Portfolio Financial Servicing Co. v. Sharemax.Com

334 F.Supp.2d 620

PORTFOLIO FINANCIAL SERVICING CO., Servicing Agent for Jacom Computer Services, Inc. Plaintiff, v. SHAREMAX.COM, INC. and Analytics, Inc., Defendants.

No. COV/ 03-229(FSH).

United States District Court, D. New Jersey.

July 12, 2004.

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Charles A. Gruen, Hackensack, NJ, for Plaintiff.

Michael P. Laffey, Cassidy Messina & Laffey, P.C., Holmdel, NJ, for Defendants.

OPINION & ORDER

HOCHBERG, District Judge.

This matter calls upon the Court to decide whether a subsidiary is liable for the debts of its parent corporation under either the doctrine of successor liability or the doctrine of corporate alter ego. Defendants Sharemax.com, Inc. ("Sharemax") and Analytics, Inc. ("Analytics") have brought a Motion for Summary Judgment against Plaintiff Portfolio Financial Servicing Co. ("PFS"), the servicing agent for Jacom Computer Services, Inc. ("Jacom").

From approximately January 7, 2000 through July 19, 2000, Jacom, PFS's predecessor in interest, entered into a Master Lease Agreement (the "Lease") with Sharemax, the parent of Analytics. There was a default under the terms of the Lease, leaving a balance due to Jacom of $413,863.56, plus interest. Because Sharemax no longer exists, Plaintiff PFS contends that Analytics is now liable for the unpaid balance on the Lease.

BACKGROUND

On January 14, 2000, Sharemax purchased all of the stock of Analytics, pursuant to an Agreement and Plan of Merger dated January 6, 2000, wherein Analytics merged with Analytics Acquisition Corporation ("AAC"), a wholly owned subsidiary of Sharemax. Under the terms of the merger, Analytics survived AAC and became a subsidiary of Sharemax. John C. Jensen and Harris Usdan — Analytics' president and vice president, respectively, prior to the merger, and who owned all outstanding common stock in Analytics — had their shares converted to common stock in Sharemax and executed with Sharemax employment agreements, pursuant to which they each would be retained as a vice president of Sharemax, while continuing in their respective roles as president and vice president of Analytics. Analytics received no cash or assets from Sharemax pursuant to the merger.

After Sharemax acquired Analytics, the parent and subsidiary operated as separate corporate entities in different states. Sharemax's offices were located in New Jersey, while Analytics's offices remained in Connecticut. Sharemax provided an internet system to its customers that assisted them in placing purchase orders. Analytics' business was the analysis of corporate purchasing habits.

During the two-year period after the merger, between 2000 and 2002, Sharemax encountered financial difficulties. (There has been no allegation that Sharemax had financial problems prior to the merger in 2000.) By April 2002, it was in the process of liquidating its assets and winding down its business. In May 2002, the Analytics corporate subsidiary was sold to a third-party for $75,000 paid to Sharemax. These funds were used to pay creditors of Sharemax. Sharemax later ceased to exist as a financially viable operating company. Plaintiffs now seek to have Sharemax's Lease balance paid by Sharemax's former subsidiary, Analytics.

STANDARD

I. Summary Judgment

Pursuant to Fed.R.Civ.P. 56(c), a motion for summary judgment will be granted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In other words, "summary judgment may be granted only if there exists no genuine issue of material fact that would permit a reasonable jury to find for the nonmoving party." Miller v. Indiana Hosp., 843 F.2d 139, 143 (3d Cir.1988). All facts and inferences must be construed in the light most favorable to the non-moving party. Peters v. Delaware River Port Auth., 16 F.3d 1346, 1349 (3d Cir.1994).

The party seeking summary judgment always bears the initial burden of production. Celotex Corp., 477 U.S. at 323, 106 S.Ct. 2548. This requires the moving party to establish either that there is no genuine issue of material fact and that the moving party must prevail as a matter of law, or to demonstrate that the nonmoving party has not shown the requisite facts relating to an essential element of an issue on which it bears the burden. See id. at 322-23, 106 S.Ct. 2548. Once the party seeking summary judgment has carried this initial burden, the burden shifts to the nonmoving party. To avoid summary judgment, the nonmoving party must demonstrate facts supporting each element for which it bears the burden, and it must establish the existence of "genuine issue[s] of material fact" justifying trial. Miller, 843 F.2d at 143; see also Celotex Corp., 477 U.S. at 324, 106 S.Ct. 2548.

If a moving party satisfies its initial burden of establishing a prima facie case for summary judgment, the opposing party "must do more than simply show that there is some metaphysical doubt as to material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no `genuine issue for trial.'" Id. at 587, 106 S.Ct. 1348 (quoting First National Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968)).

Moreover, "there is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the evidence is merely colorable or is not significantly probative summary judgment may be granted." Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505. "Consequently, the court must ask whether, on the summary judgment record, reasonable jurors could find facts that demonstrated, by a preponderance of the evidence, that the nonmoving party is entitled to a verdict." In re Paoli R.R. Yard PCB Litigation, 916 F.2d 829, 860 (3d Cir.1990).

II. Corporate Successor Liability

Traditionally, New Jersey corporate law provides that "where one company sells or otherwise transfers all its assets to another company the latter is not liable for the debts and liabilities of the transferor." Colman v. Fisher-Price, Inc., 954 F.Supp. 835, 838 (D.N.J.1996) (citing Ramirez v. Amsted Indus., Inc., 86 N.J. 332, 340, 431 A.2d 811 (1981)); Luxliner P.L. Export, Co. v. RDI/Luxliner, 13 F.3d 69, 73 (3d Cir.1993); 15 WILLIAM FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 7122 (perm. ed. rev.vol.1999) (hereinafter, "FLETCHER"). A corporation succeeds to the liabilities of another corporation only in certain limited instances. The doctrine of successor liability permits exceptions to the general rule in four such instances: (i) the purchaser expressly or implicitly agrees to assume the other company's debts and obligations; (ii) the purchase is a de facto consolidation or merger; (iii) the purchaser is a mere continuation of the seller; or (iv) the transfer of assets is for the fraudulent purpose of escaping liability. Philadelphia Elec. Co. v. Hercules, Inc., 762 F.2d 303, 308-09 (3d Cir.1985); Colman, 954 F.Supp. at 838; Glynwed, Inc. v. Plastimatic, Inc., 869 F.Supp. 265, 271 (D.N.J.1994). Plaintiff relies upon exceptions (i) through (iii) above. There is no allegation of fraudulent transfer.

In determining whether a successor corporation implicitly assumed an obligation of its predecessor, the following factors are relevant: (a) whether the successor's conduct indicated its intention to assume the debt; (b) whether the creditor relied on the conduct and the effect of any reliance; and (c) whether the successor's representatives admitted liability. See Glynwed, 869 F.Supp. at 275; FLETCHER, § 7124; Elizabeth A. Dellinger, Acquisitions of Financially Troubled Companies, (2002) in PRAC. LAW INST. CORP. LAW AND PRAC. COURSE HANDBOOK SERIES (Practising Law Institute ed., 2003). Of the above factors, Plaintiff premise its effort to impart liability on Analytics and its former principals on prong (a) only.

Successor liability may be found where two or more corporations combine through a merger or consolidation and the corporation or corporations that are merged cease to exist. Under these circumstances, the surviving corporation becomes liable for all of the obligations of the constituent corporations, even those liabilities which are contingent. Arch v. American Tobacco Co., 984 F.Supp. 830, 841 (E.D.Pa.1997); see generally 8 ZOLMAN CAVITCH, BUSINESS ORGANIZATIONS § 161.02[2] (1994) (hereinafter "CAVITCH"). By contrast, where a corporation acquires the stock of another corporation and the target corporation continues to operate as a separate corporate entity, the purchaser corporation does not thereby assume the liabilities of the acquired corporation unless it does so expressly. Arch, 984 F.Supp. at 841; CAVITCH, § 161.02[1].

Courts have analyzed and applied successor liability by treating the "de facto consolidation" and "mere continuation" exceptions together. Glynwed, 869 F.Supp. at 275 (quoting Luxliner, 13 F.3d at 73 ("Much the same evidence is relevant to each determination.") (citations omitted); Lumbard v. Maglia, Inc., 621 F.Supp. 1529, 1535 (D.C.N.Y.1985) (de facto consolidation and mere continuation theories "tend to overlap" and "`no criteria can be identified that distinguish them in any useful manner'") (citation and footnote omitted)).

In determining whether a particular transaction amounts to a "de facto consolidation" or "mere continuation", most courts consider four factors: (a) continuity of management, personnel, physical location, assets, and general...