Opinion ID: 2303387
Heading Depth: 2
Heading Rank: 5

Heading: fact-finding on appellate review

Text: Our second issue pertains solely to the other three prongs of the de facto merger exception: (1) a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; (2) assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor; and (3) a continuity of management, personnel, physical location, aspects, and general business operation. Lavelle, supra at 227-28. The trial court found that the evidence established each of these prongs. The Superior Court determined that the evidence of record did not establish these prongs. The question raised by Appellant is whether the Superior Court improperly made its own factual findings, and substituted such findings for those of the trial court, in arriving at this determination. [23] Of these three prongs, the one upon which the Superior Court placed its primary emphasis was whether the predecessor corporation had a continued existence. See Fizzano Bros., supra at 1023. Both the trial court and the Superior Court focused on XLN as the predecessor corporation. XLN did survive as a corporate entity for a period of time after the date of the asset purchase. However, the trial court determined that the cessation of ordinary business prong was met based on credible evidence that because of the asset purchase agreement, XLN essentially ceased operating; had ultimately become dormant, by the admission of its CEO and one of its shareholders, David Binder; and, can be considered out of business. Trial Court Opinion, Conclusion of Law No. 17. Although XLN did change its name pursuant to the asset purchase agreement with XLNT, and had retained two customers, the trial court found that the T-Rex software retained by XLN had no functionality, and that XLNT had hired XLN's remaining employee. Id., Findings of Fact Nos. 33, 38. The Superior Court, however, held: The record on appeal [] does not reflect that either XLN or XLNT had any intention that XLN would cease operations and end its corporate existence as soon as legally and practically possible after the sale of assets. To the contrary, XLN not only remained in business after the sale (changing its name to XE Corporation) but also retained two customers (Genco Distribution Systems and Novartis Pharmaceutical Corp.), along with the physical and intellectual property assets necessary to service them (including computer equipment and the source code for the T-Rex derivative software). Plaintiff's Exhibit 1. Far from conveying any understanding by the parties that XLN would cease its business activities, the Asset Purchase Agreement even includes a covenant not to compete forbidding XLN from marketing its products to, inter alia, former SDG or XLN customers. Fizzano Bros., 973 A.2d at 1022. It would appear that the Superior Court made factual findings contravening those of the trial court. The Superior Court found that XLN had the physical and intellectual property assets necessary to service [two retained customers] (including computer equipment and the source code for the T-Rex derivative software). Id. However, the trial court found that the T-Rex derivative software was undeveloped and had no functionality. Trial Court Opinion, Finding of Fact No. 33. Further, the trial court found that XLNT had hired XLN's remaining employee. Id., Finding of Fact No. 38. These factual findings of trial court are supported by testimony in the record. See N.T., 10/24/06, at 35, 200-01. Further, the Superior Court's analysis appears to contradict the trial court's factual finding that XLN became dormant and ceased operations because of the asset purchase agreement. Again, the trial court's factual findings are supported by the record. See N.T., 10/24/06, at 85. Indeed, XLN's president, David Binder, testified that we just closed the company down, apparently a few weeks after the asset sale. Id. The Superior Court asserted that XLN remained in business after the sale. Fizzano Bros., 973 A.2d at 1022. Accordingly, the Superior Court erred to the extent that it did make factual findings different from the trial court on these matters. The remainder of the Superior Court's analysis on this issue seems less a dispute over the factual record than a dispute over the legal requirements of the cessation of ordinary business prong of the de facto merger exception. That is, the Superior Court determined that an important consideration for this prong was the intent of the two corporations as evidenced by the asset purchase agreement. The trial court did not make any factual findings pertaining to the intent of the parties to the agreement. We are unsure why the issue of intent as evidenced from the asset purchase agreement is consequential when a de facto merger analysis requires that a court look beyond the mere formalities of a transaction; however, such question of law is not before us. To the extent the issue of intent is important, the appropriate course would have been for the Superior Court to remand to the trial court to make the necessary findings on what appears to be a factual question. The next prong concerns assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor. For this prong, the trial court concluded from the record that XLNT clearly assumed all of the obligations of XLN that were ordinarily necessary for the uninterrupted continuation of normal business operations. Trial Court Opinion, Conclusion of Law No. 18. These obligations included the lease of the work premises, payment of salary to the same key employees, servicing the same clients, assuming a debt owed to one of the clients, and taking responsibility for XLN's accounts receivable. Id., Conclusion of Law No. 19. Further, the court noted that the most significant obligation of XLN that was assumed by XLNT was the debt owed for the Software, which was the asset vital to the operation of XLNT's business and had been the asset vital to the operation of XLN's business. Id., Conclusion of Law No. 20. The Superior Court, however, held as follows: With respect to the third factor, assumption of liabilities ordinarily necessary for uninterrupted continuation of the business, the factual basis for this factor does not appear to have been extensively developed by either party. The trial court noted only that XLNT spent significant time and money to resolve issues with former XLN customer Cardinal IG. In the Asset Purchase Agreement, however, XLNT specifically assumed the obligation for remediation of problems with Cardinal IG while expressly disclaiming responsibility for XLN's other liabilities. Fizzano Bros., 973 A.2d at 1022 (citations to the Trial Court Opinion and footnote omitted). Based on the above, it would appear that the Superior Court disregarded the trial court's actual factual findings and legal conclusions on this prong, and instead shifted the focus to the trial court's ancillary concern that XLNT did not address Appellant's claim in the manner that it addressed the claim made by another XLN customer. The trial court's central conclusions, however, are based on its factual findings that are supported by the record. See Trial Court Opinion, Findings of Fact Nos. 25-26, 36-40 (citing to the record). Indeed, there does not appear to be any dispute among the parties that XLNT bought nearly all of XLN's assets, assumed the remaining debt for the Software purchase, hired XLN's current and former employees and consultants, and set up shop in the same location as XLN, assuming the lease there and holding itself out as the successor to XLN. Thus, the Superior Court is clearly incorrect that the record was not developed for this prong, and it erred by disregarding the trial court's essential findings and the support for them in the record. The final prong concerns the continuity of management, personnel, physical location, aspects, and general business operation. Many of these elements overlap with those of the previous prong. The trial court found that (1) there was an undisputed continuation of physical location, passed from SDG to XLN to XLNT; (2) XLNT acquired all of the assets of XLN, except for XLN's stock, two customers, and two computer servers with workstations; (3) the Software continued to be owned by the Shareholders under both XLN and XLNT until the purchase price was fully paid; and (4) the general business operations of XLN and XLNT were the same, involving the same essential personnel, key asset, customers (except for the two retained by XLN), and office location. Moreover, the trial court concluded that there was a continuation of management because XLNT retained the key personnel, Hamlin and Fritsch; Hamlin as Chief Operating Officer, controlling day-to-day operations, and Fritsch as Chief Technology Officer, controlling XLNT's technology issues. Id., Conclusion of Law No. 11. Additionally, the trial court noted that XLNT hired XLN's only remaining employee and made him the General Manager. Id., Conclusion of Law No. 12. The Superior Court acknowledged that the record supports the trial court's finding regarding the continuity of general business operations. However, the court determined that this finding was of no moment, noting that a continuity of business operations was not a surprising result where there has been a general asset purchase. Rather, the court emphasized, regarding this prong, that the factual record does not support the trial court's findings concerning a continuity of management. The court held: Again, however, the record on appeal does not support these findings, at least with regard to continuity of management. The record contains no information regarding the identities of the members of XLN's board of directors, and thus provides no basis for determining whether there was any overlap between the directors of XLN and XLNT. And other than Binder, identified as XLN's CEO, there is likewise no information in the record regarding the identity of the officers of XLN at the time of the sale of assets, and thus no basis for determining any connections between XLN officers and XLNT. After the sale, Binder had no continuing role at XLNT. The trial court pointed out that two former employees of XLN, Hamlin and Fritsch, were hired by XLNT in connection with the sale of assets. At the time of the sale of assets, however, Hamlin and Fritsch were no longer employees of XLN, their employment having been terminated several months prior to the transaction. As such, XLNT's employment of Hamlin and Fritsch provides no support for a finding of a continuation of personnel. Moreover, while recognizing that Hamlin and Fritsch had a direct part in the day-to-day operations of XLNT, the trial court also acknowledged that the evidence at trial demonstrated that neither of them had any power to make legal and/or personnel decisions on XLNT's behalf. Trial Court Opinion, 11/7/07, at 18. As a result, XLNT's employment of Hamlin and Fritsch, without more, did not establish a continuity of management and personnel required to support a de facto merger claim. Fizzano Bros., 973 A.2d at 1022-23 (emphasis in original; footnote omitted). In a footnote, the Superior Court noted: Hamlin's title at XLNT was Chief Operating Officer and Fritsch's was Chief Technology Officer. N.T., 10/23/06, at 99-102. Although these titles suggest they were both officers at XLNT, as noted above neither had any authority to make legal and/or personnel decisions on XLNT's behalf. Likewise, it is not clear that they held officer positions at XLN either, as their employment contracts with XLNT both provided that Employee has no authority, either express or implied, to act on behalf of XLN in any matter without express written consent and permission from an officer of XLN. Defendants' Exhibits 13, 14. Id. at 1023 n. 5. Here, it would appear that the discrepancy between the Superior Court and the trial court on the issue of management is more about how to interpret this matter in a de facto merger analysis than it is a difference over the factual record. That is, the two courts are not at odds over what the record shows concerning the composition of the corporations' respective boards of directors or chief executive officers. Further, the Superior Court does not dispute that the record supports the trial court's finding that Hamlin and Fritsch were officers of XLNT. However, the Superior Court does not explain why it would have been necessary for Appellant to show that Hamlin and Fritsch made an immediate transition from XLN to XLNT in order to prove a de facto merger. Further, it is unclear from its opinion what weight the Superior Court gave to the circumstance of the lack of common higher management between XLN and XLNT. However, such questions are beyond the scope of the issue taken on appeal, which concerns a question of fact-finding. Except to the extent the Superior Court apparently discounted the trial court's factual finding that some continuity of management occurred with XLNT's hiring of Hamlin and Fritsch as officers, the Superior Court did not improperly engage in fact-finding in this final issue. The order of the Superior Court must be vacated because it erred by (1) applying an overly-narrow and mechanical continuity of ownership analysis; and (2) substituting its own factual findings for those of the trial court in several instances in its review of the remaining prongs of the de facto merger exception. Accordingly, the Superior Court's order is vacated, and this matter is remanded for proceedings consistent with this opinion. Chief Justice CASTILLE, Justices EAKIN, TODD, and ORIE MELVIN join the opinion.