David Semirale v. Ronald Rhea

• Court: Ohio Court of Appeals
• Writing for the Court: PER CURIAM
• Decision Date: 19 May 1994
• Docket Number: 65906,94-LW-4184
• Citation: David Semirale v. Ronald Rhea, 65906, 94-LW-4184 (Ohio App. May 19, 1994)
• Parties: DAVID SEMIRALE, ET AL., Plaintiffs-Appellants v. RONALD RHEA, ET AL., Defendants-Appellees

DAVID SEMIRALE, ET AL Plaintiffs-Appellants v. RONALD RHEA, ET AL., Defendants-Appellees

No. 65906.

94-LW-4184 (8th)

Court of Appeals of Ohio, Eighth District Cuyahoga

May 19, 1994

Civil appeal from Cuyahoga County Common Pleas Court Case No 175960.

For Plaintiffs-Appellants: THOMAS S. MAZANEC, Esq., JOHN T McLANDRICH, Esq., 100 Franklin's Row, 34305 Solon Road, Cleveland, Ohio 44139.

For Defendants-Appellees: EDWARD M. MULLIN, Esq., 24800 Chagrin Blvd., Suite 313, Cleveland, Ohio 44122-5631.

OPINION

PER CURIAM

This appeal is before the Court on the accelerated docket pursuant to App. R. 11.1 and Loc. App. R. 25.

Plaintiffs-appellants David and Lu Ann Semirale appeal from an order of the Common Pleas Court directing a verdict for defendant-appellee Rheaco Builders, Inc. ("Rheaco") on Count IV of the plaintiffs' complaint. This Court had previously dismissed an appeal herein in Semirale, et al. v. Ronald Rhea, et al. (Feb. 20, 1992), Cuyahoga App. No. 62365, unreported, for lack of a final appealable order and stated:

Since defendant, in his statement, did not request a directed verdict on count four, and the judge in his rationale did not articulate that he was granting a directed verdict on this issue, there is no final appealable order before this court.

Upon remand the parties stipulated the statement of facts in the appellate opinion and the transcript of evidence at the original trial. Thereafter, the trial court journalized an entry specifically granting Rheaco's motion for directed-verdict with respect to Count IV, thereby rendering the order final and appealable. For the reasons hereinafter stated, we find no error and affirm the judgment.

Mr. Build/T & R Construction, Inc. ("T & R") was a corporation wholly owned by Ronald Rhea, its president. In a separate action, plaintiffs had recovered a $30,000 judgment against T & R for damages in remodeling their home. Thus, plaintiffs were judgment creditors of T & R, the stock of which was wholly owned by Ronald Rhea. Thereafter, T & R conducted a bulk transfer of its assets to Joan Rhea, wife of Ronald Rhea. Plaintiffs concede that they and other creditors were duly notified of the proposed bulk sale of substantially all of the assets of T & R to Joan Rhea for the sum of $3,000 pursuant to R.C. 1305.06. There is no contention that this sum was inadequate consideration for the modest assets. Plaintiffs took no action to protect their interest by executing on their judgment, objecting to the bulk sale, or bidding on the assets.

Joan Rhea purchased the assets for $3,000 by a check drawn on a personal bank account, jointly owned by Ronald and Joan Rhea. Joan Rhea then transferred the acquired assets to the new corporation, Rheaco Builders, Inc. (Rheaco), in return for 100% of the stock of the new corporation. Rheaco then proceeded to pay off some of the former trade creditors of T & R as a method of assuring the extension of credit to newly formed Rheaco.

The trial court found that the defendants had not engaged in any fraudulent conveyance or fraudulent acts and that they had complied in all respects with the Bulk Sales Act. The original trial judge entered a directed verdict on Counts I, II and III, which has not been appealed. The second trial judge directed a verdict on Count IV which alleged that Rheaco was merely a continuation of T & R and subject to successor liability.

Plaintiff's sole assignment of error is stated as follows:

I. THE TRIAL COURT ERRED IN ISSUING A DIRECTED VERDICT ON COUNT FOUR OF PLAINTIFF'S COMPLAINT THAT ALLEGES RHEACO BUILDERS, INC. IS IN REALITY A CONTINUATION OF T & R CONSTRUCTION, INC. AND IS THEREFORE LIABLE FOR THE UNSATISFIED JUDGMENT OF PLAINTIFFS AGAINST THE PREDECESSOR CORPORATION.

Plaintiffs argue that the transfer to Rheaco permitted a "preference" of T & R's former creditors prohibited by law. This was accomplished, plaintiffs claim, because Rheaco was a "mere continuation" of the corporate business of T & R. We do not agree.

"It has long been the recognized law of Ohio that a preference, by a debtor who is insolvent, of one creditor over another, has never constituted an actual fraud." Waxenfelter v. Rouch (1938), 30 Ohio Law Abs. 376, 377. In the absence of fraud or statute, a failing debtor may prefer one creditor over another. 37 C.J.S. "Fraudulent Conveyances," §235. The trial court found no evidence of fraudulent transfers and also found that defendants had complied with the Bulk Sales Act.

It should be noted that compliance with the Bulk Sales Act was not required in the instant case because there was no transfer of a stock of goods or inventory. That does not mean that defendants' voluntary compliance with the notice provisions of the Bulk Sales Act is totally without evidentiary or legal significance in the circumstances of this case. Since there was no fraud, no fraudulent conveyance and no preference, plaintiffs' argument imposing successor liability on Rheaco has to rest on the legal conclusion that Rheaco was a mere continuation of T & R.

We believe that whether Rheaco "is merely a continuation of the seller corporation" and is therefore liable for the former debts of T & R is governed by the Supreme Court decision in Welco Indus. v. Applied Cos. (1993), &7 Ohio St.3d 344.

The Ohio Supreme Court in welco stated the well recognized general rule of successor liability which provides that the purchaser of a corporation's assets is not liable for the debts and obligations of the seller corporation. Welco at 346, citing Flaugher v. Cone Automatic Machine Co. (1987), 30 Ohio St.3d 60. The Court then acknowledged a third exception to the general rule to exist when "the buyer corporation is merely a continuation of the seller corporation." Id. at 347. But the Court refused to adopt an expanded version of the mere continuation exception in contract cases, such as the case sub judice. In doing so, the Court stated as follows:

The concerns for predictability and free transferability in corporate acquisitions that led this court to decline to expand the test for tort successor liability in Flaugher are even more compelling where the claim is in contract. To expand the mere-continuation exception to a contractual claim would virtually negate the difference between an asset purchase and a stock purchase. Courts would be forced to look beyond the surface of any asset purchase to determine the extent of shared features between predecessor and successor in order to decide whether liability should attach to contractual obligations that were explicitly excluded from the transaction. The sale of a corporation's assets is an important tool in raising liquid capital to pay off corporate debts. A court-imposed expansion of contractual liability of successor corporations beyond the traditional exceptions would unnecessarily chill the marketplace of corporate acquisitions. For these reasons, we decline to expand the traditional exceptions to the general rule of nonliability of successor corporations, and hold that a corporation that purchases the assets of another corporation is not liable for the contractual liabilities of its predecessor corporation unless (1) the buyer expressly or impliedly agrees to assume such liability; (2) the transaction amounts to a de facto consolidation or merger; (3) the buyer corporation is merely a continuation of the seller corporation; or (4) the transaction is entered into fraudulently for the purpose of escaping liability. Flaugher v. Cone Automatic Machine Co., 30 Ohio St.3d at 62, 30 OBR at 167, 507 N.E.2d at 334.

Id. at 348-349.

The Welco Court then went on to hold that where the stockholders of the old corporation and the new corporation are different, the mere-continuation exception does not apply. The Court stated as follows:

Applied's primary argument is that Vickers is liable as a mere continuation of Welco. Having declined to adopt the expanded mere continuation theory, we must decide whether Applied may recover under the traditional mere continuation theory. We have held that the basis of this theory is the continuation of the corporate entity, not the business operation, after the transaction. Flaugher, supra. Such would be the case when "one corporation sells its assets to another corporation with the same people owning both corporations. Thus, the acquiring corporation is just a new hat, for, or reincarnation of, the acquired corporation. This is actually a reorganization." Turner, supra, 397 Mich. at 449, 244 N.W.2d at 892. This type of transaction is executed to escape liabilities of the predecessor corporation. Cyr, supra, 501 F.2d at 1151, 1158. Because the goal is to escape liability, inadequacy of consideration is one of the indicia of mere continuation. Jackson v. Diamond T. Trucking Co. (1968), 100 N.J Super. 186, 196, 241 A.2d 471, 477.

Applied argues, and the court of appeals held, that there exist several issues of material fact through which Vickers might be liable as a mere continuation of Welco. These asserted indicia of mere continuation include Vickers-Welco having the same physical plant, officers, employees and product line as Welco had. As we have stated, these facts are relevant only to the expanded mere continuation and product line theories of successor liability. It is not in dispute that Vickers and Welco were strangers and that the owners of Vickers are not the owners of Welco. If Wesche has been drained of assets to avoid liability, Applied's remedy lies against Wesche or its parent corporation, E.A.C. The facts not in dispute thus demonstrate that Vickers is not liable for the contractual liabilities of Welco under any of the traditional exceptions to the rule of nonliability of corporate successors. Summary judgment was thus appropriate

...