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Veritas Steel, LLC v. Lunda Construction Co.

Supreme Court of Wisconsin

January 15, 2020

Veritas Steel, LLC, Plaintiff-Respondent,
v.
Lunda Construction Company, Defendant-Third-Party Plaintiff-Appellant-Petitioner,
v.
Bridge Resources, LLC n/k/a Bridge Fabrication Holdings, LLC, Alan Sobel, Matthew Cahill and Atlas Holdings, LLC, Third-Party Defendants-Respondents.

          SUBMITTED ON BRIEFS: ORAL ARGUMENT: September 19, 2019

          REVIEW OF DECISION OF THE COURT OF APPEALS Reported at 385 Wis.2d 210, 923 N.W.2d 181 (2018 - unpublished)

          Circuit Court, Dane County, L.C. No. 2015CV509 Frank D. Remington, Judge

          For the defendant-third-party-plaintiff-appellant-petitioner, there were briefs filed by Saul C. Glazer, Michael D. Hahn, and Axley Brynelson, Madison. With whom on the brief was Dean Thomson, Paul Ratelle, and Fabyanske Westra Hart & Thomson 2 PA, Minneapolis, Minnesota. There was an oral argument by Paul Ratelle.

          For the third-party-defendants-respondents, there was a brief filed by Michael D. Leffel, Kevin M. LeRoy, Thomas L. Shriner, Jr. and Foley & Lardener LLP, Madison and Milwaukee. With whom on the brief was Richard Mancino, Jill K. Grant, Stuart R. Lombardi, William O'Brien, Patricia O. Haynes, Joseph G. Davis, and Willkie Farr & Gallagher LLP, New York, New York and Washington, DC. There was an oral argument by Richard Macino.

          DALLET, J., delivered the majority opinion of the Court, in which ANN WALSH BRADLEY, ZIEGLER, REBECCA GRASSL BRADLEY, KELLY and HAGEDORN, JJ., joined. ROGGENSACK, C.J., filed a concurring opinion.

          REBECCA FRANK DALLET, J.

         ¶1 Lunda Construction Company (Lunda) alleges that Veritas Steel, LLC (Veritas), and third-party defendants Atlas Holdings, LLC (Atlas), and Bridge Fabrication Holdings, LLC, took unfair advantage of PDM Bridge, LLC's (PDM) loan defaults, "with the intent to gain ownership of PDM's lucrative steel fabrication business for grossly inadequate consideration through a secretive, unlawful and fraudulent process designed to render PDM an empty shell with no assets remaining to satisfy PDM's eight-figure liability to Lunda."

         ¶2 The circuit court granted summary judgment to Veritas on Lunda's successor liability claim because there was no genuine issue of material fact as to the de facto merger, mere continuation, and fraudulent transaction exceptions to the general rule against successor liability.[1] The court of appeals affirmed as to the de facto merger and mere continuation exceptions, the only exceptions Lunda raised on appeal.[2]

         ¶3 The question before us is whether the de facto merger, mere continuation, and fraudulent transaction exceptions to the rule against successor liability apply in this case to impose successor liability on Veritas. Lunda asks this court to read Fish v. Amsted Indus., Inc., 126 Wis.2d 293, 376 N.W.2d 820 (1985), as having expanded the de facto merger and mere continuation exceptions. Lunda further asserts that the court of appeals erroneously dismissed its successor liability claim in light of the fraudulent transaction exception.

         ¶4 We reject Lunda's expanded reading of Fish, 126 Wis.2d 293, and conclude that Lunda has not raised a genuine issue of material fact as to an "identity of ownership" between Veritas and PDM, the key component necessary to satisfy the de facto merger and mere continuation exceptions. We further conclude that by not raising the fraudulent transaction exception before the court of appeals, Lunda forfeited that argument. We therefore affirm the court of appeals.

         I. FACTUAL BACKGROUND AND PROCEDURAL POSTURE

         ¶5 The facts of this case are lengthy and fairly complex. PDM operated a steel fabrication business.[3] In 2006, PDM entered into a credit agreement with a syndicate of lenders for a $115 million term and $25 million revolving loan. As security for repayment, the lenders obtained a first priority lien on "substantially all of PDM's assets."

         ¶6 PDM's financial condition had begun to significantly decline by 2011. PDM eventually defaulted on its obligations to the lenders under the 2006 credit agreement. By 2013, PDM was indebted to the lenders on secured debt with a face value of approximately $76 million. In June 2013, the lenders and PDM executed a forbearance agreement in which PDM agreed to either sell itself to an interested acquirer or restructure with the assistance of an investment banker.

         ¶7 Pursuant to the forbearance agreement, PDM retained an investment banker to market a sale of the company for the highest possible price. Of 136 potential acquirers contacted by the investment banker, none of them offered a price that came close to satisfying PDM's outstanding secured debt. The highest bid came from Atlas, a private equity firm.

         ¶8 Rather than purchase PDM's assets directly, Atlas and the lenders agreed that Atlas would acquire the lenders' secured claims against PDM and then foreclose on PDM's assets. Atlas caused the creation of a new entity, Bridge Resources, LLC, to aid in the acquisition of PDM's assets. Bridge Resources subsequently filed amended Uniform Commercial Code (UCC) financing statements, in which it confirmed itself as the new administrative agent under the credit agreement and verified its protected security interest in PDM's assets. Through a series of transactions, affiliates of Atlas and a co-investor purchased all of PDM's outstanding debt directly from the lenders for approximately $22 million, which was indicative of the value of PDM's assets.

         ¶9 PDM, having no prospect of paying back the outstanding debt under the credit agreement, entered into a "transaction support agreement" with Bridge Resources in October 2013. The agreement anticipated that the parties would work towards a strict foreclosure on the collateral securing PDM's loans in exchange for partial satisfaction of PDM's obligations under the 2006 credit agreement. To carry out the strict foreclosure, Atlas created a subsidiary called Veritas, which was assigned a first priority lien on PDM's assets and eventually became the sole secured lender under the credit agreement.[4]

         ¶10 In November 2013, PDM, Bridge Resources, and Veritas executed a strict foreclosure agreement. PDM conveyed to Veritas the collateral securing the loan in exchange for the discharge of approximately $71 million out of $76 million of unpaid, secured debt that PDM owed under the credit agreement.[5] The strict foreclosure agreement did not change the ownership or board structure of PDM. It is undisputed that there was no stock or other indicia of equitable ownership transferred from Veritas to PDM. Further, no director or owner of PDM became a director or owner of Veritas.

         ¶11 Meanwhile, in 2010, Lunda, a civil construction contractor, entered into a subcontract with PDM, which required PDM to provide steel for a bridge construction project. In 2012, after PDM failed to perform, Lunda sued for breach of contract. At the time that Veritas foreclosed on PDM's assets, Lunda had a contingent, unsecured breach of contract claim. It was not until 2014, after the strict foreclosure agreement was finalized, that Lunda obtained a $16 million judgment against PDM. Lunda, as an unsecured creditor, subsequently took steps under Wis.Stat. § 779.155 to assert a lien on funds owed to Veritas by the Wisconsin Department of Transportation (DOT) for projects on which PDM had worked.

         ¶12 In February 2015, Veritas commenced this action against Lunda and sought a declaration that Lunda had no claim to payments by the DOT for the projects at issue. Lunda asserted eight counterclaims against Veritas and commenced a third-party action against Atlas, Bridge Fabrication Holdings, and two former officers of PDM.[6] The circuit court granted Veritas's motion to dismiss on six of Lunda's counterclaims. Only two claims remained: a successor liability claim against Veritas[7] and a claim against Veritas, Atlas, and Bridge Fabrication Holdings under the Wisconsin Uniform Fraudulent Transfer Act (WUFTA claim).[8] Summary judgment motions on the remaining two claims were granted by the circuit court.

         ¶13 On appeal, Lunda challenged the dismissal of its successor liability claim against Veritas under the de facto merger and mere continuation exceptions. Lunda also appealed the dismissal of its WUFTA claim against Veritas and the third-party defendants. The court of appeals affirmed the circuit court as to both issues.[9]

         ¶14 Lunda petitioned this court for review and challenges the dismissal of its successor liability claim against Veritas as it relates to the de facto and mere continuation exceptions. Lunda also alleges that the court of appeals erroneously dismissed its successor liability claim in light of the fraudulent transaction exception to the rule against successor liability.

         II. STANDARD OF REVIEW

         ¶15 We review a decision on summary judgment using the same methodology as the circuit court. Green Spring Farms v. Kersten, 136 Wis.2d 304, 314-15, 401 N.W.2d 816 (1987). Summary judgment shall be granted where the record demonstrates "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Wis.Stat. § 802.08(2).

         III. ANALYSIS

         ¶16 We first discuss the purpose of the general rule against successor liability and the exceptions to that rule as developed in Wisconsin jurisprudence. We next clarify the de facto merger and mere continuation exceptions and determine whether Lunda raised a genuine issue of material fact as to these exceptions. Finally, we decide whether Lunda forfeited its successor liability claim as to the fraudulent transaction exception by failing to raise it before the court of appeals.

         A. The general rule against successor liability: its purpose and relevant exceptions

         ¶17 It is well established that when a company sells or transfers all of its assets to another company, the purchasing company does not become liable for the transferring company's debts and liabilities. See Fish, 126 Wis.2d at 298 (quoting Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977))("'[a] corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation.'"). This general rule against successor liability was designed to protect a bona fide purchaser from assuming the liabilities of a predecessor corporation.[10] See Springer v. Nohl Elec. Prods. Corp., 2018 WI 48, ¶15, 381 Wis.2d 438, 912 N.W.2d 1. "'The traditional rule of nonliability was developed . . . to protect the rights of commercial creditors and dissenting shareholders following corporate acquisitions, as well as to determine successor corporation liability for tax assessments and contractual obligations of the predecessor.'" Fish, 126 Wis.2d at 303 (quoting Ramirez v. Amsted Indus., Inc., 431 A.2d 811, 815-16 (N.J. 1981)).

         ¶18 We have recognized four exceptions to the rule against successor liability under the following circumstances:

(1) when the purchasing corporation expressly or impliedly agreed to assume the selling corporation's liability; (2) when the transaction amounts to a consolidation or merger of the purchaser and seller corporations; (3) when the purchaser corporation is merely a continuation of the seller corporation; or (4) when the transaction is entered into fraudulently to escape liability for such obligations.

Tift v. Forage King Indus., Inc., 108 Wis.2d 72, 75-76, 322 N.W.2d 14');">322 N.W.2d 14 (1982) (quoting Leannais, 565 F.2d at 439). These exceptions illustrate the balance in successor liability law between "two competing, and often conflicting, policy goals: to provide a necessary remedy to injured parties, often tort claimants, and to provide transactional clarity and certainty for business parties engaged in fundamental corporate transactions." Matheson, John H., Successor Liability, 96 Minn. L. Rev. 371, 372-73 (2011).

         ¶19 We focus our discussion on exceptions two and three, also known as the de facto merger and mere continuation exceptions. Both exceptions "are declaratory of tests to be applied to encourage 'piercing the corporate veil'" and thus examine "the substance and effect of business transformations or reorganizations to determine whether the original organization continues to have life or identity in a subsequent and existing business organization." Tift, 108 Wis.2d at 79. We resolve the parties' dispute over the type of "identity" evidence necessary for purposes of establishing these exceptions.

         B. The de facto merger and mere continuation exceptions defined

         ¶20 The de facto merger and mere continuation exceptions were defined and then developed in three main cases: Tift, Cody and Fish. This court first explicitly recognized the exceptions in Tift, 108 Wis.2d 72, a products liability action alleging injuries caused by a "chopper box" tractor attachment. The chopper box was first manufactured by a sole proprietorship, which turned into a partnership and eventually "metamorphosed into" a corporation, Forage King Industries. Id. at 74. Forage King Industries consisted of two shareholders who had formed the partnership, one of whom was the original sole proprietor. Id. Throughout its different business forms, the company retained the same employees, manufactured the same products, and sold to the same dealers. Id. at 74-75.

         ¶21 In 1975, just before the plaintiff was injured, all of the Forage King Industries stock was purchased by another corporation that continued to operate as Forage King Industries and manufacture the same products. Id. at 75. The plaintiff commenced an action against Forage King Industries and its insurer, alleging that the company was a successor to the manufacturer of the chopper box and was therefore responsible for the plaintiff's injuries. Id.

         ¶22 We applied the "rules of corporate law" and reasoned that the de facto merger and mere continuation exceptions "demonstrate that, when it is the same business organization that one is dealing with, whether it be by consolidation, merger, or continuation, liability may be enforced" because "[t]hese are tests of identity." Id. at 79. We thus concluded that, despite organizational transformation, the present Forage King Industries was "substantially identical to the organization that manufactured the allegedly defective chopper box and [was] therefore liable."[11]Id. at 80.

         ¶23 The mere continuation exception to successor liability was further developed in Cody v. Sheboygan Mach. Co., 108 Wis.2d 105, 321 N.W.2d 142 (1982). The plaintiff sued Sheboygan Machine Company for injuries caused by a defective sander. Id. at 109. The defective sander had been manufactured by the original Sheboygan Machine Company, but that company sold its assets and its name to a different company, who again resold the company assets and name. Id. at 107-08. The plaintiff brought suit against Sheboygan Machine Company, a corporation that shared the same name as the manufacturer of the sander but functioned exclusively as a repair shop. Id. at 108-09. Sheboygan Machine Company shared none of the officers, directors, or stockholders as the predecessor companies. Id. at 108.

         ¶24 Citing to the facts of Tift and the principles enunciated in that case, the Cody court concluded that the mere continuation exception did not apply because the facts did "not demonstrate any continuity or identity of business organizations" between the two entities in question. Id. at 106. The Cody court concluded that the second corporation "was an entirely different corporation" and that the "subsequent businesses were markedly different in character and purpose from the original manufacturer" and "were not continuations of the original business." Id. at 111.

         ¶25 This court refined the de facto merger and mere continuation exceptions several years later in Fish, 126 Wis.2d 293. The Fish plaintiffs alleged injuries resulting from the use of a power press manufactured by Bontrager Construction Company. Id. at 295-96. The plaintiffs filed suit against Amsted Industries, Inc., the company that acquired Bontrager's assets and continued to make the power press, and South Bend II, the company who subsequently bought the power press line from Amsted. Id. at 295-97. They alleged that, as successor corporations, Amsted and South Bend II were liable for the acts of Bontrager in manufacturing the allegedly defective power press. Id. at 297. All parties agreed that the traditional exceptions to the rule against successor liability did not apply to the case, but the plaintiffs argued that Tift expanded both the de facto merger and mere continuation exceptions. Id. at 298. The plaintiffs argued that "identity" meant "identity of assets, operations and identity of the product, rather than identity of ownership." Id. at 300-01 (emphasis added).

         ¶26 The Fish court plainly rejected the argument that Tift expanded the de facto and mere continuation exceptions: "the [p]laintiffs are in error in alleging that the Tift decision has expanded the exceptions to the rule of nonliability." Id. at 301. The court specified that "[i]dentity refers to identity of ownership, not identity of product line." Id. The court affirmed dismissal of the successor liability claim as related to both exceptions because "there [was] not sufficient identity between Bontrager and either Amsted or South Bend II to justify holding them liable for the acts of their predecessor." Id. at 295.

         ¶27 The Fish court also delineated the "key elements" required to meet the de facto and mere continuation exceptions. In determining whether a de facto merger has occurred, the "key element" "is that the transfer of ownership was for stock in the successor corporation rather than cash." Id. at 301. The "key element" to resolve whether the successor is a mere continuation of the seller corporation "'is a common identity of the officers, directors and stockholders in the selling and purchasing corporations.'" Id. at 302 (quoting Leannais, 565 F.2d at 440).

         C. The requirement of identity of ownership

         ¶28 As Fish made clear, the de facto and mere continuation exceptions to the rule against successor liability require evidence of identity of ownership.[12] For the de facto merger exception, identity of ownership hinges on whether "the transfer of ownership was for stock in the successor corporation rather than cash." Fish, 126 Wis.2d at 301. It is important to recognize that transfer of ownership may still exist even where the successor entity does not have stock to offer the acquired entity. In such cases, proof of identity of ownership may be established through equity ownership.[13] For example, equity ownership could take the form of membership interests in a limited liability corporation.[14]

         ¶29 As to the mere continuation exception, identity of ownership is established where there "'is a common identity of the officers, directors and stockholders in the selling and purchasing corporations.'" Fish, 126 Wis.2d at 302 (quoting Leannais, 565 F.2d at 440).[15] Some evidence, like the common identity of stockholders, will support application of both the de facto merger and mere continuation exceptions. However, unlike the de facto merger exception, the mere continuation exception may be established with evidence of the continuation of the same officers, directors, and stockholders under circumstances where there is no transfer of equity or stock ownership.

         ¶30 Despite Fish's clear mandate that identity of ownership is the key inquiry, Lunda asserts that Fish significantly expanded the de facto merger and mere continuation exceptions to allow the substitution of "identity of management and control" for identity of ownership. In support of its argument, Lunda highlights the Fish court's use of the phrase "identity of management and control" twice in the decision: once, in addressing Tift, where the court said there was an "identity of management and control throughout the transformation from sole proprietorship to partnership;" and again, in discussing Cody, where the court said there was "no identity of management and control throughout the transfers of ownership." Fish, 126 Wis.2d at 302. Lunda further cites to IGL and Gallenberg for the proposition that courts post-Fish have not required identity of ownership. IGL-Wis. Awning, Tent & Trailer Co., Inc. v. Greater Milwaukee Air & Water Show, Inc., 185 Wis.2d 864, 520 N.W.2d 279');">520 N.W.2d 279 (Ct. App. 1994); Gallenberg Equip., Inc. v. Agromac Int'l, Inc., 10 F.Supp.2d 1050 (E.D. Wis. 1998).

         ¶31 Identity of ownership remains the sine qua non of successor liability. Although the phrase "identity of management and control" was used to describe the transfers of ownership in Tift and Cody, the Fish court maintained that identity of ownership is required to meet the de facto merger and mere continuation exceptions. The Fish court explained that in Tift there was identity of ownership because "the identical organization continued to manufacture the same product" and in Cody there was not identity of ownership because "the successor corporation was an entirely different corporation" with "'no common ...


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