Court Opinion

ID: 4511873
Source: CourtListenerOpinion
Date Created: 2020-03-02 16:03:39.926795+00
Date Added: 2024-06-11T09:17:07.732565
License: Public Domain

FILED
                                                                             Mar 02 2020, 8:43 am

                                                                                 CLERK
                                                                             Indiana Supreme Court
                                                                                Court of Appeals
                                                                                  and Tax Court

      ATTORNEY FOR APPELLANT                                     ATTORNEYS FOR APPELLEE
      James A. Masters                                           Kevin E. Warren
      Nemeth, Feeney, Masters & Campiti,                         Benjamin M. Redgrave
      P.C.                                                       South Bend, Indiana
      South Bend, Indiana

                                                  IN THE
          COURT OF APPEALS OF INDIANA

      New Nello Operating Co., LLC,                              March 2, 2020
      Appellant-Defendant,                                       Court of Appeals Case No.
                                                                 19A-CC-603
              v.                                                 Appeal from the St. Joseph Circuit
                                                                 Court
      CompressAir,                                               The Honorable John E. Broden,
      Appellee-Plaintiff.                                        Judge
                                                                 Trial Court Cause No.
                                                                 71C01-1703-CC-826

      Mathias, Judge.

[1]   CompressAir obtained a judgment of $44,689.66 against Nello, Inc., a

      corporation the parties now refer to as “Old Nello.” Upon learning that Old

      Nello’s business was continuing under the corporate entity of New Nello

      Operating Co., LLC (“New Nello”), CompressAir filed proceedings

      Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020                               Page 1 of 11
      supplemental naming New Nello as a garnishee-defendant. In the proceedings

      supplemental, New Nello argued that it was not liable for the judgment entered

      against Old Nello. The trial court disagreed, finding that there had been a de

      facto merger of Old Nello and New Nello and that the latter was a mere

      continuation of the former. The trial court therefore entered judgment against

      New Nello in the amount of $44,689.66. New Nello appeals and claims that

      there was no de facto merger between Old Nello and New Nello and that the

      latter is not a mere continuation of the former. Concluding that the trial court

      did not clearly err in concluding that there had been a de facto merger, we

      affirm.

                                  Facts and Procedural History
[2]   The facts underlying this case are essentially undisputed. Old Nello was

      founded in 2002 by Dan Ianello (“Ianello”) and was in the business of

      manufacturing utility and cellular telephone towers. Old Nello’s officers were:

      Ianello, president; Jason Lambert (“Lambert”), Vice President of Engineering;

      Robert Rumpler (“Rumpler”), Vice President of Manufacturing; and Kevin

      Brisson (“Brisson”), Chief Financial Officer. These officers also owned

      approximately 95–99% of the shares of Old Nello.

[3]   In the summer of 2016, Old Nello consolidated its facilities in Bremen, Indiana

      and Ft. Worth, Texas, and its administrative offices in downtown South Bend

      to a new building on Sheridan Street in South Bend. The consolidation took

      longer, and cost more, than anticipated. This caused the company fiscal
      Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020          Page 2 of 11
      difficulties, and by the latter half of 2016, Old Nello was in dire financial straits;

      it had few liquid assets and was deeply in debt. Specifically, Old Nello had

      taken out a $10 million secured loan with Fifth Third Bank, a $3.4 million loan

      with a secondary secured creditor, Live Oak Capital (“Live Oak), and a $1.4

      million debt obligation to the City of South Bend’s Industrial Revolving Loan

      Fund. The officers of Old Nello each executed personal loan guarantees in

      connection with the Fifth Third loan. On November 10, 2016, Fifth Third Bank

      sent a demand letter to Old Nello and Ianello personally, declaring that its

      notes were due and payable immediately.

[4]   Concerned that it would lose its investment in Old Nello, Live Oak contacted

      Michael Clevy (“Clevy”), of the private equity firm Beckner Clevy Partners, to

      see if there was a way to continue Old Nello’s business. Clevy explored several

      options, including continuing Old Nello and paying its way out of debt, having

      other investors put money into Old Nello, refinancing Old Nello’s debt with

      another lender, or asking other private individuals in the industry to invest in or

      purchase Old Nello. None of these options came to fruition, and Fifth Third

      was ready to foreclose upon its note and liquidate Old Nello’s assets.

[5]   In early 2016, CompressAir had installed thousands of feet of compressed air

      and oxygen piping within Old Nello’s South Bend facility. The cost of the work

      exceeded $87,000, and by the spring of 2017, approximately $39,000 remained

      unpaid to CompressAir. CompressAir’s controller attempted to work out a

      payment agreement with Old Nello but was unsuccessful. Accordingly, in

      Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020            Page 3 of 11
      March 2017, CompressAir filed suit against Old Nello seeking to recover the

      unpaid $39,000. By that summer, six other creditors had filed complaints

      seeking payment for outstanding bills.

[6]   In April or May of 2017, Clevy created New Nello Acquisition Co., to purchase

      Fifth Third’s note. Clevy bought Fifth Third’s $10 million note for $3.765

      million, which was more than Clevy’s $3.1 million estimate of Old Nello’s

      liquidation value. New Nello Acquisition Co. then formed New Nello

      Operating Co. as a wholly-owned subsidiary. On November 14, 2017, New

      Nello Acquisition Co. and New Nello Operating Co. entered into a strict

      foreclosure agreement with Old Nello. Thereafter, New Nello conducted the

      same business as Old Nello, i.e., building utility and cellular towers, operated

      from the same physical location as Old Nello, and retained approximately

      ninety percent of Old Nello’s employees, including its officers, Ianello,

      Lambert, Brisson, and Rumpler. These officers, however, had no ownership

      interest in New Nello.1 There was no public announcement of New Nello’s

      assumption of Old Nello’s business to either the general public or the

      employees, for fear of marketplace upheaval. New Nello also operated under

      the name “Nello.” New Nello also used the same website as Old Nello and held

      itself out as the same company by claiming to have been founded in 2002.

      1
          The chief investors in New Nello are “Third Article Trust,” and “the Bancoff Family.” Tr. p. 42.

      Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020                                   Page 4 of 11
[7]   After its acquisition of Old Nello’s assets and business, New Nello negotiated

      with Old Nello’s vendors and creditors that it deemed were essential to the

      operation of the business and paid them. Included among the essential creditors

      were Ianello, Lambert, Brisson, and Rumpler; New Nello paid all obligations

      owed to them and released them from the personal guarantees they executed in

      favor of the note New Nello purchased from Fifth Third.2 Other creditors of

      Old Nello, were listed as “unassumed liabilities” in the strict foreclosure

      agreement. Appellant’s App. p. 67. In October 2017, Brisson continued to

      negotiate with CompressAir to come up with a payment plan. Even though Old

      Nello’s business had been assumed by New Nello by that time, Brisson never

      informed CompressAir of the transaction.

[8]   On December 1, 2017, the trial court granted summary judgment in favor of

      CompressAir in its complaint against Old Nello and entered judgment in the

      amount of $44,689.66. CompressAir did not learn about New Nello until after

      it obtained judgment against the now-defunct Old Nello. On February 26, 2018,

      CompressAir filed proceedings supplemental naming New Nello as a garnishee-

      defendant. CompressAir filed a second motion for proceedings supplemental on

      July 6, 2018, asking the trial court to enter judgment against New Nello as the

      successor to Old Nello. The trial court held an evidentiary hearing on the issue

      2
       Specifically, New Nello paid Ianello $5,496.57, Lambert $936.25, Brisson $13,293.08, and Rumpler
      $5,583.08. Appellant’s App. pp. 136–40.

      Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020                             Page 5 of 11
       on November 29, 2018. At the hearing, Clevy testified that New Nello chose to

       pay only those creditors of Old Nello that were essential to running New Nello.

[9]    On February 13, 2019, the trial court entered findings of fact and conclusions of

       law determining that New Nello is a mere continuation of Old Nello and that

       there was a de facto merger of the companies. The trial court noted that New

       Nello runs the same business with the same name, the same employees, and

       from the same location as Old Nello. The court also noted that Old Nello’s

       former shareholders retained management roles in New Nello. The court

       entered judgment against New Nello in the full amount owed to CompressAir

       by Old Nello: $44,689.66. New Nello now appeals.

                                           Standard of Review
[10]   Our standard of review in cases where the trial court enters findings of fact and

       conclusions of law was set forth by this court in Koch Development Corp. v. Koch

       as follows:

               When a trial court enters findings and conclusions, we apply a
               two-tiered standard of review: we first determine whether the
               evidence supports the findings; we then determine whether the
               findings support the judgment. In deference to the trial court's
               proximity to the issues, we disturb the judgment only where there
               is no evidence supporting the findings or the findings fail to
               support the judgment. We do not reweigh the evidence, and we
               consider only the evidence favorable to the trial court's judgment.
               We also will not reassess witness credibility. The party appealing
               the trial court’s judgment must establish that the findings are
               clearly erroneous. Findings are clearly erroneous when a review

       Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020          Page 6 of 11
                of the record leaves us firmly convinced that a mistake has been
                made. We do not defer to conclusions of law, which are
                evaluated de novo.

       996 N.E.2d 358, 369 (Ind. Ct. App. 2013) (citations and internal quotation

       marks omitted), trans. denied.3

                                        Discussion and Decision
[11]   It has long been held that when one corporation purchases the assets of another,

       the buyer does not assume the debts and liabilities of the seller. Ziese & Sons

       Excavating, Inc. v. Boyer Const. Corp., 965 N.E.2d 713, 722 (Ind. Ct. App. 2012)

       (citing Sorenson v. Allied Prods. Corp., 706 N.E.2d 1097, 1099 (Ind. Ct. App.

       1999)); see also Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d 1228, 1233 (Ind.

       1994) (citing Markham v. Prutsman Mirror Co., 565 N.E.2d 385, 387 (Ind. Ct.

       App. 1991)). There are, however, four general exceptions to this rule against

       successor liability:

                (1) an implied or express agreement to assume liabilities; (2) a
                fraudulent sale of assets done for the purpose of evading liability;

       3
         CompressAir argues that we should apply a general judgment standard of review, citing Allstate Insurance
       Co. v. Kepchar, 592 N.E.2d 694 (Ind. Ct. App. 1992), trans. denied. In Kepchar, we noted that “findings of fact
       [are] improper in proceedings supplemental.” Id. at 696 (citing In re Marriage of Hudak, 428 N.E.2d 1333, 1335
       (Ind. Ct. App. 1981)). The Kepchar court thus held that there was no error where the trial court denied a
       request for findings and conclusions in proceedings supplemental. Id. But the Kepchar court did not hold that
       the entry of findings and conclusions in proceedings supplemental was prohibited. And in the case cited by
       Kepchar, the court merely noted the rule that specific findings and conclusions are not required in proceedings
       supplemental. Hudak, 428 N.E.2d at 1335 (citing Hutchinson v. Trauerman, 112 Ind. 21, 25–26, 13 N.E. 412,
       414 (1887)). We therefore cannot say that the trial court erred by entering specific findings and conclusions,
       even though it was not required to do so. Moreover, CompressAir would prevail under either standard.

       Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020                                  Page 7 of 11
               (3) a purchase that is a de facto consolidation or merger; or (4)
               where the purchaser is a mere continuation of the seller.
               Successor liability is implicated only when the predecessor
               corporation no longer exists, such as in the case of dissolution or
               liquidation in bankruptcy.

       Ziese, 965 N.E.2d at 722 (citing Sorenson, 706 N.E.2d at 1099); see also Winkler,
638 N.E.2d at 1233.

[12]   The trial court here determined that the third and fourth exceptions applied,

       i.e., that New Nello’s purchase of Old Nello’s business assets was a de facto

       merger, and that New Nello is a mere continuation of Old Nello. New Nello

       contends that the trial court erred on both accounts.

[13]   As stated by our supreme court in Cooper Industries, LLC v. City of South Bend,

       899 N.E.2d 1274, 1288 (Ind. 2009), “[c]ourts sometimes treat asset transfers as

       de facto mergers where the economic effect of the transaction makes it a merger

       in all but name.” Factors supporting a finding of a de facto merger include:

               (1) continuity of ownership; (2) continuity of management,
               personnel, and physical operation; (3) cessation of ordinary
               business and dissolution of the predecessor as soon as practically
               and legally possible; and (4) assumption by the successor of the
               liabilities ordinarily necessary for the uninterrupted continuation
               of the business of the predecessor.

       Sorenson, 706 N.E.2d at 1100 (quoting Hernandez v. Johnson Press Corp., 388
N.E.2d 778, 780 (Ill. App. Ct. 1979)); see also Cooper Indust., 899 N.E.2d at 1288

       (listing pertinent findings that support a de facto merger as “continuity of the
       Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020              Page 8 of 11
       predecessor corporation’s business enterprise as to management, location, and

       business lines; prompt liquidation of the seller corporation; and assumption of

       the debts of the seller necessary to the ongoing operation of the business.”)

       (citations omitted).

[14]   The facts of the present case clearly support a finding of a de facto merger. New

       Nello continued Old Nello’s business enterprise as to management, location,

       and area of business. New Nello continued to refer to itself as “Nello,” and its

       website stated that it was founded in 2002, the year Old Nello was founded.

       Moreover, New Nello assumed the debts of Old Nello that it deemed necessary

       to continue the business. All of these factors support a finding of a de facto

       merger.

[15]   Even though there was no continuity of ownership, we do not consider this to

       be fatal to a finding of a de facto merger. See Lippens v. Winkler Backereitechnik

       GmbH, 31 N.Y.S.3d 340, 343 (N.Y. App. Div. 2016) (“while factors such as

       shareholder and management continuity will be evidence that a de facto merger

       has occurred . . . those factors alone should not be determinative[.]”); Gallenberg

       Equip., Inc. v. Agromac Int’l, Inc., 10 F. Supp. 2d 1050, 1055 (E.D. Wis. 1998)

       (noting that “courts have imposed successor liability without requiring

       continuity of corporate ownership.”), aff’d, 191 F.3d 456 (7th Cir. 1999). And

       even though there was no continuity of ownership in the present case, there was

       continuity of management, as the entire management team from Old Nello

       continues in the same roles in New Nello. Cf. Sorenson, 706 N.E.2d at 1100

       Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020            Page 9 of 11
       (upholding finding that there was no de facto merger where the shareholders of

       the old corporation “never possessed the authority to participate fully in the

       management function” of the new corporation).

[16]   And although Old Nello was apparently never officially dissolved, all of its

       assets were acquired by New Nello. Old Nello is therefore a defunct

       corporation, even if not legally dissolved. Knapp v. N. Am. Rockwell Corp., 506
F.2d 361, 367 (3d Cir. 1974) (holding that sale of old corporation’s assets to

       new corporation was a de facto merger even though the old corporation

       continued its existence for eighteen months after the exchange). Nor do we find

       significant that Old Nello is still liable for the Fifth Third note bought by New

       Nello; Clevy testified that New Nello did not expect the Fifth Third note to be

       paid. Tr. p. 46. For purposes of successor liability, Old Nello effectively no

       longer exists; it has no assets, having sold them to New Nello. Old Nello

       continues as an entity in name only. See Chicago, I. & S.R. Co. v. Taylor, 183 Ind.
240, 108 N.E. 1, 3 (1915) (“[A] corporation which takes, as owner, all the

       property and assets of another corporation, which thus practically ceases to

       exist except as a paper organization, is liable in equity for the obligations of the

       old company, at least to the amount of the assets converted.”) (citations

       omitted).

       Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020          Page 10 of 11
[17]   Viewing the facts in favor of the trial court’s judgment, we are unable to say

       that the trial court clearly erred in concluding that there was a de facto merger

       between Old Nello and New Nello.4

                                                   Conclusion
[18]   The trial court did not clearly err in determining that there was a de facto

       merger between Old Nello and New Nello. The de facto merger exception to

       the general rule that a corporation that purchases the assets of another

       corporation does not assume the liabilities of the former corporation therefore

       applies, and the trial court properly found that New Nello is liable for the

       $44,689.66 judgment obtained by CompressAir against Old Nello. Accordingly,

       we affirm the judgment of the trial court.

[19]   Affirmed.

       Kirsch, J., and Bailey, J., concur.

       4
        Because we conclude that the trial court did not err in determining that there was a de facto merger between
       Old Nello and New Nello, we need not address New Nello’s second argument that the trial court clearly
       erred in concluding that New Nello was merely a continuation of Old Nello. That is, because the “merger”
       exception applies, there is no reason to address whether the “continuation” exception also applies.

       Court of Appeals of Indiana | Opinion 19A-CC-603 | March 2, 2020                               Page 11 of 11