Court Opinion

ID: 1036110
Source: CourtListenerOpinion
Date Created: 2013-08-01 21:05:41.270113+00
Date Added: 2024-06-11T12:45:42.402364
License: Public Domain

Not for Publication in West’s Federal Reporter

             United States Court of Appeals
                          For the First Circuit
No. 12-2014

                  EDWIN DEJESUS; MARIA L. CARTAGENA,

                         Plaintiffs, Appellants,

                                       v.

                             PARK CORPORATION,

                           Defendant, Appellee,

                                BERTSCH, INC.

                                  Defendant.

             APPEAL FROM THE UNITED STATES DISTRICT COURT
                   FOR THE DISTRICT OF MASSACHUSETTS

             [Hon. William G. Young, U.S. District Judge]

                                    Before

                        Howard, Circuit Judge,
                      Souter,* Associate Justice,
                    and Torresen,** District Judge.

     Benjamin R. Zimmermann, with whom Sugarman and Sugarman, P.C.
was on brief, for appellant.
     Stanley Yorsz, with whom Bradley J. Kitlowski, Buchanan
Ingersoll & Rooney PC, David M. Rogers, Campbell Campbell Edwards
& Conroy PC were on brief, for appellee.

     *
       Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
     **
          Of the District of Maine, sitting by designation.
August 1, 2013
             SOUTER, Associate Justice.        Edwin DeJesus and Maria L.

Cartagena appeal the district court’s summary judgment for Park

Corporation, in which the court rejected appellants’ tort and

warranty claims against Park under a theory of corporate successor

liability.    We affirm.

                                        I

             DeJesus allegedly suffered injuries from a defective

machine manufactured in 1957 by Bertsch, Inc.                Although it was

begun as a family-owned business, 80 percent of Bertsch shares were

sold in 1978 to Deem International, Inc., leaving three living

non-Deem shareholders of Bertsch, each of whom continued to work

for the successor company.       Six years later, appellee, Park, began

negotiations     to   acquire    Bertsch,      culminating      in   Bertsch’s

liquidation through bankruptcy and Park’s acquisition of various

assets through an Asset Purchase Agreement.           Park bought Bertsch’s

patents, copyrights, licenses, know-how, the trade name “Bertsch,”

trademarks, customer lists, addresses and names of contact persons,

but    the   Agreement    provided     explicitly     that    Park   was    not

“undertaking the assumption of any liabilities of Seller,” J.A.

180.   Bertsch stock was not exchanged for stock in Park, nor did

any alternative indication of business control by the prior Bertsch

owners survive the sale.

             Following   the   sale,    none   of   Bertsch’s   directors    or

officers became directors or officers at Park, although two of the

                                       -3-
three living Bertsch shareholders became Park employees.             Park

retained a small number of Bertsch’s other employees, held itself

out to customers as Bertsch, sold the same products as Bertsch, and

answered the phones with the message, “Thank you for calling

Bertsch.”    J.A. 340.       Park assumed Bertsch’s liabilities under

processed purchase orders but asked that all orders issued after

the acquisition be resubmitted to Park. Park never operated out of

Bertsch’s primary production plant and sold much of Bertsch’s real

property upon acquisition.

            DeJesus and his wife, Cartagena, filed a complaint in

state court against Bertsch and Park in 2011, alleging negligence,

breach of warranty, and loss of consortium.             Park removed the

action to district court and moved for summary judgment on the

ground that Massachusetts law generally declines to recognize

corporate successor liability and that no exception to that rule

was applicable.

            The   district     court     agreed,   rejecting   appellants’

contention that Park’s acquisition of Bertsch was not a mere asset

sale but a de facto merger that would deprive Park of the benefit

of the general rule of successor non-liability. The district court

held that the absence of shareholder continuity (or some equivalent

continuous control structure) foreclosed appellants’ claim: “Under

Massachusetts law, a de facto merger does not occur absent a

showing that there is a continuity of shareholders or other type of

                                       -4-
transaction that ultimately makes Bertsch’s shareholders directly

or indirectly constituent owners of Park.”    DeJesus v. Bertsch,

Inc., 898 F. Supp. 2d 353, 361 (D. Mass. 2012).      Because “[n]o

evidence provided by DeJesus and Cartagena suggest[ed] that Bertsch

remained in control or ownership of the company after Park’s asset

buy . . . . as matter of law, DeJesus and Cartagena fail[ed] to

demonstrate that there was a de facto merger.” Id. at 363.     The

court also rejected appellants’ alternative argument that Park

expressly or impliedly assumed Bertsch’s liabilities.

           We review the district court’s judgment de novo, see

McDonough v. Donahoe, 673 F.3d 41, 46 (1st Cir. 2012), under the

rule that summary judgment is proper where the “movant shows that

there is no genuine dispute as to any material fact and the movant

is entitled to judgment as a matter of law.”      Fed. R. Civ. P.

56(a).   All reasonable inferences are to be drawn in favor of the

non-moving party (in this case, appellants), see Rared Manchester

NH, LLC v. Rite Aid of N.H., Inc., 693 F.3d 48, 52 (1st Cir. 2012),

and we “may affirm on any basis apparent from the record,” Boston

Prop. Exch. Transfer Co. v. Iantosca, No. 11-2475, 2013 WL 2533558,

at *7 (1st Cir. June 12, 2013) (citing Hoyos v. Telecorp Commc’ns,

Inc., 488 F.3d 1, 5 (1st Cir. 2007)).

                                II

                                 A

                                -5-
              Appellants say it was error for the district court to

require,      in    practical            terms,       a    showing           of   continuity     of

shareholders        to       demonstrate          a       de         facto    merger,    because

Massachusetts courts have routinely held that no one factor of the

relevant four-factor test is dispositive.                                 They argue that the

district court misconstrued the two Massachusetts cases on which it

primarily relied.            See Cargill, Inc. v. Beaver Coal & Oil Co., 676
N.E.2d 815 (Mass. 1997); McCarthy v. Litton Indus., Inc., 570
N.E.2d 1008 (Mass. 1991).

              We think the district court reached a sound result under

the   state    law.          We    start     from         the    undisputed        premise     that

Massachusetts courts generally “follow the traditional corporate

law   principle         that      the    liabilities            of    a   selling    predecessor

corporation are not imposed upon the successor corporation which

purchases its assets.”                  Guzman v. MRM/Elgin, 567 N.E.2d 929, 931

(Mass. 1991).           But to ensure the “fair remuneration of innocent

corporate creditors,” Milliken & Co. v. Duro Textiles, LLC, 887
N.E.2d 244, 255 (Mass. 2008), this default rule has four exceptions

that impose successor liability where “(1) the successor expressly

or    impliedly     assumes         liability         of       the     predecessor,     (2)    the

transaction        is    a   de    facto     merger         or       consolidation,     (3)    the

successor is a mere continuation of the predecessor, or (4) the

transaction is a fraudulent effort to avoid liabilities of the

                                              -6-
predecessor,” id. at 254-55 (quoting Guzman, 567 N.E.2d at 931).

Appellants argue only for the de facto merger exception here.

             In   determining   whether   de   facto   merger   is   a   fair

conclusion, Massachusetts courts “generally consider” four factors:

             whether (1) there is a continuation of the
             enterprise of the seller corporation so that
             there is continuity of management, personnel,
             physical   location,   assets,   and   general
             business operations; whether (2) there is a
             continuity of shareholders which results from
             the purchasing corporation paying for the
             acquired assets with shares of its own stock,
             this stock ultimately coming to be held by the
             shareholders of the seller corporation so that
             they become a constituent part of the
             purchasing corporation; whether (3) the seller
             corporation ceases its ordinary business
             operations, liquidates, and dissolves as soon
             as legally and practically possible; and
             whether (4) the purchasing corporation assumes
             those obligations of the seller ordinarily
             necessary for the uninterrupted continuation
             of normal business operations of the seller
             corporation.

Cargill, 676 N.E.2d at 818.       Critically, we note that the Supreme

Judicial Court of Massachusetts has repeatedly instructed that

“‘[n]o single factor [of these four] is necessary or sufficient to

establish a de facto merger.’”            Milliken, 887 N.E.2d at 255

(quoting Cargill, 676 N.E.2d at 818).

             We have also identified the overlap in the criteria of

the de facto merger exception with those of the “mere continuation”

exception.    See Dayton v. Peck, Stow and Wilcox Co., 739 F.2d 690,

693 (1st Cir. 1984); see, e.g., Milliken, 887 N.E.2d at 254 n.15

(“The terms ‘de facto merger’ and ‘mere continuation’ are often

                                    -7-
used by courts interchangeably.”); Nat’l Gypsum Co. v. Cont'l

Brands Corp., 895 F. Supp. 328, 336 (D. Mass. 1995) (“While these

two labels have been enshrined separately in the canonical list of

exceptions . . . they appear, in practice[,] to refer to the same

concept . . . .”); In re Acushnet River & New Bedford Harbor

Proceedings, 712 F. Supp. 1010, 1019 n.15 (D. Mass. 1989) (“[T]he

distinction between the two exceptions seems more apparent than

real. Upon examination, the de facto merger exception subsumes the

continuation exception.”).       To fall within the “mere continuation”

exception,    Massachusetts     courts    have   required   “at   a   minimum:

continuity    of   directors,   officers,    and   stockholders;      and    the

continued existence of only one corporation after the sale of

assets.”     McCarthy, 570 N.E.2d at 1013.           These exceptions, de

factor merger and mere continuation, both exist to ensure that a

seller cannot shield itself from past torts through a transaction

in which it retains equity or some other mechanism of continuing

control but vanquishes liability.

             As for what could not support an exception to the

successor non-liability rule, Massachusetts courts have suggested

that they would not adopt a related, independent exception embraced

by other jurisdictions, that of “continuation of enterprise.”

“Continuity of enterprise analysis does not require that the

predecessor and successor corporations have common shareholders

. . . as does the more traditional continuation exception.”                 Id.;

                                    -8-
see    also    id.     at    1013   n.6    (describing         the    “continuation     of

enterprise” exception as “distinctly a minority approach”); Nat’l

Gypsum    Co.,      895     F.   Supp.    at    340   (finding       no   “continuity   of

enterprise” exception in Massachusetts law and following “the

traditional de facto merger or continuation analysis, with its

keystones of continuous ownership and inequitable conduct”).

              With this framework in mind, we agree with appellants

that to the extent the district court considered continuity of

ownership as a necessary condition for de facto merger, the court

stepped       beyond      the    Massachusetts         cases    and       their   repeated

admonitions that no factor of the four-factor test is necessary.

See, e.g., Cargill, 676 N.E.2d at 818; Milliken, 887 N.E.2d, at

255.   Thus, the district court’s statement that “a de facto merger

does not occur absent a showing that there is a continuity of

shareholders,” DeJesus, 898 F. Supp. 2d at 361, was a stretch too

far, and summary judgment cannot be based exclusively on the

absence of continuity of ownership.                          But this does not mean

reversal, because we may still affirm if the summary judgment

record reveals materially undisputed facts that entitled Park to

judgment as a matter of law.               See Hoyos, 488 F.3d at 5.              We think

that is so here.

              The    Massachusetts         cases      show    that    the    Commonwealth

identifies the direction indicated by the four factors in synergy

together, allowing the relative significance of each to vary up or

                                               -9-
down when weighed independently case by case.                 Here, the facts

bearing on two of the four factors militate in favor of finding a

de facto merger, as Park does not seriously dispute.              The record,

first, unequivocally indicates that Bertsch, as a legal entity,

“cease[d] its ordinary business operations” after the purchase.

Cargill, 676 N.E.2d at 818.           And, second, it is equally clear that

Park assumed Bertsch’s obligations that were “ordinarily necessary

for the uninterrupted continuation of normal business operations.”

Id.

               But the appellants’ position weakens when we look to the

next factor.       Whether “there [wa]s a continuation of [Bertsch in

the   sense     of]     continuity    of    management,   personnel,   physical

location, assets, and general business operations” is a mixed bag.

Id.     On the one hand, Park maintained continuity with Bertsch’s

general business operations and assumed its assets.               But, on the

other, it did not continue to operate Bertsch’s primary production

facilities and only kept a handful of Bertsch’s management and

personnel.       This factor points both ways.

               As a consequence, the case turns on the weight to be

given    the    final    factor:     continuity   of   shareholders    or   other

continuing control device.           This element is a clear win for Park,

as the record makes plain that none of Bertsch’s shareholders

became owners of Park, and appellants have not raised a material

dispute to the contrary.           Indeed, in the district court “it [was]

                                           -10-
undisputed that Bertsch’s shareholders did not retain any type of

ownership or [non-stock] control over the business after the asset

sale to Park.”        DeJesus, 898 F. Supp. 2d at 361.               This factor,

therefore, cuts sharply against a finding of de facto merger.

           And its significance is substantial.                   In a previous

reading of Massachusetts common law, we spoke of the continuity of

shareholders as a “key requirement[]” in determining whether a de

facto merger exists sufficient to permit successor liability.

Dayton, 739 F.2d    at   693.      That    continues    to     be    the    best

understanding of how Massachusetts courts have actually implemented

this doctrine, and appellants point to no Supreme Judicial Court

decision finding a de facto merger in the absence of at least some

continuity of ownership.         Cf. In re Acushnet, 712 F. Supp. at 1015-

17   (continuity      found   when   sellers    received     stock       of   buyer’s

parent); Milliken & Co. v. Duro Textiles, LLC, 2005 WL 1791562, at

*10 (Mass. Super. Ct. 2005) (citing In re Acushnet approvingly for

the proposition that “it would be unduly technical to limit the de

facto   merger     doctrine    to    asset    sales   made   solely       with   the

purchaser’s     own   stock”),      aff’d,    887 N.E.2d 244.        Similarly,

district courts applying Massachusetts law have prized this factor

among the others.        See, e.g., Am. Paper Recycling Corp. v. IHC

Corp., 707 F. Supp. 2d 114, 121 (D. Mass. 2010) (rejecting de

factor merger claim where the predecessor acquired only 3.2%

ownership of the successor); Goguen v. Textron Inc., 476 F. Supp.

                                       -11-
2d 5, 12-15 (D. Mass. 2007) (rejecting de factor merger claim where

there was no evidence of continuity of ownership).   The best case

for appellants appears to be Cargill, in which the predecessor

acquired 12.5% of the shares of the successor corporation, but even

there, the SJC explained that this transaction did “not constitute

shareholder continuity in its fullest sense.” 676 N.E.2d at 819.

          Although we do not understand the state law to be that

continuity of shareholders is absolutely required, it remains a

very weighty factor in identifying a de facto merger.    Where, as

here, there is no shareholder continuity or any alternative means

of continuity of control, and one of the remaining three factors is

equivocal, we conclude that no such merger occurred and that the

district court correctly decided that Park has no liability for

Bertsch’s torts.1

                                B

     1
      Appellants’   arguments   to  the   contrary   focus   almost
exclusively on the district court’s absolute rule, which goes too
far, or stem from reliance on Massachusetts lower court decisions,
e.g., Lanee Great Plastic Co., Ltd. v. Handmade Bow Co., No.
SUCV200705245, 2010 WL 6650330 (Mass. Super. Ct. Dec. 26, 2010);
Dominguez v. Ruland Mfg. Co., No. 20081564, 2009 WL 3083865 (Mass.
Super. Ct. Aug. 13, 2009); Mass Printing & Forms, Inc. v. RKS
Health Ventures Corp., 2000 WL 744564 (Mass. Super. Ct. 2000). The
latter are of no moment to our analysis because we are bound to
“take [the] law in diversity cases from the state’s highest court
once that court has spoken on point.” EMC Corp. v. Arturi, 655
F.3d 75, 78 (1st Cir. 2011).        Our decision follows without
deviation from the framework outlined by the Supreme Judicial
Court.

                               -12-
          In the alternative, appellants ask us to certify the

question of the necessity for continuous ownership to the Supreme

Judicial Court of Massachusetts.   But there is no need for that.

Certification may be in order when we find “no controlling SJC

precedent on the . . . question and the issue is determinative.”

See Boston Gas Co. v. Century Indemn. Co., 529 F.3d 8, 15 (1st

Cir. 2008), but the SJC’s statements of the standard have

rejected absolute necessity, see Cargill, 676 N.E.2d at 818, and

our conclusion does not assume otherwise.

                               III

          The judgment of the district court is affirmed.

          It is so ordered.

                              -13-