Gladstone v. Stuart Cinemas, Inc.
Annotate this Case
Gladstone v. Stuart Cinemas, Inc. (2003-298); 178 Vt. 104; 878 A.2d 214
2005 VT 44
[Filed 25-Mar-2005]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
2005 VT 44
No. 2003-298
Ted Gladstone and Alexandra Gladstone Supreme Court
On Appeal from
v. Bennington Superior Court
Stuart Cinemas, Inc. and Melvin Stuart April Term, 2004
John P. Wesley, J.
Stephen L. Saltonstall of Barr Sternberg Moss Lawrence Silver &
Saltonstall, P.C., Bennington, for Plaintiffs-Appellants.
Lon T. McClintock of Jacobs, McClintock & Scanlon, LPC, Bennington, for
Defendants-Appellees.
PRESENT: Amestoy, C.J.,(FN1) Dooley, Johnson, Skoglund and Reiber, JJ.
¶ 1. DOOLEY, J. In this corporate successor liability case,
plaintiffs Ted and Alexandra Gladstone, who are attempting to collect an
$89,709.58 judgment rendered in a prior action against Bennington Cinemas,
Inc. (BCI) from defendants Stuart Cinemas, Inc. (SCI) and Melvin Stuart,
appeal an order from the trial court granting defendants' motion for a
judgment on partial findings pursuant to V.R.C.P. 52(c). The court
concluded that the evidence presented at trial did not establish
defendants' liability for the previously entered judgment. Plaintiffs
contend the court erred in granting defendants' motion because the evidence
presented at trial demonstrates that under three common law theories of
corporate successor liability-de facto merger, mere continuation and
continuing enterprise-SCI is liable for the judgment. We reverse and
remand.
¶ 2. Plaintiffs own a shopping plaza in Bennington. One of the
commercial spaces in the plaza is a three-screen movie theater. In 1988,
Stuart and his wife moved from Connecticut to Vermont to acquire a movie
theater business. At this time, Green Mountain Cinemas, Inc., which
operated the three-screen theater in plaintiffs' plaza, was selling its
assets. The lease for the theater space between Green Mountain Cinemas,
Inc. and plaintiffs, and running until June 30, 1998, was included as one
of these assets. Melvin Stuart formed BCI to purchase the assets, making
himself and his wife sole shareholders, directors and officers. BCI then
operated the theater, and the corporation met its debt obligations,
including rent due to plaintiffs, in a timely fashion.
¶ 3. BCI's movie theater was the only one operating in Bennington.
During 1991 and 1992, Stuart received warnings from acquaintances in the
movie distribution business that competitors were beginning to look at
Bennington as a location to open a multiplex movie theater. Concerned that
BCI would not survive if a competitor entered the market, Stuart
investigated the possibility of expanding the three-screen cinema. With
plaintiffs' consent, Stuart employed an architect and a contractor to
propose a design and estimate the cost of expanding plaintiffs' plaza to
accommodate a multiplex movie theater. Through BCI, Stuart applied to
several banks for financing, but only Vermont National Bank (VNB) responded
favorably. Shortly before BCI was approved for the loan, Stuart contacted
Mr. Gladstone to inform him that VNB was interested in financing the
expansion. Mr. Gladstone responded that he had received information that
led him to believe that BCI would not be approved for the loan and he had
rented the space proposed for the expansion to another tenant.
¶ 4. Because he could no longer expand his business in plantiffs'
plaza, Stuart began to consider other options. Eventually, he decided that
the best option was to purchase and renovate an existing property in
Bennington on Route 67A. In 1994 and 1995, Stuart applied to VNB for
financing for this project. VNB's commercial loan officer approved a
business plan, under which the Stuarts would form a new corporation,
separate from BCI, to run the multiplex theater. The business plan also
provided that the three-screen theater would continue to operate after the
multiplex opened if the business remained profitable. VNB approved a
financing package for the multiplex theater which included a $900,000 (FN2)
construction loan which was to mature in six months. At maturity, the
construction loan would convert to a $400,000 commercial loan secured by
the real estate and business assets, subordinated to a $500,000 commercial
loan with a Small Business Administration (SBA) guaranty. Under the terms
of the package, pending the formation of a new corporate entity, VNB
required the Stuarts and BCI to pledge as borrowers on the construction
loan. With financing in place, the Stuarts purchased the property on Route
67A on February 27, 1995. No funds from BCI were used in this purchase.
¶ 5. On March 3, 1995, the Stuarts incorporated SCI to operate the
multiplex theater. As with BCI, Mr. and Mrs. Stuart were the sole
shareholders, directors and officers of the new corporation. Despite
having identical shareholders, officers, and directors, BCI and SCI
maintained separate financial records, and BCI paid none of SCI's start up
costs. The record indicates that BCI's involvement in the multiplex
transaction was limited to being a listed borrower on the construction loan
which was discharged on September 25, 1995 when, according to the terms of
the financing package, the $400,000 commercial loan and $500,000 SBA backed
loan were issued. BCI was not listed as borrower for either of these two
loans.
¶ 6. SCI opened the multiplex theater in June 1995. During the
following month, BCI's three-screen theater remained open, but, under
direction from distributors, movies were shifted from the three-screen
theater to the multiplex, leaving BCI's theater able to show only one
movie. During July, several of BCI's employees were laid off and hired by
SCI, and Stuart removed projectors and seats from the BCI theater and
installed them in the SCI theater. Also during this month, the two
theaters shared the same phone number.
¶ 7. BCI did not pay plantiffs rent for July 1995 and ceased
operations the next month. Approximately two years later, plaintiffs sued
BCI for back rent owed on the lease that BCI had assumed. The trial court
found that BCI, as the assignee of the lease, was liable to plaintiffs for
the unpaid rent. To date, BCI has not paid any portion of the ensuing
judgment.
¶ 8. In an attempt to recover the judgment amount, plaintiffs
filed in the original case a motion for a writ of execution against Stuart
and SCI. The court denied the motion because SCI and Stuart were not
parties to the action. Following this denial, plaintiffs initiated this
action against Stuart and SCI. Plaintiffs advanced several theories of
liability under which they could recover from parties with whom they were
not in contractual privity under the lease. Each of the theories advanced
below, like those advanced here, involved disregarding BCI's corporate form
in order to impose liability on either Stuart or SCI, thereby making one or
both of those parties responsible for BCI's debts. In the trial court,
plaintiffs vigorously pursued the theory that the facts warranted the court
piercing the corporate veil and imposing liability on Stuart individually.
In the alternative, plaintiffs argued that under three subsets of the
doctrine of successor liability-de facto merger, the mere continuation, and
the fraudulent transaction theory-SCI should be liable for BCI's debts.
¶ 9. The court, in a bench trial, heard testimony over three days.
At the conclusion of plaintiffs' case, defendants moved for entry of a
judgment on partial findings under V.R.C.P. 52(c). Rule 52(c), which is
virtually identical to Federal Rule 52(c), provides:
If during a trial without a jury a party has been fully heard on
an issue and the court finds against the party on that issue, the
court may enter judgment as a matter of law against that party
with respect to a claim or defense that cannot under the
controlling law be maintained or defeated without a favorable
finding on that issue, or the court may decline to render any
judgment until the close of all the evidence. Such a judgment
shall be supported by findings of fact and conclusions of law . .
. whether or not requested by a party.
In ruling on a 52(c) motion "the court's task is to weigh the evidence,
resolve any conflicts in it, and decide for itself where the preponderance
lies." 9A Wright & Miller, Federal Practice and Procedure 2d § 2573.1, at
498-99 (1995). In this case, the court concluded that the evidence did not
establish liability on the part of SCI or Stuart and granted defendants'
motion with respect to all of plaintiffs' theories of liability.
Plaintiffs appeal this ruling, but not in its entirety. Plaintiffs do not
appeal the court's refusal to pierce the corporate veil, nor its finding
that there was no fraudulent transaction, but do contend that the court
erred in finding that there was no de facto merger between BCI and SCI and
that SCI was not a mere continuation of BCI. Plaintiff also argues here,
but did not argue below, that SCI should be liable under the continuing
enterprise theory of successor liability.
¶ 10. We have not previously considered an appeal from a Rule 52(c)
ruling. Rule 52(c) was added to bring the Vermont Rules into conformity
with the Federal Rules. The Reporter's Notes explain that the rule was
added to parallel Rule 50, Judgment as a Matter of Law in Actions Tried by
a Jury, and replaced the part of Rule 41(b)(2) that "authorized dismissal
when a plaintiff had failed to carry an essential burden of proof." Both
parties agree that when considering a Rule 52(c) judgment we should review
the trial court's conclusions of law de novo, and its underlying factual
findings for clear error. This standard of review is in conformity with
the federal courts' standard. See, e.g., Mullin v. Town of Fairhaven, 284 F.3d 31, 36-37 (1st Cir. 2002); Dubner v. San Francisco, 266 F.3d 959, 964
(9th Cir. 2001); Samson v. Apollo Res., Inc., 242 F.3d 629, 632-33 (5th
Cir. 2001); Clark v. Runyon, 218 F.3d 915, 918 (8th Cir. 2000). It is
consistent with our decisions reviewing motions granted pursuant to 52(c)'s
predecessor, Rule 41(b)(2). See New England Educ. Training Serv. Inc. v.
Silver St. P'ship, 156 Vt. 604, 611, 595 A.2d 1341, 1344-45 (1991).
¶ 11. While plaintiffs accept this deferential standard of review,
they argue that the trial court "relied upon an erroneous view of the
applicable law," and that this Court should consider whether, at trial,
plaintiffs presented sufficient evidence to establish a prima facie showing
of successor liability. Plaintiffs contend that if they established a
prima facie case they should survive defendants' motion for a judgment on
partial findings. This is not the standard under Rule 52(c). Wright and
Miller explain that, "[t]he trial judge is not . . . to concern itself with
whether the nonmovant has made out a prima facie case." Wright & Miller,
supra, § 2573.1 at 497-98. Instead the judge acts as the trier of fact,
weighing the evidence and determining whether the nonmovant has established
a right to relief. See Stearns v. Beckman Instruments, Inc. 737 F.2d 1565,
1568 (Fed. Cir. 1984) (discussing Rule 41(b) which was succeeded by 52(c)
and explaining that judge weighs and passes on evidence presented). Unlike
the procedure for summary judgment, under Rule 52(c) the judge does not
have to consider the evidence in the light most favorable to the nonmoving
party. See New England Educ. Training Serv., Inc., 156 Vt. at 611, 595
A.2d at 1344-45; Geddes v. Northwest Mo. State Univ., 49 F.3d 426, 429 n.7
(8th Cir. 1995); United States v. Davis, 20 F. Supp. 2d 326, 331 (D.R.I.
1998). Therefore, if the judge determines, after weighing the evidence,
that the plaintiff has not established a claim for relief, the motion for a
judgment on partial findings may be granted even if the plaintiff has
established a prima facie case. See Stearns, 737 F.2d at 1568; Martinez v.
U.S. Sugar Corp., 880 F. Supp. 773, 775 (M.D. Fla. 1995). Accordingly, we
reject plaintiffs' argument in this case that establishing a prima facie
case is enough to defeat defendants' motion.
¶ 12. Keeping in mind that we review the trial court's findings of
fact for clear error and conclusions of law de novo, we now turn to the
merits of this case. In doing so, we recognize that defendant SCI has not
had the opportunity to present a case so the factual record is one-sided.
We also recognize that during trial the vast majority of the attention went
to whether plaintiffs could pierce the corporate veil of BCI or SCI to
reach the Stuarts directly.
¶ 13. Nevertheless, plaintiffs addressed successor liability in
their requests for findings and conclusions of law, arguing that there was
a de facto merger between BCI and SCI, SCI is a continuation of BCI, SCI is
the alter ego of BCI, and the establishment of SCI was done to defraud
creditors. In its decision, the court discussed only the de facto merger
theory, and addressed it only briefly. The court rejected this theory with
the following rationale:
The facts . . . do not support the claim that SCI is legally
deemed to have undergone a de facto merger with BCI. First, in
proportion to the overall size of its business needs, the BCI
assets employed by SCI make an insignificant contribution.
Second, and most importantly, while E.B.M. simply carried on the
same business as Acousti-Phase under a different corporate shell,
SCI in every meaningful respect is engaged in a different business
than BCI. The imperative to develop a multiplex cinema defines
the different nature of the business, accompanied by Mr. Stuart's
acquisition and development of a wholly separate commercial
complex in which to operate it.
The reference to E.B.M. and Acousti-Phase is to the parties in one of the
two successor liability cases this Court has decided. In analyzing the
superior court's decision and the successor liability issues, we start with
those decisions.
¶ 14. The first was Ostrowski v. Hydra-Tool Corp., 144 Vt. 305, 479 A.2d 126 (1984), a products liability case in which the plaintiff injured
his hand while operating a press-brake machine manufactured by a
corporation no longer in existence. The defendant was the second of two
succeeding purchasers of the manufacturer's assets and continued to
manufacture similar press-brake machines. We stated the general rule of
successor liability as follows: "the liabilities of a predecessor
corporation will pass to the successor only when the change is occasioned
by statutory merger or consolidation." 144 Vt. at 307, 479 A.2d at 127.
In cases where the change is accomplished by the "sale of assets only," the
purchasing corporation assumes no liabilities of the selling corporation
unless one of the following five commonly accepted exceptions apply:
(1) the buyer expressly or impliedly agrees to assume [the
corporation's] liabilities; (2) the transaction amounts to a de
facto merger or consolidation; (3) the purchasing corporation is
merely a continuation of the selling corporation; (4) the sale is
a fraudulent transaction intended to avoid debts and liabilities;
and (5) inadequate consideration was given for the sale.
Id. We declined to adopt either of two additional exceptions: the product
line theory or the continuity of enterprise theory. Id. at 307-08, 479 A.2d at 127. The decision not to liberalize the exceptions in Ostrowski is
of little consequence here because the additional rejected exceptions are
designed to apply in tort cases, particularly those involving products
liability. See, e.g., Brown v. Econ. Baler Co., 599 So. 2d 1, 3 (Ala.
1992) (applying continuing enterprise test to products liability case); Ray
v. Alad Corp., 560 P.2d 3, 8-10 (Cal. 1977) (discussing policy reasons for
imposing successor liability in products liability cases); Turner v.
Bituminous Cas. Co., 244 N.W.2d 873, 883 (Mich. 1976) (adopting a
continuity test for products liability suits). Thus, we declined to adopt
the two additional exceptions because the successor: (1) did not create the
risk of harm or benefit from the proceeds of the product's sale; (2) did
not invite the product's use or make any safety representations; and (3)
cannot enhance the safety of a product already in the marketplace.
Ostrowski, 144 Vt. at 308, 479 A.2d at 127. We also reasoned that
expanding the scope of the exceptions posed an economic threat to small
business unable to bear the costs of an injured party's claim. Id. (FN3)
¶ 15. The second was Cab-Tek, Inc. v. E.B.M., Inc., 153 Vt. 432, 571 A.2d 671 (1990). For purposes of this case, an important part of the
Cab-Tek holding is its conclusion that the Ostrowski exceptions to the
general rule of successor liability apply in cases where a contract
creditor is suing the successor corporation. 153 Vt. at 436, 571 A.2d at
673. The defendant, E.B.M., Inc., was a real estate management corporation
owned by two individuals who were also directors of a corporation,
Acousti-Phase, Inc., that manufactured stereo speakers. When Acousti-Phase
ceased manufacturing because of a fire at its facility, defendant
contracted with another company to manufacture the speakers and sold them
under the Acousti-Phase name. Plaintiff was a supplier of Acousti-Phase
that was owed money for supplying cabinet housings.
¶ 16. The trial court found the defendant in Cab-Tek liable on a
theory of de facto merger, and we affirmed. We determined that the theory
of de facto merger applied when the defendant used all the assets of
Acousti-Phase without compensation, even though it did not purchase the
assets as in Ostrowski. Id. at 436-37, 571 A.2d at 673. The de facto
merger occurred because "E.B.M. absorbed Acousti-Phase when it took control
over all of the Acousti-Phase assets without consideration, and
Acousti-Phase ceased to function." Id. at 435, 571 A.2d at 672-73.
¶ 17. As a U.S. District Court in Texas recently recognized in a
case applying Vermont corporate successor law, we have "not explicitly
defined de facto merger," nor defined at all "what constitutes a mere
continuation." White v. Cone-Blanchard Corp., 217 F. Supp. 2d 767, 772-73
(E.D. Tex. 2002). The superior court analyzed the facts within the narrow
confines of Cab-Tek and Ostrowski as if these decisions had fully explored,
and set the outer contours for, corporate successor liability in Vermont.
Thus, the court decided SCI's liability based solely on the de facto merger
exception and solely on two factors that were present in Cab-Tek and
Ostrowski, but that it found were not present here: the successor
corporation purchased or used virtually all the assets of the predecessor
corporation, and the successor and predecessor corporations are in the
"same business," narrowly defined.
¶ 18. We understand that the trial court's approach appears
consistent with the logic of Ostrowski, recognizing that the successor
liability theories on which plaintiffs relied were exceptions to a general
rule that "a sale of assets only" does not create successor liability. A
narrow reading of the opinion suggests that a sale of substantial assets is
a prerequisite to any consideration of these theories. This reading is
clearly too narrow because Cab-Tek recognized successor liability based on
de facto merger despite the fact that no sale of assets had occurred.
Indeed, it is not clear that any transfer of tangible assets occurred in
Cab-Tek. Thus, this opinion must examine anew the relationship between
successor liability and asset transfer.
¶ 19. We begin, however, by putting aside the asset transfer
question and instead first turn to determining whether any of the successor
liability theories would apply independent of asset transfer. The critical
factor in this case, not present in Ostrowski, and only partially present
in Cab-Tek, is that the successor corporation is owned by the same
stockholders as the predecessor corporation. Plaintiffs argue that the SCI
is really the continuation of BCI under a different corporate shell created
in order to prevent one creditor of BCI, plaintiffs, from recovering the
debt owed to them. Because of this aspect of the case, the Ostrowski
exception most likely to apply, if any, is "the purchasing corporation is
merely a continuation of the selling corporation." 144 Vt. at 307, 479 A.2d at 127. (FN4) The "mere continuation" exception is explained in an
oft-cited treatise as follows:
The mere continuation exception to the nonliability of successors
applies when the transferee corporation is merely a continuation
or reincarnation of the transferor corporation. 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 sale of assets. While the two foregoing
factors are traditionally indications of a continuing
corporation, neither is essential. In a "de facto merger" where
one corporation is absorbed by another, there is continuity of the
selling corporation evidenced by such things as the same
management, personnel, assets, location and shareholders. 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
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.
However, the question of a successor's liability is distinct from
the doctrine of disregarding the corporate entity.
The "mere continuation" of business exception reinforces the
policy of protecting 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.
15 Fletcher Cyclopedia Corp. § 7124.10, at 298-301 (1999) (citations
omitted); see Baltimore Luggage Co. v. Holtzman, 562 A.2d 1286, 1293 (Md.
Ct. Spec. App. 1989) (explaining purpose and elements of rule); Huray v.
Fournier NC Programming, Inc., No. 0118602, 2003 WL 21151772, at *3 (Minn.
Ct. App. May 20, 2003) (unpublished op.) (explaining that mere continuation
exception applies when the transferee corporation "is merely a
reincarnation of the transferor corporation").
¶ 20. We now consider the most important factors of the mere
continuation theory against the background of the instant case. The single
most important factor for applying the mere continuation theory is the
continuity of ownership and management. See Dayton v. Peck, Stow & Wilcox
Co., 739 F.2d 690, 693 (1st Cir. 1984); Kaiser Found. Health Plan v. Clary
& Moore, P.C., 123 F.3d 201, 205 (4th Cir. 1997); Grand Labs., Inc. v.
Midcon Labs, 32 F.3d 1277, 1283 (8th Cir. 1994); Gallenberg Equip., Inc. v.
Agromac Int'l, Inc., 10 F. Supp. 2d 1050, 1053 (E.D. Wis. 1998) (applying
Wisconsin law); Vernon v. Schuster, 688 N.E.2d 1172, 1176 (Ill. 1997)
(finding continuity of ownership a requirement of mere continuation
theory). That factor is clearly present in the small closely-held
corporations before us. Both BCI and SCI are owned by the Stuarts, and
both are managed by Melvin Stuart.
¶ 21. The second most important factor for applying the mere
continuation exception is whether only the successor corporation has
survived. Here, it is undisputed that BCI is insolvent. Its only
remaining assets have little value, and it owes the judgment amount to
plaintiffs. Moreover, it has wound up its business operations and
abandoned its place of business. See In re Sunsport, Inc., 260 B.R. 88,
106 (Bank. E.D. Va. 2000) (concluding factor met where transferring
corporation continued for a few months and went into bankruptcy because
"[f]or all practical purposes, only [the successor corporations] remained
after the asset sale"); Huray, 2003 WL 21151772 at *5 (finding sufficient
that transferor corporation has "ceased operation" although it has not
declared bankruptcy or dissolved).
¶ 22. Therefore, it is not significant that BCI has not been
dissolved and thus technically continues to exist. See Cargill, Inc. v.
Beaver Coal & Oil Co., 676 N.E.2d 815, 819 (Mass. 1997); Flotte v. United
Claims, Inc., 657 S.W.2d 387, 389 (Mo. Ct. App. 1983); Gall Landau Young
Constr. Co. v. Hedreen, 816 P.2d 762, 766 (Wash. Ct. App. 1991). Nor is it
significant that BCI remained in operation for a very short period after
SCI's multiplex cinema opened. As Melvin Stuart's testimony reflected, it
was unlikely that the BCI theaters could withstand the competition from the
multiplex theaters, and it quickly became clear that they could not
generate sufficient revenues to cover expenses.
¶ 23. As a third factor, a number of jurisdictions hold that, for
the mere continuation exception to apply, any assets transferred to the
successor corporation must be transferred without adequate consideration.
See, e.g., Ray v. Alad Corp., 560 P.2d 3, 7 (Cal. 1977). Here, to the
extent there were assets transferred, no consideration was provided for the
transfers.
¶ 24. A fourth factor is whether the successor business is the same
business as the previous one. In examining this factor, we emphasize that,
while continuation in the same business is relevant, continuity of business
operations is less important than continuity of ownership and direction.
See Kaiser Found. Health Plan, 123 F.3d at 205; Grand Labs., Inc., 32 F.3d
at 1283; Vernon, 688 N.E.2d at 1176; see also 15 Fletcher Cyclopedia Corp.,
supra, at 298 ("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."). Here, we acknowledge that (1) the
superior court concluded that SCI "in every meaningful respect is engaged
in a different business than BCI," and (2) this conclusion was central to
the court's determination that a de facto merger did not occur. While a
narrow view of the nature of the businesses might be appropriate in a
products liability case-the most common circumstances for application of
the mere continuation exception-we conclude that the court viewed the
nature of the businesses too narrowly in this case. Both SCI and BCI were
in the movie theater business, and both ran the only movie screens in the
Bennington area. The fact that SCI's theater was larger and in a different
location does not transform the nature of its business into something
different from BCI.
¶ 25. Additional indicia that support application of the mere
continuation exception are present in this case. For example, SCI used,
and took over, the telephone number of BCI. See Kaiser Found. Health Plan,
123 F.3d at 205; Cargill, 676 N.E.2d at 819. Further, most of the BCI
employees, including the theater manager, became SCI employees. See Patin
v. Thoroughbred Power Boats, Inc., 294 F.3d 640, 650 (5th Cir. 2002);
Paradise Corp. v. Amerihost Dev., Inc., 848 So. 2d 177, 181 (Miss. 2003)
(same supervisory employees); Brockmann v. O'Neill, 565 S.W.2d 796, 798
(Mo. Ct. App. 1978) (same labor force and supervisors). Moreover, SCI
selectively paid BCI's debts as necessary to get started, failing to pay
only the debt owed to plaintiff. Cargill, 676 N.E.2d at 819.
¶ 26. Finally, there is another factor in this case that is not
present in most of the decisions from other jurisdictions, although it is
partially suggested by the court's overview in Flotte v. United Claims, 657
S.W.2d at 389:
We cannot, in fairness, permit the sole shareholder of one
corporation to organize another and transfer all the corporate
property from the former to the latter without paying all the
corporation's debts. The new corporation can only be regarded as
a mere continuation of the former under a different name.
As the Fletcher treatise quoted earlier states "the underlying theory of
the [mere continuation] 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." 15 Fletcher Cyclopedia Corp., supra,
at 301. Here, irrespective of intent, the effect of Stuart's actions was
that BCI did not pay its rent and the Stuarts' new movie theater business
gained an improved competitive position.
¶ 27. By way of comparison, In Association of Haystack Property
Owners, Inc. v. Sprague, 145 Vt. 443, 448, 494 A.2d 122, 125 (1985), the
plaintiff creditors sued the directors of an insolvent closely held
corporation asserting that, in managing the business into insolvency, the
directors had breached a fiduciary duty to the creditors by protecting
their own financial interests while leaving the creditors unpaid. We
reversed an order dismissing the complaint, noting that some courts have
held that "corporate directors do owe a fiduciary duty to creditors,
particularly when the corporation becomes insolvent." Id. (citations
omitted). The U.S. Court of Appeals for the Second Circuit noted the
Sprague decision and found it consistent with the majority rule that
permits injured creditors of an insolvent company to sue directors for
mismanagement. See In re STN Enters., 779 F.2d 901, 904-05 (2d Cir. 1985).
After remand, the U.S. Bankruptcy Court for the District of Vermont
concluded "that Vermont would follow the 'majority rule' to allow creditors
a 'qualified right' to sue, on behalf of the debtor corporation under
circumstances presented in this adversary proceeding, for breach of
fiduciary duty, fraudulent conveyances, and director negligence against
directors or officers." In re STN Enters., Inc., 73 B.R. 470, 490 (Bank.
D. Vt. 1987). We agree that this is the correct reading of Sprague. See
also Hardwick-Morrison v. Albertsson, 158 Vt. 145, 150-51, 605 A.2d 529,
532 (1992).
¶ 28. The duty to creditors applies not only when the corporation
is technically insolvent, but also when the corporation operates in the
vicinity or zone of insolvency. See Roselink Investors v. Shenkman, No.
01CIV7176, 2004 WL 875262, at *2-3 (S.D.N.Y. May 19, 2004) (Delaware law);
see also Steven L. Schwarcz, Rethinking a Corporation's Obligations to
Creditors, 17 Cardozo L. Rev. 647, 678 (1996) (arguing that fiduciary duty
arises as to directors "of an insolvent corporation, or of a corporation
whose actions have a reasonable expectation of resulting in insolvency").
Because Stuart's actions advanced his own interests while leaving BCI
insolvent and unable to pay its debt to plaintiffs, the duty to creditors
appears to apply here. See Laura Lin, Shift of Fiduciary Duty upon
Corporate Insolvency: Proper Scope of Directors' Duty to Creditors, 46
Vand. L. Rev. 1485, 1489 (1993) (defining "insolvent" as when liabilities
exceed the value of assets, or when the company is unable to pay its debts
as they come due).
¶ 29. We recognize that any claim of a breach of fiduciary duty
would run, if at all, against the officers and directors of BCI, and we
have no such claim on appeal. Nevertheless, the beneficiary of any such
breach was SCI, the business left standing in a better market position and
without a competitor. Therefore, the steps taken to get SCI to that
position are relevant on a theory of successor liability.
¶ 30. We now return to the relationship between asset transfer and
successor liability, the most difficult issue in this case. As the
superior court found, the transfer of physical assets was relatively minor
in this case, largely because plaintiff was not using the limited assets of
BCI in the SCI facility. Although it is not fully explored in the
evidence, it appears that in the movie theater business the critical asset
is accessibility to films for public viewing. By virtue of Stuart's
decisionmaking, and possibly that of the suppliers, SCI had such access and
BCI did not. Moreover, Stuart had years of experience in selecting films
that would attract the public, and he switched his expertise, as well as
his employees, to SCI. Finally, SCI acquired whatever goodwill BCI had
with the joint advertising and telephone listing. As BCI approached and
became insolvent from these actions, all of the actions benefitted Stuart
and his new corporation and left plaintiff with no access to income and
assets to collect its rent.
¶ 31. In many ways this case is similar to Cab-Tek, although the
superior court neither recognized nor discounted the similarities. As we
discussed above, the defendant corporation in that case used, but did not
acquire, the assets of a speaker manufacturing corporation without
compensation after that corporation went out of business because of a fire.
As in this case, the assets in that case were largely intangible-the brand
name under which the speakers were sold and the customer list-although
defendant also used the furniture of the defunct corporation. 153 Vt. at
434, 571 A.2d at 672. Also, as in this case, the overlapping directors of
both defendant and the speaker corporation advanced their own ownership
interest at the time of the insolvency of the speaker corporation at the
expense of that corporation's creditor, plaintiff in the case. Successor
liability in this case, as it was in Cab-Tek, would be based on the
underlying philosophy that a mere change in form-a "new hat"-cannot be used
to escape liability.
¶ 32. This case is also similar to a leading case, Stanford Hotel
Co. v. M. Schwind Co., 181 P. 780 (Cal. 1919), where successor liability
was found. In Stanford Hotel, a corporation that ran four restaurants in
San Francisco transferred three of these restaurants to a new corporation,
with similar ownership, in order to put the fourth restaurant out of
business and default on the lease with plaintiff. The old corporation was
left without assets to pay the rent, and the lessor sued the new
corporation for the rent. The California Supreme Court sustained the
theory of liability:
But it is well established in this state that under circumstances
such as these, where a corporation reorganized under a new name,
but with practically the same stockholders and directors, and
continues to carry on the same business, a court of equity will
regard the new corporation as a continuation of the former
corporation, and will hold it liable for the debts of the former
corporation. The allegations of the complaint as to the scheme to
avoid the payment of the plaintiff's rent go to the point of
making out, as they do, that the defendant, by name the M. Schwind
Company, is, in fact, the tenant formerly by name the Maryland
Dairy Lunch Company. That equity will strip off the mask of a
separate corporate identity, when it is but a mask, is amply
sustained by these authorities.
Id. at 783 (citations omitted). There is no indication in Stanford Hotel
whether defendant reused any assets that were in the restaurant location
leased from plaintiff; this was a minor factor, if any, in the decision.
The important consideration was that recourse to the old corporation was
not available. See Beatrice Co. v. State Bd. of Equalization, 863 P.2d 683, 690 (1993) (finding new corporation not liable "when recourse to the
debtor corporation is available"). Thus, in Shea v. Leonis, the court
noted that "[t]he equitable principle underlying [Stanford Hotel] is
equally applicable where, as in the instant case, the device adopted is not
a transfer of assets, but an attempt to avoid liability for benefits
enjoyed by means of taking the obligation in the name of a specially
organized corporation which has no other assets." 92 P.2d 400, 402 (Cal.
1939), aff'd on reh'g, 96 P.2d 332, 333-34 (Cal. 1939).
¶ 33. Stanford Hotel represents a variation of a group of corporate
split cases where a company has both a profitable and unprofitable product
line and creates a new corporation and transfers to it the profitable
product line, with associated assets. See, Schwarcz, supra, at 678-79.
The old corporation may be left with inadequate assets to pay creditors and
no prospect of developing those assets. This case is similarly a variation
of the corporate split cases.
¶ 34. We cannot conclude that this case is "markedly different" from
Cab-Tek as the superior court held. The fact that SCI acquired only
limited tangible assets from BCI does not prevent the application of
successor liability in this case.
¶ 35. The superior court ruled that the facts did not support
plaintiffs' successor liability claim because there was no transfer or use
of significant assets and SCI was engaged in a different business from BCI.
As our foregoing discussion reflects, we believe that the court erred in
defining and applying the applicable principles of successor liability in
this case. Thus, its conclusion that plaintiffs' claims against SCI
"cannot under the controlling law be maintained," V.R.C.P. 52(c), was
erroneous. In reaching this conclusion, we reiterate that we are relying
upon the one-sided record developed by plaintiffs and our recitation of the
applicable facts must be seen in this light. It may be that when defendant
has the opportunity to put on its evidence, the case will appear different
under the successor liability principles we have adopted. We reverse the
judgment entered as a matter of law against plaintiffs and remand for the
court to hear defendant's case on the issue involved in this appeal and
decide the case based on all the evidence.
Reversed and remanded for further proceedings consistent with this
opinion.
FOR THE COURT:
_______________________________________
Associate Justice
------------------------------------------------------------------------------
Footnotes
FN1. Chief Justice Amestoy sat for oral argument but did not participate in
this decision.
FN2. This construction loan was later increased to $950,000.
FN3. Despite the Ostrowski holding, plaintiffs have argued that we find
successor liability in this case on a theory of "continuing enterprise."
This argument is not preserved and not properly before us. Pion v. Bean,
2003 VT 79, ¶ 45, 176 Vt. 1, 833 A.2d 1248. To the extent plaintiffs are
urging the acceptance of the mere continuation theory, or a variation of
it, our discussion in the text applies the proper scope of this theory to
this case.
FN4. As they have evolved, there is little difference between the de facto
merger exception and the mere continuation exception. See Cargo Partner AG
v. Albatrans, Inc., 352 F.3d 41, 45 n.3 (2d Cir. 2003) (observing that de
facto merger and mere continuation doctrines "are so similar that they may
be considered a single exception"): Nat'l Gypsum Co. v. Cont'l Brands
Corp., 895 F. Supp. 328, 336 (D. Mass. 1995). We view the name of the
exception as unimportant. See Cab-Tek, Inc., 153 Vt. at 435, 571 A.2d at
672.
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
