Rondy & Co., Inc. v. Plastic Lumber Co.

[Cite as Rondy & Co., Inc. v. Plastic Lumber Co., 2011-Ohio-5775.]
STATE OF OHIO ) IN THE COURT OF APPEALS
)ss: NINTH JUDICIAL DISTRICT
COUNTY OF SUMMIT )
RONDY & CO., INC. C.A. No. 25548
Appellee
v. APPEAL FROM JUDGMENT
ENTERED IN THE
THE PLASTIC LUMBER CO., COURT OF COMMON PLEAS
COUNTY OF SUMMIT, OHIO
and CASE No. CV 2009 06 4893
BRIGHT IDEA SHOPS, LLC
Appellant
DECISION AND JOURNAL ENTRY
Dated: November 9, 2011
BELFANCE, Presiding Judge.
{¶1} Defendant-Appellant Bright Idea Shops, LLC (“Bright Idea”) appeals the decision
of the Summit County Court of Common Pleas. For the reasons stated below, we reverse.
I
{¶2} Defendant The Plastic Lumber Company (“Plastic Lumber”) was in the business
of manufacturing, assembling, and selling items made from plastic lumber. Plastic Lumber was
a corporation with two owners, Mr. Robbins, who held a 95% interest, and a second owner with
a 5% interest. In 2008, Plastic Lumber began seeking refinancing of its outstanding debt. After
Huntington National Bank (“Huntington”) purchased Sky Bank, Huntington became the secured
party obligee on Plastic Lumber’s debt, holding a blanket lien on all of Plastic Lumber’s assets
(“the collateral”). The loan obligations were also guaranteed by Mr. Robbins.
2
{¶3} By December 2008, Plastic Lumber had defaulted on its obligations to
Huntington. Notwithstanding, Plastic Lumber continued to operate. In early 2009, Plastic
Lumber ordered $37,833.72 worth of materials used to manufacture lumber board from Plaintiff-
Appellee Rondy & Company, Inc. (“Rondy”). At Huntington’s urging, Plastic Lumber engaged
the services of a consultant group to act as a restructuring officer as it continued to evaluate the
potential refinancing of the debt. Ultimately, Huntington declined to refinance Plastic Lumber’s
debt. In light of Plastic Lumber’s default, Huntington pursued a surrender and liquidation of
Plastic Lumber’s assets and the restructuring officer became a liquidating officer.
{¶4} On June 30, 2009, Plastic Lumber entered into a liquidation, voluntary surrender
and release agreement (“the agreement”) with Huntington due to Plastic Lumber’s default on
loan obligations with Huntington, which amounted to $840,708.39 at the time. Plastic Lumber
and Huntington agreed to commence an orderly liquation of the collateral. In furtherance of the
orderly liquidation, and as part of the agreement, Mr. Robbins or his “third part[y] designee”
agreed to acquire $238,650 worth of assets described in an exhibit to the agreement (“the
acquired assets”), and Mr. Robbins agreed to guaranty the obligation. Mr. Robbins formed
Bright Idea and became its president and sole member. Bright Idea was created to assemble and
sell items made from plastic lumber, but unlike Plastic Lumber, it was not a manufacturer of
plastic lumber. Bright Idea purchased the acquired assets, and Mr. Robbins, on behalf of Bright
Idea, signed a promissory note for $238,650 financed by Huntington. In addition, Bright Idea
purchased $101,361 of Plastic Lumber’s inventory. Additional assets were purchased by third
parties. Only the liquidating officer, in conjunction with Huntington, determined the acceptable
price and approved the transactions for the sale of the assets. The remaining assets were sold at
auction. Bright Idea bought approximately $9,000 to $10,000 worth of items from the auction.
3
In total, the assets of Plastic Lumber netted approximately $500,000, approximately $350,000 of
which was purchased by Bright Idea through the agreement, the purchase of inventory, and the
purchase at auction. As part of the agreement, Plastic Lumber agreed to cease business
operations no later than June 30, 2009.
{¶5} On June 30, 2009, Rondy sued Plastic Lumber for breach of contract and account
asserting $37,833.72 in damages based upon Plastic Lumber’s failure to pay for the materials it
had ordered. Rondy amended its complaint to add Bright Idea as a defendant, alleging Bright
Idea was liable for the debt of Plastic Lumber. Bright Idea moved for summary judgment on the
claim against it; however, its motion was subsequently denied. The matter proceeded to a bench
trial. The parties agreed to have judgment entered against Plastic Lumber for $37,833.72. Thus,
the only issue to be determined at trial was whether Bright Idea was liable for the $37,833.72
debt.
{¶6} The trial court concluded that it was and found that “Bright Idea continued
[Plastic Lumber’s] business through a de facto merger or a mere continuation of [Plastic
Lumber], and is therefore liable for the $37,833.72 obligation to [Rondy].”
{¶7} Bright Idea has appealed raising a single assignment of error for our review.
II.
ASSIGNMENT OF ERROR
“The trial court erred as a matter of law in determining that appellant Bright Idea
Shop, LLC, should be held liable for the obligations of Plastic Lumber
Company[,] Inc. pursuant to the ‘defacto merger’ and ‘mere continuation’
exceptions to the general rule of no successor business liability, and its findings
are against the manifest weight of the evidence.”
{¶8} Bright Idea asserts that the trial court committed legal error in concluding that the
de facto merger and mere continuation exceptions applied to Bright Idea. While Bright Idea also
4
states in its assignment of error that the trial court’s “findings” are against the manifest weight of
the evidence, it does not articulate which findings it believes are against the manifest weight of
the evidence. See App.R 16(A)(7). In fact, it appears that Bright Idea generally agrees with the
trial court’s findings of fact, but instead believes that the trial court erred in its application of the
law to those facts.
{¶9} “The well-recognized general rule of successor liability provides that the
purchaser of a corporation’s assets is not liable for the debts and obligations of the seller
corporation.” Welco Industries, Inc. v. Applied Cos. (1993), 67 Ohio St. 3d 344, 346-347 citing
Flaugher v. Cone Automatic Machine Co. (1987), 30 Ohio St. 3d 60. The Supreme Court of Ohio
has identified four well recognized exceptions to the general rule barring successor liability. In
Welco, the Supreme Court held that:
“A corporation that purchases the assets of another is not liable for the contractual
liabilities of its predecessor corporation unless (1) the buyer expressly or
impliedly agrees to assume such liability; (2) the transaction amounts to a de facto
consolidation or merger; (3) the buyer corporation is merely a continuation of the
seller corporation; or (4) the transaction is entered into fraudulently for the
purpose of escaping liability.” Welco, 67 Ohio St.3d at syllabus.
{¶10} In the instant matter, the trial court found that both the de facto merger and mere
continuation exceptions applied, and therefore, that Bright Idea was liable for the debts of Plastic
Lumber. As we conclude neither exception applies, we likewise conclude that the general rule
barring successor liability also applies.
De Facto Merger
{¶11} “A de facto merger is a transaction that results in the dissolution of the
predecessor corporation and is in the nature of a total absorption of the previous business into the
successor.” Id. at 349. It is a:
5
“merger in fact without an official declaration of such. The hallmarks of a de
facto merger include (1) the continuation of the previous business activity and
corporate personnel, (2) a continuity of shareholders resulting from a sale of
assets in exchange for stock, (3) the immediate or rapid dissolution of the
predecessor corporation, and (4) the assumption by the purchasing corporation of
all liabilities and obligations ordinarily necessary to continue the predecessor’s
business operations.” Id.
“One court has indicated that a transfer of assets for stock is the sine qua non of de facto
merger.” Id. In light of the evidence presented at trial, we conclude that the trial court erred in
concluding that the de facto merger doctrine was applicable.
{¶12} We begin by noting that the transaction at issue was not “in the nature of a total
absorption of the previous business into the successor[,]” and thus does not even seem to fit
within the general definition of a de facto merger as defined by the Welco Court. Id. In addition,
the only element of the four listed above that was established by the evidence is “the rapid
dissolution of the predecessor[.]” Even Rondy acknowledges in its brief that all of the hallmarks
of a de facto merger are not present. Notably, the “sin qua non[,]” the transfer of assets for
stocks, was not present in this transaction. Id. Further, all of Plastic Lumber’s business activities
were not continued and there was no evidence presented that Bright Idea assumed “all liabilities
and obligations ordinarily necessary to continue [Plastic Lumber’s] business operations.” Id.
Accordingly, we cannot say the de facto merger exception applies in light of the evidence
presented at trial.
Mere Continuation
{¶13} Notwithstanding the inapplicability of the de facto merger exception, the trial
court also concluded that Bright Idea is liable for Plastic Lumber’s debt under the “mere
continuation” exception to successor liability. In Welco, the Supreme Court of Ohio was
presented with the opportunity to adopt an expanded view of the mere continuation exception,
6
but declined to do so. Id. at 348. The expanded mere continuation exception involves imposing
liability if the two corporations have significant shared features. See id. at 347-348. The Court
revisited Flaugher, 30 Ohio St. 3d 60, and concluded that:
“[t]he concerns for predictability and free transferability in corporate acquisitions
that led this court to decline to expand the test for tort successor liability in
Flaugher are even more compelling where the claim is in contract. To expand the
mere-continuation exception to a contractual claim would virtually negate the
difference between an asset purchase and a stock purchase. Courts would be
forced to look beyond the surface of any asset purchase to determine the extent of
shared features between predecessor and successor in order to decide whether
liability should attach to contractual obligations that were explicitly excluded
from the transaction. The sale of a corporation’s assets is an important tool in
raising liquid capital to pay off corporate debts. A court-imposed expansion of
contractual liability of successor corporations beyond the traditional exceptions
would unnecessarily chill the marketplace of corporate acquisitions. For these
reasons, we decline to expand the traditional exceptions to the general rule of
nonliability of successor corporations[.]” Welco, 67 Ohio St. 3d at 348-349.
{¶14} Thus, under current binding Supreme Court precedent, the mere continuation
exception is limited and narrow. The basis of the mere continuation exception “is the
continuation of the corporate entity, not the business operation, after the transaction.” Id. at 350.
“Such would be the case when one corporation sells its assets to another corporation with the
same people owning both corporations. Thus, the acquiring corporation is just a new hat for, or
reincarnation of, the acquired corporation. This is actually a reorganization.” (Internal
quotations and citation omitted.) Id. “This type of transaction is executed to escape liabilities of
the predecessor corporation.” Id. Thus, “inadequacy of consideration is one of the indicia of
mere continuation.” Id.
{¶15} As an initial matter, we note that Rondy’s arguments at trial were premised upon
the notion that there was in fact a sale of assets from one corporation to another. However, in
this case, there was not a sale of assets from corporation to corporation and the facts of the
instant matter are quite distinguishable from those of either Flaugher or Welco, which did
7
involve sales of assets between two corporations. Unlike either of the two Supreme Court cases,
this case does not involve the sale of Plastic Lumber’s assets to its successor. Instead, Plastic
Lumber surrendered its assets to its secured creditor, Huntington, in order to avoid having to file
for bankruptcy. The following facts are undisputed: (1) Huntington was a secured party that
held a valid blanket lien on Plastic Lumber’s assets; (2) Huntington instructed Plastic Lumber to
hire a restructuring agent, who ultimately became a liquidating agent, so that Huntington might
realize the most money possible from the sale of Plastic Lumber’s assets; (3) Huntington was
entitled, as the secured creditor, to proceed in the manner it did; (4) the assets of Plastic Lumber
that Bright Idea acquired were acquired through the third party agent and from Huntington; and
(5) the assets were sold for fair and reasonable price given the nature of the assets and the
circumstances under which they were sold.
{¶16} In light of the undisputed facts, the indicia necessary to satisfy the mere
continuation exception are not present. There was no evidence presented which suggested that
Bright Idea purchased the assets of Plastic Lumber for inadequate consideration, or that the
transaction was conducted to escape the liabilities of Plastic Lumber. See Welco, 67 Ohio St. 3d
at 350. On the contrary, the record evidences that the purpose of selling the assets through a
restructuring/liquidating agent was to procure the best possible price for the assets for the
secured creditor, Huntington. Mr. Robbins’ testimony indicates that Bright Idea’s purchase of
assets prior to auction likely garnered Huntington more money than if the assets had been
auctioned. Accordingly, it is difficult to conclude that Bright Idea purchased the assets for
inadequate consideration, particularly when Mr. Robbins’ testimony was unrefuted.
Moreover, because this was not a corporation to corporation acquisition, this is not a
situation described in Welco in which “one corporation sells its assets to another corporation with
8
the same people owning both corporations” and “the acquiring corporation is just a new hat for,
or reincarnation of, the acquired corporation.” See id. at 350. Accordingly, we cannot say that
Bright Idea was a mere continuation of Plastic Lumber.
{¶17} The trial court and the parties in this matter found our decision in Pottschmidt v.
Klosterman, 169 Ohio App. 3d 824, 2006-Ohio-6964, to be dispositive. We, however, conclude
Pottschmidt is entirely distinguishable on its facts. In Pottschmidt the original corporation was
solely owned by Dr. Klosterman. Id. at ¶2. After the original corporation was sued by one of its
employees, Dr. Pottschmidt, Dr. Klosterman formed a new company, which he also solely
owned, for the purpose of avoiding liability related to Dr. Pottschmidt’s employment. Id. at ¶¶2-
5, 29, 31. “[T]he new corporation took possession of the original corporation’s office
equipment, medical supplies, and accounts receivable.” Id. at ¶29. “[N]either the new
corporation[,] nor Dr. Klosterman[,] paid any consideration for the assets of the original
corporation.” Id. at ¶42. The facts of Pottschmidt clearly fall within the narrow mere
continuation exception articulated in Welco. See Welco, 67 Ohio St. 3d at 350 (“This type of
transaction is executed to escape the liabilities of the predecessor corporation. * * * Because the
goal is to escape liability, inadequacy of consideration is one of the indicia of mere
continuation.”).
{¶18} Nonetheless, even though the facts of Pottschmidt fall within the narrow mere
continuation exception stated in Welco, it is evident in this case that the trial court applied the
expanded mere continuation exception in its analysis. In Pottschmidt at ¶31, citing Flaugher, 30
Ohio St. 3d at 64, this Court stated that “[w]hen a buyer and seller share significant features such
as the same employees, a common name, or the same management, the buyer can be construed to
be a mere continuation of the seller.” To the extent that this language implies the adoption by
9
this Court of the expanded mere continuation exception rejected by the Supreme Court in Welco,
we disavow it, and hold that the language has no applicability to the consideration of the mere
continuation exception to successor liability.
{¶19} Thus, in light of the particular facts of the case, we cannot say that the mere
continuation exception applies. Accordingly, Bright Idea’s argument has merit.
III.
{¶20} In light of the foregoing, we sustain Bright Idea’s assignment of error, and reverse
the decision of the Summit County Court of Common Pleas.
Judgment reversed
and cause remanded.
There were reasonable grounds for this appeal.
We order that a special mandate issue out of this Court, directing the Court of Common
Pleas, County of Summit, State of Ohio, to carry this judgment into execution. A certified copy
of this journal entry shall constitute the mandate, pursuant to App.R. 27.
Immediately upon the filing hereof, this document shall constitute the journal entry of
judgment, and it shall be file stamped by the Clerk of the Court of Appeals at which time the
period for review shall begin to run. App.R. 22(E). The Clerk of the Court of Appeals is
instructed to mail a notice of entry of this judgment to the parties and to make a notation of the
mailing in the docket, pursuant to App.R. 30.
Costs taxed to Appellee.
10
EVE V. BELFANCE
FOR THE COURT
WHITMORE, J.
MOORE, J.
CONCUR
APPEARANCES:
JOHN W. MYGRANT and HOWARD E. MENTZER, Attorneys at Law, for Appellant.
MARK W. BERNLOHR and SARAH B. BAKER, Attorneys at Law, for Appellee.