R. J. Enstrom Corp. v. Interceptor Corp.

• Decision Date: 16 May 1977
• Docket Number: No. 77-1008,77-1008
• Citation: 555 F.2d 277
• Parties: R. J. ENSTROM CORPORATION, Appellant, v. INTERCEPTOR CORPORATION and United States of America, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 277

555 F.2d 277

R. J. ENSTROM CORPORATION, Appellant, v. INTERCEPTOR CORPORATION and United States of America, Appellees.

No. 77-1008.

United States Court of Appeals Tenth Circuit.

Argued and Submitted March 18, 1977.

Decided May 16, 1977.

Clyde A. Muchmore, Oklahoma City, Okl. (Ben L. Burdick, Oklahoma City, Okl., on the brief), Crowe, Dunlevy, Thweatt, Swinford, Johnson & Burdick, Oklahoma City, Okl. (Phillip D. Bostwick and James Thomas Lenhart, Shaw, Pittman, Potts & Trowbridge, Washington, D. C., on the brief), for appellant.

J. Albert Sebald, Grant, McHendrie, Haines & Crouse, Denver, Colo. (Spradling, Stagner, Alpern & Friot and Stephen P. Friot and George S. Corbyn, Jr., Oklahoma City, Okl., on the brief), for appellee Interceptor Co.

Before LEWIS, Chief Judge, and SETH and BARRETT, Circuit Judges.

BARRETT, Circuit Judge.

Enstrom Corporation (Enstrom) appeals from an order vacating a prior order which granted a motion for joinder of a limited partnership, Interceptor Company (Interceptor), as a co-defendant pursuant to Fed.Rules Civ.Proc. rule 25(c), 28 U.S.C.A. ¹ Jurisdiction on appeal is conferred by 28 U.S.C.A. § 1292(b), in accordance with the District Court's Order. (R., Vol. I, pp. 206, 207.)

Enstrom sued Interceptor Corporation (Corporation), the designer and manufacturer of a single-engine turboprop airplane, known as the Interceptor 400, and the United States of America through the Federal Aviation Administration (FAA) to recover property damage sustained in the crash of Enstrom's Interceptor 400 aircraft on January 15, 1972. The crash occurred following the flameout of the turboprop engine due to fuel starvation. Enstrom alleges that Corporation defectively designed and manufactured the plane's fuel system, that the plane was negligently type-certified by the FAA, and that said conditions existed at the time Enstrom purchased the aircraft.

Nearly three years after this suit was filed, the record attorney for Corporation filed an application for permission to withdraw as its counsel inasmuch as Corporation was "defunct" and without assets. Enstrom then filed a motion pursuant to rule 25(c), supra, seeking to join Interceptor as a co-defendant. On August 30, 1976, upon consideration of briefs, the motion for joinder was granted. Thereafter, on motion of Interceptor for an evidentiary hearing challenging its joinder, the Court held the hearing. On December 7, 1976, the Court reversed itself and vacated the prior order of joinder. A recitation of the facts disclosed at the evidentiary hearing follows.

Corporation was organized as a Delaware corporation in 1966 with its principal place of business in Norman, Oklahoma. It was funded by a $300,000.00 stock issue, $80,000.00 of convertible debentures, and a line of credit which reached $300,000.00 with the Bank of the Commonwealth of Detroit, Michigan (Bank). The Bank loan was secured by all of Corporation's assets, including: (1) an FAA certificate authorizing holder to manufacture the Interceptor 400, and (2) tools, jigs and equipment for the manufacture of aircraft, and all future assets. It was further "secured" by certain guarantees executed by the shareholders.

In 1968, Corporation purchased the necessary jigs, dyes, toolings, fittings and parts inventory for the manufacture of the Interceptor 400. In the fall of 1971, Corporation sold its first plane to Enstrom. Soon thereafter, Ted Malpass (Malpass) was elected president of the Corporation. In January, 1972, the airplane crash which involves our concern here occurred. In March of that year, Corporation was in need of additional funds to build its second Interceptor 400. Stanley S. Kresge (Kresge) loaned it $300,000.00. In consideration, Kresge received a promissory note secured by a second lien applicable to Corporation's assets.

In November of 1972, Enstrom filed this suit. At that time, Corporation was unable to pay the rental on the building it was leasing for manufacturing purposes. The landlord was "putting on pressure." The Detroit Bank was also threatening foreclosure. In December, Malpass, who had invested $143,000.00 in the Corporation, suggested that a partnership of interested Corporation shareholders be formed to purchase the Bank note which then bore an unpaid principal balance of $100,000.00, together with accrued interest. Each shareholder of Corporation was invited to join in the formation of the partnership and the purchase of the note. A limited partnership was thereafter formed, comprised of six stockholders of Corporation. The Bank note was purchased in February, 1973. Malpass and Peter Luce (Luce) contributed the major portion of the funds required for this purchase. The other four contributing stockholders became members of the limited partnership. They contributed a smaller portion toward purchase of the Bank note. During 1973 and extending to the summer of 1974, Malpass and Luce traveled throughout the country displaying and demonstrating the Interceptor 400 in efforts to sell it. Luce finally purchased this plane so that the demonstration efforts could continue. In addition, during this period the Corporation received loans of $50,000.00 from Luce and $3,000.00 from Malpass. At about this time, the landlord of Corporation's manufacturing building threatened eviction because of repeated delays in rental payments. Thereafter, Interceptor took possession of Corporation's assets in Norman, Oklahoma, and transferred them to Boulder, Colorado.

Proper notice was sent to the Corporation's shareholders of a special meeting to be held on June 19, 1974. The only shareholders who attended this meeting were the six partners in Interceptor. A resolution was adopted at this meeting which provides that all of Corporation's assets were to be transferred to Interceptor in return for the cancellation of the note acquired by Interceptor. This was to be accomplished pursuant to 12A Okla.Statute Anno. § 9-505, the Uniform Commercial Code (U.C.C.). ² In accordance therewith, duly executed written notices of the proposed transfer were submitted to Corporation's secured creditors pursuant to § 1-201(26) U.C.C. This would be, in effect, what is commonly referred to as a "bulk" sale or transfer. One of the junior secured creditors, Don Long, objected. Long was thus advantaging himself of § 9-505 of the U.C.C. which compels a sale of the assets as provided under § 9-504 of the U.C.C. ³

In compliance with § 9-504, supra, notice (pursuant to § 1-201(26) U.C.C.) was sent to Corporation and Corporation's secured creditors of the proposed public sale. A notice was also published three times in The Denver Post. On October 12, 1974, the public sale was conducted pursuant to § 9-504, supra. No bids were placed except that of Interceptor. It, of course, purchased the assets in exchange for cancellation of the note which it held against Corporation.

On November 13, 1974, Interceptor filed an application for the formation and qualification of a partnership under the laws of Colorado. One of its stated purposes was that of manufacturing aircraft. On December 31, 1974, Interceptor received an FAA certificate authorizing it to manufacture the Interceptor 400.

At the time of the proceedings before the district court in the instant case, Interceptor did not have personnel certified by the FAA to build an airplane, nor did it have a manufacturing facility. Its assets were stored in an unheated warehouse which was without electricity or bathrooms. Interceptor did sell some spare parts for the "200" airplane, a single-engine turboprop which flies at a lower altitude than the Interceptor 400. When Corporation purchased the right to manufacture the Interceptor 400, the manufacturing tools and equipment which it acquired were capable of and did in fact manufacture parts which are interchangeable between the "200" airplane and Interceptor 400. Another company had previously manufactured and sold a number of the "200" airplanes.

The trial court found that: "There was no transfer of interest in this case between the INTERCEPTOR CORPORATION and the INTERCEPTOR COMPANY for purposes of Rule 25(c), Fed.R.Civ.P. . . . Because the INTERCEPTOR COMPANY obtained the assets of the INTERCEPTOR CORPORATION at a public foreclosure sale held pursuant to the Uniform Commercial Code, the INTERCEPTOR COMPANY is not, as a matter of law, a continuation of the INTERCEPTOR CORPORATION." (R., Vol. I, p. 206.)

On appeal, Enstrom contends that the trial court erred in holding that Interceptor was not joinable as a co-defendant under Fed.Rules Civ.Proc. rule 25(c), 28 U.S.C.A. in that Interceptor (the purchasing company) is merely a continuation of Corporation (the selling corporation) thus rendering Interceptor liable for Corporation's debts. Enstrom relies on West Texas Refining & Development Co. v. Commissioner of Internal Revenue, 68 F.2d 77 (10th Cir. 1933), for this proposition.

I.

It is within the trial court's sound discretion to substitute parties when some act has affected the capacity of a named party to be sued. United States v. F. D. Rich Company, 437 F.2d 549 (9th Cir. 1970), cert. denied, 404 U.S. 823, 92 S.Ct. 48, 30 L.Ed.2d 51; Brown v. Keller, 274 F.2d 779 (6th Cir. 1960). Accordingly, the trial court's order denying joinder of Interceptor as a party defendant will not be disturbed on appeal unless Enstrom has demonstrated an abuse of discretion. United States v. 79.95 Acres of Land, etc., Rogers County, Oklahoma, 459 F.2d 185 (10th Cir. 1972).

Enstrom argues that the trial court's order is clearly erroneous inasmuch as Interceptor is simply a continuation of Corporation and that Interceptor thus falls into an exception to the general rule of non-liability. We recognized the general rule and its exceptions in West Texas Refinery & Development Co. v. Commissioner of Internal Revenue, supra :

The general rule is that where one corporation sells or otherwise transfers all of its assets to...