This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (2000).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

C3-00-1079

 

Andrew S. Fine,
Appellant,

v.

Schwinn Cycling Fitness, Inc., et al.,
Respondent,

Penn Cycle, Inc.,
Defendant.

 

 

Filed December 26, 2000

Affirmed

Mulally, Judge*

 

Hennepin County District Court

File No. 9911065

 

Robert B. Fine, 4524 Excelsior Boulevard, Suite C, St. Louis Park, MN  55416 (for appellant)

 

Sheila T. Kerwin, Brian N. Johnson, Halleland Lewis Nilan Sipkins & Johnson, P.A., 220 South Sixth Street, Suite 600, Minneapolis, MN  55402 (for respondent)

 

            Considered and decided by Lansing, Presiding Judge, Stoneburner, Judge, and Mulally, Judge.

U N P U B L I S H E D    O P I N I O N

MULALLY, Judge

After being injured in a bicycle accident, appellant Andrew Fine sued the bicycle dealer and respondent Schwinn Cycling & Fitness, the bicycle manufacturer’s successor.  The dealer settled with a Pierringer release.  The district court denied Fine’s motion to compel discovery and granted Schwinn Cycling’s motion for summary judgment.  On appeal, Fine argues that (1) the district court improperly denied his motion to compel discovery and his motion for attorney fees; (2) had discovery been ordered he would have obtained information showing there was a genuine issue of material fact on the issue of successor liability; and (3) the district court erred in determining there was no successor liability.  We affirm.        

FACTS

 

            In 1991, Fine purchased a bicycle that was manufactured by Schwinn Bicycle Company (Schwinn I).  In 1992, Schwinn I filed for bankruptcy under Chapter 11 of the bankruptcy code.  In January, 1993, the bankruptcy court approved an asset purchase agreement, in which Schwinn I sold substantially all of its assets to Bicycle and Fitness Limited Partnership (Bicycle and Fitness) as assignee of the Zell/Chilmark Fund L.P.  The asset purchase was consummated by payment of over $40 million in cash and did not include any corporate stock transfer.  The bankruptcy court found this price to be fair, reasonable, and the highest price offered for Schwinn I’s assets.

            The asset purchase agreement expressly precluded any liability to the buyer resulting from sales by the seller.  In addition, Schwinn I explicitly retained liabilities for claims involving tort, product liability, and breach of contract or breach of warranty for injuries resulting from defective products designed, manufactured, and sold by Schwinn I. 

            In June 1993, Bicycle and Fitness formed a new corporation, Schwinn Cycling & Fitness, Inc. (Schwinn II).  Schwinn II continues to use the trade name used by Schwinn I.  In June 1996, Fine allegedly fell and was injured when his bicycle’s front fork broke while he was riding it.  There is no evidence that Schwinn II manufactured, serviced, or repaired the bicycle or that Fine was the victim of any fraud by Schwinn I or Schwinn II. 

            Schwinn II submitted an affidavit of Debra J. Brandwein, general counsel for the corporation.  In it, she asserted that Schwinn II did not design, manufacture, or sell the allegedly defective bicycle.  Fine presented no evidence to the contrary.

D E C I S I O N

            1.         On an appeal from summary judgment, we ask two questions:  (1) whether any genuine issues of material fact exist and (2) whether the district court erred in applying the law.  State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990).  A motion for summary judgment is granted when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that no genuine issue of material fact exists and that either party is entitled to judgment as a matter of law.  Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993) (citing Minn. R. Civ. P. 56.03).  On appeal, we “must view the evidence in the light most favorable to the party against whom judgment was granted.”  Id. (citation omitted).

             The district court has wide discretion to issue discovery orders and, absent clear abuse of that discretion, its discovery order will not be disturbed.  Shetka v. Kueppers, Kueppers, Von Feldt & Salmen, 454 N.W.2d 916, 921 (Minn. 1990).  However, summary judgment should not be granted when an opposing party has been unable to complete relevant discovery through no fault of its own.  Rice v. Perl, 320 N.W.2d 407, 412-13 (Minn. 1982). 

            Fine argues that further discovery needed to be conducted to determine whether or not successor liability applied to Schwinn II.  The key question, then, is whether further discovery would have produced relevant evidence that would have further assisted the district court in determining successor liability.  Thus, we must first examine the factors of successor liability to determine whether the district court had sufficient evidence before it to grant summary judgment.

2.         If one corporation sells or transfers all its assets to another corporation, the second corporation is not liable for the debts and liabilities of the transferring corporation, with the following exceptions:  (1)  the purchaser expressly or impliedly agrees to assume such debts; (2) the transaction amounts to a consolidation or merger of the corporation; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently in order to escape liability for such debts.  Niccum v. Hydra Tool Corp., 438 N.W.2d 96 (Minn. 1989) (citing J.F. Anderson Lumber Co. v. Myers, 296 Minn. 33, 37-38, 206 N.W.2d 365, 368-69 (1973)).

In addition, Minn. Stat. § 302A.661, subd. 4 (1998), provides:

The transferee is liable for the debts, obligations, and liabilities of the transferor only to the extent provided in the contract or agreement between the transferee and the transferor or to the extent provided by this chapter or other statutes of this state. 

 

In Niccum, the supreme court interpreted this provision to mean that the legislature did not intend to extend successor liability beyond the four exceptions already established.  438 N.W.2d at 99.

Fine only argues that the second and third Niccumexceptions apply, and the record shows that there was no express or implied assumption of liability and no fraudulent transaction.

A statutory merger or consolidation occurs “whereby two or more corporations merge into one of the constituent corporations, or where two or more corporations consolidate into a new corporation.”  J.F. Anderson, 296 Minn. at 37, 206 N.W.2d at 368; see also  Minn. Stat. §§ 300.14 (consolidation), 302A.601, .611-.651 (1998 & Supp. 1999) (merger).  Neither of these two events occurred in this case.  Schwinn I dissolved completely pursuant to a bankruptcy proceeding, and sold its assets to Schwinn II’s predecessor.  The two companies did not exchange stock.  Thus, the consolidation or merger exception can not be used to find successor liability for Schwinn II.

Fine argues that Minnesota should find that the asset purchase was a de facto merger.  In general, a de facto merger does not occur unless:

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 may 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 practicably 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.

 

Shannon v. Samuel Langston Co., 379 F. Supp. 797, 801 (W.D. Mich. 1974). Without the element of shareholder continuity, a de facto merger does not exist.   See Niccum, 438 N.W.2d at 99 (holding that without continuation of the corporate entity, shareholders, stock, and directors, the successor corporation is not liable).

            Fine has not disputed the fact that Schwinn I did not transfer any of its shares of stock to Schwinn II.  According to the purchase agreement, only assets were transferred, in exchange for cash.  Furthermore, Fine did not ask any questions regarding transfer of shares or continuity of shareholders in his interrogatories to Schwinn II.  There is no dispute of material fact that a de facto merger has not occurred. 

            The third exception to the rule of no successor liability occurs “where the purchasing corporation is merely a continuation of the selling corporation,” and refers mainly to “a ‘reorganization’ of the original corporation, such as is accomplished occasionally under Chapter X of the Bankruptcy Act, 11 U.S.C.A. §§ 501 to 676, and perhaps under other state statutory devices.”  J.F. Anderson,296 Minn. at 38, 206 N.W.2d at 369 (quotation omitted).

The mere fact that a purchasing corporation is carrying on the same business as the selling corporation is not sufficient to make the purchasing corporation liable for the debts of the selling corporation.

 

Id. at 38-39, 206 N.W2d at 369 (quotation omitted).

            The facts in J.F. Anderson were very similar to those in this case.  In J.F. Anderson, the successor corporation engaged in the same type of business, used almost the same name, and kept the same management as the transferring corporation.  Id. at 36, 206 N.W.2d at 368.  The supreme court refused to find successor liability, however, stating that

rest[ing] on continuity of business, name, and management alone, is not, we think, sufficient basis for holding a transferee liable for the debts of the transferor.

 

Id. at 40, 206 N.W.2d at 370; see also Carstedt v. Grindeland, 406 N.W.2d 39, 41-42 (Minn. App. 1987) (following J.F. Anderson).

            Schwinn II was not the result of a reorganization of Schwinn I.  Instead, Schwinn I completely liquidated its assets in accordance with chapter 11 of the bankruptcy code.  Fine does not dispute this fact, and none of the interrogatory answers it disputes relate to a reorganization of the business entity.  Thus, there is no fact dispute regarding this element of successor liability.  Schwinn II as a matter of law is not a “mere continuation” of Schwinn I.

            Fine seeks to distinguish this case from the cases cited above based on the fact that the asset sale was accomplished by a trustee in bankruptcy.  He argues that a trustee in bankruptcy will always provide that the purchaser of assets is purchasing just the assets and not the liabilities, in order to entice a higher bid.  However, Fine cites no authority supporting the position that an asset sale pursuant to a bankruptcy proceeding should be treated differently from any other asset sale. 

The case Fine does cite, Western Auto Supply Co. v. Savage Arms, Inc. (In Re Savage Indus., Inc.), 43 F.3d 714 (1st Cir. 1994), is not similar to this case.  In Savage, the first circuit addressed the issue of whether a bankruptcycourt could enjoin prosecution of a state-law successor liability claim when an asset sale had not yet been completed.  Id. at 718-19.  The court found that the bankruptcy court could not do so without giving notice to potential creditors who might have a product liability claim against the bankrupt party.  Id. at 720-23.  The court did not address whether or not the plaintiff’s successor liability claim was valid in such a situation.  Instead, it addressed the issue of whether or not the bankruptcy court could issue an injunction against proceeding with such a claim.  Id. at 718-19.

In his brief, Fine lists factors for successor liability cited by the court in Savage.  The Savage court was merely stating the law according to other states which have adopted the “hybrid” or “product-line” exception, specifically naming California and New Jersey.  Id. at 718 n.4.  As discussed below, Minnesota courts have not adopted an exception as broad as the product-line exception.

Similarly, in Schwinn Cycling & Fitness Inc. v. Benonis, 217 B.R. 790 (N.D. Ill. 1997), the issue was whether or not the bankruptcy court could issue an injunction against a private individual seeking to proceed with a personal injury claim against Schwinn in state court.  The court found that the bankruptcy court could not issue an injunction, and therefore, the action was allowed to proceed in Pennsylvania state court.  Id. at 797.  However, the court did not address the issue of whether or not the plaintiff had a valid successor liability claim against Schwinn II. 

            Fine argues that the court of appeals should expand the continuation exception in accord with other jurisdictions.  For example, Fine cites Turner v. Bituminous Cas. Co. as an example of a case where a court found successor liability in the sale of corporate assets for cash.  244 N.W.2d 873 (Mich. 1976).  However, the Minnesota Supreme Court declined to follow the Turner case, noting that successor liability should not be expanded to include asset sales for the following reasons:

1.                  the successor corporation did not create the risk by placing the defective product into the market;

2.                  any profit realized on the product is only received in a remote way; and

3.                  the successor has not represented to the public the safety of the predecessor’s product.

 

Niccum, 438 N.W.2d  at 99.

 

            Fine also cites Ray v. Alad Corp. for the proposition that successor liability should be found when there is an acquisition of the trade name, good will, and customer lists; the successor corporation continues to produce the same line of products; and the successor corporation holds itself out as the same enterprise.  560 P.2d 3 (Cal. 1977).  This approach is called the product-line exception and invokes strict liability for the successor corporation.  Niccum, 438 N.W.2d at 99.  Niccum explicitly rejected the approach followed in Ray, citing the following reasons:

1.                  the exception is inconsistent with elementary products liability principles, and strict liability principles in particular, in that it results in an imposition of liability without a corresponding duty;

2.                  the exception threatens small successor businesses with economic annihilation because of the difficulty involved in obtaining insurance for defects in a predecessor’s product; and

3.                  the exception is essentially a radical change in the principles of corporation law, and, as such, should be left to legislative action.

 

Id. at 100.

 

              Fine cites Standal v. Armstrong Cork Co. to support the position that Minnesota courts have varied in their application of corporate successor liability.  356 N.W.2d 380 (Minn. App. 1984), review denied (Minn. Feb. 19, 1985).  However, in Standal, the court concluded that the appropriate choice of law should be Pennsylvania law rather than Minnesota law.  Id. at 382-83.  Pennsylvania uses the product-line exception to evaluate successor liability, unlike Minnesota.  Id.at 382.  Thus, the case is not controlling in the application of Minnesota successor liability law.  Fine raises the issue of choice of law for the first time in his appellate brief.  Issues that were not timely raised before the district court cannot be considered by the court of appeals.  Thiele v. Stich, 425 N.W.2d 580, 582 (Minn. 1988).

            We conclude that the evidence in the record was sufficient for the district court to decide a summary judgment motion in favor of Schwinn II without the need for further discovery.  The factors have been properly supported by the record.  The purchase agreement did not provide for a stock transfer, necessary for either consolidation or merger.  The bankruptcy order demonstrated that the asset sale was conducted pursuant to a liquidation, not a reorganization.  Thus, Scwhinn II cannot be considered a mere continuation of Schwinn I.  Further discovery would not add any relevant evidence to the record.

            Fine also raises the issue of attorney fees in his brief.  The district court did not address the issue of attorney fees.  Issues that have not been addressed by the district court cannot be considered by the court of appeals.  Thiele, 425 N.W.2d at 582.

            Affirmed.

 

 

 

           

           

                                                                                                                                           

    

           

 

 

 

 

 



* Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, § 10.