Opinion ID: 4473339
Heading Depth: 2
Heading Rank: 2

Heading: Corporate Assets

Text: ¶62 When one corporation buys the assets of another corporation in a commercial context, the transferee corporation generally does not succeed to the transferor's debts. Marie T. Reilly, Making Sense of Successor Liability, 31 Hofstra L. Rev. 745 (2003). However, a court may decide that the transferee corporation should be treated as a successor corporation and be liable for the transferor's debts. Id. at 746. In the matter before us, strict foreclosure, a Wis. Stat. § 409.620, et seq. remedy available to secured creditors, is the context in which to evaluate Lunda's claims.8 8There are occasions when federal law causes the purchasing corporation to be liable for the acts of the transferor corporation. See Kathryn A. Barnard, EPA's Policy of Corporate Successor Liability Under CERCLA, 6 Stan. Envtl. L. J. 78 (19861987). CERCLA and its policy concerns are not present here. I mention CERCLA only because the context in which successor corporate liability is evaluated is important. 6 No. 2017APAP822.pdr ¶63 Wisconsin follows the general rule, wherein a corporation that purchases the assets of another corporation in a commercial context is not liable for the obligations of the selling corporation. See Fish v. Amsted Indus., Inc., 126 Wis. 2d 293, 298, 376 N.W.2d 820 (1985). The general rule stated above promotes alienability of corporate assets and is in accord with policies that promote productive use of business assets. Gallenberg Equip., Inc. v. Agromac Int'l, Inc., 10 F. Supp. 2d 1050, 1053 (1998).
¶64 In Wisconsin, there are four exceptions to the rule of non-liability for the transferee corporation:
impliedly agreed to assume the selling corporation's liability; (2) when the transaction amounts to a consolidation or merger of the purchaser and seller corporations; (3) when the purchaser corporation is merely a continuation of the seller corporation; or (4) when the transaction is entered into fraudulently to escape liability for such obligations. Fish, 126 Wis. 2d at 298 (quoting Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977)). ¶65 Lunda contends that the strict foreclosure employed here caused a de facto merger between PDM and Veritas. In evaluating a claim of de facto merger, appellate precedent considers whether: (1) the assets of the seller corporation are acquired with shares of the stock in the buyer corporation, resulting in a continuity of shareholders; (2) the seller ceases operations and dissolves soon after the sale; (3) the buyer continues the enterprise of the seller corporation so that there is a continuity of management, employees, business location, assets and general business operations; and (4) the buyer assumes those liabilities of the seller necessary for the uninterrupted continuation of normal business operations. 7 No. 2017APAP822.pdr Sedbrook v. Zimmerman Design Grp., Ltd., 190 Wis. 2d 14, 20-21, 526 N.W.2d 758 (Ct. App. 1994) (quoting Parson v. Roper Whitney, Inc., 586 F. Supp. 1447, 1449 (W.D. Wis. 1984)). However, as we explained in Fish, [t]he key element in determining whether a merger or de facto merger has occurred is that the transfer of ownership was for stock in the successor corporation rather than cash. Fish, 126 Wis. 2d at 301 (quoting Leannais, 565 F.2d at 439). ¶66 In the matter before us, Lunda has provided nothing from which we could conclude that PDM's member, ASP, received membership status in Veritas, upon foreclosure, at the time of asset transfer or at any other time. The assets of PDM were obtained in exchange for satisfaction of approximately $65 million of PDM's $70 million of secured debt, which Veritas then held.9 Veritas's position relative to the assets that belonged to PDM did not arise due to a merger or a de facto merger of PDM with Veritas. ¶67 Lunda also contends that Veritas is a mere continuation of PDM; that it is the same corporation, but with a different name. In evaluating a claim that one corporation is a mere continuation of an earlier corporation, we consider whether there is a common identity of the officers, directors and stockholders in the selling and purchasing corporations. Leannais, 565 F.2d at 440. In Tift, we cited Leannais and also focused on identity. As we explained: When viewed in the context of a tort caused by a defective product, these two exceptions merely recite that, where either one is applicable, there is identity, because in substance the successor business 9 Five million dollars of secured debt remained and was retained by Veritas together with the assets that secured it. 8 No. 2017APAP822.pdr organization which the plaintiff sues is, despite organizational metamorphosis, the same business organization which manufactured the product which caused his injury. Tift v. Forage King Indus., Inc., 108 Wis. 2d 72, 78, 322 N.W.2d 14 (1982). Our major concern in Tift was whether a company that began as a sole proprietorship, proceeded to a partnership and ended as a corporation could be liable for a product manufactured by an earlier business form that was not corporate. Id. at 7677. However, lest there be confusion on the meaning of identity, in Fish, we explained that [i]dentity refers to identity of ownership, not identity of product line. Fish, 126 Wis. 2d at 301. ¶68 In the matter before us, there is no identity of ownership between PDM and Veritas. Both PDM and Veritas have LLC non-stock structures, but there was no overlap in their members or in their creators. PDM, a Delaware LLC, had a single member, ASP. Veritas, also a Delaware limited liability company, has a single member, BFH. BFH's members do not include ASP or PDM. While nonstock corporations generally are controlled by their articles and owned by their members, the articles of neither PDM nor Veritas are in the record before us. There is no proof in the record that supports the conclusion that Veritas and PDM have the same ownership. While it appears that Matt Cahill,10 who was the CEO of PDM, and Alan Sobel, who was the CFO of PDM, continued for at least some period of time in those roles at Veritas, neither had an owner's interest PDM or in Veritas. Accordingly, Veritas does 10 Cahill was replaced as CEO in April of 2014. 9 No. 2017APAP822.pdr not meet the criteria necessary for us to conclude that it is a mere continuation of PDM. ¶69 Lunda also contends that because Veritas foreclosed by using strict foreclosure procedures that were designed to eliminate all debt that had a lesser priority than the debt Atlas affiliates purchased from the Syndicate, the transactions at issue here were fraudulent as to Lunda.11 Therefore, Lunda reasons the general rule that the purchasing corporation is not responsible for the debts of the seller does not apply; and accordingly, it has the right to execute its $16 million judgment against Veritas's assets. ¶70 The elements of common law fraud are: (1) a representation of fact that the speaker intends the hearer to rely on; (2) which the speaker either knows is untrue, or makes with reckless disregard for its truthfulness; (3) another believes such representation and relies on it; (4) with resulting damage. Ollerman v. O'Rourke Co., Inc., 94 Wis. 2d 17, 25, 288 N.W.2d 95 (1980) (quoting Whipp v. Iverson, 43 Wis. 2d 166, 169-170, 168 N.W.2d 201 (1969)). 11Lunda pled common law fraud and the circuit court addressed it. Lunda also raised it in its arguments before us. The majority opinion applies forfeiture and does not address this contention because Lunda did not continue this allegation before the court of appeals. Majority op., ¶¶38-42. Forfeiture is a doctrine of judicial administration. See State v. Soto, 2012 WI 93, ¶¶35, 36, 343 Wis. 2d 43, 817 N.W.2d 848. Because Lunda's contention arises in a commercial context where statutory procedures under ch. 409 were employed and guidance may be helpful to future commercial litigants, I choose to address Lunda's contention. 10 No. 2017APAP822.pdr ¶71 We recently addressed common law fraud in Springer v. Nohl Elec. Prods. Corp., 2018 WI 48, 381 Wis. 2d 438, 912 N.W.2d 1, in the context of a products liability claim that alleged successor corporation liability. There, Mrs. Springer claimed that her husband died from exposure to asbestos-containing products, which occurred during his employment for a company that preceded Nohl. Id., ¶2. She sued Nohl to recover for his injuries and death. Id. We explained that the fraudulent transfer of assets exception to non-liability has rarely been used to impose successor liability for products liability claims. Id., ¶17 (citing Restatement (Third) of Torts: Products Liability § 12 cmt. e (Am. Law Inst. 1998); Timothy J. Murphy, A Policy Analysis of a Successor Corporation's Liability for Its Predecessor's Defective Products When the Successor Has Acquired the Predecessor's Assets for Cash, 71 Marq. L. Rev. 815, 819 (1988). ¶72 In Springer, we painted the fraud exception with broad strokes that left the particulars of that exception for another day. We said, The fraudulent transaction theory turns on the intention underlying the transfer of assets to [the successor], i.e., whether it was made with an actual intention to hinder, delay, or defraud creditors. Springer, 381 Wis. 2d 438, ¶19 (quoting United States ex rel. Bunk v. Gov't Logistics N.V., 842 F.3d 261, 276 (4th Cir. 2016)). We also said that the fraudulent transfer exception, [in] the law [of] every jurisdiction . . . requires a finding that the corporate transfer of assets 'is for the fraudulent purpose of escaping liability.' Id. (quoting Raytech Corp. v. White, 54 F.3d 187, 192 (3d Cir. 1995) (alterations in original)). The wrongful intent of the 11 No. 2017APAP822.pdr person seeking to avoid liability was critical to our decision in Springer. Id., ¶19. ¶73 It is important to note that Springer arose in the context of a products liability claim. It did not involve strict foreclosure of secured debt pursuant to Wis. Stat. § 409.620. Lunda gave little attention to the commercial context in which its claim arose, yet an understanding of the context in which Lunda makes its claim and Veritas raises its defense is critical. Therefore, a brief overview of strict foreclosure will be helpful to the reader's understanding of my discussion that follows. ¶74 Article 9 of the Uniform Commercial Code (U.C.C.) permits a secured creditor to elect among several alternative remedies in the event of a default by the debtor.12 LaRoche v. Amoskeag Bank, 969 F.2d 1299, 1302 (1st Cir. 1992). Subsequent to debtor default, the secured creditor may dispose of the collateral, as long as it does it in a 'commercially reasonable manner.' Id. at 1303. However, a secured creditor also may choose to proceed by strict foreclosure, which is a different statutory opportunity. Id. ¶75 Strict foreclosure permits a secured creditor to retain the collateral in complete satisfaction of the indebtedness. Id. Disputes about valuation or even a clear excess of collateral value over the amount of obligations satisfied do not necessarily demonstrate the absence of good faith. Michael L. Monson, Strict Foreclosure Under Article 9: Benefits, Risks, and Strategies, 43 No. 1 UCC L.J. (Oct. 2010), 3. 12Wisconsin Stat. ch. 409 is the Wisconsin equivalent of Uniform Commercial Code chapter 9. 12 No. 2017APAP822.pdr ¶76 When a secured party employs strict foreclosure pursuant to statute and accepts the collateral in full or partial satisfaction of the debt owed: (1) the debt is discharged to the extent consented to by the debtor, (2) all of the debtor's rights in the collateral are transferred to the secured party, (3) the security interest that was the subject of the debtor's consent and any subordinate security interest or other subordinate liens are discharged, and (4) any other subordinate interests are terminated. . . . After the secured party has accepted the collateral it may resell the collateral to a subsequent purchaser, keep it, or otherwise deal with it as its own property. Id. at 6. ¶77 Wisconsin Stat. § 409.620's authorization of strict foreclosure has a number of mandatory procedures and the availability of objections that could stop the process. For example, subordinate secured creditors have a right to notice of the proposed strict foreclosure, Wis. Stat. § 409.621(1), and a right to object to using strict foreclosure, Wis. Stat. § 409.620(1)(b). However, on November 5, 2013, when Veritas strictly foreclosed on the debt that was secured by PDM's assets, Lunda was not a subordinate secured creditor. Therefore, Lunda did not have the opportunity to object to Veritas' use of strict foreclosure. ¶78 In addition, Lunda has not claimed that the strict foreclosure that occurred here did not satisfy the statutory obligations of Wis. Stat. ch. 409. Lunda simply contends that because the strict foreclosure process was used to cleanse assets of debt the process was fraudulent. ¶79 Lunda's argument misses its mark because Wis. Stat. ch. 409 was created in part to do exactly what happened 13 No. 2017APAP822.pdr here. Veritas's conduct was not fraudulent because it was not wrongful in this commercial context.13 Stated otherwise, I conclude that a creditor that strictly forecloses in a commercial context in accord with the statutory procedures set out in ch. 409 to avoid the claims of debtors with lesser priority does not exhibit wrongful intent that supports a claim of common law fraud. Accordingly, the broad statements about fraudulent intent set out in Springer have no application here. ¶80 My conclusion that strict foreclosure under Wis. Stat. § 409.620 does not support Lunda's fraud claim is reinforced by Wis. Stat. § 242.08(5)(b). Statutory fraud, Wisconsin Uniform Fraudulent Transfer Act (WUFTA), is set out in Wis. Stat. ch. 242. Lunda sought to use WUFTA to void the transfer of PDM's assets to Veritas. However, § 242.08(5)(b) provides that a transfer is not voidable if it results from Enforcement of a security interest in compliance with ch. 409. Here, there is no question that the transfer of personal property, tangible and intangible, occurred through enforcement of a security interest under § 409.620 et seq. WUFTA also has no application here. 13Chapter 409's legislation for secured transactions is complicated. An understanding of the claim and defense and the context in which they arise is critical. Here, we have strict foreclosure between commercial parties engaged in commercial transactions. 14 No. 2017APAP822.pdr