Bud Antle, Inc. v. Eastern Foods, Inc.

• Decision Date: 25 April 1985
• Docket Number: No. 84-8106,84-8106
• Citation: 758 F.2d 1451
• Parties: BUD ANTLE, INC., Plaintiff-Appellee, v. EASTERN FOODS, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1451

758 F.2d 1451

BUD ANTLE, INC., Plaintiff-Appellee, v. EASTERN FOODS, INC., Defendant-Appellant.

No. 84-8106.

United States Court of Appeals Eleventh Circuit.

April 25, 1985.

William A. Trotter, III, Augusta, Ga., Paul R. Jordan, Atlanta, Ga., for defendant-appellant.

F. Barron Grier, III, Charles Carpenter, Jr., Columbia, S.C., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Georgia.

Before VANCE and ANDERSON, Circuit Judges, and PITTMAN ^*, District Judge.

PITTMAN, District Judge.

The appellant, Eastern Foods, Inc. (Eastern), appeals from a jury verdict in which it was held liable under the theory of de facto merger for a debt on open account owed by B & B Produce Processors, Inc. (B & B) to the plaintiff-appellee Bud Antle, Inc. (Bud Antle). Eastern contends that the district court erred in its refusal to direct a verdict in its favor on the de facto merger count and in its charge to the jury on the de facto merger doctrine. This court agrees and must reverse the district court's judgment.

I. Factual Background

The plaintiff-appellee Bud Antle, which is in the wholesale produce business, sold lettuce on open account to B & B. B & B processed and packaged the lettuce and sold it to its customers, principally fast food franchises. B & B experienced cash flow problems, and by September 30, 1978, it owed Bud Antle $158,659.57 on open account.

During September, 1978, the defendant-appellant Eastern, a corporation that produces, sells, and distributes food products, met with B & B and showed interest in a possible merger with B & B. Eastern, B & B, and B & B's shareholders on September 29, 1978 entered an "Option Agreement" under which Eastern paid B & B $50,000.00 for "the option to purchase all of the business and affairs of B & B." The agreement provided:

If such option is exercised then at Eastern's election, either the Shareholders [of B & B] will transfer to Eastern all of the issued and outstanding stock of B & B or B & B will transfer all of its assets, real, personal, tangible and intangible to Eastern which at closing shall assume all of the disclosed liabilities of B & B. The exercise price under such option shall be a total of $50,000 payable at closing.

Contemporaneously with the execution of this option agreement, Eastern and B & B entered into a "Management Agreement" which gave Eastern certain authority to manage the operations of B & B. The purported purpose of this arrangement was to give Eastern an opportunity to evaluate in detail the financial condition of B & B and thus enable Eastern to reach an informed decision about whether to exercise its option. On October 1, 1978, Eastern and B & B entered a more comprehensive "Restated Management Agreement" which gave Eastern greater control over the management of B & B. This agreement provided that Eastern "shall be the exclusive manager of [B & B's] business, and hereby agrees to provide such services and perform such duties as are customarily provided for in such instances." It provided that Eastern agreed "to advise, consult with, and issue directions" on a variety of matters including all sales activities; the hiring, paying, and discharging of B & B's employees; the ordering of inventory and supplies; the conducting of promotional activities; and the maintenance of all machinery, fixtures, vehicles, and other operating equipment. The agreement authorized Eastern to place any or all B & B employees on Eastern's payroll. It authorized Eastern to terminate or renegotiate B & B's equipment rental contracts and leases. It authorized Eastern, where feasible, to consolidate the two companies' existing branch facilities. It authorized Eastern to negotiate with B & B's creditors to obtain voluntary reductions of B & B's outstanding debt. The agreement stated that Eastern would provide these services as an independent contractor, and it provided for Eastern to be compensated for the services based on the volume of B & B's production and sales during the operation of the agreement.

Pursuant to this agreement, Eastern undertook the management and operation of B & B from October 1, 1978 to February 29, 1979. It instituted a number of management actions authorized by the agreement. It loaned money to B & B without interest, receiving in return promissory notes executed by B & B and personally guaranteed by two of B & B's officers. Eastern renegotiated several of B & B's leases which were in default. It consolidated five of the two companies' branch warehouse facilities. There was no separate accounting by either B & B or Eastern for the cost or rent associated with the joint use of the other's offices and warehouses. Eastern also assumed the responsibility of making B & B's payroll, and the employees of B & B were paid by checks drawn on Eastern's account.

Since the management agreement provided that all funds derived from the operation of B & B would be received by Eastern, Eastern established a separate bank account for B & B. This account was entitled "Bell and Brook Account." Eastern used the name "Bell & Brook" in place of "B & B" on invoices and stationery. The Bell & Brook invoices listed the products sold by B & B as well as certain products sold by Eastern. Each product was identified by a unique product code number which enabled Eastern to keep separate records for the sale of B & B products and the receivables they generated. The name "Bell & Brook" allegedly was used in place of "B & B" to distinguish the sales, receipts, and expenses that B & B generated prior to the management agreement from those it generated after the agreement. Most of B & B's receivables generated prior to the signing of the management agreement had been sold to a factoring company.

During this period Eastern advised B & B's creditors, including Bud Antle, that Eastern and B & B had entered into a management agreement and option agreement and that the two corporations were considering a merger. Eastern also sought to ascertain from B & B's creditors the outstanding balances on B & B's accounts. Eastern, B & B, and Bud Antle engaged in a series of discussions and communications concerning B & B's outstanding debt and the possible merger. Eastern attempted to persuade Bud Antle to accept a reduction in B & B's debt, but Bud Antle insisted on full payment.

During the operation of the Restated Management Agreement, Eastern purchased produce from Bud Antle. All of these purchases were invoiced to Eastern even though some of the shipments were made to B & B at various warehouse locations. Eastern paid Bud Antle for all of the produce it purchased. During the term of the Restated Management Agreement Bud Antle made no sales of lettuce directly to B & B.

Eastern terminated the Restated Management Agreement in February of 1979 as the agreement provided it could do. Eastern ceased doing business with B & B's customers and notified them that its management relationship with B & B had been terminated. There was conflicting testimony about whether Eastern retained any of B & B's assets after terminating the agreement. It is clear that most of B & B's assets were seized by creditors and state taxing authorities.

It is undisputed that there was no statutory merger between Eastern and B & B. There was never a transfer of the capital stock of one corporation to the other corporation or its shareholders, officers, or directors. No shareholder, officer, or director of either corporation ever became a shareholder, officer, or director of the other.

II. Proceedings Below

Bud Antle filed suit against Eastern to recover the unsecured open account indebtedness of B & B. Bud Antle's complaint included several counts, but only two remained when the case came to trial. Count One alleged that Eastern had defrauded Bud Antle. Count Two alleged that a de facto merger had occurred between B & B and Eastern, making Eastern liable for B & B's debts. At the close of the plaintiff's evidence, Eastern moved for a directed verdict on both counts. The district court granted Eastern's motion on the fraud count but denied it on the de facto merger count. At the conclusion of all the evidence, Eastern renewed its motion for a directed verdict on Count Two. The district court decided that there was sufficient evidence of a de facto merger to submit the case to the jury, and it denied the motion.

The court submitted the case to the jury, instructing them in relevant part as follows:

You should sift the evidence and determine ... whether the Plaintiff has proven the following essential elements of the claim against the Defendant....

First, that B & B Produce Processors, Inc., was indebted to Bud Antle, Inc., in some amount of money. Second, that B & B Produce Processors, Inc., merged with Eastern Foods, Inc. There is no dispute about the amount of debt which is owed by B & B Produce Processors, Inc., to Bud Antle, Inc. Accordingly the main question to which you must direct yourselves is that of merger. Has the Plaintiff proven by a preponderance of the evidence that the two corporations, Eastern Foods, Inc., and B & B Produce Processors, Inc., have merged, joined or combined their ownership or business affairs so that the two have become one and the surviving corporation is liable for the debts of both corporations....

... A company to which assets or property is transferred by whatever means is not ordinarily liable for the debts of the former owner of the assets or property. Some exceptions to this rule obtain when A, there is an express or implied assumption of liability, B, the transaction is fraudulent, C, the transfer is not entirely in good faith, or D, the company acquiring the assets or property is a mere continuation of the old corporation. To guide you in any determination of whether one of the companies involved in this case is a mere continuation of the old corporation you may consider what's called a laundry list...