VILLAGE BUILDERS 96 v. US LABORATORIES

• Decision Date: 09 June 2005
• Docket Number: No. 40950, 41420.,40950, 41420.
• Citation: 112 P.3d 1082
• Parties: VILLAGE BUILDERS 96, L.P., a California Limited Partnership, Appellant, v. U.S. LABORATORIES, INC., a Delaware Corporation; and Testing Engineers of Nevada, Inc., a Delaware Corporation, f/k/a Buena Engineers, Inc., Respondents. Village Builders 96, L.P., a California Limited Partnership, Appellant, v. U.S. Laboratories, Inc., A Delaware Corporation; and Testing Engineers of Nevada, Inc., a Delaware Corporation, f/k/a Buena Engineers, Inc., Respondents.
• Court: Nevada Supreme Court

112 P.3d 1082

VILLAGE BUILDERS 96, L.P., a California Limited Partnership, Appellant, v. U.S. LABORATORIES, INC., a Delaware Corporation; and Testing Engineers of Nevada, Inc., a Delaware Corporation, f/k/a Buena Engineers, Inc., Respondents.

Village Builders 96, L.P., a California Limited Partnership, Appellant, v. U.S. Laboratories, Inc., A Delaware Corporation; and Testing Engineers of Nevada, Inc., a Delaware Corporation, f/k/a Buena Engineers, Inc., Respondents.

No. 40950, 41420.

Supreme Court of Nevada.

June 9, 2005.

Santoro, Driggs, Walch, Kearney, Johnson & Thompson and Kirby C. Gruchow Jr. and Gregory J. Walch, Las Vegas, for Appellant.

Lewis Brisbois Bisgaard & Smith, LLP, and Michael M. Edwards and Sheri M. Schwartz, Las Vegas, for Respondents.

Before the Court en Banc.

OPINION

ROSE, J.

These cases involve the applicability of the general rule against finding a successor corporation liable for the acts of its predecessor and the exceptions to the rule and the appropriateness of an award of costs.

While this court has adopted the general rule that a successor is not liable for the acts of its predecessor and has recognized the rule's exceptions, we have yet to address the parameters of those exceptions under Nevada law. We now clarify the requirements that a plaintiff must meet to have a successor corporation held liable under the de facto merger and mere continuation exceptions to the general rule. We decline to expand the mere continuation exception by adopting the continuity of the enterprise exception urged by appellant. We do conclude, however, that neither of the exceptions applies in the instant case; as a result, the district court ruled correctly on the issue of summary judgment, and we affirm the district court's order. Nevertheless, we conclude that the district court abused its discretion in awarding costs to respondent U.S. Laboratories, Inc. (U.S. Labs) in the absence of a verified memorandum of costs. Accordingly, we reverse the district court's order awarding costs to U.S. Labs.

FACTS AND PROCEDURAL BACKGROUND

Ray Brannen formed Buena Nevada in September of 1995. Buena Nevada performed geotechnical engineering, environmental consulting work, construction inspection, and materials testing. At first, Brannen remained the sole shareholder of the corporation, but eventually he sold shares of the corporation to other investors. Brannen served as the chairman of the corporation's Board of Directors.

In December 1996, Brannen encountered financial difficulties and, as a result, sold Buena Nevada to Geofon, Inc., which purchased 100 percent of Buena Nevada's shares. The new company was named Buena Engineers, Inc., a Division of Geofon, Inc. (Buena Geofon). As part of the sales agreement, Brannen reserved the right to repurchase the shares of Buena Geofon. Importantly, Brannen never acted as a shareholder, officer, or director of Buena Geofon. Nevertheless, the Secretary of State's filings listed Brannen as president, secretary, and treasurer of Buena Geofon as of July 22, 1998. Brannen, however, testified in his deposition that after December 30, 1999, he did not perform any of those roles in Buena Geofon. Brannen admitted, however, that he acted as Buena Geofon's manager after the sale. In his testimony, Brannen stated that Buena Geofon's chief executive officer, Alex Khan, made all of the major decisions concerning the company's activities and most of the minor ones as well. Brannen compared his position and authority in Buena Geofon to that of a Jack-In-The-Box manager but with less authority. Despite this representation by Brannen, Paul Davis, a Buena Geofon employee, testified that Brannen was authorized to enter into contracts on behalf of Buena Geofon. Geofon owned Buena Geofon until May 1999, when it sold the company back to Brannen, pursuant to his right of repurchase, so that Brannen could sell the company to respondent U.S. Labs.

In 1997, before Brannen purchased Buena Geofon and sold it to U.S. Labs, Buena Geofon submitted a proposal to appellant Village Builders, L.P. (Village) to perform an environmental site assessment (ESA) on property in Clark County, Nevada (the property). This property had an existing car wash and gas station facility on the premises. Village intended to purchase all rights in the property contingent upon a favorable ESA.

The proposal submitted by Buena Geofon was signed by Alex Khan as chief executive officer of Buena Geofon. The proposal was also signed by the chief executive officer of Geofon, Inc. Among other tasks, Buena Geofon proposed to drill three borings near the underground storage tanks (USTs) to gather samples and check for the presence of petroleum hydrocarbons. Village hired Buena Geofon to perform the tasks outlined in the proposal.

After completing the tasks, Buena Geofon submitted a report to Village documenting the results. The report stated that the ESA revealed only one recognized condition in connection with the property and no evidence of leaks or spills from the USTs. Additionally, the report stated that the USTs had recently passed tank tightness tests and therefore complied with applicable regulations. After receiving the report, Village purchased the property in September 1998 for approximately $2.8 million.

Village alleges that in December 1998 it discovered hydrocarbon contamination at the property and immediately notified the Nevada Division of Environmental Protection (NDEP) as required under Nevada law. NDEP acknowledged Village's notification and directed Village to clean up the contaminated soil and ground water at the property. Subsequently, Village alerted Buena Geofon about the discovery, and consequently, between March 3 and March 5, 1999, Buena Geofon drilled and constructed three monitoring wells to evaluate the extent of the property's contamination.

On April 30, 1999, less than three weeks before Brannen purchased Buena Geofon and sold it to U.S. Labs, Buena Geofon submitted a "Detailed On-Site Characterization Report" to NDEP that recommended installing a monitoring well, sampling ground water, monitoring water evaluations, and preparing a corrective action plan to clean up the property. After performing tests at the site, Buena Geofon submitted proposals on March 2, 1999, and March 23, 1999, to perform the clean-up work required by NDEP. NDEP approved the proposals, and Village hired Buena Geofon to clean up the property.

During the period when Village and Buena Geofon learned of the contamination on the property, Brannen began negotiating with U.S. Labs, which wished to purchase Buena Geofon. To achieve the sale, Brannen negotiated with Alex Khan to repurchase all of Buena Geofon's outstanding shares. At the same time, Brannen negotiated an asset purchase agreement with Don Alford, U.S. Labs' executive vice president, which would result in the sale of all of Buena Geofon's assets to U.S. Labs, but which specifically excluded the sale of the company's stock. Dickerson Wright, the chief executive officer of U.S. Labs, also participated in the negotiations.

To conclude the deal, Brannen bought all of Buena Geofon's stock, thereby resuming ownership of the company known as Buena Nevada. Subsequently, Brannen sold all of Buena Nevada's assets and good will to U.S. Labs, excepting any stock. The asset purchase was completed on May 18, 1999, with an Asset Purchase Agreement (APA) between Buena Nevada, Brannen, U.S. Labs, and Buena Engineers, Inc., a Delaware Corporation (Buena Delaware), a company specifically formed to hold Buena Nevada's assets.

The APA identified the assets purchased by U.S. Labs as: personal property, personal property leases, phone numbers, certain contracts, computer software, trade rights, the Buena Engineers, Inc., name, customer lists, and good will. The APA also contained clauses assuming and limiting specific liabilities. After the sale, Buena Nevada continued to exist as a corporate entity until an ongoing lawsuit was settled; however, the company did not engage in any business activity.

The asset purchase was a cash transaction. While the APA provided that Brannen would receive 3,333 shares of U.S. Labs stock, Brannen never received that stock because he elected to receive $14,000, the cash value of the stock, instead. Brannen did, however, use this cash to purchase U.S. Labs stock.

In addition, after completing the agreement and transferring ownership, U.S. Labs hired many of Buena Geofon's employees to work for Buena Delaware, including Brannen. Buena Delaware also continued to utilize the same facilities and company logo after the sale and continued to offer geotechnical services and Phase I testing. Moreover, after the sale, Buena Delaware never altered the contracts it obtained under the APA, which included Buena Nevada's lease, its vendor and customer contracts, and the right to collect receivables, including those generated by the contract with Village for clean-up work on the property.

Meanwhile, in August 1999, Village filed an action seeking to recover its clean-up costs against the former property operators. In July 2002, after it discovered that U.S. Labs had purchased all of Buena Nevada's assets and good will in 1999, Village submitted an amended complaint and brought breach of contract, negligence, and negligence per se claims against U.S. Labs.

U.S. Labs moved to dismiss Village's claims and contended that the APA expressly stated which liabilities Village would assume. U.S. Labs argued that under the APA, it was not liable for Village's clean-up costs as Buena's successor and that, therefore, U.S. Labs and Buena Delaware were not proper parties to the litigation. In response, Village argued that U.S. Labs and Buena Delaware were proper parties to the suit based upon the doctrine of successor liability.

The district court treated U.S. Labs' motion to dismiss as a motion for summary judgment. The district court also ordered further discovery...