CARY LUMLEY, Plaintiff-Appellant, vs. ADVANCED DATA-COMM, INC., MICHAEL J. BUDDE as President of ADVANCED DATA-COMM, INC., and WS LIVE, L.L.C., a Foreign Limited Liability Company, Defendants-Appellees.
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IN THE COURT OF APPEALS OF IOWA
No. 9-565 / 09-0224
Filed August 19, 2009
CARY LUMLEY,
Plaintiff-Appellant,
vs.
ADVANCED DATA-COMM, INC.,
MICHAEL J. BUDDE as President of
ADVANCED DATA-COMM, INC., and
WS LIVE, L.L.C., a Foreign Limited Liability Company,
Defendants-Appellees.
________________________________________________________________
Appeal from the Iowa District Court for Dubuque County, Lawrence
Fautsch, Judge.
Cary Lumley appeals from the district court’s order granting WS Live’s
motion for summary judgment. AFFIRMED.
Angela C. Simon, David L. Hammer, and Susan M. Hess of Hammer,
Simon & Jensen, Dubuque, for appellant.
Darin Harmon, Dubuque, for appellees Advanced Data-Comm, Inc. and
Michael Budde.
Les V. Reddick of Kane, Norby & Reddick, P.C., Dubuque, for appellee
WS Live, L.L.C.
Considered by Vogel, P.J., and Potterfield and Mansfield, JJ.
2
POTTERFIELD, J.
I. Background Facts and Proceedings
Michael Budde founded Advanced Data-Comm, Inc. (ADCI) and was its
president and CEO. Cary Lumley began working for ADCI in 1999 and worked
there through October of 2006. On May 1, 2005, Lumley and Budde signed a
change of control agreement that provided certain benefits and assurances,
including severance payments, to Lumley in the event of a change of ownership
in the company. The change of control agreement provided that ADCI agreed
not to sell its assets unless: (1) the entity acquiring the assets agreed to assume
all duties and obligations of ADCI; or (2) ADCI established a reserve for amounts
payable under the agreement.
In the fall of 2006, WS Live, L.L.C. signed a purchase agreement to
purchase the assets of ADCI. WS Live then operated under the fictitious name
Advanced Data-Comm (ADC). WS Live was managed by Kim Houlne, who was
its president and chief operating officer, and Tim Houlne, who was its CEO.
Lumley’s employment did not continue with ADC. After Lumley’s employment
ended, WS Live did not honor the terms of the change of control agreement,
arguing it did not assume responsibility for the liabilities of ADCI. In addition,
ADCI had not established a reserve as contemplated by the change of control
agreement, so Lumley did not receive the benefits for which she had contracted.
Lumley filed suit against WS Live, alleging breach of the change of control
agreement for WS Live’s failure to pay Lumley after demand was made.1
1
Lumley also filed suit against ADCI and Michael Budde, but these suits are not at issue
on appeal.
3
On October 31, 2008, WS Live filed a motion for summary judgment,
asserting it was under no obligation to honor the change of control agreement.
On December 11, 2008, Lumley filed a resistance to summary judgment, arguing
Iowa case law allowed the imposition of successor liability in this case.
On
January 8, 2009, the district court granted WS Live’s motion for summary
judgment, finding successor liability did not apply to WS Live because of the
change of management and ownership.
Lumley appeals, arguing there is a
question of disputed fact as to whether WS Live is a mere continuation of ADCI
and is therefore liable for ADCI’s debts and liabilities. Lumley also asserts WS
Live is liable because the transaction between ADCI and WS Live was
fraudulent.
II. Standard of Review
We review the granting of a summary judgment motion for correction of
errors at law.
In re Estate of Renwanz, 561 N.W.2d 43, 44 (Iowa 1997).
Summary judgment is appropriate when the record demonstrates that there is no
genuine issue of material fact and the moving party is entitled to judgment as a
matter of law. Id. We review the evidence in the light most favorable to the
nonmoving party.
Id.
When a motion for summary judgment is made and
supported, the nonmoving party must set forth specific evidentiary facts showing
existence of a genuine issue of material fact and may not rest on mere
allegations or denial of pleadings. Iowa. R. Civ. P. 1.981(5).
III. Summary Judgment
As a general rule, a corporation that purchases the assets of
another corporation assumes no liability for the transferring
corporation’s debts and liabilities. Exceptions arise only in four
4
circumstances: (1) the buyer agrees to be held liable; (2) the two
corporations consolidate or merge; (3) the buyer is a “mere
continuation” of the seller; or (4) the transaction amounts to fraud.
Pancratz v. Monsanto Co., 547 N.W.2d 198, 200 (Iowa 1996) (citations omitted).
Lumley asserts the mere continuation and fraud exceptions apply, imposing
liability on WS Live for ADCI’s debts and liabilities, including the change of
control agreement.
A. Mere Continuation
The Iowa Supreme Court discussed the mere continuation exception in
great detail in Pancratz, 547 N.W.2d at 200-02. The traditional approach to the
mere continuation exception focuses on the continuation of corporate
management
and
ownership
between
the
predecessor
and
successor
corporations. Id. at 201. However, a more expansive approach adopted by
some courts focuses on the continuity of the business operation, which includes
continuity of factors such as employees, business location, trade name, and
products. Id. The Pancratz court found Iowa case law followed the traditional
approach, stating, “In determining whether a successor corporation is liable
under the mere continuation exception, this court has consistently looked for a
continuity of management and ownership.” Id. The supreme court in Pancratz
declined to adopt the expanded approach, finding public policy was best served
by the traditional approach.
Id.
Thus, in our analysis, we must follow the
traditional approach to the mere continuation exception.
In determining whether a successor is a mere continuation of its
predecessor under the traditional approach, we must look for a “common identity
of the officers, directors and stockholders in the selling and purchasing of
5
corporations.”
Id.
The uncontroverted facts show there was no common
ownership between ADCI and WS Live.
“We have never applied the mere
continuation exception where the buying and selling corporations had different
owners.” Id.
However, it is undisputed that Budde became the general manager and
vice president of WS Live while it operated under the name of Advanced DataComm and was therefore involved at some level in the management of both
companies.
The Pancratz court considered a similar situation, where the
president and CEO of the successor corporation had served in a management
position in the predecessor corporation. 547 N.W.2d at 202. In finding the mere
continuation exception did not apply, the Pancratz court noted that a two-year
hiatus existed between that individual’s management of the predecessor
corporation and the purchase by the successor. Id. Though we do not have a
similar hiatus in this case, we find Budde’s role in ADC does not invoke the mere
continuation exception for three reasons.
First, the Iowa Supreme Court has established that employees of an
insolvent corporation may become involved in a new corporation without the
successor corporation becoming liable for its predecessor’s debts or obligations.
Nelson v. Pampered Beef-Midwest, Inc., 298 N.W.2d 281, 286 (Iowa 1980)
(quoting Allen v. N. Des Moines Methodist Episcopal Church, 127 Iowa 96, 98,
102 N.W. 808, 809 (1905) (“[M]embers or some of the members of an insolvent
or dormant corporation may organize a new corporation for the promotion of the
same purposes to which the old one is dedicated without becoming chargeable
with its debts or obligations . . . .”)).
“The fact that the new organization
6
embraces the old membership is immaterial, and in itself affords no reason why it
should be held liable for the debts of the old corporation.” Allen, 127 Iowa at 99,
102 N.W. at 809.
The Allen court noted that such transactions are closely
monitored to prevent fraud, but the presence of common members between a
company and its successor is not, standing alone, reason “to charge the
successor with the debts or delinquencies of the party succeeded.” Id. at 99, 102
N.W. at 809-10.
Second, the evidence presented on summary judgment does not
demonstrate that ADCI or WS Live collaborated in a sham transaction to avoid
ADCI’s debt and/or liabilities. WS Live purchased ADCI in a legitimate arm’slength business transaction. See Pancratz, 547 N.W.2d at 202 (finding the mere
continuation exception did not apply where, among other things, “the record
reveals no hint of a sham transfer. The substantial purchase price evidences an
arm’s-length transaction”).
Iowa courts have applied the mere continuation
exception in the past where a company changed only its form, or inserted
relatives as sham owners and directors. See, e.g., C. Mac Chambers Co. v.
Iowa Tae Kwon Do Acad., Inc., 412 N.W.2d 593, 597 (Iowa 1987) (finding a mere
continuation in the business after the father-owner gave his shares in the new
corporation to his son but remained in charge of the business); Arthur Elevator
Co. v. Grove, 236 N.W.2d 383, 393 (Iowa 1975) (finding the mere continuation
exception applied where a partnership transformed itself into a corporation but
otherwise “continued its business in the same manner”). In contrast, this record
supports a finding that the transfer between ADCI and WS Live was legitimate.
7
Further, WS Live produced uncontroverted evidence that the Houlnes
were actively involved in the business of the successor corporation.
Lumley
tendered no proof that the Houlnes operated as mere figureheads while Budde
continued to run the business. See Grand Labs., Inc. v. Midcon Labs of Iowa, 32
F.3d 1277, 1285-86 (8th Cir. 1994) (applying Iowa law and finding that where the
cofounder of the original corporation became the key employee of the successor
corporation, the successor corporation was not a mere continuation of its
predecessor because new directors and officers were actively involved in running
the successor business and were not mere figureheads).
Third, the evidence shows Budde’s role changed after the sale of ADCI,
as the Houlnes took over the management of ADC. Budde was the president
and CEO of ADCI. The Houlnes were not involved in the management of ADCI.
The facts included in Kim Houlne’s undisputed affidavit are that she is the
president and chief operating officer of WS Live. Tim Houlne is the CEO of WS
Live. Kim Houlne states in her affidavit that she and Tim Houlne took over the
management of ADCI, replacing Budde. Houlne’s affidavit states the leadership
of the company changed and the successor company is different in both
management style and business intent. Budde stated at his deposition that his
duties after the sale of ADCI were not substantially the same as they had been
before the sale.
Budde stated that before the sale he was “responsible for
everything,” whereas after the sale the accounting, human resources,
programming, and information technology departments no longer reported to
him. Budde further explained that his decision-making duties decreased at ADC,
8
as he was no longer in charge of establishing and negotiating contracts with
potential clients.
The evidence establishes that there is a marked difference between the
management of ADCI and WS Live. See Nelson, 298 N.W.2d at 286 (Iowa
1980) (finding the mere continuation exception did not apply when there was a
marked difference between transferor and transferee). “[T]he controlling factor is
whether the transferor continues to own and control the new corporation.”
Grundmeyer v. Weyerhaeuser Co., 649 N.W.2d 744, 752 (Iowa 2002). Though
Budde was involved in the management of both ADCI and WS Live, he did not
continue to own or control the successor corporation. Thus, his participation in
the management of both companies, by itself, does not generate a fact question
as to whether there was a continuity of management as a whole. Because the
undisputed facts demonstrate that WS Live and ADCI operated under different
ownership and substantially different management, we find the mere continuation
exception does not apply. “The [mere continuation] exception has no application
without proof of continuity of management and ownership between the
predecessor and successor corporations.” Pancratz, 547 N.W.2d at 201.
Lumley asserts WS Live is a mere continuation of ADCI by virtue of
continuity of name, address, phone number, logo, billing, marketing, and
employees.
However, these factors are irrelevant when evaluating the mere
continuation exception under the traditional standard.
See id. at 202 (“Other
common factors urged by Monsanto (same employees, same location, same
trade name) are irrelevant when evaluating the mere continuation exception
under the traditional standard.”).
Further, that WS Live carried on the same
9
business operations as ADCI does not necessitate a finding that WS Live was a
mere continuation of ADCI.
Nelson, 298 N.W.2d at 287 (“There must be
something more than a mere succession in business to charge the successor
with the debts or delinquencies of the party succeeded.”).
B. Fraud
Lumley also asserts employees were led to believe ADC was the same
company as ADCI and therefore the fraud exception to the general rule of
successor nonliability applies2. The elements of fraud are: (1) representation, (2)
falsity, (3) materiality, (4) scienter, (5) intent to deceive, (6) reliance, (7) resulting
injury and damage. Wilden Clinic, Inc. v. City of Des Moines, 229 N.W.2d 286,
292 (Iowa 1975). We agree with the district court that there is no fact question as
to whether WS Live’s purchase of ADCI was fraudulent.
Lumley does not
present evidence that WS Live or ADCI intended to deceive employees through
false representation. Budde sent an email to all ADCI employees informing them
of discussions with WS Live regarding the purchase of ADCI. Budde further
stated ADCI accepted WS Live’s offer to purchase the company.
release
also
clearly
stated,
“WORKING
SOLUTIONS™
A press
COMPLETES
PURCHASE OF ADVANCED DATA-COMM . . . .” There is no indication that WS
Live or ADCI made any false representations. WS Live and ADCI announced
both publicly and privately to employees that WS Live had purchased ADCI, and
Lumley presents no evidence to the contrary. Lumley does not present a fact
2
WS Live contends Lumley did not preserve this issue for appeal. We find this issue
was properly raised before the district court. The district court found WS Live’s purchase
of ADCI was not fraudulent.
10
question as to whether the transaction between ADCI and WS Live was
fraudulent.
AFFIRMED.
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