Nationwide Mut. Ins. Co. v. Eagle Window & Door, Inc.

• Decision Date: 22 August 2018
• Docket Number: Appellate Case No. 2016-001459,Opinion No. 27831
• Citation: Nationwide Mut. Ins. Co. v. Eagle Window & Door, Inc., 424 S.C. 256, 818 S.E.2d 447 (S.C. 2018)
• Parties: NATIONWIDE MUTUAL INSURANCE COMPANY and Gilliam Construction Company Inc., Respondents, v. EAGLE WINDOW & DOOR, INC., Petitioner.
• Court: South Carolina Supreme Court

424 S.C. 256

818 S.E.2d 447

NATIONWIDE MUTUAL INSURANCE COMPANY and Gilliam Construction Company Inc., Respondents,

v.EAGLE WINDOW & DOOR, INC., Petitioner.

Appellate Case No. 2016-001459

Opinion No. 27831

Supreme Court of South Carolina.

Heard March 28, 2018

Filed August 22, 2018

G. Dana Sinkler, of Gibbs & Holmes, of Charleston, and Ainsley Fisher Tillman, of Charleston, for Petitioner.

Jason M. Imhoff and Ginger D. Goforth, both of The Ward Law Firm, of Spartanburg, for Respondents.

JUSTICE HEARN :

This products liability case presents a narrow question: Is Petitioner Eagle Window & Door, Inc. (Eagle) subject to successor liability for defective windows manufactured by a company who later sold its assets to Eagle in a bankruptcy sale? The answer requires us to revisit our holding in Simmons v. Mark Lift Industries, Inc.¹ and clarify the doctrine of successor liability in South Carolina. The court of appeals affirmed the trial court's holding that Eagle is the "mere continuation" of the entity.

Nationwide Mut. Ins. Co. v. Eagle Window & Door, Inc. , Op. No. 2016-UP-168, 2016 WL 1359188 (S.C. Ct. App. filed Apr. 6, 2016). We now reverse because both the trial court and court of appeals incorrectly applied the test for successor liability.

FACTUAL BACKGROUND

In 1999, homeowners Renaul and Karen Abel contracted with Gilliam Construction Company, Inc. for the construction of a house in an upscale Landrum subdivision. In constructing the house, Gilliam used windows manufactured by Eagle & Taylor Company d/b/a Eagle Window & Door, Inc. (Eagle & Taylor). Sometime after the home was completed, the Abels discovered damage from water intrusion around the windows. The Abels brought suit against Gilliam for the alleged defects and settled with Gilliam and its insurer, Nationwide Mutual, for $210,000. Nationwide and Gilliam (collectively Respondents) then initiated this contribution action seeking repayment of the settlement proceeds from several defendants, including Eagle, alleging it was liable for the obligations of Eagle & Taylor.

At the time of the manufacture and sale of the windows used in the Abel home, Eagle & Taylor was a wholly-owned subsidiary corporation of American Architectural Products Company (AAPC). Eagle & Taylor did business under two fictitious entities, neither of which was incorporated: Eagle Window & Door, Inc. and Taylor Building Products, Inc. In 2000, AAPC filed for reorganization under the U.S. Bankruptcy Code in the Northern District of Ohio. With the approval of the bankruptcy court, AAPC placed substantially all of the assets of the fictitious entity Eagle Window & Door, Inc. up for auction in 2002, where Linsalata Capital Partners Fund IV, L.P. (Linsalata)² was the successful bidder. To purchase and take title to the assets, Linsalata formed EWD Acquisition Co., a wholly-owned subsidiary corporation. After the assets were conveyed, EWD Acquisition Co. formally changed its name to Eagle Window & Door, Inc.—the entity against which Respondents brought their contribution claim and the Petitioner in this appeal.

After the acquisition, Eagle engaged in substantially the same business of manufacturing and selling windows and doors, using the same facilities where Eagle & Taylor conducted business in Dubuque, Iowa.³ Five officers from Eagle & Taylor joined Eagle in similar capacities after the sale, including David Beeken, who served as president of Eagle & Taylor since 2000 and had been with the company for several decades.

a. Shareholders

Prior to the asset sale, AAPC was the sole shareholder of Eagle & Taylor. After the sale was completed, Linsalata owned roughly 88% of the outstanding shares in Eagle, with the rest distributed in small amounts to Eagle officers and various investors.

b. Directors

From 1997 through May 2001, Frank Amedia was the sole director of Eagle & Taylor, with Joseph Dominijanni replacing him as sole director until the company's liquidation in 2002.⁴ At the time of the asset purchase, Linsalata's Senior Vice President, Stephen Perry, was the sole director of Eagle (then known as EWD Acquisition Co.). After the transaction was completed and the corporate name changed to Eagle Window & Door, Inc., Perry issued a resolution adding Frank Linsalata and Ronald Neill as additional directors. At some point after May 2002, David Beeken was added as a director of Eagle.

c. Officers

Out of Eagle & Taylor's eight officers, five assumed similar roles as officers with Eagle after the asset sale. The remaining three officer positions were filled by Linsalata appointees.

Contribution Suit

In 2007, Respondents initiated a contribution suit against Eagle seeking to recover for amounts paid in the settlement with the Abels. Eagle defended against the claim on the ground that no successor liability flowed from Eagle & Taylor, the entity responsible for the manufacture and sale of the defective windows.⁵ Respondents argued Eagle should be treated as a "mere continuation" of Eagle & Taylor because it retained a substantially similar name, produced the same products in the same facility, and benefitted from the brand's history by holding itself out as the successor entity. Moreover, Respondents asserted Simmons established that a plaintiff must only show commonality of officers, directors, or shareholders between predecessor and successor corporations in order to satisfy the mere continuation test.

The trial court ultimately entered judgment in favor of Respondents, finding Eagle to be a mere continuation of its predecessor. In its order, the trial court found the "predecessors [sic] and successor Eagle companies shared directors, officers, and shareholders." Citing Simmons , the trial court stated, "A successor corporation is a mere continuation of its predecessor when the predecessor and successor corporations have substantially the same officers, directors, or shareholders." (Emphasis added.). Finding five of Eagle's eight officers served in the same capacity with Eagle & Taylor, the trial court determined Eagle met the mere continuation test. The order further explained, "the Court finds that a review of Eagle's own website establishes that Eagle is a mere continuation of its predecessor corporation," finding Eagle retained the same president (Beeken) as its predecessor, and that it benefitted from its name recognition and history. Lastly, the trial court found it unnecessary to determine whether Simmons required "officers, directors, and shareholders" or "officers, directors, or shareholders" because Respondents had proven commonality among all three classes in the successor and predecessor corporations. As a result, the court ordered Eagle to pay $187,758.42 in contribution and interest to Respondents.

In a split decision, the court of appeals affirmed the trial court's finding that Eagle was a mere continuation of Eagle & Taylor but reduced the contribution award to $78,333.33. Eagle Window & Door , Op. No. 2016-UP-168. Like the trial court, the court of appeals majority also found commonality of officers alone was sufficient to establish successor liability as a mere continuation.⁶ Dissenting, Judge Konduros found Simmons and Walton v. Mazda of Rock Hill , 376 S.C. 301, 307, 657 S.E.2d 67, 70 (Ct. App. 2008), cert. denied Oct. 8, 2008, established that shareholder continuity was a critical component of the mere continuation test. The dissent further held the trial court erroneously relied upon the "continuation of operations" approach urged in Justice Burnett's dissent, which was ultimately rejected by the Simmons majority in favor of requiring continuity of ownership to establish a mere continuation. This Court granted Eagle's petition for a writ of certiorari to review the decision.

ISSUES

I. Did the court of appeals err in holding Eagle was a mere continuation of its predecessor corporation when there was no commonality of ownership?

II. Did the court of appeals err in holding Eagle abandoned the issue of whether Nationwide failed to prove a manufacturing or design defect?

DISCUSSION

I. Successor Liability

Eagle argues the court of appeals' holding conflicts with the established law on successor liability in South Carolina. According to Eagle, the Simmons court recognized the presumption that ordinarily, a successor corporation is not liable for the obligations of its predecessor, apart from four exceptions, including the mere continuation exception. Eagle's argument is straightforward: Simmons established the mere continuation exception only applies where there is continuity of ownership, and the court of appeals erred by finding commonality of corporate officers alone was sufficient to establish mere continuation. On the other hand, Respondents argue the court of appeals properly applied Simmons by requiring commonality between officers, directors, or shareholders, rather than all three groups. Consistent with their approach throughout this litigation, Respondents rely heavily on Justice Burnett's dissent and effectively ignore the Simmons majority's holding, arguing in favor of the broader enterprise continuation doctrine which the Simmons majority unequivocally rejected. We agree with Eagle that the court of appeals erred by finding that carryover of corporate officers resulted in a mere continuation when the record demonstrates there was no commonality of shareholders and directors between Eagle and its predecessor.

Ordinarily, in the absence of a statute, a successor or purchasing corporation is not liable for the debts of a predecessor or seller unless: (1) there was an agreement to assume such debts; (2) the circumstances surrounding the transaction amount to a consolidation or merger of the two corporations; (3) the successor company was a mere continuation of the predecessor; or (4) the transaction was entered into fraudulently for the purpose of wrongfully defeating creditors' claims. Brown v. American Ry. Express Co. , 128 S.C. 428, 123 S.E. 97 (1924). In this case we are concerned only with...