Weather Underground, Incorporated v. Navigation Catalyst Systems, Incorporated et al
Filing
186
APPENDIX re: 178 MOTION for Summary Judgment filed by Epic Media Group, Incorporated. by Epic Media Group, Incorporated (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13) (Delgado, William)
Exhibit 10
Page 1
Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
Only the Westlaw citation is currently available.
United States District Court,
E.D. Michigan,
Northern Division.
SAGINAW PROPERTY, LLC, Plaintiff,
v.
VALUE CITY DEPARTMENT STORES, LLC and
Retail Ventures, Inc., Defendants.
No. 08-13782-BC.
Oct. 30, 2009.
West KeySummaryGuaranty 195
30
195 Guaranty
195II Construction and Operation
195k29 Parties
195k30 k. In general. Most Cited Cases
Corporations and Business Organizations 101
3656
101 Corporations and Business Organizations
101XV Unincorporated Business Organizations
101XV(E) Limited Liability Companies
101k3656 k. Mergers, acquisitions, and
reorganizations. Most Cited Cases
(Formerly 241Ek27 Limited Liability Companies)
A parent limited liability company was not liable for the unpaid rent payments of a bankrupt
subsidiary company under a guaranty agreement
that was executed to support the subsidiary's lease.
The parent acquired the subsidiary through a reverse triangular merger and was therefore not a
party to the guaranty or liable as a successor to the
subsidiary's original parent company.
Stuart H. Teger, Honigman, Miller, Detroit, MI, for
Plaintiff.
Scott R. Knapp, Dickinson Wright, Lansing, MI,
for Defendant.
ORDER GRANTING DEFENDANT RETAIL
VENTURES MOTION FOR SUMMARY JUDGMENT. DENYING PLAINTIFF SAGINAW
PROPERTY'S MOTION FOR SUMMARY
JUDGMENT AS TO LIABILITY. AND DISMISSING PLAINTIFF'S CLAIMS AGAINST RETAIL
VENTURES WITH PREJUDICE
THOMAS L. LUDINGTON, District Judge.
*1 Plaintiff Saginaw Property, LLC (“Saginaw
Property”) filed a complaint seeking to recoup rental payments from Defendants Value City Department Stores, LLC (“Value City LLC”) and Retail
Ventures, Inc. (“Retail Ventures”) on September 3,
2008. Now before the Court are the Parties cross
motions for summary judgment on the issue of
whether Retail Ventures is liable to Saginaw Property for the unpaid rent.
The facts are not in dispute. Value City of
Michigan, Inc. (“Value City of Michigan”) leased
retail space from Saginaw Property's predecessor in
1997. Value City Department Stores, Inc. (“Value
City Inc.”), Value City of Michigan's parent company, executed a guaranty in support of that lease.
The guaranty provides that Value City Inc.,
“together with its successors and assigns, including,
without limitation, any entity succeeding thereto by
merger, consolidation or acquisition of its assets
substantially as an entirety,” will meet the obligations of Value City of Michigan in the event of a
default. [Dkt. # 18-A at 1]. In 2003, Value City Inc.
reorganized; first creating Retail Ventures, then
merging with a subsidiary of Retail Ventures so
that Value City Inc. survived as a wholly owned
subsidiary of Retail Ventures. Value City Inc. later
merged with and into Defendant Value City LLC,
and Value City Inc. subsequently dissolved.
The crux of this dispute is whether Retail Ventures is a “successor” of Value City Inc. under the
lease guaranty. It is undisputed that Value City
LLC is a successor to Value City Inc. and liable
pursuant to the guaranty, but this Court stayed the
case against Value City LLC on January 27, 2009
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
[Dkt. # 16], pending resolution of Value City LLC's
bankruptcy proceedings. See 11 U . S.C. § 362. Retail Ventures has not sought bankruptcy protection.
Saginaw Property's motion will be DENIED, and
all Plaintiff's claims against Retail Ventures will be
DISMISSED WITH PREJUDICE.
This case presents a unique legal question,
even though the issue arises from a fairly common
corporate transaction. The Defendants used a
vehicle known as a reverse triangular merger, common in acquisitions, for a corporate restructuring. If
the transaction occurred as part of an acquisition,
Retail Ventures would not be a “successor” to
Value City Inc., as that term is commonly understood, and therefore not liable on the guaranty.
However, the parties have not cited a Michigan
case discussing successor liability in the context of
a similar corporate restructuring, nor has the
Court's search revealed any such authority, meaning
the Court is presented with an issue of first impresFN1
sion under Michigan Law.
I
*2 On August 13, 1997, MRSLV Saginaw,
LLC (“MRSLV”), as landlord, and Value City of
Michigan, as tenant, entered into a twenty-year
lease for a commercial property in Saginaw,
Michigan. The lease established an annual rent of
$823,472.00, to be paid in monthly installments of
$68,622.67.
FN1. Retail Ventures cites Cima v. Wellpoint Health Networks, Inc., No. 05-4127,
2008 U.S. Dist. LEXIS 84882 (S.D.Ill.
Oct. 22, 2008), and contends the transaction at issue in Cima was “nearly identical”
to the transaction in this case. [Dkt. # 19 at
14]. It is identical to the extent that the
Cima court held that an acquiring corporation in a reverse triangular merger is not liable as the successor to the target, but like
most cases that discuss this type of merger,
the acquiring corporation was unrelated to
the target before the transaction. This case
is unique because it is a restructuring
transaction not an acquisition. The acquiring corporation was actually created by the
target in order to restructure the company.
The difference between an acquisition and a
corporate restructuring does not present a justification for departing from settled law. Furthermore,
plaintiff Saginaw Property has not presented a detailed factual record concerning the initial restructuring, nor alleged that it was fraudulent or otherwise improper. Consequently, Retail Ventures' motion for summary judgment will be GRANTED,
Contemporaneous to the execution of the lease
agreement, Value City Inc. and MRSLV executed a
guaranty of the lease agreement. [Dkt. # 12-3].
Value City Inc. became the guarantor, “together
with its successors and assigns, including, without
limitation, any entity succeeding thereto by merger,
consolidation or acquisition of its assets substantially as an entirety ....” [Dkt. # 18-A]. As the guarantor, Value City Inc. “unconditionally and irrevocably guarantee[d]” that tenant Value City of
Michigan would complete the duties created by the
lease. Id. The guaranty is unaffected by “the voluntary or involuntary liquidation, dissolution, sale of
all or substantially all of the assets ... bankruptcy ...
[or] reorganization ....” Id. ¶ 2(g). Likewise, a sale
by MRSLV of the leased premises did not alter the
guaranty. Id. ¶ 2(n). The guaranty was binding on
the successors and assigns of MRSLV and Value
City Inc. Id. ¶ 16.
On September 21, 2005, Saginaw Property acquired the shopping center owned by MRSLV, including the leased premises. In April of 2008,
Value City of Michigan vacated the property and
ceased paying monthly rent. Saginaw Property filed
suit against Defendants alleging that both are
“successors” under the guaranty and liable for unpaid rent. It is undisputed that Value City LLC is
the successor to Value City Inc., and therefore a
“guarantor” under the lease. The principal question
is whether Retail Ventures is also a successor and
guarantor.
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
Plaintiff acknowledges that Value City Inc. did not
merge directly with Retail Ventures. Rather,
Plaintiff characterizes Retail Ventures as the successor to Value City Inc. because of a triangular
merger that combined Value City Inc. with a
wholly owned subsidiary of Retail Ventures. By
contrast, Retail Ventures labels its relationship as a
shareholder of Value City Inc., and later, a holder
of membership interests in Value City Inc.'s successor, Value City LLC.
aries, Filene's Basement, and DSW Shoes. Graphics
adopted from Retail Ventures' renewed motion for
summary judgment [Dkt. # 19] are useful to understanding the series of transactions that led to the
current structure. The graphics refer to Retail Ventures as “RVI,” Value City Inc. as “VCDS, Inc.,”
and Value City LLC as “VCDS LLC.” The first
graphic depicts the structure of the related entities
at the time the lease agreement and guaranty were
signed in 1997.
The structure of the related entities has changed
substantially since the lease and guaranty were
signed in 1997. At that time, Value City Inc. owned
Value City of Michigan, other Value City subsidi-
*3 Value City Inc. completed the first phase of its
reorganization in 2003. First, it formed Retail Ventures as a wholly-owned affiliate that would become a holding company.
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
Next, Retail Ventures formed several wholly owned
subsidiary affiliates, including one called “Merger
Sub Inc.”
Next, Merger Sub Inc. merged with and into Value
City Inc. with Value City Inc. as the surviving corporation.
Value City Inc. became a wholly owned subsidiary
of Retail Ventures.
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
Retail Ventures explained the restructuring and
the related shareholder transactions in its renewed
motion for summary judgment:
Through the merger between [Value City Inc.]
and Merger Sub Inc., (1) [Retail Ventures] received newly issued common shares of [Value
City Inc.] in exchange for all of the common
shares of Merger Sub held by [Retail Ventures],
(2) all of [Retail Ventures'] common shares
(which were owned by [Value City Inc.] ) were
cancelled and (3) the outstanding common shares
of [Value City Inc.] (i.e. the public shares) were
converted into and exchanged for common shares
of [Retail Ventures].
Renewed Mot. for Summ. J. Ex. B at 5; [Dkt. #
19]. Such transactions are known as triangular mergers, whereby the acquiring company, Retail Ventures, forms a wholly-owned subsidiary that merges
with the target, Value City Inc., and the outstanding
shares of the target are exchanged for shares of the
acquiring company or some other consideration.
This transaction is a reverse triangular merger because the target, Value City Inc., survived as a separate entity with its assets and liabilities intact, and
distinct from its new shareholder-owner, Retail
Ventures.
Retail Ventures explained the transaction in a
form 8k filed with the Securities and Exchange
Commission on October 8, 2003:
Effective October 8, 2003, [Value City Inc.] reorganized [its] corporate structure into a “holding
company” structure, consisting of a holding company conducting all of the business previously
conducted by [Value City Inc.] through [Value
City Inc.] and other wholly-owned direct and indirect operating subsidiaries. The name of the
new holding company is [Retail Ventures] and as
with [Value City Inc.], it is an Ohio corporation.
As described below, in connection with reorganization, holders of common stock of [Value City
Inc.] became holders of an identical number of
shares of common stock of [Retail Ventures], and
[Value City Inc.] became a wholly-owned subsidiary of [Retail Ventures].
In the merger, [Value City Inc.] merged with
Value City Merger Sub, Inc., a newly-formed,
wholly owned direct subsidiary of [Retail Ven-
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
tures] (the “Merger”), with [Value City Inc.] as
the surviving corporation of the Merger. In the
Merger, each outstanding share of common stock
of [Value City Inc.] and each share of common
stock of [Value City Inc.] held in treasury was
automatically converted into one share of common stock of [Retail Ventures]. Each share of
Value City Merger Sub, Inc. common stock was
converted into a share of [Value City Inc.] common stock. Additionally, each outstanding option
to purchase shares of [Value City Inc.] common
stock was automatically converted into an option
to purchase, upon the same terms and conditions,
an identical number of shares of [Retail Ventures] common stock, and the stock options were
assumed by and continued as stock options of
[Retail Ventures]. In addition, Retail Ventures assumed sponsorship of all employee benefits pursuant to the terms of the Merger. [Value City
Inc.] will continue to operate as a wholly owned
subsidiary of [Retail Ventures] under the name
“Value City Department Stores, Inc.”
*4 As a result of the reorganization, all the
business and operations previously conducted by
[Value City Inc.] and its subsidiaries are now
conducted by [Retail Ventures] and its subsidiaries, and the assets and liabilities of [Retail Ventures] and its subsidiaries on a consolidated basis
are the same as the assets and liabilities of [Value
City Inc.] and its subsidiaries immediately before
the reorganization. The capital stock of [Retail
Ventures] has the same designations, rights, and
preferences as the capital stock of [Value City
Inc.] prior to the reorganization. In addition, the
persons who were directors and executive officers of [Value City Inc.] prior to the reorganization are directors and executive officers of [Retail
Ventures] after the reorganization.
tion:
[Value City Inc.] today announced the adoption
of a new holding company structure for its operating units and stand-alone service organization.
As a result, the stock of [Value City Inc.] will be
exchanged on a share-for-share basis for shares
of the new holding company, [Retail Ventures],
and [Value City Inc.] will become a wholly
owned subsidiary of [Retail Ventures].
[Dkt. # 19-C].
A Retail Ventures executive, James McGrady,
described the restructuring as follows:
[Value City Inc.] caused [Retail Ventures] to be
incorporated as a direct, wholly-owned subsidiary
of [Value City Inc.]. [Retail Ventures] then
caused certain subsidiaries, including Merger
Sub, to be incorporated as wholly-owned subsidiaries of [Retail Ventures]. Merger Sub, not
[Retail Ventures], was then merged with and into
[Value City Inc.]. Through the merger between
[Value City Inc.] and Merger Sub, (1) [Retail
Ventures] received newly-issued common shares
of [Value City Inc.] in exchange for all of the
common shares of Merger Sub held by [Retail
Ventures], (2) all of [Retail Ventures'] common
shares (which were owned by [Value City Inc.] )
were cancelled and (3) the outstanding common
shares of [Value City Inc.] (i.e., the public
shares) were converted into and exchanged for
common shares of [Retail Ventures].
Following the reorganization of the corporate
structure ... [Value City Inc.] remained a separate
and distinct corporate entity and continued to
maintain its own assets and liabilities. [Retail
Ventures] held 100% of the investment of [Value
City Inc.].
[Dkt. # 18-E at 2].
[Dkt. # 13-3 at 2-3].
On October 7, 2003, Retail Ventures issued a
press release entitled “[Value City Inc.] Is Now
[Retail Ventures].” [Dkt. # 19-C]. The press release
provides the following summary of the reorganiza-
In December 2004, Retail Ventures and Value
City Inc. further reorganized. First, Retail Ventures
created Value City LLC as a wholly-owned subsidi-
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
ary, and then merged Value City Inc. into Value
City LLC and dissolved Value City Inc. Value City
LLC then distributed all of its stock in Filene's
Basement and DSW to Retail Ventures in exchange
for a $240 million promissory note, dated January
1, 2005. [Dkt. # 19-E]. The promissory note was
signed by the same person on behalf of both companies-James A. McGrady, who apparently served
as both the executive vice president of Retail Ventures and the vice president of Value City LLC. The
note was paid in full, including interest, by August
15, 2006. [Dkt. # 19-F]. Importantly, Saginaw
Property has not alleged that the sale of Filene's and
DSW was fraudulent or otherwise unlawful. Nor
has Saginaw Property argued that the proceeds of
the sale were improperly distributed to the holders
of equity interests in Value City LLC to the detriment of the company's creditors.
Finally, on January 23 2008, Retail Ventures
sold eighty-one percent of its interest in Value City
*5 The resulting structure is represented by the diagram below.
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Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
LLC to VCHI Acquisition Co., an entity owned by
VCDS Acquisition Holdings, LLC, Emerald Capital
Management, LLC, and Crystal Value, LLC. That
transaction left Retail Ventures with a nineteen percent interest in its co-defendant, Value City LLC.
Value City Inc. no longer existed, and any ownership stake Value City Inc. or Value City LLC had
held in DSW or Filene's had been sold to Retail
Ventures. DSW and Filene's are not depicted in the
diagram below.
Retail Ventures' McGrady said of the series of
transactions:
City Inc.] was a corporate restructuring and not
an acquisition by [Retail Ventures] of the assets
of [Value City Inc.] substantially as an entirety.
The October 8, 2003 reorganization of [Value
City Inc.] was not a merger or consolidation
between [Retail Ventures] and [Value City Inc.].
Furthermore, the 2003 reorganization of [Value
[Dkt. # 13-3 at 2-3]. Consequently, in its view,
Retail Ventures is not liable under the 1997 lease
guaranty because it is not the “successor” of Value
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
City Inc within the meaning of the lease guaranty
and Michigan law. Rather, it is simply the owner of
nineteen percent of the membership interests in
Value City LLC, Value City Inc.'s only real successor. [Dkt. # 19]. Saginaw Property, on the other
hand, contends that no matter how the transactions
are formally characterized, the company that was
Value City Inc. “is now” Retail Ventures, consequently Retail Ventures must be Value City Inc.'s
successor and liable under the guaranty. [Dkt. #
18].
On September 3, 2008, Saginaw Property filed
the instant complaint. On October 26, 2008, Value
City LLC petitioned for Chapter 11 bankruptcy protection in the Southern District of New York. Retail
Ventures did not file for protection. On January 27,
2009 this Court stayed the proceedings against
Value City LLC, but held that the proceedings
could not be stayed as to Retail Ventures because
Retail Ventures had not filed for Chapter 11 protection. [Dkt. # 16]. The parties then filed crossmotions for summary judgment [Dkt. # 18 & 19] on
the issue of whether Retail Ventures is liable to
Saginaw Property under the 1997 guaranty.
II
A motion for summary judgment is governed
by Federal Rule of Civil Procedure 56. The motion
should be granted if “the pleadings, the discovery
and disclosure materials on file, and any affidavits
show that there is no genuine issue as to any material fact and that the movant is entitled to judgment
as a matter of law.” Fed. R. Civ. Pro. 56(c). When
the “record taken as a whole could not lead a rational trier of fact to find for the nonmoving party,”
there is no genuine issue of material fact. Mich.
Paytel Joint Venture v. City of Detroit, 287 F.3d
527, 534 (6th Cir.2002).
The party seeking summary judgment has the
initial burden of informing the Court of the basis
for its motion, and identifying where to look in the
record for relevant facts, “which it believes demonstrate the absence of a genuine issue of material
fact.” Crelotex Corp. v. Catrett, 477 U.S. 317, 323,
106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The burden
then shifts to the opposing party who must “set out
specific facts showing a genuine issue for trial.”
Fed. R. Civ. Pro. 56(e) (2); Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91
L.Ed.2d 202 (1986). If the opposing party fails to
raise genuine issues of fact and the record indicates
the moving party is entitled to judgment as a matter
of law, the court shall grant summary judgment.
Anderson, 477 U.S. at 250. The Court must view
the evidence and draw all reasonable inferences in
favor of the non-moving party and determine
“whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a
matter of law.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d
202 (1986).
*6 The party opposing the motion may not
“rely on the hope that the trier of fact will disbelieve the movant's denial of a disputed fact,” but
must make an affirmative showing with proper
evidence in order to defeat the motion. Street v.
J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th
Cir.1989). A party opposing a motion for summary
judgment must designate specific facts in affidavits,
depositions, or other factual material showing
“evidence on which the jury could reasonably find
for the plaintiff.” Anderson, 477 U.S. at 252. “[T]he
party opposing the summary judgment motion must
‘do more than simply show that there is some
“metaphysical doubt as to the material facts.” ’ ”
Highland Capital, Inc. v. Franklin Nat. Bank, 350
F.3d 558, 564 (6th Cir.2003) (citing Pierce v. Commonwealth Life Ins. Co., 40 F.3d 796, 800 (6th
Cir.1994) (quoting Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct.
1348, 89 L.Ed.2d 538 (1986))).
III
The question framed by the parties cross motions is whether Retail Ventures is a successor to
Value City Inc. within the meaning of the 1997
guaranty. The guaranty provision provided that it
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
bound Value City Inc. “together with its successors
and assigns, including, without limitation, any entity succeeding thereto by merger, consolidation or
acquisition of its assets substantially as an entirety
....”
Value City Inc., Value City LLC, and Retail
Ventures are or were organized under Ohio law, but
the guaranty contains a choice of law clause, which
provides that Michigan law should apply. [Dkt. #
12-A ¶ 5]. Because neither party raised the choice
of law issue, and both implicitly rely on Michigan
law, the Court will accept the parties' premise that
the choice of law provision governs the successor
liability provision of the guaranty and apply
Michigan law.
Under Michigan law, the interpretation of a
contract is a question of law. Royal Ins. Co. of Am.
v. Orient Overseas Container Line Ltd., 525 F.3d
409, 421 (6th Cir.2008) (citation and quotation
omitted). “The question of whether the language of
a written agreement is ambiguous is one of law;
therefore, it may be resolved summarily.” Parrett v.
Am. Ship Bldg. Co., 990 F.2d 854, 858 (6th
Cir.1993) (citations and quotation omitted).
“Ambiguity exists if the language is susceptible to
two or more reasonable interpretations.” Royal, 525
F.3d at 421 (citation and quotation omitted). When
a contract is clear and unambiguous “there is no issue of fact to be determined.” Id.
Neither party contends there is any issue of fact
that must be determined before interpreting the contract. Therefore, its meaning is a matter of law to be
decided by the Court. The narrow issue is whether
Retail Ventures is Value City's “successor.” That
term that has a specific meaning under Michigan
Law. The term was also defined in the guaranty,
and includes “without limitation, any entity succeeding thereto by merger, consolidation or acquisition of Value City Inc.'s assets substantially as an
entirety ....”
*7 Here, Saginaw Property advances three alternative theories to support its contention that the
2003 reorganization converted Retail Ventures into
a successor of Value City Inc. Specifically, it contends that (A) Retail Ventures acquired all of Value
City Inc.'s assets; (B) that Retail Ventures merged
with Value City Inc.; and/or (C) that Retail Ventures “is” Value City Inc. Saginaw Property,
however, does not cite any legal authority to advance its arguments. In fact, Saginaw Property's
motion for summary judgment cites a single case as
its legal authority. That case deals with contract interpretation under Michigan law, not successor liability.
A
Saginaw Property asserts that Retail Ventures
became Value City Inc.'s successor through the acquisition of all or substantially all of Value City
Inc.'s assets during the 2003 reorganization. As a
general rule, when one company sells its assets to
another the buyer is not the “successor” to the
seller, and therefore not responsible for the seller's
liabilities, unless the buyer assumed those liabilities
or one of four narrow exceptions applies. See John
R. Trentacosta, Michigan Contract Law § 16.17
(1998 & Supp.2008).
Saginaw Property's contends that the language
of the guaranty demonstrates an assumption of liability by Retail Ventures because the guaranty expressly states that any company acquiring all or
substantially all of Value City Inc.'s assets would
become a successor within the terms of the guaranty. This argument fails because Retail Ventures
never acquired any, much less substantially all, of
Value City Inc.'s assets during the first phase of the
reorganization. Value City Inc.'s public shareholders received common stock in Retail Ventures in
exchange for their common stock in Value City Inc.
Additionally, Value City Inc. issued new common
stock to Retail Ventures in exchange for the common stock Retail Ventures held in Merger Sub.
Stock is an asset of the person or entity who owns it
and holds the certificate, but not of the corporation
that issues it. See Black's Law Dictionary 112 (7th
ed. 1999) (“Asset. 1. An Item that is owned and has
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value. 2. (pl.) The entries on a balance sheet showing the items of property owned, including cash, inventory equipment, real estate, accounts receivable,
and goodwill.”). Following the first phase of the reorganization, Value City Inc. retained all of the assets it held before the reorganization, including the
real property it owned, the inventory in its stores,
its leases, accounts, goodwill associated with its
brand, and any ownership interests it held in its
subsidiaries, like Value City of Michigan. The 2003
transaction was a reorganization in which the shares
of Value City Inc. were exchanged on a one-for-one
basis for shares of Retail Ventures, it was not a sale
of substantially all of Value City Inc.'s assets to Retail Ventures.
Retail Ventures would eventually purchase
some of Value City Inc.'s assets in the second phase
of the reorganization, namely Value City Inc.'s
ownerships interests in DSW and Filene's, but that
transaction was not completed until January 1,
2005. Moreover, there is no allegation that the price
Retail Ventures paid for those assets was too low,
or that the proceeds of the sale were distributed to
Value City Inc.'s shareholders at the expense of its
creditors.
*8 Even if the Court were to consider the series
of transactions a sale of substantially all of Value
City Inc.'s assets to Retail Ventures, the transactions still would not convert Retail Ventures into
Value City Inc.'s successor because Retail Ventures
was not a party to the lease guaranty. As a nonparty, Retail Ventures is not bound by the guaranty's terms and is only a successor if it would be
recognized as a successor under Michigan law.
EEOC v. Waffle House, Inc., 534 U.S. 279, 294,
122 S.Ct. 754, 151 L.Ed.2d 755 (2002) (“It goes
without saying that a contract cannot bind a nonparty.”). The Michigan Supreme Court has held that
successor liability will only arise in the context of
an asset sale in five circumstances:
(1) where there is an express or implied assumption of liability; (2) where the transaction
amounts to a consolidation or merger; (3) where
the transaction was fraudulent; (4) where some of
the elements of a purchase in good faith were
lacking, or where the transfer was without consideration and the creditors of the transferor were
not provided for; or (5) where the transferee corporation was a mere continuation or reincarnation
of the old corporation.
Craig v. Oakwood Hosp., 684 N. W.2d 296,314
(Mich.2004) (footnote omitted); see also Johnson v.
Ventra Group, Inc., 191 F.3d 732 (6th Cir.1999).
Here, there was no express or implied assumption
of liability. Moreover, Saginaw Property has not alleged that the transaction was fraudulent, or that the
transaction lacked the elements of a purchase in
good faith and did not provide for creditors. The
only remaining issues, then, are whether the transaction was actually a merger or de facto merger,
and whether Retail Ventures is liable as a “mere
continuation or reincarnation” of Value City Inc.
Craig, 684 N.W.2d at 314.
B
Retail Ventures never merged with Value City
Inc., even though it did acquire all of Value City
Inc.'s stock as the result of a merger. The transaction structure, used here to affect a corporate reorganization, is not uncommon. The reverse triangular merger is popular precisely because it allows the
acquiring company, Retail Ventures, to gain control
of the target, Value City Inc., without actually merging with the target or risking its own assets on the
targets liabilities. See, e.g., Kaufmann v. LVA Holdings, Inc., No. 05-cv-02140, 2006 U.S. Dist. LEXIS
49499 at *2 (D.Col. Oct. 22, 2008) (“The recognized purpose of this type of merger agreement is to
avoid successor liability which would be the consequence of a direct merger of two constituent corporations. [It] is an artful but lawful dodge ....”).
Value City Inc. remained separate and distinct from
Retail Ventures throughout the 2003 reorganization. The fact that Value City Inc. actually created
Retail Ventures and then merged with a subsidiary
of its own newly created subsidiary does not alter
the equation.
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 12
Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
Nor did the transaction amount to a de facto
merger. Under Michigan law, a de facto merger will
lead to successor liability where each of four elements is met:
*9 (1) There is a continuation of the enterprise of
the seller corporation, so that there is a continuity
of management, personnel, physical location, assets, and general business operations.
(2) There is a continuity of shareholders which
results from the purchasing corporation paying
for the acquired assets with shares of its own
stock, this stock ultimately coming to be held by
the shareholders of the seller corporation so that
they become a constituent part of the purchasing
corporation.
(3) The seller corporation ceases its ordinary
business operations, liquidates, and dissolves as
soon as legally and practically possible.
(4) The purchasing corporation assumes those liabilities and obligations of the seller ordinarily
necessary for the uninterrupted continuation of
normal business operations of the seller corporation.
Craig, 684 N.W.2d at 314-15 (citing Turner v.
Bituminous Cas. Co., 397 Mich. 406, 244 N.W.2d
873, 879 (Mich.1976); see also Chrysler Corp. v.
Ford
Motor
Co.,
972
F.Supp.
1097
(E.D.Mich.1997). Here, even though the first two
elements and potentially the fourth element were
met, Value City Inc. never “ceased its ordinary
business operations” or “liquidate[d] and dissolve[d].” In fact, Value City Inc. continued to operate Value City Department Stores as a whollyowned subsidiary of Retail Ventures until Value
City Inc. merged with Value City LLC. It is undisputed that Value City LLC is a successor to Value
City Inc. Moreover, Value City Inc. retained all of
its own assets following the merger with Merger
Sub, such that Value City Inc.'s ability to meet its
obligations to its creditors was unaffected by the reorganization.
C
Finally, Retail Ventures is not liable under the
guaranty as a “mere continuation” of Value City
Inc. The “mere continuation” or “continuity of enterprise” theories are similar to the de facto merger
theory. Trentacosta, supra § 16.17; see also Craig,
684 N.W.2d at 315 (calling for analysis of the
nature of the transaction to determine whether the
buyer is the “mere continuation” of the seller). The
continuity of enterprise theory, however, has only
been applied in the context of products liability.
City Management Corp. v. U.S. Chemical Co., 43
F.3d 244, 251-53 (6th. Cir.1994) (interpreting
Michigan law and holding continuity of enterprise
theory is limited to products liability cases). Therefore, it does not apply to the lease guaranty at issue
here.
IV
In this Court's January 27, 2009 opinion, it emphasized that Saginaw property had not offered any
evidence of a merger between Value City Inc. and
Retail Ventures, and that absent a merger, Saginaw
Property would have to prove that Retail Ventures
stripped “significant assets for inadequate consideration” from Value City Inc. in order to prevail on
the successor liability claim. Saginaw Property,
LLC v. Value City Dept. Stores, LLC, No.
08-13782, 2009 WL 189963 (E.D.Mich. Jan.27,
2009). Saginaw Property has still not offered any
evidence that there was a merger or consolidation
between Retail Ventures and Value City Inc. Nor
has it offered any proof that Retail Ventures received Value City Inc.'s assets for too little consideration or otherwise acted fraudulently in an attempt to avoid its obligations to Saginaw Property
or its other creditors. Retail Ventures has met the
burden of demonstrating an absence of genuine issues of material fact, and its entitlement to judgment as a matter of law. Fed.R.Civ.P. 56.
*10 Accordingly, it is ORDERED that Defendant Retail Ventures, Inc.'s motion for summary
judgment is GRANTED.
It is further ORDERED that Plaintiff Saginaw
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 13
Not Reported in F.Supp.2d, 2009 WL 3536616 (E.D.Mich.)
(Cite as: 2009 WL 3536616 (E.D.Mich.))
Property, LLC's motion for summary judgment is
DENIED.
It is further ORDERED that Plaintiff Saginaw
Property, LLC's claims against Defendant Retail
Ventures, Inc. are DISMISSED WITH PREJUDICE.
E.D.Mich.,2009.
Saginaw Property, LLC v. Value City Dept. Stores,
LLC
Not Reported in F.Supp.2d, 2009 WL 3536616
(E.D.Mich.)
END OF DOCUMENT
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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