Opinion ID: 676559
Heading Depth: 3
Heading Rank: 2

Heading: Iowa Successor Liability Law

Text: 15 Both parties correctly point out that Iowa law governs the substantive successor liability issues in this case because jurisdiction is based on diversity of citizenship. We must apply the substantive law of Iowa, the forum in which the district court sits. B.B. v. Continental Ins. Co., 8 F.3d 1288, 1291 (8th Cir.1993). The decisions of the Iowa Supreme Court as to state law are binding on this court. Id. Our task is to attempt to rule as an Iowa court would if presented with the same issues. Mozeke v. International Paper Co., 856 F.2d 722, 724 (5th Cir.1988). 16 In Iowa, a corporation that acquires the assets of another company generally will not be held liable for the debts of that company. There are, however, limited exceptions to this rule. A corporation that purchases the assets of another corporation will be held liable for the latter's debts when: (1) there is an express agreement to assume liability; (2) there is a consolidation or a merger; (3) the purchasing corporation is a 'mere continuation' of the selling corporation; or (4) the transaction is fraudulent. C. Mac Chambers Co. v. Iowa Tae Kwon Do Academy, 412 N.W.2d 593, 597 (Iowa 1987). Grand argued at trial that exceptions (3) and (4) apply here. 5 17
18 Defendants argue that Grand failed to make a submissible case that Midcon is liable for the MBL Judgment under the fraudulent transfer exception to the nonliability of successors. Iowa courts have not elaborated on the elements of such a claim. Authorities suggest, however, that the fraud exception to the nonliability of successors is merely an application of the law of fraudulent conveyances. Chaveriat v. Williams Pipe Line Co., 11 F.3d 1420, 1426 (7th Cir.1993) (citing 15 Fletcher Cyclopedia of the Law of Private Corporations Secs. 7125, 7129 (1990 rev. ed.)). Moreover, the parties both cite C. Mac Chambers Co., which involved a fraudulent conveyance claim, for support on this issue. Because we find nothing to the contrary in Iowa law, we believe that the Iowa law of fraudulent conveyances applies to Grand's claim that MBL fraudulently transferred assets to Midcon. 19 A fraudulent conveyance is ... 'a transaction by means of which the owner of real or personal property has sought to place the land or goods beyond the reach of his creditors, or which operates to the prejudice of their legal or equitable rights.'  Graham v. Henry, 456 N.W.2d 364, 366 (Iowa 1990) (quoting 37 Am.Jur.2d Fraudulent Conveyances Sec. 1, at 691 (1968 & 1988 Supp.)). To recover on a fraudulent conveyance claim, a plaintiff-creditor must first show that the transferor actually owned the property that it allegedly fraudulently transferred. See 37 Am.Jur.2d Fraudulent Conveyances Secs. 100, 102, at 782, 783 (1968); see also Harvey v. Phillips, 193 Iowa 231, 186 N.W. 910, 913 (1922) (explaining that [w]here property is purchased by the husband with his wife's money, and he takes title in his own name without her consent, there is a resulting trust in her favor, and under such circumstances a subsequent conveyance to the wife is not fraudulent as to [the husband's] creditors). Moreover, the plaintiff-creditor must show that it was prejudiced by a transfer of assets. C. Mac Chambers Co., 412 N.W.2d at 596. Prejudice requires the creditor to show that [it] would have received something which has become lost to [it] by reason of the conveyance. Id. 20 We hold that the district court erred in submitting the fraudulent transfer issue to the jury because Grand did not produce sufficient evidence that MBL fraudulently transferred assets to Midcon. First, Grand relies on evidence allegedly showing that MBL transferred trade secrets, which were worth $6.5 million, to Midcon. Even assuming the evidence supports that such a transfer was made, it does not support a finding of liability under a fraudulent transfer theory because MBL did not own the trade secrets; indeed, Grand admittedly owned the trade secrets and claimed that MBL stole them. See Dist.Ct. Doc. No. 168, at 3, 12 (May 6, 1992). A transfer of property in which the transferor has neither legal nor equitable title does not work to defraud the transferor's creditors. See, e.g., Harvey, 186 N.W. at 913; 37 Am.Jur.2d Fraudulent Conveyances Sec. 102, at 783. Thus, any transfer from MBL to Midcon of Grand's trade secrets is irrelevant to the fraudulent transfer exception. 6 21 Grand's other evidence on the fraudulent transfer issue is similarly deficient. Grand cites the following evidence: Gary Buffington's testimony that when he left the company in 1982, MBL had equipment and inventory worth $500,000; Phillip Brown's deposition testimony 7 that Graham transferred some equipment that probably went to Northern Farms first and then was transferred by Northern to Midcon; Brown's deposition testimony that when Northern Farms acquired the two farm properties and building in 1984 from third parties, some inventory was on the Lamar, Missouri, property from which MBL had run its operations; Graham's deposition testimony that he received no consideration for the transfer of his own assets to Midcon; and the deposition testimony of Gerald Schlink, a Midcon employee, that when he began working for Midcon in January 1985, the company had an inventory of some [biological veterinary] products on hand. We note in addition that Pankratz, Grand's owner, summarily testified at trial that MBL transferred $250,000 worth of assets to Midcon. 22 Even assuming that the jury was entitled to find from this testimony that MBL transferred some of its own assets to Midcon for inadequate consideration, there is insufficient evidence that Grand was prejudiced by the asset transfer. Grand can cite no evidence, for example, that MBL had no other creditors, that Grand was entitled to priority over other creditors to any extent, much less to the extent of the assets allegedly transferred, or that the assets that MBL allegedly transferred were unencumbered. See C. Mac Chambers Co., 412 N.W.2d at 597 (holding that creditors with unperfected security interests were not prejudiced where corporation transferred assets subject to perfected security interest worth less than the amount of the perfected interest). In short, Grand failed to meet its burden of showing that it would have received something had MBL not transferred assets to Midcon. See id. at 596-97. Thus, we hold that the district court erred in denying defendants' posttrial motion for judgment as a matter of law on Grand's claim that Midcon is liable for the MBL Judgment under a fraudulent transfer theory. 23
24 Defendants argue in addition that Grand failed to make a submissible case that Midcon was a mere continuation of MBL under Iowa law. The mere continuation exception [to the nonliability of successors] applies when the [transferee] corporation is merely a continuation or reincarnation of the [transferor] corporation. Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451, 1458 (11th Cir.1985). In determining whether one corporation is a continuation of another, the test is whether there is a continuation of the corporate entity of the [transferor]--not whether there is a continuation of the [transferor]'s business operation. Id. Indeed,  '[t]here must be something more than a mere succession in business to charge the [transferee] with the debts or delinquencies of the [transferor].'  Nelson v. Pampered Beef-Midwest, Inc., 298 N.W.2d 281, 287 (Iowa 1980) (quoting Allen v. North Des Moines Methodist Episcopal Church, 127 Iowa 96, 102 N.W. 808, 809-10 (1905)). 25 The traditional mere continuation exception focuses on the continuation of management and ownership between the predecessor and successor corporations. Thus,  '[t]he key element of a continuation is a common identity of the officers, directors and stockholders in the selling and purchasing corporations.'  Bud Antle, Inc., 758 F.2d at 1458-59 (quoting Leannais v. Cincinnati, Inc., 565 F.2d 437, 440 (7th Cir.1977)). In Weaver v. Nash International, Inc., 730 F.2d 547, 548 (8th Cir.1984), for instance, we applied Iowa law and held that a successor corporation was not a mere continuation of its predecessor where the two corporations had different owners. See also Bud Antle, Inc., 758 F.2d at 1459 (holding mere continuation exception inapplicable where there was no continuation in management and ownership) (applying Georgia law); Tucker v. Paxson Mach. Co., 645 F.2d 620, 625-26 (8th Cir.1981) (holding mere continuation exception inapplicable where there was no continuation in management and ownership) (applying Missouri law). 26 It is important to distinguish the mere continuation exception from two relatively new theories of successor liability that courts have developed in some jurisdictions. These theories resemble the mere continuation exception in that both focus on certain elements of continuity between predecessor and successor corporations. They are fundamentally different from the mere continuation exception, however, because continuity of ownership and management is not dispositive under either one. One such theory is the product line exception to the nonliability of successors. Under the product line exception,  'a party which acquires a manufacturing business and continues the output of its line of products ... assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired.'  DeLapp v. Xtraman, Inc., 417 N.W.2d 219, 220-21 (Iowa 1987) (quoting Ray v. Alad Corp., 19 Cal.3d 22, 136 Cal.Rptr. 574, 582, 560 P.2d 3, 11 (1977)). Thus, even if a successor corporation has different ownership and management, it may still be liable under the product line exception for injuries that its predecessor caused. This exception applies only in products liability cases. See Florom v. Elliott Mfg., 867 F.2d 570, 578 (10th Cir.1989). Moreover, in DeLapp, 417 N.W.2d at 222-23, the Iowa Supreme Court squarely rejected the product line exception. 27 The other new theory of successor liability that courts have developed is the continuity of enterprise exception. Like the product line exception, the continuity of enterprise exception is significantly different from the mere continuation exception. Florom, 867 F.2d at 578 n. 3. Under this exception, the focus is on the continuity of the seller's business operation and not the continuity of its management and ownership. Thus, using a kind of totality of the circumstances approach, courts look at factors such as whether the successor corporation used the same employees, business location, assets, and trade name and produced the same products as the predecessor to determine if there was a continuity of the predecessor's enterprise. See, e.g., Cyr v. B. Offen & Co., 501 F.2d 1145, 1151-53 (1st Cir.1974); Turner v. Bituminous Casualty Co., 397 Mich. 406, 244 N.W.2d 873, 883-84 (1976). Like the product line exception, the continuity of enterprise exception applies only in the products liability context. See Bud Antle, Inc., 758 F.2d at 1458 n. 1. 28 It is against this background that we must view Iowa cases on the mere continuation exception. The cases uniformly recite that Iowa recognizes the four traditional exceptions to the nonliability of successors, one of which is the mere continuation exception. Although none of the cases elaborate on the elements of a mere continuation claim, the DeLapp court explained that Iowa follows the traditional rule[ ]. 417 N.W.2d at 220. Thus, were it not for Iowa's most recent case on the mere continuation exception, C. Mac Chambers Co., we would have little difficulty concluding that Iowa requires continuity of management and ownership to satisfy the mere continuation exception. 29 At first blush, however, C. Mac Chambers Co. casts doubt on the idea that Iowa follows the traditional rule. In that case, defendant In Mook Kim operated martial arts teaching centers in Iowa. The business (Academy I) was incorporated in Iowa and Kim was the sole shareholder, officer, and director. When Academy I was on the verge of bankruptcy, Kim's son, Ki Tae, formed a new corporation (Academy II). Although he did not pay for any stock nor was he involved in running the business, Ki Tae Kim became the sole shareholder, officer, and director of Academy II. 8 In all other respects, however, Academy II was the functional equivalent of Academy I. 30 The court held that Academy II was a mere continuation of Academy I. 412 N.W.2d at 597. It rejected defendants' argument that Academy II was not liable for Academy I's business debts solely because (1) there was no identity of shareholders, officers, and directors between the two corporations and (2) both corporations were still in existence after the sale of assets. Id. The court held that although the two foregoing factors are traditional indicia of a continuing corporation, neither is essential. Id. Rather, the court concluded, that the businesses were identical in every other respect compelled the conclusion that Academy II was a mere continuation of Academy I. See id. The court found that Ki Tae Kim was made the sole director and shareholder [of Academy II] for only one reason: to attempt to avoid liability under the continuation corporation theory. Id. 31 We believe that C. Mac Chambers Co. merely carves out a narrow exception to the traditional mere continuation theory's requirement that there be a continuation of management and ownership between the predecessor and successor corporations. Specifically, we believe that the case stands for the unremarkable proposition that parties cannot circumvent the mere continuation exception by inserting relatives as sham owners and directors of a new company that is in substance the predecessor. Thus, outside of those cases where the successor corporation's ownership and management is different in form but not in substance, we do not believe that Iowa has departed from the traditional requirement of the mere continuation exception that there be a continuity of management and ownership between the two companies at issue. 9 Nor do we believe that C. Mac Chambers Co. represents the sub silentio adoption of a modified continuation exception under which courts are to balance numerous factors, two of which are continuity of management and ownership, relating to the operations of the two companies in a totality of the circumstances test. 32 Several factors support our reading of C. Mac Chambers Co. First, three months after it decided C. Mac Chambers Co., the Iowa Supreme Court squarely rejected the product line exception. See DeLapp, 417 N.W.2d at 222-23. To read C. Mac Chambers Co. as eliminating the requirement of continuity of ownership and management in mere continuation cases would be fundamentally inconsistent with DeLapp. 10 Second, courts have applied these modified continuation exceptions only in the area of products liability. It would be unreasonable to hold that C. Mac Chambers Co. adopted such a modified continuation exception in a case not involving a products liability claim, much less that it would make such a fundamental change in successor liability law without even stating that it was doing so or mentioning the continuity of enterprise exception. 33 Finally, C. Mac Chambers Co. cited the district court opinion in Weaver v. Nash International, Inc., 562 F.Supp. 860 (S.D.Iowa 1983), aff'd, 730 F.2d 547 (8th Cir.1984), without disavowing or even commenting on its holding or analysis. In Weaver, the district court thoroughly discussed the traditional mere continuation exception and how some jurisdictions had expanded it through the product line and continuity of enterprise theories. See id. at 863-64. The court, however, found no evidence that Iowa would choose to depart from the traditional rules regarding the liability of successor corporations. Id. at 863. For this reason, the court held that a successor corporation was not liable under the mere continuation exception where there was no continuity of ownership and management. Id. at 864. 11 If the C. Mac Chambers Co. court had intended to reject the court's analysis in Weaver, which explained that Iowa follows the traditional mere continuation exception, we believe that it would have done so explicitly. Thus, we do not believe that C. Mac Chambers Co. eliminated the mere continuation exception's general requirement that there be continuity of management and ownership between successor and predecessor corporations; rather, the case merely created a limited exception to the rule. 34 In light of our reading of C. Mac Chambers Co., we hold that the district court erred in denying defendants' posttrial motion for judgment as a matter of law. Grand produced no evidence that there were any common shareholders between MBL and Midcon; indeed, the undisputed evidence was that Northern Farms, which was owned by Jenkins and KCSI, first owned Midcon and then sold the stock to KCSI. KCSI owned all the stock of Midcon through its wholly owned subsidiary PVI. Appellee's Br. at 10. The only common officer was Graham, who became a Midcon vice president in 1986, two years after the company was incorporated. It is undisputed that MBL and Midcon had no common directors. 35 Moreover, unlike the case in C. Mac Chambers Co., Grand produced no evidence that Midcon's owners were sham owners who collaborated with MBL's shareholders to avoid MBL's debts. For instance, Grand produced no evidence that KCSI and PVI lacked a real financial stake in Midcon. To the contrary, the undisputed evidence showed that KCSI and PVI funded Midcon with over six million dollars of their own funds. Moreover, Grand failed to establish that Graham or any of MBL's shareholders actually owned Midcon in substance or had an ownership interest in Northern Farms, KCSI or PVI. In short, no reasonable jury could find that MBL and Midcon had common ownership either in form or in substance. 36 Further, Grand produced no evidence that Midcon's directors and officers were not involved in the running of the business. C. Mac Chambers Co., 412 N.W.2d at 597. It did produce evidence that Graham was Midcon's key employee and the only person associated with the corporation with knowledge of the veterinary biological products industry. Defendants, however, produced uncontradicted evidence that Midcon's directors and officers--none of whom, besides Graham, were involved in MBL--were actively involved in running the business. See, e.g., VII Tr. at 1097; VI Tr. at 1042; Appellee's App. at 57. Thus, unlike the case in C. Mac Chambers Co., there was no evidence from which a jury could conclude that the managers of the successor corporation were mere figureheads. Because Grand showed that the only substantive continuity in management and ownership between MBL and Midcon was that Graham was an officer of Midcon, we believe that Iowa courts would hold that, as a matter of law, Midcon was not a mere continuation of MBL. See Weaver, 730 F.2d at 548. Thus, we hold that the district court erred in denying defendants' motion for judgment as a matter of law on Grand's claim that Midcon is liable for the MBL Judgment under the mere continuation exception. 12