Wells Fargo Vendor Fin. Servs., LLC v. Nationwide Learning, LLC

• Decision Date: 17 August 2018
• Docket Number: No. 118,334,118,334
• Citation: 56 Kan.App.2d 259,429 P.3d 221
• Parties: WELLS FARGO VENDOR FINANCIAL SERVICES, LLC, Appellant, v. NATIONWIDE LEARNING, LLC and Studentreasures Acquisition, LLC, Appellees.
• Court: Kansas Court of Appeals

56 Kan.App.2d 259

429 P.3d 221

WELLS FARGO VENDOR FINANCIAL SERVICES, LLC, Appellant,

v.NATIONWIDE LEARNING, LLC and Studentreasures Acquisition, LLC, Appellees.

No. 118,334

Court of Appeals of Kansas.

Opinion filed August 17, 2018.

Thomas G. Berndsen, of Law Offices of Thomas G. Berndsen, P.C., of St. Louis, Missouri, and Thomas J. Fritzlen Jr. and Matthew M. Peters, of Kansas City, Missouri, for appellant.

David M. Skeens and Bruce V. Nguyen, of Walters Renwick Richards Skeens & Vaughan, P.C., of Kansas City, Missouri, for appellee.

Before Gardner, P.J., Pierron, J., and Walker, S.J.

Gardner, J.:

Wells Fargo Vendor Financial Services (Wells Fargo) obtained a judgment against Nationwide Learning, LLC (Nationwide) for breach of its equipment lease contract. Wells Fargo sought to enforce that judgment against Studentreasures Acquisition, LLC (Studentreasures), who had acquired Nationwide's assets, on the theory of successor liability. The district court held that Studentreasures was not liable for Nationwide's debt to Wells Fargo because no exception applied to the general rule that a purchasing corporation is not liable for the debts of a selling corporation. Wells Fargo also sued Studentreasures under the Kansas Uniform Fraudulent Transfer Act (KUFTA), K.S.A. 33-201 et seq., but the district court found it failed to establish a fraudulent transfer and was not entitled to punitive damages. We find that the district court made several errors of law that influenced its factual findings and compel us to reverse on the successor liability claim. Otherwise, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

In 1994, Joseph Gigous founded Nationwide Learning, Inc. in Topeka. Its product was books containing student-created content. It provided "kits" to teachers or students to collect stories, pictures, or other work to be published in a custom book. The kits were returned to the company in the spring and were made into bound books. Nationwide scanned the students' work, bound the students' original pages into a free copy, and printed additional copies to sell to families and teachers.

In 2010, Nationwide was incorporated to purchase the business assets from Gigous. The purchase price was $6.825 million and Gigous took back a note for $2 million. The purchase was financed with capital from Brass Ring and additional capital it secured from a "mezzanine lender," C3 Capital Partners II, LLP (C3). Brass Ring contributed $2.5 million in equity and C3 contributed $250,000 in equity and $2.5 million through a Securities Purchase Agreement. A Security Agreement in favor of C3, titled "14% Secured Subordinate Note" (Note) was also executed, showing that C3's contribution was secured by a blanket security interest in all of Nationwide's assets. C3 filed a UCC Financing Statement reflecting this interest. The issues in this case arise from Studentreasures's eventual foreclosure on this Note.

At first, Brass Ring was the majority shareholder, owning about 73% of the company. C3 held about 18%, and Gigous held about 9%. Of the five board of director seats, Gigous held one, two were allocated to Brass Ring, one was allocated to C3, and one director was selected by a majority of the board. C3 exercised its option to appoint a sixth "observer" director who was a non-voting member but had proxy voting authority for the C3 director.

In early 2014, Konica Minolta solicited Nationwide to lease new printing equipment to replace its older printers. Nationwide's board of directors considered whether to continue in-house production on leased printers or to outsource production. The board decided to lease seven new printers, three of them from Minolta. Wells Fargo obtained the lease agreements on those three printers after a series of assignments. Wells Fargo filed a UCC Financing Statement on its interest in the printers. As of May 2015, Nationwide had about $1.7 million of printer lease obligations to be paid over the next three years. Those lease obligations for the three printers form the underlying basis for Wells Fargo's claim here.

The printers were primarily used in the spring because the large majority of book kits were returned near the end of the school year, so the work flow and cash flow varied over the course of the year. Throughout the year, Nationwide drew on an annually-renewable $3.4 million line-of-credit loan from Enterprise Bank. It then paid that line of credit down to zero in April or May when seasonal sales revenue flowed in. This line of credit was secured by all of Nationwide's assets, and the bank's security interest—when a balance was owed—was superior to C3's security interest.

In 2012, before Nationwide acquired the seven new printers, and in each following year, Enterprise Bank placed additional terms or restrictions on the line of credit. A bank representative testified that Nationwide had underperformed for three years. Enterprise Bank renewed the line of credit for the 2014-15 school year only after getting loan guaranties of $250,000 each from C3 and Renovare (Brass Ring's financing arm) and $150,000 each from Gigous and Timothy Keane, a member of Nationwide's Board of Directors. In February 2015, Enterprise notified Nationwide that to renew the line for the 2015-16 school year, Nationwide would need to invest an additional $900,000 equity and trim expenses to show a profitability of $500,000 as calculated by the Earning Before Interest, Taxes, Depreciation, and Amortization (EBITDA) method.

In response, David Raffel, one of the principals of Brass Ring, proposed a restructuring that would meet the required equity infusion with contributions by the owners and would increase C3's ownership to about 43%. Ultimately, Gigous withdrew his support for the proposal and C3 rejected it. Nationwide then sought additional investors or possible purchasers for the company. It received two offers, but C3 rejected both.

In early 2015, Nationwide experimented with outsourcing some of its production and then tried to renegotiate its obligations to equipment lessors, including Wells Fargo, because the lease expenses hindered its profitability. At least as early as May 2015, Steve Swartzman, Timothy Keane, and Jared Poland began discussions and email conversations about foreclosing on C3's Note to "reconstitute the business in a new entity" and "save the future lease expense." Swartzman and Keane were voting members of Nationwide's Board of Directors, and Poland was C3's Managing Director, who could vote as a proxy in Swartzman's absence.

On June 29, 2015, Nationwide's line of credit with Enterprise Bank expired and the bank was not willing to renew it. On June 30, 2015, accrued interest on C3's Note in the amount of $588,607 became due and was not paid. On July 7, C3 sent a notice of default stating that it was foreclosing and accelerating all amounts owed, for a total demand of over $3.1 million. That same day, C3's counsel served a notice of disposition of collateral. A UCC Article 9 foreclosure sale was held on July 24, 2015. C3 was the only bidder and purchased all of Nationwide's assets by "credit-bidding" its $2.5 million Note. C3 then conveyed those assets to Studentreasures, which it had formed as its nominee for the purpose of acquiring Nationwide's assets.

In October 2015, C3 conducted a second foreclosure sale in which it purchased notes that Chad Zimmerman and Chad Turnbull (officers of Nationwide who became officers of Studentreasures) had granted Nationwide to purchase Class B ownership units. That sale was intended to prevent any of Nationwide's unpaid creditors who might obtain judgments against Nationwide from being able to execute against the notes and collect from the officers.

Wells Fargo repossessed the collateral and sold the printers. It then sued Nationwide, a defunct corporation, for breaching the lease agreement for the printers. Wells Fargo also sued Studentreasures for actual and punitive damages on theories of successor liability and violation of the KUFTA. The district court entered default judgment against Nationwide for $492,836.40 in damages and attorney fees but ruled against Wells Fargo on its other claims. Wells Fargo timely appeals.

DID THE DISTRICT COURT ABUSE ITS DISCRETION IN APPLYING THE GENERAL RULE OF NO CORPORATE SUCCESSOR LIABILITY?

We first review the district court's ruling on Wells Fargo's claim that Studentreasures is liable under the doctrine of successor liability.

Our standard of review is abuse of discretion.

The doctrine of successor liability is an equitable doctrine. See Ramsey v. Adams , 4 Kan. App. 2d 184, 186, 603 P.2d 1025 (1979) (corporate veil pierced "[w]hen equity demands"). Under Kansas law, the application of an equitable doctrine rests within the sound discretion of the district court. Consolver v. Hotze , 306 Kan. 561, 568, 395 P.3d 405 (2017) ; Green v. Higgins , 217 Kan. 217, 220, 535 P.2d 446 (1975). We thus review the district court's decision for an abuse of discretion.

The abuse of discretion standard requires us to review (1) whether the factual basis of the decision is supported by substantial competent evidence; (2) whether the district court has correctly identified and properly applied the applicable legal principles; and (3) whether the district court's decision is such that no reasonable person would take the view adopted by the court. State v. Gonzalez , 290 Kan. 747, 756, 234 P.3d 1 (2010). We define substantial evidence as evidence that a reasonable person might accept as sufficient to support a conclusion. Gannon v. State , 298 Kan. 1107, 1175, 319 P.3d 1196 (2014). We review the district court's legal conclusions from those facts de novo. See Prairie Land Elec. Co-op v. Kansas Elec. Power Co-op , 299 Kan. 360, 366, 323 P.3d 1270 (2014). And if we find no factual or legal error, we then look to the reasonableness of the district court's decision and reverse only if no reasonable person would agree with the decision. Cresto v. Cresto , 302 Kan. 820, 848-49, 358...