Opinion ID: 1948327
Heading Depth: 2
Heading Rank: 2

Heading: Imputation of Corporation's Liability to the Partnership

Text: Appellants argue that the trial court erred in the first instance in imputing PFP's corporate obligation under the contract to WWL, the partnership. They contend that this ruling is contrary to the undisputed evidence and erroneous as a matter of law. The trial court imputed a transfer of liability to WWL for PFP's obligations under the GMK contract by operation of law from the date of the partnership's formation, March 1, 1984. The factual findings underpinning the court's ruling were these: (1) PFP and the partnership had the same business; (2) the significant persons in the corporation remained as significant persons in the partnership; (3) PFP made no arrangements to meet its obligations under the contract, although it continued to operate under it through June 30, 1984; and (4) PFP failed to inform GMK that it was no longer dealing with the same legal entity. In concluding that successor liability should be imposed on the partnership, the trial court relied on three cases, namely: Colonial Ice Cream Co. v. Southland Ice Utilities Corp., 60 App.D.C. 320, 53 F.2d 932 (1931), Bishop v. Dura-Lite Mfg. Co., 489 F.2d 710 (6th Cir.1973) and Brockmann v. O'Neill, 565 S.W.2d 796 (Mo.App.Div. 1 (1978)). Appellants contend that, unlike this case, each of these cases involved fraudulent conveyances which the original corporation made for the purpose of evading its creditors. Appellee contends that the cases are analogous to this case because each imposed successor liability based upon a before and after comparison of how the businesses of the buyers and sellers operated which revealed no essential differences. In any event, appellee argues, the evidence in this case established fraudulent transfers, although the trial court made no finding to that effect. Ordinarily, a business entity which acquires the assets of another business is not liable for its predecessor's liabilities and debts. Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451, 1456, reh'g denied, 765 F.2d 154 (11th Cir.1985) (citations omitted). There are several recognized exceptions to this general rule. Liability will be imposed on the successor entity when (1) the buyer expressly or impliedly agrees to assume such debts; or (2) the transaction amounts to a de facto merger of the buyer and seller; or (3) the buying corporation is a mere continuation of the selling corporation; or (4) the transaction is entered into fraudulently in order to escape liability for such debts. Id. (quoting Acheson v. Falstaff Brewing Corp., 523 F.2d 1327, 1329-30 (9th Cir.1975)); see also Baltimore Luggage v. Holtzman, 80 Md.App. 282, 562 A.2d 1286, 1289-90 (1989), cert. denied, 318 Md. 323, 568 A.2d 28 (1990); Brockmann, supra, 565 S.W.2d at 798. There is no dispute that the first two exceptions are not involved here. The trial court relied principally upon the continuation exception to the general rule against successor liability in imputing liability to WWL for PFP's obligations under the GMK contract. We review first the cases relied upon by the trial court and then their applicability to the facts and issues involved here. We note at the outset that Colonial Ice Cream, Brockmann, and Dura-Lite are materially distinguishable from the case before this court. In each of these cases, the transferring or selling entity ceased to exist in fact or in effect, and the transferee literally continued the business of the transferor. In Colonial Ice Cream, the seller corporation, Zero Products, Inc. (Zero Company) sold all of its assets, including its plant, stock in trade, fixtures, patents, machinery, other property, and good will to the successor company, Zero Ice Cream Company (Colonial). [21] 53 F.2d at 933. In exchange, the buyer, Colonial, assumed the seller corporation's liabilities, up to a certain amount, and gave the seller 1,785 shares of its second preferred capital stock. Id. The creditor, Southland Ice Utilities Corporation (Merchants), [22] contended that the seller and buyer companies, Zero and Colonial, were essentially the same company, having substantially the same stockholders and officers, and that consolidation of their assets was, in effect, a merger. [23] Id. The appellate court agreed, concluding essentially that the purported sale was no more than a continuation of the seller's business under a new name and that the mere retention by the predecessor company of its corporate charter after the transfer of its assets did not make it any less extinct as an active entity. Id. at 934. Therefore, the court sustained the trial court's determination that the creditor of the seller corporation could follow the seller's assets to the successor company, which was deemed to hold them in trust for the payment of creditors. Id. In Brockmann, the creditors sued the trustees of the assets of a former corporation, Royal Electric Contractors, Inc. (Royal), on a promissory note for $10,000. 565 S.W.2d at 797. Subsequent to incurring the debt, Royal had ceased operations, and its owners formed a second corporation, Consolidated Electrical Contractors, Inc. (Consolidated), which took over performance of Royal's contracting projects, using Royal's employees, trucks, and equipment. Id. at 797-98. In the meantime, Royal sold its trucks and other assets to an individual who became a director of Consolidated in consideration for the amount of back taxes which Royal owed the government before ceasing operations. Id. at 798. Neither the contractors doing business with Royal nor Royal's employees were notified of the formation of the successor corporation. Id. Although the trial court found in Brockmann that there was sufficient consideration to validate Royal's sale of its assets and that no fraud or merger was shown, the appellate court reversed, finding that there was no significant difference in the selling and purchasing entities, that there was no actual change of ownership, and that a continuation occurred. Id. at 798-99. The Brockmann court was persuaded by the reasoning in Dura-Lite upon which the trial court also relied here. Id. at 799. In Dura-Lite, the creditors obtained a money judgment against National Outdoor Display, Inc. (National) and National's president. 489 F.2d at 711. In order to satisfy the judgment, the creditors sought to attach an aircraft which National had transferred to Dura-Lite Manufacturing Co. (Dura-Lite) during the pendency of the creditors' law suit against National. Id. The trial court made findings that National and Dura-Lite had the same president, were engaged in the same business, used the same assets and equipment, and operated from the same premises and that National had transferred the aircraft for well below its market value. Id. Therefore, the court concluded that Dura-Lite had been formed with the intent to escape liability on the debts previously accumulated by National. Id. The Sixth Circuit affirmed, holding that the buying corporation was merely a continuation of the selling corporation. Id. at 711-12. The applicable state law provided that a new corporation which is merely the continuation of an old one and which was formed in order that the old corporation could escape liability on its debts shall be deemed to have assumed the debts and liabilities of its predecessor. Id. at 711 (internal quotation marks and citation omitted). In contrast, in the case before this court, the undisputed evidence showed that PFP continued to exist as a separate entity after the formation of WWL, the limited partnership. PFP's principals held board meetings, signed leases for partnership office space, and transferred substantial funds into the partnership through late 1984. It is undisputed that PFP retained cash assets of more than $78,000 and continued to pay bills after the partnership's formation. Although there were several principal investors in PFP, only one of PFP's principals, Joan Bingham, took part in the partnership's business on a regular basis. PFP filed its own tax returns through 1986 and maintained separate books. In all of the cases relied on by the trial court, the transferring entity ceased to exist. Even in Colonial Ice Cream, where the transferring entity retained its corporate charter, the court found that the company effectively had ceased to exist. That is not the case here. The partnership was formed to obtain investors and to raise capital through different investors to fund production of the newspaper, not merely to continue the corporation's business. [24] Although PFP's purpose became to act as general partner and to serve as management agent for the partnership under the terms of the partnership agreement, the partnership's purpose was separate and distinct from that of PFP. A number of factors must be examined to determine whether one business is a mere continuation of a predecessor. Among these are a common identity of officers, directors, and stockholders in the purchasing and selling corporations. Bud Antle, supra, 758 F.2d at 1458-59. While this factor is a key element in examining transactions between two corporations, its applicability is less useful in considering a situation where the claimed successor is a partnership for which the alleged predecessor corporation serves as corporate general partner. [25] In such a case, the officers for the corporation and for the corporate general partner would necessarily be the same. Therefore, other factors must be considered. Of some significance to our determination is the fact that there were many different limited partners in the partnership who were not shareholders in the corporation. Therefore, we do not view the identity of officers for the corporation as the officers of the corporate general partner to be sufficient on these facts to establish that a continuation occurred. Such an obvious occurrence when the predecessor corporation is the corporate general partner of the partnership is not sufficient to require ignoring the separate identities of the corporation and the partnership and imposing liability on the latter for the former's debts. Another factor of importance to the determination is the sufficiency of the consideration passing from one entity for the sale of its interest to another. See Baltimore Luggage, supra, 562 A.2d at 1294. The trial court made no finding that the corporation, PFP, gave inadequate consideration for the interest it purchased in the partnership, WWL. The undisputed evidence shows that the corporation originally contributed properties valued at $127,693 to the partnership. Both the general and limited partners contributed cash to the partnership over time. A major factor relied upon by the trial court in imposing successor liability was its finding that PFP failed to arrange to meet its contractual obligations. This finding is contrary to the undisputed evidence, and therefore, we can not accept it. See Byrd, supra, 614 A.2d at 30. The evidence shows that PFP retained cash assets of $78,830.74 for business expenses after the transfer of properties. Under the partnership agreement PFP could anticipate earning management fees from the venture. It also expected to receive a share of the profits from the venture. The fact that the venture failed ultimately is not determinative of whether the corporation took steps to meet its financial obligation upon the transfer of some of its assets. Moreover, GMK was paid more than $77,000 in payments after the partnership was formed. Therefore, it cannot be said that the transaction was entered by PFP to avoid liability for its debts. See Dura-Lite, supra, 489 F.2d at 711 (new corporation deemed to assume liabilities of predecessor where formed to escape liability of former corporation). Both PFP and WWL paid their debts as long as each had cash to do so. Another factor relied upon by the trial court in concluding that a mere continuation occurred is that PFP and the partnership had the same business. However, [i]n determining whether one corporation is a continuation of another, the test is whether there is a continuation of the corporate entity of the sellernot whether there is a continuation of the seller's business operation. Bud Antle, supra, 758 F.2d at 1458. Thus, the fact that both were involved in some phase of the development of the weekly newspaper is not the key factor. Rather, it is whether entities involved remained separate. See id. As we have observed previously, two distinct entities existed during the transactions, a corporation and a limited partnership, and no circumstances have been shown which suggest that their separate identities should not be respected. In summary, we conclude that the undisputed facts fail to show a basis for application of any of the four exceptions to the rule against successor liability. See Bud Antle, supra, 758 F.2d at 1456. Therefore, the trial court erred in imputing the liability of the corporation under the GMK contract to the partnership. [26] Accordingly, its determination that Bingham became personally liable on the GMK contract because she was a limited partner who took part in the control of the business, cannot be upheld. [27]