Opinion
No. CV 05 400 53 35
June 1, 2006
MEMORANDUM OF DECISION
The issue before this court is whether the defendant corporation, Waterview of Bridgeport Association, Inc., should be held liable as successor for debts incurred by Seabreeze Condominium Association, Inc.
Seabreeze Condominium Association was created through a Declaration of Condominium which was recorded with the Bridgeport Town Clerk in May of 1981. (Exhibit [hereinafter "Ex."], 1). The Declaration stated that the "Association" is the corporation known as "Seabreeze Condominium Association, Inc." Beginning on January 13, 1998, the plaintiff provided gas service to Seabreeze Condominium Association, Inc., which eventually accrued an outstanding balance of $13,985.20. (Transcript [hereinafter "T.R."], 18).
In November of 2001, William Chanaca, President of Seabreeze Condominium Association, Inc., filed a voluntary bankruptcy petition in the United States Bankruptcy Court, District of Connecticut. (Ex., 4.) The bankruptcy schedule listed the plaintiff as an unsecured creditor with an amount owed of $12,000. The plaintiff continued to provide gas service to Seabreeze Condominium Association, Inc. after the bankruptcy was filed, and an additional outstanding balance of $1,069.24 accrued. (T.R., 18.)
On May 16, 2003 the defendant corporation was formed through the filing of a Certificate of Incorporation with the Secretary of State of Connecticut. (Ex. 6.) One month later Jacob Bernat, President of Waterview, filed a Notice of Amendment with regard to the Declaration of Seabreeze Condominium. (Ex. 3.) The amendment substituted "Waterview of Bridgeport Association, Inc." for "Seabreeze Condominium Association, Inc." The plaintiff now claims that under the doctrine of successor liability, the defendant is liable for $15,054.44 which constitutes the outstanding balance on Seabreeze Association's account, due to the fact that this amount was not discharged in bankruptcy. "Under the general rule, a corporation which purchases all the assets of another company does not become liable for the debts and liabilities of its predecessor unless (1) the purchase agreement expressly or impliedly so provides; (2) there was a merger or consolidation of the two firms; (3) the purchaser is a "mere continuation" of the seller, or (4) the transaction is entered into fraudulently for the purpose of escaping liability." Ricciardello v. J.W. Grant Co., 717, F.Sup.56, 57-58 (D.Conn. 1989). Another exception to the general rule is the "product line" exception, which states that where the successor corporation holds itself out as being the same name or product, operation and sale, thereby receiving the benefit of past goodwill, it should likewise bear the burden of past operation. Lynch v. Infinity Outdoor, Inc., 2003 WL 21213708 (Conn.Super. 2003).
In the case at bar, the plaintiff argues that the doctrine of successor liability should apply for two reasons. First, Waterview Association was a "mere continuation" of Seabreeze Association. Second, Seabreeze Association fraudulently transferred its assets to Waterview Association. The plaintiff claims the transfer was fraudulent in that there was no exchange of consideration. Thus, the corporate assets were transferred merely to protect those assets from the company's creditors, as the debts listed on the schedule were not discharged in the bankruptcy proceeding under 11 U.S.C. § 727.
The court will first examine the plaintiff's claim that the defendant is a "mere continuation" of Seabreeze Condominium Association, Inc. "In determining whether or not successor liability should be imposed, it is the duty of the court to examine the substance of the transaction to ascertain its purpose and true intent. Factors relevant to the `mere continuation' exception include continuity of management; continuity of personnel; continuity of physical location, assets and general business operations; and cessation of the prior business shortly after the new entity is formed. Also relevant is the extent to which the successor intended to incorporate the predecessor into its system with as much the same structure and operation as possible. Thus the court should determine whether the purchaser holds itself out to the world as the effective continuation of the seller. However, the proponent of successor liability need not necessarily establish all of these factors." Bowen Engineering v. Estate of Reeve, 799 F.Sup. 467, 487-88 (D.N.J. 1992).
The first factor to be considered is whether there was continuity of management between the two corporations. The only officer of Seabreeze Association was its President, William Chanaca, as evidenced in Seabreeze Association's bankruptcy petition. (Ex., 4.) However, the officers for Waterview of Bridgeport Association, Inc. are Naftali Steinmetz, Miriam Steinmetz, and Jacob Bernard, as stated on the association's certificate of incorporation. (Ex., 6.) As none of the officers were the same for both corporations it appears that there is no continuity of management between Seabreeze Association and Waterview Association. Additionally, there is nothing in the record to indicate that there was continuity of personnel between Seabreeze Association and Waterview Association.
Although the plaintiff has not proven continuity of management or personnel, there is sufficient evidence with regard to the remaining factors to show that the defendant was a "mere continuation" of its predecessor. There is continuity of physical location in this case as Seabreeze Condominium Association, Inc. and Waterview of Bridgeport Association, Inc. both operated the Seabreeze Condominium complex at 223 Iranistan Avenue in Bridgeport. (T.R. 17.)
Both of the corporations at issue in this case were associations so there were no assets transferred from one to the other. However, the general business operations of the two corporations are the same. The by-laws of Waterview of Bridgeport Association, Inc. set forth the same requirements for the operation of Seabreeze Condominiums as did the by-laws for Seabreeze Condominium Association, Inc.
In addition, there was also cessation of the prior company shortly after the new company was formed in this case. On May 16, 2003 the defendant was incorporated in the state of Connecticut with the express purpose of operating Seabreeze Condominium complex. (Ex., 6.) One month later on July 16, 2003, Waterview of Bridgeport Association, Inc. amended the Declaration of Seabreeze Condominium to name itself as the association of unit owners in replace of Seabreeze Condominium Association, Inc. (Ex., 3.) As such, Seabreeze Condominium Association, Inc. ceased operating the Seabreeze Condominium Complex once Waterview of Bridgeport Association, Inc. was formed and then substituted as the association of unit owners for Seabreeze Condominium complex.
Lastly, the defendant clearly had the intent to incorporate Seabreeze Condominium Association into its system with as much the same structure and operation as possible. This intent is evidenced through the defendant's adoption of by-laws that are almost identical to the by-laws of Seabreeze Condominium Association, Inc. The by-laws of the two corporations require the operation of Seabreeze Condominiums in almost the same exact manner.
In balancing all of these relevant factors the court concludes that Waterview of Bridgeport Association, Inc is the "mere continuation" of Seabreeze Condominium Association, Inc. As a result, the defendant is subject to successor liability for the debts incurred by Seabreeze Condominium Association, Inc.
The plaintiff next claims that Seabreeze Condominium Association, Inc. fraudulently transferred their assets to Waterview of Bridgeport Association, Inc. According to the plaintiff the predecessor corporation fraudulently transferred their assets to the defendant when they relinquished their powers and privileges under the Condominium act without receiving any consideration.
Under section 52-552e of the Connecticut General Statutes, "[a] transfer made or obligation incurred by a debtor is fraudulent as to a creditor, if the creditor's claim arose before the transfer was made or the obligation was incurred and if the debtor made the transfer or incurred the obligation: (1) With actual intent to hinder, delay or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor (A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction, or (B) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due."
The term "transfer" "[m]eans every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or interest, and includes payment of money, release, lease and creation of a lien or other encumbrance." C.G.S. § 52-552b(12). An "asset" means the property of a debtor but the term does not include property to the extent it is encumbered by a valid lien. C.G.S. § 52-552b(2). The term "property" "[m]eans anything that may be the subject of ownership." C.G.S. § 52-552b(10).
The court holds that the powers and privileges of Seabreeze Condominium Association, Inc. did in fact constitute "property" within the meaning of C.G.S. § 52-552b(10). Seabreeze Association owned the sole right to operate Seabreeze Condominiums when the company filed a Declaration of Condominium in 1981. Therefore, the alienable right to operate the Seabreeze Condominium complex was an asset of Seabreeze Condominium Association, Inc., and this asset was transferred when the association voluntarily disposed of its interest.
It must next be considered whether the debt was incurred before an asset was transferred. The debt owed to the plaintiff was incurred by Seabreeze Condominium Association Inc. on or before July of 2002. (T.R., 18.) However, Seabreeze Association's interest in the Condominium was not transferred until June 16, 2003 when a notice of amendment was filed with the office of town clerk. (Ex., 3.) Therefore, this debt arose before any asset was transferred to the defendant.
The final issue is whether Seabreeze Condominium Association, Inc. transferred its interest without receiving a reasonably equivalent value in exchange for the transfer and the corporation intended to incur, or should reasonably have believed that it would incur, debts beyond its ability to pay as they became due. C.G.S. § 52-552e. "Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied . . ." C.G.S. § 52-552d.
The court finds that Seabreeze Condominium Association, Inc. transferred its interest without receiving any value from Waterview of Bridgeport Association, Inc., and the former corporation should reasonably have known that it would incur debts beyond its ability to pay, as the company's outstanding balance owed Southern Connecticut Gas Company had not been discharged in its bankruptcy.
The defendant is therefore liable for the debts incurred by their predecessor corporation because the defendant was a "mere continuation" of that company and the defendant fraudulently transferred assets to protect it from creditors. Judgment shall enter on behalf of the plaintiff in the amount of $15,054.44 including costs.