United States v. Adaptive Microsystems, LLC ( 2013 )

Slip Op. 13- 50
UNITED STATES COURT OF INTERNATIONAL TRADE
Before: Nicholas Tsoucalas, Senior Judge
___________________________________
UNITED STATES, :
:
Plaintiff, :
:
v. : Court No.: 12-00122
:
ADAPTIVE MICROSYSTEMS, LLC, AMS :
CHAPTER 128, LLC, and AMS HOLDINGS :
CHAPTER 128, INC., :
:
Defendants. :
:
OPINION and ORDER
Held: Defendant Adaptive MicroSystems, LLC’s motion for summary
judgment is granted in part and denied in part. Defendant’s motion
for sanctions is denied.
Dated: April 10, 2013
Stuart F. Delery, Principal Deputy Assistant Attorney General;
Jeanne E. Davidson, Director, Patricia M. McCarthy, Assistant
Director, Civil Division, United States Department of Justice,
(Daniel B. Volk, J. Hunter Bennett, Nelson Ryan Richards); Brian M.
Holt, Of Counsel, Office of the Associate Chief Counsel, United
States Customs and Border Protection, for the United States,
Plaintiff.
Reinhart Boerner Van Deuren, s.c., (David G. Peterson) for
Adaptive MicroSystems, LLC, Defendant.
TSOUCALAS, Senior Judge: Defendant Adaptive MicroSystems, LLC
(“New AMS”) moves for summary judgment pursuant to USCIT Rule 56 on
plaintiff United States Department of Homeland Security, Customs
and Border Protection’s (“Customs”) claim for unpaid import duties
and penalties under sections 592(c) and (d) of the Tariff Act of
1930, as amended, 19 U.S.C. §§ 1592(c), (d) (2006). New AMS’s Mem.
Court No. 12-00122 Page 2
Supp. Mot. Summ. J. 2 (“New AMS’s Mem.”). New AMS also moves to
impose sanctions under USCIT Rule 11, alleging Customs acted
unreasonably in filing and continuing to pursue this action. New
AMS’s Mem. Supp. Mot. Sanctions 4 (“New AMS’s Sanctions Mem.”).
Customs opposes both motions, and no other party joins in the
motions or opposition.
BACKGROUND
New AMS seeks summary judgment on Customs’s allegation that it
is responsible for the debts of a now-defunct Wisconsin company
named Adaptive MicroSystems, LLC (“Old AMS”). Customs avers that
Old AMS intentionally or negligently misclassified imports of light
emitting diode display panels and related components (“LED panels”)
from Malaysia under duty-free tarriff headings from July 2005 until
April 2010. Pl.’s Compl. 2 & Ex. A; see Answer of Michael S.
Polsky to Pl.’s Compl. 3. During all or some of that time, Thomas
Mandler (“Mr. Mandler”) owned a 15.8% share of another Wisconsin
company called Adaptive MicroSystems Holdings, Inc. (“Old AMS
Holdings”), which in turn owned 95% of Old AMS. Thums Aff. 1st Ex.
6 at 2, 5. Mr. Mandler was also an Old AMS officer during that
period, serving as its executive vice president. Thums Aff. 2d at
2.
On April 20, 2011, US Bank National Association (“US Bank”)
initiated a receivership action against Old AMS and Old AMS
Court No. 12-00122 Page 3
Holdings pursuant to Chapter 128 of the Wisconsin Statutes.1
Complaint, US Bank Nat’l Assoc. v. AMS Chapter 128 LLC,
2011CV005894 (Wis. Cir. Ct. Milwaukee Cnty. Apr. 20, 2011). The
Milwaukee County Circuit Court (the “Milwaukee Court”) appointed
Michael S. Polsky (“the Receiver”) as the receiver for Old AMS and
Old AMS Holdings six days later. Thums Aff. 2d Ex. 1 at 1–2.
Customs acknowledges that the Receiver provided notice of his
appointment and the existence of the receivership action on May 5,
2011. Pl.’s Resp. New AMS’s Mem. Ex. A at 1 (“Pl.’s Resp.”).
Customs chose not intervene in the receivership action due to
its priority creditor status under 31 U.S.C. § 3713, see Pl.’s
Resp. Ex. A at 2, leaving US Bank as the creditor with highest
priority among those participating. Thums Aff. 2d Ex. 1 at 2. On
June 9, 2011 — more than one month after Old AMS entered
receivership — Customs issued a pre-penalty notice of unpaid duties
to Old AMS describing the same alleged misconduct at issue in this
suit. Pl.’s Resp. Ex. A at 1. Having apparently received no
response from Old AMS, Old AMS Holdings, or the Receiver, Customs
issued a penalty notice on July 27, 2011 demanding payment of
outstanding duties and penalties totaling about $6.8 million. Id.at 1–2.
At the Milwaukee Court’s direction, the Receiver conducted an
1
New AMS describes receivership under Chapter 128 as “the
Wisconsin State functional equivalent of a federal Chapter 7
bankruptcy.” New AMS’s Mem. at 2.
Court No. 12-00122 Page 4
auction on August 2, 2011 in an attempt to sell Old AMS’s assets.
Thums Aff. 2d Ex. 1 at 2. The auction produced three bids
inconsistent with the auction terms and no bids at or above the
estimated liquidation value of the assets. Id. US Bank refused to
consent to any of the bids, leading the Receiver to decline
acceptance of each. Id.On August 9, 2011, the Receiver entered into a purchase
agreement with a Wisconsin company named AMS Acquisition, LLC (“AMS
Acquisition”), id. at 2–3, whereby AMS Acquisition would “operate
the business of [Old AMS] and its affiliates.” Id. Ex. 3 at § 1.1.
The court-approved sale transferred most of Old AMS’s assets2 to
AMS Acquisition at a price above their estimated liquidation value.
Id. Ex. 1 at 2–3. The deal also required AMS Acquisition to hire
a substantial number of Old AMS’s employees in their old positions,
including the appointment of Mr. Mandler as executive vice
president. Thums Aff. 1st Ex. 3 at 10. The record is unclear as
to whether any officers besides Mr. Mandler retained their
positions. See id.; Thums Aff. 2d Ex. 3 at §§ 6.9(a), (g).
The Milwaukee Court described the sale as “the product of good
2
AMS Acquisition purchased all of Old AMS’s tangible and
intangible property except: stock in Thai and German subsidiaries,
cash, potential legal claims, insurance policies, leased equipment,
and certain real estate holdings in Wisconsin. Thums Aff. 1st Ex.
3 at 3; Thums Aff. 2d Ex. 1 at 2–3. AMS Acquisition also agreed to
rent Old AMS’s office space in Milwaukee, Thums Aff. 1st Ex. 3 at
4–5, which New AMS thereafter bought in a court-approved sale on
September 20, 2012. Thums Aff. 2d at Ex. 2.
Court No. 12-00122 Page 5
faith negotiations at arm’s length and without collusion.” Thums
Aff. 2d Ex. 1 at 3. However, the Milwaukee Court did not address
Customs’s potential claim in its order, providing no indication as
to whether it was aware of the penalty notice when it approved the
sale.3 See id. Exs. 1, 2. In this context, the court approved of
a provision exonerating AMS Acquisition from all liability,
“whether absolute or contingent, known or unknown” that may be
looming against Old AMS, and held specifically that the sale
transferred the assets “free and clear of all security interest,
liens, claims, encumbrances, or interests of any kind or nature.”
Id. Ex. 1 at 4 (emphasis and strikethrough omitted).
Old AMS, Old AMS Holdings, and AMS Acquisition all changed
their corporate names after completing the sale. Thums Aff. 1st at
1–2. Old AMS and Old AMS Holdings became AMS Chapter 128, LLC and
AMS Holdings Chapter 128, Inc., respectively, while AMS Acquisition
assumed the “Adaptive MicroSystems, LLC” trade name to become New
AMS. Id. New AMS is owned by a Wisconsin company named AMS
3
New AMS asserts that “the [Milwaukee Court] had all the
facts before it.” New AMS’s Mem. at 11. However, New AMS cites no
record evidence in support of this claim and the court is unable to
find any on its own. Neither the pre-penalty notice nor the
penalty notice appear on the Milwaukee Court docket, and there are
no entries showing conclusively that Customs’s potential claim was
raised at all in the receivership action. US Bank Nat’l Assoc.,
2011CV005894, Nos. 1–215. The docket does include one entry for a
“CONTINUED HEARING AS TO FEDERAL PRIORITY” after the sale on
September 22, 2011, but the entry contains no further specification
as to whether it refers to a potential United States government
claim, and if so, whether the claimant is Customs, the Internal
Revenue Service, or some other federal entity. Id. No. 146.
Court No. 12-00122 Page 6
Holdings, LLC, which at the time of the receivership sale had no
relationship whatsoever with Old AMS or Old AMS Holdings. Id. at
2–4.
After the sale, however, New AMS transferred 400 shares of
class B stock to Mr. Mandler, entitling him to 2% of New AMS’s
profits but no voting rights. Thums Aff. 2d Ex. 4 at 1–2. The
stock vests 100 shares at a time for each year Mr. Mandler remains
employed with New AMS, beginning on October 1, 2011. At present,
200 of Mr. Mandler’s 400 shares have vested. Id. at 5.
On May 3, 2012, Customs initiated the present action against
New AMS, Old AMS, and Old AMS Holdings, alleging that “[u]pon
information and belief, New [AMS] purchased some portion of Old
[AMS] out of receivership and is liable for Old [AMS]’s debts.”
Pl.’s Compl. 2. New AMS now moves for summary judgment and
sanctions, arguing that it “did not succeed to Old [AMS]’s alleged
liability for unpaid duties and penalties” and that “[t]he facts .
. . are undisputed as they relate to New [AMS]’s purchase of Old
[AMS]’s assets and non-assumption of liabilities.” New AMS’s Mem.
at 7; see New AMS’s Sanctions Mem. at 4. In response, Customs
insists that the facts demonstrate, “at the very least,” the
existence of a genuine issue of material fact as to whether New AMS
falls into one of the four common law exceptions to the Wisconsin
Court No. 12-00122 Page 7
general rule against successor liability.4 Pl.’s Resp. at 4–5.
JURISDICTION and STANDARD OF REVIEW
When reviewing a motion for summary judgment, “the Court
evaluates ‘the pleadings, the discovery and disclosure materials on
file, and any affidavits’ in order to determine whether there is
any ‘genuine issue as to any material fact’ and, if none exists,
whether the ‘movant is entitled to judgment as a matter of law.’”
United States v. Trek Leather, Inc., 35 CIT __, __, 781 F. Supp. 2d
1306, 1310 (2011) (quoting USCIT R. 56(c)); see Celotex Corp. v.
Catrett, 477 U.S. 317, 322–23 (1986). An issue of fact is material
“if it could affect the outcome of the suit under the governing
law.” Trek Leather, Inc., 35 CIT at __, 781 F. Supp. 2d at 1310
(citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).
“The non-moving party is ‘entitled to have both the evidence viewed
in the light most favorable to it and all doubts resolved in its
favor.’” Mazak Corp. v. United States, 33 CIT __, __, 659 F. Supp.
2d 1352, 1356 (2009) (quoting Guess? Inc. v. United States, 944
F.2d 855, 858 (Fed. Cir. 1991)).
ANALYSIS
I. Comity
As a preliminary matter, New AMS argues that the court “should
respect the Order from the Chapter 128 proceedings under the
4
The parties agree that Wisconsin substantive law governs the
successor liability issue.
Court No. 12-00122 Page 8
principle of comity.” New AMS’s Mem. at 7 n.5. New AMS is
presumably referring to the Milwaukee Court’s “conclusion[] of law”
that New AMS “shall not be liable for any of the Receiver’s, [Old
AMS Holdings]’s or [Old AMS]’s debts, liabilities or obligations,
except those expressly assumed” in the asset purchase agreement.
Thums Aff. 2d Ex. 1 at 4 (emphasis omitted).
“When there is parallel state and federal litigation . . .
[c]omity or abstention doctrines may, in various circumstances,
permit or require the federal court to stay or dismiss the federal
action in favor of the state-court litigation.” Exxon Mobil Corp.
v. Saudi Basic Indus. Corp., 544 U.S. 280, 281–82 (2005). Other
than cursory references to the interest of comity, New AMS does not
articulate any legal standard that counsels or obliges the court to
defer judgment in this matter. See New AMS’s Mem. at 7 n.5, 11;
New AMS’s Reply Supp. M. Summ. J. 7 (“New AMS’s Reply”).5 The
Milwaukee Court did not have an opportunity to consider the
transfer of New AMS shares to Mr. Mandler because the shares did
not change hands until after it issued the order. Thums Aff. 2d
Ex. 4 at 1–2. Furthermore, the Milwaukee Court apparently did not
consider any potential claim Customs may have held on the estate of
5
Without explanation, New AMS cites to one case with a
passing reference to comity in dicta. See New AMS’s Mem. at 7
n.5, 11 (citing Washington Int’l Ins. Co. v. United States, 25 CIT
207, 218, 138 F. Supp. 2d 1314, 1326 (2001)); New AMS’s Reply at 7
(citing Washington Int’l Ins. Co., 25 CIT at 218, 138 F. Supp. 2d
at 1326).
Court No. 12-00122 Page 9
Old AMS at the time of the sale. See id. at Exs. 1, 2; US Bank
Nat’l Assoc., 2011CV005894, at Nos. 1–215. Lastly, Customs was not
a party to the Milwaukee Court proceeding and therefore did not
have a full opportunity to be heard on the asset sale or any
successor liability issues.
As the court sees little reason to defer to a state court
judgment rendered before significant facts emerged and in the
absence of a party asserting a claim in this action, it declines to
rule in New AMS’s favor on the basis of comity alone.
II. Successor Liability
“In Wisconsin, the general rule is a corporation who purchases
the assets of another corporation does not succeed to the liability
of the selling corporation.”6 Compuware Corp. v. Innovatec
Commc’ns, LLC, No. 03-C-429, 2005 WL 2076717 at *14 (E.D. Wis. Aug.
24, 2005) (citing Columbia Propane, L.P. v. Wis. Gas Co., 661
N.W.2d 776, 784 (Wis. 2003)). “Important policies underlie the
general rule,” including consistency with “the fundamental
principle[s] of justice and fairness” and the promotion of “free
alienability of corporate assets.” Gallenberg Equip., Inc. v.
Agromac Intern., Inc., 10 F. Supp. 2d 1050, 1053 (E.D. Wis. 1998),
6
Although many of the entities involved here are limited
liability companies, not corporations, “the [successor liability]
rule and its exceptions are applicable[] irrespective of whether a
prior organization was a corporation or a different form of
business organization.” Tift v. Forage King Indus., Inc., 322
N.W.2d 14, 16 (Wis. 1982).
Court No. 12-00122 Page 10
aff’d, 191 F.3d 456 (7th Cir. 1999) (quoting Leannais v.
Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977)) (internal
quotation marks omitted). Nevertheless, there are four exceptions
to the general rule. A purchasing corporation succeeds to the
selling corporation’s liabilities (1) when the purchaser expressly
or impliedly agrees to assume the seller’s liability; (2) when the
transaction amounts to a consolidation or merger; (3) when the
purchaser is a “mere continuation” of the selling corporation; or
(4) when the transaction is a fraudulent attempt to escape
liability for such obligations. Id. Customs argues that summary
judgment is not proper as material issues remain as to the second
and third exceptions.7 Pl.’s Resp. at 4–5.
“Exceptions (2) and (3) are tests of identity under which the
substance and effect of business transformations are examined ‘to
determine whether the original organization continues to have life
or identity in a subsequent and existing organization . . . .’”
Parson v. Roper Whitney, Inc., 586 F. Supp. 1447, 1449 (W.D. Wis.
1984) (quoting Tift, 322 N.W.2d at 17). These exceptions target
business realities as they exist notwithstanding formalistic
differences between the buying and selling entities. See Leannais,
7
Because the parties have conducted minimal discovery at this
stage, the court recognizes that new facts may emerge later in the
action that present a triable issue of fact on these or other
matters. See Whitford v. Boglino, 63 F.3d 527, 530 (7th Cir. 1995)
(A “district court may, in its discretion, allow a party to renew
a previously denied summary judgment motion or file successive
motions, particularly if good reasons exist.”).
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565 F.2d at 439–40. “A court merely need determine that the
[buyer], despite business transformations, is substantially the
same as the original [entity].” Fish v. Amsted Indus., Inc., 376
N.W.2d 820, 824 (Wis. 1985) (quoting Tift, 322 N.W.2d at 17).
A. De Facto Merger
Customs does not dispute that the transfer at issue fails to
meet the traditional definitions of merger and consolidation.
Pl.’s Resp. at 5; see Leannais, 565 F.2d at 439–40 (defining merger
and consolidation). Instead, it argues that the present
circumstances give rise to an issue of material fact as to whether
the transaction “amounts to a merger.” Sedbrook v. Zimmerman
Design Group, Ltd., 526 N.W.2d 758, 760 (Wis. Ct. App. 1994)
(emphasis omitted); see Pl.’s Resp. at 5. New AMS counters that
the transaction did not amount to a merger because it acquired Old
AMS’s assets using cash rather than stock. New AMS’s Reply at 2.
Wisconsin courts employ a four-factor analysis to determine
whether a transaction is a “de facto merger” within the merger-
consolidation exception:
(1) the assets of the seller corporation are acquired
with shares of stock in the buyer corporation, resulting
in a continuity of shareholders; (2) the seller ceases
operations and dissolves soon after the sale; (3) the
buyer continues the enterprise of the seller corporation
so that there is a continuity of management, employees,
and business location, assets, and general business
operations; and (4) the buyer assumes those liabilities
of the seller necessary for the uninterrupted
continuation of normal business operations.
Smith v. Meadows Mills, Inc., 60 F. Supp. 2d 911, 917 (E.D. Wis.
Court No. 12-00122 Page 12
1999) (quoting Sedbrook, 526 N.W.2d at 760–61). Courts describe
the stock transfer factor as the “key” feature of a de facto
merger. Sedbrook, 526 N.W.2d at 760–62; see Leannais, 565 F.2d at439–40 (“[A] ‘de facto merger’ may be found if the consideration
given by the [buyer] be shares of its own stock.”).
Customs argues that New AMS’s relationship to Old AMS is
sufficient to satisfy the stock transfer factor because, “although
New [AMS] purchased Old [AMS]’s assets with cash rather than shares
of stock,” it is undisputed “that there is at least some continuity
of shareholders.” Pl.’s Resp. at 6. Further, Customs asserts that
Wisconsin courts have only rejected the de facto merger exception
in cases where there was no shared ownership between buying and
selling corporations. Id. Customs also argues that there is no
legal authority explicitly stating that non-voting shares or a
delay in exchanging shares “are irrelevant for successor liability
purposes.” Id. at 7.
Courts interpreting Wisconsin law consistently refuse to apply
the de facto merger exception when no shares have changed hands,
regardless of the extent to which the other factors may be
satisfied. E.g., Smith, 60 F. Supp. 2d 911 (no de facto merger
despite substantial continuity of business operations between buyer
and seller because buyer paid in cash). Once some stock is
exchanged, however, Wisconsin law is less clear on how much the
second, third, and fourth factors may counterbalance an incomplete
Court No. 12-00122 Page 13
stock transfer. See Sedbrook, 526 N.W.2d at 762 & n.3 (transfer of
minority stock interest can be sufficient to establish the presence
of a de facto merger, depending on other factors); Schawk, Inc. v.
City Brewing Co., 662 N.W.2d 679, 2003 WL 1563767 at *4 (Wis. Ct.
App. 2003) (unpublished opinion noting that “not every factor need
be present”).
Even assuming Wisconsin law is as expansive as Customs
insists, the uncontroverted facts demonstrate that Mr. Mandler did
not receive his shares as consideration for the receivership sale.
See Restatement 2d of Contracts, § 71 (2012) (defining
consideration as a “bargained for” exchange). The sale of assets
in Chapter 128 receivership is an exchange between the assigned
receiver and the purchaser, see Wis. Stat. § 128.02(3)(b) (2013);
Thums Aff. 1st at Ex. 1, and there is no evidence to suggest that
the Receiver sought stock for Mr. Mandler’s personal portfolio as
a condition of sale. Indeed, New AMS president Dennis Thums states
that “there were no plans or agreements in place to allow [Mr.
Mandler] to become a shareholder” at the time of the asset
purchase. Thums Aff. 2d at 2. Customs acknowledges that Mr.
Mandler received his ownership stake six months after the Wisconsin
court approved the asset sale, Pl.’s Resp. at 7, indicating that
the stock exchange was unrelated to the negotiation of the deal
itself. Lastly, Customs does not present any evidence that
contravenes record evidence characterizing Mr. Mandler’s stock as
Court No. 12-00122 Page 14
a deferred employment package unrelated to the asset purchase. See
Thums Aff. 2d at 2.
Because the undisputed facts are insufficient as a matter of
law to support a conclusion that New AMS offered Mr. Mandler shares
in consideration to the Receiver for Old AMS’s assets, the de facto
merger exception cannot apply. Accordingly, New AMS’s motion for
summary judgment is granted with respect to the de facto merger
exception.
B. Mere Continuation
New AMS argues that it is “not a mere continuation of [Old
AMS]” because it has a somewhat different business model than Old
AMS, has a new president who was never affiliated with Old AMS, and
has a completely different set of directors and shareholders — the
only exception being Mr. Mandler, who acquired his shares six
months after the asset purchase agreement. New AMS’s Mem. at 8–9.
Customs, on the other hand, argues that New AMS is a mere
continuation of Old AMS because there is “significant overlap”
between the two companies, specifically in that New AMS hired
“substantially all” of Old AMS’s employees, continued operating
under a “similar business” model, and most importantly, retained
Mr. Mandler as both an owner and officer. Pl.’s Resp. at 11–12.
As these differences constitute a genuine issue of fact material to
whether New AMS can be considered a mere continuation of Old AMS,
New AMS’s motion must be denied insofar as it relates to this
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exception.
“The key element of a continuation is a common identity of the
officers, directors and stockholders in the selling and purchasing
corporations.” Parson, 586 F. Supp. at 1450 (quoting Leannais, 565
F.2d at 441) (internal quotation marks omitted). Thus, the test is
not whether the business operations continue, but whether the
purchaser is simply a “continuation of the corporate entity” of the
seller. Id. The Wisconsin Supreme Court unambiguously rejected
“modified theories of continuity crafted by other courts,”
including the product line and continuity of enterprise exceptions.
Smith, 60 F. Supp. 2d at 918. Nevertheless, Wisconsin courts will
consider factors like continued enterprise if there is overlap in
ownership and control. See Gallenberg, 10 F. Supp. 2d at 1053–54.
New AMS insists that Wisconsin law requires an “identity of
officers, directors and stockholders.” New AMS’s Reply at 6
(emphasis in original). This phrasing implies that New AMS is
arguing that the mere continuation exception only applies where
buyers share at least one officer, one director, and one
stockholder with their sellers. See id. at 6–7. Accordingly, New
AMS concludes that the lack of overlap between directors and the
lack of overlap between ownership interests at the time of the
asset sale indicates that there is no issue of material fact as to
the mere continuation exception. Id.New AMS’s interpretation of Wisconsin law is not persuasive.
Court No. 12-00122 Page 16
Wisconsin courts do not require absolute identity between
controlling forces in the buying and selling corporation. See,
e.g., Home Indem. Co v. Farm House Foods Corp., 770 F. Supp. 1339(E.D. Wis. 1991) (applying the mere continuation exception where
predecessor and successor companies shared a “majority” of
officers, directors, and shareholders); Nelson v. Hebert Const.
Co., 482 N.W.2d 670 (Wis. Ct. App. 1992) (unpublished opinion
finding lack of “substantial identity” in a situation with slight
overlap between predecessor and potential successor company).
Further, the crux of the mere continuation analysis is not in
measuring the specific numbers of shared officers, directors, and
stockholders as New AMS suggests — rather, it is in determining
whether the combined effect of some shared control and ownership,8
along with other considerations, establish that the selling
corporation is merely “changing hats” through the sale. See
Gallenberg, 10 F. Supp. 2d at 1054. Though neither party
identifies authority directly on point, these two settled aspects
of Wisconsin law render it unlikely that a Wisconsin court would
require at least one officer, director, and owner in common between
the buying and selling companies as a prerequisite for applying the
mere continuation exception. See Smith, 60 F. Supp. 2d at 918
8
Wisconsin courts will not apply the mere continuation
exception “in the complete absence of continuity in stockholders,
directors and officers.” Parson, 586. F. Supp. at 1450–52
(emphasis added); see Sedbrook, 526 N.W.2d at 761.
Court No. 12-00122 Page 17
(treating “management and control” as characteristics distinct from
“continuity of ownership” for purposes of the mere continuation
exception); cf. IGL-Wisc. Awning, Tent & Trailer Co. v. Greater
Milwaukee Air & Water Show, Inc., 520 N.W.2d 279, 280–81 (Wis. Ct.
App. 1994) (affirming trial court finding of “identity of
management and control” under mere continuation exception where
director and vice president of prior non-profit company was one of
several founders of the successor non-profit company).
Here, one owner of Old AMS, Mr. Mandler, now holds a class B
ownership interest in New AMS. Thums Aff. 2d Ex. 4 at 1–3.
Although New AMS does have a different set of directors than Old
AMS, a reasonable interpretation of meeting minutes on the record
show Mr. Mandler playing an active and influential role in guiding
New AMS’s board of directors. See id. at 4–6. New AMS employs
“substantially all” of same people as Old AMS to carry out those
business operations, including Mr. Mandler and possibly other Old
AMS officers. See Thums Aff. 1st Ex. 3 at 10; New AMS’s Mem. at
8–9 (mentioning directors and owners, but not officers).
Furthermore, New AMS acquired substantially all of Old AMS’s
assets, Thums Aff. 2d Ex. 1 at 2–3, and operates a similar business
under the same trade name out of some of the same physical
addresses. New AMS’s Mem. at 4; Thums Aff. 1st Ex. 3 at 4–5. On
these facts, a reasonable jury could find that Mr. Mandler’s
ownership share and influence on New AMS’s board — coupled with the
Court No. 12-00122 Page 18
otherwise substantial overlap between Old AMS and New AMS —
outweighs his non-voting status and the lack of shared directors in
defining New AMS’s corporate identity. See Mazak, 33 CIT at __,
659 F. Supp. 2d at 1356 (quoting Guess? Inc., 944 F.2d at 858).
Although new undisputed facts may emerge through additional
discovery showing that Mr. Mandler has a de minimis influence on
New AMS’s corporate identity, the record is insufficient at present
to support that conclusion as a matter of law. See id.; Whitford,
63 F.3d at 530. Consequently, New AMS’s motion for summary
judgment must be denied as to the mere continuation exception.
III. SANCTIONS
Eleven days after Customs filed its response to the motion for
summary judgment, New AMS moved to impose USCIT Rule 11 sanctions.
New AMS asserts that “[d]espite repeated requests to dismiss, and
despite conclusive proof that New [AMS] bears no liability in this
lawsuit and [Customs’s] claims against it are baseless, [Customs]
has continued to pursue its claims against New [AMS].” New AMS’s
Sanctions Mem. at 4. New AMS further alleges that Customs should
be sanctioned because “[i]t appears that [Customs’s] pre-filing
investigation was insufficient.” Id. at 6.9
9
New AMS also “wonders at [Customs’s] motives for including
New [AMS] in this suit,” alleging that “[t]o the extent that
[Customs] sued New [AMS] . . . in hopes that New [AMS] might pay to
be dismissed from this litigation, the claims against New [AMS]
were brought for an improper purpose.” New AMS’s Sanctions Mem.
at 7. New AMS provides no legal or factual support for this
additional charge other than its own insistence that it cannot be
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USCIT Rule 11 “is identical to Federal Rule of Civil Procedure
Rule 11[,] . . . and it therefore is appropriate to look to
decisions under the latter in interpreting and applying” the
former. Precision Specialty Metals, Inc. v. United States, 315
F.3d 1346, 1353 (Fed. Cir. 2003) (quoting A. Hirsh, Inc. v. United
States, 948 F.2d 1240, 1246 (Fed. Cir. 1991)) (internal quotation
marks omitted). “In general, ‘the standard for triggering the
award of fees under Rule 11 is objective unreasonableness.” Murray
v. Town of N. Hempstead, 853 F. Supp. 2d 247, 276 (E.D.N.Y. 2012)
(quoting Margo v. Weiss, 213 F.3d 55, 65 (2d Cir. 2000)). “To
determine whether an attorney’s prefiling inquiry was reasonable,
a court must consider all the circumstances of a case.” Cooter &
Gell v. Hartmarx Corp., 496 U.S. 384, 401 (1990); see View Eng’g,
Inc. v. Robotic Vision Sys., Inc., 208 F.3d 981, 984–87 (Fed. Cir.
2000) (discussing reasonableness of prefiling inquiry in the
context of a patent dispute).
Contrary to New AMS’s assertions, Customs is not pursuing a
baseless or frivolous claim. As described above, the complex
procedural posture and unsettled legal and factual backdrop of this
case demonstrate that, at a minimum, Customs raises issues of
material fact at this stage. Furthermore, Customs presents
evidence showing that New AMS holds itself out to the public as the
held liable for Old AMS’s debts. See id. The court will not
impose sanctions solely on the basis of New AMS’s confidence and
speculation.
Court No. 12-00122 Page 20
same entity as Old AMS, boasting “Over 30 Years of Building
Business with Indoor and Outdoor LED Displays!” on its website, and
claiming to have been established in 1978 in an online job posting.
Pl.’s Resp. New AMS’s Sanctions Mem. Exs. A, E (“Pl.’s Sanctions
Resp.”). When investigating New AMS, counsel for Customs contacted
New AMS president Dennis Thums, who insisted that New AMS had “NO
common ownership” with Old AMS, id. Ex. B at 2, even though he knew
that Mr. Mandler owned a portion of both. Thums Aff. 2d at Ex. 4.
Customs also presents evidence showing that it offered to dismiss
the action against New AMS “if [New AMS] could establish that [its]
owners . . . had no connection to Old [AMS],” Pl.’s Sanctions Resp.
at 6, which New AMS ultimately could not on account of Mr.
Mandler’s ownership interest. Id. Exs. B, C. Customs therefore
acted reasonably in deciding to lodge and to pursue its claim
against New AMS.
Parties cannot be expected to bend at the threat of sanctions
based solely on opposing counsel’s confidence in its own position.
See Cooter & Gell, 496 U.S. at 399 (“Rule 11 sanctions are not tied
to the outcome of litigation; the relevant inquiry is whether a
specific filing was, if not successful, at least well founded.”).
The requirement of zealous representation means that parties should
at least have the discretion to pursue a claim based on complex
facts and unsettled law — including the present action — even if
that claim ultimately fails on the merits. Therefore, New AMS’s
Court No. 12-00122 Page 21
motion for sanctions must be denied in its entirety.
CONCLUSION
New AMS’s motion for summary judgment is granted in part. As
it has failed to demonstrate that it is entitled to judgment as a
matter of law on the “mere continuation” exception to the general
rule against corporate successor liability under Wisconsin law,
however, New AMS’s motion for summary judgment must also be denied
in part. Furthermore, New AMS’s USCIT Rule 11 motion to impose
sanctions is denied in its entirety because it fails to raise any
viable basis on which to sanction Customs for filing and continuing
to pursue this action.
Court No. 12-00122 Page 22
ORDER
In accordance with the foregoing, it is hereby
ORDERED that defendant Adaptive MicroSystem LLC’s motion for
summary judgment is DENIED with respect to the mere continuation
exception to the general rule against successor liability; and
ORDERED that defendant Adaptive MicroSystem LLC’s motion for
summary judgment is GRANTED in all other respects; and
ORDERED that defendant Adaptive MicroSystem LLC’s motion for
sanctions is DENIED in its entirety.
/s/NICHOLAS TSOUCALAS
Nicholas Tsoucalas
Senior Judge
Dated: April 10, 2013
New York, New York