Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc.

Decision Date04 October 1985
Docket NumberD,No. 1186,1186
Citation775 F.2d 38
CourtU.S. Court of Appeals — Second Circuit
PartiesARNOLD GRAPHICS INDUSTRIES, INC., Plaintiff-Appellee, v. INDEPENDENT AGENT CENTER, INC., Defendant, and Electronic Tabulating Corporation, Defendant-Appellant. ocket 85-7115.

John Doar, New York City (David Wade, Michael S. Devorkin, New York City, on brief), for plaintiff-appellee.

Philip M. Gassel, New York City (Stuart M. Gerson, Epstein, Becker, Borsody & Green, New York City, on brief), for defendant-appellant.

Before MESKILL, KEARSE and WINTER, Circuit Judges.

KEARSE, Circuit Judge:

Defendant Electronic Tabulating Corporation ("ETC") appeals from a final judgment of the United States District Court for the Southern District of New York, Charles S. Haight, Jr., Judge, granting a motion by plaintiff Arnold Graphics Industries, Inc. ("Arnold"), pursuant to Fed.R.Civ.P. 25(c) to substitute ETC for defendant Independent Agent Center, Inc. ("IAC"), as defendant-judgment-debtor on a judgment won by Arnold against IAC in the United States District Court for the Northern District of Ohio (the "Ohio action"), and registered by Arnold in the district court for the Southern District of New York pursuant to 28 U.S.C. Sec. 1963 (1982). Judge Haight ruled that substitution was appropriate because IAC had been de facto merged into ETC. On appeal, ETC contends principally that the court erred in concluding that there had been a de facto merger and in failing to rule that Arnold had waived its opportunity to establish such a merger during the Ohio action. We agree with the rulings of the district court and we affirm the judgment.


In June 1979, Arnold, then a Pennsylvania corporation with its principal place of business in Ohio, commenced the Ohio action against ETC, a New York corporation whose principal place of business was in Newburgh, New York, and against IAC, ETC's wholly-owned subsidiary, which was incorporated in Texas and had once had its principal place of business in Texas but whose operations had by then been transferred to ETC's headquarters in Newburgh. Arnold sought to recover two debts totaling more than $73,000 allegedly owed Arnold by IAC.

In August 1979, ETC moved to dismiss Arnold's complaint against it for lack of personal jurisdiction, arguing that the parent-subsidiary relationship between it and IAC was insufficient to subject it to the court's jurisdiction. In support of its motion ETC submitted the affidavit of Aaron Ruscitti, an ETC vice president, stating that ETC did not do business in Ohio, that IAC had been acquired as an operating subsidiary, and that IAC "is a distinct corporate entity and exists as a corporate subsidiary of" ETC. After giving Arnold an opportunity to conduct discovery on the jurisdiction issue, District Judge William K. Thomas, to whom the case had been assigned, dismissed the complaint as to ETC for lack of personal jurisdiction. The dismissal was stated to be "without prejudice."

IAC appeared in the action and defended during the pretrial stages through July 1, 1981. At the pretrial conference held on that date, counsel for IAC stated that IAC was no longer doing business but that it was still a corporation in good standing. When the case was called for trial in November 1982, however, IAC defaulted. In colloquy with the court, counsel for Arnold The court proceeded to take evidence on Arnold's claim against IAC and entered judgment against IAC for $180,332.86, including interest, plus costs and interest from the date of the judgment ("Ohio judgment").

stated that he was prepared to proceed on the merits of the case against IAC but that he would prefer to reopen the case against ETC since Arnold now had some evidence that ETC had diluted the assets of IAC and that IAC had been an agent for ETC. The court suggested that Arnold proceed with the merits of its case against IAC and that Arnold might later pursue ETC if there were some basis for moving to vacate ETC's dismissal.

In June 1984, the Ohio judgment was docketed in the Southern District, and Arnold moved for an order pursuant to Fed.R.Civ.P. 25(c) substituting ETC for IAC as defendant-judgment-debtor on the ground that there had been a de facto merger of IAC into ETC. Rule 25(c) provides, in pertinent part, that "[i]n 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 interest is transferred to be substituted in the action or joined with the original party."

The papers before the court on the Rule 25(c) motion included undisputed evidence that IAC's debts to Arnold had been incurred prior to December 12, 1977; that on December 12, 1977, ETC acquired 100% of the stock of IAC; that in 1978, ETC began to phase out IAC's Texas operation, and by August 31, 1978, only one employee remained at IAC in Texas; that an apparently contemporary ETC document describing the 1979 liquidation of ETC subsidiaries including IAC stated that "[o]n January 1, 1979 the assets and liabilities of Independent Agent Center, Inc. ... were transferred to the books of Electronic Tabulating Corporation"; that notes to the financial statements in ETC's 1979 annual report on Form 10-K to the Securities and Exchange Commission ("SEC") stated that "[a]s of January 1, 1979 the assets and liabilities [of IAC] were merged into [ETC]"; that notes to the financial statements in ETC's Form 10-K reports to the SEC for 1980 and 1981 also stated that as of January 1, 1979, the assets and liabilities of IAC had been transferred to ETC; and that in March 1981, IAC's charter was forfeited by the Texas Secretary of State.

In a memorandum opinion and order dated January 22, 1985 ("Opinion"), the district court granted Arnold's motion. The district court rejected ETC's contention that the motion was an impermissible collateral attack on the Ohio court's decision to dismiss ETC for lack of personal jurisdiction, stating that "Judge Thomas was not asked to and did not adjudicate the question of de facto merger which is present[ed] by the present motion." Opinion at 14. As to the merits of the motion, it concluded that there had been a de facto merger:

Where the evidence shows a purchase of the selling corporation's stock by the purchasing corporation; the acquisition of the selling corporation's assets and an acknowledgement that the purchasing corporation had also assumed the selling corporation's liabilities; the continuation of the selling corporation's business by the purchasing corporation; and the eventual dissolution of the selling corporation, a de facto merger has occurred which will render the purchasing corporation liable for just claims which third parties may have against the selling corporation.

Id. at 18. Accordingly, the court entered judgment substituting ETC for IAC as judgment debtor on the Ohio judgment.


On appeal, ETC challenges the judgment entered below on the grounds that (1) Arnold should have been held collaterally barred from litigating in the Southern District whether a de facto merger had occurred between IAC and ETC, (2) the evidence presented was insufficient to support a conclusion that a de facto merger had occurred, and (3) the district court should

not have granted Arnold's motion without a trial as to whether ETC assumed the liabilities of IAC. We disagree and affirm the decision of the district court.

A. The Contention that Arnold is Barred from Asserting De Facto Merger

ETC contends that Arnold was barred by principles of res judicata, collateral estoppel, or law of the case from asserting in the Southern District that there had been a de facto merger of IAC into ETC. The premise for its position is that since the Ohio court admittedly had jurisdiction over IAC, if there had been a de facto merger of IAC into ETC, the court would also have had jurisdiction over ETC; since the Ohio court dismissed the case against ETC for lack of jurisdiction, it must have determined that there had been no de facto merger. See Fehl v. S.W.C. Corp., 433 F.Supp. 939 (D.Del.1977) (successor corporation not transacting business in state is subject to personal jurisdiction based on specific business transacted by its predecessor where de facto merger has occurred); cf. I.A.M. National Pension Fund v. Wakefield Industries, 699 F.2d 1254, 1258-59 (D.C.Cir.1983) (service on parent corporation reaches foreign subsidiary when two are not really separate entities). We reject ETC's arguments.

First, the dismissal of ETC for lack of personal jurisdiction has no res judicata effect because it was not a final judgment on that issue. See 1B J. Moore, J. Lucas & T. Currier, Moore's Federal Practice p 0.405 at 231-32 (2d ed. 1984) (dismissal for lack of jurisdiction "does not preclude a subsequent action where in the interim facts have occurred which now establish jurisdiction"). The fact that Arnold was given an opportunity in the Ohio action to conduct discovery in order to oppose ETC's motion and the fact that it did not come forward with evidence at that time to refute the basis for the motion did not mean that Arnold was thereafter barred on the question of the court's jurisdiction over ETC. The Ohio court entered its order dismissing ETC "without prejudice." Thus, Arnold remained free to renew its attempt to bring ETC into the Ohio action. Nor does the fact that upon the default of IAC Arnold suggested that it had evidence that might warrant bringing ETC into the case preclude Arnold's present reliance on de facto merger. The Ohio court left open the possibility that Arnold might reopen the matter, and the order dismissing ETC remained "without prejudice."

Nor is ETC aided by the doctrines of collateral estoppel or law of ...

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