DeJesus v. Park Corporation

Not for Publication in West’s Federal Reporter
United States Court of Appeals
For the First Circuit
No. 12-2014
EDWIN DEJESUS; MARIA L. CARTAGENA,
Plaintiffs, Appellants,
v.
PARK CORPORATION,
Defendant, Appellee,
BERTSCH, INC.
Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Howard, Circuit Judge,
Souter,* Associate Justice,
and Torresen,** District Judge.
Benjamin R. Zimmermann, with whom Sugarman and Sugarman, P.C.
was on brief, for appellant.
Stanley Yorsz, with whom Bradley J. Kitlowski, Buchanan
Ingersoll & Rooney PC, David M. Rogers, Campbell Campbell Edwards
& Conroy PC were on brief, for appellee.
*
Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
**
Of the District of Maine, sitting by designation.
August 1, 2013
SOUTER, Associate Justice. Edwin DeJesus and Maria L.
Cartagena appeal the district court’s summary judgment for Park
Corporation, in which the court rejected appellants’ tort and
warranty claims against Park under a theory of corporate successor
liability. We affirm.
I
DeJesus allegedly suffered injuries from a defective
machine manufactured in 1957 by Bertsch, Inc. Although it was
begun as a family-owned business, 80 percent of Bertsch shares were
sold in 1978 to Deem International, Inc., leaving three living
non-Deem shareholders of Bertsch, each of whom continued to work
for the successor company. Six years later, appellee, Park, began
negotiations to acquire Bertsch, culminating in Bertsch’s
liquidation through bankruptcy and Park’s acquisition of various
assets through an Asset Purchase Agreement. Park bought Bertsch’s
patents, copyrights, licenses, know-how, the trade name “Bertsch,”
trademarks, customer lists, addresses and names of contact persons,
but the Agreement provided explicitly that Park was not
“undertaking the assumption of any liabilities of Seller,” J.A.
180. Bertsch stock was not exchanged for stock in Park, nor did
any alternative indication of business control by the prior Bertsch
owners survive the sale.
Following the sale, none of Bertsch’s directors or
officers became directors or officers at Park, although two of the
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three living Bertsch shareholders became Park employees. Park
retained a small number of Bertsch’s other employees, held itself
out to customers as Bertsch, sold the same products as Bertsch, and
answered the phones with the message, “Thank you for calling
Bertsch.” J.A. 340. Park assumed Bertsch’s liabilities under
processed purchase orders but asked that all orders issued after
the acquisition be resubmitted to Park. Park never operated out of
Bertsch’s primary production plant and sold much of Bertsch’s real
property upon acquisition.
DeJesus and his wife, Cartagena, filed a complaint in
state court against Bertsch and Park in 2011, alleging negligence,
breach of warranty, and loss of consortium. Park removed the
action to district court and moved for summary judgment on the
ground that Massachusetts law generally declines to recognize
corporate successor liability and that no exception to that rule
was applicable.
The district court agreed, rejecting appellants’
contention that Park’s acquisition of Bertsch was not a mere asset
sale but a de facto merger that would deprive Park of the benefit
of the general rule of successor non-liability. The district court
held that the absence of shareholder continuity (or some equivalent
continuous control structure) foreclosed appellants’ claim: “Under
Massachusetts law, a de facto merger does not occur absent a
showing that there is a continuity of shareholders or other type of
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transaction that ultimately makes Bertsch’s shareholders directly
or indirectly constituent owners of Park.” DeJesus v. Bertsch,
Inc., 898 F. Supp. 2d 353, 361 (D. Mass. 2012). Because “[n]o
evidence provided by DeJesus and Cartagena suggest[ed] that Bertsch
remained in control or ownership of the company after Park’s asset
buy . . . . as matter of law, DeJesus and Cartagena fail[ed] to
demonstrate that there was a de facto merger.” Id. at 363. The
court also rejected appellants’ alternative argument that Park
expressly or impliedly assumed Bertsch’s liabilities.
We review the district court’s judgment de novo, see
McDonough v. Donahoe, 673 F.3d 41, 46 (1st Cir. 2012), under the
rule that summary judgment is proper where the “movant shows that
there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). All reasonable inferences are to be drawn in favor of the
non-moving party (in this case, appellants), see Rared Manchester
NH, LLC v. Rite Aid of N.H., Inc., 693 F.3d 48, 52 (1st Cir. 2012),
and we “may affirm on any basis apparent from the record,” Boston
Prop. Exch. Transfer Co. v. Iantosca, No. 11-2475, 2013 WL 2533558,
at *7 (1st Cir. June 12, 2013) (citing Hoyos v. Telecorp Commc’ns,
Inc., 488 F.3d 1, 5 (1st Cir. 2007)).
II
A
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Appellants say it was error for the district court to
require, in practical terms, a showing of continuity of
shareholders to demonstrate a de facto merger, because
Massachusetts courts have routinely held that no one factor of the
relevant four-factor test is dispositive. They argue that the
district court misconstrued the two Massachusetts cases on which it
primarily relied. See Cargill, Inc. v. Beaver Coal & Oil Co., 676
N.E.2d 815 (Mass. 1997); McCarthy v. Litton Indus., Inc., 570
N.E.2d 1008 (Mass. 1991).
We think the district court reached a sound result under
the state law. We start from the undisputed premise that
Massachusetts courts generally “follow the traditional corporate
law principle that the liabilities of a selling predecessor
corporation are not imposed upon the successor corporation which
purchases its assets.” Guzman v. MRM/Elgin, 567 N.E.2d 929, 931
(Mass. 1991). But to ensure the “fair remuneration of innocent
corporate creditors,” Milliken & Co. v. Duro Textiles, LLC, 887
N.E.2d 244, 255 (Mass. 2008), this default rule has four exceptions
that impose successor liability where “(1) the successor expressly
or impliedly assumes liability of the predecessor, (2) the
transaction is a de facto merger or consolidation, (3) the
successor is a mere continuation of the predecessor, or (4) the
transaction is a fraudulent effort to avoid liabilities of the
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predecessor,” id. at 254-55 (quoting Guzman, 567 N.E.2d at 931).
Appellants argue only for the de facto merger exception here.
In determining whether de facto merger is a fair
conclusion, Massachusetts courts “generally consider” four factors:
whether (1) there is a continuation of the
enterprise of the seller corporation so that
there is continuity of management, personnel,
physical location, assets, and general
business operations; whether (2) there is a
continuity of shareholders which results from
the purchasing corporation paying for the
acquired assets with shares of its own stock,
this stock ultimately coming to be held by the
shareholders of the seller corporation so that
they become a constituent part of the
purchasing corporation; whether (3) the seller
corporation ceases its ordinary business
operations, liquidates, and dissolves as soon
as legally and practically possible; and
whether (4) the purchasing corporation assumes
those obligations of the seller ordinarily
necessary for the uninterrupted continuation
of normal business operations of the seller
corporation.
Cargill, 676 N.E.2d at 818. Critically, we note that the Supreme
Judicial Court of Massachusetts has repeatedly instructed that
“‘[n]o single factor [of these four] is necessary or sufficient to
establish a de facto merger.’” Milliken, 887 N.E.2d at 255
(quoting Cargill, 676 N.E.2d at 818).
We have also identified the overlap in the criteria of
the de facto merger exception with those of the “mere continuation”
exception. See Dayton v. Peck, Stow and Wilcox Co., 739 F.2d 690,
693 (1st Cir. 1984); see, e.g., Milliken, 887 N.E.2d at 254 n.15
(“The terms ‘de facto merger’ and ‘mere continuation’ are often
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used by courts interchangeably.”); Nat’l Gypsum Co. v. Cont'l
Brands Corp., 895 F. Supp. 328, 336 (D. Mass. 1995) (“While these
two labels have been enshrined separately in the canonical list of
exceptions . . . they appear, in practice[,] to refer to the same
concept . . . .”); In re Acushnet River & New Bedford Harbor
Proceedings, 712 F. Supp. 1010, 1019 n.15 (D. Mass. 1989) (“[T]he
distinction between the two exceptions seems more apparent than
real. Upon examination, the de facto merger exception subsumes the
continuation exception.”). To fall within the “mere continuation”
exception, Massachusetts courts have required “at a minimum:
continuity of directors, officers, and stockholders; and the
continued existence of only one corporation after the sale of
assets.” McCarthy, 570 N.E.2d at 1013. These exceptions, de
factor merger and mere continuation, both exist to ensure that a
seller cannot shield itself from past torts through a transaction
in which it retains equity or some other mechanism of continuing
control but vanquishes liability.
As for what could not support an exception to the
successor non-liability rule, Massachusetts courts have suggested
that they would not adopt a related, independent exception embraced
by other jurisdictions, that of “continuation of enterprise.”
“Continuity of enterprise analysis does not require that the
predecessor and successor corporations have common shareholders
. . . as does the more traditional continuation exception.” Id.;
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see also id. at 1013 n.6 (describing the “continuation of
enterprise” exception as “distinctly a minority approach”); Nat’l
Gypsum Co., 895 F. Supp. at 340 (finding no “continuity of
enterprise” exception in Massachusetts law and following “the
traditional de facto merger or continuation analysis, with its
keystones of continuous ownership and inequitable conduct”).
With this framework in mind, we agree with appellants
that to the extent the district court considered continuity of
ownership as a necessary condition for de facto merger, the court
stepped beyond the Massachusetts cases and their repeated
admonitions that no factor of the four-factor test is necessary.
See, e.g., Cargill, 676 N.E.2d at 818; Milliken, 887 N.E.2d, at
255. Thus, the district court’s statement that “a de facto merger
does not occur absent a showing that there is a continuity of
shareholders,” DeJesus, 898 F. Supp. 2d at 361, was a stretch too
far, and summary judgment cannot be based exclusively on the
absence of continuity of ownership. But this does not mean
reversal, because we may still affirm if the summary judgment
record reveals materially undisputed facts that entitled Park to
judgment as a matter of law. See Hoyos, 488 F.3d at 5. We think
that is so here.
The Massachusetts cases show that the Commonwealth
identifies the direction indicated by the four factors in synergy
together, allowing the relative significance of each to vary up or
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down when weighed independently case by case. Here, the facts
bearing on two of the four factors militate in favor of finding a
de facto merger, as Park does not seriously dispute. The record,
first, unequivocally indicates that Bertsch, as a legal entity,
“cease[d] its ordinary business operations” after the purchase.
Cargill, 676 N.E.2d at 818. And, second, it is equally clear that
Park assumed Bertsch’s obligations that were “ordinarily necessary
for the uninterrupted continuation of normal business operations.”
Id.
But the appellants’ position weakens when we look to the
next factor. Whether “there [wa]s a continuation of [Bertsch in
the sense of] continuity of management, personnel, physical
location, assets, and general business operations” is a mixed bag.
Id. On the one hand, Park maintained continuity with Bertsch’s
general business operations and assumed its assets. But, on the
other, it did not continue to operate Bertsch’s primary production
facilities and only kept a handful of Bertsch’s management and
personnel. This factor points both ways.
As a consequence, the case turns on the weight to be
given the final factor: continuity of shareholders or other
continuing control device. This element is a clear win for Park,
as the record makes plain that none of Bertsch’s shareholders
became owners of Park, and appellants have not raised a material
dispute to the contrary. Indeed, in the district court “it [was]
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undisputed that Bertsch’s shareholders did not retain any type of
ownership or [non-stock] control over the business after the asset
sale to Park.” DeJesus, 898 F. Supp. 2d at 361. This factor,
therefore, cuts sharply against a finding of de facto merger.
And its significance is substantial. In a previous
reading of Massachusetts common law, we spoke of the continuity of
shareholders as a “key requirement[]” in determining whether a de
facto merger exists sufficient to permit successor liability.
Dayton, 739 F.2d at 693. That continues to be the best
understanding of how Massachusetts courts have actually implemented
this doctrine, and appellants point to no Supreme Judicial Court
decision finding a de facto merger in the absence of at least some
continuity of ownership. Cf. In re Acushnet, 712 F. Supp. at 1015-
17 (continuity found when sellers received stock of buyer’s
parent); Milliken & Co. v. Duro Textiles, LLC, 2005 WL 1791562, at
*10 (Mass. Super. Ct. 2005) (citing In re Acushnet approvingly for
the proposition that “it would be unduly technical to limit the de
facto merger doctrine to asset sales made solely with the
purchaser’s own stock”), aff’d, 887 N.E.2d 244. Similarly,
district courts applying Massachusetts law have prized this factor
among the others. See, e.g., Am. Paper Recycling Corp. v. IHC
Corp., 707 F. Supp. 2d 114, 121 (D. Mass. 2010) (rejecting de
factor merger claim where the predecessor acquired only 3.2%
ownership of the successor); Goguen v. Textron Inc., 476 F. Supp.
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2d 5, 12-15 (D. Mass. 2007) (rejecting de factor merger claim where
there was no evidence of continuity of ownership). The best case
for appellants appears to be Cargill, in which the predecessor
acquired 12.5% of the shares of the successor corporation, but even
there, the SJC explained that this transaction did “not constitute
shareholder continuity in its fullest sense.” 676 N.E.2d at 819.
Although we do not understand the state law to be that
continuity of shareholders is absolutely required, it remains a
very weighty factor in identifying a de facto merger. Where, as
here, there is no shareholder continuity or any alternative means
of continuity of control, and one of the remaining three factors is
equivocal, we conclude that no such merger occurred and that the
district court correctly decided that Park has no liability for
Bertsch’s torts.1
B
1
Appellants’ arguments to the contrary focus almost
exclusively on the district court’s absolute rule, which goes too
far, or stem from reliance on Massachusetts lower court decisions,
e.g., Lanee Great Plastic Co., Ltd. v. Handmade Bow Co., No.
SUCV200705245, 2010 WL 6650330 (Mass. Super. Ct. Dec. 26, 2010);
Dominguez v. Ruland Mfg. Co., No. 20081564, 2009 WL 3083865 (Mass.
Super. Ct. Aug. 13, 2009); Mass Printing & Forms, Inc. v. RKS
Health Ventures Corp., 2000 WL 744564 (Mass. Super. Ct. 2000). The
latter are of no moment to our analysis because we are bound to
“take [the] law in diversity cases from the state’s highest court
once that court has spoken on point.” EMC Corp. v. Arturi, 655
F.3d 75, 78 (1st Cir. 2011). Our decision follows without
deviation from the framework outlined by the Supreme Judicial
Court.
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In the alternative, appellants ask us to certify the
question of the necessity for continuous ownership to the Supreme
Judicial Court of Massachusetts. But there is no need for that.
Certification may be in order when we find “no controlling SJC
precedent on the . . . question and the issue is determinative.”
See Boston Gas Co. v. Century Indemn. Co., 529 F.3d 8, 15 (1st
Cir. 2008), but the SJC’s statements of the standard have
rejected absolute necessity, see Cargill, 676 N.E.2d at 818, and
our conclusion does not assume otherwise.
III
The judgment of the district court is affirmed.
It is so ordered.
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