Opinion
CIVIL ACTION NO. 3:02CV-45-H
February 11, 2004
MEMORANDUM OPINION
Defendants, GenTec Equipment Company ("GenTec"), Internetek, Inc. ("Internetek"), GenTec Group Intellectual Property Corp. ("GGIPC"), Hotmix Asphalt Equipment Co. ("Hotmix"), ContractorsHeaven.Com, Inc. ("ContractorsHeaven"), Michael R. Mercer ("Mercer"), Leonard A. Loesch ("Loesch"), and Industrial Process Systems, Inc. ("Industrial") and Plaintiffs Dixstar, Inc. ("Dixstar") and Terry J. Kocher ("Kocher") have submitted cross-motions for summary judgment on the issues of successor liability, fraudulent conveyance, and piercing the corporate veil. The successor liability claim was specifically brought against Defendants Hotmix, ContractorsHeaven, Internetek, and Industrial.
Plaintiffs argue that the sale by Bank One to Defendant ContractorsHeaven as well as the disbursement of assets from ContractorsHeaven to Hotmix and Industrial were fraudulent and therefore fall into the fourth exception of successor liability. Plaintiffs, however, have produced no facts that tend to show fraud. The same is true for Plaintiffs' argument in support of piercing the corporate veil against Defendant Loesch. Plaintiffs' motions for summary judgment on these grounds must therefore be denied and the Defendants' motions sustained.
As befits the difficulty of this issue, the Court's decision-making process has been extensive. The parties exchanged initial summary judgment memoranda. The Court held a hearing in chambers on August 27, 2003 and invited the parties to file supplemental memoranda on whether the court-ordered sale decided the issue of successor liability. Contrary to its initially expressed belief, the Court has ultimately concluded ( see infra Part II.B) that a court-ordered foreclosure did not bar successor liability as a matter of law. On October 16, 2003, the Court held another hearing in chambers to discuss the specific issue of successor liability and invited the parties once again to file memoranda and to supplement the record regarding that question, particularly with respect to consideration.
Whether Plaintiffs may rely upon the theory of successor liability to enforce their earlier judgments from state court is the only issue remaining before the Court. This is a most difficult issue because few Kentucky cases discuss the doctrine in depth, few other cases provide comprehensive analysis, and the facts at issue here point in several directions. One can be distracted into thinking the issue is similar to fraudulent conveyance or piercing the corporate veil. While the consequence of its application may produce some similar results, it is conceptually distinct. The parties have agreed that the Court must now decide the legal question remaining upon the facts submitted to the Court.
The Court has carefully considered the arguments of both parties and concludes that Plaintiffs have not offered facts that meet the mere continuation exception under the prohibition against successor liability.
I.
The facts giving rise to this dispute are complex and lengthy. Beginning in 1994, GenTec pledged virtually all of its assets to Bank One as security for various loans. In November 1998, GenTec was indebted to Bank One on a revolver loan ($6.5 million) and a term loan ($3.5 million). The revolver loan was secured by a first priority security interest, in favor of Bank One, in all of GenTec's inventory, chattel paper, accounts, equipment, general intangibles, and all proceeds thereof.
In February 1999, the revolver loan was increased from $6.5 million to $9 million, and a second term loan was entered into for an additional $1.5 million. All of these obligations were secured by the assets of GenTec as the primary debtor.
On November 18, 1998, Dixstar sold its assets to First Thermal Systems, Inc. ("FTS") for $410,000 in cash and a $250,000 promissory note, which was guaranteed by GenTec. FTS also granted Dixstar a security interest in certain of Dixstar's assets sold to FTS. Simultaneously, Kocher and FTS entered into a consulting agreement under which Kocher received $750,000 over time. For this obligation, FTS issued a promissory note, guaranteed by GenTec and by a security interest in certain assets previously belonging to Dixstar.
In January 1999, Defendant Loesch acquired the entire ownership of GenTec as a result of a stock redemption. In mid — 1999, GenTec began diversifying its operations by forming several new companies. GGIPC was initially formed with the goal of diversification in mind, the concept being to separate various aspects of the asphalt plant and process equipment businesses of Gen Tec and its affiliates into distinct operations. In May 1999, Defendant Mercer incorporated Industrial, and in August, both Mercer and Loesch together formed three new companies: Hotmix, Contractors Marketplace (which subsequently became ContractorsHeaven), and Internetek. Loesch became the sole shareholder of all four companies. Soon thereafter, in the fall of 1999, GenTec and its affiliates began transferring assets to the newly formed companies and transferred more assets in late 2000, all of which included, among other things, real property, machinery, inventory, and intellectual property. GenTec continued to operate as a going concern.
GenTec was originally owned by four principals: Carl Henlein, E.J. Golightly, Charles Grote, and Leonard Loesch. Loesch bought out Henlein in 1996 and Golightly in 1997. He acquired Grote's shares in January 1999.
Diversification was suggested by private counsel when GenTec became concerned about its potential liability for $17 million in actual damages arising out of a series of fires beginning in 1997. The fires involved industrial drying machinery, which GenTec had sold to certain Canadian companies. GenTec's goal in seeking legal advice was to reduce the risk of liability.
On October 4, 2000, having assumed the previous debts of FTS and subsequently Louisville Dryer Company to Plaintiffs, GenTec defaulted on its note payments to both Dixstar and Kocher. Since FTS and Louisville Dryer Company no longer existed by this point, GenTec was left as the sole debtor on all of the notes it guaranteed to Dixstar and Kocher. On October 12, 2000, Dixstar and Kocher filed suit in Tennessee state court against GenTec to recover on their promissory notes. On November 9, 2000, Bank One filed suit in Jefferson County Circuit Court against GenTec and some of its affiliates, seeking payment on the loans it had extended to GenTec. This action was initially filed against GenTec, as the primary debtor, against Stansteel, CPI, and Louisville Dryer Company, as guarantors of GenTec's debt, and against ContractorsHeaven, in order to collect its indebtedness to GenTec, for obligations totaling almost $13.5 million. By amendment, Bank One later brought claims against ContractorsHeaven, Hotmix, GGIPC, Internetek, Industrial, Loesch, and Mercer, as well as GenTec. The Jefferson County Circuit Court appointed a receiver on December 8, 2000 for GenTec, Stansteel, CPI, and Louisville Dryer Company. By this time, GenTec had transferred a good portion of its assets, largely in the asphalt replacement parts business, to the four new companies. The receiver shut down GenTec and its affiliates as operating concerns, which reduced the value of GenTec's remaining assets considerably.
This action was styledBank One, Kentucky, N.A. v. GenTec Equipment Co., No. 00-CI-07263.
On January 10, 2001, Dixstar obtained a judgment of $310,224.51 plus interest against GenTec in Tennessee state court. On the same day, Kocher obtained a judgment of $950,145.12 plus interest. In March 2001, the Plaintiffs moved to intervene in the Bank One state court action in order to enforce their Tennessee state court judgments against GenTec. The Jefferson County Circuit Court granted their motions to intervene. Plaintiffs filed pleadings against Bank One and GenTec, but the Court never granted Plaintiffs' motion for leave to amend their complaint to add cross-claims against the new companies.
Instead, on October 18, 2001, the Circuit Court entered an Order Authorizing Sale of Collateral. The order established that GenTec was indebted to Bank One for a total amount over $13 million and that Bank One held a first priority, perfected security interest in virtually all of the assets of the corporate defendants. The order also stated that Bank One's security interest was prior and superior to any and all claims, liens, and interests of Dixstar and Kocher on the assets. The assets were to be sold free and clear of all claims and liens, with the purchaser to take title free and clear of the claims, liens, and encumbrances of Dixstar and Kocher. The court also required the four new companies, which had acquired GenTec's assets, to transfer these assets back to GenTec.
On November 29, 2001, Bank One acquired the assets at a public auction for $1 million. On December 3, 2001, ContractorsHeaven bought those assets from Bank One for $1 million. ContractorsHeaven then redistributed the assets back among the new companies that had acquired the assets from GenTec prior to the Bank One litigation.
Plaintiffs argue that, despite these transactions and the court-ordered judicial sale, Defendants Hormix, ContractorsHeaven, Internetek, and Industrial should be liable for GenTec's debts under the theory of successor liability. Plaintiffs argue that Defendants fit under the "mere continuation" exception to the successor liability rule and should therefore be liable just as GenTec would be if it was still a solvent, working corporation.
II.
Kentucky generally prohibits successor liability. Long ago, the state's highest court established that "a purchaser, in the absence of a contract obligation, cannot be held for the debts and liabilities of the selling corporation." Am. Ry. Express Co. v. Commonwealth, 228 S.W. 433, 441 (Ky. 1920). This policy is intended to protect creditors, dissenting shareholders, and to facilitate determination of tax responsibilities while promoting the free alienability of business assets in the corporate contractual world. Gfynwed, Inc. v. Plastimatic, Inc., 869 F. Supp. 265, 271 (D.N.J. 1994) (quoting Polius v. Clark Equip. Co., 802 F.2d 75, 78 (3d Cir. 1986)). Kentucky has four exceptions to the rule that prohibits passing on the selling corporation's debts to the buying corporation: (1) where the buyer expressly or impliedly agrees to assume the seller's debts, (2) where the transaction amounts to a consolidation or merger between the buyer and seller, (3) where the buyer is merely a continuation of the seller, or (4) where the transaction is entered into fraudulently in order to escape liability for the seller's debts. Conn v. Fales Div. of Mathewson Corp., 835 F.2d 145, 146 (6th Cir. 1987). Here, Plaintiffs assert the mere continuation exception. This means that, if a new corporation is in major respects merely a continuation of the debtor (i.e., same company under a "new hat"), the new corporation will be responsible for the debts of its predecessor under the theory of successor liability.A.
The cases discussing this doctrine have evaluated several common elements in determining whether the "mere continuation" exception applies: (1) continuity of shareholders and ownership, management, personnel, physical location, and business operations, (2) whether sufficient consideration was given, particularly whether stock was given in exchange, (3) whether the predecessor ceased business operations and was dissolved shortly after the new company was formed, (4) whether the successor company paid any outstanding debts on behalf of the previous company in order to continue business without interruption, (5) the buyer's intent or purpose when the new company was formed, and (6) whether the successor held itself out to the public as a continuation of the previous company. See Conn, 835 F.2d at 147; Westlake Monomers Corp. v. Cont'l Boiler Works, Inc., No. 93-0167-P(J), slip op. at 6, 8 (W.D. Ky. Aug. 9, 1995) (unpublished opinion); Glynwed, Inc., 869 F. Supp. at 275-77; United States v. Distler, 741 F. Supp. 637, 643 (W.D. Ky. 1990), declined to follow on other grounds, City Mgmt. Corp. v. United States Chem. Co., 43 F.3d 244, 252 n. 12 (6th Cir. 1994); Pearson v. Nat'l Feeding Sys., Inc., 90 S.W.3d 46, 51 (Ky. 2002); Am. Ry. Express Co., 228 S.W. at 441; see also Kaiser Found. Health Plan of the Mid-Atlantic States v. Clary Moore, P.C., 123 F.3d 201, 205 (4th Cir. 1997); Luxliner P.L. Exp. Co. v. RDI/Luxliner, Inc., 13 F.3d 69, 73 (3d Cir. 1993); Stoumbos v. Kilimnik, 988 F.2d 949, 962 (9th Cir. 1993). The court balances all of these factors. All of the elements need not be present for the mere continuation exception to apply. Luxliner P.L. Exp. Co., 13 F.3d at 73; see also Gtynwed, Inc., 869 F. Supp. at 276 (quoting Luxliner P.L. Exp. Co.). The difficulty with considering all of these factors is that courts weigh the factors differently depending on the case and do not always offer much guidance on which issues are the most important under the exception.B.
Defendants say that they cannot be held liable under any of the successor liability exceptions because Bank One intervened as a third party in the court-ordered judicial sale. According to Defendants, the new companies cannot be considered successor corporations because Bank One, a third party, actually acquired the assets directly from GenTec and then ContractorsHeaven subsequently bought the assets from Bank One and redistributed them among the other new companies. Initially, the Court was persuaded by this argument.
The concepts in a judicial sale, however, are different than those under successor liability. The latter is concerned with former debts of the selling corporation, not the selling corporation's former assets. Upon closer consideration, the Court must conclude that the absence of a direct transfer between Defendants and GenTec is not dispositive. Substance must be elevated over form in these successor liability cases because "[o]therwise, unscrupulous businesspersons would be able to avoid successor liability and cheat creditors merely by changing the form of the transfer." Stoumbos, 988 F.2d at 961; see also Fiber-Lite Corp. v. Molded Acoustical Prods. of Easton, Inc., 186 B.R. 603, 610 (E.D. Penn. 1994).
Various courts have discussed the applicability of successor liability where there was a third-party sale or transfer between the selling corporation and the purchasing corporation. In Glynwed, the court held that the general policy reasons for applying successor liability were relevant despite the assets being acquired in a foreclosure sale. Additionally, the court found no common law rule, nor authority from any jurisdiction, to support the claim that such a transferee corporation would not be liable for the transferor's debts when an appropriate exception would otherwise apply. 869 F. Supp. at 272. Judge Johnstone of the Western District of Kentucky used a similar analysis in an unpublished opinion in Westlake Monomers Corp. v. Continental Boiler Works, Inc., No. 93-0167-P(J), slip op. at 5-6. He found that a sale/transfer of assets from a third party, namely a bank in a foreclosure sale, did not preclude successor liability under the mere continuation exception. Id. at 6. He stated that:
Even though the purchase had not been direct, the Conn Court analyzed successor liability under the general rule for successor liability and its exceptions. The Sixth Circuit, applying Kentucky law, did not hold that the general rule was inapplicable. Rather, whether the transfer had been direct was utilized simply as a factor in determining successor liability. Thus, Kentucky has not limited successor liability to direct transfers.Id. Judge Johnstone also cited the Ninth Circuit's opinion in Stoumbos for the similar approach that the appellate court took: "The mere fact that the transfer of assets involved foreclosure on a security interest will not insulate a successor corporation from liability where other facts point to continuation." 988 F.2d at 962.
This Court can find no reported federal or Kentucky cases that discuss whether an intermediate sale precludes successor liability. Rather, the cases appear to assume that an intermediate sale does not preclude successor liability. Where the assets of the debtor transfer to a successor corporation in an indirect manner, it may well suggest more complicated circumstances than mere continuation. The Court will apply these circumstances as part of its analysis of the mere continuation exception in the next section.
III.
The Court now evaluates whether Defendants meet the mere continuation exception to the prohibition against successor liability. On balance, the Court concludes that they have not.
The purpose of the "mere continuation" exception is to prevent companies from changing their appearance in form, but not in substance, to avoid fulfilling obligations to creditors. See Bud Antle, Inc., 758 F.2d at 1458; Balt. Luggage Co. v. Holtzman, 562 A.2d 1286, 1293 (Md. Ct. Spec. App. 1989). Typically, a successor corporation that inherits its predecessor's debts is one where "the purchasing corporation is merely a `new hat' for the seller." Bud Antle, Inc., 758 F.2d at 1458. The new company has the same management, owners, and employees, uses the same facilities, conducts the same business, and assumes control of the customer base. At the same time, the former company is wrapped up and dissolved within a short period of time with the intent that the new company will take over. The transfer of assets to the new company is not conducted at arm's length, and the parties exchange inadequate consideration. While a key factor in showing mere continuation is similarity of management and ownership, the analysis does not end there. If it did, then the exception would effectively swallow the rule. A court must consider the broader circumstances surrounding the transfer of assets to evaluate whether the mere continuation exception applies. See Balt. Luggage Co., 562 A.2d at 1293 ("To find that continuity exists merely because there was common management and ownership without considering other factors is to disregard the separate identities of the corporation without the necessary considerations that justify such an action.") (quoting 15 W. Fletcher, Cyclopedia of the Law of Private Corporations § 7122 (Cum. Supp. 1988)) (internal quotation marks omitted).
The Court must weigh the evidence that tends to show a mere continuation of GenTec's operations as well as evidence demonstrating otherwise.
A.
The Court begins with the facts that favor Plaintiffs. Plaintiffs have shown significant similarity of ownership, management, personnel, and use of facilities. Defendant Leonard Loesch became sole shareholder of GenTec in January 1999 and has also had a controlling interest in all of the GenTec affiliates (Louisville Dryer Company, FTS, Custom Products, Inc. ("CPI"), CPI Acquisition Corp, Stansteel, and GGIPC). As of March 1999, Loesch was also one of three directors of GenTec as well as its President. He has held these positions since that time and later became GenTec's sole director. In addition, since 1999, he has been an officer and/or director of many of GenTec's affiliates. Since 1999, Defendant Michael Mercer has been Secretary and Treasurer of GenTec and each of its affiliates. Mercer was also a director of GenTec in 1999 and 2000 and of CPI and Stansteel in 2000. After Loesch and Mercer formed Hotmix, ContractorsHeaven, Internetek, and Industrial as corporate repositories for GenTec's assets in 1999, Loesch became the sole shareholder and a director of all four companies (sole director for Hotmix, Internetek, and Industrial), President of Hotmix, ContractorsHeaven, and Internetek, and Vice President of Industrial. Mercer became the first Secretary and Treasurer of all four companies in 1999. After the judicial sale in November 2001, Loesch remained the sole shareholder and director of GenTec and all four new companies. He was President of GenTec, ContractorsHeaven, and Internetek and Vice President of Industrial. Mercer was Secretary and Treasurer of GenTec, ContractorsHeaven, and Internetek and President and Secretary and Treasurer of Hotmix and Industrial. Ownership and management remained essentially with Loesch and Mercer even after GenTec's assets were transferred to the four new companies in 1999 and after the judicial sale in 2001 — a fact that Defendants do not dispute. Thus, the ownership and management of the four new companies are very similar to GenTec and its affiliates.
As to personnel and business operations, after GenTec transferred its assets to the four new companies, 105 of 133 employees of the new companies in 2000 and 93 out of 144 in 2001 came from GenTec or one of its affiliates. GenTec and its affiliates, however, retained a substantial number of their employees in other areas of the business aside from the parts business, which had been transferred to the new companies. After the judicial sale, ContractorsHeaven also hired a large number of employees from GenTec and its affiliates to work in the asphalt parts business. As to physical plants, although the new companies operate with four fewer facilities than GenTec and its affiliates, they occupy the same four remaining Louisville facilities that GenTec and its affiliates used. The use of a large number of the same employees and facilities suggests a continuation of GenTec's business. Cf. Conn, 835 F.2d at 147 (transfer of only one employee between buying and selling corporations does not show continuation).
Three out-of-state plants were closed, and a Louisville facility was sold.
Lastly, there is evidence that Internetek and Hotmix conducted business under the names of former GenTec affiliates. Defendant Mercer's affidavit attests to the fact that, in November 2000, Internetek began offering on-site maintenance services to rotary process equipment owners under the Industrial Kiln Dryer ("IKD") name. In addition, in December 2000, Hotmix began selling new and used hotmix asphalt plant equipment, rotary process equipment, and thermal fluid heaters under former affiliate names Stansteel, Louisville Dryer Company, and FTS. Conducting business under the names of former GenTec affiliates shows that Internetek and Hotmix were holding themselves out to the public as continuation of some of GenTec's former affiliates. All this evidence suggests that the new companies were continuations of GenTec.
IKD merged into CPI in December 1999.
B.
A lot of the other evidence presents a more complex picture. Much of what happened as GenTec transferred assets and functions to various other companies is contrary to the classic model of successor liability. Ultimately, the Court finds the weight of this evidence to be persuasive.
1.
GenTec continued operations for almost a year following the formation of the new companies. Moreover, GenTec operations were not dissolved voluntarily. These facts are directly contrary to the concept of successor liability.After the transfers, GenTec continued to manufacture and distribute new asphalt plant equipment and to refurbish used asphalt plant equipment, and it kept its non-parts business employees and all of its customers. Plaintiffs have not offered any evidence that GenTec was merely a shell of its former self — meaning it maintained nothing of its former identity — after it transferred different aspects of the parts business to the four new companies. On the contrary, until it was effectively, and involuntarily, dissolved by the receiver in late 2000, GenTec continued to run a separate business apart from the operations of the four new companies.
After Plaintiffs and Bank One filed suit against GenTec in October and November 2000, a receiver was appointed in December 2000 to handle the settlement of financial debts on behalf of GenTec, CPI, and Stansteel. The receiver shut down GenTec and its affiliates as operating concerns, reducing the value of the companies' assets. If GenTec was a shell at the time of the judicial sale in late 2001, it was not because its owners left GenTec as only a shell. In fact, it appears that the receiver caused the dissolution. In addition, Stansteel and GGIPC were likewise involuntarily shut down. Stansteel was administratively dissolved by the Texas Secretary of State in 2001, and GGIPC was administratively dissolved by the Kentucky Secretary of State in 2001.
2.
The evidence shows that GenTec's business and the business of the four new companies were distinct business operations in many respects.
Before the transfers, GenTec manufactured and distributed new and used asphalt plant equipment and replacement parts. Stansteel also manufactured and distributed asphalt plant equipment and replacement parts. Louisville Dryer Company manufactured rotary process equipment and provided related maintenance services until it merged with GenTec in August 2000. CPI was an engineering and marketing company under the name Louisville Drying Machinery and provided on-site maintenance services for rotary process equipment under the IKD name after it merged with IKD in December 1999. FTS manufactured and distributed thermal fluid heaters for industrial use before merging with the Louisville Dryer Company in March 2000.
When GenTec transferred its assets to the four new companies in 1999 and 2000, it basically transferred just its replacement parts business and some related services. ContractorsHeaven received the lion's share of the asset transfers and therefore the largest portion of GenTec's business. With the exception of GenTec property transferred to Hotmix, Internetek and Hotmix generally received smaller amounts of assets, largely consisting of a few work-in-process contracts, machinery, and manufacturing and office equipment. GenTec transferred the rotary process and asphalt replacement parts business in GenTec, Stansteel, and Louisville Dryer Company to ContractorsHeaven, including machinery, equipment, new inventory, and work in process. In addition to providing administrative services to GenTec and its affiliates, Internetek provides on-site maintenance services to rotary process equipment owners under the IKD trade name and appears to have inherited business from CPI. Hotmix manufactures and distributes new and used rotary process equipment, hotmix asphalt plant equipment, and thermal fluid heaters. GenTec transferred work in process, machinery, and equipment to Hotmix, and Hotmix appears to have inherited business from FTS and Louisville Dryer Company, which later merged into GenTec. Industrial appears to have followed in the footsteps of GGIPC as a real estate and intellectual property management corporation. The parts business that was transferred was only a small portion of GenTec's total annual revenue, only 23% of GenTec's total sales for 1999 according to Defendants' calculations.
ContractorsHeaven received three major transfers from GenTec or one of its affiliates on November 30, 1999: (1) GenTec transferred its parts business assets to ContractorsHeaven for $123,750 in cash and a ten-year unsecured promissory note for $701,250; (2) Louisville Dryer Company transferred its parts business assets to Contractors Heaven for $45,000 cash and a ten-year unsecured promissory note for $255,000; and (3) Stansteel transferred its parts replacement and service business assets to ContractorsHeaven for $11,250 in cash and a ten-year unsecured promissory note for $63,750.
In November 2000, GenTec made several more transfers of assets to ContractorsHeaven: (1) GenTec shipped new inventory worth $250,581; (2) GenTec and Stansteel transferred a total of three work-in-process contracts in three separate transactions (the Court notes that two of the agreements transferring work in process to ContractorsHeaven were for the same purchase orders for the same customer); (3) GenTec transferred machinery and equipment for $130,100; and (4) GenTec transferred telephone system equipment for $5,000 and a copier for $2,500.
On October 25, 1999, GenTec transferred thirty-seven pieces of office furniture and computer equipment to Internetek for $47,830. In November 2000, CPI transferred machinery to Internetek for $60,000, and GenTec transferred to Internetek telephone system equipment for $5,000 and office equipment for $7,963.
In November 2000, Hotmix received from GenTec five work-in-process contracts, telephone system equipment for $3,600, and machinery and equipment for $124,350. On two occasions, Hotmix accepted assets from GGIPC and GenTec in exchange for assuming the company's debt: (1) on September 30, 1999, GGIPC transferred two trademarks to Hotmix in exchange for Hotmix assuming GGIPC's debts to CPI for GGIPC's purchase of intellectual property on June 26, 1998; and (2) on August 4, 2000, GenTec transferred its property at 1100 Industrial Boulevard for $2,059,999.66 (the remaining mortgage balance on the property), which consisted of GenTec's debt to Charles Grote for Loesch's purchase of Grote's shares of stock in GenTec.
3.
The Court does not find strong evidence that the assets were exchanged for less than adequate consideration in the 1999-2000 transactions or in the transactions during and after the judicial sale in November 2001.Unlike the transaction in American Railway Express, no stock was exchanged as consideration in the 1999-2000 asset transfers. 228 S.W. at 440 (use of stocks as only consideration is not sufficient to show bona fide transaction). Purchasing companies paid the sellers with cash or promissory notes or, in a couple of instances, agreed to assume debt on behalf of the seller as payment. All of these are acceptable forms of consideration. See, e.g., Balt. Luggage Co., 562 A.2d at 1294. In addition, Plaintiffs have not shown that any of the assets transferred were not given fair value. In fact, Contractors Heaven seems to have paid fair value for the parts business it acquired from GenTec. Defendants used the same valuation method to estimate the worth of Gen Tec's parts business — earnings before taxes with a multiplier of three — that was used to estimate the value of Plaintiffs' assets purchased by FTS. Plaintiffs do not dispute the valuation method used and offer no evidence that fair value for the parts business was calculated inaccurately. The same is true for the method of valuation used for the parts business transferred by Stansteel. Through a series of offsets of accounts receivable and accounts payable, Contractors Heaven paid off the promissory notes it owed to GenTec and some of its affiliates for the parts business purchased from GenTec, Stansteel, and Louisville Dryer Company.
In exchange for trademarks purchased from GGIPC in September 1999, Hotmix agreed to assume GGIPC's debt to CPI for trademarks purchased by GGIPC in June 1998. Later, Hotmix agreed to assume GenTec's debt to Charles Grote as payment for property on Industrial Boulevard bought by Hotmix in August 2000. See supra note 14.
See supra note 13.
The Court cannot find evidence of any promissory notes issued by ContractorsHeaven for any other purposes or by Hotmix and Internetek in November 2000 for the sale of machinery and equipment. The agreements for these other transactions do not show that any promissory notes were issued by the buyers to GenTec or CPI. In fact, from the evidence presented, it appears that, through the same series of offsets used to pay the promissory notes owed by ContractorsHeaven, the new companies paid GenTec and CPI for the machinery, equipment, and inventory purchased by ContractorsHeaven, Internetek, and Hotmix in October 1999 and November 2000. The offsets used to pay for the assets transferred to the new companies from GenTec and its affiliates seem accurately calculated. Admittedly, these transactions are confusing enough that one could draw a variety of inferences. But the Court simply cannot find persuasive evidence of inadequate consideration.
See supra notes 13-14.
The same is true for the transactions completed during and after the judicial sale in November 2001, namely the purchase by Bank One of GenTec's assets and the repurchase by ContractorsHeaven of the same. Again, no stock was exchanged in these transactions. Assets that had been previously transferred to the new companies in 1999-2000 were returned to GenTec and then sold to Bank One for $1 million in a court-ordered public sale. This was not a sham transaction. The sale was not structured in any way to exclude other bidders. In fact, Plaintiffs appear to have consented to the sale and chosen not to bid at the sale. After the sale, Bank One then sold the assets purchased from GenTec to ContractorsHeaven for $1 million. By this time, the court — appointed receiver had shut down GenTec as an operating concern in late 2000, and GenTec's assets were of comparatively little value. Thus, at the time of the sale, Bank One negotiated a settlement with ContractorsHeaven to obtain new cash and receive some payment for its loans to GenTec — a settlement, which, the Court notes, was contingent upon Bank One submitting the winning bid at the sale. In short, the Court finds no evidence that the sale of GenTec's assets to Bank One and then the sale from Bank One to ContractorsHeaven were not conducted at arm's length.
4.
Plaintiffs do not show that the new companies were formed for the sole purpose of taking over GenTec's business and avoiding debt obligations to Plaintiffs. See Westlake Monomers Corp., No. 93-0167-P(J), slip op. at 6-7 (quoting Am. Ry. Express Co., 228 S.W. at 441).
There is a fine line to draw between "risk management," which Defendants cite as their purpose in forming the new companies, and avoiding debt obligations. The Court, however, finds that diversifying assets into the four new companies is not the same as establishing them for the specific purpose of taking over GenTec's operations completely. That GenTec continued its asphalt plant business after forming the four new companies and transferring some of its assets to them is strong evidence of this. Plaintiffs cite no cases stating that redistributing assets to protect company holdings in the event of an adverse judgment is impermissible. GenTec also defaulted on its debts to Plaintiffs in 2000, after GenTec transferred the bulk of its parts business assets to the new companies in November 1999, which is evidence that GenTec was motivated by real concerns about a potential adverse judgment in the products liability actions in Canada rather than avoiding payments to Plaintiffs.
See supra note 4.
In addition, ContractorsHeaven did not hold itself out to the public as a continuation of GenTec's parts business, which belonged to GenTec, Louisville Dryer Company, and Stansteel. See Westlake Monomers Corp., No. 93-0167-P(J), slip op. at 7-8 (considering outward appearance to public as factor); Glynwed, Inc., 869 F. Supp. at 277 (same); see also Distler, 741 F. Supp. at 643 (citing as factor "whether the successor holds itself out to the public as the continuation of the previous corporation"). In Glynwed, the court held that the new company was in fact the successor to the previous company in part because the successor company "held itself out to the world `as the effective continuation of the seller.' " 869 F. Supp. at 277. Here, while Defendant Mercer's affidavit does suggest that Internetek and Hotmix have operated under the names of former GenTec affiliates, his affidavit does not suggest that ContractorsHeaven has done the same nor have Plaintiffs presented any similar evidence.
5.
Finally, the intervention of the Bank One foreclosure sale emphasizes the overall point that the new companies were not created merely to take the place of GenTec and its affiliates. While the judicial sale does not preclude Plaintiffs from pursuing their case, it is certainly a factor in deciding whether the mere continuation exception applies. During the 2001 judicial sale, GenTec regained all of its former assets by court order; Bank One bought them; and then ContractorsHeaven repurchased them. Several transactions intervened here and disrupted any kind of mere continuity typically associated with successor liability when GenTec transferred its parts business to the four new companies. The new companies regained GenTec's assets only because ContractorsHeaven repurchased them from Bank One as part of a settlement, which was agreed upon only if Bank One submitted the winning bid at the judicial sale. These intervening acts suggest that the new companies are not mere continuations of GenTec.
C.
The concepts of successor liability and its exceptions are not easy to apply. Overall, the Court finds that the facts weigh quite distinctly in Defendants' favor. The facts that the Court finds most dispositive are the continuation of GenTec's operations following the asset transfers, the difference in the nature of GenTec's operations and those of the new companies, the lack of evidence that inadequate consideration was exchanged, and the several intervening transfers of assets back and forth before, during, and after the judicial sale. For these reasons, the Court concludes that the totality of the circumstances does not suggest that the new companies were mere continuations of GenTec and its affiliates. Defendants therefore cannot be held liable for GenTec's debts to Plaintiffs as successor corporations.
The Court will enter an order consistent with this Memorandum Opinion.
ORDER
Plaintiffs and Defendants have submitted numerous dispositive motions. Being otherwise sufficiently advised,IT IS HEREBY ORDERED that Defendants' motions for summary judgment on the issues of fraudulent conveyance, piercing the corporate veil, and successor liability are SUSTAINED; all Plaintiffs' motions for summary judgment on these issues are DENIED and these claims are DISMISSED WITH PREJUDICE.
This is a final and appealable order.