Court Opinion

ID: 994214
Source: CourtListenerOpinion
Date Created: 2013-07-04 00:19:39.450098+00
Date Added: 2024-06-11T09:11:19.588850
License: Public Domain

UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

JAY R. HERN,
Plaintiff-Appellant,

v.

TELSYS INTERNATIONAL,
                                                                    No. 96-2045
INCORPORATED, a Delaware
Corporation; TSI TELSYS,
INCORPORATED, a Maryland
Corporation; JAMES R. CHESNEY,
Defendants-Appellees.

Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Alexander Harvey II, Senior District Judge.
(CA-95-3169-H)

Argued: July 17, 1997

Decided: February 19, 1998

Before MURNAGHAN, Circuit Judge, and BUTZNER and
PHILLIPS, Senior Circuit Judges.

_________________________________________________________________

Vacated and remanded by unpublished opinion. Senior Judge Butzner
wrote the opinion, in which Judge Murnaghan and Senior Judge
Phillips joined.

_________________________________________________________________

COUNSEL

ARGUED: Stephen Laurence Joseph, LAW OFFICES OF STE-
PHEN L. JOSEPH, ESQ., Washington, D.C., for Appellant. Gary L.
Bohlke, SEMMES, BOWEN & SEMMES, Baltimore, Maryland, for
Appellees. ON BRIEF: Kent K. Matsumoto, SEMMES, BOWEN &
SEMMES, Baltimore, Maryland, for Appellees.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

BUTZNER, Senior Circuit Judge:

Jay R. Hern appeals the district court's entry of summary judgment
in favor of TelSys International, Inc. (TelSys), TSI TelSys, Inc. (TSI
TelSys), and James R. Chesney. Because the record discloses genuine
issues of material fact, we vacate the district court's judgment and
remand the case for trial.

I

James R. Chesney was an employee of the National Aeronautic and
Space Administration (NASA) stationed at Goddard Space Flight
Center, Maryland. He was the head of the microelectronic systems
branch at the time of his retirement in 1994. His speciality was telem-
etry. Chesney recognized that telemetry had many potential applica-
tions in addition to its use by the government. In their spare time, he
and several of his colleagues sought funding so they could make their
expertise in telemetry available for both governmental and civilian
use. Chesney called the persons who worked with him the team. Over
the course of time they developed business plans, but they were
unsuccessful in receiving funding.

Chesney realized that the team needed a person with"expertise in
preparing financial and corporate administrative information for the
business plan." J.A. 608. He also recognized that any potential inves-
tor would be more likely to fund a corporation rather than a team of
individuals. Chesney selected Jay R. Hern, a family friend who had

                    2
a corporate and management background, to join the effort and to
form and manage a new corporate venture. The proposed venture,
according to Chesney's letter to Hern, involved the development and
sale of telemetry components and systems. Chesney, speaking for the
team, offered Hern the position of president/chief operations officer,
at a salary of $150,000 a year, shares in the corporation, and appropri-
ate benefits, effective August 1, 1992. At Chesney's request, Hern
arranged for the incorporation of TelSys International, Inc., in Dela-
ware on November 13, 1992. At Hern's request, TelSys' counsel
drafted an employment agreement for Hern that followed Chesney's
letter offering Hern a job. The agreement was backdated to the date
of incorporation, and it provided that Hern's pay was contingent upon
TelSys' receipt of funding.

Chesney asked Hern to resign on August 30, 1993, because of con-
flicts with other team members, the employment agreement, and a
potential investor's reservations. There was a dispute about the
amount and quality of Hern's services. Chesney was still a govern-
ment employee at the time, not an officer or director of TelSys, and
therefore without authority to demand Hern's resignation. TelSys'
counsel drafted a resignation letter which provided that Hern would
receive $130,000, Hern's full salary to date, to be paid in installments
when TelSys received funding. Hern signed the resignation letter on
September 1, 1993. Peter Campisi as secretary-treasurer and director
of TelSys accepted Hern's resignation on behalf of TelSys.

At the same time Chesney agreed to pay Hern 15% of the profits
Chesney received with a cap of $50,000. Chesney intended his prom-
ise to be personal and not an obligation of TelSys.

Shortly after Chesney resigned from NASA in May 1994 the Tel-
Sys board elected him chairman, director, and CEO of TelSys.

On August 17, 1994, International Contour Technology, Inc. (Con-
tour), a Canadian firm, agreed to fund a new venture as outlined in
the Business Plan. For reasons explained by its vice-president, Con-
tour insisted on forming a new company. The first reason was that the
Federal Bureau of Investigation had launched an investigation of
Chesney and TelSys. It was essential to have a "clean" company
which would permit Contour to represent to investors that the com-

                    3
pany was not involved in any FBI investigation. The second reason
was to avoid contingent liabilities that TelSys had incurred, including
the obligation to Hern. In accordance with Contour's requirements, a
new company named TSI TelSys, Inc., was incorporated in Maryland
on August 18, 1994, and Contour provided some funding. Ultimately,
TelSys became a dormant corporation because it did not pay its taxes.

Chesney strongly opposed the formation of a new company. In a
letter addressed to the officers of Contour he said:

          My understanding is that Contour will not consider reim-
          bursing Ackerson & Bishop [TelSys' former law firm] or
          Mr. Hern, either from equity funds provided by Contour or
          from future revenues of TelSys. I understand and will accept
          Contour's position. But, I must express my personal view
          that to never reimburse a debt for services provided in good
          faith (regardless of their ultimate value to TelSys) is bad
          business. I do not want to pay these debts in the early
          months of the company and planned to achieve this deferral
          through negotiation. However, refusal to reimburse ever is
          inappropriate and potentially damaging to TelSys.

          Gary Bohlke [TelSys' counsel] also explained that Contour
          desires that a new corporation be established to avoid these
          contingent liabilities. I will accept Contour's direction, but
          may I first suggest that you research this point further and
          confirm this item. We are advised that, under American law,
          such an action is pointless since our courts would consider
          the new corporation a transparent ruse to avoid a legitimate
          liability. If this is true, then the only sure result of a new
          corporation will be increased legal fees. (emphasis in origi-
          nal).

He signed the letter TelSys International, Inc., James R. Chesney,
Chairman. Also, Bruce G. Montgomery, a consultant who later
became an officer of TSI TelSys, wrote Chesney:

          I reiterate my earlier comment to you about the probable
          uselessness of creating a new corporation to avoid contin-

                    4
          gent liabilities associated with TelSys. The only sure conse-
          quence of a new corporation will be higher legal fees.

In the end, however, Chesney acquiesced in Contour's terms.

Hern subsequently requested payment of $130,000 in accordance
with his resignation agreement. TelSys and TSI TelSys denied the
request on the ground that TelSys never received funding.

Hern brought suit alleging diversity jurisdiction. He asserts causes
of action based on breach of contract, fraudulent conveyance, viola-
tion of Delaware law, and TSI TelSys' status as a successor corpora-
tion. TelSys, TSI TelSys, and Chesney defend on the grounds that
TelSys' liability to Hern was contingent upon the receipt of funding
by TelSys, that TelSys has not received any funding, that TelSys
never had assets, and that TSI TelSys is not liable as a successor cor-
poration because it received no assets from TelSys.

Both parties filed motions for summary judgment. From their sub-
missions it is apparent that decision of their respective positions
depends primarily on the resolution of a factual dispute: Did TelSys
have any assets?

The district court granted summary judgment to TelSys, TSI Tel-
Sys, and Chesney. It held that the payment of $130,000 provided in
Hern's resignation agreement was by its terms contingent on TelSys'
receipt of funding, but TelSys never received any funding, and, con-
sequently, Hern could not prevail. The court recognized that the Busi-
ness Plan was a valuable asset, but it held that TelSys did not own the
Business Plan; that the plan belonged to Chesney and his team. The
district court also held that TSI Telsys was not liable as a successor
corporation or as the recipient of a fraudulent conveyance from Tel-
Sys because TelSys had no assets to convey.

II

We review the district court's decision to grant summary judgment
de novo. Shaw v. Stroud, 13 F.3d 791, 798 (4th Cir. 1994). Summary
judgement is appropriate if, after examining the entire record, the

                    5
court concludes that there exists no genuine issue of material fact.
Fed. R. Civ. P. 56(c). The party seeking summary judgement must
initially show "that there is an absence of evidence to support the non-
moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325
(1986). The opposing party, to survive the motion for summary judg-
ment, "need only present evidence from which a jury might return a
verdict in his favor." Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
257 (1986). The evidence is to be viewed and reasonable inferences
are to be drawn in the favor of the nonmoving party. Id. at 255. A
scintilla of evidence is insufficient to bar summary judgment. See id.
at 251.

Maryland's leading case pertaining to corporate successor liability
is Baltimore Luggage Co. v. Holtzman, 80 Md. App. 282, 562 A.2d
1286 (1989). "The general rule of corporate liability is that, ordinar-
ily, a corporation which acquires the assets of another corporation is
not liable for the debts and liabilities of the predecessor corporation."
Baltimore Luggage, 80 Md. App. at 290, 562 A.2d at 1289. There are
four exceptions to this rule. A successor will be liable for the debts
of its predecessor when "(1) there is an expressed or implied assump-
tion of liability; (2) the transaction amounts to a consolidation or
merger; (3) the purchasing corporation is a mere continuation of the
selling corporation; or (4) the transaction is entered into fraudulently
to escape liability for debts." Baltimore Luggage, 80 Md. App. at 290,
562 A.2d at 1290.

Maryland has codified the second exception, consolidation or
merger. When there is a consolidation or merger,"[t]he successor is
liable for all the debts and obligations of each nonsurviving corpora-
tion." Md. Code Ann., Corps. & Ass'ns § 3-114(e)(1) (1993 & Supp.
1997).

The fourth exception is codified as the Maryland Uniform Fraudu-
lent Conveyance Act. See Baltimore Luggage, 80 Md. App. at 290,
562 A.2d at 1290. This act provides: "Every conveyance made and
every obligation incurred by a person who is or will be rendered
insolvent by it is fraudulent as to creditors without regard to his actual
intent, if the conveyance is made or the obligation is incurred without
a fair consideration." Md. Code Ann., Comm'l Law§ 15-204 (1990).

                     6
III

Hern contends that the principal asset of TelSys was the Business
Plan. Other assets, according to Hern, were TelSys' name, logo, net-
work of contacts, and work product. Hern supported his testimony
about TelSys assets by reference to documents that suggest that Tel-
Sys and Chesney viewed the Business Plan to be a TelSys asset.

In May 1994, TelSys prepared an initial working draft of its Busi-
ness Plan, which served as a prospectus for investors. The Business
Plan was labeled "proprietary," and it contained a notice of confiden-
tiality that prohibited its reproduction or use"without the prior written
permission of TelSys International, Inc."

In July 1994, TelSys prepared a document it called"TelSys Busi-
ness Plan Summary." Each page bore the legend"TelSys' proprietary
information."

On August 15, 1994, TelSys entered into an agreement with Wil-
liam L. Babcock which refers to "Proprietary Information owned sep-
arately by TelSys." The agreement describes proprietary information
as documents "relating to TelSys' business and/or products and/or
future planned business and/or products which are clearly marked as
being Proprietary Information." The agreement was signed by Bab-
cock and "TelSys International, Inc., James Chesney, Chairman."

TSI TelSys, TelSys, and Chesney support their motion for sum-
mary judgment with the team's affidavits averring that the team
owned the Business Plan and that TelSys had no assets.

At this stage of the litigation, inasmuch as all reasonable inferences
must be drawn in favor of Hern, the nonmoving party, one can rea-
sonably infer from TelSys documents, which Hern cites, that TelSys
owned the Business Plan. Moreover, the evidence and the inferences
that reasonably can be drawn from the evidence disclose genuine
issues of material fact about the ownership of the Business Plan that
preclude summary judgment. See Fed. R. Civ. P. 56(c).

One can also reasonably infer that TelSys transferred this asset to
TSI TelSys. In its letter agreement of August 17, 1994, International

                     7
Contour Technology, Inc., proposed that the business of the new cor-
poration, TSI TelSys, "is to be that set out in the business plan we
reviewed and it is understood that it is that business (telemetry and
telecommunications) which Contour is agreeing to fund." Chesney
was to become Chief Executive Officer of TSI TelSys, and he
accepted the proposal in his own behalf and in behalf of the new cor-
poration, TSI TelSys. Chesney, however, did not accept the proposal
until after he and Montgomery, who became a vice president of TSI
TelSys, strongly protested the formation of a new company to escape
liability for TelSys contingent debts including the amount owed Hern.
See Part I infra.

Gary R. Bahsler testified that International Contour Technology,
Inc., had changed its name to TSI TelSys and that he was its presi-
dent. His deposition contains the following question and answer:

          Q. Do you know whether there was any difference
          between what Corporation 1 [TelSys] was proposing to do
          as a business purpose and what Corporation 2 [TSI TelSys]
          was proposing to do as a business purpose?

          A. My understanding would be that the primary purpose
          would be the same.

Similarly, Chesney's deposition contains the following question
and answer:

           Q. I am asking if that is correct. Corporation Two's
          [TSI TelSys'] business is exactly the same as Corporation
          One's [TelSys'] business.

           A. The activities of Corporation Two do reflect the
          intent of the business plan and the presentations provided to
          investors.

From the evidence one can reasonably infer that TelSys transferred
the Business Plan to TSI TelSys, leaving TelSys insolvent. Because
a stated reason for the formation of TSI TelSys was to avoid paying
Hern, it is apparent that a genuine issue of material fact exists con-

                    8
cerning the fourth exception in Baltimore Luggage: "The transaction
is entered into fraudulently to escape liability for debts." 80 Md. App.
at 290, 562 A.2d at 1290. Also, by the terms of Maryland Fraudulent
Conveyance Act it is not necessary to prove actual fraudulent intent,
and the rights of a creditor with respect to the property conveyed can
be secured. See Md. Code Ann. §§ 15 209, -210. It will be, however,
necessary for Hern to prove that TelSys had assets including the Busi-
ness Plan about which there is a genuine issue of material fact.

The third exception of Baltimore Luggage applies when the "pur-
chasing corporation is a mere continuation of the selling corporation."
80 Md. App. at 290, 562 A.2d at 1290.

          The exception is designed to prevent a situation whereby the
          specific purpose of acquiring assets is to place those assets
          out of reach of the predecessor's creditors. In other words,
          the purchasing corporation maintains the same or similar
          management and ownership but wears a "new hat." To allow
          the predecessor to escape liability by merely changing hats
          would amount to fraud. Thus, the underlying theory of the
          exception is that, if a corporation goes through a mere
          change in form without a significant change in substance, it
          should not be allowed to escape liability.

          ***

          The indicia of continuation are: "common officers, directors,
          and stockholders; and only one corporation in existence
          after the completion of the sale of assets. While the two
          foregoing factors are traditionally indications of a continu-
          ing corporation, neither is essential. Other factors such as
          continuation of the seller's business practices and policies
          and the sufficiency of consideration running to the seller
          corporation in light of the assets being sold may also be con-
          sidered." 80 Md. App. at 297, 562 A.2d at 1293 (citations
          omitted).

It is clear from the evidence that one of the reasons TSI TelSys was
formed was to escape liability for Hern's contingent debt. Chesney
occupied the same position in the old and new company. Chesney and

                    9
TelSys' counsel allowed TelSys to become dormant, though still in
existence. But the dormant existence of TelSys does not defeat Hern's
action brought under the exceptions to Baltimore Luggage. See 80
Md. App. at 297, 562 A.2d at 1293. An important indicia of the third
exception is the continuation of TelSys business as described in its
Business Plan. Although TSI TelSys revised the Business Plan, it
used the TelSys Business Plan to explain to investors the company's
work. Moreover, TSI TelSys' revised Business Plan frequently
referred to TelSys in its text.

TSI TelSys paid TelSys' counsel approximately a quarter of a mil-
lion dollars for work he did for TelSys. TSI TelSys also paid a find-
er's fee in an undisclosed sum for service performed for TelSys.
Payment for these services, like the obligation to Hern, was also con-
tingent on TelSys' receipt of funding. These payments give rise to
reasonable, conflicting inferences ranging from gifts--very unlikely
--to acknowledgment of indebtedness to all TelSys creditors except
Hern. TSI TelSys' payments for services incurred by TelSys also give
rise to inferences that involve indicia of TSI TelSys status as a succes-
sor corporation of TelSys.

At this stage of the proceedings, we must give Hern, as the non-
moving party, the benefit of inferences pertaining to the exceptions
in Baltimore Luggage, 80 Md. App. at 290, 562 A.2d at 1290. These
inferences reasonably arise from facts which the evidence discloses:
the similarity in Chesney's position in both companies; the similar
business purpose of the companies; TelSys' assertion that it owned
the information pertaining to the Business Plan; TelSys' protection of
its proprietary interest in the Business Plan; the similarity in design,
but not the text of the TelSys and TSI TelSys logos; the use of Tel-
Sys' name in the TSI TelSys Business Plan; the effort to avoid paying
Hern by incorporating TSI TelSys; and TSI TelSys' payment of Tel-
Sys' other conditional creditors.

Hern's recovery, if any, is not precluded by the fact that TelSys'
obligation to him was contingent. The Maryland Fraudulent Convey-
ance Act, Md. Code Ann. § 15-201(d), defines"creditor" to include
a person who has a contingent claim. Section 15-201(e) defines "debt"
to include a contingent legal liability.

                     10
As we have previously noted, Hern's recovery, if any, depends in
large part on whether TelSys had any assets and whether TSI TelSys
is liable as a successor to TelSys. If these inquiries are answered in
Hern's favor, we turn to Delaware law to determine the effect of
merger or consolidation involving a Delaware corporation. Section
259(a) of the Delaware General Corporation Law provides in part:

          [A]ll debts, liabilities and duties of the respective constitu-
          ent corporations [TelSys] shall thenceforth attach to said
          surviving or resulting corporation [TSI TelSys], and may be
          enforced against it to the same extent as if said debts, liabili-
          ties and duties had been incurred or contracted by it.

To the same effect, Md. Code Ann. § 3-114(e) provides that the suc-
cessor [TSI TelSys] is liable for "debts and obligations" of the non-
surviving corporation [TelSys].

IV

Chesney's promise to pay Hern up to $50,000 from his personal
profits discloses a genuine issue of material fact concerning consider-
ation. Chesney maintains that he was under no legal obligation to pay
Hern. He asserts that he did it out of the goodness of his heart to
sweeten the deal by easing Hern's resignation. Chesney looked upon
it as a family affair. Hern contends that the promise was made to
induce him to resign from TelSys by paying him compensation for the
lost opportunity of an equity position in TelSys. The district court
granted summary judgment to Chesney on the ground that payment
depended on TelSys' receipt of funding and the subsequent genera-
tion of profits for Chesney. The district court pointed out that TSI
TelSys, not TelSys, received funding and TelSys never had any prof-
its. The court held that TSI TelSys was not a successor corporation.
It decided that Chesney did not breach a contract with Hern because
an essential condition was never satisfied.

Decision of Hern's breach of contract action against Chesney, how-
ever, involves the resolution of credibility issues, which is not the
function of summary judgment, and resolution of genuine issues of
material fact pertaining to successor liability.

                     11
V

Hern also claims TelSys is liable because it violated Del. Code
Ann. Title 8, §§ 274, 275, 280, and 281 by failing to wind up its
affairs properly for the protection of its creditors. The outcome of this
cause of action depends on whether TelSys had any assets and
whether TSI TelSys is a successor corporation. As previously noted,
there are genuine issues of material fact concerning these questions.

VI

We conclude that summary judgment was an inappropriate proce-
dure for deciding whether TSI TelSys is a successor of TelSys,
whether TelSys fraudulently conveyed assets to TSI TelSys, whether
Chesney is liable to Hern, and whether TelSys failed to wind up its
affairs in accordance with Delaware law. Regarding all these ques-
tions there are genuine issues of material fact which require trial. The
district court's judgment is vacated, and the case is remanded. Hern
shall recover his costs.

VACATED AND REMANDED

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