COMMONWEALTH LAND TITLE INSURANCE COMPANY v METRO TITLE CORPORATION
Docket No. 324914
Court of Appeals of Michigan
May 3, 2016
315 MICH APP 312
Submitted April 5, 2016, at Detroit.
Plaintiff, Commonwealth Land Title Insurance Company, filed a complaint in the Oakland Circuit Court to enforce a default judgment entered in plaintiff‘s favor in an earlier, separate case between plaintiff and Metro Title Agency, a registered assumed name for Metro Title Corporation (collectively, Metro Title). After the judgment and before plaintiff initiated the instant case, Metro Title formed a new business entity, Metro Equity Services (Metro Equity). The owner of Metro Equity was also the owner of Metro Title. Plaintiff asserted that Metro Title had formed Metro Equity and fraudulently transferred assets to it so that Metro Title could avoid collection on the previous default judgment. Plaintiff claimed that under a successor-liability theory, Metro Equity was responsible for paying the default judgment to plaintiff because Metro Equity was a mere continuation of Metro Title. The court, Nanci J. Grant, J., denied Metro Equity‘s motion for summary disposition. After a bench trial, the court granted Metro Equity a directed verdict on plaintiff‘s fraudulent-transfer claim. However, the court also ruled that Metro Equity was liable for the judgment because Metro Equity was a mere continuation of Metro Title for purposes of plaintiff‘s successor-liability claim. Metro Equity appealed.
The Court of Appeals held:
With two exceptions, a successor corporation is not ordinarily liable for the liabilities of its predecessor corporation. The exceptions are (1) when there is a continuity of the enterprise between the predecessor and the successor corporations and (2) when the successor corporation is a mere continuation of the predecessor corporation. In cases involving a continuity-of-the-enterprise claim, the successor corporation may be liable only in cases involving products liability or cases with similar public-policy concerns. The mere-continuation theory is broader. In general, the transaction between the successor and predecessor corporations defines the exception to the nonliability rule. When a corporation merges with another corporation and shares of stock serve as consideration for the acquisition, there is continuity of the enterprise and the successor corporation is liable for the predecessor‘s liability if the case concerns products liability. A successor is liable for its predecessor‘s liabilities under a continuity-of-the-enterprise theory when (1) the seller corporation continues to do business and there is a continuity of management, location, personnel, etc., (2) the predecessor corporation stops ordinary business operations, liquidates, and dissolves, and (3) the successor corporation assumes the seller‘s obligations that are necessary to continue normal business operations. On the other hand, in a transaction involving two corporations exchanging cash for assets, the successor corporation is generally not liable for its predecessor‘s liabilities unless one of the following is present: (1) an express or implied assumption of liability, (2) a de facto consolidation or merger, (3) fraud, (4) a transfer lacking in good faith or consideration, and (5) the successor corporation is a mere continuation or reincarnation of the predecessor corporation. In this case, the trial court correctly held that Metro Equity was a mere continuation of Metro Title. Metro Title transferred its assets to Metro Equity before Metro Title filed for bankruptcy; therefore, Metro Equity was responsible for paying to plaintiff the amount of money awarded in the default judgment against Metro Title.
Affirmed.
CORPORATIONS - SUCCESSOR NONLIABILITY - EXCEPTIONS - MERE CONTINUANCE OF PREDECESSOR.
A successor corporation is generally not liable for the liabilities of its predecessor unless the successor corporation is a mere continuation of the predecessor corporation or, in cases involving products liability, there is continuity in the enterprise of both
Plunkett Cooney (by Karen E. Beach) for plaintiff.
The Darren Findling Law Firm, PLC (by Darren Findling and Andrew J. Black), for defendant.
Before: O‘CONNELL, P.J., and MARKEY and O‘BRIEN, JJ.
O‘CONNELL, P.J. Defendant Metro Equity Services (Metro Equity) appeals as of right the trial court‘s November 17, 2014 order enforcing a judgment obtained by plaintiff, Commonwealth Land Title Insurance Company, under a successor-liability theory. Because Michigan recognizes a separate and distinct exception to successor nonliability in cases other than products liability, we affirm.
I. FACTUAL BACKGROUND
This case arises out of a default judgment that was entered in May 2012 in
Metro Equity moved for summary disposition under
The trial court denied Metro Equity‘s motion, concluding that questions of fact remained regarding Metro Equity‘s liability as a successor corporation. The trial court held a bench trial, and at the close of plaintiff‘s proofs, it granted Metro Equity a directed verdict on plaintiff‘s fraudulent-transfer claim, but it found that Metro Equity constituted a mere continuation of Metro Title under plaintiff‘s successor-liability theory. Thus, the trial court entered an order enforcing the May 2012 judgment against Metro Equity. Metro Equity now appeals.
II. STANDARD OF REVIEW
This Court reviews de novo the trial court‘s conclusions of law made during a bench trial. Waisanen v Superior Twp, 305 Mich App 719, 723; 854 NW2d 213 (2014). We review for an abuse of discretion a trial court‘s decisions regarding the scope and meaning of pleadings. Dacon v Transue, 441 Mich 315, 328; 490 NW2d 369 (1992).
III. ANALYSIS
Metro Equity asserts that the “mere continuation” exception to successor nonliability is no longer a viable theory of successor liability and that all plaintiffs must proceed under a “continuity of the enterprise” theory, which may not be applied to judgment creditors. We disagree.
Michigan law recognizes two separate exceptions to a successor corporation‘s nonliability. The continuity-of-the-enterprise exception only applies to products-liability cases and cases with similar public-policy concerns, but the mere-continuation exception applies to other causes of action involving successor nonliability. Judge RIORDAN has elegantly summarized these two exceptions and the difference between them:
I. “MERE CONTINUATION”
Michigan follows the traditional rule of successor liability. Foster [v Cone-Blanchard Machine Co], 460 Mich [696,] 702[; 597 NW2d 506 (1999)]. Under that rule, the nature of the transaction determines the potential liability of predecessor and successor corporations. Id. “If the acquisition is accomplished by merger, with shares of stock serving as consideration, the successor generally assumes all its predecessor‘s liabilities. However, where the purchase is accomplished by an exchange of cash for assets, the successor
is not liable for its predecessor‘s liabilities unless one of five narrow exceptions applies.” Id. The five exceptions are: (1) an express or implied assumption of liability; (2) de facto consolidation or merger; (3) fraud; (4) transfer lacking in good faith or consideration; or (5) where the transferee corporation was a mere continuation or reincarnation of the old corporation. Id. at 702....
II. “CONTINUITY OF THE ENTERPRISE”
However, another relevant doctrine is the continuity of the enterprise doctrine. In Turner [v Bituminous Cas Co], 397 Mich [406, 429-430; 244 NW2d 873 (1976)], the Michigan Supreme Court applied the successor liability doctrine in the context of products liability cases, establishing the continuity of the enterprise doctrine. Pursuant to this doctrine, successor liability is imposed if: (1) there is continuation of the seller corporation (i.e.[,] continuity of management, personnel, physical location, assets, and general business operations of the predecessor corporation); (2) the predecessor corporation ceases its ordinary business operations, liquidates, and dissolves; and (3) the purchasing corporation assumes liabilities and obligations of the seller ordinarily necessary for the continuation of normal business operations. See Foster, 460 Mich at 703 (describing the Turner doctrine). Also pertinent is whether the purchasing corporation held itself out to the world as the effective continuation of the seller corporation. Turner, 397 Mich at 430.
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... [T]he continuity of the enterprise doctrine generally is limited to products liability cases. See CT Charlton & Assoc, Inc, 541 Fed Appx [549,] 552 [2013] (“No matter how the ‘continuity of the enterprise’ doctrine is characterized, a review of Michigan law and the policies underlying the doctrine makes clear that it is only meant to apply in products-liability cases (and potentially a few other areas animated by similar public-policy concerns).“). See also Turner, 397 Mich at 416 (“This is a products liability case first and foremost.“). In fact, Starks could be interpreted as limiting the continuity of the enterprise doctrine to the products liability context. [Starks v Mich Welding Specialists, Inc], 477 Mich [922 (2006)] (“Because an exception designed to protect injured victims of defective products rests upon policy reasons not applicable to a judgment creditor, the Court declines to expand the exception to the traditional rule set forth in [Turner] to cases in which the plaintiff is a judgment creditor.“). See also City Mgt Corp v US Chem Co, Inc, 43 F3d 244, 253 (CA 6, 1994) (“[T]he Michigan Supreme Court intended that the continuing enterprise exception be limited to products liability cases.“).
However, no such limitation appears in the context of the mere continuation doctrine. As the bankruptcy court in the eastern district of Michigan opined, “the traditional exceptions under Michigan law for the general rule of corporate successor nonliability, one of which is the ‘mere continuation’ exception, do apply in the commercial context, and are not limited to product liability cases.” In re Clements Mfg Liquidation Co, LLC [v THB America, LLC], 521 BR [231,] 253 [(ED Mich, 2014)] (emphasis added). Stated differently, the mere continuation exception applies to commercial cases and is not limited to product
liability cases. The Clements court further opined that “[t]he Michigan Supreme Court‘s one paragraph opinion in the Starks case ... does not hold otherwise. Rather, ... Starks limited ... to product liability cases, a different exception to the traditional rule of non-liability of corporate successors, namely, the ‘continuity of the enterprise’ doctrine, which is a separate basis for imposing successor liability from the ‘mere continuation’ doctrine.” Id. at 253-254. [Taizhou Golden Sun Arts & Crafts, Ltd v Colorbök, LLC, unpublished opinion per curiam of the Court of Appeals, issued August 18, 2015 (Docket No. 320129) (RIORDAN, J., concurring), pp 1-3.]2
A deeper analysis of precedent reveals that Judge RIORDAN‘s summary well reflects the current state of the law in this area. In Chase v Mich Tel Co, 121 Mich 631, 634; 80 NW 717 (1899), our Supreme Court considered whether a successor corporation could be liable for injuries sustained by an employee of the predecessor corporation, and stated that
[t]he law is well settled in regard to liability of the consolidated or purchasing corporation for the debts and liabilities of the consolidating or selling corporation. Such obligations are assumed (1) when two or more corporations consolidate and form a new corporation, making no provision for the payment of the obligations of the old; (2) when by agreement, express or implied, a purchasing corporation promises to pay the debts of the selling corporation; (3) when the new corporation is a mere continuance of the old; (4) when the sale is fraudulent, and the property of the old corporation, liable for its debts, can be followed into the hands of the purchaser. [Emphasis added.]
The Chase Court explained that separate exceptions arose from each of the four situations. See id. (“Plaintiff produced no evidence tending to bring the defendant within any of these cases.“). In Turner, our Supreme Court summarized the elements of a de facto merger, Turner, 397 Mich at 420, and then modified them to account for the fact that the sale of a product will rarely involve shareholders, id. at 430. Accordingly, the Turner Court created a continuity-of-the-enterprise exception to apply in products-liability cases involving the cash sale of corporate assets. The exception depended on
whether (1) the enterprise continued through its retention of assets and personnel, (2) the selling corporation ceased operations, (3) the purchasing corporation assumed liabilities and obligations to the extent necessary to continue operations, and (4) the purchasing corporation held itself out to the world as a continuation. Id. at 430-431. Turner did not specifically rely on Chase and did not purport to limit the scope of Chase‘s mere-continuation general exception.
Our Court has applied the traditional mere-continuation exception outside the context of products-liability cases. See RDM Holdings, Ltd v Continental Plastics Co, 281 Mich App 678, 707; 762 NW2d 529 (2008) (stating that the plaintiff in a commercial context could pursue a mere-continuation theory at trial); Lakeview Commons Ltd Partnership v Empower Yourself, LLC, 290 Mich App 503, 508-509; 802 NW2d 712 (2010) (same). Particularly relevant to this case, the plaintiff in RDM Holdings was allowed to advance a mere-continuation theory when
Our Supreme Court‘s decision in Starks does not mandate a different result:
Where, as here, a successor corporation acquires the assets of a predecessor corporation and does not explicitly assume the liabilities of the predecessor, the traditional rule of corporate successor non-liability applies. See Foster v Cone-Blanchard Machine Co, 460 Mich 696, 702 (1999). Because an exception designed to protect injured victims of defective products rests upon policy reasons not applicable to a judgment creditor, the Court declines to expand the exception to the traditional rule set forth in Turner v Bituminous Casualty Co, 397 Mich 406 (1976), to cases in which the plaintiff is a judgment creditor. [Starks, 477 Mich 922 (emphasis added).]
The Starks Court expressly affirmed this Court‘s judgment in a case in which this Court considered whether there was a sufficient continuity of the enterprise between the successor and predecessor corporations. Starks v Mich Welding Specialists, Inc, unpublished opinion per curiam of the Court of Appeals, issued November 29, 2005 (Docket No. 257127), pp 4-5. The factors in that case did not support imposing successor liability. Id. at 5. Specifically, in that case, the predecessor corporation did not sell the assets - a foreclosing creditor did - the predecessor ceased operating before the assets were purchased, and the successor corporation did not hold itself out as a continuation of the previous corporation. Id.
In this case, Starks does not apply because there has been no intervening foreclosure and this case involves the mere-continuation exception. The plaintiff in Starks was attempting to pursue successor liability through a foreclosure and unrelated transfer of assets on the basis of a products-liability exception. Such an expansion is not at issue in this case; there has been no foreclosure (i.e., the assets were transferred in advance of bankruptcy, like in RDM Holdings), and the case involves a different legal doctrine (i.e., the mere-continuation exception).
We also note that two federal cases, Stramaglia v United States, 377 Fed Appx 472, 475 (CA 6, 2010), and CT Charlton, 541 Fed Appx at 551-552, recognize the ongoing viability of the mere-continuation exception to successor nonliability in Michigan.3 As Judge Boggs stated in CT Charlton, 541 Fed Appx at 551-552, “A
review of Turner ... suggests that these are best understood as two independent exceptions, motivated by different policy concerns and applied in different circumstances.” Judge Boggs explained:
In creating the “continuity of the enterprise” doctrine, Turner modified one of the traditional “limited exceptions” to successor liability to fit in the products-liability context. But this modified exception was not the “mere continuation” exception, which is only mentioned in passing in Turner, appearing in a list in a footnote. Turner, 244 NW2d at 877 n 3. Instead, Turner modified the de-facto-merger doctrine, a traditional exception that imposes successor liability when four requirements are met: 1)
continuation of the enterprise, 2) continuity of shareholders, 3) ending of ordinary business operations by the seller, and 4) assumption of liabilities and obligations necessary for uninterrupted continuation of business operations by the purchaser. Turner, 244 NW2d at 879. After reviewing the policies underlying products-liability law, the court concluded that, in the products-liability context, the form of the acquisition is irrelevant to the question of liability. Id. at 880.... As a result, the Turner court dropped the “continuity of shareholders” element, requiring only elements 1, 3, and 4 of the de-facto-merger doctrine to establish successor products liability. Id. at 883. The “continuity of the enterprise” doctrine, therefore, is best read as a relaxation of the de-facto-merger doctrine in products-liability cases, not a redefinition of the “mere continuation” exception. The “mere continuation” exception remains narrow, but retains its general applicability. [Id. at 552 (emphasis added).]
In this case, in the absence of any clear authority holding that the mere-continuation exception has ceased to exist, we find these decisions persuasive. We conclude that the trial court in this case properly applied the mere-continuation exception, which continues to exist as a traditional successor-liability theory and allowed plaintiff to establish successor liability after Metro Title transferred its assets in advance of bankruptcy.
Metro Equity also asserts that the trial court erred by allowing plaintiff to proceed to trial on a mere-continuation theory. We disagree.
A complaint must provide the opposing party with reasonable notice of the nature of the claims brought against it. Dacon, 441 Mich at 329. A trial court has the discretion to allow a party to amend a pleading at any time to conform to the proofs.
We affirm.
MARKEY and O‘BRIEN, JJ., concurred with O‘CONNELL, P.J.