Leonard Huray, Respondent, vs. Fournier NC Programming, Inc., Appellant.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2002).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

C9-02-1852

 

 

Leonard Huray,

Respondent,

 

vs.

 

Fournier NC Programming, Inc.,

Appellant.

 

 

Filed May 20, 2003 Affirmed Halbrooks, Judge

 

 

Hennepin County District Court

File No. 0118602

 

Thomas L. Kimer, Gretchen J. August, Faegre & Benson, LLP, 2200 Wells Fargo Center, 90 South 7th Street, Minneapolis, MN 55402-3901 (for respondent)

 

Norris J. Skogerboe, Skogerboe & Skogerboe, Chtd., Raintree Professional Center, 11937 Central Avenue N.E., Blaine, MN 55434 (for appellant)

 

 

 

            Considered and decided by Harten, Presiding Judge, Peterson, Judge, and Halbrooks, Judge.

U N P U B L I S H E D   O P I N I O N

HALBROOKS, Judge

            Appellant Fournier NC Programming, Inc. (Fournier NC) challenges the district court's order concluding that Fournier Mullins Manufacturing Services, LLC (FMMS) is liable for the debts of Fournier NC and awarding payment of garnished funds to respondent Leonard Huray.  Fournier NC argues that FMMS is not liable for the debts of Fournier NC because FMMS is not a continuation of Fournier NC and because FMMS paid adequate consideration for the assets of Fournier NC.  Fournier NC also argues that the affidavit submitted by Huray was false and was improperly relied on by the district court.  Because we conclude that the district court did not err in holding that FMMS is responsible for the debts of Fournier NC and that the court's reliance on Huray's affidavit was not clearly erroneous, we affirm.     

FACTS

In 1995, Kevin Fournier and his wife incorporated Fournier NC.  Fournier NC was in the computer programming business and specialized in programming tools for machine shops.  In 1997, Fournier sold a 50% ownership interest in Fournier NC to Darrel Mullins.  Fournier and Mullins were equal owners, and both sat on the board of directors.  In mid-1997, Fournier and Mullins started two other businesses: Mullins Machining, Inc. (Mullins Machining) and Fournier Mullins, LLC (Fournier Mullins).[1] 

Mullins Machining was a machine shop that made parts for the aircraft industry, and Fournier Mullins bought or leased all of the equipment used by Mullins Machining.  Similar to the arrangement of Fournier NC, Fournier and Mullins each held a 50% ownership interest in each company, and sat on the board of directors/governors.  In December 1997, the companies leased 12,500 square feet of space.  Fournier NC occupied 2,000 square feet of office space and Mullins Machining used the rest as a machine shop.

            In 1998, the three companies began to have financial problems, and Fournier and Mullins decided to take on investors.  Late in the summer of 1998, Fournier and Mullins sold an 8% ownership interest in each of the three companies to Leonard Huray for $32,000.  Huray subsequently quit his job at Remmele Engineering, Inc. (Remmele) to do programming work for Fournier NC.  Huray was secretary of the three companies and was also on the board of directors.  Huray was only with Fournier NC for about a year.  He sold his ownership interest back to the remaining owners in May 1999 in exchange for a $20,600 promissory note and returned to work for Remmele.

Fournier and Mullins also sold a 2% interest in each of the three companies to Eric Canny and Dave Winger, who were employees of Mullins Machining.[2]  Canny and Winger were board members of the three companies, but not officers.  After Huray left, Dean Milke purchased a 2% interest in the companies and joined the board of directors.  Winger sold his interest to the remaining owners in January 2000, and Canny and Milke sold their interests to the remaining owners in October 2001.  As a result, Fournier then owned approximately 52% of each of the three companies and Mullins owned approximately 48%.

            Late in 1998, Mullins Machining received a large order with a short timeline.  Mullins Machining purchased additional equipment and hired more employees.  When the order was put on hold, Mullins Machining was left with payments due on the new equipment and many additional employees, but no work.  In February 1999, Mullins Machining was told it could start working on the project, but payment was delayed. 

Mullins Machining was dissolved in late 1999 because of financial problems.  Soon after, Fournier and Mullins incorporated FMM, Inc. to do their machining work.  FMM performed machining work for several clients through 2000 and into 2001.  But due to an economic downturn in the stock market and the computer industry, FMM essentially ceased operations.

            By January 2000, Fournier NC was doing 21% of its programming business for Fortune Manufacturing, Inc.; 54.25% for McCann Aerospace, Inc.; 23% for Progressive, Inc.; and 1.75% for Remmele Engineering, Inc.  Fournier NC also did a few small jobs for Advanced Tool and Die, Inc.  Throughout 2000 and 2001, the programming business decreased significantly, and Fournier NC sent out its last invoice in August 2001.  In December 2001, Fournier NC, FMM, and Fournier Mullins were unable to make their lease payments.  The companies were evicted, their equipment was placed in storage, and all three closed their doors. 

            On November 13, 2001, Fournier and Mullins formed Fournier Mullins Manufacturing Services, LLC (FMMS).  Similar to Fournier NC, FMMS's primary business was the programming of machine tools for machine shops.  But under the trade name Metallinus Synergy, FMMS also began providing consulting services. 

            FMMS did about 31% of its work for Advanced Tool and Die, Inc.; 30% for Remmele Engineering, Inc.; 17% for Fortune Manufacturing, Inc.; 14% for Progressive Inc.; 6% for McCann Aerospace, Inc.; 1% for LAI Midwest, Inc.; and 1% for Wilson Products.  About 5% of the work done for Advanced Tool and Die, Inc. and all of the work done for LAI Midwest was consulting work.  The remainder of the work performed by FMMS was programming.   

            FMMS used NCL and Vericut software programs in its programming business.  Fournier NC had purchased licenses for NCL in 1995 and for Vericut in 1997 for use in its programming business.  FMMS used the same version of the software that was purchased by Fournier NC but did not pay Fournier NC for it.  When Fournier NC ceased business operations, it sold its hardware to FMM for $15,000.  When FMM closed its doors, it sold the hardware and a digital camera to FMMS for $15,357.75.  Fournier NC also sold its furniture to FMMS for $4,000.

            Fournier NC defaulted on the payments due to Huray under the promissory note and signed a confession of judgment for $19,242.31 on August 16, 2000.  Fournier NC again defaulted on its payment schedule, and Huray filed the confession of judgment with the court on December 11, 2001.  The outstanding balance of the debt owed to Huray at that time was $12,893.49. 

Huray served Remmele with a garnishment summons on January 15, 2002, seeking to garnish any amounts owed by Remmele to Fournier NC.  Remmele responded that it was not holding any property for Fournier NC, but that it was holding property for FMMS.  Huray submitted a motion to the district court requesting that Remmele pay Huray the funds that Remmele owed to FMMS.  FMMS opposed the motion, arguing that the district court should dismiss the garnishment action because Remmele did not owe any money to Fournier NC.  The district court ordered Remmele to deposit the disputed funds into the court and dismissed Remmele from the action.  The district court also ordered the parties to conduct limited discovery and indicated that, upon completion of the discovery, both parties could submit motions requesting payment of the deposited funds.  Following the depositions of Fournier and Huray, both parties brought motions.  The district court ordered that the $12,893.49 on deposit with the court be paid to Huray.  The court held that FMMS was liable for the debts and responsibilities of Fournier NC because FMMS is a successor corporation of Fournier NC.  This appeal follows.

D E C I S I O N

1.         Successor Liability

 

            Appellant asserts that the district court erred in holding that FMMS is a successor corporation of Fournier NC.  This court need not defer to the district court's application of the law when the material facts are not in dispute.  Hubred v. Control Data Corp., 442 N.W.2d 308, 310 (Minn. 1989).

            "Minnesota follows the traditional approach to corporate successor liability."  Niccum v. Hydra Tool Corp., 438 N.W.2d 96, 98 (Minn. 1989).  Generally, where one company sells or otherwise transfers all of its assets to another company, the transferee is not liable for the debts and liabilities of the transferor.  J. F. Anderson Lumber Co. v. Myers, 296 Minn. 33, 37, 206 N.W.2d 365, 368 (1973).  But, a transferee will be liable for the debts and liabilities of a transferor

(1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporation; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts. 

 

Id. at 37-38; 206 N.W.2d at 368-69 (quotation and citation omitted).  Another exception, that is sometimes incorporated as an element of one of the above four exceptions, "is the absence of adequate consideration for the sale or transfer."[3]  Id. at 38, 206 N.W.2d at 369.  The district court held that FMMS is responsible for the debts of Fournier NC because FMMS is merely a continuation of Fournier NC, and because FMMS provided no consideration for the use of software programs originally licensed to Fournier NC.

          A.        Mere Continuation

            Generally, the mere-continuation exception applies when the transferee corporation is merely a reincarnation of the transferor corporation.[4]  Braucher, supra, § 7124.10. 

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 operations.

            The traditional indications of "continuation" are: common officers, directors, and shareholders; and only one corporation in existence after the completion of the sale of assets.  * * *  Other factors such as continuation of the seller's business practices and polices and the sufficiency of the consideration running to the seller corporation in light of the assets being sold may also be considered.  To find that continuity exists merely because there was common management and ownership without considering other factors is to disregard the separate identities of the corporation without the necessary considerations that justify such an action.

 

Id. (citations omitted); see also Grand Labs., Inc. v. Midcon Labs of Iowa, 32 F.3d 1277, 1283 (8th Cir. 1994) (applying Iowa law and explaining that "[t]he traditional mere continuation exception focuses on the continuation of management and ownership between the predecessor and successor corporations."); Baltimore Luggage Co. v. Holtzman, 562 A.2d 1286, 1294 (Md. Ct. Spec. App. 1989) (determining whether there was a mere continuation of a corporate entity by examining whether there was a change in management and/or ownership, whether the nature of the business changed, whether there was a sole corporation remaining after the sale, and whether the predecessor corporation received sufficient consideration for the sale of its assets); J. F. Anderson, 296 Minn. at 38-39, 206 N.W.2d at 369 (stating that the fact that a successor corporation is carrying on the same business as a predecessor corporation is insufficient to make the successor liable for the debts of the predecessor).

            Fournier NC and FMMS had common shareholders/members, officers/managers, and directors/governors.  While Wilke, Canny, and Winger had ownership interests in Fournier NC for short periods of time and sat on the board of directors, their ownership interests were very small.  For a time, Huray held an 8% ownership interest in Fournier NC, and he was also an officer and a director.  But Huray's ownership interest and control of Fournier NC were also relatively minor.  Fournier and Mullins held the major ownership interests in Fournier NC and FMMS.  They had complete control of the respective boards, were the major officers/managers, and exercised managerial control of both companies.  Even though there were other minor shareholders, officers, and directors of Fournier NC for short periods of time, FMMS and Fournier NC essentially had the same ownership, management, and the same board of directors/governors.

            FMMS essentially conducts the same business as Fournier NC.  Fournier NC programmed machine tools for machine shops.  While a small and growing percentage of FMMS's business is providing consulting services, over 90% of FMMS's business is programming machine tools for machine shops.  In fact, the record demonstrates that approximately 97% of FMMS's revenues are generated from providing programming services.  The similarity in business is also demonstrated by the similarity in clients between the two companies.  Five of FMMS's seven major clients, accounting for approximately 98% of FMMS's revenues, were also clients for Fournier NC.  While FMMS may plan to have consulting services constitute a larger part of its business activities in the future, at this point, FMMS is conducting essentially the same business activities as Fournier NC and for essentially the same clients. 

            Another indication that a successor corporation is merely a continuation of its predecessor is whether there is a sole corporation remaining after the sale.  Baltimore Luggage, 562 A.2d at 1294 (using whether there was a sole corporation remaining as a factor in the mere-continuation analysis).  Fournier NC has not declared bankruptcy and has never been dissolved.  But it has ceased operation.  Fournier NC sold or gave away most of its major assets, including its computer hardware and software; its business is now being conducted by FMMS.  While technically it cannot be said that FMMS is the only remaining corporate entity, in reality, that is the case.

            Finally, in our analysis of whether a successor corporate entity is a mere continuation of its predecessor, we consider whether there was sufficient consideration running to the seller from the purchasing corporation.  Id. (including whether sufficient consideration ran to the seller from the purchasing corporation in the mere-continuation analysis); Carstedt v. Grindeland, 406 N.W.2d 39, 41 (Minn. App. 1987) (same).  Here, Fournier NC sold its hardware to FMM for $15,000, and FMM then sold the hardware and a digital camera to FMMS for $15,357.75.  Fournier NC also sold its furniture to FMMS for $4,000.  But FMMS did not pay for the use of Fournier NC's software licenses.  The reason that no consideration was paid was because Fournier NC was prohibited from selling the software by its licensing agreement.  The only way that FMMS could get the software transferred to its name was to pay the software companies to update the software and licensing agreement.  Because FMMS did not have the resources to update the software, FMMS used the software without paying any consideration to Fournier NC and without transferring the software license.  Fournier testified that the software was outdated and likely had little value.  But FMMS used the software to conduct its business and has been able to generate significant revenue using the outdated products. 

            The record demonstrates that Fournier and Mullins were the major shareholders/members, officers/managers, and directors/governors of both Fournier NC and FMMS, that FMMS is essentially operating the same business as Fournier NC with the same clients, that FMMS is the only viable corporation remaining after the sale of Fournier NC's assets, and that FMMS received Fournier NC's software without sufficient consideration.  Based on this record, we conclude that FMMS is merely a continuation of Fournier NC, and that the district court did not err in holding that FMMS is responsible for the debts of Fournier NC. 

 

B.        Insufficient Consideration

 

Appellant contends that the district court erred in holding that FMMS is responsible for the debts of Fournier NC because FMMS received and used software that was licensed to Fournier NC without sufficient consideration.  Whether or not the predecessor corporation received sufficient consideration for the sale or transfer of its assets is sometimes considered to be a fifth exception, and other times considered to be an element of one of the other four major exceptions.  J. F. Anderson, 296 Minn. at 38, 206 N.W.2d at 369 (stating that adequacy of consideration is a fifth exception that is sometimes considered as an element of the other exceptions).  While there are few Minnesota cases applying the adequacy-of-consideration exception, adequacy of consideration is generally viewed as an element of the mere-continuation exception.  Carstedt, 406 N.W.2d at 41 (considering adequacy of consideration as an element of the mere-continuation exception analysis); see also Baltimore Luggage, 562 A.2d at 1294 (same).

FMMS provided consideration for the computer hardware[5] and the furniture it received from Fournier NC.  But it did not provide consideration for the computer software that it received from Fournier NC.  Considering the adequacy of consideration alone, FMMS's failure to pay for the software is not a sufficient justification for making FMMS responsible for Fournier NC's debts.  But the failure of consideration supports the district court's determination that FMMS was a continuation of Fournier NC.        

 

2.         Huray Affidavit

 

Finally, Fournier NC asserts that Huray's affidavit was false and, therefore, should not have been relied on by the district court.  This court will not set aside a district court's findings of fact unless they are clearly erroneous.  Fletcher v. St. Paul Pioneer Press, 589 N.W.2d 96, 101 (Minn. 1999).  After a careful review of Huray's affidavit and the district court record, we conclude that the court's finding that Huray's affidavit was not deliberately false or misleading was not clearly erroneous.  

            Affirmed.

[1] The reason for starting the new companies was to separate the programming and the machining businesses.  Fournier testified that machine shops usually do not want to send their programming work to another machine shop who may be a competitor.

[2] Fournier purchased stock at the same time they sold the ownership interests to Huray, Winger, and Canny.  Thus, after the sale of the partial ownership interests, Fournier had a 51% ownership interest in the three companies, Mullins had a 37% interest, Huray had an 8% interest, and Winger and Canny each had a 2% interest.

[3] Both the general rule and the exceptions reflect an attempt to balance the need to protect corporate creditors with the need to respect the separation of corporate entities.  Victoria Braucher, et al., Fletcher Cyclopedia of the Law of Private Corporations § 7122 (perm. ed. rev. vol. 1999).

[4] Fletcher's Cyclopedia also explains the policy behind the mere-continuation exception as follows:

 

The "mere continuation" of business exception reinforces the policy of protecting the rights of a creditor by allowing a creditor to recover from the successor corporation whenever the successor is substantially the same as the predecessor.  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. 

 

Braucher, supra, § 7124.10.

[5] FMM purchased the hardware from Fournier NC, and then sold it to FMMS.