Luxliner P.L. Export, Co. v. RDI/Luxliner, Inc.

• Citation: 13 F.3d 69
• Decision Date: 30 December 1993
• Docket Number: No. 92-5530,92-5530
• Parties: LUXLINER P.L. EXPORT, CO., a New Jersey Corporation; P.L. Custom Body & Equipment Co., Inc., a New Jersey Corporation; and Martin V. Smock, v. RDI/LUXLINER, INC., a Michigan Corporation; Luxliner Coach, Inc., a Michigan Corporation; Recreational Designs, Inc., a Michigan Corporation; Oyvind Haugestad; Jeffrey Showman; Sturgis Lux-Liner Homologation, Inc., Sturgis Lux-Liner Homologation, Inc., Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 69

13 F.3d 69

27 Fed.R.Serv.3d 1001

LUXLINER P.L. EXPORT, CO., a New Jersey Corporation; P.L.

Custom Body & Equipment Co., Inc., a New Jersey

Corporation; and Martin V. Smock, v. RDI/LUXLINER, INC., a Michigan Corporation; Luxliner Coach,

Inc., a Michigan Corporation; Recreational Designs, Inc., a

Michigan Corporation; Oyvind Haugestad; Jeffrey Showman;

Sturgis Lux-Liner Homologation, Inc.,

Sturgis Lux-Liner Homologation, Inc., Appellant.

No. 92-5530.

United States Court of Appeals, Third Circuit.

Argued May 6, 1993.

Decided Dec. 30, 1993.

Lewis J. Pepperman, Craig S. Hilliard (argued), Stark & Stark, Princeton, NJ, for appellant.

Jonathan J. Lerner (argued), Gern, Dunetz, Davison & Weinstein, Roseland, NJ, for appellees.

Before: SLOVITER, Chief Judge, COWEN and LEWIS, Circuit Judges.

OPINION OF THE COURT

LEWIS, Circuit Judge.

Rule 25(c) of the Federal Rules of Civil Procedure allows a district court to join a corporation that succeeds to the interest of a party with, or substitute it for, its predecessor in a lawsuit. Acting pursuant to Rule 25(c), the district court joined a corporation on judgments entered against another corporation despite the presence of conflicting affidavits regarding whether the joined corporation was the initial judgment debtor's successor in interest. Because we hold that the district court should have conducted a hearing to determine the joined corporation's status under such circumstances, we will reverse and remand for an evidentiary hearing.

I.

This case involves a planned joint venture which never materialized. Plaintiffs and defendants had planned to join forces to modify Ford Motor Company ("Ford") vehicles for export to Scandinavia. After plaintiffs advanced money to the defendants and began preparation themselves, defendants withdrew from the deal. Plaintiffs filed a complaint alleging various claims, including breach of contract, tortious interference with contractual relations and fraud.

One of the defendants was RDI/Luxliner, Inc. ("RDI"). In August, 1991, the district court entered a default judgment against RDI on the breach of contract claims. Because it found that there was no just reason for delay, the court directed the entry of judgment, despite the pendency of the remainder of the case. See Fed.R.Civ.P. 54(b). The parties settled and dismissed the remainder of the case.

Two months later, however, plaintiffs requested that the case be reopened because the settlement had never been consummated. They also moved, pursuant to Rule 25(c), to join or substitute another company, Sturgis Lux-Liner Homologation, Inc. ("Sturgis"), on the judgment previously entered against RDI because Sturgis had purchased RDI's assets in May, 1991, making RDI judgment-proof.

In support of the latter motion, plaintiffs filed the affidavit of Martin Smock, a plaintiff himself and the sole shareholder of one of the plaintiff corporations (the "Smock affidavit"). In response, Sturgis filed the affidavit of Jack L. Clingingsmith, its majority shareholder, sole director and sole officer (the "Clingingsmith affidavit"). Sturgis also filed a memorandum in which it requested that the court "permit [it] to test the veracity of ... statements [contained within the Smock affidavit] through further discovery and an evidentiary hearing." Reply brief, exhibit 1.

The district court reopened the case and, without conducting an evidentiary hearing, decided the Rule 25(c) motion. The court joined Sturgis on the judgments against RDI because it found that Sturgis' purchase of RDI's assets "gave rise to a de facto merger and a continuation of RDI's business." District court opinion at 5. Sturgis appeals.

The district court had jurisdiction over this case pursuant to 28 U.S.C. Sec. 1332. We exercise jurisdiction pursuant to 28 U.S.C. Sec. 1291.

II.

Rule 25 provides in relevant part:

(c) Transfer of Interest. In case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party.

Fed.R.Civ.P. 25(c). A "transfer of interest" in a corporate context occurs when one corporation becomes the successor to another by merger or other acquisition of the interest the original corporate party had in the lawsuit. See Froning's, Inc. v. Johnston Feed Service, Inc., 568 F.2d 108, 110 (8th Cir.1978) (assignment of claims); DeVilliers v. Atlas Corp., 360 F.2d 292, 297 (10th Cir.1966) (merger); Hazeltine Corp. v. Kirkpatrick, 165 F.2d 683, 685-86 (3d Cir.1948) (transfer of patents).

Rule 25(c) "does not require that anything be done after an interest has been transferred." See 7C Wright, Miller & Kane, Federal Civil Procedure (hereinafter "Wright & Miller") Sec. 1958 at 555 (2d ed. 1986). When a defendant corporation has merged with another corporation, for example, the case may be continued against the original defendant and the judgment will be binding on the successor even if the successor is not named in the lawsuit. See id.; see also Froning's, 568 F.2d at 110. Although substitution is usually effected during the course of litigation, substitution has been upheld even after litigation has ended as long as the transfer of interest occurred during the pendency of the case. See, e.g., Bamerilease Capital Corp. v. Nearburg, 958 F.2d 150, 153-54 (6th Cir.1992) (affirming substitution in the context of proceeding to enforce a settlement agreement); Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc., 775 F.2d 38, 40 (2d Cir.1985) (affirming district court's substitution of successor corporation for original defendant after entry of judgment).

Because joinder or substitution under Rule 25(c) does not ordinarily alter the substantive rights of parties but is merely a procedural device designed to facilitate the conduct of a case, a Rule 25(c) decision is generally within the district court's discretion. Fontana v. United Bonding Ins. Co., 468 F.2d 168, 169 (3d Cir.1972). See also Otis Clapp & Son, Inc. v. Filmore Vitamin Co., 754 F.2d 738, 743 (7th Cir.1985), citing 7A Wright & Miller Sec. 1958 at 664-65; National Independent Theatre Exhibitors, Inc. v. Buena Vista Distribution Co., 748 F.2d 602, 610 (11th Cir.1984). To determine whether an entity is a transferee of interest so as to trigger this discretion, however, a district court's mission is one of applying law to facts. We review the district court's factual findings for clear error; its application of the law, and the manner in which it finds facts under the law, are subject to plenary review. Levendos v. Stern Entertainment, Inc., 909 F.2d 747, 749 (3d Cir.1990).

In contrast to Rule 56, regarding summary judgment, Rule 25(c) does not specify a method for deciding motions or a standard to use in determining whether motions can be decided on the papers. This gap in Rule 25(c) most likely stems from the fact that the rule does not easily lend itself to contested motions practice; it permits automatic continuation of a lawsuit against an original corporate party, although the outcome will bind the successor corporation, unless the court believes the transferee's presence would facilitate the conduct of the litigation. See Froning's, 568 F.2d at 110; 7C Wright & Miller Sec. 1958 at 557; 3B Moore, Moore's Federal Practice Sec. 25.08 at 25-58-25-63 (1993). Thus, it would appear that the drafters may not have anticipated the need to instruct courts on how to decide Rule 25(c) motions in cases in which the parties dispute whether one corporation should be substituted for or joined with another. In the absence of explicit direction, we will delineate the procedures required to accord due process to the parties.

Before a party may be deprived of a property interest, due process requires, at a minimum, notice and an opportunity to be heard. See, e.g., Mathews v. Eldridge, 424 U.S. 319, 332-33, 96 S.Ct. 893, 901-02, 47 L.Ed.2d 18 (1976); Board of Regents v. Roth, 408 U.S. 564, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972); Goldberg v. Kelly, 397 U.S. 254, 90 S.Ct. 1011, 25 L.Ed.2d 287 (1970). The adversarial process "assumes that a factfinder will give the parties an adequate opportunity to be heard; if it does not, it cannot find facts reliably." In re Paoli Railroad Yard PCB Litigation, 916 F.2d 829, 854 (3d Cir.1990). See also Hardy v. Johns-Manville Sales Corp., 681 F.2d 334, 338 (5th Cir.1982) (right to a full and fair opportunity to litigate an issue is protected by the due process clause).

In this case, Sturgis' due process interests, when weighed in the context of plaintiffs' Rule 25(c) motion, are particularly compelling, for Sturgis was joined not merely in ongoing litigation but on a judgment already entered against RDI. Assuming the affidavits filed presented a genuine issue of material fact, to join Sturgis on the judgment without conducting a hearing would be to deprive Sturgis of its only opportunity to develop the operative facts before being held liable for RDI's actions. When competing sworn affidavits may result in one or more genuine issues of material fact, due process requires that a district court judge hear the evidence to assess for him or herself the credibility, or lack thereof, of one side as opposed to the other. Accordingly, we hold that where competing affidavits focus on a material issue, a district court may not decide factual issues arising in the context of Rule 25(c) motions simply by weighing the sworn affidavits against one another. Cf. Minnesota Mining & Manufacturing Co. v. Eco Chem, Inc., 757 F.2d 1256, 1259 (Fed.Cir.1985). See also Panther Pumps & Equipment Co., Inc. v. Hydrocraft, Inc., 566 F.2d 8, 16-17, 23-24 (7th Cir.1977). Instead, at least in a context such as this in which a decision on a Rule 25(c) motion effectively imposes liability, the court must first determine whether the affidavits "show that there is no genuine...