Carter Enterprises, Inc. v. Ashland Specialty Co.
| Decision Date | 31 January 2001 |
| Docket Number | Civ.A. No. 3:00-00294. Bankruptcy No. 98-30281. Adversary No. 99-0154. |
| Court | U.S. District Court — Southern District of West Virginia |
| Parties | CARTER ENTERPRISES, INC., Plaintiff, v. ASHLAND SPECIALTY CO., INC., Defendant. |
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William D. Levine, St. Clair & Levine, Huntington, WV, for appellant.
J. Grant McGuire, Campbell, Woods, Bagley, Emerson, McNeer & Herndon, Huntington, WV, for appellee.
This case is an appeal from the denial by the bankruptcy judge of Appellant's objections to Appellee's proof of claim and the February 17, 2000 judgment order of the bankruptcy court. The Court disposes with oral argument because the facts and legal arguments are adequately presented in the briefs and in the record, and the decisional process would not be significantly aided by oral argument. See FED. R.BANKR.P. Rule 8012. For the reasons set forth below, the Court AFFIRMS the judgment order of the bankruptcy court.
Before July 1996, Greg Carter owned and operated as a sole proprietorship three retail stores in the Huntington, West Virginia, area (denominated in the record as Tobacco Huts # 1, # 2, and # 3). Through July 1996, the sole proprietorship purchased inventory from Appellee Ashland Specialty Company (Ashland). Evidence in the record is that on June 30, 1996, at the ostensible end of the sole proprietorship, Carter owed Ashland $426,744.41 for unpaid purchases.1 (Ex. B.)
In March 1996, Carter incorporated as Carter Enterprises, Inc. (Appellant). On July 1, 1996, this corporation began operation of those same stores. Thereafter, from July 1996 through 1998, Carter Enterprises, Inc., continued to purchase inventory from Ashland. Appellant introduced evidence that during this period, it purchased $1,777,049.34 worth of goods from Ashland (Tr. at 18 & 24; Ex. 1) and paid to Ashland $1,763.866.22 (Tr. at 18; Ex. 1). Throughout the period of 1996 to 1998, Ashland continued to make payment demands from Carter Enterprises, Inc., for amounts due from both pre- and post-incorporation sales, demands which Appellant made no effort to dispute. Furthermore, Ashland asserts that it was unaware of Carter's incorporation.
Unable to resolve the Carter account, Ashland filed a petition for involuntary bankruptcy on April 10, 1998. See In re Carter Enter., Inc., No. 98-30281. On June 4, 1998, the bankruptcy judge converted the case from Chapter 7 to Chapter 11. Appellant filed its objection to Appellee's proof of claim on July 2, 1999, and the bankruptcy court converted the same to adversary proceeding number 99-0154 on December 9, 1999. A hearing was held before the bankruptcy judge on February 3, 2000. On February 17, 2000, the bankruptcy court entered a judgment order, denying Appellant's objections and finding that Appellee has a valid, unsecured claim of $348,542.73. Appellant filed its notice of appeal from that judgment order on April 14, 2000.
This Court has jurisdiction pursuant to 28 U.S.C. §§ 158 & 1334 and FED. R.BANKR.P. 8001. In an appeal from a bankruptcy court, a district court may not set aside the bankruptcy judge's findings of fact unless those findings are clearly erroneous. See FED.R.BANKR.P. 8013;2In re Bryson Prop., XVIII, 961 F.2d 496, 499 (4th Cir.1992); In re Johnson, 960 F.2d 396, 399 (4th Cir.1992). "`A finding is "clearly erroneous" when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). A bankruptcy court's conclusions of law are reviewed de novo. See In re Johnson, supra. Mixed question of fact and law are typically reviewed de novo. See Rinn v. First Union Nat. Bank of Md., 176 B.R. 401 (D.Md.1995) ; In re Grimm, 156 B.R. 958 (E.D.Va.1993) ().
A proof of claim executed and filed in accordance with the Federal Rules of Bankruptcy constitutes prima facie evidence of the validity and amount of that claim. FED.R.BANKR.P. 3001(f); see 11 U.S.C. §§ 501(a), 502(a) (). Such a proof of claim is some evidence and will suffice to overcome a mere formal objection without more. Thus, where a debtor objects to such a claim, the burden of proof falls on the objecting debtor. The ultimate burden of persuasion by a preponderance of the evidence, however, at all times remains with the creditor. See, e.g., In re Allegheny Int'l, Inc., 954 F.2d 167, 173-74 (3d Cir.1992) (); Wright v. Holm (In re Holm), 931 F.2d 620, 623 (9th Cir.1991) ( ; In re Fidelity, Holding Co., Ltd., 837 F.2d 696 (5th Cir.1988).
The first issue on appeal is whether the bankruptcy judge erred in finding successor liability, i.e., in holding Carter Enterprises, Inc., liable for debts previously incurred by Greg Carter, the sole proprietorship, doing business as Carter Enterprises. This issue presents a mixed question of fact and law; therefore, this Court will review the decision of the bankruptcy judge de novo.
It is important to state at the outset what this case is not about: This case is not about corporate veil-piercing, or even about reverse corporate veil-piercing.3 Notwithstanding allegations to the contrary, the bankruptcy judge did not find that "Carter Enterprises was liable for the debts of its stockholder" (Br. of Appellant at 3), or "that since Ashland did not know about the change from sole proprietorship to corporation, the corporate debtor was liable for the obligations of its stockholders" (Br. of Appellant at 6). (See, e.g., Tr. at 137.1 to 138.10.) Successor liability, relied upon by the bankruptcy judge and by this Court, and corporate veil-piercing, while based on many overlapping factors, are separate legal doctrines with distinct legal consequences.
Piercing the corporate veil to hold a corporation's owner responsible for the corporation's liabilities (or its reverse counterpart, where that cause of action has been recognized) involves examination of the relationship between the corporation and its owner and the degree to which the corporation observes, vel non, the formalities required of it by the state. If a court finds that such a blurring of the line between the corporation and its owner exists and that equity demands it, the court's conclusion will be that the two are legally one, i.e., that what appears to be two entities existing in parallel is, for certain purposes, a single entity. See, e.g., syl. pt. 9, Dieter Eng'g Serv., Inc. v. Parkland Dev., Inc., 199 W.Va. 48, 483 S.E.2d 48 (1996) .
Successor liability, on the other hand, involves an examination of the relationship between an entity that existed for one period of time and an (allegedly different) entity that existed for a subsequent period of time. Unlike its veil-piercing cousin, successor liability does not speak to an existing relationship between the corporation and its current owner, but to the relationship between the corporation and its predecessor, whether such predecessor happens to be the current owner (for example, in the case where, like here, the predecessor was an individual operating as a sole proprietor who then incorporated), another corporation (in the case of a reorganization), or two or more other corporations (in the case of a merger). Accordingly, the corporate veil-piercing cases from within and without West Virginia cited by the parties are inapposite.
In this bankruptcy appeal, successor liability is a question of state law. See Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, ___, 120 S.Ct. 1951, 1955, 147 L.Ed.2d 13 (2000) ( ) (internal quotations and...
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