New Nello Operating Co., LLC v. CompressAir ( 2020 )

FILED
Mar 02 2020, 8:43 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEY FOR APPELLANT ATTORNEYS FOR APPELLEE
James A. Masters Kevin E. Warren
Nemeth, Feeney, Masters & Campiti, Benjamin M. Redgrave
P.C. South Bend, Indiana
South Bend, Indiana
IN THE
COURT OF APPEALS OF INDIANA
New Nello Operating Co., LLC, March 2, 2020
Appellant-Defendant, Court of Appeals Case No.
19A-CC-603
v. Appeal from the St. Joseph Circuit
Court
CompressAir, The Honorable John E. Broden,
Appellee-Plaintiff. Judge
Trial Court Cause No.
71C01-1703-CC-826
Mathias, Judge.
[1] CompressAir obtained a judgment of $44,689.66 against Nello, Inc., a
corporation the parties now refer to as “Old Nello.” Upon learning that Old
Nello’s business was continuing under the corporate entity of New Nello
Operating Co., LLC (“New Nello”), CompressAir filed proceedings
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supplemental naming New Nello as a garnishee-defendant. In the proceedings
supplemental, New Nello argued that it was not liable for the judgment entered
against Old Nello. The trial court disagreed, finding that there had been a de
facto merger of Old Nello and New Nello and that the latter was a mere
continuation of the former. The trial court therefore entered judgment against
New Nello in the amount of $44,689.66. New Nello appeals and claims that
there was no de facto merger between Old Nello and New Nello and that the
latter is not a mere continuation of the former. Concluding that the trial court
did not clearly err in concluding that there had been a de facto merger, we
affirm.
Facts and Procedural History
[2] The facts underlying this case are essentially undisputed. Old Nello was
founded in 2002 by Dan Ianello (“Ianello”) and was in the business of
manufacturing utility and cellular telephone towers. Old Nello’s officers were:
Ianello, president; Jason Lambert (“Lambert”), Vice President of Engineering;
Robert Rumpler (“Rumpler”), Vice President of Manufacturing; and Kevin
Brisson (“Brisson”), Chief Financial Officer. These officers also owned
approximately 95–99% of the shares of Old Nello.
[3] In the summer of 2016, Old Nello consolidated its facilities in Bremen, Indiana
and Ft. Worth, Texas, and its administrative offices in downtown South Bend
to a new building on Sheridan Street in South Bend. The consolidation took
longer, and cost more, than anticipated. This caused the company fiscal
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difficulties, and by the latter half of 2016, Old Nello was in dire financial straits;
it had few liquid assets and was deeply in debt. Specifically, Old Nello had
taken out a $10 million secured loan with Fifth Third Bank, a $3.4 million loan
with a secondary secured creditor, Live Oak Capital (“Live Oak), and a $1.4
million debt obligation to the City of South Bend’s Industrial Revolving Loan
Fund. The officers of Old Nello each executed personal loan guarantees in
connection with the Fifth Third loan. On November 10, 2016, Fifth Third Bank
sent a demand letter to Old Nello and Ianello personally, declaring that its
notes were due and payable immediately.
[4] Concerned that it would lose its investment in Old Nello, Live Oak contacted
Michael Clevy (“Clevy”), of the private equity firm Beckner Clevy Partners, to
see if there was a way to continue Old Nello’s business. Clevy explored several
options, including continuing Old Nello and paying its way out of debt, having
other investors put money into Old Nello, refinancing Old Nello’s debt with
another lender, or asking other private individuals in the industry to invest in or
purchase Old Nello. None of these options came to fruition, and Fifth Third
was ready to foreclose upon its note and liquidate Old Nello’s assets.
[5] In early 2016, CompressAir had installed thousands of feet of compressed air
and oxygen piping within Old Nello’s South Bend facility. The cost of the work
exceeded $87,000, and by the spring of 2017, approximately $39,000 remained
unpaid to CompressAir. CompressAir’s controller attempted to work out a
payment agreement with Old Nello but was unsuccessful. Accordingly, in
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March 2017, CompressAir filed suit against Old Nello seeking to recover the
unpaid $39,000. By that summer, six other creditors had filed complaints
seeking payment for outstanding bills.
[6] In April or May of 2017, Clevy created New Nello Acquisition Co., to purchase
Fifth Third’s note. Clevy bought Fifth Third’s $10 million note for $3.765
million, which was more than Clevy’s $3.1 million estimate of Old Nello’s
liquidation value. New Nello Acquisition Co. then formed New Nello
Operating Co. as a wholly-owned subsidiary. On November 14, 2017, New
Nello Acquisition Co. and New Nello Operating Co. entered into a strict
foreclosure agreement with Old Nello. Thereafter, New Nello conducted the
same business as Old Nello, i.e., building utility and cellular towers, operated
from the same physical location as Old Nello, and retained approximately
ninety percent of Old Nello’s employees, including its officers, Ianello,
Lambert, Brisson, and Rumpler. These officers, however, had no ownership
interest in New Nello.1 There was no public announcement of New Nello’s
assumption of Old Nello’s business to either the general public or the
employees, for fear of marketplace upheaval. New Nello also operated under
the name “Nello.” New Nello also used the same website as Old Nello and held
itself out as the same company by claiming to have been founded in 2002.
1
The chief investors in New Nello are “Third Article Trust,” and “the Bancoff Family.” Tr. p. 42.
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[7] After its acquisition of Old Nello’s assets and business, New Nello negotiated
with Old Nello’s vendors and creditors that it deemed were essential to the
operation of the business and paid them. Included among the essential creditors
were Ianello, Lambert, Brisson, and Rumpler; New Nello paid all obligations
owed to them and released them from the personal guarantees they executed in
favor of the note New Nello purchased from Fifth Third.2 Other creditors of
Old Nello, were listed as “unassumed liabilities” in the strict foreclosure
agreement. Appellant’s App. p. 67. In October 2017, Brisson continued to
negotiate with CompressAir to come up with a payment plan. Even though Old
Nello’s business had been assumed by New Nello by that time, Brisson never
informed CompressAir of the transaction.
[8] On December 1, 2017, the trial court granted summary judgment in favor of
CompressAir in its complaint against Old Nello and entered judgment in the
amount of $44,689.66. CompressAir did not learn about New Nello until after
it obtained judgment against the now-defunct Old Nello. On February 26, 2018,
CompressAir filed proceedings supplemental naming New Nello as a garnishee-
defendant. CompressAir filed a second motion for proceedings supplemental on
July 6, 2018, asking the trial court to enter judgment against New Nello as the
successor to Old Nello. The trial court held an evidentiary hearing on the issue
2
Specifically, New Nello paid Ianello $5,496.57, Lambert $936.25, Brisson $13,293.08, and Rumpler
$5,583.08. Appellant’s App. pp. 136–40.
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on November 29, 2018. At the hearing, Clevy testified that New Nello chose to
pay only those creditors of Old Nello that were essential to running New Nello.
[9] On February 13, 2019, the trial court entered findings of fact and conclusions of
law determining that New Nello is a mere continuation of Old Nello and that
there was a de facto merger of the companies. The trial court noted that New
Nello runs the same business with the same name, the same employees, and
from the same location as Old Nello. The court also noted that Old Nello’s
former shareholders retained management roles in New Nello. The court
entered judgment against New Nello in the full amount owed to CompressAir
by Old Nello: $44,689.66. New Nello now appeals.
Standard of Review
[10] Our standard of review in cases where the trial court enters findings of fact and
conclusions of law was set forth by this court in Koch Development Corp. v. Koch
as follows:
When a trial court enters findings and conclusions, we apply a
two-tiered standard of review: we first determine whether the
evidence supports the findings; we then determine whether the
findings support the judgment. In deference to the trial court's
proximity to the issues, we disturb the judgment only where there
is no evidence supporting the findings or the findings fail to
support the judgment. We do not reweigh the evidence, and we
consider only the evidence favorable to the trial court's judgment.
We also will not reassess witness credibility. The party appealing
the trial court’s judgment must establish that the findings are
clearly erroneous. Findings are clearly erroneous when a review
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of the record leaves us firmly convinced that a mistake has been
made. We do not defer to conclusions of law, which are
evaluated de novo.
996 N.E.2d 358, 369 (Ind. Ct. App. 2013) (citations and internal quotation
marks omitted), trans. denied.3
Discussion and Decision
[11] It has long been held that when one corporation purchases the assets of another,
the buyer does not assume the debts and liabilities of the seller. Ziese & Sons
Excavating, Inc. v. Boyer Const. Corp., 965 N.E.2d 713, 722 (Ind. Ct. App. 2012)
(citing Sorenson v. Allied Prods. Corp., 706 N.E.2d 1097, 1099 (Ind. Ct. App.
1999)); see also Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d 1228, 1233 (Ind.
1994) (citing Markham v. Prutsman Mirror Co., 565 N.E.2d 385, 387 (Ind. Ct.
App. 1991)). There are, however, four general exceptions to this rule against
successor liability:
(1) an implied or express agreement to assume liabilities; (2) a
fraudulent sale of assets done for the purpose of evading liability;
3
CompressAir argues that we should apply a general judgment standard of review, citing Allstate Insurance
Co. v. Kepchar, 592 N.E.2d 694 (Ind. Ct. App. 1992), trans. denied. In Kepchar, we noted that “findings of fact
[are] improper in proceedings supplemental.” Id. at 696 (citing In re Marriage of Hudak, 428 N.E.2d 1333, 1335
(Ind. Ct. App. 1981)). The Kepchar court thus held that there was no error where the trial court denied a
request for findings and conclusions in proceedings supplemental. Id. But the Kepchar court did not hold that
the entry of findings and conclusions in proceedings supplemental was prohibited. And in the case cited by
Kepchar, the court merely noted the rule that specific findings and conclusions are not required in proceedings
supplemental. Hudak, 428 N.E.2d at 1335 (citing Hutchinson v. Trauerman, 112 Ind. 21, 25–26, 13 N.E. 412,
414 (1887)). We therefore cannot say that the trial court erred by entering specific findings and conclusions,
even though it was not required to do so. Moreover, CompressAir would prevail under either standard.
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(3) a purchase that is a de facto consolidation or merger; or (4)
where the purchaser is a mere continuation of the seller.
Successor liability is implicated only when the predecessor
corporation no longer exists, such as in the case of dissolution or
liquidation in bankruptcy.
Ziese, 965 N.E.2d at 722 (citing Sorenson, 706 N.E.2d at 1099); see also Winkler,
638 N.E.2d at 1233.
[12] The trial court here determined that the third and fourth exceptions applied,
i.e., that New Nello’s purchase of Old Nello’s business assets was a de facto
merger, and that New Nello is a mere continuation of Old Nello. New Nello
contends that the trial court erred on both accounts.
[13] As stated by our supreme court in Cooper Industries, LLC v. City of South Bend,
899 N.E.2d 1274, 1288 (Ind. 2009), “[c]ourts sometimes treat asset transfers as
de facto mergers where the economic effect of the transaction makes it a merger
in all but name.” Factors supporting a finding of a de facto merger include:
(1) continuity of ownership; (2) continuity of management,
personnel, and physical operation; (3) cessation of ordinary
business and dissolution of the predecessor as soon as practically
and legally possible; and (4) assumption by the successor of the
liabilities ordinarily necessary for the uninterrupted continuation
of the business of the predecessor.
Sorenson, 706 N.E.2d at 1100 (quoting Hernandez v. Johnson Press Corp., 388
N.E.2d 778, 780 (Ill. App. Ct. 1979)); see also Cooper Indust., 899 N.E.2d at 1288
(listing pertinent findings that support a de facto merger as “continuity of the
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predecessor corporation’s business enterprise as to management, location, and
business lines; prompt liquidation of the seller corporation; and assumption of
the debts of the seller necessary to the ongoing operation of the business.”)
(citations omitted).
[14] The facts of the present case clearly support a finding of a de facto merger. New
Nello continued Old Nello’s business enterprise as to management, location,
and area of business. New Nello continued to refer to itself as “Nello,” and its
website stated that it was founded in 2002, the year Old Nello was founded.
Moreover, New Nello assumed the debts of Old Nello that it deemed necessary
to continue the business. All of these factors support a finding of a de facto
merger.
[15] Even though there was no continuity of ownership, we do not consider this to
be fatal to a finding of a de facto merger. See Lippens v. Winkler Backereitechnik
GmbH, 31 N.Y.S.3d 340, 343 (N.Y. App. Div. 2016) (“while factors such as
shareholder and management continuity will be evidence that a de facto merger
has occurred . . . those factors alone should not be determinative[.]”); Gallenberg
Equip., Inc. v. Agromac Int’l, Inc., 10 F. Supp. 2d 1050, 1055 (E.D. Wis. 1998)
(noting that “courts have imposed successor liability without requiring
continuity of corporate ownership.”), aff’d, 191 F.3d 456 (7th Cir. 1999). And
even though there was no continuity of ownership in the present case, there was
continuity of management, as the entire management team from Old Nello
continues in the same roles in New Nello. Cf. Sorenson, 706 N.E.2d at 1100
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(upholding finding that there was no de facto merger where the shareholders of
the old corporation “never possessed the authority to participate fully in the
management function” of the new corporation).
[16] And although Old Nello was apparently never officially dissolved, all of its
assets were acquired by New Nello. Old Nello is therefore a defunct
corporation, even if not legally dissolved. Knapp v. N. Am. Rockwell Corp., 506
F.2d 361, 367 (3d Cir. 1974) (holding that sale of old corporation’s assets to
new corporation was a de facto merger even though the old corporation
continued its existence for eighteen months after the exchange). Nor do we find
significant that Old Nello is still liable for the Fifth Third note bought by New
Nello; Clevy testified that New Nello did not expect the Fifth Third note to be
paid. Tr. p. 46. For purposes of successor liability, Old Nello effectively no
longer exists; it has no assets, having sold them to New Nello. Old Nello
continues as an entity in name only. See Chicago, I. & S.R. Co. v. Taylor, 183 Ind.
240, 108 N.E. 1, 3 (1915) (“[A] corporation which takes, as owner, all the
property and assets of another corporation, which thus practically ceases to
exist except as a paper organization, is liable in equity for the obligations of the
old company, at least to the amount of the assets converted.”) (citations
omitted).
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[17] Viewing the facts in favor of the trial court’s judgment, we are unable to say
that the trial court clearly erred in concluding that there was a de facto merger
between Old Nello and New Nello.4
Conclusion
[18] The trial court did not clearly err in determining that there was a de facto
merger between Old Nello and New Nello. The de facto merger exception to
the general rule that a corporation that purchases the assets of another
corporation does not assume the liabilities of the former corporation therefore
applies, and the trial court properly found that New Nello is liable for the
$44,689.66 judgment obtained by CompressAir against Old Nello. Accordingly,
we affirm the judgment of the trial court.
[19] Affirmed.
Kirsch, J., and Bailey, J., concur.
4
Because we conclude that the trial court did not err in determining that there was a de facto merger between
Old Nello and New Nello, we need not address New Nello’s second argument that the trial court clearly
erred in concluding that New Nello was merely a continuation of Old Nello. That is, because the “merger”
exception applies, there is no reason to address whether the “continuation” exception also applies.
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