilities while maintaining control over its assets. We hold that to determine the liability of a once-removed successor corporation, a court must make a finding that each company along the line of succession met one of the four exceptions to non-liability set out in Pulis v. United States Elec. Tool Co., II. ¶15 BECAUSE CRUTCHFIELD DID NOT ESTABLISH A CONTINUATION OF THE CORPORATE ENTITY ALONG THE CHAIN OF SUCCESSION FROM MP ENGINE TO MP HOLDING, THE TRIAL COURT ERRED BY FINDING THAT THE MERE CONTINUATION EXCEPTION WAS APPLICABLE TO MP HOLDING. ¶16 Crutchfield argues that MP Holding is liable for the judgment against MP Engine because MP Holding is a mere continuation of MP Engine. MP Holding argues that it is not and that it is not liable for the judgment. Crutchfield did not allege that any exception other than "mere continuation" was applicable. ¶17 The mere continuation exception covers a re-organization of a corporation. ¶18 Our decision in Pulis v. United States Elec. Tool Co., ¶19 In the instant cause, there were no disputed facts at trial. Crutchfield offered the following evidence to show that Hirel was a mere continuation of MP Engine. He produced a facsimile transmission sent from the facility in Louisiana in July 1997 (five months after MP Engine's assets were purchased by Hirel) that still carried the name "Marine Power, Inc." in the embedded header. He offered a severance check from October 1997 that identified the employer as "Marine Power, Inc." He obtained testimony from Allbright that despite its continued existence, MP Engine ". . . did not operate after Hirel bought the assets." ¶20 As to whether MP Holding was a mere continuation of MP Engine through Hirel, Crutchfield noted that MP Holding used the same phone number at the Louisiana facility as did Hirel. He demonstrated that MP Holding used a website that had been developed by MP Engine. He showed that MP Holding filled outstanding orders for engines that had been placed with Hirel. He also showed that MP Holding uses the trade name "Marine Power," advertises based on the goodwill attendant to the "Marine Power" brand, and retains copyrights originally acquired by MP Engine. Hirel and MP Holding had entirely different officers and directors. However, it is unclear from the record whether there were any shareholders with a common identity. The parties agreed that Hirel retained some assets after the sale, but it is unclear from the record how long and to what extent Hirel continued to exist after the sale. ¶21 The court relied on two pieces of evidence in making its ruling: 1) MP Holding used a copyright that had been originally obtained by MP Engine; and 2) MP Holding used a website which had been developed by MP Engine. Now, I do have your evidence that says that you changed corporate entities, but yet to the general public, or at least to this Court, you're still using the same information and you're basically even representing that you are the same in what they own. . . It is clear that the trial court emphasized continuation of business operations over continuation of the corporate entity. The majority of the evidence presented by Crutchfield --- that MP Holding used facilities, equipment, trademarks, copyrights, and goodwill which it purchased from Hirel and which Hirel had previously purchased from MP Engine --- was entered to establish the continuation of business operations, but it did not speak to the question of whether there was a continuation of the corporate entity. The trial court erred on a question law by incorrectly applying the Pulis standard for mere continuation successor liability. ¶22 It was demonstrated that MP Engine, Hirel, and MP Holding had no common directors or officers. ¶23 The trial court erred by finding that MP Holding was a mere continuation of the corporate entity of MP Engine. We reverse the order denying MP Holding's motion to reconsider and vacate the judgment on garnishment. III. ¶24 MP HOLDING IS NOT ENTITLED TO AN AWARD OF REASONABLE ATTORNEY'S FEES AND COSTS PURSUANT TO ¶25 MP Holding and Tige requested an award of attorney's fees and costs incurred at trial and on appeal should they prevail. Crutchfield argues that even if MP Holding prevails, it is not entitled to an award of attorney fees and costs incurred at trial under 12 O.S. Supp. 2002 §119023 because it is not a garnishee. MP Holding responds that because it was entitled to defend the proceedings against Tige, it is the prevailing party and entitled to such an award. It is a question of first impression whether a putative judgment debtor who successfully defends a garnishee is entitled to an award of reasonable attorney's fees and costs under §1190. ¶26 Oklahoma follows the American Rule concerning the recovery of attorney fees.24 It provides that each litigant pay for legal representation and that courts are without authority to assess attorney fees in the absence of a specific statute or contract.25 Exceptions to this rule are narrowly defined because attorney fee awards against the non-prevailing party have a chilling effect on open access to the courts.26 For an award of attorney fees to be authorized under a particular statute, the authorization must be found within the strict confines of the statute.27 Exceptions to the American Rule are usually crafted to encourage the conservation of judicial resources by promoting settlement and discouraging unnecessarily protracted litigation or frivolous claims.28 ¶27 If an exception requires interpretation, it may be read in context with other parts of the statute and with the law in effect at the time of its enactment. ¶28 Section 1190(B)(1) contains an exception to the American Rule. ¶29 It must first be stated that the facts of this cause are extraordinarily unusual. It is rare that a judgment creditor seeks to enforce a judgment against a successor corporation once-removed; it is rarer still that a judgment debtor takes up the defense of a garnishee in a garnishment proceeding. Perhaps rarest of all is a request for an award of attorney fees and costs made by a putative judgment debtor which has successfully defended a garnishee in a garnishment proceeding. The conflagration of these legal oddities in a single cause serves to reinforce the principle that, in the law, the actual is always stranger than the hypothetical. ¶30 Section §1190(B)(1) is not ambiguous; therefore, we need not employ rules of statutory interpretation. ¶31 Crutchfield had obtained a judgment against MP Engine, and sought, in good faith, to enforce it against a customer of a corporation he thought was a liable successor to MP Engine. To extend the plain language of §1190(B)(1) to include a prevailing putative judgment debtor would be to inequitably sanction Crutchfield for bringing a good faith garnishment action on a close question. We hold that Tige, as prevailing garnishee, is entitled to an award of reasonable attorney's fees and costs incurred at trial, but MP Holding, as putative judgment debtor, is not. ¶32 In a separate portion of their Brief-in-Chief, MP Holding and Tige requested an award of appeal-related attorney fees based on §1190(B)(1). CONCLUSION ¶33 To determine the liability of a once-removed successor corporation, a court must make a finding that each company along the line of succession met an exception to non-liability set forth in Pulis v. United States Elec. Tool Co., ¶34 Title CERTIORARI PREVIOUSLY GRANTED; COURT OF CIVIL APPEALS OPINION VACATED; TRIAL COURT REVERSED AND CAUSE REMANDED. EDMONDSON, C.J., TAYLOR, V.C.J., HARGRAVE, OPALA, KAUGER, WATT, WINCHESTER, COLBERT, J.J., concur. REIF, J., disqualified. FOOT