CRUTCHFIELD v. MARINE POWER ENGINE CO.

CRUTCHFIELD v. MARINE POWER ENGINE CO.
2009 OK 27
209 P.3d 295
Case Number: 103342
Decided: 05/05/2009

THE SUPREME COURT OF THE STATE OF OKLAHOMA

STEVE CRUTCHFIELD, Plaintiff/Garnishor/Appellee,
v.
MARINE POWER ENGINE COMPANY, Defendant,
and
TIGE BOATS, INC., Garnishee/Appellant,
and
MARINE POWER HOLDING, L.L.C., Appellant.

CERTIORARI TO THE COURT OF CIVIL APPEALS, DIVISION IV

Honorable Robert G. Haney, Trial Judge

¶0 A year after Steve Crutchfield was hired by Marine Power Engine, Inc. (MP Engine), all of its assets were purchased by Hirel Holdings, Inc. (Hirel). A few months later, Crutchfield was terminated and given a severance package which included unreimbursed expenses and medical benefits. After some of the severance package remained unpaid, he brought an action against MP Engine. Subsequently, a portion of Hirel's assets were purchased by Marine Power Holding, L.L.C. (MP Holding), and Crutchfield and MP Engine entered an agreed judgment. After the judgment remained unpaid, Crutchfield filed a garnishment affidavit against MP Engine and Tige Boat, Inc. (Tige), a debtor of MP Holding. MP Holding and Tige each filed answers. The trial court determined that MP Holding and Tige were liable, and they moved for a new trial. The trial court denied the motion, and MP Holding and Tige appealed. The Court of Civil Appeals reversed and remanded. On certiorari, we reverse and hold that: 1) in order to establish the liability of a successor corporation once-removed, each corporation along the chain of succession must meet one of the exceptions to liability found in Pulis v. United States Elec. Tool Co.,

CERTIORARI PREVIOUSLY GRANTED;
COURT OF CIVIL APPEALS OPINION VACATED;
TRIAL COURT REVERSED AND CAUSE REMANDED.

Steven R. Hickman, Tulsa, Oklahoma, for Plaintiff/Appellee.
Joe M. Fears, Tulsa, Oklahoma, for Defendants/Appellants.

KAUGER, J.:

¶1 The first impression issue presented is whether Marine Power Holding, L.L.C. (MP Holding), a successor company once-removed from Marine Power Engine, Inc. (MP Engine), is liable for a judgment taken against MP Engine. As a general rule, when one company sells or otherwise transfers all its assets to another company, the successor is not liable for the debts and liabilities of the seller. There are exceptions to the rule. In Pulis v. United States Elec. Tool Co.,

1) an agreement exists to assume such debts or liabilities;
2) the corporations are consolidated or merged;
3) the transaction was fraudulent; or
4) the purchasing corporation is a mere continuation of the selling company.

The trial court found that the mere continuation exception was applicable and that MP Holding was liable for the judgment. For the "mere continuation" exception, the test is not whether there is a continuation of business operations, but whether there is a continuation of the corporate entity. We hold that: 1) in order to establish the liability of a successor corporation once-removed, each corporation along the chain of succession must meet a Pulis exception to liability; 2) because there was insufficient evidence of a continuation of the corporate entity along the chain of corporate succession, the trial court erred by finding that MP Holding was a "mere continuation" of MP Engine; 3)

FACTS

¶2 On February 1, 1996, Steve Crutchfield (Crutchfield) was hired as vice-president of sales by MP Engine, a manufacturer of boat engines domiciled in Ponchatoula, Louisiana. Crutchfield's employment contract designated his employer as Marine Power Engine Company, a name under which MP Engine did business. MP Engine was incorporated in 1984.

¶3 Crutchfield's employment contract was signed by Walter E. Allbright, Jr. (Allbright), president and sole director of MP Engine. In February 1997, MP Engine's assets were purchased in exchange for stock by Hirel Holdings, Inc. (Hirel). Hirel was a publicly-held Delaware corporation traded on the NASDAQ exchange and based in Pompano Beach, Florida.

¶4 On July 1, 1997, as a result of Hirel's new sales priorities, Crutchfield was terminated, and his employer agreed to pay him four months severance, including payment for medical insurance and outstanding expenses. On November 7, 1997, Crutchfield, a resident of Oklahoma, filed a petition in Delaware County District Court alleging that he was owed $10,163.97 in unreimbursed expenses and unpaid medical insurance premiums. Marine Power Engine Company, Hirel, and Allbright were named as defendants. On April 4, 1998, the trial court dismissed Hirel and Allbright as defendants for lack of personal jurisdiction.

¶5 At some time in late 1997, Hirel notified Allbright that it was approaching insolvency. In order to preserve operations, Allbright located John Benton Smallpage, Jr. (Smallpage), an investor. Smallpage formed MP Holding to purchase certain of Hirel's assets. On December 31, 1997, MP Holding agreed to pay $300,000 in cash and assume $2.4 million of Hirel's liabilities in order to purchase the engine manufacturing operation in Louisiana, facilities in California, Washington, and New Jersey, several accounts receivable, and the rights to several trademarks, copyrights, and patents. MP Holding expressly declined to assume any of Hirel's liabilities other than those catalogued in the purchase agreement.

¶6 On April 3, 2001, Marine Power Engine Company made an offer of judgment to Crutchfield in the amount of $10,163.47. Crutchfield accepted the offer without amendment, and on April 11, 2001, the trial court entered the agreed judgment.

¶7 On August 15, 2005, Crutchfield filed a garnishment affidavit against Tige Boat, Inc. (Tige) and Marine Power Engine Company. Tige, a customer of MP Holding, owed MP Holding approximately $20,000. MP Holding filed an answer on August 15, 2005, and Tige filed an answer on August 17, 2005. Each corporation argued that it owed no money to Crutchfield. Crutchfield filed an election to take issue with each answer, and a hearing was held on December 7, 2005. At the hearing, the trial court found that because it was a mere continuation of MP Engine, MP Holding was liable for the judgment and Tige was liable as garnishee. The trial court also awarded $600 in attorney fees to Crutchfield. On February 7, 2006, the final garnishment order was filed, and MP Holding and Tige filed a joint motion to reconsider.

¶8 The cause was assigned to the Court of Civil Appeals on December 18, 2006. On March 9, 2007, the Court of Civil Appeals reversed the findings of the trial court and remanded the cause. In its opinion, the Court of Civil Appeals determined that: 1) the evidence did not support that MP Holding was a mere continuation of MP Engine; 2) although MP Holding was entitled to an award of attorney fees and costs incurred at trial, it was not entitled to an award of appeal-related attorney fees and costs.

¶9 On March 29, 2007, Crutchfield filed a petition for certiorari. Later that same day, MP Holding and Tige filed a motion with the Court of Civil Appeals to reconsider the denial of appeal-related attorney fees and costs. On April 4, 2007, we issued an order recasting the motion to reconsider as a petition for rehearing in the Court of Civil Appeals.

¶10 In a garnishment action, when a judgment creditor takes issue with a garnishee's answer, the issue stands for trial as a civil action and is in the nature of an equitable proceeding.

I.
¶11 IN ORDER TO ESTABLISH THE LIABILITY OF A SUCCESSOR
CORPORATION ONCE-REMOVED, EACH CORPORATION ALONG
THE CHAIN OF SUCCESSION MUST MEET AN EXCEPTION TO THE
GENERAL RULE OF NON-LIABILITY.

¶12 As a general rule, when one company sells or otherwise transfers all its assets to another company, the successor is not liable for the debts and liabilities of the seller.11 The four exceptions to this rule are when:

1) there is an agreement to assume such debts or liabilities;
2) there is a consolidation or merger of the corporations;
3) the transaction was fraudulent in fact; or
4) the purchasing corporation is a mere continuation of the selling company.12

In Collinsville Nat. Bank v. Esau,

Can parties managing a corporation contract debts and obligations in its name, then by some legerdemain of high financing denude the corporation of all its property and assets by transferring them to a new corporation which the same parties manage, and thereby render it powerless to pay under the mere guise of a sale? Under such circumstances, A. controlled the corporation, the corporation owed the debt; but by the transfer A. still controls the corporation, but the corporation owes no debts, therefore A. owes nothing. The law has no toleration for such jugglery. It is a fraud both in fact and in law.

¶13 This cause differs from our prior decisions on successor liability because MP Holding is a successor once-removed from MP Engine. The liability of a once-removed successor corporation is an issue of first impression,

¶14 According to the teaching of Collinsville Nat. Bank, supra, the exceptions to the general rule of successor non-liability exist to prevent the shareholders, officers, and directors of a corporation from eluding its debts and liabilities while maintaining control over its assets. We hold that to determine the liability of a once-removed successor corporation, a court must make a finding that each company along the line of succession met one of the four exceptions to non-liability set out in Pulis v. United States Elec. Tool Co.,

II.
¶15 BECAUSE CRUTCHFIELD DID NOT ESTABLISH A
CONTINUATION OF THE CORPORATE ENTITY ALONG THE CHAIN
OF SUCCESSION FROM MP ENGINE TO MP HOLDING, THE TRIAL
COURT ERRED BY FINDING THAT THE MERE CONTINUATION
EXCEPTION WAS APPLICABLE TO MP HOLDING.

¶16 Crutchfield argues that MP Holding is liable for the judgment against MP Engine because MP Holding is a mere continuation of MP Engine. MP Holding argues that it is not and that it is not liable for the judgment. Crutchfield did not allege that any exception other than "mere continuation" was applicable.

¶17 The mere continuation exception covers a re-organization of a corporation.

¶18 Our decision in Pulis v. United States Elec. Tool Co.,

¶19 In the instant cause, there were no disputed facts at trial. Crutchfield offered the following evidence to show that Hirel was a mere continuation of MP Engine. He produced a facsimile transmission sent from the facility in Louisiana in July 1997 (five months after MP Engine's assets were purchased by Hirel) that still carried the name "Marine Power, Inc." in the embedded header. He offered a severance check from October 1997 that identified the employer as "Marine Power, Inc." He obtained testimony from Allbright that despite its continued existence, MP Engine ". . . did not operate after Hirel bought the assets."

¶20 As to whether MP Holding was a mere continuation of MP Engine through Hirel, Crutchfield noted that MP Holding used the same phone number at the Louisiana facility as did Hirel. He demonstrated that MP Holding used a website that had been developed by MP Engine. He showed that MP Holding filled outstanding orders for engines that had been placed with Hirel. He also showed that MP Holding uses the trade name "Marine Power," advertises based on the goodwill attendant to the "Marine Power" brand, and retains copyrights originally acquired by MP Engine. Hirel and MP Holding had entirely different officers and directors. However, it is unclear from the record whether there were any shareholders with a common identity. The parties agreed that Hirel retained some assets after the sale, but it is unclear from the record how long and to what extent Hirel continued to exist after the sale.

¶21 The court relied on two pieces of evidence in making its ruling: 1) MP Holding used a copyright that had been originally obtained by MP Engine; and 2) MP Holding used a website which had been developed by MP Engine.

Now, I do have your evidence that says that you changed corporate entities, but yet to the general public, or at least to this Court, you're still using the same information and you're basically even representing that you are the same in what they own. . .

It is clear that the trial court emphasized continuation of business operations over continuation of the corporate entity. The majority of the evidence presented by Crutchfield --- that MP Holding used facilities, equipment, trademarks, copyrights, and goodwill which it purchased from Hirel and which Hirel had previously purchased from MP Engine --- was entered to establish the continuation of business operations, but it did not speak to the question of whether there was a continuation of the corporate entity. The trial court erred on a question law by incorrectly applying the Pulis standard for mere continuation successor liability.

¶22 It was demonstrated that MP Engine, Hirel, and MP Holding had no common directors or officers.

¶23 The trial court erred by finding that MP Holding was a mere continuation of the corporate entity of MP Engine. We reverse the order denying MP Holding's motion to reconsider and vacate the judgment on garnishment.

III.
¶24 MP HOLDING IS NOT ENTITLED TO AN AWARD OF
REASONABLE ATTORNEY'S FEES AND COSTS PURSUANT TO

¶25 MP Holding and Tige requested an award of attorney's fees and costs incurred at trial and on appeal should they prevail. Crutchfield argues that even if MP Holding prevails, it is not entitled to an award of attorney fees and costs incurred at trial under 12 O.S. Supp. 2002 §119023 because it is not a garnishee. MP Holding responds that because it was entitled to defend the proceedings against Tige, it is the prevailing party and entitled to such an award. It is a question of first impression whether a putative judgment debtor who successfully defends a garnishee is entitled to an award of reasonable attorney's fees and costs under §1190.

¶26 Oklahoma follows the American Rule concerning the recovery of attorney fees.24 It provides that each litigant pay for legal representation and that courts are without authority to assess attorney fees in the absence of a specific statute or contract.25 Exceptions to this rule are narrowly defined because attorney fee awards against the non-prevailing party have a chilling effect on open access to the courts.26 For an award of attorney fees to be authorized under a particular statute, the authorization must be found within the strict confines of the statute.27 Exceptions to the American Rule are usually crafted to encourage the conservation of judicial resources by promoting settlement and discouraging unnecessarily protracted litigation or frivolous claims.28

¶27 If an exception requires interpretation, it may be read in context with other parts of the statute and with the law in effect at the time of its enactment.

¶28 Section 1190(B)(1) contains an exception to the American Rule.

¶29 It must first be stated that the facts of this cause are extraordinarily unusual. It is rare that a judgment creditor seeks to enforce a judgment against a successor corporation once-removed; it is rarer still that a judgment debtor takes up the defense of a garnishee in a garnishment proceeding. Perhaps rarest of all is a request for an award of attorney fees and costs made by a putative judgment debtor which has successfully defended a garnishee in a garnishment proceeding. The conflagration of these legal oddities in a single cause serves to reinforce the principle that, in the law, the actual is always stranger than the hypothetical.

¶30 Section §1190(B)(1) is not ambiguous; therefore, we need not employ rules of statutory interpretation.

¶31 Crutchfield had obtained a judgment against MP Engine, and sought, in good faith, to enforce it against a customer of a corporation he thought was a liable successor to MP Engine. To extend the plain language of §1190(B)(1) to include a prevailing putative judgment debtor would be to inequitably sanction Crutchfield for bringing a good faith garnishment action on a close question. We hold that Tige, as prevailing garnishee, is entitled to an award of reasonable attorney's fees and costs incurred at trial, but MP Holding, as putative judgment debtor, is not.

¶32 In a separate portion of their Brief-in-Chief, MP Holding and Tige requested an award of appeal-related attorney fees based on §1190(B)(1).

CONCLUSION

¶33 To determine the liability of a once-removed successor corporation, a court must make a finding that each company along the line of succession met an exception to non-liability set forth in Pulis v. United States Elec. Tool Co.,

¶34 Title

CERTIORARI PREVIOUSLY GRANTED;
COURT OF CIVIL APPEALS OPINION VACATED;
TRIAL COURT REVERSED AND CAUSE REMANDED.

EDMONDSON, C.J., TAYLOR, V.C.J., HARGRAVE, OPALA, KAUGER, WATT, WINCHESTER, COLBERT, J.J., concur.

REIF, J., disqualified.

FOOTNOTES

1 The company was originally called WJA, Inc., and founded at some time in the 1950s. In 1984, the company was incorporated in Louisiana as Marine Power I, Inc., and in 1992, its name was changed to Marine Power Engine, Inc.

2 Hirel Holdings, Inc. was traded in the NASDAQ market under the symbol HIRL.

3 The schedule of liabilities totaled $2,418,475.21. See Purchase and Sale Agreement, Record, p. 76-77, 89-97. The judgment against MP Engine could not have been included in the schedule of liabilities because it was not entered until 2001--- four years after the sale.

4 The only mention of Hirel's continued existence after the sale was an oblique sentence in MP Holding's Motion to Reconsider, Record, p. 33, which it repeated in its Brief in Chief, p. 12. MP Holding stated: "There was no evidence introduced that Hirel ceased to exist after the asset purchase by MPH."

5 MP Holding and Tige actually filed their motion to reconsider on January 23, 2008 ---- after the pronouncement of the judgment, but before the final garnishment order was filed. However, 12 O.S. 2001 §653(C) provides:

A motion for new trial filed after the announcement of the decision on all issues in the case but before the filing of the judgment or decree shall be deemed filed immediately after the filing of the judgment or decree.

Therefore, MP Holding's motion is deemed to have been filed on February 7, 2006.

6 The meaning and effect of an instrument filed in court depends on its contents and substance rather than on form or title given it by the author. Whitehorse v. Johnson, 2007 OK 11, ¶8 fn. 13, 156 P.3d 41.

7 Oklahoma Supreme Court Rule 1.777(A), 12 O.S. Supp. 2005, App. 1, provides in pertinent part:

A party who is aggrieved by a decision of the Court of Civil Appeals may file one petition for rehearing combined with brief in its support. . . .

8 Title 12 O.S. 2001 §1177 provides in pertinent part:

The answer of the garnishee shall in all cases be conclusive of the truth of the facts therein stated, with reference to the garnishee's liability to the defendant unless the judgment creditor shall within twenty (20) days from the receipt of the garnishee's answer, from the date of the deposition of the garnishee, or from receipt of the garnishee's answers to interrogatories, whichever is later, serve upon the garnishee or the garnishee's attorney of record personally or by certified mail, return receipt requested, a notice in writing that the judgment creditor elects to take issue with the garnishee's answer; in which case, the issue shall stand for trial as a civil action in which the affidavit on the part of the judgment creditor shall be deemed the petition and the garnishee's answer the answer thereto. . . .

Nogales Avenue

In many states that employ the mere continuation exception, the common identity of directors, officers, and shareholders is the most important factor. See Travis v. Harris Corp., 565 F.2d 443, 447 (7th Cir. 1977)(under Indiana law, indicia are common identity of stock, directors, stockholders and existence of only one corporation after sale); Wallace v. Dorsey Trailers Southeast, Inc., 849 F.2d 341, 343 (8th Cir. 1988)(under Missouri law, key factor is common identity of incorporators, directors, officers, and stockholders); Cilurso v. Premier Crown Corp., 769 F. Supp. 372, 374 (M.D.Ga. 1991)(under Georgia law, need identity of ownership between seller corp. and purchasing corp.); Hoover v. Recreation Equip. Corp., 792 F. Supp. 1492, 1494-1495(N.D. Ohio 1991)(under Ohio law, common officers and directors, whether all assets were purchased, and whether seller corp. was dissolved); CenterPoint Energy, Inc. v. Superior Court, 69 Cal. Rptr. 3d 202, 219 (Cal. Ct. App. 2007)(key factors are adequate consideration for sale and identity of officers, directors, and shareholders); Vernon v. Schuster, 688 N.E.2d 1172, 1176 (Ill. 1997)(test is whether there is a continuation of business entity, look to identity of officers, directors, and stock of selling and purchasing corporations, identity of ownership is a requirement); Grundmeyer v. Weyerhaeuser Co., 649 N.W.2d 744, 751-752 (Iowa 2002)(controlling factor is whether the transferor controls the purchasing corp.); Stratton v. Garvey Int'l, Inc. 676 P.2d 1290, 1292 (Kan. Ct. App. 1984)(factors are: 1) common identity of officers, shareholders, personnel, and operations; 2) lack of adequate consideration, and 3) dissolution and insolvency of seller corp.); McCarthy v. Litton Indus., Inc., 570 N.E.2d 1008, 1012-1013 (Mass. 1991)(key factors are is continued existence of seller corp. and continuity of directors, officers, and stockholders); Niccum v. Hydra Tool Corp., 438 N.W.2d 96, 99 (Minn. 1989)(must show continuity of corporate entity by showing common identity of directors, shareholders, and stock); Timmerman v. American Trencher, Inc., 368 S.W.2d 502, 503 (Neb. 1985)(commonality of officers, directors, or shareholders is a more important consideration than continuity of operations); Garcia v. Coe Mfg. Co.,

THE COURT: Well, it appears to me from the information that I have been given, specifically everything that you have or that your company is using on the web site, it appears that you're still doing business or at least using Marine Power, Inc. That gives this Court basically a continuation of the formal corporation. Now, I do have your evidence that says that you changed corporate entities, but yet to the general public, or at least to this Court, you're still using the same information and you're basically even representing that you are the same in what they own, i.e., the trademark of Marine Power being owned by Marine Power, Inc., is what you put on your web site. . . . So at this point in time I am going to find that based upon the evidence that I have, that the judgment creditor will be allowed to proceed on against Marine Power, LLC, if that is now the proper name. . . .

A. A garnishee may deduct a fee of Ten Dollars ($10.00) from the funds of the defendant in the garnishee's possession as reimbursement for costs incurred in answering. If the garnishee is not indebted to the defendant and the garnishee's answer evidencing that is filed and mailed or delivered to the judgment creditor or to the judgment creditor's attorney of record, the garnishee may assess the judgment creditor a fee of Ten Dollars ($10.00) as reimbursement for such costs.

B. 1. In case of the trial of any issue between the judgment creditor and any garnishee, costs shall be awarded to the judgment creditor and against the garnishee, in addition to the garnishee's liability, if the judgment creditor recovered more than the garnishee admitted by the garnishee's answer; and if the judgment creditor does not, the garnishee shall recover costs from the judgment creditor. The costs shall include a reasonable attorney's fee to be taxed in favor of the prevailing party.

2. In the case of the trial to determine the amount to be recovered for due and owing child support, where any liability on the part of the garnishee is disclosed, costs shall be awarded to the judgment creditor and against the defendant, including a reasonable attorney's fee.

C. In all other cases under this article not expressly provided for, the court may, in its discretion, award costs in favor of or against any party.

D. In addition to sums otherwise due pursuant to a judgment, a judgment creditor, if represented by an attorney, shall be entitled to an attorney's fee of Fifty Dollars ($50.00) for prosecuting a garnishment pursuant to subparagraphs b, c, and d of paragraph 2 of subsection B of Section 1171 of this title, and an attorney's fee of One Hundred Dollars ($100.00) for prosecuting a garnishment pursuant to subparagraph e of paragraph 2 of subsection B of Section 1171 of this title, not to exceed a total of One Hundred Fifty Dollars ($150.00) in any twelve-month period.

In all other cases under this article not expressly provided for, the court may, in its discretion, award costs in favor of or against any party.

At any time before final order or judgment against the garnishee, the defendant may in all cases, by answer duly verified defend the proceedings against any garnishee, upon the ground that the indebtedness of the garnishee, or any property held by him, is exempt from execution against such defendant, or for any other reason is not liable to garnishment; or upon any ground upon which a garnishee might defend the same; and may participate in the trial of any issue between the plaintiff and garnishee for the protection of his interests. The garnishee may at his option, defend the principal action for the defendant, if the latter does not, but shall be under no obligations so to do.

The proceedings against a garnishee shall be deemed an action by the judgment creditor against garnishee and defendant, as parties defendant, and all of the provisions for enforcing judgment shall be applicable thereto. . . .

'Tis strange----but true; for truth is always strange;
Stranger than fiction;

Costs must be sought by a separately filed and labeled motion in the appellate court prior to mandate. The Clerk shall not tax as costs any expense unless the person claiming the same, prior to the issuance of a mandate in the cause, shall file with the Clerk a verified statement of taxable cost items showing that person has paid the same.

MP Holding and Tige have not separately filed a motion and an attached verification.