Only the Westlaw citation is currently available.
Not Reported in F.Supp.2d, 2004 WL 1453529
(D.Minn.)
and consistent with the terms hereof since the date
of the Base Balance Sheet which are outstanding at
the time of Closing....
(Christensen Aff. Ex. B at Tab 1, § 2.2(a).) The
Agreement also contained a section that expressly
excluded certain liabilities:
Except to the extent expressly assumed pursuant to
Section 2.2(a) above, [CDC Acquisition] does not
assume and shall not be liable for any debt,
obligation, responsibility or liability of [CDC
Technologies] or any affiliate of [CDC
Technologies], or any claim against any of the
foregoing, whether known or unknown, contingent
or absolute, or otherwise. Without limiting the
foregoing sentence, [CDC Acquisition] shall have
no responsibility with respect to the following,
whether or not disclosed in the Base Balance Sheet
or a schedule hereto: ... (iii) liabilities and
obligations resulting from or arising in connection
with any alleged breach of contract based upon
events occurring prior to the Closing Date....
(Id. at § 2.2(b).) The Agreement further provided
that CDC Technologies would dissolve "as soon as
practicable" after the execution of the Agreement,
and that a successor entity would be formed "for the
purpose of winding up the affairs" of CDC
Technologies, including the payment of liabilities not
assumed by the Agreement. (Id. at § 6.13.) The
closing date of the Agreement was December 7,
2000. (Id. at § 2.4.)
.
SOURCE ONE ENTERPRISES, L.L.C.
and G.O. Exporting Group, L.L.C., Plaintiffs,
v.
CDC ACQUISITION CORPORATION
and Edward L. Carver, Jr., Defendants.
United States District Court,
D. Minnesota
No. Civ.02-4925(PAM/RLE).
June 24, 2004.
MEMORANDUM AND ORDER
MAGNUSON, J.
This matter is before the Court on
Defendant CDC Acquisition Corporation's Motion
for Summary Judgment and on Defendant Edward L.
Carver, Jr.s' Motion to Dismiss. For the following
reasons, both Motions are granted in part and denied
in part.
BACKGROUND
In 1998, Plaintiffs Source One Enterprises, L.L.C.
and G.O. Exporting, L.L.C. (collectively, "Source
One") contracted with CDC Technologies,
Incorporated ("CDC Technologies") to purchase and
exclusively market and distribute medical devices in
the People's Republic of China. In November 2000,
Source One allegedly discovered that the medical
devices failed to perform properly, and that CDC
Technologies allegedly breached its marketing and
distribution agreement by permitting another
company to sell these medical devices in China.
Following the acquisition, two officers of CDC
Technologies became officers of CDC Acquisition.
CDC Acquisition physically occupied CDC
Technologies' business space, and all but two
employees of CDC Technologies became employees
of CDC Acquisition. (Reed Aff. Ex. A at 77-78
(Blain Dep.).) Following the sale, CDC Acquisition
continued to use CDC Technologies' website and its
telephone number. (Reed Aff. Ex. F.) CDC
Acquisition continued to bill CDC Technologies'
customers under the CDC Technologies letterhead
and address. (Reed Aff. Ex. D.) This information
identified CDC Technologies as a "Drew Scientific
Group Company." (Id.)
On December 15, 2000, CDC Acquisition
Corporation ("CDC Acquisition"), an entity of Drew
Scientific Group, P.L.C. ("Drew Scientific")
purchased certain assets and assumed certain
liabilities of CDC Technologies, under an Asset
Acquisition
Agreement
("Agreement").
This
Agreement included a section of a general
assumption of liabilities by CDC Acquisition:
Upon the sale and purchase of the Subject Assets,
except as excluded in Section 2.2(b) hereof, [CDC
Acquisition] shall assume and agree to pay or
discharge when due the following: ... (ii) all
liabilities and obligations incurred by [CDC
Technologies] in the ordinary course of business
*2 In July 2002, Source One filed a lawsuit in state
court against CDC Technologies, asserting claims for
breach of contract, breach of warranty, promissory
estoppel, unjust enrichment, and negligent and
intentional misrepresentation. CDC Technologies did
not respond to the lawsuit and the state court entered
default judgment against CDC Technologies in the
amount of $184,199.96. A motion to set aside the
judgment is now pending in state court. In October
2002, Source One filed suit in state court against
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CDC Acquisition and Defendant Edward Carver, Jr.,
to enforce its judgment against CDC Technologies.
CDC Acquisition successfully removed that action to
this Court. CDC Acquisition and Mr. Carver maintain
that they are not liable for CDC Technologies'
liability to Source One.
Cir.1990). The Court must construe the allegations in
the Complaint and reasonable inferences arising from
the Complaint favorably to Plaintiff. Morton v.
Becker, 793 F.2d 185, 187 (8th Cir.1986). A motion
to dismiss will be granted only if "it appears beyond
doubt that the Plaintiff can prove no set of facts
which would entitle him to relief." Id.; see also
Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2
L.Ed.2d 80 (1957).
CDC Acquisition asserted cross-claims against
Defendant Edward Carver, Jr., based on the
indemnification provision of the Agreement. The
indemnification provision provides that "Seller and
Principal Stockholder shall ... defend, indemnify and
hold harmless ... [CDC Acquisition] ... and [its]
successors and assigns ... and agents ... from any and
all liabilities...." (Christensen Aff. Ex. B at Tab 1, §
8.2.) CDC Acquisition claims that in the event it is
accountable for CDC Technologies' liabilities, Mr.
Carver is contractually obligated to defend and
indemnify this liability.
B. CDC Acquisition's Liability
*3 Source One claims that it can recover from CDC
Acquisition the judgment entered in state court
against CDC Technologies. Source One asserts that
CDC Acquisition is liable based the Agreement
between CDC Acquisition and CDC Technologies.
Alternatively, Source One contends that CDC
Acquisition is liable because the transaction between
CDC Acquisition and CDC Technologies satisfies the
exceptions to corporate successor liability.
CDC Acquisition filed a Motion for Summary
Judgment against both Source One and Mr. Carver.
Source One and Mr. Carver oppose this Motion. At
Mr. Carver's request, the Court extended the
dispositive Motion deadline to allow Mr. Carver to
file a Motion to Dismiss against CDC Acquisition
and Source One.
Generally, when one corporation sells or otherwise
transfers assets to another, the receiving corporation
is liable for the actions of the transferor corporation
only as provided in contract or by law. Minn.Stat. §
302A.661. As discussed below, the Agreement
expressly excludes liability arising in connection with
CDC Technologies' breach of contract. However,
Minnesota recognizes four exceptions to this general
rule: (1) an express or implied agreement by the
purchaser to assume liabilities; (2) the transaction
results in a de facto merger; (3) the purchasing
corporation is a continuation of the selling
corporation; or (4) a fraudulent transaction entered
into to escape liabilities. Gamradt v. Fed. Lab. Inc.,
No. 02-816, slip op. at 3 (D.Minn. Sept.3, 2003)
(Rosenbaum, J.); Sylvester Bros. Dev. Co. v.
Burlington N. R.R., 772 F.Supp. 443, 447
(D.Minn.1990) (Murphy, J.). In order for Source One
to enforce its judgment against CDC Acquisition, one
of these four exceptions to general corporate
successor liability must apply. [FN1]
DISCUSSION
A. Standard of Review
Rule 56(c) provides that a motion for summary
judgment shall be granted only if "there is no genuine
issue as to any material fact and ... the moving party
is entitled to judgment as a matter of law."
Fed.R.Civ.P. 56(c). When considering a motion for
summary judgment, the Court must view the
evidence and the inferences that may be reasonably
drawn from the evidence in the light most favorable
to the non-moving party. Enter. Bank v. Magna Bank,
92 F.3d 740, 747 (8th Cir.1996). The burden of
demonstrating that there are no genuine issues of
material fact rests on the moving party. Celotex Corp.
v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91
L.Ed.2d 265 (1986). If the moving party has carried
its burden, the non-moving party must demonstrate
the existence of specific facts in the record that create
a genuine issue for trial. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d
202 (1986); Krenik v. County of LeSueur, 47 F.3d
953, 957 (8th Cir.1995).
FN1. The Complaint lacks any allegation of
fraudulent transfer, so the Court will not
address this exception to corporate successor
liability.
1. Express or Implied Agreement
CDC Acquisition and CDC Technologies agreed that
CDC Acquisition had no liability "resulting from or
arising in connection with any alleged breach of
contract" that existed before the closing date of the
Agreement. (Christensen Aff. Ex. B at Tab 1, §
For the purposes of the Motion to Dismiss, the Court
takes all facts alleged in the Complaint as true.
Westcott v. Omaha, 901 F.2d 1486, 1488 (8th
2
2.2(b).) Source One maintains that this clause only
limits CDC Acquisition's liability with respect to the
breach of contract claims, and that CDC Acquisition
is liable on any remaining claims. (Pl.'s Opp'n. Mem.
to Def. CDC Acquisition's Mot. for Summ. J. at 8.)
Source One obtained default judgment against CDC
Technologies on its claims for breach of contract,
breach of implied warranties, promissory estoppel,
unjust enrichment, intentional misrepresentation, and
negligent misrepresentation. The issue is whether the
claims for intentional and negligent misrepresentation
fall within this express exclusion of liabilities.
merger analysis. However, because the
Minnesota Supreme Court has recognized
this exception and the Minnesota Court of
Appeals "frequent[ly] delineat[es][ ] this
analysis," this Court finds that the
Minnesota Supreme Court would accept the
de facto merger analysis. See Gamradt, 02816, slip op. at 4.
a. Shareholder Continuity
Though no single factor is dispositive, a de facto
merger requires the existence of a continuity of
shareholders through a stock purchase. Gamradt, No.
02-816, slip. op. at 3; Sylvester Bros. Dev. Co. v.
Burlington N. R.R., 772 F.Supp. 443, 448
(D.Minn.1990) (Murphy, J.). Drew Scientific, the
parent company of CDC Acquisition, issued shares of
Drew Scientific to CDC Technologies' shareholders.
(Reed Aff. Ex. A. at 65; Christensen Aff. Ex. A at
Tab 1, § 2.3.) CDC Acquisition is a wholly-owned
subsidiary of Drew Scientific. (Christensen Aff. Ex.
B. at 1.) The fact that CDC Acquisition's parent
company, Drew Scientific, transferred stock for
assets is in this instance sufficient to satisfy the
requirement of shareholder continuity. Sylvester, 772
F.Supp. at 448 n. 5 (citing In re Acushnet River &
New Bedford Harbor, 712 F.Supp. 1010, 1016
(D.Mass.1989)). Thus, this factor weighs in favor of
a de facto merger.
The state court complaint alleges that CDC
Technologies made intentional and negligent
misrepresentations at the time Source One and CDC
Technologies entered into their marketing and
distribution agreement. Although the claims for
intentional and negligent misrepresentation are torts,
these claims arise in connection with Source One's
claims for alleged breach of the marketing and
distribution agreement. The claims for breach of
contract and for misrepresentation are premised on
the same facts. (Christensen Aff. Ex. A ¶ ¶ 44-49,
72-82.) CDC Technologies' duty to Source One arose
exclusively out of the marketing and distribution
agreement. Moreover, the Asset Acquisition
Agreement extends the liability exclusion not only to
claims resulting from breach of contract, but also for
claims "arising in connection" with CDC
Technologies' breach of contract. Thus, there is an
express agreement by CDC Acquisition to not
assume the liabilities that Source One claims against
CDC Technologies. This factor does not apply.
b. Continuity of Management
The Court must further examine whether there was a
continuation of management, personnel, physical
location, and assets and operations following CDC
Acquisition's acquisition of CDC Technologies.
Following the sale in December 2000, two of CDC
Technologies' officers became officers of CDC
Acquisition. (Reed Aff. Ex. A. at 74.) However, these
two officers were released from employment within
the year. None of the directors of CDC Technologies
became directors of CDC Acquisition. Mr. Carver,
principal shareholder, director, and officer of CDC
Technologies, assumed no role whatsoever at CDC
Acquisition.
2. De Facto Merger
*4 A de facto merger requires the Court to evaluate:
(1) the continuity of management, personnel,
physical location, assets, and general business
operations; (2) the continuity of shareholders from
the seller corporation to the purchasing corporation;
(3) whether the purchased corporation ceases
ordinary business operations, liquidates, or dissolves
as soon as legally and practically possible; and (4)
whether the purchasing corporation assumed the
ordinary obligations of the seller for the continuation
of normal business operations of the seller. Gamradt,
No. 02-816, slip op. at 3. No single factor is
dispositive. [FN2] Id. The Court need not find every
element to conclude that a de facto merger occurred.
T.H.S. Northstar Assocs. v. W.R. Grace & Co.-Conn.,
840 F.Supp. 676, 678 (D.Minn.1993) (Renner, J.).
On the other hand, all but two of CDC Technologies'
employees became employees of CDC Acquisition.
(Id. at 73.) CDC Acquisition also assumed the lease
of the physical location and business from CDC
Technologies for one year. (Id. at 74 Ex. 2, Tab 11.)
CDC Acquisition continued to sell and manufacture
CDC Technologies' medical technology. CDC
Acquisition maintained and continued to operate
CDC Technologies' website at least through
FN2. There is some dispute about whether
Minnesota has actually accepted the de facto
3
December 2001. (Reed Aff. Ex. F.) CDC Acquisition
continued to bill customers under the address and
name of CDC Technologies, even as late as January
2002. (Reed Aff. Ex. D.) A genuine issue of material
fact exists on whether these facts support a de facto
merger.
successor law is unnecessary.
C. Indemnification
CDC Acquisition also brings a Motion for Summary
Judgment on its cross-claims against Defendant
Edward Carver, Jr. Mr. Carver has filed an opposing
Motion for Summary Judgment both against CDC
Acquisition and against Source One. [FN4]
c. Continuation of CDC Technologies
*5 The de facto merger analysis also inquires as to
whether CDC Technologies continued to operate
following the acquisition. Gamradt, No. 02-816, slip.
op. at 4. There is no evidence to suggest that CDC
Technologies did not cease its ordinary business
operations following the closing of the Agreement in
December 2000. Moreover, a term of the Agreement
further required CDC Technologies to dissolve "as
soon as practicable" following the closing.
(Christensen Aff. Ex. B, Tab 1 at § 6.13(a).) This
factor weighs in favor of a de facto merger.
FN4. Mr. Carver contends that the
Agreement designates that Delaware law
will apply. (Christensen Aff. Ex. B, Tab 1 §
10.10.) The Agreement provides that "the
Agreement shall ... in all respects be
interpreted, construed and governed by and
in accordance with the laws of the state of
Delaware (other than choice of law
principles thereof) applicable to contracts to
be performed wholly in such state." (Id.)
Because jurisdiction is based on diversity,
the Court must look to Minnesota law to
determine whether this choice of law clause
should be given effect. Contractual choice of
law provisions do not bind litigants who are
not parties to the contract, so Source One is
not required to apply Delaware law. SCM
Corp. v. Deltak Corp., 702 F.Supp. 1428,
1431 (D.Minn.1988) (McLaughlin, J.). Mr.
Carver and CDC Acquisition are both
parties to the Agreement, and although
Minnesota courts give effect to contractual
choice of law provisions, in this instance
there is no conflict between Delaware and
Minnesota law, so the distinction is
irrelevant. The Court nonetheless interprets
the Agreement under both Delaware and
Minnesota law. However, the choice of law
provision in the Agreement does not extend
to the corporate successor analysis. T.H.S.
Northstar, Assoc., 840 F.Supp. at 677-78.
d. Assumption of Obligations by CDC Acquisition
The fourth and final factor of the de facto merger
analysis examines whether CDC Acquisition
assumed the ordinary obligations of CDC
Technologies in order to continue the normal
business operations of CDC Technologies. The
Agreement expressly states that CDC Acquisition
assumes "all liabilities and obligations incurred by
[CDC Technologies] in the ordinary course of
business." (Id. at § 2.2(a).) The evidence further
supports that CDC Acquisition assumed control of
CDC Technologies' physical location, continued to
produce and sell CDC Technologies' products,
operated CDC Technologies' website, used CDC
Technologies' phone number, and continued to
collect CDC Technologies' accounts receivable. The
Court finds that this factor weighs in favor of a de
facto merger.
4. Conclusion
1. CDC Acquisition
Three out of four factors weigh in favor of a de facto
merger. Therefore, even assuming that the facts
would show no continuity of management, the Court
finds that the transaction between CDC Acquisition
and CDC Technologies amounted to a de facto
merger as a matter of law. Therefore, CDC
Acquisition is liable as a corporate successor to CDC
Technologies. [FN3]
The indemnification provision of the Agreement
provides that:
Principal Stockholders shall severally and not
jointly defend, indemnify and hold harmless each
of [Drew Scientific], [CDC Acquisition], their
affiliates and their successors and assigns ... from
and against all Liabilities, losses, damages, claims,
costs and expenses, interest, awards, judgments and
penalties ... actually suffered or incurred by any of
them ... (iii) in respect of any liability or obligation
of [CDC Technologies] not included in the
Assumed Liabilities ...
FN3. Because the Court concludes that CDC
Acquisition is liable as a corporate successor
under the de facto merger analysis, further
analysis under Minnesota's corporate
4
(Christensen Aff. Ex. A at Tab 1, § 8.2.) Mr. Carver
is a principal stockholder and a signatory to this
Agreement. Mr. Carver contends that he is entitled to
summary judgment against CDC Acquisition because
CDC Acquisition's claim for indemnification has not
yet accrued. Although Mr. Carver is correct that an
actual claim for indemnification may not accrue for
statute of limitations purposes until the party entitled
to indemnification has sustained damage by paying
more than it was legally obligated to. The accrual
inquiry is not relevant to whether CDC Acquisition
may bring a cause of action for indemnification.
Because the Court concludes that CDC Acquisition is
liable as CDC Technologies' corporate successor,
CDC Acquisition's indemnification claim against Mr.
Carver is proper.
it is entitled to maintain suit against Mr. Carver
because it is a third party beneficiary to the
Agreement. The Court finds this argument
unpersuasive.
Source One is not a party to the Agreement. Instead,
it claims that it is a third party beneficiary of the
indemnification provision, as an agent or assign of
CDC Acquisition, and therefore within the scope of
the indemnification provision. Third party
beneficiary rights attach if it such rights are
appropriate and either the duty owed or the intent-tobenefit test is met. Cretex Co., Inc. v. Construction
Leaders, Inc., 342 N.W.2d 135, 139 (Minn.1984).
Source One contends that under the intent-to-benefit
test, it is a third party beneficiary under the indemnity
clause.
*6 Under the indemnification provision, Mr. Carver
is only required to "defend, indemnify and hold
harmless" against liabilities that CDC Acquisition did
not assume. As noted above, CDC Acquisition
expressly excluded the assumption of liabilities
"resulting from or arising in connection with any
alleged breach of contract based on events occurring
prior to the Closing date." (Id. at § 2.2(b)(iii).) Mr.
Carver attempts to create a genuine issue of material
fact by asserting that the express assumption of
liabilities included "all the liabilities of [CDC
Technologies] shown on the Base Balance Sheet,"
and that because none of the parties can produce a
complete Base Balance Sheet, summary judgment is
improper. (Id. at 2.2(a)(i).) However, the plain
language of Section 2.2(b) further provides that CDC
Acquisition did not assume any liability for CDC
Technologies' breach of contract, "whether or not
disclosed on the Base Balance Sheet or a schedule
hereto." (Id. at § 2.2(b).) Thus, the completeness of
the Base Balance Sheet is irrelevant on CDC
Acquisition's indemnification claim.
The Court disagrees. The intent-to-benefit test is
satisfied "if the circumstances indicate that the
promisee intends to give the beneficiary the benefit
of the promised performance." Mears Park Holding
Corp. v. Morse/Diesel, Inc., 427 N.W.2d 281, 285
(Minn.Ct.App.1988) (citing Restatement (Second) of
Contracts § 302(1)(a)). Generally, the contract "must
express some intent by the parties to benefit the third
party through contractual performance." Norwest Fin.
Leasing, Inc. v. Morgan Whitney, Inc., 787 F.Supp.
895, 898 (D.Minn.1992) (Doty, J.). Examining the
language of the Agreement, the Court concludes that
it expresses no intent to benefit Source One.
Although the Agreement between CDC Acquisition
and CDC Technologies expresses an intent to benefit
CDC Acquisition and its successors and assigns, the
Court finds that Source One is not an assign nor an
agent of CDC Acquisition. Therefore, Source One
may not maintain an action in indemnity against Mr.
Carver. Mr. Carver's Motion to Dismiss on Source
One's claims is granted.
Because the Court finds that CDC Acquisition
expressly excluded any liabilities relating to or
arising out of CDC Technologies' alleged breach of
contract, and because Source One's state court claims
against CDC Technologies arise in connection to an
alleged breach of contract, Mr. Carver is legally
obligated to "defend, indemnify and hold harmless"
CDC Acquisition from this liability. Mr. Carver must
indemnify CDC Acquisition for any liability imposed
as a result of the state court judgment.
CONCLUSION
2. Source One
*7 As a matter of law, the Court finds that the
transaction between CDC Acquisition and CDC
Technologies was a de facto merger. Therefore, CDC
Acquisition is liable to Source One as CDC
Technologies' corporate successor. The Court further
finds that the language of the Agreement requires Mr.
Carver to indemnify CDC Acquisition for liability in
this case. Finally, Source One may not maintain a
cause of action against Mr. Carver for
indemnification.
Source One's Complaint also seeks to impose
liability on Mr. Carver by virtue of this
indemnification provision. Source One contends that
Accordingly, based on all the records, files and
proceedings herein, IT IS HEREBY ORDERED that:
1. Defendant CDC Acquisition's Motion for
5
Summary Judgment (Clerk Doc. No. 43) is
GRANTED in part and DENIED in part; and
2. Defendant Edward Carver Jr.'s Motion to
Dismiss (Clerk Doc. No. 56) is GRANTED in part
and DENIED in part.
Not Reported in F.Supp.2d, 2004 WL 1453529
(D.Minn.)
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• 0:02cv04925 (Docket) (Dec. 30, 2002)
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