Opinion
Civil No. 02-6222-TC.
July 28, 2004
ORDER
Presently before the court are plaintiff's motion (#77) for partial summary judgment, defendant BikeE's motion (#107) for leave to file a second amended complaint, and defendants' joint motion (#117) for partial summary judgment.
BACKGROUND
At the end of 1999, BikeE Corporation ("BikeE") was experiencing financial turbulance: it was in debt to its factoring company, to Giant Manufacturing Company ("Giant"), to defendant Richard Carone, and to its shareholders. In 2000, however, Carone and defendant John Acres made investments in BikeE that totaled over $2.4 million dollars, helping to shore up the company's financials. In July 2001, Acres and Carone made a substantial, secured loan to BikeE, and BikeE used the proceeds to pay off its factoring company.In late 2001 and in 2002, Acres — as BikeE's president — proposed to the BikeE shareholders that BikeE raise additional capital via the issuance of new Series C stock. Acres and Carone provided BikeE with an additional $900,000 in January 2002, and a further $250,000 in February 2002, both with the intention that they be converted into stock when the new Series C stock issued. However, the Series C stock never issued, possibly because other shareholders expressed less interest in committing additional funds than did Acres and Carone. Although a few other shareholders did send checks to BikeE with the intention that they be used to purchase stock if it was issued, those checks apparently were returned to the shareholders. The money provided by Acres and Carone, however, was utilized by BikeE to sustain operations.
By this time, BikeE had an established manufacturing agreement with Giant that had culminated in the execution of a formal Supplier Agreement in October 2001. The agreement between the parties called for Giant to manufacture and provide bicycles and bicycle components to BikeE, and for BikeE, unsurprisingly, to pay Giant for them. In January and March in 2002, BikeE placed an order for 1490 bicycles from Giant, which were delivered to BikeE in eight shipments between April 15, 2002 and June 26, 2002. There is no allegation that the bicycles were defective.
Pursuant to the Supplier Agreement, payment for each shipment was due 90 days after delivery to the common carrier. Giant delivered the first shipment to the common carrier on April 15, 2002; payment on that shipment was therefore due on July 14, 2002. Giant delivered the second shipment on April 22, 2002; payment on that shipment was due on July 21, 2002. Giant made a written demand for payment on the first and second shipments on July 24, 2002, but no payment was made. Pursuant to the Supplier Agreement, Giant then accelerated the remaining balance, and filed the instant action. In its complaint, Giant brings the following claims: (1) breach of contract and foreclosure of security interest, against BikeE; (2) account stated, against BikeE; (3) goods sold and delivered, against BikeE; (4) quantum meruit, against BikeE; (5) fraudulent conveyance, against BikeE, Acres, and Carone; (6) piercing the corporate veil, against Acres and Carone; and (7) successor liability, against Bigha Development and Bigha Manufacturing. Plaintiff seeks to recover $370,548.76 in principal for the shipment of the bikes, as well as interest, costs, and attorney fees. Plaintiff also seeks a declaration that an alleged conveyance from BikeE to Acres and Carone of approximately $988,200 was fraudulent and therefore void. Plaintiff now seeks summary judgment in its favor on its breach of contract claim against BikeE, and defendants Acres, Carone, Bigha Manufacturing and Bigha Development ("the Bigha defendants") seek summary judgment in their favor on Giant's fraudulent conveyance, piercing the corporate veil, and successor liability claims.
Defendant BikeE has also filed a motion for leave to file an amended answer containing an additional defense and counterclaim. As I stated at the oral argument of these motions, the proposed defense and counterclaim are brought quite late, would require a substantially different set of evidence to prove at trial than the underlying action, and are more properly the subject of an independent action. The motion (#107) to file an amended answer is denied.
STANDARD OF REVIEW
A party is entitled to summary judgment as a matter of law if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact." Fed.R.Civ.P. 56(c);Bahn v. NME Hosp's, Inc., 929 F.2d 1404, 1409 (9th Cir. 1991). The moving party must carry the initial burden of proof. This burden is met through identifying those portions of the record which demonstrate the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986). Once the initial burden is satisfied, the burden shifts to the opponent to demonstrate through the production of probative evidence that there remains an issue of fact to be tried. Id. The facts on which the opponent relies must be admissible at trial, although they need not be presented in admissible form for the purposes of opposing the summary judgment motion. Id.The court must view the evidence in the light most favorable to the nonmoving party. Bell v. Cameron Meadows Land Co., 669 F.2d 1278, 1284 (9th Cir. 1982). All reasonable doubt as to the existence of a genuine issue of fact should be resolved against the moving party. Hector v. Wiens, 533 F.2d 429, 432 (9th Cir. 1976). The inferences drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Valadingham v. Bojorquez, 866 F.2d 1135, 1137 (9th Cir. 1989). Where different ultimate inferences may be drawn, summary judgment is inappropriate. Sankovich v. Insurance Co. Of North America, 638 F.2d 136, 140 (9th Cir. 1981).
Deference to the non-moving party does have some limit. The non-moving party "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e) (emphasis added). Where "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 587 (1986). The "mere existence of a scintilla of evidence in support of the plaintiff's position would be insufficient." Anderson v. Liberty Lobby Inc., 477 U.S. 242, 252 (1986). If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted. Id. at 248. However, trial courts should act with caution in granting summary judgment, and may deny summary judgment "in a case where there is reason to believe that the better course would be to proceed to a full trial." Anderson, 477 U.S. at 255.
DISCUSSION
I. Plaintiff's motion for summary judgment
It is undisputed that BikeE received, and has not yet paid for, the bicycles at issue in the action. BikeE's argument in opposition to Giant's motion for summary judgment on its breach of contract claim is based instead on grounds that the contract is unconscionable and ambiguous, and that Giant has violated its prior course of conduct. However, none of these arguments are convincing.
Counsel for BikeE reiterated at oral argument that the debt remains outstanding.
BikeE's first unconscionability argument stems from section 8(c)(3) of the Supplier Agreement. Section 8 of the Supplier Agreement provides that:
a. BikeE shall pay Giant the net amount stated in Giant's invoice no more than ninety (90) days following delivery of each shipment to the facilities of the common carrier selected by BikeE ("Delivery"). The foregoing does not apply to bicycle components, for which BikeE shall pay Giant the net amount stated in Giant's invoice prior to Delivery.
b. Payment shall be made by wire transfer or certified or cashier's check.
c. Payments not made within 30 days of Delivery shall be subject to interest charges as follows:
(1) payment made within 60 days of Delivery shall be subject to interest of 1.5% of the amount of the invoice;
(2) payment made within 90 days of Delivery shall be subject to interest of 3.5% of the amount of the invoice;
(3) payment made after 90 days of Delivery shall be subject to interest of 3.5% per month of the amount of the invoice.
d. BikeE shall be in default if payment is not made 90 days following delivery of each shipment to the facilities of the common carrier selected by BikeE.
The allegedly objectionable provision, 8(c)(3), calls for an monthly interest assessment of 3.5% on payments made over 90 days after delivery — which computes out to 42% per year, an admittedly high rate of interest. Giant concedes that section 8(c)(3) should be found unenforceable, and that the statutory rate of interest — 9% per year — should be used instead. Given that both parties agree that the provision calling for an interest rate of 42% should not be enforced, the court will not enforce it and will treat it as stricken from the contract. As the contract is then left without an agreed upon interest rate for payments made after 90 days, the rate provided by statute steps in to fill the void. See ORS 82.010(1). The 9% rate so provided is appropriate and cannot be considered unconscionable.
ORS 82.010(1) provides, in relevant part, that: "The rate of interest for the following transactions, if the parties have nor otherwise agreed to a rate of interest, is nine percent per annum and is payable on: (a) All moneys after they become due."
BikeE argues that the parties had an agreed upon rate of interest for open accounts of 1%, based on a prior course of conduct. However, that rate was used before the Supplier Agreement was signed, which became the operative agreement between the parties. As such, the 1% rate the parties had used is inapplicable here.
BikeE also argues that a clause that allows Giant to recover its attorney fees in collecting on BikeE's delinquent accounts is unconscionable. However, as noted by Giant, such clauses are common in commercial contracts, and the legislature has taken steps to ensure that they are not thrust unwillingly upon only one side to an agreement by passing a statute that makes all such clauses reciprocal. See ORS 20.096. Further, it is noted that, although BikeE claims it would not have entered into a contract with this clause but for the unequal bargaining power of the parties, at about the same time as it signed the contract with Giant, BikeE signed a Security Agreement with Acres and Carone, which included just such a clause in favor of Acres and Carone. Neither the fee provision, nor the bargaining power of the parties when they agreed to it, are unconscionable as to make the clause void and unenforceable.
BikeE also contends that the contract is ambiguous as to whether Giant was within its rights to bring this action when it did, and that the ambiguity should be construed against Giant, who drafted the agreement. However, a proper reading of the contract shows no ambiguity that would call into question Giant's rights under it.
The Supplier Agreement allows Giant, in the event of a default by BikeE, to inform BikeE of the default in writing, and, if BikeE does not then cure the default within ten days, to accelerate all amounts remaining unpaid and characterize them as due and payable immediately. Specifically, Section 10(d)(1) of the agreement states:
On the occurrence of any Default Event, and at any later time:
(1) Giant shall notify BikeE in writing of the Default Event, and BikeE will have ten (10) days within which to cure the default. If the default is not cured within that period, Giant may, at Giant's option, declare all amounts remaining unpaid under this Agreement to be immediately due and payable, and Giant may proceed to enforce payment and exercise any and all of the rights and remedies at law or in equity possessed by Giant.
. . .
Such is what occurred here. Although BikeE argues that ambiguity exists because of the separate termination provision of the agreement — which provides for a thirty day cure period — it is clear from the correspondence Giant sent BikeE that it was noticing a ten day cure period pursuant to section 10(d) due to a section 8(d) default. That the agreement contained a separate clause with a different cure period for a notice of Giant's intent to terminate the agreement does not make the agreement, or section 10(d), ambiguous.
Finally, BikeE contends that Giant is estopped from declaring a default event and accelerating the outstanding debt on ten days notice based on the parties' prior course of conduct. However, the course of conduct between the parties that BikeE references occurred prior to the execution of the Supplier Agreement. As such, it cannot be used as a waiver to express provisions of the Supplier Agreement, such as the default or ten day notice provisions. Weyerhaeuser Co. v. First Nat'l Bank, 150 Or. 172, 195, 32 P.2d 38 (1935). Furthermore, the parties specifically agreed in the Supplier Agreement that that agreement would extinguish any prior understandings between the parties. Section 19 of the Supplier Agreement provides that:
This is the entire agreement between BikeE and Giant concerning the subject matter hereof. As of its execution by both parties, it supercedes and extinguishes any other prior oral or written agreements or understandings between them.
As the evidence does not suggest that Giant accepted late payments after the full execution of the agreement, the agreement — not any prior understanding or course of conduct — controls. Giant is not estopped from declaring a default and utilizing the ten day notice provision.
In any event, even were the evidence of one late payment allowed by Giant to be construed as having occurred after the execution of the agreement, the mere acceptance of one late payment does not amount to a waiver of the right to declare a default if subsequent payments are also late. Lent v. Towery, 271 Or. 41, 45, 530 P.2d 77 (1975); see also Section 21 of the agreement.
Because there is no genuine issue of material fact that could allow a reasonable factfinder to find for BikeE on plaintiff's breach of contract claim, summary judgment in favor of Giant is appropriate. The amount due by BikeE to Giant on the claim shall be the total principal balance ($370,548.76) plus interest on each shipment starting 90 days after delivery of the shipment to the common carrier at 9% per annum.
II. The Bigha defendants' motion for summary judgment.
The Bigha defendants seek summary judgment on Giant's three claims asserting that the Bigha defendants are vicariously liable for the above debt of BikeE. These claims assert vicarious liability on the following theories: fraudulent conveyance, piercing the corporate veil, and successor liability.
The main thrust of the Bigha defendants' arguments is that Giant's premise for asserting vicarious liability — that the $1.15 million provided to BikeE by Acres and Carone was intended as a stock purchase and not a secured loan — is incorrect. However, the parties' submissions make it clear that there is a triable issue on that question. Acres and Carone clearly intended the money to be used toward the purchase of stock if such stock was issued. Records of BikeE indicate that, at some point at least, the money was recorded as stock purchases, and that Acres reported a large purchase of BikeE stock on his 2001 federal income tax return. Indeed, there is evidence that the BikeE board of directors authorized the sale of stock and did everything statutorily necessary to issue it. Further, Giant has provided evidence from which a factfinder could determine that in mid-2002, a BikeE employee — under pressure from Acres and Carone — altered the records showing the $1.15 million as stock purchases, converting the funds into secured loans. The employee then allegedly backdated the entries so as to give them the appearance that the intent all along was to treat the funds as loans rather than investments. Finally, a reasonable factfinder could also determine that a few months later, BikeE — under direction from Acres, BikeE's president — transferred $988,200 to Acres and Carone.
Given the above triable issues, defendants' motion cannot be granted as to plaintiff's claims for fraudulent conveyance and piercing the corporate veil.
Giant also contends that defendants Bigha Manufacturing and Bigha Development should be held liable for BikeE's debts as successors in interest.
The Oregon courts have followed the traditional rule regarding successor liability, which is stated in Erickson v. Grand Ronde Lumber Co., 162 Or. 556, 568, 92 P.2d 170 (Or. 1939):
The general rule is that where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. . . . To this general rule there are four recognized exceptions, under which the purchasing corporation becomes liable for the debts and liabilities of the selling corporation. (1) Where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts.
Here, Giant alleges only the third exception to the general rule, i.e., that the Bigha corporations are mere continuations of BikeE.
A successor corporation is merely a continuation of the predecessor corporation, despite a business transformation, if it is substantially the same as the predecessor corporation. Alicki v. Intratec USA, Inc., 769 F. Supp. 336, 340 (D.Or. 1991). As explained by Judge Redden of this court in Estey Assocs., Inc. v. McCulloch Corp., 663 F. Supp. 167, 171 (D.Or. 1986), "The theory of the exception is that if a corporation goes through a mere change of form without substantial change in substance, then it should not be allowed to thereby avoid liability." For something of a test of what constitutes a change of form versus substance, Judge Redden cited to the case of Groover v. West Coast Shipping Co., 479 F. Supp. 950, 951 (S.D.N.Y. 1979), which, citing that court's prior ruling in Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F. Supp. 834, 839 (S.D.N.Y. 1977), stated: "`A continuation envisions a common identify [sic] of directors, stockholders and the existence of only one corporation at the completion of the transfer. What is accomplished is something in the nature of a corporate reorganization, rather than a mere sale.'"
A reasonable factfinder could determine that the Bigha corporations are mere continuations of BikeE. Although much of it is disputed by defendants, Giant has provided evidence from which a jury could conclude that the Bigha corporations (a) purchased all or nearly all of BikeE's assets; (b) have substantially common shareholders with BikeE; (c) have substantially identical officers and directors with BikeE; (d) have substantially identical management with BikeE; (e) have substantially common employees; and that (f) BikeE substantially ceased operations shortly after the Bigha corporations completed the purchase of BikeE assets and the BikeE shareholders, management, and employees moved over to the Bigha corporations. If a jury so concluded, it could fairly find that the Bigha corporations are "mere continuations" of BikeE subject to successor liability. As such, defendants' motion for summary judgment on that claim must be denied.
Although BikeE had numerous shareholders, Acres — who now owns almost all the shares of Bigha Manufacturing — owned the vast majority of shares, and Carone — who now owns all the shares of Bigha Development — owned numerous shares of BikeE stock before selling them to Acres, and purchased additional stock (or floated BikeE a substantial loan) subsequent to that sale.
A jury could find that Acres and Carone were both directors of BikeE and resigned from BikeE a few days after accepting positions as directors of the Bigha corporations. A jury could also find that Acres was the president of BikeE until he resigned a few days after accepting the positions of president and secretary of the Bigha corporations.
In addition to Acres' position as president, a jury could find that Robert Brown — named president of BikeE after Acres' resignation — provided financial management services to BikeE and upon formation of the Bigha corporations provided similar support to them. Likewise, BikeE's purchasing coordinator, Melanie Moe, provides similar services to the Bigha corporations as she did to BikeE.
Shortly after the Bigha corporations were formed and BikeE essentially ceased operations, 12 out of the 18 employees working for the Bigha corporations were former BikeE employees.
Defendants' argument that to successfully assert the mere continuation theory plaintiff must prove that there was inadequate consideration provided for the purchase of BikeE's assets is not well taken. The only courts to have considered the issue in Oregon — the Estey and Alicki courts — did not mention a requirement of inadequate consideration, and the cases cited by defendants for that proposition all arose in other jurisdictions.
CONCLUSION
For the above stated reasons, plaintiff's motion (#77) for summary judgment on its breach of contract claim is granted. Defendants' motions for leave (#107) and for summary judgment (#117) are denied.