Explosives Corp. v. Garlam Enterprises Corp.

• Decision Date: 08 August 1985
• Docket Number: Civ. No. 72-0001CC.
• Citation: 615 F. Supp. 364
• Parties: EXPLOSIVES CORPORATION OF AMERICA, Plaintiff, v. GARLAM ENTERPRISES CORPORATION and Federal Insurance Company, Defendants.
• Court: U.S. District Court — District of Puerto Rico

615 F. Supp. 364

EXPLOSIVES CORPORATION OF AMERICA, Plaintiff, v. GARLAM ENTERPRISES CORPORATION and Federal Insurance Company, Defendants.

Civ. No. 72-0001CC.

United States District Court, D. Puerto Rico.

August 8, 1985.

Salvador Antonetti, Fiddler, Gonzalez & Rodriguez, San Juan, P.R., for plaintiff.

Charles A. Cordero, Cordero, Colon & Miranda, Old San Juan, P.R., for Garlam Enterprises Corp.

OPINION AND ORDER

CEREZO, District Judge.

Rockcor, Inc. (Rockcor) formerly known as Rocket Research, Inc., a publicly held corporation incorporated in the State of Washington and having its principal place of business in that state, has been summoned before this court to substitute Explosives Corporation of America, (Explo) judgment-debtor and plaintiff herein, as its successor in interest. Rockcor was duly served with process on September 1, 1983 in Washington. After many continuances, an evidentiary hearing was set for June 28, 1984. On that date, however, the parties informed that there was no need for a hearing and submitted the issue by documentary evidence and legal memoranda.

The facts which originated the present controversy between the parties are as follows. As a result of a contract negotiated between Explosives Corporation of America (Explo), a subsidiary of then Rocket Research Corporation, and Garlam Enterprises Corporation (Garlam) for the pre-splitting and blasting operations required in the construction of a certain part of Las Américas Expressway in Puerto Rico, Explo filed this lawsuit against Garlam and its surety, the Federal Insurance Company, on January 3, 1972 alleging breach of contract and requesting payment of $300,000 in damages. Garlam filed a counterclaim also alleging breach of contract and demanding $4,120,000 in damages. After four years of litigation the trial of the case was bifurcated and the issue of liability under the contract was tried without a jury on January 26-30, 1976. Prior to any decision on the issue of liability but after trial on that issue Excoa, Inc. (Excoa), Explo's successor by merger, was dissolved by consent of its sole stockholder, Rocket Research Corp., on October 29, 1976. On that date certain lands known as the Preston property, which had belonged to Explo and then to Excoa by reason of the merger, were conveyed to Rocket Research Corp. in lieu of foreclosure of the mortgage given on October 8 to secure payment of a debt in the amount of $5,575,029.00 owed by Excoa to Rocket Research Corp. In a separate document the remaining assets of Excoa were transferred to Rocket Research Corp. in partial satisfaction of a debt Excoa had with Rocket Research Corp. Among the "property" so conveyed was "all of Excoa's interest in and to that lawsuit pending in the United States District Court, the District of Puerto Rico being Cause No. 1-72 entitled Explosives Corporation of America vs. Garlam Enterprises Corporation and Federal Insurance Company, General Insurance Company of North America, third party defendant." Excoa's dissolution, like Explo's merger, was not notified to Garlam or to the court. Thereafter, on March 30, 1977, this Court, by Senior District Judge W.A. Bootle of the Middle District of Georgia sitting by designation, decided the issue of liability in favor of Garlam and against Explo.

On September 9, 1977 Garlam filed a motion for substitution of parties under Rule 25(c) stating that it had found out about Explo's dissolution from answers to its interrogatory submitted in preparation for the hearing on damages and requesting that Explo be substituted by Rockcor, Inc. On November 10, 1977, however, Garlam filed an amended third-party complaint including Rockcor as a third-party defendant alleging that this corporation was Explo's alter ego since 1971. Rockcor's motion to dismiss the complaint for lack of personal jurisdiction was first denied by Judge Pesquera on July 22, 1979. On reconsideration, the motion was granted and judgment was entered on October 30, 1979 dismissing the complaint as to Rockcor. The Court then held that Rockcor was not "doing business" in Puerto Rico within the interpretation of International Shoe v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945) and could not be subjected to suit in this jurisdiction. An appeal of that judgment was dismissed for lack of jurisdiction under 28 U.S.C. Section 1291 on December 20, 1979. Thereafter, upon Garlam's motion for reconsideration, the Court reviewed the matter once more and concluded that jurisdiction could not be asserted over Rockcor for purposes of the amended third-party complaint since its contacts with this forum occurred after the commencement of the action and to consider Explo's contacts as binding on Rockcor would be tantamount to a determination that Rockcor was Explo's alter ego since the beginning of this action. Nevertheless, the court considered the possibility of bringing Rockcor into the action in substitution of Explo as its successor in interest and determined that Rockcor's involvements with the forum upon acquiring Explo's interests in this proceeding would be sufficient for purposes of examining if Rockcor was Explo's successor in interest and should be made a party in substitution of Explo. Given the circumstances of the case and the fact that Rockcor knew about the case having monitored the proceedings since it acquired Explo's interests in it, the Court in fairness to Garlam allowed it to move for substitution under Rule 25, Fed.Rules of Civ.Proc. It is Garlam's motion for substitution and Rockcor's opposition thereto that are before us now for disposition.¹

In its motions opposing substitution under Rule 25 Rockcor insists that its acquisition of Excoa's assets upon dissolution and its monitoring of this case since then are insufficient contacts with this forum to justify exercising personal jurisdiction over it. As explained in our Opinion and Order of November 16, 1982 the considerations involved to determine whether jurisdiction lies for purposes of filing a claim directly against a party are different from those involved in a determination on whether a party should substitute as its successor in interest the original party, against whom a claim was filed or judgment entered. Jurisdiction will not be premised on the mere acquisition of assets by the successor but on the existence of certain conditions which can make the purchaser of those assets a successor or an extension of the original party. As such, it will be liable for any obligations incurred by the original party within the forum. Jurisdiction would exist over the successor to the extent that there was jurisdiction over the original party.

Generally, "a purchasing corporation does not assume the liabilities of its predecessor unless (a) the purchaser expressly or implicitly agrees to assume liability; (b) the purchase is a de facto consolidation or merger; (c) the purchaser is a mere continuation of the seller; or (d) the transfer of assets is for the fraudulent purpose of escaping liability" Meisel v. M & N Modern Hydraulic Press Co., 97 Wash.2d 403, 645 P.2d 689, 690 (1982) citing 15 W. Fletcher, Cyclopedia of Law of Private Corporations, Secs. 7118-7123 (rev. ed. 1973). See also Hall v. Armstrong Cork, Inc., 103 Wash.2d 258, 692 P.2d 787, 789-790 (1984); Martin v. Abbott Laboratories, 102 Wash.2d 581, 689 P.2d 368, 384 (1984). This rule has been accepted by the majority of American jurisdictions. See Dayton v. Peck, Stow & Wilcox Co. (Pexto), 739 F.2d 690, 692 (1st Cir.1984) and Cashar v. Redford, 28 Wash.App. 394, 624 P.2d 194, 195 (1981).

Garlam contends that by acquiring all of Excoa's interest in this lawsuit Rockcor expressly assumed liability for the counterclaim. This contention is based on its interpretation of the word "interest" as encompassing both beneficial as well as adverse interests. It appears, however, from the contract itself, as well as from the deposition of Rockcor's Chairman of the Board, Mr. George Sutherland, that this was not the meaning given to the term by the parties to the bill of sale. The "interest" in this lawsuit conveyed to Rockcor by the bill of sale was one of several properties conveyed in partial satisfaction of Excoa's debts to Rockcor. This "interest" was one of Excoa's assets at the time of the transaction. Clearly, what was transferred to Rockcor was Excoa's right to collect from Garlam the amounts claimed by Explo in this lawsuit. Aside from the fact that we cannot ascribe property qualities to Garlam's counterclaim against Explo, other than as a property of Garlam, it is dubious that a creditor would accept a debt in payment of its credit. Rockcor did not expressly assume this liability and its acquisition of Excoa's interest in this lawsuit cannot, by itself, justify imposing liability against it for the amounts due by Explo on the counterclaim. For the same reasons it cannot be said either that Rockcor impliedly assumed that liability.

Garlam argues that upon acquiring all interests in this suit Rockcor accepted the terms of the subcontract between Explo and Garlam. Quoting article XX of that agreement which provides that it would "bind the heirs, executors, administrators, successors, holding companies and assigns of the parties hereto" it claims that Rockcor became an "assign" of Explo and is now responsible for the latter's breach in the performance of the contract. The quoted clause can only mean that persons within the categories mentioned can be held responsible for any breach of contract committed by the original parties to the contract. See 4 Corbin on Contracts, section 871, note 80, and cases cited therein, especially George v. Richards, 361 Pa. 278, 64 A.2d 811, 813 (1949). By acquiring all interests in this action, however, Rockcor did not acquire the contract as an "assignee," which under the provisions of the same could not be assigned without Garlam's written consent and which had been terminated upon Garlam's...