Court Opinion

ID: 3200422
Source: CourtListenerOpinion
Date Created: 2016-05-04 18:09:44.54275+00
Date Added: 2024-06-11T14:00:28.107212
License: Public Domain

STATE OF MICHIGAN

                               COURT OF APPEALS

COMMONWEALTH LAND TITLE                                            FOR PUBLICATION
INSURANCE COMPANY,                                                 May 3, 2016
                                                                   9:00 a.m.
                 Plaintiff-Appellee,

v                                                                  No. 324914
                                                                   Oakland Circuit Court
METRO TITLE CORPORATION and METRO                                  LC No. 2012-129057-CK
TITLE AGENCY,

                 Defendants,

and

METRO EQUITY SERVICES,

                 Defendant-Appellant.

Before: O’CONNELL, P.J., and MARKEY and O’BRIEN, JJ.

O’CONNELL, P.J.

        Defendant Metro Equity Services appeals as of right the trial court’s November 17, 2014
order enforcing a judgment obtained by plaintiff, Commonwealth Land Title Insurance
Company, under a successor-liability theory. Because Michigan recognizes a separate and
distinct exception to successor non-liability for causes of action for successor non-liability in
cases other than products liability, we affirm.

                                  I. FACTUAL BACKGROUND

        This case arises out of a default judgment that was entered in favor of plaintiff against
defendant Metro Title Corporation/Metro Title Agency (Metro Title)1 in a separate case in May
2012. Approximately three months after the trial court entered a default judgment, plaintiff filed
this lawsuit against Metro Title and Metro Equity Services, asserting that (1) Metro Title formed
Metro Equity for the purpose of fraudulently transferring their assets to avoid collection on the

1
    Metro Title Agency is a registered assumed name for Metro Title Corporation.

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May 2012 default judgment, and (2) Metro Equity was liable for the judgment as a mere
continuation of Metro Title under a successor-liability theory.

       Metro Equity moved for summary disposition under MCR 2.116(C)(8) and (10). While it
acknowledged that its owner was the owner of Metro Title and Metro Equity, it argued that
Metro Equity was not a mere continuation of Metro Title because Metro Equity did not engage in
the same business or customer base as Metro Title and Metro Equity did not purchase any of
Metro Title’s stock or liabilities.

       The trial court denied Metro Equity’s motion, concluding that questions of fact remained
as to Metro Equity’s liability as a successor corporation. The trial court held a bench trial and, at
the close of plaintiff’s proofs, it granted Metro Equity a directed verdict motion on plaintiff’s
fraudulent transfer claim, but it found that Metro Equity constituted a mere continuation of
Metro Title under plaintiff’s successor-liability theory. Thus, the trial court entered an order
enforcing the May 2012 judgment against Metro Equity. Metro Equity now appeals.

                                  II. STANDARD OF REVIEW

       This Court reviews de novo the trial court’s conclusions of law made during a bench trial.
Bertrand v City of Mackinac Island, 256 Mich. App. 13, 28; 662 NW2d 77 (2003). We review for
an abuse of discretion a trial court’s decision regarding the scope and meaning of pleadings.
Dacon v Transue, 441 Mich. 315, 328; 490 NW2d 369 (1992).

                                         III. ANALYSIS

       Metro Equity asserts that the “mere continuation” exception to successor non-liability is
no longer a viable theory of successor liability and that all plaintiffs must proceed under a
“continuity of the enterprise” theory, which may not be applied to judgment creditors. We
disagree.

         Michigan law recognizes two separate exceptions to a successor corporation’s non-
liability. The “continuity of enterprise” exception only applies to products liability cases and
cases with similar public-policy concerns, but “the mere continuation” exception applies to other
causes of action involving successor non-liability. Judge RIORDAN has elegantly summarized
these two exceptions and the difference between them:

                                  I. “MERE CONTINUATION”

               Michigan follows the traditional rule of successor liability. Foster [v
       Cone-Blanchard Machine Co], 460 Mich [696] at 702[; 597 NW2d 506 (1999)].
       Under that rule, the nature of the transaction determines the potential liability of
       predecessor and successor corporations. Id. “If the acquisition is accomplished
       by merger, with shares of stock serving as consideration, the successor generally
       assumes all its predecessor’s liabilities. However, where the purchase is
       accomplished by an exchange of cash for assets, the successor is not liable for its
       predecessor’s liabilities unless one of five narrow exceptions applies.” Id. The
       five exceptions are: (1) an express or implied assumption of liability; (2) de facto

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consolidation or merger; (3) fraud; (4) transfer lacking in good faith or
consideration; or (5) where the transferee corporation was a mere continuation or
reincarnation of the old corporation. Id. at 702.

                                       ***

                  II. “CONTINUITY OF THE ENTERPRISE”

        However, another relevant doctrine is the continuity of the enterprise
doctrine. In Turner [v Bituminous Cas Co], 397 Mich [406] at 883[; 244 NW2d
873 (1976)], the Michigan Supreme Court applied the successor liability doctrine
in the context of products liability cases, establishing the continuity of the
enterprise doctrine. Pursuant to this doctrine, successor liability is imposed if:
(1) there is continuation of the seller corporation (i.e. continuity of management,
personnel, physical location, assets, and general business operations of the
predecessor corporation); (2) the predecessor corporation ceases its ordinary
business operations, liquidates, and dissolves; and (3) the purchasing corporation
assumes liabilities and obligations of the seller ordinarily necessary for the
continuation of normal business operations. See Foster, 460 Mich. at 703
(describing the Turner doctrine). Also pertinent is whether the purchasing
corporation held itself out to the world as the effective continuation of the seller
corporation. Turner, 397 Mich. at 430.

                                       ***

         . . . [T]he continuity of the enterprise doctrine generally is limited to
products liability cases. See CT Charlton & Assoc, Inc, 541 Fed Appx at 552
(“No matter how the ‘continuity of the enterprise’ doctrine is characterized, a
review of Michigan law and the policies underlying the doctrine makes clear that
it is only meant to apply in products-liability cases (and potentially a few other
areas animated by similar public-policy concerns).”). See also Turner, 397 Mich.
at 416 (“This is a products liability case first and foremost.”). In fact, Starks
could be interpreted as limiting the continuity of the enterprise doctrine to the
products liability context. 477 Mich. at 922 (“Because an exception designed to
protect injured victims of defective products rests upon policy reasons not
applicable to a judgment creditor, the Court declines to expand the exception to
the traditional rule set forth in [Turner] to cases in which the plaintiff is a
judgment creditor.”). See also City Mgt Corp v US Chem Co, Inc, 43 F3d 244,
253 (CA 6,1994) (“[T]he Michigan Supreme Court intended that the continuing
enterprise exception be limited to products liability cases.”).

         However, no such limitation appears in the context of the mere
continuation doctrine. As the bankruptcy court in the eastern district of Michigan
opined, “the traditional exceptions under Michigan law for the general rule of
corporate successor nonliability, one of which is the ‘mere continuation’
exception, do apply in the commercial context, and are not limited to product
liability cases.” In re Clements Mfg Liquidation Co, LLC, 521 B.R. at 253
                                        -3-
       (emphasis added). Stated differently, the mere continuation exception applies to
       commercial cases and is not limited to product liability cases. The Clements court
       further opined that “[t]he Michigan Supreme Court’s one paragraph opinion in the
       Starks case . . . does not hold otherwise. Rather, . . . Starks is limited . . . to
       product liability cases, a different exception to the traditional rule of non-liability
       of corporate successors, namely, the ‘continuity of the enterprise’ doctrine, which
       is a separate basis for imposing successor liability from the ‘mere continuation’
       doctrine.” Id. at 253-254. [Taizhou Golden Sun Arts v COLORBÖK, LLC,
       unpublished opinion per curiam of the Court of Appeals, issued August 15, 2015
       (Docket No. 320129), pp 1-3, (RIORDAN, J., concurring).][2]

       A deeper analysis of precedent reveals that Judge RIORDAN’s summary well-reflects the
current state of the law in this area. In Chase v Mich Tel Co, our Supreme Court considered
whether a successor corporation could be liable for injuries sustained by an employee of the
predecessor corporation, and stated that

       [t]he law is well settled in regard to liability of the consolidated or purchasing
       corporation for the debts and liabilities of the consolidating or selling corporation.
       Such obligations are assumed (1) when two or more corporations consolidate and
       form a new corporation, making no provision for the payment of the obligations
       of the old; (2) when by agreement, express or implied, a purchasing corporation
       promises to pay the debts of the selling corporation; (3) when the new corporation
       is a mere continuance of the old; (4) when the sale is fraudulent, and the property
       of the old corporation, liable for its debts, can be followed into the hands of the
       purchaser. [Chase v Mich Tel Co, 121 Mich. 631, 634; 80 N.W. 717 (1899)
       (emphasis added).]

The Chase court provided that these were each separate exceptions. See Id. (“Plaintiff produced
no evidence tending to bring the defendant within any of these cases.”) In Turner v Bituminous
Cas Co, our Supreme Court summarized the elements of a de-facto merger, id, at 420, and then
modified them to account for the fact that a sale of product will rarely involve shareholders, id. at
430. Accordingly, the Turner court created a “continuity of enterprise” exception to apply in
products liability cases involving the cash sale of corporate assets, which depended on whether
(1) the enterprise continued such as through retaining assets and personnel, (2) the selling
corporation ceased operations, (3) the purchasing corporation assumed liabilities and obligations
to the extent necessary to continue operations, and (4) the purchasing corporation held itself out
to the world as a continuation. Id. at 430-431. Turner did not specifically rely on Chase and did
not purport to limit the scope of Chase’s “mere continuation” general exception.

       Our Court has applied the traditional mere continuation successor exception outside the
context of products liability cases. See RDM Holdings, Ltd v Continental Plastics Co, 281 Mich.
2
 Also see Petrik, The Current State of Successor Liability in Michigan and Why the Michigan
Supreme Court’s Clarification is Necessary, 93 U Det Mercy L Rev ___ (2016).

                                                -4-
App 678, 607; 762 NW2d 529 (2008) (stating that the plaintiff in a commercial context could
pursue a mere continuation theory at trial); Lakeview Commons Ltd Partnership v Empower
Yourself, LLC, 290 Mich. App. 503, 508-509; 802 NW2d 712 (2010) (same). Particularly
relevant, the plaintiff in RDM Holdings was allowed to advance a mere continuation theory
where the defendant had transferred its assets and obligations “in advance of bankruptcy.” RDM
Holdings, 281 Mich. App. at 707.

      Our Supreme Court’s decision in Starks v Mich Welding Specialists, Inc, does not
mandate a different result:

       Where, as here, a successor corporation acquires the assets of a predecessor
       corporation and does not explicitly assume the liabilities of the predecessor, the
       traditional rule of corporate successor non-liability applies. See Foster v Cone-
       Blanchard Machine Co, 460 Mich. 696, 702 (1999). Because an exception
       designed to protect injured victims of defective products rests upon policy reasons
       not applicable to a judgment creditor, the Court declines to expand the exception
       to the traditional rule set forth in Turner v Bituminous Casualty Co, 397 Mich. 406
       (1976), to cases in which the plaintiff is a judgment creditor. [Starks v Mich
       Welding Specialists, Inc, 477 Mich. 922; 722 NW2d 888 (2006) (emphasis
       added).]

The Starks court expressly affirmed a case in which this Court considered whether the successor
corporation was a sufficient “continuity of enterprise” between the successor and predecessor
corporations. Starks v Mich Welding Specialists, Inc, unpublished opinion per curiam of the
Court of Appeals, issued November 29, 2005 (Docket No. 257127), pp 4-5. The factors in that
case did not support imposing successor liability. Id. at 5. Specifically, in that case, the
predecessor corporation did not sell the assets—a foreclosing creditor did—the predecessor
ceased operating before the assets were purchased, and the successor corporation did not hold
itself out as a continuation of the previous corporation. Id.

         In this case, Starks does not apply because there has been no intervening foreclosure, and
this case involves the “mere continuation” exception. The plaintiff in Starks was attempting to
pursue successor liability through a foreclosure and unrelated transfer of assets under a products
liability-based exception. Such an expansion is not at issue in this case, where there has been no
foreclosure (i.e., the assets were transferred in advance of bankruptcy, like in RDM Holdings),
and the case involves a different rule (i.e., the mere continuation exception).

       We also note that two federal cases, Stramaglia v United States, 377 Fed Appx 472, 475
(CA 6, 2010), and CT Charleton & Assoc, Inc v Thule, Inc, 541 Fed Appx 549, 551-552 (CA 6,
2013), recognize the ongoing viability of the mere continuity exception to successor non-liability
in Michigan.3 As Judge BOGGS stated in CT Charlton & Assoc, Inc v Thule, Inc, 541 Fed Appx

3
  Although this Court is not bound to follow federal decisions that interpret state law, we may
view these decisions as persuasive authority. Wormsbacher v Seaver Title Co, 284 Mich. App. 1,
5; 772 NW2d 827 (2009).

                                                -5-
549, 551-552 (CA 6, 2013), “A review of Turner . . . suggests that these are best understood as
two independent exceptions, motivated by different policy concerns and applied in different
circumstances.” Judge BOGGS explained:

                In creating the ‘continuity of the enterprise’ doctrine, Turner modified one
       of the traditional ‘limited exceptions’ to successor liability to fit in the products
       liability context. But this modified exception was not the ‘mere continuation’
       exception, which is only mentioned in passing in Turner, appearing in a list in a
       footnote. Turner, 244 NW2d at 877 n 3. Instead, Turner modified the de-facto-
       merger doctrine, a traditional exception that imposes successor liability when four
       requirements are met: 1) continuation of the enterprise, 2) continuity of
       shareholders, 3) ending of ordinary business operations by the seller, and 4)
       assumption of liabilities and obligations necessary for uninterrupted continuation
       of business operations by the purchaser. Turner, 244 NW2d at 879. After
       reviewing the policies underlying products-liability law, the court concluded that,
       in the products-liability context, the form of the acquisition is irrelevant to the
       question of liability. . . . As a result, the Turner court dropped the ‘continuity of
       shareholders’ element, requiring only elements 1, 3, and 4 of the de-facto-merger
       doctrine to establish successor products liability. Id. at 883. The ‘continuity of
       the enterprise’ doctrine, therefore, is best read as a relaxation of the de-facto-
       merger doctrine in products-liability cases, not a redefinition of the ‘mere
       continuation’ exception. The ‘mere continuation’ exception remains narrow, but
       retains its general applicability. [Id. at 552 (emphasis added).]

        In this case, in the absence of any clear authority holding that the mere continuation
exception has ceased to exist, we find these decisions persuasive. We conclude that the trial
court in this case properly applied the mere continuation exception, which continues to exist as a
traditional successor liability theory and allowed plaintiff to establish successor liability where
Metro Title transferred its assets in advance of bankruptcy.

       Metro Equity also asserts that the trial court erred by allowing plaintiff to proceed to trial
on a continuation theory. We disagree.

        A complaint must provide reasonable notice to the opposing party of the nature of the
claims brought against it. Dacon, 441 Mich. at 329. A trial court has the discretion to allow a
party to amend a pleading at any time to conform to the proofs. MCR 2.118(C)(1). In this case,
a review of the pleadings indicates that plaintiff’s first amended complaint, filed in February
2014, alleged the theory on which plaintiff proceeded at trial in September and October 2014.
We reject Metro Equity’s argument that it lacked notice of plaintiff’s theory.

       We affirm.

                                                              /s/ Peter D. O’Connell
                                                              /s/ Jane E. Markey
                                                              /s/ Colleen A. O’Brien

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