2010 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

3-11-2010

Greenway Ctr Inc v. Essex Ins Co

Precedential or Non-Precedential: Non-Precedential

Docket No. 08-3724

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Recommended Citation

"Greenway Ctr Inc v. Essex Ins Co" (2010). 2010 Decisions. Paper 1744.

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NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

No. 08-3724

_____________

GREENWAY CENTER, INC.

v.

ESSEX INSURANCE COMPANY; ANNETTE MAIONE, 

Individually and as Administrator of the Estate of 

Mark Willet

ESSEX INSURANCE COMPANY,

 Appellant

_______________

On Appeal from the United States District Court

for the Middle District of Pennsylvania

(D.C. No. 04-cv-1143)

District Judge: Honorable James M. Munley

_______________

Submitted Under Third Circuit LAR 34.1(a)

January 26, 2010

Before: RENDELL and JORDAN, Circuit Judges, and 

PADOVA*, Senior District Judge.

(Filed: March 11, 2010)

_______________

 *Honorable John R. Padova, United States District Court Senior Judge for the Eastern

District of Pennsylvania, sitting by designation.
 The policy was issued on February 3, 1997 and had a term of one year. 1

2

_______________

OPINION OF THE COURT

_______________

JORDAN, Circuit Judge.

Essex Insurance Company (“Essex”) appeals from a declaratory judgment entered

against it by the United States District Court for the Middle District of Pennsylvania after

a bench trial, obligating it to defend and indemnify Greenway Center, Inc. (“GCI”) in a

wrongful death action brought against GCI in the Monroe County Court of Common

Pleas by Annette Maione. The basis for the District Court’s judgment was its conclusion

that a de facto merger occurred between GCI and Winco Acquisitions, Inc. d/b/a

Greenway Center (“Winco”). Winco is the former operator of the Greenway Center (the

“Center”), a drug and alcohol treatment facility in Henryville, Pennsylvania, and the

insured on a 1997 policy issued by Essex. Because we conclude that GCI is not a 1

successor to Winco under Pennsylvania law, we will vacate the District Court’s judgment

and remand for further proceedings consistent with this opinion.

I. Background

On June 24, 1997, Mark Willet passed away the day after having checked into the

Center for treatment of his drug and alcohol addictions. At the time of Willet’s death,

Winco operated the Center. However, as discussed in more detail below, GCI, which was
3

incorporated in 1998, eventually took over the Center’s operations. In 1999, Maione

brought a wrongful death action against GCI in connection with her husband’s death. 

GCI filed the instant lawsuit against Essex and Maione, individually and in her

capacity as the administrator of her husband’s estate, in the Monroe County Court of

Common Pleas in December of 2003, seeking a declaratory judgment that Essex is

obligated to indemnify and defend GCI in Maione’s wrongful death action. The matter

was removed to the District Court in 2004. After a bench trial on April 19, 2005, the

Court found in favor of GCI, holding that the state court in the underlying negligence

action had already found GCI to be a successor of Winco and that issue preclusion

prevented Essex from challenging that finding. We reversed on appeal, holding that issue

preclusion was inapplicable, and remanded for a determination as to whether GCI was a

successor in interest to Winco. Greenway Ctr. Inc. v. Essex Ins. Co., 475 F.3d 139 (3d

Cir. 2007).

On remand, the District Court held a supplemental bench trial and, in an August 6,

2008 memorandum opinion, the following facts emerged. Winco operated the Center as

an alcohol and drug rehabilitation center pursuant to a license issued by the Pennsylvania

Department of Health (“DOH”). After Willet’s death, the DOH revoked Winco’s license,

and the Center was shut down in November 1997. Winco had previously filed for

bankruptcy in June of 1997 and had developed a reorganization plan pursuant to which all

of its stock was to be vested in or reissued to GCI. Ultimately, however, no stock was
 HMA, GCI, and Winco did, however, have the same attorney. 

2

 Although the District Court did not expressly acknowledge this fact, it is apparent 3

from the record and our prior opinion in this matter.

4

ever transferred from Winco to GCI. Furthermore, GCI did not purchase any of Winco’s

assets. 

Heath Management Associates (“HMA”), a management company, was authorized

by the Bankruptcy Court to operate the Center during the transition period. HMA began

running the Center in February 1998 pursuant to a management agreement with Winco,

and reopened the Center in March 1998 “with the aim of eventually turning the business

over to GCI.” (App. at 16.) Financing for the Center’s operation was provided by

Viacare. HMA, Viacare, and GCI all had the same individuals serving on their boards of

directors. However, none of the shareholders, officers, or directors of Winco were

shareholders, officers, or directors of GCI. 

2

HMA became the holder of Winco’s license, though the license remained in

Winco’s name. Since most of Winco’s employees left the Center after it closed, HMA

hired new employees upon reopening with the exception of two individuals from the

previous administration. While running the Center, HMA did not take any direction from

any of Winco’s stockholders or owners. In fact, it was prohibited from doing so by the

DOH, which only permitted the Center to reopen on the condition that Winco’s

management be prohibited from participating in the Center’s operations. Greenway Ctr. 3
5

Inc., 475 F.3d at 143 n.3. In other words, Winco’s management was forbidden to, and in

fact never again did, play any role in running the Center after it was shut down. 

The boards of HMA, Viacare, and GCI met between 1998 and 2000 to discuss the

Center’s operations. No one from Winco was present at those meetings, and thus GCI’s

executive director made decisions for Winco. Winco was the licensee and the named

insured on relevant insurance policies during this time period, and it maintained bank

accounts to pay employees, even though it played no role in running the Center. 

Additionally, Winco remained a party to contracts with various counties that referred

patients to the Center for court-supervised treatment so that referrals pursuant to those

contracts could continue uninterrupted. In short, after HMA took over operations, Winco

essentially existed only as a shell, its shareholders had abandoned the corporation and

other entities ran the business, but Winco was not dissolved because of the pendency of

Willet’s state court suit and “because it was convenient to allow Winco to remain a party

to third party contracts that were serviced by Greenway Center.” (App. at 17.) By the

time Maione sued Winco – after suing GCI and presumably realizing that she had

mistakenly sued the wrong defendant – the statute of limitations had run and her lawsuit

against Winco was dismissed as time-barred. Essex defended Winco in that action. The

persistent efforts to find GCI to be Winco’s successor appear to stem from Maione’s

initial mistake in suing the improper defendant. 
6

On June 28, 2000, GCI became the holder of the license to run the Center. 

Regardless of who was operating the facility, the Center was always known as the

Greenway Center; its business did not change; it was always located on the same

premises, and its letterhead and phone number did not change. 

The District Court, applying Pennsylvania law, held that a de facto merger had

occurred between Winco and GCI, such that GCI could take advantage of Essex’s

insurance policy. In making that determination, the Court considered four factors set

forth under Pennsylvania law for assessing a claim of de facto merger: “(1) continuity of

ownership; (2) cessation of the ordinary business by, and dissolution of, the predecessor

as soon as practicable; (3) assumption by the successor of liabilities ordinarily necessary

for uninterrupted continuation of the business; and (4) continuity of the management,

personnel, physical location, and the general business operation.” (App. at 15 (quoting

Continental Ins. Co. v. Schneider, Inc., 810 A.2d 127, 135 (Pa. Super. Ct. 2002).)

The Court held that the first factor, continuity of ownership, was met because

HMA “had in effect been running Winco to the extent that it needed running” and the

shareholders of HMA are identical to those of GCI. (App. at 19.) The Court found that

the second factor, earliest practicable dissolution, weighed in favor of de facto merger

because, even though Winco was never officially dissolved, “it has no shareholders, no

business and does nothing.” (App. at 19.) The Court found that the third factor,

assumption of liabilities necessary for continuation of business, weighed in favor of de
 The District Court rejected GCI’s other theories of recovery. Those issues are not 4

before us on appeal.

 This case was removed to District Court pursuant to 28 U.S.C. § 1441. The District 5

Court’s jurisdiction was based upon diversity because the parties are citizens of different

states – GCI is a citizen of Pennsylvania while Essex is a citizen of Delaware and

Virginia and Maione and Willet are both citizens of New Jersey – and the amount in

controversy exceeds $75,000. See 28 U.S.C. § 1332. We have jurisdiction over this

appeal based on 28 U.S.C. § 1291.

7

facto merger because the Center’s contracts remained in Winco’s name but were carried

out by HMA and GCI. Finally, the Court found that the fourth factor, continuity of

management and general business operation, weighed in favor of merger because there

was a continuity “in the physical location and general business operations of the

Greenway Center” and a continuation of personnel to a certain extent. (App. at 20.) The

Court accordingly entered declaratory judgment in favor of GCI, obligating Essex to

defend and indemnify GCI in Maione’s wrongful death action based on its finding that a

de facto merger had occurred. Essex timely appealed. 

4

II. Discussion5

“We review a district court’s findings of fact following a bench trial under the

clearly erroneous standard.” Am. Soc’y for Testing & Materials v. Corrpro Cos., Inc.,

478 F.3d 557, 566 (3d Cir. 2007). In contrast, we exercise plenary review over a district

court’s legal conclusions. Id. Since this action is governed by Pennsylvania law, we must

“apply existing state law as interpreted by the state’s highest court in an effort to predict

how that court would decide the precise legal issues before us.” See Koppers Co. v.
8

Aetna Cas. and Sur. Co., 98 F.3d 1440, 1445 (3d Cir. 1996). If the highest state court has

not spoken on the pertinent issue, we may look for guidance to, among other things,

decisions of state intermediate appellate courts and decisions of federal courts interpreting

that state’s law. Id.

The general rule in Pennsylvania is that, when one company sells all or

substantially all of its assets to another company, the purchasing company is not liable as

a successor. Continental Ins. Co. v. Schneider, Inc., 873 A.2d 1286, 1291 (Pa. 2005). 

One exception to that rule occurs when the purchasing company is “merely a continuation

of the selling corporation,” id. at 1291, also known as a de facto merger, Berg Chilling

Sys., Inc. v. Hull Corp., 435 F.3d 455, 468 (3d Cir. 2006) (noting that courts treat de facto

merger and continuation identically). A de facto merger or mere continuation occurs

when a new corporation is formed to acquire the assets of or take over a second

corporation, which then ceases to exist. See Schneider, 810 A.2d at 134-35.

Again, as the District Court recognized, Pennsylvania law requires courts to

consider the following four factors in determining whether a de facto merger has occurred

between two entities, “(1) continuity of ownership; (2) cessation of the ordinary business

by, and dissolution of, the predecessor as soon as practicable; (3) assumption by the

successor of liabilities ordinarily necessary for uninterrupted continuation of the business;

and (4) continuity of the management, personnel, physical location, and the general

business operation.” Id. at 135; see also Berg Chilling, 435 F.3d at 468-69. In Berg, we
 In its supplemental brief, GCI claims that Fizzano is somehow irrelevant to our 6

analysis, because Fizzano concerned an asset purchase while no asset purchase occurred

in this case. Fizzano is the Pennsylvania Superior Court’s latest pronouncement on the de

facto merger doctrine, and its legal principles are applicable here even if there are factual

differences in the cases. Indeed, GCI itself cites cases in its answering brief as applicable

law on the issue which themselves concern asset purchases. Nor does Fizzano conflict

with the Pennsylvania Superior Court’s earlier decision in Schneider, 810 A.2d 127 (Pa.

Super. Ct. 2002). Instead, Fizzano clarified Schneider, explaining that Schneider

emphasized “the importance of continuity of ownership in the de facto merger analysis.” 

Fizzano, 973 A.2d at 1021. 

9

explained that the first factor, continuity of ownership, is the most important factor in the

analysis, and that the absence of any continuity of ownership therefore creates a “strong

presumption against imposing successor liability.” 435 F.3d at 469. Recently, the

Pennsylvania Superior Court confirmed that continuity of ownership is “a key element

that must exist in order to apply the de facto merger doctrine, since in the absence of a

transfer of stock for assets the consequence of the transaction is not the functional

equivalent of a merger.” Fizzano Bros. Concrete Prods., Inc. v. XLN, Inc., 973 A.2d

1016, 1020 (Pa. Super. Ct. 2009). “The objective of [the continuity of ownership] 6

requirement is usually to identify situations in which shareholders of a seller corporation

unfairly attempt to impose their costs or misdeeds on third parties by retaining assets that

have been artificially cleansed of liability.” Berg, 435 F.3d at 469. 

The District Court erred in concluding that a de facto merger occurred between

GCI and Winco because there is no evidence of continuity of ownership. GCI never

purchased any of Winco’s assets and no stock was ever transferred from Winco’s
 GCI’s reliance on the bankruptcy plan, which sought to transfer Winco’s stock to GCI, 7

is misplaced, not least because there was no such transfer. 

10

shareholders to GCI’s shareholders. Furthermore, Winco’s owners never participated in

running the Center after it was closed in November 1997 and, importantly, were

prohibited from doing so as a condition of the reopening of the Center under HMA’s

management. The record does not show that the ownership of Winco passed to HMA in

any fashion.

The District Court found a continuity of ownership between HMA and Winco “to

a certain extent” because HMA ran “Winco to the extent that it needed running.” (App.

at 19.) Presumably, the District Court was referring to the fact that HMA ran the Center

after it reopened and carried out contracts to which Winco was still a party. That does not

mean, however, that the officers and directors of HMA somehow became owners of

Winco. And, to the extent that overlapping management is meaningful, none of Winco’s

management played any role at all in the Center’s operation once it reopened. 

Accordingly, there was no continuity of ownership between Winco and HMA, and the

fact that GCI and HMA share the same management is irrelevant. 

7

GCI asserts that the “gradual metamorphoses [where] the operations of [the

Center] went from Winco to HMA to GCI over a course of time” establishes continuity of

ownership. (Appellee’s Ans. Br. at 21.) Although it is true that HMA, and GCI

thereafter, assumed operation of the Center, there was no continuity of ownership
11

between Winco and HMA (and thus, GCI) – an important distinction. In the absence of a

stock transfer, asset purchase, or any other evidence establishing that the owners of

Winco became the owners of GCI, there is no basis for finding a continuity of ownership.

Although our conclusion is sufficient to preclude application of the de facto

merger doctrine, see Fizzano, 973 A.2d at 1020 (concluding that “since there was no

continuity of ownership, the de facto merger doctrine does not apply”), we also note that

the remaining factors – earliest practicable dissolution of the predecessor, assumption by

the successor of the necessary liabilities, and the continuity of the management and

general operations – do not support a finding of de facto merger. First, regardless of

whether Winco conducted any business, it was never dissolved and was capable of

responding to the action Maione filed against it. Second, although GCI serviced several

of Winco’s contracts, GCI did not purchase Winco’s service agreements or assume

Winco’s liabilities. Finally, although the general business operations and physical

location of the Center did not change under GCI’s ownership, the management was new

and the personnel was, for the most part, different from personnel under Winco’s

management. Taking the four factors together, we cannot conclude that GCI is a

continuation of Winco and, thus, the District Court’s conclusion to the contrary was
 At the end of its analysis, the District Court focused on the fact that “GCI maintained 8

the insurance in Winco’s name even when Winco was clearly doing nothing to operate the

business.” Although it may have appeared equitable to the Court to permit GCI to

recover insurance proceeds from Essex when GCI was running the Center, Willet’s death

took place in June of 1997, when Winco was running the Center. Furthermore, the

insurance policy in question was issued to Winco for a term of one year, beginning on

February 3, 1997. Accordingly, that particular policy would have expired before HMA –

and certainly before GCI – began running the Center.

12

erroneous. Since GCI is not Winco’s successor, GCI cannot take advantage of Essex’s 8

insurance policy on that basis.

III. Conclusion

No de facto merger or continuation occurred between GCI and Winco that would

permit GCI to take advantage of Essex’s insurance policy as Winco’s successor. We

must therefore vacate the District Court’s declaratory judgment and remand for further

proceedings consistent with this opinion.