Vernon v. Schuster ( 1997 )

     Vernon v. Schuster,

              Docket No. 82680--Agenda 25--September 1997.

    GEORGE VERNON et al., Appellees, v. JERRY SCHUSTER, d/b/a Diversey

                 Heating and Plumbing, Appellant.

                 Opinion filed December 18, 1997.

                                       CHIEF JUSTICE FREEMAN delivered the opinion of the court:

         Plaintiffs, George Vernon and Nancy Baker, brought an action in the

    circuit court of Cook County against defendant, Jerry Schuster, doing business as

    Diversey Heating and Plumbing. Plaintiffs alleged, inter alia, that defendant, a

    sole proprietorship, succeeded to the liability of a predecessor sole proprietorship

    for breach of contract and breach of warranty claims.

         The circuit court dismissed those claims for failure to state a cause of

    action. The appellate court reversed and remanded. 285 Ill. App. 3d 857. We

    allowed defendant's petition for leave to appeal. 166 Ill. 2d R. 315(a). We now

    reverse the appellate court and remand the cause to the circuit court for further

    proceedings.

                          BACKGROUND

         In determining whether to allow a motion to dismiss, a court must take as

    true all well-pled allegations of fact contained in the complaint and construe all

    reasonable inferences therefrom in favor of the plaintiff. Bryson v. News America

    Publications, Inc., 174 Ill. 2d 77, 86 (1996).

         Plaintiffs' first-amended complaint alleged as follows. In November 1989,

    plaintiffs owned a building at 953 W. Webster Avenue in Chicago. James Schuster

    was a sole proprietor doing business as Diversey Heating and Plumbing (Diversey

    Heating). Diversey Heating was in the business of selling, installing, and servicing

    heating and plumbing systems.

         Plaintiffs contracted with Diversey Heating to replace the boiler in their

    building. Diversey Heating warranted for 10 years portions of the boiler against

    cracking. In the course of installing the boiler, Diversey Heating employees sealed

    a valve with a pipe, which prevented the valve from draining water from the

    boiler. Diversey Heating instructed Baker that the only care the boiler would need

    was an annual preseason servicing prior to the heating season. Diversey also

    admonished plaintiffs not to drain water from the boiler because that could

    severely damage it.

         From 1990 through 1992, plaintiffs paid Diversey Heating to inspect and

    service the boiler annually. In September or October 1993, Baker and James

    Schuster agreed that Diversey Heating would perform preseason service on the

    boiler.

         On October 20, 1993, James Schuster died. Beginning on that date,

    Diversey Heating was a sole proprietorship owned and operated by defendant,

    Jerry Schuster, who is James Schuster's son.

         In late October or early November 1993, Vernon asked Diversey Heating

    whether it had performed the preseason service on the boiler. Defendant informed

    Vernon of his father's death. Defendant told Vernon that Diversey Heating had not

    yet performed the preseason service on the boiler, but that it would service the

    boiler immediately.

         In February 1994, the boiler stopped heating. Defendant inspected the

    boiler and told plaintiffs that it was totally broken, could not be repaired, and had

    to be replaced. Defendant told plaintiffs that Diversey Heating had no

    responsibility for the failure of the boiler and would not honor the warranty. After

    consulting a second heating contractor, plaintiffs paid $8,203 for a new boiler.

         Count I of plaintiffs' four-count complaint alleged that defendant was

    negligent in installing and servicing the boiler and instructing plaintiffs on caring

    for the boiler. Count II alleged that defendant's promise in late October or early

    November 1993 to service the boiler was the basis of a contract, and that

    defendant breached that contract.

         Count III alleged that Diversey Heating breached its warranty on the boiler,

    and count IV alleged that Diversey Heating breached its contract to install and

    service the boiler properly. In these counts, plaintiffs alleged:

                   "18. On Jim Schuster's death Jerry Schuster succeeded to

                   the assets, rights and obligations of Diversey Heating and Plumbing

                   and received the benefits of the good will associated with the name

                   of Diversey Heating and Plumbing.

                   19. Jerry Schuster d/b/a Diversey Heating and Plumbing is

                   a continuation of Jim Schuster d/b/a Diversey Heating and

                   Plumbing and a successor to the relationship, rights and obligations

                   of Diversey Heating and Plumbing under the contract and warranty

                   ***."

         On defendant's motion, the circuit court dismissed count I based on the

    economic loss doctrine enunciated in Moorman Manufacturing Co. v. National

    Tank Co., 91 Ill. 2d 69 (1982). The court dismissed counts III and IV "because

    this defendant cannot be held liable for any obligations of his father's sole propri-

    etorship." The court limited count II "to events occurring after the death of James

    Schuster on October 20, 1993." The court also found no just reason to delay an

    appeal of the decision. See 155 Ill. 2d R. 304(a).

         Plaintiffs appealed from the dismissal of counts III and IV. The appellate

    court reversed and remanded. The court noted the above-quoted allegations that

    Diversey Heating, a sole proprietorship owned and operated by defendant, was

    merely a continuation of Diversey Heating, a sole proprietorship owned and

    operated by his father, James Schuster. The appellate court held that counts III and

    IV stated a cause of action against defendant. 285 Ill. App. 3d at 863. Defendant

    appealed (166 Ill. 2d R. 315).

                          DISCUSSION

         This case is before us following the dismissal of plaintiffs' claims pursuant

    to section 2--615 of the Code of Civil Procedure (735 ILCS 5/2--615 (West

    1996)). A section 2--615 motion attacks the legal sufficiency of a complaint. The

    motion does not raise affirmative factual defenses, but rather alleges only defects

    on the face of the complaint. The question presented by a section 2--615 motion

    to dismiss is whether the allegations of the complaint, when viewed in a light

    most favorable to the plaintiff, are sufficient to state a cause of action upon which

    relief can be granted. Bryson, 174 Ill. 2d at 86-87; Urbaitis v. Commonwealth

    Edison, 143 Ill. 2d 458, 475 (1991). A cause of action will not be dismissed on

    the pleadings unless it clearly appears that no set of facts can be proved which

    will entitle the plaintiff to recover. Gouge v. Central Illinois Public Service Co.,

    144 Ill. 2d 535, 542 (1991).

         Moreover, Illinois is a fact-pleading jurisdiction. A plaintiff must allege

    facts sufficient to bring his or her claim within the scope of the cause of action

    asserted. Anderson v. Vanden Dorpel, 172 Ill. 2d 399, 408 (1996); People ex rel.

    Fahner v. Carriage Way West, Inc., 88 Ill. 2d 300, 308 (1981). Since ruling on

    a motion to dismiss does not require a court to weigh facts or determine

    credibility, we review the complaint de novo. Mt. Zion State Bank & Trust v.

    Consolidated Communications, Inc., 169 Ill. 2d 110, 127 (1995); Toombs v. City

    of Champaign, 245 Ill. App. 3d 580, 583 (1993).

         The issue presented here is whether plaintiffs sufficiently alleged that

    defendant succeeded to the liability of his father, James Schuster, doing business

    as Diversey Heating. The well-settled general rule is that a corporation that

    purchases the assets of another corporation is not liable for the debts or liabilities

    of the transferor corporation. Nilsson v. Continental Machine Manufacturing Co.,

    251 Ill. App. 3d 415, 417 (1993); People ex rel. Donahue v. Perkins & Will

    Architects, Inc., 90 Ill. App. 3d 349, 351 (1980).

         The traditional rule of successor corporate nonliability "developed as a

    response to the need to protect bonafide purchasers from unassumed liability"

    (Tucker v. Paxon Machine Co., 645 F.2d 620, 623 (8th Cir. 1981)) and was

    "designed to maximize the fluidity of corporate assets" (Upholsterers'

    International Union Pension Fund v. Artistic Furniture, 920 F.2d 1323, 1325 (7th

    Cir. 1990)). The rule is the "general rule in the majority of American

    jurisdictions." Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977);

    accord 15 W. Fletcher, Private Corporations sec. 7122 (rev. vol. 1990).

         "To offset the potentially harsh impact of the rule, however, the law also

    developed methods to protect the rights of corporate creditors after dissolution."

    Tucker, 645 F.2d at 623. There are four exceptions to the general rule of successor

    corporate nonliability: (1) where there is an express or implied agreement of

    assumption; (2) where the transaction amounts to a consolidation or merger of the

    purchaser or seller corporation; (3) where the purchaser is merely a continuation

    of the seller; or (4) where the transaction is for the fraudulent purpose of escaping

    liability for the seller's obligations. Steel Co. v. Morgan Marshall Industries, Inc.,

    278 Ill. App. 3d 241, 248 (1996); Green v. Firestone Tire & Rubber Co., 122 Ill.

    App. 3d 204, 209 (1984), quoting Hernandez v. Johnson Press Corp., 70 Ill. App.

    3d 664, 667 (1979). These exceptions are equally recognized in most American

    jurisdictions. See, e.g., Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451,

    1456 (11th Cir. 1985); Welco Industries, Inc. v. Applied Cos., 67 Ohio St. 3d 344,

    347, 617 N.E.2d 1129, 1132 (1993); Baltimore Luggage Co. v. Holtzman, 80 Md.

    App. 282, 290, 562 A.2d 1286, 1289-90 (1989). Relying on the third exception,

    plaintiffs alleged that Diversey Heating, the sole proprietorship of defendant, was

    the mere continuation of his father's sole proprietorship.

         The continuation exception to the rule of successor corporate nonliability

    applies when the purchasing corporation is merely a continuation or reincarnation

    of the selling corporation. Grand Laboratories, Inc. v. Midcon Labs of Iowa, Inc.,

    32 F.3d 1277, 1282 (8th Cir. 1994), quoting Bud Antle, 758 F.2d at 1458. In other

    words, the purchasing corporation maintains the same or similar management and

    ownership, but merely "wears different clothes." Bud Antle, 758 F.2d at 1458;

    Nilsson, 251 Ill. App. 3d at 418. The rationale of this exception is as follows:

              "The exception is designed to prevent a situation whereby the

                   specific purpose of acquiring assets is to place those assets out of

                   the reach of the predecessor's creditors. *** 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." Baltimore Luggage, 80 Md. App. at 297, 562

                   A.2d at 1293.

         Although purporting to apply the continuation exception to this case, the

    appellate court did not accurately state the test of continuation. In determining

    whether one corporation is a continuation of another, the test used in the majority

    of jurisdictions is whether there is a continuation of the corporate entity of the

    seller--not whether there is a continuation of the seller's business operation, as the

    dissent appears to emphasize. Grand Laboratories, Inc., 32 F.3d at 1282-83,

    quoting Bud Antle, 758 F.2d at 1458; Travis v. Harris Corp., 565 F.2d 443, 447

    (7th Cir. 1977). Thus, "[t]he majority of courts considering this exception

    emphasize a common identity of officers, directors, and stock between the selling

    and purchasing corporation as the key element of a `continuation.' " Tucker, 645

    F.2d at 625-26, citing, inter alia, Leannis v. Cincinnati, Inc., 565 F.2d 437, 440

    (7th Cir. 1977). In accord with the majority view, our appellate court has "con-

    sistently required identity of ownership before imposing successor liability under

    [the continuation exception]." Nilsson, 251 Ill. App. 3d at 418 (and cases cited

    therein). The appellate court's statement of the test of continuation, endorsed by

    the dissent, i.e., that common identity of ownership is only one factor out of

    many, is not the majority view. See 285 Ill. App. 3d at 861, citing Kaeser &

    Blair, Inc. v. Willens, 845 F. Supp. 1228, 1233 (N.D. Ill. 1993); slip op. at 9

    (Bilandic, J., dissenting, joined by Miller and McMorrow, JJ.).

         We note that in M.I.G. Investments, Inc. v. Marsala, 92 Ill. App. 3d 400

    (1981), our appellate court applied this reasoning in concluding that a sole

    proprietorship which bought the business and assets of a partnership was not liable

    as a continuation of the partnership. The partnership's trade name remained on

    equipment acquired by the sole proprietorship. However, both the partnership and

    the sole proprietorship "retained their separate identities," and none of the partners

    "had any interest in the management" of the sole proprietorship. M.I.G.

    Investments, 92 Ill. App. 3d at 404.

         Common identity of ownership is lacking when one sole proprietorship

    succeeds another. It is well settled that a sole proprietorship has no legal identity

    separate from that of the individual who owns it. The sole proprietor may do

    business under a fictitious name if he or she chooses. However, doing business

    under another name does not create an entity distinct from the person operating

    the business. The individual who does business as a sole proprietor under one or

    several names remains one person, personally liable for all his or her obligations.

    Patterson v. V&M Auto Body, 63 Ohio St. 3d 573, 574-75, 589 N.E.2d 1306, 1308

    (1992), quoting Duval v. Midwest Auto City, Inc., 425 F. Supp. 1381, 1387 (D.

    Neb. 1977); accord Pinkerton's, Inc. v. Superior Court, 49 Cal. App. 4th 1342,

    1348-49, 57 Cal. Rptr. 2d 356, 360 (1996) (collecting cases). A sole proprietor

    may hire others, with whom the proprietor enters into the relation of employer and

    employee, or principal and agent. H. Henn & J. Alexander, Corporations sec. 18

    (3d ed. 1983). Thus, one commentator has stated: "There is generally no continuity

    of existence because on the death of the proprietor, the proprietorship obviously

    ends." H. Henn & J. Alexander, Corporations sec. 18, at 59 (3d ed. 1983). See

    generally J. Moye, The Law of Business Organizations sec. 1.01 et seq. (2d ed.

    1982); H. Reuschlein & W. Gregory, Agency and Partnership secs. 169 through

    173 (1979).

         In this case, therefore, it must be remembered that "Diversey Heating" has

    no legal existence. Diversey Heating was only a pseudonym for James Schuster.

    Once he died, Diversey Heating ceased to exist. Now, Diversey Heating is only

    a pseudonym for defendant.

         Based on the obvious lack of common identity of ownership, the

    continuation exception to the rule of successor corporate nonliability cannot be

    applied to defendant. Plaintiffs alleged that James Schuster was the sole proprietor

    of Diversey Heating until his death and, after which, defendant became the sole

    proprietor of Diversey Heating. Plaintiffs did not allege that defendant held any

    type of ownership interest in James Schuster's sole proprietorship. Indeed, by

    definition, defendant could not. Plaintiffs did not allege the existence of any busi-

    ness entity that could survive the death of James Schuster.

         Once sole proprietor James Schuster died, he could not be the same sole

    proprietor as defendant, who became a sole proprietor after his father's death.

    James Schuster and defendant, one succeeding the other, cannot be the same

    entity. See Elizabeth Gamble Deaconess Home Ass'n v. Turner Construction Co.,

    38 Ohio Misc. 2d 17, 20-21, 526 N.E.2d 1368, 1372 (1986). Even if defendant

    inherited Diversey Heating from his father, defendant would not have continued

    his father's sole proprietorship, but rather would have started a new sole

    proprietorship. See H. Henn & J. Alexander, Corporations sec. 18, at 59 (3d ed.

    1983); J. Moye, The Law of Business Organizations sec. 1.03, at 3 (2d ed. 1982).

         We also note that plaintiffs did not allege that defendant falls within any

    of the other three exceptions to the rule of successor corporate nonliability.

    Plaintiffs did not allege that James Schuster and defendant agreed that defendant

    would assume James Schuster's liabilities and obligations. Plaintiffs did not allege

    and, logically, could not allege, that defendant consolidated or merged with James

    Schuster. Also, plaintiffs did not allege that James Schuster fraudulently trans-

    ferred Diversey Heating to defendant to escape liability. We agree with the circuit

    court that, under the rule of successor corporate nonliability, defendant is not

    liable for the obligations of his father's sole proprietorship.

                          CONCLUSION

         For the foregoing reasons, the judgment of the appellate court is reversed,

    the judgment of the circuit court of Cook County is affirmed, and the cause is

    remanded to the circuit court for consideration of plaintiffs' remaining claim.

    Appellate court reversed;

                                       circuit court affirmed;

                                               cause remanded.

                                                                     JUSTICE BILANDIC, dissenting:

         I respectfully dissent. The plaintiffs' complaint alleged that the plaintiffs

    purchased a boiler from Diversey Heating and Plumbing, a business engaged in

    the selling, installing and servicing of heating and plumbing systems located at

    2830 N. Lincoln in Chicago. At the time of the plaintiffs' purchase, Jim Schuster

    owned Diversey Heating and his son, defendant Jerry Schuster, worked with him

    in the business. When Jim died in October 1993, Jerry took over the business.

    Apparently without interruption, Jerry continued to operate Diversey Heating and

    Plumbing as a business engaged in the selling, installing and servicing of heating

    and plumbing systems. Not only did Jerry retain the name of his father's business,

    he also continued to operate the business out of the same location and apparently

    continued to service his father's customers, as evidenced by his dealings with the

    plaintiffs alleged in count II of the plaintiffs' complaint. In my view, these alleged

    facts clearly provide sufficient support for the plaintiffs' allegation that Jerry

    Schuster d/b/a Diversey Heating and Plumbing was a mere continuation of Jim

    Schuster d/b/a Diversey Heating and Plumbing. Yet, despite these allegations, the

    majority finds it appropriate to uphold the dismissal of the plaintiffs' successor

    liability claims on a section 2--615 motion. I cannot agree that the plaintiffs'

    claims should be so prematurely rejected.

         The majority finds that, as a matter of law, the plaintiffs cannot prove

    successor liability in this case. The sole reason successor liability is not possible

    is that Jim Schuster was a sole proprietor. According to the majority, no other fact

    or circumstance is relevant because the "essential" element of continuity of

    ownership is absent. I disagree. As the majority notes, the reason for recognizing

    exceptions to the general rule of nonliability for successor businesses is to "offset

    the potentially harsh impact" of the rule. Slip op. at 4. Accordingly, those

    exceptions should be interpreted and applied in a manner that attempts to achieve

    fairness in a particular situation. The majority, however, ignores that consideration

    and applies an overly restrictive interpretation of the mere continuation exception.

    Under the majority's view, even when the facts of a case overwhelmingly

    demonstrate that a successor business is a mere continuation of the predecessor,

    a lack of common ownership will allow the successor to escape liability. I would

    apply an interpretation of the mere continuation exception which considers the

    totality of the circumstances surrounding the transfer to determine if the successor

    business is merely a continuation of the predecessor. Continuity of ownership is

    only one consideration, and its absence should not defeat a plaintiff's claim if the

    remainder of the circumstances clearly demonstrate that the exception should, in

    fairness, apply. Other courts have followed such an approach to this exception.

    See Kaeser & Blair, Inc. v. Willens, 845 F. Supp. 1228, 1233 (N.D. Ill. 1993); C.

    Mac Chambers Co. v. Iowa Tae Kwon Do Academy, Inc., 412 N.W.2d 593, 597

    (Iowa 1987); see also Baltimore Luggage Co. v. Holtzman, 80 Md. App. 282, 297,

    562 A.2d 1286, 1293 (1989) (noting that, while " `common officers, directors, and

    stockholders' " is a traditional indication of a continuing corporation, it is not an

    essential factor), quoting 15 W. Fletcher, Private Corporations sec. 7122 (Perm.

    ed. Supp. 1988). In this case, liberally construing the plaintiffs' complaint, I would

    find that the plaintiffs sufficiently alleged that Jerry Schuster d/b/a Diversey

    Heating and Plumbing was a mere continuation of Jim Schuster d/b/a/ Diversey

    Heating and Plumbing.

         I note that the defendant contends that, even if common ownership is not

    essential, the plaintiffs have failed to allege sufficient facts regarding the transfer

    of the business from Jim to Jerry to support the mere continuation exception. As

    noted above, I believe that the facts alleged by the plaintiffs are sufficient to state

    a claim pursuant to that exception. Further, it must be noted that the trial court

    prevented the plaintiffs from obtaining discovery from the defendant by staying

    discovery pending the outcome of the defendant's motion to dismiss. The plaintiffs

    should therefore not be faulted for failing to include in their complaint more

    specifics regarding the transfer of the business. Discovery may support the

    plaintiffs' claim that the defendant's business was a mere continuation of his

    father's business, or it may reveal that the defendant's business was not a mere

    continuation. The plaintiffs should be allowed the opportunity to discover the true

    nature of the transfer of the business from Jim to Jerry.

         In addition, I would also find that the plaintiffs' complaint sufficiently

    alleged a second exception to the general rule of successor nonliability. The

    plaintiffs alleged that, on Jim's death, the defendant succeeded to the assets, rights

    and obligations of Jim's business. In my view, this allegation is sufficient to allow

    the plaintiffs to proceed under the theory that the defendant expressly or impliedly

    assumed the obligations of his father's business. Due to the trial court's restriction

    on discovery, at this juncture, we have no knowledge of the circumstances of the

    transfer of the business from Jim to Jerry. Discovery may well reveal that, in the

    course of that transfer, the defendant either expressly or impliedly agreed to

    assume the obligations of the business, along with its assets and rights. Supporting

    that conclusion is the fact that the defendant continued to operate the business out

    of the same location as his father. This suggests that the defendant may have

    assumed at least one of the obligations of his father's business, the lease. The

    plaintiffs should have the opportunity to discover the full extent of the terms under

    which the defendant acquired his father's business.

         In sum, I believe that the plaintiffs' successor liability counts against the

    defendant should be permitted to proceed. The plaintiffs' allegations, when viewed

    in the light most favorable to the plaintiffs, are clearly sufficient to state a cause

    of action upon which relief can be granted. Dismissal of the plaintiffs' claims

    under section 2--615 was therefore improper. I would affirm the judgment of the

    appellate court reversing the dismissal.

         JUSTICES MILLER and McMORROW join in this dissent.