Louis Stramaglia v. United States , 377 F. App'x 472 ( 2010 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 10a0295n.06
No. 08-2624 FILED
May 13, 2010
UNITED STATES COURT OF APPEALS LEONARD GREEN, Clerk
FOR THE SIXTH CIRCUIT
LOUIS STRAMAGLIA, MILL CONTRACTORS )
AND DEVELOPERS, INC., MELTON ROAD )
DEVELOPMENT CO., )
)
Plaintiffs, )
)
VOLPE-VITO, INC., )
)
Plaintiff-Appellant, )
)
v. ) On Appeal from the United States
) District Court for the Eastern
UNITED STATES OF AMERICA, ) District of Michigan
)
Defendant-Appellee. )
Before: BOGGS and COOK, Circuit Judges; and COLLIER, Chief District Judge.*
PER CURIAM. Volpe-Vito, Inc. appeals the district court’s order granting summary
judgment in favor of the United States of America on the issue of whether, under Michigan law,
Volpe-Vito is a mere continuation of Auburn Park Management Co. Because we conclude that the
district court did not err, and because we find no genuine issues of material fact, we affirm the
judgment of the district court.
*
The Honorable Curtis L. Collier, Chief Judge of the United States District Court for the
Eastern District of Tennessee, sitting by designation.
No. 08-2624
Stramaglia, et al. v. USA
I
Volpe-Vito, Inc. (Volpe-Vito), a Michigan corporation, was founded in October 1981. In
1982, Louis Stramaglia (Stramaglia) and his brother Frank acquired sole ownership of the
corporation.
Volpe-Vito’s business involved the development of a water park on the corporation’s real
estate in Shelby Township, Michigan. Volpe-Vito began operating the park, known as Four Bears
Water Park (Four Bears), in 1983. Volpe-Vito continued to operate the park, which was open
seasonally, until 1992.
In 1992, at the behest of Volpe-Vito’s creditors and attorneys, the Stramaglias decided to
form a separate management company to operate Four Bears. The express reason for forming this
new company was to separate the water park’s operating liabilities from Volpe-Vito’s assets (i.e.,
the land and facilities). Stramaglia’s sister Nancy formed the new corporation, named Auburn Park
Management Company (Auburn Park), in March 1992.
Shortly after its formation, Auburn Park entered into a lease agreement with Volpe-Vito,
which granted Auburn Park the right to operate Four Bears. Auburn Park entered into new lease
agreements with Volpe-Vito in 1993 and 1996, the latter of which is at issue in this case. Under the
terms of these contracts, Auburn Park agreed to pay Volpe-Vito an annual rental fee of $200,000 and
ten percent of gross sales. Auburn Park also agreed to pay all real estate taxes and assessments that
became due on Volpe-Vito’s property. The agreements would automatically renew annually unless
either party gave notice of cancellation due to breach.
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Auburn Park managed Four Bears for nine years. During that time, Stramaglia gradually
assumed sole ownership and control over both Auburn Park and Volpe-Vito. By 1997, Stramaglia
was the sole shareholder, director, and president of both Auburn Park and Volpe-Vito. The only
other officer was Thomas Nepa (Nepa), who served as secretary and accountant for both Volpe-Vito
and Auburn Park. It was Stramaglia, however, who, in his capacity as Auburn Park’s president,
managed the daily business activities of Four Bears.
Both before and after Stramaglia became president, Auburn Park apparently repeatedly
neglected to satisfy its employment tax obligations. According to the Internal Revenue Service
(IRS), between 1996 and 2002, Auburn Park accrued over $270,000 in unpaid employment tax
obligations. In October 2001, the IRS filed Notices of Federal Tax Liens against Auburn Park for
over $300,000 in back taxes.
Shortly thereafter, on November 29, 2001, Stramaglia, acting as sole shareholder and director
of Volpe-Vito, passed a resolution terminating the lease agreement between Volpe-Vito and Auburn
Park. The resolution noted that Auburn Park had failed to pay Volpe-Vito’s real estate taxes in 2000
and 2001, and that such failure constituted a breach of the lease agreement. Auburn Park made no
apparent effort to contest or resist termination.
Pursuant to the November 29 resolution, the lease agreement between Auburn Park and
Volpe-Vito ended on December 31, 2001. At that time, the right to operate Four Bears reverted to
Volpe-Vito. This left Auburn Park with three remaining assets. First, Auburn Park held equipment
and machinery with a book value of $14,228. Stramaglia offered to surrender this equipment and
machinery to the IRS, but the IRS apparently declined the offer. Thereafter, the equipment and
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machinery were placed on Volpe-Vito’s books, in return for which Volpe-Vito reduced Auburn
Park’s debt to Volpe-Vito by $14,228. Second, Auburn Park held investment accounts of unknown
value. These accounts were transferred to Volpe-Vito’s books. Finally, Auburn Park possessed
accounts receivable with a book value of over $300,000, representing debts owed to Auburn Park
by Flab, Inc.1 Auburn Park continued to carry these receivables on its books, but eventually forgave
them as uncollectible.
Once Stramaglia cancelled the lease agreement between Volpe-Vito and Auburn Park, Volpe-
Vito resumed operating Four Bears. Volpe-Vito apparently did not make any significant changes
to the operations of Four Bears. Rather, Stramaglia, acting as Volpe-Vito’s president, continued to
manage Four Bears much as he had before. Volpe-Vito operated Four bears until 2004, at which
time the park permanently closed.
In 2006, the IRS filed tax liens against Volpe-Vito, Stramaglia, and two other related entities,
asserting that they were liable for the unpaid tax liabilities of Auburn Park. Stramaglia, Volpe-Vito,
and the related entities filed a complaint in the United States District Court for the Eastern District
of Michigan seeking a judgment declaring that they were not liable for Auburn Park’s debts. Volpe-
Vito and the government both filed motions seeking summary judgment on the issue of Volpe-Vito’s
1iability as successor to Auburn Park. The district court granted summary judgment in favor of the
government on the grounds that, under Michigan law, Auburn Park was a mere continuation of
Volpe-Vito. Volpe-Vito timely appealed.
1
Flab, Inc. was another corporation owned by Stramaglia’s family and, by 1992, run by
Stramaglia. Flab operated Honey Bear Restaurant, the on-site restaurant of Four Bears.
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No. 08-2624
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II
On appeal, Volpe-Vito asserts that the district court erred when it applied the “mere
continuation” exception. This court reviews a district court’s order granting summary judgment de
novo, but reviews its findings of fact for clear error. Keck v. Graham Hotel Sys., 566 F.3d 634, 636
(6th Cir. 2009). Summary judgment is appropriate where “the pleadings, the discovery and
disclosure materials on file, and any affidavits show that there is no genuine issue as to any material
fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). The party
moving for summary judgment “bears the initial burden of identifying those parts of the record
which demonstrate the absence of any genuine issue of material fact.” White v. Baxter Healthcare
Corp., 533 F.3d 381, 389-90 (6th Cir. 2008) (citing Celotex Corp. v. Cartrett, 477 U.S. 317, 323
(1986)). Once the moving party has satisfied its burden, the nonmoving party “may not rest upon
its mere allegations or denials of the adverse party’s pleadings, but rather must set forth specific facts
showing that there is a genuine issue for trial.” Moldowan v. City of Warren, 578 F.3d 351, 374 (6th
Cir. 2009). The “mere existence of a scintilla of evidence” will not prevent summary judgment,
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986), and if the evidence “is merely colorable,
or is not significantly probative, summary judgment may be granted.” Id. at 249-50 (citations
omitted).
In this case, the district court did not err when it found Volpe-Vito liable as Auburn Park’s
successor. Michigan follows the “traditional rule of nonliability for corporate successors who
acquire a predecessor through the purchase of assets.” Foster v. Cone-Blanchard Mach. Co., 597
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N.W. 2d 506, 509 (Mich. 1999). However, Michigan recognizes five narrow exceptions to the
traditional rule of non-liability:
(1) where there is an express or implied assumption of liability; (2) where the
transaction amounts to a consolidation or merger; (3) where the transaction was
fraudulent; (4) where some elements of a purchase in good faith were lacking, or
where the transfer was without consideration and the creditors of the transferor were
not provided for; or (5) where the transferee corporation was a mere continuation or
reincarnation of the old corporation.
Id. at 509-10 (quoting Turner v. Bituminous Casualty Co., 244 N.W.2d 873, 878 n.3 (Mich. 1976)).
It is the fifth exception–the so-called “mere continuation” exception–that is at issue in the present
case.
The Michigan Supreme Court has recognized the “mere continuation” exception since the
turn of the twentieth century. See Chase v. Mich. Tel. Co., 80 N.W. 717, 718 (Mich. 1899) (citing
Austin v. Tecumseh Natl. Bank, 68 N.W. 628 (Neb. 1896)). The court has indicated that the
exception rests on two related principles. See Pearce v. Schneider, 217 N.W. 761 (Mich. 1928)
(imposing liability on a corporation because it was a “reincarnation” of its predecessor). First,
“courts will not tolerate any species of transaction where the stockholders in the debtor corporation
are permitted, by virtue of their stock ownership, to retain for themselves an interest in the corporate
assets until the debts of the corporation shall have been paid.” Id. at 762 (quoting 15 A.L.R. 1112).
Second, a “corporation which acquires the entire property of another corporation under an
arrangement which has the effect of distributing the assets of the latter corporation among its
stockholders, to the exclusion of its creditors, takes the property subject to payment of the debts of
its vendor.” Ibid. (quoting Grenell v. Detroit Gas Co., 70 N.W. 413, 413-14 (Mich. 1897)).
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To determine whether a successor corporation is a mere continuation of its predecessor,
Michigan courts examine the totality of the circumstances and engage in a multi-factor analysis. See,
e.g., id. at 762; Shue & Voeks, Inc. v. Amenity Design & Mfg., Inc., 511 N.W.2d 700, 702 (Mich.
App. 1993); Ferguson v. Glaze, No. 268586, 2008 WL 314544, at *5 (Mich. App. Feb. 5, 2008).
The only indispensable prerequisites to application of the exception appear to be common ownership
and a transfer of substantially all assets.2 See, e.g., Pearce, 217 N.W. at 762; Shue & Voeks, Inc.,
511 N.W.2d at 702; Gougeon Bros. v. Phoenix Resins, Inc., No. 211738, 2000 WL 33534582, at *2
(Mich. App. Feb. 8, 2000). Beside these two factors, the most important consideration appears to
be the nature of the business performed by the successor corporation–that is, whether its “main
corporate purpose was to conduct the same business” as its predecessor. Pearce, 217 N.W. at 762;
see also Shue & Voeks, Inc., 511 N.W.2d at 702; Ferguson, 2008 WL 314544, at *2. Several other
factors also bear upon “mere continuation” analysis: the new corporation’s retention of the old
corporation’s officers and employees, see Shue & Voeks, Inc., 511 N.W.2d at 702; Ferguson, 2008
WL 314544, at *5; the new corporation’s occupancy of the old corporation’s place of business; see
Gougeon Bros., 2000 WL 33534582, at *2; and the new corporation’s selective repayment of the old
corporation’s debts, see ibid.Volpe-Vito asserts that a court must also find evidence of inadequate consideration or fraud
to impose liability under the “mere continuation” exception. We recognize that several jurisdictions
do require the presence of one or both of these factors. See, e.g., Kazir’s Floor & Home Design, Inc.
2
Notably, however, no Michigan court has found these factors alone sufficient to justify
imposition of successor liability.
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v. M-MLS.com, 394 F.3d 1143, 1150 (9th Cir. 2004) (discussing California law). Michigan,
however, is not such a jurisdiction. See Shue & Voeks, Inc., 511N.W.2d at 702 (finding the Uniform
Fraudulent Conveyance Act inapplicable based on the adequacy of consideration and absence of
fraud, but failing to mention either the absence of fraud or adequacy of consideration as part of “mere
continuation” analysis).
Applying the factors examined by Michigan courts to the present case, Volpe-Vito was a
mere continuation of Auburn Park. First, Volpe-Vito acquired substantially all of Auburn Park’s
assets. This included not only all of Auburn Park’s physical assets3–which were relatively
meager–but also, more importantly, Auburn Park’s most valuable asset: the right to operate Four
Bears.4 Cf., e.g., Warne Invs., Ltd. v. Higgins, 195 P.3d 645, 651 (Ariz. App. 2008) (imposing
liability based on the transfer of intangible assets); Gladstone v. Stuart Cinemas, Inc., 878 A.2d 214,
225 (Vt. 2005) (basing liability on the transfer of “the critical asset [of] accessibility to films for
public viewing”). Stramaglia effectively transferred that right from Auburn Park to Volpe-Vito
when, in his capacity as sole shareholder and director of Volpe-Vito, he cancelled the lease
agreement between Volpe-Vito and Auburn Park. Ordinarily, of course, cancellation of a lease
agreement would not constitute an asset transfer. In this case, however, Stramaglia had sole control
over both Auburn Park’s performance of its obligations under the lease agreement and Volpe-Vito’s
3
Volpe-Vito suggests that Auburn Park actually abandoned this property. Yet Volpe-Vito’s
actions belie this characterization of Auburn Park’s conduct, as Volpe-Vito sought to compensate
Auburn Park for the assets by forgiving part of Auburn Park’s debt.
4
Stramaglia acknowledged in his deposition testimony that Auburn Park’s assets included
the right to operate Four Bears, embodied by the lease agreement.
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response to default. Moreover, Stramaglia controlled Auburn Park’s response to cancellation–that
is, whether Auburn Park fought to preserve its primary revenue-producing asset, or simply accepted
the loss (as it did). As a result, Stramaglia essentially had discretion to shift the right to operate Four
Bears between Auburn Park and Volpe-Vito. Under these circumstances, cancellation of the lease
agreement resembled more a voluntary transfer than an involuntary termination of rights.
Appellant contends, however, that Auburn Park’s most valuable asset was actually the
$300,000 in accounts receivable that remained on Auburn Park’s books. See Appellant’s Brief at
18. Yet the district court found that these receivables were eventually forgiven as uncollectible, and
appellant does not contest that finding. Further, Auburn Park’s accountant, Nepa, admitted that the
company had no assets after it transferred its physical property to Volpe-Vito. The evidence in the
record thus indicates that Volpe-Vito did acquire substantially all of Auburn Park’s assets.
Second, as appellant concedes, Auburn Park and Volpe-Vito shared common ownership, as
Stramaglia was the sole shareholder in both corporations.
Third, after Volpe-Vito acquired Auburn Park’s assets, it conducted exactly the same
business at the same location as Auburn Park–it operated Four Bears.5 Appellant seeks to distinguish
Volpe-Vito’s business on the grounds that Volpe-Vito operated the park using its own property and
equipment. Yet appellant offers no explanation of how ownership of the underlying assets altered
the nature of the business conducted. Both Auburn Park and Volpe-Vito focused entirely on
5
According to Stramaglia’s testimony, before resuming control over Four Bears, Volpe-Vito
was merely a shell that held the property and facilities operated by Auburn Park, but that conducted
no business and had no employees of its own.
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operating the same facilities; the latter’s ownership of those facilities had no apparent impact upon
the nature of its business activities.
Fourth, Volpe-Vito retained the same managers as Auburn Park. Stramaglia served as
president and sole director of both companies, with primary responsibility for the affairs of Four
Bears, and Nepa served as both corporations’ secretary and accountant.
Finally, though their employees were not identical, there were substantial similarities between
Auburn Park’s and Volpe-Vito’s workforces.6
Additionally, the considerations that led Michigan to embrace the “mere consideration”
exception support its application in the present case. By transferring Auburn Park’s assets to Volpe-
Vito, Stramaglia sought to derive benefits from the same assets (including the right to operate Four
Bears) that served as Auburn Park’s primary source of revenue, while leaving Auburn Park’s
creditors without recourse. This is precisely the type of behavior that the Michigan Supreme Court
sought to control when it adopted the “mere continuation” exception. See Pearce, 217 N.W. at 762.
Accordingly, under Michigan law, Volpe-Vito is a mere continuation of Auburn Park. The
district court thus did not err when it granted summary judgment in favor of appellee.
III
For the aforementioned reasons, we affirm the judgment of the district court.
6
Unsurprisingly, given the seasonal nature of the water park’s business, many employees
changed between seasons. Notably, however, the categories and number of positions that existed
under Volpe-Vito’s control was essentially the same as existed under Auburn Park’s control.
Moreover, there was significant overlap between the life guards and office workers employed by the
two corporations, the positions that presumably required the most training and thus exhibited the
most stability.
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