Gladstone v. Stuart Cinemas, Inc.

• Decision Date: 25 March 2005
• Docket Number: No. 03-298.,03-298.
• Parties: Ted GLADSTONE and Alexandra Gladstone v. STUART CINEMAS, INC. and Melvin Stuart.
• Court: Vermont Supreme Court

878 A.2d 214

Ted GLADSTONE and Alexandra Gladstone v. STUART CINEMAS, INC. and Melvin Stuart.

No. 03-298.

Supreme Court of Vermont.

March 25, 2005.

John P. Wesley, J.

Stephen L. Saltonstall of Barr Sternberg Moss Lawrence Silver & Saltonstall, P.C., Bennington, for Plaintiffs-Appellants.

Lon T. McClintock of Jacobs, McClintock & Scanlon, LPC, Bennington, for Defendants-Appellees.

Present: AMESTOY, C.J.,¹ DOOLEY, JOHNSON, SKOGLUND and REIBER, JJ.

DOOLEY, J.

In this corporate successor liability case, plaintiffs Ted and Alexandra Gladstone, who are attempting to collect an $89,709.58 judgment rendered in a prior action against Bennington Cinemas, Inc. (BCI) from defendants Stuart Cinemas, Inc. (SCI) and Melvin Stuart, appeal an order from the trial court granting defendants' motion for a judgment on partial findings pursuant to V.R.C.P. 52(c). The court concluded that the evidence presented at trial did not establish defendants' liability for the previously entered judgment. Plaintiffs contend the court erred in granting defendants' motion because the evidence presented at trial demonstrates that under three common law theories of corporate successor liability—de facto merger, mere continuation and continuing enterprise— SCI is liable for the judgment. We reverse and remand.

¶ 2. Plaintiffs own a shopping plaza in Bennington. One of the commercial spaces in the plaza is a three-screen movie theater. In 1988, Stuart and his wife moved from Connecticut to Vermont to acquire a movie theater business. At this time, Green Mountain Cinemas, Inc., which operated the three-screen theater in plaintiffs' plaza, was selling its assets. The lease for the theater space between Green Mountain Cinemas, Inc. and plaintiffs, and running until June 30, 1998, was included as one of these assets. Melvin Stuart formed BCI to purchase the assets, making himself and his wife sole shareholders, directors and officers. BCI then operated the theater, and the corporation met its debt obligations, including rent due to plaintiffs, in a timely fashion.

¶ 3. BCI's movie theater was the only one operating in Bennington. During 1991 and 1992, Stuart received warnings from acquaintances in the movie distribution business that competitors were beginning to look at Bennington as a location to open a multiplex movie theater. Concerned that BCI would not survive if a competitor entered the market, Stuart investigated the possibility of expanding the three-screen cinema. With plaintiffs' consent, Stuart employed an architect and a contractor to propose a design and estimate the cost of expanding plaintiffs' plaza to accommodate a multiplex movie theater. Through BCI, Stuart applied to several banks for financing, but only Vermont National Bank (VNB) responded favorably. Shortly before BCI was approved for the loan, Stuart contacted Mr. Gladstone to inform him that VNB was interested in financing the expansion. Mr. Gladstone responded that he had received information that led him to believe that BCI would not be approved for the loan and he had rented the space proposed for the expansion to another tenant.

¶ 4. Because he could no longer expand his business in plaintiffs' plaza, Stuart began to consider other options. Eventually, he decided that the best option was to purchase and renovate an existing property in Bennington on Route 67A. In 1994 and 1995, Stuart applied to VNB for financing for this project. VNB's commercial loan officer approved a business plan, under which the Stuarts would form a new corporation, separate from BCI, to run the multiplex theater. The business plan also provided that the three-screen theater would continue to operate after the multiplex opened if the business remained profitable. VNB approved a financing package for the multiplex theater which included a $900,000² construction loan which was to mature in six months. At maturity, the construction loan would convert to a $400,000 commercial loan secured by the real estate and business assets, subordinated to a $500,000 commercial loan with a Small Business Administration (SBA) guaranty. Under the terms of the package, pending the formation of a new corporate entity, VNB required the Stuarts and BCI to pledge as borrowers on the construction loan. With financing in place, the Stuarts purchased the property on Route 67A on February 27, 1995. No funds from BCI were used in this purchase.

¶ 5. On March 3, 1995, the Stuarts incorporated SCI to operate the multiplex theater. As with BCI, Mr. and Mrs. Stuart were the sole shareholders, directors and officers of the new corporation. Despite having identical shareholders, officers, and directors, BCI and SCI maintained separate financial records, and BCI paid none of SCI's start up costs. The record indicates that BCI's involvement in the multiplex transaction was limited to being a listed borrower on the construction loan which was discharged on September 25, 1995 when, according to the terms of the financing package, the $400,000 commercial loan and $500,000 SBA backed loan were issued. BCI was not listed as borrower for either of these two loans.

¶ 6. SCI opened the multiplex theater in June 1995. During the following month, BCI's three-screen theater remained open, but, under direction from distributors, movies were shifted from the three-screen theater to the multiplex, leaving BCI's theater able to show only one movie. During July, several of BCI's employees were laid off and hired by SCI, and Stuart removed projectors and seats from the BCI theater and installed them in the SCI theater. Also during this month, the two theaters shared the same phone number.

¶ 7. BCI did not pay plaintiffs rent for July 1995 and ceased operations the next month. Approximately two years later, plaintiffs sued BCI for back rent owed on the lease that BCI had assumed. The trial court found that BCI, as the assignee of the lease, was liable to plaintiffs for the unpaid rent. To date, BCI has not paid any portion of the ensuing judgment.

¶ 8. In an attempt to recover the judgment amount, plaintiffs filed in the original case a motion for a writ of execution against Stuart and SCI. The court denied the motion because SCI and Stuart were not parties to the action. Following this denial, plaintiffs initiated this action against Stuart and SCI. Plaintiffs advanced several theories of liability under which they could recover from parties with whom they were not in contractual privity under the lease. Each of the theories advanced below, like those advanced here, involved disregarding BCI's corporate form in order to impose liability on either Stuart or SCI, thereby making one or both of those parties responsible for BCI's debts. In the trial court, plaintiffs vigorously pursued the theory that the facts warranted the court piercing the corporate veil and imposing liability on Stuart individually. In the alternative, plaintiffs argued that under three subsets of the doctrine of successor liability—de facto merger, the mere continuation, and the fraudulent transaction theory—SCI should be liable for BCI's debts.

¶ 9. The court, in a bench trial, heard testimony over three days. At the conclusion of plaintiffs' case, defendants moved for entry of a judgment on partial findings under V.R.C.P. 52(c). Rule 52(c), which is virtually identical to Federal Rule 52(c), provides:

If during a trial without a jury a party has been fully heard on an issue and the court finds against the party on that issue, the court may enter judgment as a matter of law against that party with respect to a claim or defense that cannot under the controlling law be maintained or defeated without a favorable finding on that issue, or the court may decline to render any judgment until the close of all the evidence. Such a judgment shall be supported by findings of fact and conclusions of law ... whether or not requested by a party.

In ruling on a 52(c) motion "the court's task is to weigh the evidence, resolve any conflicts in it, and decide for itself where the preponderance lies." 9A C. Wright & A. Miller, Federal Practice and Procedure 2d § 2573.1, at 498-99 (1995). In this case, the court concluded that the evidence did not establish liability on the part of SCI or Stuart and granted defendants' motion with respect to all of plaintiffs' theories of liability. Plaintiffs appeal this ruling, but not in its entirety. Plaintiffs do not appeal the court's refusal to pierce the corporate veil, nor its finding that there was no fraudulent transaction, but do contend that the court erred in finding that there was no de facto merger between BCI and SCI and that SCI was not a mere continuation of BCI. Plaintiffs also argue here, but did not argue below, that SCI should be liable under the continuing enterprise theory of successor liability.

¶ 10. We have not previously considered an appeal from a Rule 52(c) ruling. Rule 52(c) was added to bring the Vermont Rules into conformity with the Federal Rules. The Reporter's Notes explain that the rule was added to parallel Rule 50, Judgment as a Matter of Law in Actions Tried by a Jury, and replaced the part of Rule 41(b)(2) that "authorized dismissal when a plaintiff had failed to carry an essential burden of proof." Both parties agree that when considering a Rule 52(c) judgment we should review the trial court's conclusions of law de novo, and its underlying factual findings for clear error. This standard of review is in conformity with the federal courts' standard. See, e.g., Mullin v. Town of Fairhaven, 284 F.3d 31, 36-37 (1st Cir.2002); Dubner v. City & County of San Francisco, 266 F.3d 959, 964 (9th Cir.2001); Samson v. Apollo Res., Inc., 242 F.3d 629, 632-33 (5th Cir. 2001); Clark v. Runyon, 218 F.3d 915, 918 (8th Cir.2000). It is consistent with our decisions reviewing motions granted pursuant to 52(c)'s predecessor, Rule 41(b)(2). See New England Educ. Training Serv., Inc. v. Silver St. P'ship, 156 Vt. 604, 611, ...