IHFC Props., LLC v. APA Mktg., Inc.

IHFC PROPERTIES, LLC, Plaintiff, v. APA MARKETING, INC., and WHALEN FURNITURE MANUFACTURING, INC., Defendants.

1:10cv568

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

January 14, 2014

MEMORANDUM OPINION AND ORDER

THOMAS D. SCHROEDER, District Judge.

Plaintiff IHFC Properties, LLC ("IHFC"), brings this action against Defendants APA Marketing, Inc., and Whalen Furniture Manufacturing, Inc. ("Whalen"), for damages arising out of the use of one of IHFC's furniture showrooms.¹ IHFC originally filed this action in the General Court of Justice, Superior Court Division, of Guilford County, North Carolina, alleging breach of lease, future rent, and, in the alternative, Whalen's responsibility for lease payments pursuant to doctrines of mere continuation or de facto merger. (Doc. 3.) Whalen timely removed the action to this court on the ground of diversity jurisdiction, pursuant to 28 U.S.C. §§ 1332(a) and 1441(b). (Doc. 1.) Whalen then moved to dismiss the case for impropervenue, or in the alternative, to transfer it. (Doc. 13.) Upon Recommendation of the United States Magistrate Judge, (Doc. 24); IHFC Props., LLC v. APA Mktg., Inc., No. 1:10CV568, 2011 WL 7423427 (M.D.N.C. July 12, 2011), this court found that venue was proper and, determining that Whalen was substantively (though not formally) challenging personal jurisdiction, found that IHFC had made a prima facie showing of this court's personal jurisdiction sufficient to survive a motion to dismiss, (Doc. 31); IHFC Props., LLC v. APA Mktg., Inc., 850 F. Supp. 2d 604 (M.D.N.C. 2012).

APA Marketing, Inc., moved to relieve its counsel of further obligation in the action, acknowledging that the withdrawal may result in the entry of default judgment against it. (Doc. 42.) This court granted the motion (Doc. 50), and APA Marketing, Inc., has not appeared further in the case.

IHFC's claims against the only other defendant, Whalen, were tried to the court on October 7, 8, and 9, 2013. At trial, IHFC presented three live witnesses: Thomas Loney, IHFC's vice president of leasing during the dispute; Tom Mitchell, IHFC's president and Chief Executive Officer; and Ed Thomas, IHFC's then chief financial officer. IHFC also presented one witness by deposition: Al Schwerin, a co-founder, director, and shareholder of APA Marketing, Inc., who became an employee of Whalen.

At the close of IHFC's evidence, Whalen moved for judgment on partial findings pursuant to Federal Rule of Civil Procedure 52(c),² which the court took under advisement. Whalen then presented three live witnesses: Ken Whalen, Whalen's founder and president; Lisa Johnson, IHFC's lease administrator; and Paul Coscarelli, a co-founder, director, and shareholder of APA Marketing, Inc., who, like Schwerin, became an employee of Whalen. Whalen also presented two witnesses by deposition: Al Schwerin and Ed Thomas.

Pursuant to Federal Rule of Civil Procedure 52(a), the court enters the following findings of fact and conclusions of law. To the extent any factual statement is contained in the conclusions of law, it is deemed a finding of fact as well.

I. FINDINGS OF FACT

The court finds the facts stated herein based upon its evaluation of the evidence, including the credibility of witnesses, and the inferences that the court has found reasonable to draw from the evidence.

1. Plaintiff IHFC is a Delaware limited liability company authorized to transact business in the State of North Carolina. It maintains offices and has its principal place of business in High Point, North Carolina. IHFC is owned by IHFC Holdings,LLC, which is owned by International Home Furnishings Center, Inc. IHFC owns and manages the real estate for its parent company, including showroom buildings in High Point, North Carolina, that are utilized by vendors exhibiting furniture at the biannual furniture market in High Point.

2. Defendant APA Marketing, Inc., was a corporation organized and existing under the laws of the State of California and maintained offices in Monument, Colorado, and Henderson, Nevada. APA Marketing, Inc., imported casual dining and entertainment furniture for retail. It formally dissolved after the principal events at issue in this litigation.³

3. Defendant Whalen is a corporation organized and existing under the laws of the State of California, having its principal place of business in San Diego, California. Whalen imports and manufactures furniture for retail sale.

4. On November 16, 2006, IHFC and APA Marketing, Inc., entered into a five-year lease agreement for one of IHFC's High Point showrooms ("the IHFC Lease" or "the Lease"). (Plaintiff ("Pl.") Ex. 1.) The Lease provided APA Marketing, Inc., the right to 15,005 square feet of showroom space at $14.50 per square foot, was backdated to November 1, 2006, and ran until October 14, 2011.

5. The annual rent for the showroom was to be paid in equal installments due on May 1 and November 1 of each year to reflect the twice-yearly High Point furniture market occurring each mid-April and mid-October. Therefore, the May 1 rent installment covered the six-month period from May 1 to October 31, including the October market, and the November 1 rent installment covered the six-month period from November 1 to April 30, including the April market.

6. Al Schwerin and Paul Coscarelli were the co-founders and co-owners of APA Marketing, Inc. They owned equal one-half shares in the corporation. Coscarelli signed the IHFC lease on behalf of APA Marketing, Inc.

7. APA Marketing, Inc., shared the IHFC showroom space with Ultimate Accents, Inc. ("Ultimate"). Ultimate also imported furniture, but specialized in accent pieces, such as credenzas and end tables. (Schwerin Dep. 13:8-22.) Ultimate had three owners: Gail Steele, president; Coscarelli, chief financial officer; and Schwerin, board member.⁴ Because of the common ownership of APA Marketing, Inc., and Ultimate, IHFC agreed to allow the two companies to combine their showroom space under the Lease. By doing so, APA Marketing, Inc., andUltimate benefitted from a lower per-square-foot rate than they would have paid had each leased from IHFC separately. Under this arrangement, APA Marketing, Inc., occupied approximately 10,000 square feet of the showroom space and Ultimate occupied the remaining approximately 5,000 square feet. APA Marketing, Inc., was the only lessee on the Lease, however. IHFC, Ultimate, and APA Marketing, Inc., had only a verbal agreement as to Ultimate's use of the space.

8. Typically, when IHFC approves a sublease, it requires that the sublessee pay rent directly to IHFC instead of to the lessee. IHFC has this policy to ensure that it collects any excess rent a lessee charges a sublessee. In Ultimate's case, however, Thomas Loney, IHFC's vice president of leasing, testified that he did not consider Ultimate to be a sublessee. Instead, IHFC invoiced APA Marketing, Inc., for the total rent due each cycle. APA Marketing, Inc., in turn, collected Ultimate's share of the rent and forwarded it, along with APA Marketing, Inc.'s share, to IHFC.⁵

9. APA Marketing, Inc., occupied the showroom space and paid rent without incident from 2006 through 2007. On April 1, 2008, IHFC billed APA Marketing, Inc., for the upcoming$124, 409.58 rent due May 1, 2008 (Pl. Ex. 2), but May 1 passed without payment. On July 25 and August 6, 2008, APA Marketing, Inc., submitted late, partial payments of $24,409.58 and $25,354.42, respectively. Both checks reflected only the payments by Ultimate for its share of the rent obligation.

10. Unknown to IHFC at the time, APA Marketing, Inc., had entered into negotiations in early 2008 to sell its assets to Whalen. On July 10, 2008, APA Marketing, Inc., and Whalen signed an asset purchase agreement ("the Purchase Agreement"). (Pl. Ex. 6.) Schwerin and Coscarelli each signed on behalf of APA Marketing, Inc.; Ken Whalen,⁶ founder and president of Whalen, signed on behalf of Whalen. Because the Purchase Agreement required a valuation of APA Marketing, Inc.'s assets, the sale was not consummated until September 1. Ultimately, Whalen paid $3.5 million for APA Marketing, Inc.'s assets.

11. As part of the Purchase Agreement, Whalen agreed to enter into employment contracts with Schwerin and Coscarelli, and both became Whalen employees after the Purchase Agreement was signed.⁷ Coscarelli remains a Whalen employee; Schwerin left Whalen in April 2012.

12. The Purchase Agreement was admitted into evidence at trial, and precisely what it covers - more specifically, whether it covers the IHFC Lease - is a major disputed issue in this litigation. Therefore, its provisions will not be detailed here, but will instead be addressed as relevant to the legal analysis. It is undisputed, however, that Whalen acquired significant assets in the form of inventory, as well as three trade names ("APA Marketing," "Encore Home Entertainment," and "Entrée Casual Dining") and all leases and subleases⁸ at APA Marketing, Inc.'s facility in Henderson, Nevada. "APA Marketing" became a wholly-owned division of Whalen. APA Marketing, Inc., transferred all of its customers and customer lists to Whalen and, sometime after the Purchase Agreement, Whalen began selling APA Marketing, Inc., products under the name "APA by Whalen."

13. APA Marketing, Inc., continued to exist after the Purchase Agreement, but it had no product, no customers, and no ability to use its own trade name, as Whalen had purchased the exclusive right to use the name "APA Marketing." APA Marketing, Inc., also had no need for the IHFC showroom at the October 2008 market or for any market thereafter because it had no more product to sell.

14. After the Purchase Agreement, APA Marketing, Inc.'s only purpose was to collect its accounts receivable of approximately $2.9 million. Its liabilities disclosed in connection with the Purchase Agreement exceeded that amount. The IHFC Lease was only booked as a liability when the rent became due, so at the time of the...