Continental Ins. Co. v. Schneider, Inc.

• Decision Date: 17 May 2005
• Citation: 582 Pa. 591,873 A.2d 1286
• Court: Pennsylvania Supreme Court
• Parties: CONTINENTAL INSURANCE COMPANY v. SCHNEIDER, INC.; Schneider Enterprises, Inc.; Vanadium Enterprises Corporation; S.E. Technologies, Inc.; Schneider Consulting Engineers; Schneider Technologies, Inc.; S.S.I. Services, Inc.; Jones Krall, Inc.; Construction Rental and Supply, Inc.; Energy Consultants, Inc.; Seventh Street Investment Assoc. 1982; Schneider Holding, Inc.; Industrial Art Services, Inc.; E.C. Planning & Management, Inc.; Schneider Baseball, Inc.; Schneider Outage Maintenance, Inc.; Schneider Management Co.; Schneider Energy Exploration, Inc. Appeal of: Vanadium Enterprises Corporation, S.E. Technologies, Inc., S.S.I. Services, Inc., Jones Krall, Inc., Construction Rental and Supply, Inc.

873 A.2d 1286

582 Pa. 591

CONTINENTAL INSURANCE COMPANY v. SCHNEIDER, INC.; Schneider Enterprises, Inc.; Vanadium Enterprises Corporation; S.E. Technologies, Inc.; Schneider Consulting Engineers; Schneider Technologies, Inc.; S.S.I. Services, Inc.; Jones Krall, Inc.; Construction Rental and Supply, Inc.; Energy Consultants, Inc.; Seventh Street Investment Assoc. 1982; Schneider Holding, Inc.; Industrial Art Services, Inc.; E.C. Planning & Management, Inc.; Schneider Baseball, Inc.; Schneider Outage Maintenance, Inc.; Schneider Management Co.; Schneider Energy Exploration, Inc.

Appeal of: Vanadium Enterprises Corporation, S.E. Technologies, Inc., S.S.I. Services, Inc., Jones Krall, Inc., Construction Rental and Supply, Inc.

Supreme Court of Pennsylvania.

Argued March 1, 2004.

Decided May 17, 2005.

Manning James O'Connor, II, Esq., Pittsburgh, for Vanadium Enterprises Corp., S.E. Technologies, Inc., et al.

Steven William Zoffer, Esq., Joseph S.D. Christof, II, Esq., Pittsburgh, for Continental Insurance Company.

Anthony Mark Mariani, Esq., Pittsburgh, for Schneider, Inc., et al.

BEFORE: CAPPY, C.J., and CASTILLE, NIGRO, NEWMAN, SAYLOR, EAKIN and BAER, JJ.

OPINION

Justice NIGRO.

We granted allowance of appeal in this secured transactions case to determine whether the Superior Court erred in finding that a successor business entity could be held liable on a theory of successor liability to a general creditor of its predecessor entity, even though the successor purchased the predecessor's assets from the predecessor's secured creditors at foreclosure sale pursuant to the Pennsylvania Uniform Commercial Code (the "UCC"). For the following reasons, we hold that the Superior Court did not err and therefore affirm.

From 1984 through 1990, Appellee Continental Insurance Company ("Continental") provided general liability, automobile and workers' compensation insurance to approximately forty companies or divisions that were owned and controlled by Frank Schneider (the "Schneider Companies").¹ During the mid-to-late 1980s, the Schneider Companies fell upon severe financial difficulties, such that by 1989, they had accumulated $35 million in debt to their three secured creditors, Pittsburgh National Bank (now PNC Bank), Mellon Bank and Equitable Bank (now National City Bank) (collectively, the "Banks"), who held blanket security interests in virtually all of the assets of the companies. As a result, Schneider, in coordination with the Banks, began shutting down or selling off most of the Schneider Companies. By April of 1990, only four of the Schneider Companies were still conducting any business and after May of 1990, even those four were nothing more than empty shells.

Sometime in early 1990, Schneider delivered all of the non-real estate assets that were owned by the Schneider Companies to the Banks. The Banks then sold the assets for $15 million at a consensual private foreclosure sale, pursuant to section 9-504 of the UCC, 13 Pa.C.S. § 9504.² The purchaser of the assets was an entity named Vanadium Enterprises Corporation ("Vanadium"), which, according to Continental, is owned and operated by the same individuals who had owned and managed the Schneider Companies.

Thereafter, Continental, who was now an unsecured creditor of the Schneider Companies, instituted this action, seeking, inter alia, to impose joint and several successor liability on Vanadium, S.E. Technologies, Inc., Construction Rental and Supply, Inc., Jones Krall, Inc. and S.S.I. Services, Inc. (collectively, "the Vanadium Group"),³ for $12 million in retrospective premiums that the entire family of Schneider Companies allegedly owed to Continental.⁴ Ultimately, the Vanadium Group filed a motion for summary judgment, in which it asserted that it could not be liable to Continental as a matter of law, because purchasers of assets from a secured creditor of a debtor cannot be liable for the general obligations of the debtor. In the alternative, the Vanadium Group argued that none of the recognized exceptions to the general rule against successor liability were applicable here and thus, judgment should be entered in its favor.

In ruling on the Vanadium Group's motion, the trial court first agreed with the Vanadium Group that most of the exceptions to the general rule against successor liability were not applicable here,⁵ but it refused to rule out the possibility that Continental could establish the factual predicate for the application of the exception for a successor who is a "mere continuation" of the predecessor entity,⁶ stating that there was a "factual dispute as to whether there is a continuity of ownership and control" between the Schneider Companies and the Vanadium Group.⁷Id. at 3. Accordingly, the court went on to consider whether the "mere continuation" avenue to successor liability would nevertheless be unavailable to impose liability on the Vanadium Group. In that regard, it explained that "Pennsylvania courts have never considered whether the continuation exception should apply where the buying corporation acquired the assets from a secured creditor of the selling corporation rather than from the selling corporation itself." Id. at 9. Ultimately, the trial court concluded that "[e]xceptions to the general rule against successor liability that would protect the interests of general creditors at the expense of a secured creditor would be inconsistent with the principles of creditor law which protect lien holders vis-à-vis general creditors." Id. Thus, the court refused to permit the imposition of successor liability here, holding that "it would be inconsistent with the legislative policy giving preference to the interests of secured creditors over the interests of general creditors." Id. at 19. As such, the court entered summary judgment in favor of the Vanadium Group and against Continental.

On appeal, however, the Superior Court reversed, holding that "a sale pursuant to section 9504 of the UCC," which governs a secured creditor's disposal of collateral following a debtor's default, see 13 Pa.C.S. § 9504, "does not, as a matter of law, preclude a creditor's claim against the purchaser based on successor liability." Continental Ins. Co. v. Schneider, Inc., 810 A.2d 127, 133 (Pa.Super.2002). While acknowledging that the UCC provides "very specific protections to secured creditors," the Superior Court explained that "there is no language in section 9504 which would bar judicial inquiry into the propriety of the transaction itself." Id. In fact, the Superior Court noted, section 9-504 "specifically contemplates that a disposition of assets by a secured creditor may not be made with unfettered discretion," as it provides that "the disposition including the method, manner, time, place, and terms must be commercially reasonable." Id. (quoting 13 Pa.C.S. § 9504(c)). Moreover, the court pointed out, the UCC generally provides that "general principles of law and equity shall supplement its provisions unless displaced." Id. (citing 13 Pa.C.S. § 1103). Accordingly, the Superior Court rejected the trial court's conclusion that Continental was barred from pursuing a successor liability claim against the Vanadium Group because the Banks had sold the Schneider Companies' assets to the Vanadium Group in a section 9-504 transaction.

Having concluded that the trial court's entry of summary judgment in favor of the Vanadium Group on this basis was in error, the Superior Court went on to consider the Vanadium Group's alternative argument that it was nevertheless entitled to summary judgment because none of the recognized exceptions to the general rule against successor liability were applicable under the facts of this case. Ultimately, however, the Superior Court stated that the record reflects that the Vanadium Group "operated substantially the same businesses serving the same clients and had the same employees working in the same offices as the former Schneider companies" and that "there is clearly a genuine dispute over continuity of ownership and control." 810 A.2d at 135. Accordingly, the Superior Court found that there were genuine issues of material fact that precluded a determination as to whether either the mere continuation exception or the de facto merger exception were applicable, and thus, it declined to enter summary judgment in the Vanadium Group's favor on that basis and instead remanded the case so that the fact-finder could determine whether either of those exceptions applied.

The Vanadium Group appealed and this Court granted allowance of appeal to address the purely legal question of whether a general creditor of a debtor may pursue successor liability claims against an entity that purchased the debtor's assets from a secured creditor of the debtor in a commercially reasonable transaction pursuant to section 9-504 of the UCC. Summary judgment may only be entered if the record clearly demonstrates that there is no genuine issue as to any material fact and it is clear that the moving party is entitled to judgment as a matter of law. Sphere Drake Ins. Co. v. Philadelphia Gas Works, 566 Pa. 541, 782 A.2d 510, 512 (2001). Meanwhile, a trial court's order on summary judgment will only be reversed where the court committed an error of law or clearly abused its discretion. Basile v. H & R Block, Inc., 563 Pa. 359, 761 A.2d 1115, 1118 (2000). In the instant case, the issue presented is one of law and thus, our scope of review is plenary. Phillips v. A-Best Products Co., 542 Pa. 124, 665 A.2d 1167, 1170 (1995).

With respect to successor liability in this Commonwealth, it is well-established that "when one company sells or transfers all of its assets to another company, the purchasing or receiving company is not responsible for the debts and liabilities of the selling company simply because it acquired the seller's property." Hill, 603 A.2d at 605; see also 15 William Meade Fletcher, Fletcher Cyclopedia of the Law of Private...