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ALEXANDER & BALDWIN, INC. v. PEAT

October 18, 1974

ALEXANDER & BALDWIN, INC., Plaintiff,
v.
PEAT, MARWICK, MITCHELL & CO., and Hauser, O'Connor & Hylind, Defendants. PEAT, MARWICK, MITCHELL & CO. et al., Defendants and Third-Party Plaintiffs, v. ACME FAST FREIGHT, INC., et al., Third-Party Defendants



The opinion of the court was delivered by: BRIEANT

MEMORANDUM AND ORDER

 BRIEANT, District Judge.

 By motion filed September 20, 1974 and argued October 15, 1974, third-party defendants Acme Fast Freight, Inc. ("New Acme") and Acme Fast Freight of Canada, Ltd. ("Acme-Canada") move to dismiss the First Amended Third-Party Complaint as to them on grounds more particularly set forth in the Notice of Motion, which for simplicity may be styled as a defense of mistaken identity.

 In the Underlying Complaint, Alexander & Baldwin, Inc. ("Alexander") seeks damages from Peat, Marwick, Mitchell & Co. ("Peat") and others, Certified Public Accountants, arising out of a claimed fraudulent certification of financial statements of corporations which Alexander purchased from the Bradley third-party defendants on June 30, 1969. In the Third-Party Complaint Peat seeks contribution from the Acme third-party defendants and the Bradleys as joint tort-feasor, should it be held liable to Alexander.

 Acme-Canada is the same corporate entity, originally incorporated in 1952, for which Peat acted as auditors and accountants in 1969. This fact was admitted on the oral argument of the motion. The contention, insofar as concerns Acme-Canada, that it did not "assume the liability" for Peat's claim complained of, is entirely without merit. No assumption was necessary. Acme-Canada was and is an original party whose actions or inactions are relied on as giving rise to liability. No subsequent transactions between or among plaintiff, Acme-Canada, and its present shareholders, or its parent, or others, to which Peat was not a party, can affect Peat's claim in any way. The motion of Acme-Canada to dismiss the Third-Party Complaint on that ground is denied.

 New Acme was incorporated under a slightly different name in Delaware on February 20, 1973, long after June 30, 1969, the last date of the acts complained of.

 Previously, a corporation of the same name ("Old Acme") existed in Delaware at least prior to June 1, 1935. *fn1" It was Old Acme which had all transactions with Peat which are the subject of the Third-Party Complaint. On July 31, 1973 it changed its name, and was thereafter dissolved in November, 1973 under the name of "Acme Freight, Inc." It remains subject to suit.

 New Acme is a different entity. By a purchase agreement dated June 7, 1973, and as a result of antecedent agreements incorporated therein, Alltrans, Incorporated, purchased from Old Acme all the capital stock of New Acme. Seller warranted a pro forma balance sheet of New Acme which includes no liability to Peat, contingent or otherwise. Should Peat prevail on its Third-Party Complaint against New Acme, a claim should lie for breach of such warranty, also a claim to full indemnification under para. 12.5 of the purchase agreement, and indeed, possibly a claim for fraud. See para. 11 of affidavit of Sir Peter Abeles, sworn to May 30, 1974, read in support of the motion.

 On February 22, 1973 by agreement, later amended May 11, 1973, Old Acme transferred to New Acme, effective upon Interstate Commerce Commission approval, all its "operating rights", i.e., the permits, franchises, licenses, or certificates from various federal and state regulatory authorities which allowed it to engage in business as a motor carrier or freight forwarder. Also transferred were "all current assets . . . excluding future income tax benefits" (Agreement para. 3a.1); and all investments in named subsidiaries, all machinery, equipment, terminals, offices and leasehold improvements. New Acme assumed some but not all of Old Acme's liabilities. Old Acme received all of the capital stock of New Acme in consideration for the transfer. This was the stock sold to Alltrans, Incorporated. After the transfer, which became effective as of July 31, 1973, the same day on which Alltrans purchased, Old Acme was a relatively naked shell; it had disabled itself from doing business but, because of its ownership of all of the shares of New Acme, was not insolvent. New Acme took the name of Old Acme, which, as noted, changed its name to Acme Freight, Inc., and has since dissolved.

 None of the parties to the transactions by which Alltrans, Incorporated acquired New Acme, intended that New Acme assume or become responsible for any contingent liability of Old Acme to Peat. The existence of the claim was known, at least to Old Acme and its parent Alexander & Baldwin, Inc., at the time of the closing, and at all material times. Alltrans claims it did not know.

 From all of the circumstances set forth in the agreements and related documents submitted in support of this motion, it is clear that New Acme is in all respects a successor in interest of the entire business of Old Acme. There is a complete continuity of name, operating rights, personnel and equipment in the successor. The predecessor has given up business, and ceased to exist. As such successor, under the facts shown, it is or may be liable for its predecessor's torts, without the necessity of any agreement to assume all such liabilities. The rule is stated negatively in 15 Fletcher, Cyclopedia of Corporations ยง 7122, et seq. (1973 rev.) as follows:

 
"The purchasing or transferee company, that is to say, is not liable on the other company's obligations merely by reason of its succession to such company's property. . . . An express agreement . . . or one that can be implied, . . . to assume the other company's debts and obligations, is necessary; or the circumstances must warrant a finding that there was a consolidation or merger of the corporations, . . . or that the transaction was fraudulent in fact, . . . or that the purchasing company was a mere continuation of the selling company;. . . the foregoing constitute the so-called exceptions to the general rule. . . ." [Footnotes omitted] [Italics added]

 The foregoing rule was stated as follows in In Re Johnson-Hart Co., 34 F.2d 183, 184 (D.Minn.1929), a pre- Erie case:

 
"It seems to have been fairly well settled that, where the circumstances attending the succession of a new corporation to the assets and business of an old corporation warrant the conclusion that the new corporation is simply a continuation of the old, it becomes liable for the debts of the corporation to the business and assets of which it has succeeded. See Skirvin Operating Co. v. Southwestern Electric Co., 71 Okl. 25, 174 P. 1069, 15 A.L.R. 1104, and cases referred to in ...

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