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indicating that contractual choice of law clause did not apply to successor liability
Summary of this case from McAllister v. McDermott, Inc.Opinion
Civil No. 02-4925 (PAM/RLE).
June 24, 2004
MEMORANDUM AND ORDER
This matter is before the Court on Defendant CDC Acquisition Corporation's Motion for Summary Judgment and on Defendant Edward L. Carver, Jr.s' Motion to Dismiss. For the following reasons, both Motions are granted in part and denied in part.
BACKGROUND
In 1998, Plaintiffs Source One Enterprises, L.L.C. and G.O. Exporting, L.L.C. (collectively, "Source One") contracted with CDC Technologies, Incorporated ("CDC Technologies") to purchase and exclusively market and distribute medical devices in the People's Republic of China. In November 2000, Source One allegedly discovered that the medical devices failed to perform properly, and that CDC Technologies allegedly breached its marketing and distribution agreement by permitting another company to sell these medical devices in China.
On December 15, 2000, CDC Acquisition Corporation ("CDC Acquisition"), an entity of Drew Scientific Group, P.L.C. ("Drew Scientific") purchased certain assets and assumed certain liabilities of CDC Technologies, under an Asset Acquisition Agreement ("Agreement"). This Agreement included a section of a general assumption of liabilities by CDC Acquisition:
Upon the sale and purchase of the Subject Assets, except as excluded in Section 2.2(b) hereof, [CDC Acquisition] shall assume and agree to pay or discharge when due the following: . . . (ii) all liabilities and obligations incurred by [CDC Technologies] in the ordinary course of business and consistent with the terms hereof since the date of the Base Balance Sheet which are outstanding at the time of Closing. . . .
(Christensen Aff. Ex. B at Tab 1, § 2.2(a).) The Agreement also contained a section that expressly excluded certain liabilities:
Except to the extent expressly assumed pursuant to Section 2.2(a) above, [CDC Acquisition] does not assume and shall not be liable for any debt, obligation, responsibility or liability of [CDC Technologies] or any affiliate of [CDC Technologies], or any claim against any of the foregoing, whether known or unknown, contingent or absolute, or otherwise. Without limiting the foregoing sentence, [CDC Acquisition] shall have no responsibility with respect to the following, whether or not disclosed in the Base Balance Sheet or a schedule hereto: . . . (iii) liabilities and obligations resulting from or arising in connection with any alleged breach of contract based upon events occurring prior to the Closing Date. . . .
(Id. at § 2.2(b).) The Agreement further provided that CDC Technologies would dissolve "as soon as practicable" after the execution of the Agreement, and that a successor entity would be formed "for the purpose of winding up the affairs" of CDC Technologies, including the payment of liabilities not assumed by the Agreement. (Id. at § 6.13.) The closing date of the Agreement was December 7, 2000. (Id. at § 2.4.)
Following the acquisition, two officers of CDC Technologies became officers of CDC Acquisition. CDC Acquisition physically occupied CDC Technologies' business space, and all but two employees of CDC Technologies became employees of CDC Acquisition. (Reed Aff. Ex. A at 77-78 (Blain Dep.).) Following the sale, CDC Acquisition continued to use CDC Technologies' website and its telephone number. (Reed Aff. Ex. F.) CDC Acquisition continued to bill CDC Technologies' customers under the CDC Technologies letterhead and address. (Reed Aff. Ex. D.) This information identified CDC Technologies as a "Drew Scientific Group Company." (Id.)
In July 2002, Source One filed a lawsuit in state court against CDC Technologies, asserting claims for breach of contract, breach of warranty, promissory estoppel, unjust enrichment, and negligent and intentional misrepresentation. CDC Technologies did not respond to the lawsuit and the state court entered default judgment against CDC Technologies in the amount of $184,199.96. A motion to set aside the judgment is now pending in state court. In October 2002, Source One filed suit in state court against CDC Acquisition and Defendant Edward Carver, Jr., to enforce its judgment against CDC Technologies. CDC Acquisition successfully removed that action to this Court. CDC Acquisition and Mr. Carver maintain that they are not liable for CDC Technologies' liability to Source One.
CDC Acquisition asserted cross-claims against Defendant Edward Carver, Jr., based on the indemnification provision of the Agreement. The indemnification provision provides that "Seller and Principal Stockholder shall . . . defend, indemnify and hold harmless . . . [CDC Acquisition] . . . and [its] successors and assigns . . . and agents . . . from any and all liabilities. . . ." (Christensen Aff. Ex. B at Tab 1, § 8.2.) CDC Acquisition claims that in the event it is accountable for CDC Technologies' liabilities, Mr. Carver is contractually obligated to defend and indemnify this liability.
CDC Acquisition filed a Motion for Summary Judgment against both Source One and Mr. Carver. Source One and Mr. Carver oppose this Motion. At Mr. Carver's request, the Court extended the dispositive Motion deadline to allow Mr. Carver to file a Motion to Dismiss against CDC Acquisition and Source One.
DISCUSSION
A. Standard of Review
Rule 56(c) provides that a motion for summary judgment shall be granted only if "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). When considering a motion for summary judgment, the Court must view the evidence and the inferences that may be reasonably drawn from the evidence in the light most favorable to the non-moving party. Enter. Bank v. Magna Bank, 92 F.3d 740, 747 (8th Cir. 1996). The burden of demonstrating that there are no genuine issues of material fact rests on the moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party has carried its burden, the non-moving party must demonstrate the existence of specific facts in the record that create a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986); Krenik v. County of LeSueur, 47 F.3d 953, 957 (8th Cir. 1995).
For the purposes of the Motion to Dismiss, the Court takes all facts alleged in the Complaint as true. Westcott v. Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990). The Court must construe the allegations in the Complaint and reasonable inferences arising from the Complaint favorably to Plaintiff. Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986). A motion to dismiss will be granted only if "it appears beyond doubt that the Plaintiff can prove no set of facts which would entitle him to relief." Id.; see also Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
B. CDC Acquisition's Liability
Source One claims that it can recover from CDC Acquisition the judgment entered in state court against CDC Technologies. Source One asserts that CDC Acquisition is liable based the Agreement between CDC Acquisition and CDC Technologies. Alternatively, Source One contends that CDC Acquisition is liable because the transaction between CDC Acquisition and CDC Technologies satisfies the exceptions to corporate successor liability.
Generally, when one corporation sells or otherwise transfers assets to another, the receiving corporation is liable for the actions of the transferor corporation only as provided in contract or by law. Minn. Stat. § 302A.661. As discussed below, the Agreement expressly excludes liability arising in connection with CDC Technologies' breach of contract. However, Minnesota recognizes four exceptions to this general rule: (1) an express or implied agreement by the purchaser to assume liabilities; (2) the transaction results in a de facto merger; (3) the purchasing corporation is a continuation of the selling corporation; or (4) a fraudulent transaction entered into to escape liabilities.Gamradt v. Fed. Lab. Inc., No. 02-816, slip op. at 3 (D. Minn. Sept. 3, 2003) (Rosenbaum, J.); Sylvester Bros. Dev. Co. v. Burlington N.R.R., 772 F. Supp. 443, 447 (D. Minn. 1990) (Murphy, J.). In order for Source One to enforce its judgment against CDC Acquisition, one of these four exceptions to general corporate successor liability must apply.
The Complaint lacks any allegation of fraudulent transfer, so the Court will not address this exception to corporate successor liability.
1. Express or Implied Agreement
CDC Acquisition and CDC Technologies agreed that CDC Acquisition had no liability "resulting from or arising in connection with any alleged breach of contract" that existed before the closing date of the Agreement. (Christensen Aff. Ex. B at Tab 1, § 2.2(b).) Source One maintains that this clause only limits CDC Acquisition's liability with respect to the breach of contract claims, and that CDC Acquisition is liable on any remaining claims. (Pl.'s Opp'n. Mem. to Def. CDC Acquisition's Mot. for Summ. J. at 8.) Source One obtained default judgment against CDC Technologies on its claims for breach of contract, breach of implied warranties, promissory estoppel, unjust enrichment, intentional misrepresentation, and negligent misrepresentation. The issue is whether the claims for intentional and negligent misrepresentation fall within this express exclusion of liabilities.
The state court complaint alleges that CDC Technologies made intentional and negligent misrepresentations at the time Source One and CDC Technologies entered into their marketing and distribution agreement. Although the claims for intentional and negligent misrepresentation are torts, these claims arise in connection with Source One's claims for alleged breach of the marketing and distribution agreement. The claims for breach of contract and for misrepresentation are premised on the same facts. (Christensen Aff. Ex. A ¶¶ 44-49, 72-82.) CDC Technologies' duty to Source One arose exclusively out of the marketing and distribution agreement. Moreover, the Asset Acquisition Agreement extends the liability exclusion not only to claims resulting from breach of contract, but also for claims "arising in connection" with CDC Technologies' breach of contract. Thus, there is an express agreement by CDC Acquisition to not assume the liabilities that Source One claims against CDC Technologies. This factor does not apply.
2. De Facto Merger
A de facto merger requires the Court to evaluate: (1) the continuity of management, personnel, physical location, assets, and general business operations; (2) the continuity of shareholders from the seller corporation to the purchasing corporation; (3) whether the purchased corporation ceases ordinary business operations, liquidates, or dissolves as soon as legally and practically possible; and (4) whether the purchasing corporation assumed the ordinary obligations of the seller for the continuation of normal business operations of the seller.Gamradt, No. 02-816, slip op. at 3. No single factor is dispositive. Id. The Court need not find every element to conclude that a de facto merger occurred. T.H.S. Northstar Assocs. v. W.R. Grace Co.-Conn., 840 F. Supp. 676, 678 (D. Minn. 1993) (Renner, J.).
There is some dispute about whether Minnesota has actually accepted the de facto merger analysis. However, because the Minnesota Supreme Court has recognized this exception and the Minnesota Court of Appeals "frequent[ly] delineat[es] this analysis," this Court finds that the Minnesota Supreme Court would accept the de facto merger analysis. See Gamradt, 02-816, slip op. at 4.
a. Shareholder Continuity
Though no single factor is dispositive, a de facto merger requires the existence of a continuity of shareholders through a stock purchase. Gamradt, No. 02-816, slip. op. at 3; Sylvester Bros. Dev. Co. v. Burlington N.R.R., 772 F. Supp. 443, 448 (D. Minn. 1990) (Murphy, J.). Drew Scientific, the parent company of CDC Acquisition, issued shares of Drew Scientific to CDC Technologies' shareholders. (Reed Aff. Ex. A. at 65; Christensen Aff. Ex. A at Tab 1, § 2.3.) CDC Acquisition is a wholly-owned subsidiary of Drew Scientific. (Christensen Aff. Ex. B. at 1.) The fact that CDC Acquisition's parent company, Drew Scientific, transferred stock for assets is in this instance sufficient to satisfy the requirement of shareholder continuity. Sylvester, 772 F. Supp. at 448 n. 5 (citing In re Acushnet River New Bedford Harbor, 712 F. Supp. 1010, 1016 (D. Mass. 1989)). Thus, this factor weighs in favor of a de facto merger.
b. Continuity of Management
The Court must further examine whether there was a continuation of management, personnel, physical location, and assets and operations following CDC Acquisition's acquisition of CDC Technologies. Following the sale in December 2000, two of CDC Technologies' officers became officers of CDC Acquisition. (Reed Aff. Ex. A. at 74.) However, these two officers were released from employment within the year. None of the directors of CDC Technologies became directors of CDC Acquisition. Mr. Carver, principal shareholder, director, and officer of CDC Technologies, assumed no role whatsoever at CDC Acquisition.
On the other hand, all but two of CDC Technologies' employees became employees of CDC Acquisition. (Id. at 73.) CDC Acquisition also assumed the lease of the physical location and business from CDC Technologies for one year. (Id. at 74 Ex. 2, Tab 11.) CDC Acquisition continued to sell and manufacture CDC Technologies' medical technology. CDC Acquisition maintained and continued to operate CDC Technologies' website at least through December 2001. (Reed Aff. Ex. F.) CDC Acquisition continued to bill customers under the address and name of CDC Technologies, even as late as January 2002. (Reed Aff. Ex. D.) A genuine issue of material fact exists on whether these facts support a de facto merger.
c. Continuation of CDC Technologies
The de facto merger analysis also inquires as to whether CDC Technologies continued to operate following the acquisition.Gamradt, No. 02-816, slip. op. at 4. There is no evidence to suggest that CDC Technologies did not cease its ordinary business operations following the closing of the Agreement in December 2000. Moreover, a term of the Agreement further required CDC Technologies to dissolve "as soon as practicable" following the closing. (Christensen Aff. Ex. B, Tab 1 at § 6.13(a).) This factor weighs in favor of a de facto merger.
d. Assumption of Obligations by CDC Acquisition
The fourth and final factor of the de facto merger analysis examines whether CDC Acquisition assumed the ordinary obligations of CDC Technologies in order to continue the normal business operations of CDC Technologies. The Agreement expressly states that CDC Acquisition assumes "all liabilities and obligations incurred by [CDC Technologies] in the ordinary course of business." (Id. at § 2.2(a).) The evidence further supports that CDC Acquisition assumed control of CDC Technologies' physical location, continued to produce and sell CDC Technologies' products, operated CDC Technologies' website, used CDC Technologies' phone number, and continued to collect CDC Technologies' accounts receivable. The Court finds that this factor weighs in favor of a de facto merger.
4. Conclusion
Three out of four factors weigh in favor of a de facto merger. Therefore, even assuming that the facts would show no continuity of management, the Court finds that the transaction between CDC Acquisition and CDC Technologies amounted to a de facto merger as a matter of law. Therefore, CDC Acquisition is liable as a corporate successor to CDC Technologies.
Because the Court concludes that CDC Acquisition is liable as a corporate successor under the de facto merger analysis, further analysis under Minnesota's corporate successor law is unnecessary.
C. Indemnification
CDC Acquisition also brings a Motion for Summary Judgment on its cross-claims against Defendant Edward Carver, Jr. Mr. Carver has filed an opposing Motion for Summary Judgment both against CDC Acquisition and against Source One.
Mr. Carver contends that the Agreement designates that Delaware law will apply. (Christensen Aff. Ex. B, Tab 1 § 10.10.) The Agreement provides that "the Agreement shall . . . in all respects be interpreted, construed and governed by and in accordance with the laws of the state of Delaware (other than choice of law principles thereof) applicable to contracts to be performed wholly in such state." (Id.) Because jurisdiction is based on diversity, the Court must look to Minnesota law to determine whether this choice of law clause should be given effect. Contractual choice of law provisions do not bind litigants who are not parties to the contract, so Source One is not required to apply Delaware law. SCM Corp. v. Deltak Corp., 702 F. Supp. 1428, 1431 (D. Minn. 1988) (McLaughlin, J.). Mr. Carver and CDC Acquisition are both parties to the Agreement, and although Minnesota courts give effect to contractual choice of law provisions, in this instance there is no conflict between Delaware and Minnesota law, so the distinction is irrelevant. The Court nonetheless interprets the Agreement under both Delaware and Minnesota law. However, the choice of law provision in the Agreement does not extend to the corporate successor analysis.T.H.S. Northstar, Assoc., 840 F. Supp. at 677-78.
1. CDC Acquisition
The indemnification provision of the Agreement provides that:
Principal Stockholders shall severally and not jointly defend, indemnify and hold harmless each of [Drew Scientific], [CDC Acquisition], their affiliates and their successors and assigns . . . from and against all Liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties . . . actually suffered or incurred by any of them . . . (iii) in respect of any liability or obligation of [CDC Technologies] not included in the Assumed Liabilities. . . .
(Christensen Aff. Ex. A at Tab 1, § 8.2.) Mr. Carver is a principal stockholder and a signatory to this Agreement. Mr. Carver contends that he is entitled to summary judgment against CDC Acquisition because CDC Acquisition's claim for indemnification has not yet accrued. Although Mr. Carver is correct that an actual claim for indemnification may not accrue for statute of limitations purposes until the party entitled to indemnification has sustained damage by paying more than it was legally obligated to. The accrual inquiry is not relevant to whether CDC Acquisition may bring a cause of action for indemnification. Because the Court concludes that CDC Acquisition is liable as CDC Technologies' corporate successor, CDC Acquisition's indemnification claim against Mr. Carver is proper.
Under the indemnification provision, Mr. Carver is only required to "defend, indemnify and hold harmless" against liabilities that CDC Acquisition did not assume. As noted above, CDC Acquisition expressly excluded the assumption of liabilities "resulting from or arising in connection with any alleged breach of contract based on events occurring prior to the Closing date." (Id. at § 2.2(b)(iii).) Mr. Carver attempts to create a genuine issue of material fact by asserting that the express assumption of liabilities included "all the liabilities of [CDC Technologies] shown on the Base Balance Sheet," and that because none of the parties can produce a complete Base Balance Sheet, summary judgment is improper. (Id. at 2.2(a)(i).) However, the plain language of Section 2.2(b) further provides that CDC Acquisition did not assume any liability for CDC Technologies' breach of contract, "whether or not disclosed on the Base Balance Sheet or a schedule hereto." (Id. at § 2.2(b).) Thus, the completeness of the Base Balance Sheet is irrelevant on CDC Acquisition's indemnification claim.
Because the Court finds that CDC Acquisition expressly excluded any liabilities relating to or arising out of CDC Technologies' alleged breach of contract, and because Source One's state court claims against CDC Technologies arise in connection to an alleged breach of contract, Mr. Carver is legally obligated to "defend, indemnify and hold harmless" CDC Acquisition from this liability. Mr. Carver must indemnify CDC Acquisition for any liability imposed as a result of the state court judgment.
2. Source One
Source One's Complaint also seeks to impose liability on Mr. Carver by virtue of this indemnification provision. Source One contends that it is entitled to maintain suit against Mr. Carver because it is a third party beneficiary to the Agreement. The Court finds this argument unpersuasive.
Source One is not a party to the Agreement. Instead, it claims that it is a third party beneficiary of the indemnification provision, as an agent or assign of CDC Acquisition, and therefore within the scope of the indemnification provision. Third party beneficiary rights attach if it such rights are appropriate and either the duty owed or the intent-to-benefit test is met. Cretex Co., Inc. v. Construction Leaders, Inc., 342 N.W.2d 135, 139 (Minn. 1984). Source One contends that under the intent-to-benefit test, it is a third party beneficiary under the indemnity clause.
The Court disagrees. The intent-to-benefit test is satisfied "if the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance." Mears Park Holding Corp. v. Morse/Diesel, Inc., 427 N.W.2d 281, 285 (Minn.Ct.App. 1988) (citing Restatement (Second) of Contracts § 302(1)(a)). Generally, the contract "must express some intent by the parties to benefit the third party through contractual performance." Norwest Fin. Leasing, Inc. v. Morgan Whitney, Inc., 787 F. Supp. 895, 898 (D. Minn. 1992) (Doty, J.). Examining the language of the Agreement, the Court concludes that it expresses no intent to benefit Source One. Although the Agreement between CDC Acquisition and CDC Technologies expresses an intent to benefit CDC Acquisition and its successors and assigns, the Court finds that Source One is not an assign nor an agent of CDC Acquisition. Therefore, Source One may not maintain an action in indemnity against Mr. Carver. Mr. Carver's Motion to Dismiss on Source One's claims is granted.
CONCLUSION
As a matter of law, the Court finds that the transaction between CDC Acquisition and CDC Technologies was a de facto merger. Therefore, CDC Acquisition is liable to Source One as CDC Technologies' corporate successor. The Court further finds that the language of the Agreement requires Mr. Carver to indemnify CDC Acquisition for liability in this case. Finally, Source One may not maintain a cause of action against Mr. Carver for indemnification.
Accordingly, based on all the records, files and proceedings herein, IT IS HEREBY ORDERED that:
1. Defendant CDC Acquisition's Motion for Summary Judgment (Clerk Doc. No. 43) is GRANTED in part and DENIED in part; and
2. Defendant Edward Carver Jr.'s Motion to Dismiss (Clerk Doc. No. 56) is GRANTED in part and DENIED in part.