Many of our readers know how frustrating it can be to secure a judgment against a tortfeasor company only to see that company close down. However, an increasingly common scenario sees that same “company” resurrect itself as a new company shortly afterwards. Normally, the law protects successor corporations from the liabilities of its predecessors, and this can hamper collection efforts. See Tift v. Forage King Industries, Inc., 108 Wis.2d 72, 322 N.W.2d 14 (1982) (Wisconsin follows the general rule of corporate law that a corporation which purchases with cash the assets of another corporation does not succeed to the liabilities of the seller.)
Matthiesen, Wickert & Lehrer, S.C. (MWL) has dedicated itself to understanding the law of corporate successor liability and applying its exceptions towards our clients’ recovery efforts. The MWL legal team of Ryan Woody and Richard Schuster recently won an important victory for Auto-Owners Insurance Company before the Western District of Wisconsin. Auto-Owners possessed a judgment against Cover-All of Wisconsin, LLC (Cover-All) and sought to collect that judgment from Cover-All’s alleged successor corporation.
The history of the case is interesting. In October 2008, a snow storm caused the Cover-All constructed barns in Idaho to collapse. The barn owners brought a lawsuit against Isom and defendant Cover-All to recover their damages. At the same time, MWL’s subrogation team concurrently prosecuted a subrogation action against Cover-All for the collapse.
In addition, before and after the 2008 Idaho collapse, several other failures of Cover-All buildings occurred throughout the United States. Cover-All Building Systems, Inc., the Canadian supplier, announced that their fabric system might not be up to building code and that the buildings should not be occupied in bad weather. Most notably, Cover-All Building Systems had designed the Dallas Cowboy’s practice facility that collapsed. Facing mounting liabilities, the company filed for bankruptcy in March 2010. The bankruptcy of the Canadian company also led to the collapse of its North American dealer network. As a result, Cover-All transferred all of its assets to a new company called Structures Unlimited (Structures), owned and operated by the same individual, in the same office, and constructing the same type of fabric-covered buildings through utilization of different suppliers.
Auto-Owners successfully settled the Wisconsin subrogation action. However, in the Idaho action, Auto-Owners’ insured, Isom Industrial Metals, was awarded a judgment of $139,394.00, plus interest against Cover-All of Wisconsin. After numerous unsuccessful efforts to collect the judgment from Cover-All’s alleged successor company, Auto-Owners turned to MWL’s team to litigate the matter. MWL filed a lawsuit based on corporate successor liability, advancing fraudulent transfer, mere continuation, de facto merger, and alter ego causes of action against Cover-All, Structures, and Darnell Leffel, the sole member of both companies. The case was assigned to Judge Crabb (Auto-Owners Ins. Co. v. Cover-All of Wisconsin, LLC, No. 13-CV-748-BBC).
After the cased was filed, Auto-Owners amended its complaint to add a claim for breach of fiduciary duty premised on Cover-All’s duties as a judgment creditor. Afterwards, the Defendants moved for judgment on the pleadings under F.R.C.P. 12(c). Judge Crabb ruled in Auto-Owners’ favor on all the issues, yielding some important holdings for federal pleading standards and successor liability issues.
First, the Defendants argued that the claims failed because Auto-Owners had attached certain deposition transcripts to the Amended Complaint in order to prove diversity jurisdiction over the LLC defendants. The Defendants argued that by doing so Auto-Owners had incorporated all of the testimony as true and, therefore, Mr. Leffel’s prior exculpatory testimony must be accepted as true. The Court rejected the entirety of the argument about the exhibits, writing:
Courts do not robotically assume as true the facts or statements in all the exhibits attached to a plaintiff’s complaint. Northern Indiana Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 455 (7th Cir. 1998) (“When the exhibit, however, is not the subject of the claim, Rule 10(c) does not require a plaintiff to adopt every word within the exhibits as true for purposes of pleading simply because the documents were attached to the complaint to support an alleged fact.”) Rather, courts consider the purpose of the attachment. Id. In this case, the exhibits complained of were attached by plaintiff to show facts relevant to diversity jurisdiction, such as defendant Leffel’s domicile; they were not attached to support any of plaintiff’s substantive claims. Auto-Owners Ins. Co. v. Cover-All of Wisconsin, LLC, No. 13-CV-748-BBC, 2014 WL 2865160, at *3 (W.D. Wis., June 24, 2014).
Next the Defendants argued that Structures could not be found to be a successor corporation because (1) the predecessor corporation continues to exist; and (2) the asset sale was for cash. In emphasizing these defenses, the Defendants sought to place form over substance. While it was true that Cover-All’s owner continued to pay the annual fee to the State of Wisconsin to keep the company active, it had ceased doing business as a result of the asset sale to Structures. Auto-Owners countered that Mr. Leffel’s refusal to close the predecessor business was merely a ruse to avoid transferring liability for the judgment. The Court agreed, stating: “Plaintiff does not deny that Cover-All continues to exist. Its argument is that defendant Leffel refuses to close Cover-All because he wants to insulate defendant Structures Unlimited from litigation.”
The Court then turned its attention to the defense that the “cash” deal precluded liability:
Defendants point to instances in which defendant Leffel says that the transaction between defendants Cover-All and Structures Unlimited was in cash, arguing that the general rule in Wisconsin is that cash transactions do not result in successor liability. Parson v. Roper Whitney, Inc., 586 F.Supp. 1447, 1449 (W.D. Wis. 1984) (“Wisconsin follows the general rule of corporate law that a corporation which purchases with cash the assets of another corporation does not succeed to the liabilities of the seller.”) Id. at *3.
Recognizing that Auto-Owners had invoked the exceptions to non-liability, the Court went on to hold that the nature of the deal did not necessarily shield the Defendants from potential liability:
However, plaintiff’s claims are premised on exceptions to that general rule: de facto merger and continuation. Id. (“This rule is subject to four well-recognized exceptions: (1) the purchasing corporation expressly or impliedly agrees to assume the liabilities of the seller; (2) the transaction amounts to a consolidation or merger of the two companies; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape liability.”) Defendants have ignored this aspect of plaintiff’s argument. Id.
Finally, after dispensing with those issues, the Court tackled the breach of fiduciary duty claim. This cause of action had previously existed against corporations in Wisconsin but, was recently applied also to LLCs in Executive Ctr. III, LLC v. Meieran, 823 F.Supp.2d 883 (E.D. Wis. 2011) (Fiduciary duties exist to protect people who are affected by the actions of those who control businesses…. Therefore, it would not make any sense if the expectation for a business to act fairly were to be different simply due to the business owners’ choice of form—an LLC, in this case. If that were so, every dishonest owner could simply elect to operate its business as an LLC and claim that no fiduciary duties applied to its actions.”)
Here, the Defendants had argued that they could not be liable under this theory because it did not owe a duty to Auto-Owners if the asset transfer is what caused Cover-All’s insolvency. Again, the Court rejected this argument, finding sufficient factual allegations that the company was no longer an ongoing concern prior to the transfer:
Plaintiff alleges that defendant Leffel “depleted” Cover-All’s money market account, taking it from more than $1 million in September 2008 (before the snow storm incident) to only $823.00 in January 2009 (after the incident). In addition, plaintiff alleges that defendant Leffel formed Structures Unlimited in March 2010 and allegedly received an extension of defendant Cover-All of Wisconsin’s line of credit by informing the bank that Cover-All’s assets would be transferred to defendant Structures Unlimited. Defendant Cover-All of Wisconsin faced considerable liability from the snow storm incident and had taken on debt at least equal to its assets. Furthermore, following other incidents like the one in Idaho, the Canadian company for which defendant Cover-All of Wisconsin was a dealer (Cover-All Building Systems, Inc.) had informed its dealerships that its building systems might not be up to building codes and should not be occupied in bad weather conditions. Facing significant liabilities, Cover-All Building Systems, Inc. filed for bankruptcy in March 2010, putting into question whether Cover-All products would be available to be sold by dealers. Id. at *5.
The Court’s decision was the turning point in the litigation for Auto-Owners, and the Defendants settled the case shortly thereafter without admitting liability. If you find yourself in a similar situation with a recalcitrant successor corporation, contact MWL’s legal team for a full assessment of your recovery options. Additionally, if you are dealing with collection efforts against foreign manufacturers ask about MWL’s unique international recovery program.
If you have any questions regarding this article, please contact Richard Schuster at [email protected].