Ed Peters v. C & J Jewelry
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Ed Peters v. C & J Jewelry, (1st Cir. 1997).
Opinion
USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 96-1642
ED PETERS JEWELRY CO., INC.,
Plaintiff, Appellant,
v.
C & J JEWELRY CO., INC., ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Francis J. Boyle, Senior U.S. District Judge]
Before
Torruella, Chief Judge,
Aldrich and Cyr, Senior Circuit Judges.
Robert Corrente, with whom Corrente, Brill & Kusinitz, Ltd.,
Sanford J. Davis and McGovern & Associates were on brief for appellant.
John A. Houlihan , with whom Edwards & Angell and Marc A. Crisafulli
were on brief for appellees Fleet National Bank and Fleet Credit Corp.
James J. McGair, with whom McGair & McGair was on brief for
appellees C & J Jewelry Co., Inc. and William Considine, Sr.
August 29, 1997
CYR, Senior Circuit Judge. Plaintiff Ed Peters Jewelry
Co., Inc. ("Peters") challenges a district court judgment entered
as a matter of law pursuant to Fed. R. Civ. P. 50(a) in favor of
defendants-appellees on Peters' complaint to recover $859,068 in
sales commissions from Anson, Inc. ("Anson"), a defunct jewelry
manufacturer, its chief executive officer (CEO) William Considine,
Sr. ("Considine"), its secured creditors Fleet National Bank and
Fleet Credit Corporation (collectively: "Fleet"), and C & J Jewelry
Company ("C & J"), a corporate entity formed to acquire Anson's
operating assets. We affirm the district court judgment in part,
and vacate and remand in part.
I
BACKGROUND
We restrict our opening factual recitation to an
overview, reserving further detail for discussion in connection
with discrete issues. Anson, a Rhode Island jewelry manufacturer,
emerged from a chapter 11 reorganization proceeding in 1983.
Thereafter, Fleet routinely extended it revolving credit, secured
by blanket liens on Anson's real property and operating assets.
In January 1988, Anson executed a four-year contract
designating Peters, a New York corporation, as one of its sales
agents. Peters serviced Tiffany's, an account which represented
roughly one third of all Anson sales. By the following year,
The facts are related in the light most favorable to appellant
Peters, the nonmoving party. See Fed. R. Civ. P. 50(a); Coyante v.
Puerto Rico Ports Auth., 105 F.3d 17, 21 (1st Cir. 1997).
2
however, Anson had fallen behind in its commission payments to
Peters. During 1991, in response to Anson's dire financial straits
and the adverse business conditions prevailing in the domestic
jewelry industry at large, Fleet restructured Anson's loan
repayment schedule and assessed Anson an $800,000 deferral fee. In
1992, after determining that Anson had not achieved the pre-tax,
pre-expense earnings level specified in the 1991 loan restructuring
agreement, Fleet waived the default and loaned Anson additional
monies, while expressly reserving its right to rely on any future
default. Anson never regained solvency. See Fleet Credit Memo
(10/14/93), at 6 ("[Anson] is . . . technically insolvent, with a
negative worth of $6MM at 12/31/92.").
Fleet and Anson entered into further loan restructuring
negotiations in April 1993, after Fleet determined that Anson had
not achieved the prescribed earnings target for December 1992.
Fleet gave Anson formal written notice of the default.
During May 1993, Considine, Anson's CEO, submitted a
radical "restructuring" proposal to Fleet, prompted by the fact
that Anson owed numerous creditors, including Peters, whose claims
represented a serious drain on its limited resources. Considine
recommended that Fleet foreclose on Anson's assets, that Anson be
dissolved, and that a new company be formed to acquire the Anson
assets and carry on its business. The Considine recommendation
stated: "If Fleet can find a way to foreclose [Anson] and sell
certain assets to our [new] company that would eliminate most of
the liabilities discussed above [ viz., including the Peters debt],
3
then we would offer Fleet . . . $3,250,000." The $3,250,000 offer
to Fleet also contemplated, however, that the new company would
assume all Anson liabilities to essential trade creditors. Other-
wise, Fleet was to receive only $2,750,000 for the Anson assets
following the Fleet foreclosure and Fleet would assume "all the
liabilities and the problems attached to it and, hopefully, be able
to work them out."
Fleet agreed, in principle, to proceed with the proposed
foreclosure sale, noting reservations respecting only the foreclo-
sure price and the recommendation by Considine that the debt due
Peters neither be satisfied by Anson nor assumed by the new
company. In the latter regard, Fleet advised that its "counsel
[was] not convinced that you will be able to do this without
inviting litigation," and that "there may be a problem on this
issue."
In October 1993, Fleet gave Anson formal notice that its
operating assets were to be sold in a private foreclosure sale to
a newly-formed corporation: C & J Jewelry.
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USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 96-1642
ED PETERS JEWELRY CO., INC.,
Plaintiff, Appellant,
v.
C & J JEWELRY CO., INC., ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Francis J. Boyle, Senior U.S. District Judge]
Before
Torruella, Chief Judge,
Aldrich and Cyr, Senior Circuit Judges.
Robert Corrente, with whom Corrente, Brill & Kusinitz, Ltd.,
Sanford J. Davis and McGovern & Associates were on brief for appellant.
John A. Houlihan , with whom Edwards & Angell and Marc A. Crisafulli
were on brief for appellees Fleet National Bank and Fleet Credit Corp.
James J. McGair, with whom McGair & McGair was on brief for
appellees C & J Jewelry Co., Inc. and William Considine, Sr.
August 29, 1997
CYR, Senior Circuit Judge. Plaintiff Ed Peters Jewelry
Co., Inc. ("Peters") challenges a district court judgment entered
as a matter of law pursuant to Fed. R. Civ. P. 50(a) in favor of
defendants-appellees on Peters' complaint to recover $859,068 in
sales commissions from Anson, Inc. ("Anson"), a defunct jewelry
manufacturer, its chief executive officer (CEO) William Considine,
Sr. ("Considine"), its secured creditors Fleet National Bank and
Fleet Credit Corporation (collectively: "Fleet"), and C & J Jewelry
Company ("C & J"), a corporate entity formed to acquire Anson's
operating assets. We affirm the district court judgment in part,
and vacate and remand in part.
I
BACKGROUND
We restrict our opening factual recitation to an
overview, reserving further detail for discussion in connection
with discrete issues. Anson, a Rhode Island jewelry manufacturer,
emerged from a chapter 11 reorganization proceeding in 1983.
Thereafter, Fleet routinely extended it revolving credit, secured
by blanket liens on Anson's real property and operating assets.
In January 1988, Anson executed a four-year contract
designating Peters, a New York corporation, as one of its sales
agents. Peters serviced Tiffany's, an account which represented
roughly one third of all Anson sales. By the following year,
The facts are related in the light most favorable to appellant
Peters, the nonmoving party. See Fed. R. Civ. P. 50(a); Coyante v.
Puerto Rico Ports Auth., 105 F.3d 17, 21 (1st Cir. 1997).
2
however, Anson had fallen behind in its commission payments to
Peters. During 1991, in response to Anson's dire financial straits
and the adverse business conditions prevailing in the domestic
jewelry industry at large, Fleet restructured Anson's loan
repayment schedule and assessed Anson an $800,000 deferral fee. In
1992, after determining that Anson had not achieved the pre-tax,
pre-expense earnings level specified in the 1991 loan restructuring
agreement, Fleet waived the default and loaned Anson additional
monies, while expressly reserving its right to rely on any future
default. Anson never regained solvency. See Fleet Credit Memo
(10/14/93), at 6 ("[Anson] is . . . technically insolvent, with a
negative worth of $6MM at 12/31/92.").
Fleet and Anson entered into further loan restructuring
negotiations in April 1993, after Fleet determined that Anson had
not achieved the prescribed earnings target for December 1992.
Fleet gave Anson formal written notice of the default.
During May 1993, Considine, Anson's CEO, submitted a
radical "restructuring" proposal to Fleet, prompted by the fact
that Anson owed numerous creditors, including Peters, whose claims
represented a serious drain on its limited resources. Considine
recommended that Fleet foreclose on Anson's assets, that Anson be
dissolved, and that a new company be formed to acquire the Anson
assets and carry on its business. The Considine recommendation
stated: "If Fleet can find a way to foreclose [Anson] and sell
certain assets to our [new] company that would eliminate most of
the liabilities discussed above [ viz., including the Peters debt],
3
then we would offer Fleet . . . $3,250,000." The $3,250,000 offer
to Fleet also contemplated, however, that the new company would
assume all Anson liabilities to essential trade creditors. Other-
wise, Fleet was to receive only $2,750,000 for the Anson assets
following the Fleet foreclosure and Fleet would assume "all the
liabilities and the problems attached to it and, hopefully, be able
to work them out."
Fleet agreed, in principle, to proceed with the proposed
foreclosure sale, noting reservations respecting only the foreclo-
sure price and the recommendation by Considine that the debt due
Peters neither be satisfied by Anson nor assumed by the new
company. In the latter regard, Fleet advised that its "counsel
[was] not convinced that you will be able to do this without
inviting litigation," and that "there may be a problem on this
issue."
In October 1993, Fleet gave Anson formal notice that its
operating assets were to be sold in a private foreclosure sale to
a newly-formed corporation: C & J Jewelry. Ostensibly out of
concern that Tiffany's might learn of Anson's financial difficul-
ties, and find another jewelry manufacturer, Fleet did not invite
competing bids for the Anson operating assets.
Meanwhile, Peters had commenced arbitration proceedings
against Anson, demanding payment of its unpaid sales commissions.
Peters subsequently secured two arbitration awards against Anson
for $859,068 in sales commissions. The awards were duly confirmed
by the Rhode Island courts.
4
On October 22, 1993, Anson ceased to function; C & J
acquired its operating assets in a private foreclosure sale from
Fleet and thereupon continued the business operations without
interruption. After the fact, Anson notified Peters that all Anson
operating assets had been sold to C & J at foreclosure, by Fleet.
C & J was owned equally by the Considine Family Trust and
Gary Jacobsen. Considine, Gary Jacobsen and Wayne Elliot, all
former Anson managers, became the joint C & J management team.
Jacobsen and Considine acquired the Anson operating assets from
Fleet for approximately $500,000 and Fleet immediately deposited
$300,000 of that sum directly into various accounts which had been
established at Fleet in the name of C & J. The $300,000 deposit
was to be devoted to capital expenditures by C & J. Fleet itself
financed the remainder of the purchase price (approximately $1.4
million), took a security interest in all C & J operating assets,
and received $500,000 in C & J stock warrants scheduled to mature
in 1998. C & J agreed to indemnify Fleet in the event it were held
liable to any Anson creditor. See Credit Agreement q 8.10.
Considine received a $200,000 consulting fee for negotiating the
sale.
In December 1993, Fleet sold the Anson real estate for
$1.75 million to Little Bay Realty, another new company incorporat-
ed by Considine and Jacobsen. Considine and Jacobsen settled upon
the dual-company format in order to protect their real estate
investment in the event C & J itself were to fail. The two
principals provided an additional $500,000 in capital, half of
5
which was used to enable Little Bay Realty to acquire the Anson
real estate from Fleet. The remainder was deposited in a Little
Bay Realty account with Fleet, to be used for debt service. Fleet
in turn advanced the $1.5 million balance due on the purchase
price. Little Bay leased the former Anson business premises to C
& J.
In April 1994, Peters instituted the present action in
federal district court, alleging that Anson, C & J (as Anson's
"successor"), Considine, and Fleet had violated Rhode Island
statutory law governing bulk transfers and fraudulent conveyances,
and asserting common law claims for tortious interference with
contractual relations, breach of fiduciary duty, wrongful foreclo-
sure, and "successor liability." The complaint essentially alleged
that all defendants had conspired to conduct a sham foreclosure and
sale for the purpose of eliminating Anson's liabilities to certain
unsecured creditors, including the $859,068 debt due Peters in
sales commissions.
The defendants submitted a motion in limine to preclude
the testimony of two witnesses former banker Richard Clarke and
certified public accountant John Mathias who were to have
provided expert testimony on the value of the Anson assets.
Ultimately, their testimony was excluded by the district court on
the grounds that their valuation methodologies did not meet minimum
standards of reliability and, therefore, their testimony would not
have aided the jury.
Finally, after Peters rested its case in chief, the
6
district court granted judgment as a matter of law for all
defendants on all claims. The court essentially concluded that
neither Peters nor other Anson unsecured creditors had been wronged
by the private foreclosure sale, since Fleet had a legal right to
foreclose on the encumbered Anson assets which were worth far less
than the amount owed Fleet.
II
DISCUSSION
A. Exclusion of Expert Testimony
Many of the substantive claims asserted by Peters depend
largely upon whether Fleet was an oversecured creditor, i.e.,
whether the Anson assets were worth more than the total indebted-
ness Anson owed Fleet as of the October 1993 foreclosure. Other-
wise, since Fleet had a legal right to foreclose on all the Anson
assets, there could have been no surplus from which any Anson
unsecured or judgment creditor, including Peters, could have
recovered anything. Thus, evidence on the value of the Anson
assets at the time of the Fleet foreclosure was critical.
Peters proffered the testimony of CPA John Mathias on the
value of the Anson assets. During voir dire, Mathias testified
that the total Anson indebtedness to Fleet amounted to $9,828,000,
but that the total value of its assets was $12,738,500. The
A breakdown of the Mathias methodology follows:
Asset Maximum Average Minimum
Value Value Value
7
district court granted the motion in limine in all respects.
1. Standard of Review
Peters tendered the Mathias testimony pursuant to Fed. R.
Evid. 702, which requires trial courts to assess expert-witness
proffers under a three-part standard. Bogosian v. Mercedes-Benz of
N.A., Inc., 104 F.3d 472, 476 (1st Cir. 1997). The trial court
first must determine whether the putative expert is "qualified by
'knowledge, skill, experience, training, or education.'" Id.
(citation omitted). Second, it inquires whether the proffered
testimony concerns "'scientific, technical, or other specialized
knowledge.'" Id. (citation omitted). Finally, it must perform its
gatekeeping function, by assessing whether the testimony "will
assist the trier of fact to understand the evidence or to determine
a fact in issue." Id. Thus, the trial court must decide whether
Accounts Receivable 1,500.000 1,500,000 1,500,000
Other Sales (Unrecorded) 418,000 409,000 400,000
Other Sales (Backlog) 400,000 400,000 400,000
Inventory 2,648,000 2,648,000 2,648,000
Machinery/Equipment 450,000 375,000 300,000
Real Estate 2,941,000 2,941,000 2,941,000
Intangible assets 2,714,000 1,998,500 1,283,000
Net Operating Losses 1,442,000 1,267,000 1,092,000
Life Insurance Policy 1,200,000 1,200,000 1,200,000
_________________________________________________________________
Total (Avg) 12,738,500
(less) Fleet Debt (9,828,000)
Amount Fleet Oversecured 2,910,500
Evidence Rule 702 provides: "If scientific, technical, or
other specialized knowledge will assist the trier of fact to
understand the evidence or to determine a fact in issue, a witness
qualified as an expert by knowledge, skill, experience, training,
or education, may testify thereto in the form of an opinion or
otherwise." Fed. R. Evid. 702.
8
the proposed testimony, including the methodology employed by the
witness in arriving at the proffered opinion, "rests on a reliable
foundation and is relevant to the facts of the case." Id. at 476,
479 (citing Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579,
591, (1993)) (emphasis added); Vadala v. Teledyne Indus., Inc. , 44
F.3d 36, 39 (1st Cir. 1995). Finally, the circumspect and deferen-
tial standard of review applicable to Rule 702 rulings contemplates
their affirmance absent manifest trial-court error. Bogosian, 104
F.3d at 476 (noting that "an expert witness's usefulness is almost
always a case-specific inquiry"); see also United States v.
Schneider, 111 F.3d 197, 201 (1st Cir. 1997) ("In [determining] .
. . relevance, . . . reliability, helpfulness[,] the district court
has a comparative advantage over an appeals panel . . . [and] is
closer to the case.").
2. Total Anson Indebtedness
The district court ruled that the proffered testimony
from Mathias, fixing the total Anson indebtedness to Fleet at
$9,828,000, was patently flawed. For one thing, Mathias admitted
The United States Supreme Court has granted certiorari in
Joiner v. General Elec. Co., 78 F.3d 524 (11th Cir. 1996), cert.
granted, 117 S. Ct. 1243 (1997), wherein the Eleventh Circuit held
that Daubert requires appellate courts to employ a more stringent
standard than "abuse of discretion" in reviewing trial court
"gatekeeping" rulings at the summary judgment or directed judgment
stage. See Cortes-Irizarry v. Corporacion Insular de Seguros , 111
F.3d 184, 189 n.4 (1st Cir. 1997); compare Joiner, 78 F.3d at 529,
and In re Paoli R.R. Yard PCB Litig. , 35 F.3d 717, 749-50 (3d Cir.
1994) (same), with Duffee v. Murray Ohio Mfg. Co. , 91 F.3d 1410-11,
1411 (10th Cir. 1996) ( Daubert requires customary abuse-of-discre-
tion review), and Buckner v. Sam's Club, Inc., 75 F.3d 290, 292
(7th Cir. 1996) (same). As the district court ruling was proper
under either standard, we need not opt between them.
9
not including the $800,000 deferral fee Anson owed Fleet in
connection with the 1991 loan restructuring, see supra Section I,
even though he did not question its validity. Moreover, Mathias
conceded that he had no independent knowledge regarding the total
Anson indebtedness, but compiled the $9,828,000 figure from
unspecified Fleet documents. Thus, Peters adduced no competent
evidence that the total Anson indebtedness was less than
$10,628,000.
3. Value of the Fleet Security Interest
The district court ruled, for good reason, that the
methodology Mathias used to arrive at the $12,738,500 total
valuation for the Anson assets was internally inconsistent and
unreliable. First, on deposition in February 1996 Mathias had
valued the Anson assets at only $10,238,000, roughly equal to the
total indebtedness Anson owed Fleet. After Fleet moved for summary
judgment, however, Mathias revised the valuation on Anson's assets
upward by approximately $2.5 million well above the total Fleet
indebtedness. Thus, the "moving target" nature of the valuation
alone provided ample reason for the district court to scrutinize
the Mathias methodology with special skepticism. Against this
backdrop, therefore, the deferential standard of review looms as a
very high hurdle for Peters. We turn now to the principal factors
which accounted for the increased valuation.
a. Net Operating Losses
Mathias valued Anson's $5 million net operating loss
("NOL") at approximately $1,267,000. Of course, an NOL
10
"carryforward" may have potential value to the taxpayer ( viz.,
Anson) if it can be used to offset future taxable income. Mathias
conceded, however, that his inclusion of the NOL carryforward as an
Anson asset was "inconsistent," since an NOL normally cannot be
transferred, with certain exceptions inapplicable here ( e.g., a
change in the ownership of a corporate taxpayer through qualified
stock acquisitions). Thus, the Anson NOL carryforward would have
been valueless to a third-party purchaser at foreclosure.
Mathias, on the other hand, included the $1,267,000 NOL
in tallying Anson assets on the theory that the Fleet foreclosure
extinguished Anson's future right to utilize the NOL, thereby
effectively "destroying" the asset. The Mathias thesis is beside
the point, however, since the appraisal was designed to determine
the value of Fleet's security interest in Anson's assets at the
date of foreclosure ( i.e., the value Fleet might reasonably expect
to realize were the assets sold and applied to the Anson debt), not
the value of the NOL while Anson continued to function as a going
concern. Thus, Mathias effectively conceded that the value of the
Fleet security interest in the NOL was zero.
b. Keyman Life Insurance Policy
Mathias proposed to testify that the keyman insurance
policy Anson owned on the life of a former director was worth $1.2
million. The valuation was derived from a Fleet document assessing
The Internal Revenue Code allows NOLs to be carried back 3
years, and forward 15 years. See 26 U.S.C. S 172(b).
11
Fleet's collateral position, in which the $1.2 million figure
reflected the net proceeds payable to the beneficiary ( i.e., Fleet)
at the death of the insured.
The district court correctly concluded that the Mathias
appraisal was patently inflated. As previously noted, the only
material consideration, for present purposes, was the policy's
value at the time Fleet foreclosed in October 1993, when the
insured had a life expectancy of seven years and the cash value was
only $62,000. At the very most, therefore, an arm's-length
purchaser would have paid an amount equal to $1.2 million,
discounted to present value.
Indeed, pressed by the district court, Mathias conceded
that he had not calculated "present value," but then estimated it
at "somewhere in the vicinity of $800,000." Mathias likewise
conceded that he had not taken into account the annual premium
($75,000) costs for maintaining the policy seven more years,
totaling $525,000. Thus, Mathias effectively conceded that the
policy might fetch only $275,000, some $925,000 below the proffered
valuation. Absent any suggestion that accepted accounting
principles would countenance such deficiencies, the district court
acted well within its discretion in excluding the Mathias valua-
tion.
As there has been no demonstration that the appraisal
"rest[ed] on a reliable [methodological] foundation," Bogosian, 104
Although its face value was $1.5 million, the policy had been
pledged to Fleet to secure a $300,000 loan.
12
F.3d at 477, 479, with respect to the net operating losses and the
keyman insurance policy, the most optimistic valuation to which
Mathias supportably might have testified was $10,271,500, see supra
Section II.A.2 $356,500 less than the total Anson indebtedness
to Fleet even assuming all other property values ascribed by
Mathias were reasonably reliable, such as intangible assets ( e.g.,
goodwill, trade reputation, going-concern value, etc.) totaling
$1,998,500, see Rev. Rul. 68-609, 1968-2 C.B. 327; the $2,648,000
valuation given Anson's inventory; and the $2,941,000 real estate
valuation.
B. The Rule 50(a) Judgments on Substantive Claims
1. Standard of Review
Judgments entered as a matter of law under Rule 50(a) are
reviewed de novo, to determine whether the evidence, viewed most
favorably to the nonmoving party, Peters, could support a rational
jury verdict in its favor. See Fed. R. Civ. P. 50(a); Coyante v.
Puerto Rico Ports Auth., 105 F.3d 17, 21 (1st Cir. 1997). Of
course, Peters was not entitled to prevail against the Rule 50(a)
motion absent competent evidence amounting to "'more than a mere
scintilla.'" Id. (citation omitted).
2. The Peters Claims
The gravamen of the substantive claims for relief
asserted by Peters is that Fleet colluded with Considine and
Jacobsen to rid Anson of certain burdensome unsecured debt, thereby
effecting a partial "private bankruptcy" discharge under the guise
of the Fleet foreclosure, which advantaged Considine and Jacobsen
13
at the expense of Peters and other similarly situated Anson
unsecured creditors. The Peters proffer included: (1) the March
1993 decision by Fleet to declare Anson in default, which coincided
with the Peters demand for payment from Anson on its sales commis-
sions; (2) the August 1992 decision by Fleet to waive a default
involving a shortfall much larger than the March 1993 default; (3)
the 1993 negotiations with Fleet, in which Considine and Jacobsen
made known their intention that C & J not assume the unsecured debt
Anson owed Peters; (4) the decision to arrange a private foreclo-
sure sale by Fleet, thus ensuring that C & J alone could "bid" on
the Anson operating assets; and (5) the payments made to select
unsecured Anson creditors ( i.e., essential trade creditors) only.
The district court ruled that Peters' failure to
establish that Anson's assets were worth more than its total
indebtedness to Fleet was fatal to all claims for relief. It noted
that, as an unsecured creditor of Anson, Peters was simply experi-
encing a fate common among unsecured creditors who lose out to a
partially secured creditor (hereinafter: "undersecured creditor")
which forecloses on their debtor's collateral. As the district
court did not analyze the individual claims for relief, we now turn
to that task.
a. Fraudulent Transfer Claims
Peters first contends that the jury reasonably could have
found defendants' transfer of the Anson assets fraudulent under
R.I. Gen. Laws SS 6-16-1 et seq., which provides that a "transfer"
is fraudulent if made "[w]ith actual intent to hinder, delay, or
14
defraud any creditor of the debtor." Id. S 6-16-4(a)(1).
Normally, it is a question of fact whether a transfer was made with
actual intent to defraud. At least arguably, moreover, Peters
adduced enough competent evidence to enable the jury to infer that
defendants deliberately arranged a conveyance of the Anson assets
with the specific intent to leave the Peters claim unsatisfied.
Nonetheless, under the plain language of the Rhode Island statute,
the actual intent of the defendants was immaterial as a matter of
law.
The statute covers only a "[fraudulent] transfer made or
obligation incurred by a debtor." Id. S 6-16-4(a) (emphasis
added). The term "transfer" is defined as "every mode, direct or
indirect, absolute or conditional, voluntary or involuntary, of
disposing of or parting with an asset or an interest in an asset,
and includes payment of money, release, lease, and creation of a
lien or other encumbrance." Id. S 6-16-1(l). However, the term
The Rhode Island fraudulent transfer statute lists eleven
"badges of fraud," from which a factfinder might infer actual
fraudulent intent: "(1) The transfer or obligation was to an
insider; (2) The debtor retained possession or control of the
property transferred after the transfer; (3) The transfer or
obligation was . . . concealed; (4) Before the transfer was made or
[the] obligation was incurred, the debtor had been sued or
threatened with suit; (5) The transfer was of substantially all the
debtor's assets; (6) The debtor absconded; (7) The debtor removed
or concealed assets; (8) The value of the consideration received by
the debtor was [not] reasonably equivalent to the value of the
asset transferred or the amount of the obligation incurred; (9) The
debtor was insolvent or became insolvent shortly after the transfer
was made or the obligation was incurred; (10) The transfer occurred
shortly before or shortly after a substantial debt was incurred;
and (11) The debtor transferred the essential assets of the
business to a lienor who transferred the assets to an insider of
the debtor." R.I. Gen Laws S 6-16-4(b).
15
"asset" "does not include . . . (1) Property to the extent it is
encumbered by a valid lien." Id. 6-16-1(b) (emphasis added). As
Fleet unquestionably held a valid security interest in all Anson
assets, and Peters did not establish that their fair value exceeded
the amount due Fleet under its security agreement, see supra
Section II.A, the Anson property conveyed to C & J did not
constitute an "asset" and no cognizable "transfer" occurred under
section 6-16-4(a). See also Richman v. Leiser, 465 N.E.2d 796, 798
(Mass. App. Ct. 1984) ("A conveyance is not established as a
fraudulent conveyance upon a showing of a fraudulent intention
alone; there must also be a resulting diminution in the assets of
the debtor available to [unsecured] creditors.").
b. The Wrongful Foreclosure Claim and
Uniform Commercial Code ("UCC") S 9-504
Peters claimed that Fleet, in combination with the other
defendants, conducted a "wrongful foreclosure" by utilizing its
right of foreclosure as a subterfuge for effectuating Anson's
fraudulent intention to avoid its lawful obligations to certain
unsecured creditors. Thus, Peters contends, Fleet violated its
duty to act in "good faith," see R.I. Gen. Laws S 6A-1-203 ("Every
contract or duty within title 6A imposes an obligation of good
faith in its performance or enforcement."), thereby entitling
Peters to tort damages. The "good faith" claim likewise fails.
As Peters adduced no competent evidence that Fleet
concocted the March 1993 default by Anson, it demonstrated no
trialworthy issue regarding whether Anson remained in default at
the time the foreclosure took place in October 1993. Specifically,
16
Peters proffered no competent evidence to counter the well-
supported ground relied upon by Fleet in declaring a default under
the 1991 loan restructuring agreement; namely, that Anson failed to
meet its earnings target for 1992. See supra Section I. Nor is it
material that Fleet had waived an earlier default by Peters in
1992, particularly since Fleet at the time expressly reserved its
right to act on any future default. See id. Thus, Fleet's legal
right to foreclose was essentially uncontroverted at trial.
The Peters argument therefore reduces to the proposition
that a secured creditor, with an uncontested right to foreclose
under the terms of a valid security agreement, nonetheless may be
liable on a claim for wrongful foreclosure should a jury find that
the secured creditor exercised its right based in part on a
clandestine purpose unrelated to the default. But see Richman, 465
N.E.2d at 799 ("To be a 'collusive foreclosure,' a foreclosure must
be based on a fraudulent mortgage, or it must be irregularly
conducted so as to claim a greater portion of the mortgagor's
property than necessary to satisfy the mortgage obligation.")
(citations omitted). Since Peters cites and we have found no
Rhode Island case articulating the exact contours of a wrongful
foreclosure claim by an unsecured creditor under R.I. Gen. Laws S
6A-1-203, in the exercise of our diversity jurisdiction we are at
liberty to predict the future course of Rhode Island law. See
Vanhaaren v. State Farm Mut. Auto. Ins. Co., 989 F.2d 1, 3 (1st
Cir. 1993). Nevertheless, having chosen the federal forum, Peters
is not entitled to trailblazing initiatives under Rhode Island law.
17
See Carlton v. Worcester Ins. Co., 923 F.2d 1, 3 (1st Cir. 1991);
Porter v. Nutter, 913 F.2d 37, 40-41 (1st Cir. 1990). Nor do its
citations none purporting to apply Rhode Island law persuade
us that the Rhode Island courts would countenance the freewheeling
"wrongful foreclosure" claim it advocates.
Tellingly, none of the cited cases involved a plaintiff who
had prevailed without demonstrating actual prejudice; that is, that
the secured creditor had neither a present contractual right to
foreclose nor a comprehensive lien claim balance exceeding the
value of the collateral.
We briefly note the more significant distinguishing features
which make the cited authorities inapposite. First, in Voest-
Alpine Trading USA v. Vantage Steel Corp. , 732 F. Supp. 1315, 1324-
25 (E.D. Pa. 1989), aff'd, 919 F.2d 206 (3d Cir. 1990), a foreclo-
sure and resale were set aside, not as constituting a wrongful
foreclosure under the common law, but under the Pennsylvania
Fraudulent Conveyance Act, see Pa. Stat. Ann. tit. 39, S 357
(repealed 1993). Moreover, whereas Peters failed to show that the
Anson assets were even arguably worth more than the Anson indebted-
ness to Fleet, see supra Section II.A., in Voest-Alpine, 732 F.
Supp. at 1322, 1325, where the collateral was worth "at least $1
million" and the $1.5 million secured indebtedness was backed by
personal guarantees of $300,000 as well, the district court
concluded that the plaintiff had been "prejudiced" because it might
have received partial payment had the debtor been forced into a
chapter 7 liquidation or chapter 11 reorganization.
Second, in Limor Diamonds, Inc. v. D'Oro by Christopher
Michael, Inc. , 558 F. Supp. 709 (S.D.N.Y. 1983), the plaintiff, who
had sold the debtor diamonds without obtaining a perfected purchase
money security interest, sued both the debtor and a secured
creditor which had foreclosed on the debtor's entire inventory,
including the diamonds, as after-acquired property subject to its
perfected security interest. The plaintiff alleged a conspiracy to
convert the diamonds, on the ground that the defendants had induced
the plaintiff to deliver the diamonds even as the secured creditor
was poised to foreclose on any after-acquired collateral. Id. at
711-12. Thus, the species of bad faith alleged in Limor was
qualitatively different from any involved here, since Peters had
supplied Anson with no goods or assets which could have become
subject to the Fleet security interest.
Third, in Mechanics Nat'l Bank of Worcester v. Killeen, 384
N.E.2d 1231 (Mass. 1979), a "wrongful foreclosure" claim was upheld
where no default had occurred. Id. at 1235-36. In the instant
case, of course, there is no suggestion that Peters was not in
default under its loan restructuring agreement with Fleet.
18
Thus, the Peters contention that the jury would need to
delve further into what motivated Fleet to exercise its legitimate
contractual right to foreclose lacks significant foundation in the
cited authorities. See also, e.g., E.A. Miller, Inc. v. South
Shore Bank, 539 N.E.2d 519, 523 (Mass. 1989) ("The [UCC] defines
'[g]ood faith' as 'honesty in fact in the conduct or transaction
concerned[,]' [and] [t]he essence of bad faith, in this context, is
not the [secured creditor's] state of mind but rather the attendant
bad actions.") (citations omitted). Consequently, Peters is left
to its argument that the Fleet decision to conduct a private
foreclosure sale, rather than solicit potential competing buyers at
a public sale, rendered the foreclosure sale "commercially
unreasonable," in violation of the objective "good faith" require-
ment established in R.I. Gen. Laws S 6A-1-203. See, e.g., American
Sav. & Loan Ass'n v. Musick, 531 S.W.2d 581, 587 (Tex. 1975)
(wrongful foreclosure involves irregularities in sale which
Finally, Peters relies on Sheffield Progressive, Inc. v.
Kingston Tool Co., 405 N.E.2d 985 (Mass. App. Ct. 1980), which
upheld a denial of a motion to dismiss a "collusive foreclosure"
claim that collateral worth over $3 million had been sold in a
private foreclosure sale for only $879,159, the full amount of the
secured debt. Id. at 987. The decision was based not on a showing
of subjective "bad faith" on the part of the secured creditor,
however, but on an objective determination that if the allegations
were proven true, it would mean that the debtor effectively would
have "released," for no consideration, an unencumbered equity
interest worth over $2 million otherwise available to unsecured
creditors, id., clearly a commercially unreasonable sale. See
Thomas v. Price, 975 F.2d 231, 239 (5th Cir. 1992); see also
Bezanson v. Fleet Bank - N.H., 29 F.3d 16, 20-21 (1st Cir. 1994)
(affirming finding of commercial unreasonableness where secured
creditor turned down purchase offer of $3.4 million, which would
have left equity for other creditors). Peters, on the other hand,
failed to prove that Anson had any equity in its operating assets
when Fleet foreclosed. See supra Section II.A.
19
contributed to inadequate price).
Fleet maintained at trial that its decision to conduct
a private sale was reasonable because the publicity attending a
public sale would frighten off Tiffany's, Anson's principal client,
thereby virtually assuring the failure of any successor company
which acquired the Anson operating assets. Thus, Fleet plausibly
reasoned that the anticipated publicity attending a nonprivate sale
would tend to depress the sales price. Peters, on the other hand,
failed to offer any evidence of commercial unreasonableness which
dealt adequately with the justification relied upon by Fleet.
Rather, Peters relied exclusively upon its proffer of testimony
from Richard Clarke, a former banker who would have testified,
categorically, that private foreclosure sales, at which the secured
creditor solicits no third-party bids, are unreasonable per se.
Ultimately, commercial reasonableness poses a question of law,
though its resolution often depends on an assessment of the
constituent facts in dispute, such as the actual circumstances
surrounding the particular sale (e.g., sales price, bid solicita-
tion, etc.). See Dynalectron Corp. v. Jack Richards Aircraft Co. ,
337 F. Supp. 659, 663 (W.D. Okla. 1972). The factfinder must
consider all aspects of the disposition, however, as no single
factor, including the sales price, is dispositive. See Bezanson,
29 F.3d at 20 (N.H. law); RTC v. Carr, 13 F.3d 425, 430 (1st Cir.
1993) (Mass. law).
Peters now suggests that the district court misunderstood and
oversimplified the Clarke testimony, and that Clarke merely meant
that most reasonable private sales would need to be promoted among
interested third parties if possible. We have reviewed the
proffered Clarke testimony in its entirety, however, and find no
sound basis for suggesting that the district court abused its
discretion in concluding that it would have confused the jury. See
Bogosian, 104 F.3d at 476. In other words, as we see it, a sale in
which third-party bids are actively solicited is not a "private"
sale, at least absent considerations not apparent here.
20
Quite the contrary, however, under the Rhode Island UCC,
private sales are expressly permitted. See R.I. Gen. Laws 6A-9-
504(3) (noting that "[d]isposition of the collateral may be by
public or private proceedings . . . but every aspect of the
disposition including the method, manner, time, place, and terms
must be commercially reasonable"). "A sale of collateral is not
subject to closer scrutiny when the secured party chooses to
dispose of the collateral through a private sale rather than a
public sale. Indeed, the official comment to [UCC] section [9-504]
indicates that private sale may be the preferred method of
disposition. . . . The only restriction placed on the secured
party's disposition is that it must be commercially reasonable."
Thomas v. Price, 975 F.2d 231, 238 (5th Cir. 1992). In order to
prove the private foreclosure sale commercially unreasonable,
Peters would have had to demonstrate that the means employed by
Fleet did not comport with prevailing trade practices among those
engaged in the same or a comparable business, see, e.g., In re
Frazier, 93 B.R. 366, 368 (Bankr. M.D. Tenn. 1988), aff'd, 110 B.R.
827 (M.D. Tenn. 1989), whereas Clarke simply testified that he
invariably solicited bids in foreclosure sales. Clarke did not
testify that the steps taken by Fleet, confronted in October 1993
with the concern that Tiffany's might withdraw its indispensable
jewelry orders, did not comport with reasonable private foreclosure
practice in such circumstances. As to the latter point, Clarke
simply stated that he did not know.
Furthermore, though Fleet may have foreclosed for any
21
number of subjective reasons, the record indisputably discloses
that it had at least one unimpeachable reason: the uncontested
Anson default under the 1991 loan restructuring agreement.
Consequently, we are not persuaded that the Rhode Island courts
would accept the amorphous "wrongful foreclosure" claim advocated
by Peters in the present circumstances. See Carlton, 923 F.2d at
3. Accordingly, the wrongful foreclosure claim was properly
dismissed.
c. Bulk Transfer Act (UCC S 6-102(1),(2))
Peters alleged that the sale of all Anson operating
assets to C & J constituted a "bulk transfer" under the Rhode
Island Bulk Transfer Act, see R.I. Gen. Laws SS 6A-6-101, et seq.
("BTA"), and that the admitted failure to give prior notification
to other Anson creditors violated the BTA notice provision, thus
entitling Peters to treat the entire transfer as "ineffective," id.
S 6A-6-105. Defendants counter that the asset sale fell within an
express BTA exemption because it was nothing more than a
"[t]ransfer[] in settlement or realization of a lien or other
Of course, were Fleet found to have foreclosed on the Anson
assets solely to assist Considine and Jacobsen in defrauding
certain of Anson's unsecured creditors, the foreclosure could prove
less fruitful than Fleet supposed. See infra Section II.B.2(d).
But that is an entirely different question than whether Fleet would
be liable in tort under Rhode Island law.
A "bulk transfer" is "any transfer in bulk and not in the
ordinary course of the transferor's business of a major part of the
materials, supplies, merchandise, or other inventory, . . . [as
well as] a substantial part of the equipment . . . if made in
connection with a bulk transfer of inventory." Id. S 6A-6-102(1),
(2).
22
security interests [ viz., Fleet's undersecured claim against
Anson]." Id. S 6A-6-103(3); cf. supra Section II.B.2(a) (compara-
ble "lien" exception under fraudulent transfer statute).
Parry for thrust, relying on Starman v. John Wolfe, Inc. ,
490 S.W.2d 377 (Mo. Ct. App. 1973), Peters argues that defendants
are not entitled to claim the "lien" exemption under S
6A-6-103(3). Peters contends, inter alia, that the first and
third prongs in the Starman test were not met here. It argues that
though Fleet declared a loan default in March 1993, its loan
officers conceded at trial that Fleet had waived more serious
defaults in the recent past and that it had not reassessed whether
Anson was still in default in October 1993, i.e., at the time Fleet
foreclosed. Second, some of the purchase monies C & J paid for the
Anson assets were not applied to Fleet's secured claim against
Anson. For example, Fleet increased the purchase price for Anson's
assets to cover approximately $322,000 in outstanding checks, drawn
In Starman, an automobile dealership owed approximately
$60,000 to a bank, which held a security interest in all dealership
assets, and owed plaintiff Starman a $3,300 unsecured debt. On its
own initiative, the dealership sold its entire business for $74,000
to third parties, who directly paid the bank's security interest in
full, then paid over the remaining $14,000 to two other creditors
of the dealership. The court held that a transferee must make
three factual showings to qualify for the "lien" exemption under
BTA S 103(3): (1) the transferor defaulted on a secured debt, and
its secured creditor had a present right to foreclose on the
transferor's assets to satisfy its lien; (2) the transferor
conveyed the collateral directly to the secured party, rather than
a third party; and (3) the secured party applied all sale proceeds
to the transferor's debt, rather than remitting part of the
proceeds preferentially to some (but less than all) of the
transferor's other unsecured creditors. See Starman, 490 S.W.2d at
382-83. The Missouri court found that the transferor and
transferees had satisfied none of these criteria. Id.
23
on Anson's checking account with Fleet and made payable to Anson's
trade creditors. Further, as a term of the asset sale, Fleet
funnelled half a million dollars in "new capital" back into the
newly created business entity, which C & J then used to pay off
certain trade debts it had assumed from Anson. Both transactions
violated Starman's third or anti-preference prong, says
Peters, because some, but not all, Anson unsecured creditors were
paid with cash not used to reduce or extinguish the $10,628,000
Fleet debt. We cannot agree.
Starman poses no bar to defendants' "lien" exemption
claim under U.C.C. S 6A-6-103(3). First, as we have noted, see
supra Section II.B.2(b), Fleet declared the loan default in March
1993 because Anson had failed to achieve its earnings target for
1992. Thus, the very nature of the default meant that it could not
be cured at any time after December 31, 1992, by which time 1992
year-end earnings were a fait accompli. Under the terms of the
loan restructuring agreement, therefore, Fleet had the unilateral
right to foreclose on the collateral. Furthermore, the previous
Fleet waivers of default were immaterial to the question whether
Fleet had a right to foreclose in October 1993, as the default it
expressly declared in March 1993 was never waived.
Second, the circumstances surrounding the Peters claim
remove it from under the third Starman prong. In Starman, and in
We hasten to add, however, that Fleet incorrectly suggests
that the Missouri Court of Appeals later "negated" its Starman
holding in Techsonic Indus., Inc. v. Barney's Bassin' Shop, Inc.,
621 S.W.2d 332 (Mo. Ct. App. 1981). Rather, Techsonic jettisoned
24
later cases applying its third prong, see, e.g., Mid-America
Indus., Inc. v. Ketchie, 767 P.2d 416, 418-19 (Okla. 1989), the
sale proceeds were more than sufficient to satisfy the secured
claim in full, leaving excess proceeds. The BTA is designed to
prevent transferors like Anson from liquidating their assets
without notice to their creditors, and retaining the proceeds.
Here, however, the sale price paid by C & J did not exceed the
amount due Fleet on its secured claim, see supra Section II.A, and
Fleet therefore was entitled to apply the entire purchase price
toward the Anson indebtedness. That Fleet chose to devote a
portion of the sale proceeds to certain Anson trade creditors did
not implicate Starman's third prong since those monies were never
only the second prong in the Starman test. A transferee would be
exempt from the BTA even if the transferor conveyed the bulk assets
to a third party, rather than to its secured creditor, so long as
all sale proceeds were applied to the secured debt. The court
rejected the proposition that the BTA requires the secured creditor
and transferee to proceed with the empty formalities of a bifurcat-
ed transfer (i.e., passing the assets from transferor to secured
creditor, from secured creditor to third-party transferee) in order
to claim the "lien exemption." Importantly, however, the Techsonic
defendants had applied all sale proceeds to the secured debt, see
id. at 334 ("[A]ll proceeds went to the bank."), and the Techsonic
court therefore had no occasion to reconsider Starman's third
"anti-preference" criterion. Further, other courts have since
acknowledged the continuing efficacy of the third prong in Starman.
See, e.g., Mid-America Indus., Inc. v. Ketchie, 767 P.2d 416, 418-
19 (Okla. 1989) (transfer not exempt where "only a portion of the
proceeds of the sale was paid to the secured creditor"); see also
Ouachita Elec. Coop. Corp. v. Evans-St. Clair , 672 S.W.2d 660, 176-
77 (Ark. Ct. App. 1984) (finding transfer exempt where all proceeds
were applied to secured debts, but expressly distinguishing Starman
on ground that defendants had not applied all sales proceeds to
secured debt); Schlussel v. Emmanuel Roth Co., 637 A.2d 944, 955
n.5 (N.J. Super. Ct. App. Div. 1994) (in dicta, endorsing Starman's
partial-proceeds rule); American Metal Finishers, Inc. v.
Palleschi, 391 N.Y.S.2d 170, 173 (App. Div. 1977) (same); Peerless
Packing Co. v. Malone & Hyde, Inc., 376 S.E.2d 161, 164 (W. Va.
1988).
25
"excess" proceeds. Thus, the district court properly dismissed the
BTA claim.
d. Successor Liability
Next, Peters invokes the "successor liability" doctrine,
by contending that C & J is simply Anson reorganized in another
guise, and therefore answerable in equity for Anson's outstanding
liabilities, including the $859,068 debt due Peters in sales
commissions. See H.J. Baker & Bro. v. Orgonics, Inc. , 554 A.2d 196
(R.I. 1989).
Under the common law, of course, a corporation normally
may acquire another corporation's assets without becoming liable
for the divesting corporation's debts. See id. at 205; see also
National Gypsum Co. v. Continental Brands Corp. , 895 F. Supp. 328,
333 (D. Mass. 1995); 15 William M. Fletcher, Fletcher Cyclopedia of
Law of Private Corporations S 7122, at 231 (1991) [hereinafter:
"Fletcher"]. But since a rigid nonassumption rule can be bent to
evade valid claims, the successor liability doctrine was devised to
safeguard disadvantaged creditors of a divesting corporation in
four circumstances. An acquiring corporation may become liable
under the successor liability doctrine for the divesting
corporation's outstanding liabilities if: (1) it expressly or
impliedly assumed the divesting entity's debts; (2) the parties
structured the asset divestiture to effect a de facto merger of the
two corporations; (3) the divesting corporation transferred its
assets with actual fraudulent intent to avoid, hinder, or delay its
creditors; or (4) the acquiring corporation is a "mere continua-
26
tion" of the divesting corporation. See H.J. Baker, 554 A.2d at
205 (citing, with approval, "mere continuation" test set forth in
Jackson v. Diamond T. Trucking Co. , 241 A.2d 471, 477 (N.J. Super.
Ct. Law Div. 1968) (recognizing, as distinct exceptions, both the
"actual fraud" and "mere continuation" tests)); Cranston Dressed
Meat Co. v. Packers Outlet Co., 57 R.I. 345, 348 (1937) (noting
that nonassumption rule applies only "in the absence of fraud");
see also Golden State Bottling Co. v. NLRB, 414 U.S. 168, 182 n.5
(1973); Western Auto Supply Co. v. Savage Arms, Inc. ( In re Savage
Indus., Inc.), 43 F.3d 714, 717 n.4 (1st Cir. 1994); Philadelphia
Elec. Co. v. Hercules, Inc., 762 F.2d 303, 308-09 (3d Cir. 1985);
Fletcher, at S 7122. This case implicates the third and fourth
successor liability tests.
The district court dismissed the instant successor
liability claim on the ground that Peters could not have been
prejudiced, because Fleet had a legitimate right to foreclose and
Peters did not prove the Anson assets were worth more than the
total Anson indebtedness to Fleet. On appeal, C & J takes
essentially the same position, but with the flourish that the
successor liability doctrine is inapplicable per se where the
divesting corporation's assets were acquired pursuant to an
intervening foreclosure, rather than a direct purchase. See R.I.
Gen. Laws S 6A-9-504(4) ("When collateral is disposed of by a
secured party after default, the disposition transfers to a
purchaser for value all of the debtor's rights therein and
discharges the security interest under which it is made and any
27
security interest or lien subordinate thereto. The purchaser takes
free of all such rights and interests . . . .") (emphasis added).
We do not agree.
First and foremost, existing case law overwhelmingly
confirms that an intervening foreclosure sale affords an acquiring
corporation no automatic exemption from successor liability. See,
e.g., Glynwed, Inc. v. Plastimatic, Inc. , 869 F. Supp. 265, 273-75
(D.N.J. 1994) (collecting cases); Asher v. KCS Int'l, Inc., 659
So.2d 598, 600 (Ala. 1995); G.P. Publications, Inc. v. Quebecor
Printing-St. Paul, Inc., 481 S.E.2d 674, 679-80 (N.C. Ct. App.
1997); see also Upholsterers' Int'l Union Pension Fund v. Artistic
Furniture of Pontiac, 920 F.2d 1323, 1325, 1327 (7th Cir. 1990).
Nor has C & J cited authority supporting its position.
Second, by its very nature the foreclosure process cannot
preempt the successor liability inquiry. Whereas liens relate to
assets (viz., collateral), the indebtedness underlying the lien
appertains to a person or legal entity (viz., the debtor). Thus,
although foreclosure by a senior lienor often wipes out junior-lien
interests in the same collateral, see, e.g., Levenson v. G.E.
Capital Mortgage Servs., Inc., 643 A.2d 505, 512 (Md. Ct. Spec.
App. 1994), rev'd on other grounds, 657 A.2d 1170 (Md. 1995), it
does not discharge the debtor's underlying obligation to junior
lien creditors. See, e.g., Trustees of MacIntosh Condominium Ass'n
v. FDIC, 908 F. Supp. 58, 64 (D. Mass. 1995) ("'As a result of the
first mortgage foreclosure the second mortgage lien was extin-
guished but not the second mortgage debt.'") (quoting Osborne v.
28
Burke, 300 N.E.2d 450, 451 (Mass. App. Ct. 1973)). As one might
expect, therefore, UCC S 9-504 focuses exclusively on the effect a
foreclosure sale has upon subordinate liens, see R.I. Gen. Laws S
6A-9-504(4), supra, rather than any extinguishment of the underly-
ing indebtedness. Whereas the successor liability doctrine focuses
exclusively on debt extinguishment, be the debt secured or unse-
cured.
Following the October 1993 foreclosure sale by Fleet, the
then-defunct Anson unquestionably remained legally obligated to
Peters for its sales commissions, even if the lack of corporate
wherewithal rendered the obligation unenforceable as a practical
matter. True, Fleet might have sold the Anson assets to an entity
with no ties to Anson, but that is beside the point, since the
Peters successor liability claim alleges that C & J is Anson in
disguise. As Peters simply seeks an equitable determination that
C & J, as Anson's successor, is liable for the sales commissions
It is for this reason that the successor liability doctrine
often proves problematic in bankruptcy proceedings. In contrast to
UCC S 9-504, the Bankruptcy Code expressly permits sales free and
clear of liens, and of any other " interest" in the collateral.
See, e.g., 11 U.S.C. S 363(f) ("The trustee may sell property . .
. free and clear of any interest in such property . . . .")
(emphasis added); S 727 (discharge in liquidation); S
1141(d)(discharge in reorganization). Thus, arguably at least,
such "interest[s]" might be thought to encompass successor
liability claims by unsecured creditors. But see, e.g., Wilkerson
v. C.O. Porter Mach. Co. , 567 A.2d 598, 601-02 (N.J. Super. Ct. Law
Div. 1989) (finding successor liability doctrine applicable
notwithstanding entry of S 363 order). Unlike a bankruptcy court,
however, a secured creditor and its nonbankrupt debtor lack the
power either at common law or by statute to effect a
discharge of underlying third-party debts, even for the most
beneficent of reasons.
29
Peters earned from Anson, see Glynwed, 869 F. Supp. at 274-75, its
claim in no sense implicates any lien interest in any former Anson
asset. Third, successor liability is an equitable doctrine, both
in origin and nature. See, e.g., Chicago Truck Drivers, Helpers
and Warehouse Workers Union (Indep.) Pension Fund v. Tasemkin,
Inc., 59 F.3d 48, 49 (7th Cir. 1995); The Ninth Ave. Remedial Group
v. Allis-Chalmers Corp., 195 B.R. 716, 727 (N.D. Ind. 1996) ("The
successor doctrine is derived from equitable principles . . . .");
Stevens v. McLouth Steel Prods. Corp., 446 N.W.2d 95, 100 (Mich.
1989); Uni-Com N.W., Ltd. v. Argus Publ'g Co., 737 P.2d 304, 314
(Wash. Ct. App. 1987). Moreover, the UCC, as adopted in Rhode
Island, see R.I. Gen. Laws S 6A-9-103, provides that generally
applicable principles of equity, unless expressly preempted, are to
supplement its provisions. See G.P. Publications, 481 S.E.2d at
680; see also Ninth Dist. Prod. Credit Ass'n v. Ed Duggan, Inc.,
821 P.2d 788, 794 (Colo. 1991) (en banc); see also Sheffield
Progressive, Inc. v. Kingston Tool Co. , 405 N.E.2d 985, 988 (Mass.
App. Ct. 1980) (UCC Article 9 does not preempt Uniform Fraudulent
Conveyance Act). Moreover, R.I. Gen. Laws S 6A-9-504 neither
explicitly nor impliedly preempts the successor liability doctrine.
Finally, the fact that C & J acquired the Anson assets
indirectly through Fleet, rather than in a direct sale from Anson,
does not trump the successor liability doctrine as a matter of law,
since equity is loath to elevate the form of the transfer over its
substance, and deigns to inquire into its true nature. See
Glynwed, 869 F. Supp. at 275 (collecting cases); G.P. Publications ,
30
481 S.E.2d at 679-80; see also Bangor Punta Operations, Inc. v.
Bangor & Aroostook R. Co., 417 U.S. 703, 713 (1974) ("In such
cases, courts of equity, piercing all fictions and disguises, will
deal with the substance of the action and not blindly adhere to the
corporate form."); Young v. Higbee Co., 324 U.S. 204, 209 (1945)
(same); Henry F. Mitchell, Co. v. Fitzgerald, 231 N.E.2d 373,
375-76 (Mass. 1967) (same). Thus, were C & J otherwise qualified
as Anson's "successor" under Rhode Island law, because its
principals acted with intent to evade the Peters claim, see infra,
there would be no equitable basis for treating the asset transfer
by foreclosure differently than a direct transfer from Anson to C
& J. See A.R. Teeters & Assocs., Inc. v. Eastman Kodak Co., 836
P.2d 1034, 1039 (Ariz. Ct. App. 1992) ("Successor liability is
based upon the theory 'that the assets of a private corporation
constitute a trust fund for the benefit of its creditors . . . .'")
(citation omitted). Consequently, we reject the contention that C
& J's acquisition of Anson's assets through the Fleet foreclosure
pursuant to R.I. Gen. Laws S 6A-9-504, warranted dismissal of the
successor liability claim as a matter of law.
Thus, Peters was entitled to attempt to prove that C & J,
as Anson's "successor," became liable for the Anson debt to Peters
because C & J is a "mere continuation" of the divesting corporate
entity. See Nissen Corp. v. Miller, 594 A.2d 564, 566 (Md. 1991)
("'The [mere continuation] exception is designed to prevent a
situation whereby the specific purpose of acquiring assets is to
place those assets out of reach of the predecessor's creditors. In
31
other words, the purchasing corporation maintains the same or
similar management and ownership but wears a "new hat."'")
(citation omitted). The "mere continuation" determination turns
upon factfinding inquiries into five emblematic circumstances: (1)
a corporation transfers its assets; (2) the acquiring corporation
pays "less than adequate consideration" for the assets; (3) the
acquiring corporation "continues the [divesting corporation's]
business"; (4) both corporations share "at least one common officer
who [was] instrumental in the transfer"; and (5) the divesting
corporation is left "incapable of paying its creditors." See H.J.
Baker, 554 A.2d at 205 (adopting, inter alia, the factors set forth
in Jackson, 241 A.2d at 477).
C & J relies heavily, indeed almost exclusively, on Casey
v. San-Lee Realty, Inc. , 623 A.2d 16 (R.I. 1993), wherein the Rhode
Island Supreme Court identified five factual considerations which
contradicted the contention that San-Lee Realty was a "successor"
corporation. Id. C & J then argues that all five factual
considerations in Casey appertain here. By disregarding the
distinctive procedural posture in which the Casey appeal presented
itself, however, C & J fundamentally misdirects its reliance.
Unlike the judgment as a matter of law at issue here, the
Casey court affirmed a judgment entered for the defendants
following a bench trial in which the trial judge made factual
findings directly pertinent to the "mere continuation" theory. See
id. at 19 ("The findings of fact made by a trial justice, sitting
without a jury, are to be given great weight."). Thus, Casey
32
provides no support for the proposition that the particular factual
considerations credited by the trial court, qua factfinder, would
permit a trial court, sitting with a jury, to enter judgment as a
matter of law.
We emphasize the misplaced reliance on Casey because it
points up the fundamental flaw underlying the Rule 50 dismissal
below. The Baker court was careful to note that the "mere
continuation" inquiry is multifaceted, and normally requires a
cumulative, case-by-case assessment of the evidence by the
factfinder. See H.J. Baker, 554 A.2d at 205; see also Cranston
Dressed Meat, 57 R.I. at 350 (affirming judgment for plaintiff
based on findings of fact); Steel Co. v. Morgan Marshall Indus.,
Inc., 662 N.E.2d 595, 600-01 (Ill. App. Ct. 1996) (trialworthy
issue of fact precluded directed verdict); Burgos v. Pulse
Combustion, Inc. , 642 N.Y.S.2d 882, 882-83 (App. Div. 1996); Bryant
v. Adams, 448 S.E.2d 832, 839-40 (N.C. Ct. App. 1994) ("mere
continuation" inquiry implicates issues of fact precluding summary
judgment); Bagin v. IRC Fibers Co., 593 N.E.2d 405, 408 (Ohio Ct.
App. 1991) (genuine issue of fact relating to "mere continuation"
inquiry precluded summary judgment for defendant); cf. Dickinson v.
Ronwin, 935 S.W.2d 358, 364 (Mo. Ct. App. 1996) ("Although none of
the badges of fraud existing alone establishes fraud, a concurrence
of several of them raises a presumption of fraud.").
Thus, although a Rule 50 dismissal may be warranted where
the trial court has determined the evidence insufficient to permit
a rational jury to find for the plaintiff, we are not presented
33
with such a case. Rather, viewed in the light most favorable to
Peters, see Fed. R. Civ. P. 50(a); Coyante, 105 F.3d at 21, its
evidentiary proffer generated a trialworthy issue of material fact
respecting all five factual inquiries identified in H.J. Baker , as
we shall see.
(i) "Transfer" of Assets
Anson transferred all its operating assets, thereby
enabling C & J to continue the identical product line without
interruption. H.J. Baker, 554 A.2d at 205. C & J nonetheless
contends that a cognizable "transfer" could not have occurred,
because Anson did not convey all its assets to C & J; that is, it
conveyed its real property to Little Bay Realty. See Casey, 623
A.2d at 19 (finding no transfer where, inter alia, not all
corporate assets were conveyed). We disagree.
Under the first Baker criterion, the plaintiff need only
demonstrate "a transfer of corporate assets." H.J. Baker , 554 A.2d
at 205. That is, it is not necessary, as a matter of law, that a
single corporation acquire all the divesting corporation's assets,
though the relative inclusiveness of any such asset transfer may
Since the district court judgment must be vacated in any
event, we assume arguendo that Rhode Island law would require
Peters to make adequate showings on all five Baker factors, even
though Baker expressly adopted the New Jersey model for the "mere
continuation" test, under which "[n]ot all of these factors need be
present for a de facto merger or continuation to have occurred."
Luxliner P.L. Export, Co. v. RDI/Luxliner, Inc. , 13 F.3d 69, 73 (3d
Cir. 1993) (citing Good v. Lackawanna Leather Co., 233 A.2d 201,
208 (N.J. Super. Ct. 1967)). Indeed, the Baker court itself did
not even discuss the "inadequate consideration" element in arriving
at its determination that the acquiring company qualified as a
"successor." See H.J. Baker, 554 A.2d at 205.
34
prove to be a very pertinent factual consideration which the
factfinder would take into account in the overall mix. Cf. Casey,
623 A.2d at 19 (noting that divesting corporation conveyed only
three-fifths of its assets). In this respect, Baker accords with
the law in other jurisdictions. See, e.g., G.P. Publications , 481
S.E.2d at 679 (successor liability doctrine concerns "the pur-
chase[] of all or substantially all the assets of a corporation");
cf. Dickinson, 935 S.W.2d at 364 (recognizing, as badge of fraud,
"the transfer of all or nearly all of the debtor's property")
(emphasis added); supra note 7.
Yet more importantly, however, this is not an instance in
which the divesting corporation transferred its real estate to a
third corporation which was beyond the de facto control of the
principals of the corporation which acquired the operating assets.
Considine and Jacobsen deliberately structured the overall
transaction so as to keep the Anson operating assets and real
property under the ownership of two separate entities, C & J and
Little Bay Realty respectively, concurrently established and
controlled by them. Once again, therefore, since the successor
liability doctrine is equitable in nature, it is the substance of
the overall transaction which controls, rather than its form. See
Glynwed, 869 F. Supp. at 275. Thus, the fact that C & J leased the
real property from Little Bay is not controlling, since C & J
Rather, the ostensible purpose was to immunize Little Bay
from a possible C & J failure, which likewise explains why the
October 1993 agreement contemplated no cross-collateralization.
35
(through Considine and Jacobsen) retained de facto control of the
former Anson real estate following its transfer to Little Bay.
See, e.g., H.J. Baker , 554 A.2d at 205 (focusing on fact that two
companies "operated from the same manufacturing plant," not on
whether they both owned the premises). Accordingly, viewing the
evidence in the light most favorable to Peters, we cannot conclude,
as a matter of law, that no cognizable "transfer" occurred.
(ii) "Inadequate Consideration"
Peters likewise adduced sufficient evidence from which a
rational jury could conclude that the operating assets were
transferred to C & J for "inadequate consideration." Id. The
second Baker factor rests on the theory that inadequate consider-
ation is competent circumstantial evidence from which the
factfinder reasonably may infer that the transferor harbored a
fraudulent intent to evade its obligations to creditors. See,
e.g., Ricardo Cruz Distribs., Inc. v. Pace Setter, Inc., 931 F.
Supp. 106, 110 (D.P.R. 1996) ("a fraudulent transfer of property
from the seller to the buyer, evinced by inadequate consideration
for the transfer"); Casey Nat'l Bank v. Roan, 668 N.E.2d 608, 611
(Ill. App. Ct.) ("Proof of fraud in fact requires a showing of an
actual intent to hinder creditors, while fraud in law presumes a
fraudulent intent when a voluntary transfer is made for no or
inadequate consideration and directly impairs the rights of
creditors."), appeal denied, 675 N.E.2d 631 (1996); cf. Dickinson,
935 S.W.2d at 364 (recognizing "inadequacy of consideration" as
badge of fraud); supra note 7. On the other hand, a valuable
36
consideration negotiated at arm's-length between two distinct
corporate entities normally is presumed "adequate," particularly if
the divesting corporation's creditors can continue to look to the
divesting corporation and/or the sales proceeds for satisfaction of
their claims. See A.R. Teeters, 836 P.2d at 1040; see also Arch
Mineral Corp. v. Babbitt, 894 F. Supp. 974, 986 n.11 (S.D. W. Va.
1995) (one inquiry is whether divesting corporation retains
sufficient assets from which to satisfy creditor claims), aff'd,
104 F.3d 660 (1997); Eagle Pac. Ins. Co. v. Christensen Motor Yacht
Corp., 934 P.2d 715, 721 (Wash. Ct. App. 1997) (inquiring whether
divesting corporation is "left unable to respond to [the]
creditor's claims").
The total consideration for all Anson assets in this case
was less than $500,000. Fleet effectively wrote off its outstand-
ing balances ($10,628,000) on the Anson loan in 1993, and provided
C & J and Little Bay Realty "new" financing totaling approximately
$2.9 million. See Fleet Credit Memo (10/14/93), at 4 ("This
[agreement] is to involve forgiveness of some of [Fleet's] legal
balance in conjunction with a significant equity injection.")
(emphasis added). Thus, though normally loans obtained by buyers
to finance asset acquisitions would be considered in calculating
the total consideration paid, here the two newly-formed acquiring
Because the conveyances to C & J and Little Bay allegedly
comprised part of an integrated scheme to defraud certain Anson
creditors, we weigh the total consideration involved in both
transactions. Our conclusion would be precisely the same, however,
were we to consider only the operating-assets sale to C & J.
37
companies actually incurred no "new" indebtedness to Fleet. In
fact, if the two companies were determined to be Anson's "succes-
sors," the asset sale would have gained them loan forgiveness
approximating $7.728 million ( i.e., $10,628,000, less new indebted-
ness of only $2.9 million), given their total exoneration from
Anson's preexisting indebtedness to Fleet. Since the "new" Fleet
loans cannot count as "consideration," at least as a matter of law,
C & J and Little Bay paid a combined total of only $1 million in
additional cash consideration for the Anson operating assets and
real estate, of which $550,000 was immediately reinjected into the
two acquiring companies for capital improvements and debt service.
See supra Section I. As a practical matter, therefore, C & J and
Little Bay acquired all the Anson assets for only $450,000.
Although Peters utterly failed to demonstrate that the
Anson assets were worth as much as $12,738,000, see supra Section
II.A., it nevertheless adduced competent evidence as to their
minimum value. Thus, the trial record would support a rational
inference that the assets transferred by Anson had a fair value of
just under $4 million. Fleet documents indicate that the book
The district court implied that the fact that Considine and
Jacobsen injected new capital into the two acquiring companies was
dispositive of the "mere continuation" inquiry. We cannot agree,
however, that an injection of new capital at these minimal levels
precluded a finding of fraudulent intent as a matter of law.
Rather, assuming the reconfigured business were to escape, inter
alia, the $859,068 debt due Peters, the $450,000 invested by
Considine and Jacobsen could be considered quite a bargain.
Finally, the remaining $550,000 in new capital was directed back
into the C & J and Little Bay coffers, where it served as an
immediate benefit to Considine and Jacobsen, not a detriment.
38
value of the operating assets approximated $5.2 million; Fleet's
conservative estimate of their value approximated $2.11 million;
and its conservative valuation of the real property was $1.78
million. Therefore, with a total minimum asset value just under $4
million, and a de facto purchase price below $500,000, a rational
jury could conclude that C & J and Little Bay acquired the Anson
assets at 12.5 cents on the dollar.
At these minimal levels, adequacy of consideration
presents an issue for the factfinder. See Nisenzon v. Sadowski,
689 A.2d 1037, 1042-43 (R.I. 1997) (under R.I. fraud conveyance
statute, adequacy of consideration is for factfinder, and review-
able only for clear error); see also Pacific Gas & Elec. Co. v.
Hacienda Mobile Home Park, 119 Cal. Rptr. 559, 566 (Cal. Ct. App.
1975) ("Adequacy of consideration is a question of fact to be
determined by the trier of fact."); Gaudio v. Gaudio, 580 A.2d
1212, 1221 (Conn. App. Ct. 1990) ("[T]he adequacy of the consider-
ation in an action to set aside a fraudulent conveyance is an issue
of fact."); Textron Fin. Corp. v. Kruger, 545 N.W.2d 880, 884 (Iowa
Ct. App. 1996) ("We refrain, however, from adopting any mathemati-
cal rules to determine the adequacy of consideration. All the
facts and circumstances of each case must be considered."). On the
present record, therefore, it was error to determine as a matter of
law that no rational factfinder could conclude that 12.5% of fair
value was "inadequate" consideration for the Anson assets. See,
e.g., Miner v. Bennett, 556 S.W.2d 692, 695 (Mo. Ct. App. 1977)
("The assumption by the grantees of the mortgages in an amount
39
equal to approximately one fourth of the value of the property was
not an adequate consideration for the transfer.") (emphasis added).
Moreover, even assuming arguendo that the circumstantial
evidence of fraudulent intent presented by Peters, in the way of
demonstrating "inadequate consideration," could not have survived
the Rule 50(a) motion for judgment as a matter of law, Peters
adduced competent direct evidence of actual fraudulent intent as
well. Actual fraud is a successor liability test entirely indepen-
dent of the circumstantial "mere continuation" test. See H.J.
Baker, 554 A.2d at 205 (describing "mere continuation" test as
"[a]n exception," not as "the" exception, to the general rule of
"nonassumption"; citing, with approval, Jackson, 241 A.2d at 477,
which recognized the "actual fraud" test as distinct from the "mere
continuation" test, see id. at 475); Cranston Dressed Meat, 57
R.I. at 348 (noting that "nonassumption" presumption applies only
"in the absence of fraud"); see also Joseph P. Manning Co. v.
Shinopoulos, 56 N.E.2d 869, 870 (Mass. 1944) (UFCA case) ("[A]t
common law, if the conveyance is made and received for the purpose
of hindering, delaying or defrauding creditors it is fraudulent and
can be set aside without regard to the nature or amount of
consideration."); Eagle Pacific, 934 P.2d at 721 (noting that,
besides the separate "mere continuation" theory, "[s]uccessor
liability may also be imposed where the transfer of assets is for
the fraudulent purpose of escaping liability").
Baker focused on the "mere continuation" test simply because
there was no evidence of actual fraudulent intent.
40
Peters adduced direct evidence that Considine and
Jacobsen entered into the asset transfer with the specific intent
to rid the business of all indebtedness due entities not essential
to its future viability, including in particular the Peters sales
commissions. Peters notified Anson in March 1993 that it intended
to pursue Anson vigorously for payment of its sales commissions.
See Dickinson, 935 S.W.2d at 364 (recognizing, as badge of fraud,
"transfers in anticipation of suit or execution"); supra note 7.
The intention to evade the Peters debt is explicitly memorialized
in Jacobsen's notes, and yet more explicitly in the May 5, 1993
memo from Considine to Fleet ("If Fleet can find a way to foreclose
the company [ viz., on its security interests in Anson's real estate
and operating assets] and sell certain assets to our company that
would eliminate most of the liabilities discussed above, then we
would offer Fleet . . . $3,250,000."). Thereafter, Fleet
presciently forewarned Considine that its counsel was "not
convinced that you will be able to do this [i.e., shed the Peters
debt] without inviting litigation," and then insisted on an
indemnification clause from C & J should any such litigation
eventuate, see Credit Agreement q 8.10 (Oct. 26, 1993). Moreover,
it is immaterial whether Considine believed that this evasive
maneuver was essential to ensure the solvency and success of the
Anson business; fraudulent intent need not be malicious. See
Balzer & Assocs., Inc. v. The Lakes on 360, Inc., 463 S.E.2d 453,
455 (Va. 1995) ("[M]alicious intent is not an element required to
41
prove the voidability of the transfer.").
(iii) " Continuation of Business"
Furthermore, Peters proffered ample evidence on the third
factor in the Baker test, by demonstrating that C & J did "continue
[Anson's] business." H.J. Baker, 554 A.2d at 205. Among the
considerations pertinent to the business continuity inquiry are:
(1) whether the divesting and acquiring corporations handled
identical products; (2) whether their operations were conducted at
the same physical premises; and (3) whether the acquiring corpora-
tion retained employees of the divesting corporation. See id.; see
also Bagin, 593 N.E.2d at 407 ("The gravamen of the 'mere
continuation' exception is whether there is a continuation of the
corporate entity. Indicia of the continuation of the corporate
entity would include the same employees, a common name, the same
product, the same plant.") (citation omitted).
C & J was incorporated in October 1993 for the specific
purpose of acquiring the assets of the then-defunct Anson. See
Asher, 659 So.2d at 599-600 (noting relevance of fact that
Once again in mistaken reliance on Casey, C & J points out
that the Casey court found no evidence of fraudulent intent.
However, that determination was based on a finding that the
original transferor had no knowledge of the plaintiff's potential
lawsuit at the time of the asset transfer; hence, could not have
effected the transfer with fraudulent intent to evade the debt it
owed the plaintiff. See Casey, 623 A.2d at 19. The Casey court
expressly noted, however, that "the consideration in this case
would not have validated a transfer of assets if the transfer were
made with notice of the existence of a claim of a creditor." Id.
at 19 n.4. Not only is it undisputed that the C & J principals
knew of the Peters claim prior to October 1993, but Peters adduced
direct evidence that the asset transfer was structured with the
specific intent to evade the Peters debt.
42
divesting corporation ceased business operations soon after asset
transfer, then liquidated or dissolved); Steel Co., 662 N.E.2d at
600 (noting significance of circumstantial evidence that acquiring
corporation "was incorporated on the same day that [predecessor]
ceased . . . ."). Peters adduced evidence that C & J not only
continued manufacturing the same jewelry products as Anson, see
H.J. Baker, 554 A.2d at 205 (noting that two companies "sold
virtually identical [] products"), but conducted its manufacturing
at the same physical premises and continued servicing Anson's
principal customer, Tiffany's. Moreover, its uninterrupted
continuation of the Anson manufacturing business was prominently
announced to Anson's customers in an October 1993 letter from C &
J. See Glynwed, 869 F. Supp. at 277 (purchasing corporation "held
itself out to the world '"as the effective continuation of the
seller."'") (citations omitted); Kleen Laundry & Dry Cleaning
Servs., Inc. v. Total Waste Mgt., Inc., 867 F. Supp. 1136, 1142
(D.N.H. 1994) ("This seamless client transfer reveals that the
defendant purchased and operated a complete business and, in so
doing, tacitly held itself out to the public as the continuation of
[] Portland Oil."); cf. United States v. Mexico Feed & Seed Co.,
764 F. Supp. 565, 573 (E.D. Mo. 1991) (noting that the acquiring
corporation continued production of the same product lines and held
itself out to the public as a continuation of the divesting
corporation), aff'd in relevant part, 908 F.2d 478, 488 (8th Cir.
1992). In its October 1993 letter, C & J stated that it had
"acquired all of the assets of Anson," that it was its "intention
43
to build on [Anson's '55-year heritage of quality'] to reestablish
the Anson brand as the pre-eminent one [in the jewelry market],"
and that C & J had therefore " retained all of the former Anson
employees [including Anson's 'current retail sales representation']
the core of any business." (Emphasis added.) See H.J. Baker,
554 A.2d at 205; see also Cyr v. B. Offen & Co., Inc., 501 F.2d
1145, 1153-54 (1st Cir. 1974) (same employees continued to produce
same products in same factory); Mexico Feed, 764 F. Supp. at 572
(noting relevance of finding that acquiring entity retained "same
supervisory personnel" or "production facilities"). Finally, in
order to facilitate the product-line continuation, C & J specifi-
cally assumed responsibility for, and paid off, all indebtedness
due Anson's "essential" trade creditors. See Asher, 659 So.2d at
600 (noting that "purchasing corporation [expressly] assumed those
liabilities and obligations of the seller [ e.g., trade debts]
ordinarily necessary for the continuation of the [seller's] normal
business operations"). Thus, the Peters proffer handily addressed
the third factor in the Baker inquiry.
(iv) Commonality of Corporate Officers
Fourth, Peters adduced sufficient evidence at trial that
C & J and Anson had "at least one common officer [viz., Considine
or Jacobsen] who [was] instrumental in the [asset] transfer." H.J.
Baker, 554 A.2d at 205. C & J responds, inappositely, that the
respective ownership interests held by the principals in the
divesting and acquiring corporations were not identical, as
Considine owned 52% of the Anson stock, whereas Jacobsen and the
44
Considine Family Trust were equal shareholders in C & J.
The present inquiry does not turn on a complete identity
of ownership ( i.e., shareholders), however, but on a partial
identity in the corporate managements (i.e., "officers"). Thus,
the fact that Jacobsen not only held a corporate office in both
Anson and C & J but was instrumental in negotiating the asset
transfer to C & J was sufficient in itself to preclude a Rule 50
dismissal under the fourth prong, even if he were not an Anson
shareholder. See H.J. Baker, 554 A.2d at 205 (noting that "the
management [of the two companies] remained substantially the
same").
Further, the same result obtains even if we were to
assume that the "one common officer" referred to in Baker
must be a shareholder as well. Prior to Baker, the Rhode Island
Supreme Court did not require complete identity between those who
"controlled" the two corporations or the asset transfer, whether
their "control" derived from stock ownership or from their manage-
ment positions. For example, the court had upheld a judgment for
plaintiff, following trial, even though the officers and incorpora-
tors of the divesting and acquiring corporations were not the same,
on the ground that the principals involved in the sale "all had a[]
[common] interest in the transaction." Cranston Dressed Meat, 57
R.I. at 349; cf. Casey, 623 A.2d at 19 (finding no successor
liability where two corporations shared no stockholders, officers,
or directors); cf. also Glynwed, 869 F. Supp. at 277 ("[C]ontinuity
of ownership, not uniformity, is the test."); Park v. Townson &
45
Alexander, Inc. , 679 N.E.2d 107, 110 (Ill. App. Ct. 1997) ("We note
that the continuity of shareholders necessary to a finding of mere
continuation does not require complete identity between the
shareholders of the former and successor corporations.").
Considine easily fits the bill here. After all, "C & J" stands for
something and Jacobsen conceded at trial that Considine "partici-
pates in the management of C & J Jewelry." Moreover, Considine
admitted that no C & J decision could be taken without Considine's
prior approval.
C & J heavily relies as well on the fact that Considine,
individually, held no direct ownership interest in C & J, but
instead had conveyed his interest to the Considine Family Trust.
Once again, however, as equity looks to substance not form, see
Glynwed, 869 F. Supp. at 275, the fact that Considine established
a family trust to receive his ownership interest in C & J did not
warrant a Rule 50 dismissal, especially in light of his concession
that he actively participates in the management of C & J. See
Fleet Credit Memo (10/14/93), at 1 ("[T]hese transactions will be
considered a Troubled Debt Restructure ('TDR') because of
Considine's effective control of the assets both before and after
the contemplated transaction."); id. at 14 (noting that Considine
would be a "Principal" of C & J, although his "involvement in day-
to-day operations will be limited"). Moreover, such intra-family
transfers may be nominal only, and thus may constitute circumstan-
tial evidence of a fraudulent, manipulative intent to mask the
continuity in corporate control. See Park, 679 N.E.2d at 110
46
("[W]hile the spousal relationship between the owners of the
corporations does not in itself establish a continuity of share-
holders, it is certainly a factor which can be considered."); The
Steel Co., 662 N.E.2d at 600 ("We cannot allow the law to be
circumvented by an individual exerting control through his
spouse."); Hoppa v. Schermerhorn & Co. , 630 N.E.2d 1042, 1046 (Ill.
App. Ct. 1994) (noting that the fact that former joint tenant
shareholder's interest was reduced to 2%, and that an additional
family member was shareholder of successor corporation, did not
preclude finding of continuity); cf. Dickinson, 935 S.W.2d at 364
(recognizing "a conveyance to a spouse or near relative" as a badge
of fraud); supra note 7 ("The debtor retained possession or control
of the property"). Focusing on the transactional substance, rather
than its form, therefore, we cannot conclude that a rational
factfinder could not decide that Considine used the family trust to
camouflage his ultimate retention of control over the Anson jewelry
manufacturing business which C & J continued to conduct, without
interruption, after Anson's demise. See National Gypsum, 895 F.
Supp. at 337 ("The intended result in all cases is the same, to
permit the owners of the selling corporation to avoid paying
creditors without losing control of their business.") (emphasis
added).
(v) Insolvency of Divesting Corporation
Finally, C & J does not dispute that Anson is a defunct
corporation, consequently unable to pay its debt to Peters. See
Nelson v. Tiffany Indus., 778 F.2d 533, 535-36 (9th Cir. 1985)
47
("Justification for imposing strict liability upon a successor to
a manufacturer . . . rests upon . . . the virtual destruction of
the plaintiff's remedies against the original manufacturer caused
by the successor's acquisition of the business."); The Ninth Ave.
Remedial Group , 195 B.R. at 727 ("The successor doctrine is derived
from equitable principles, and it would be grossly unfair, except
in the most exceptional circumstances, to impose successor
liability on an innocent purchaser when the predecessor is fully
capable of providing relief . . . .").
Accordingly, since the Peters proffer, at the very least,
generated a trialworthy dispute under each of the five Baker
factors, the Rule 50 motion was improvidently granted.
e. Tortious Interference with Contract
The tortious interference claim alleges that Fleet and
Considine acted in concert not only to extinguish the debt Anson
owed Peters for sales commissions, but caused Anson and C & J to
displace Peters prematurely as the sales representative for the
Tiffany's account. The parties agree that the tortious interfer-
ence claim required that Peters prove: (1) a sales-commission
contract existed between Anson and Peters; (2) Fleet and Considine
Anson retained but one asset the keyman life insurance
policy under which Fleet, not Anson, was the named beneficiary.
See supra Section II.A.3(b).
Peters did not name Fleet in the successor liability count
proper, nor seek to amend its complaint when the omission was
brought to its attention at trial. Consequently, we deem any
independent claim against Fleet abandoned. See Rodriguez v. Doral
Mortgage Corp. , 57 F.3d 1168, 1172 (1st Cir. 1995) (abjuring trial
by ambush).
48
intentionally interfered with the sales-commission contract, and
(3) their tortious actions damaged Peters. See Jolicoeur Furniture
Co. v. Baldelli, 653 A.2d 740, 752 (R.I.), cert. denied, 116 S. Ct.
417 (1995); Smith Dev. Corp. v. Bilow Enters., Inc. , 308 A.2d 477,
482 (R.I. 1973). With respect to the first and third prongs, there
is no dispute that Fleet and Considine knew of the Peters contract
to serve as Anson's sales representative to Tiffany's, or that
Peters sustained damages due to the premature termination of its
sales-commission contract, without receiving payment for its
outstanding commissions.
With respect to the disputed second criterion ( viz.,
intent), Peters need only establish that Fleet or Considine acted
with "legal malice an intent to do harm without justification."
Mesolella v. City of Providence, 508 A.2d 661, 669-70 (R.I. 1986)
(emphasis added); see Friendswood Dev. Co. v. McDade & Co., 926
S.W.2d 280, 282 (Tex. 1996) (noting that defendant may assert
defense of "justification," by demonstrating that the alleged
interference was merely an exercise of its own superior or equal
legal rights, or a good-faith claim to a colorable albeit mistaken
legal right); see also Shaw v. Santa Monica Bank, 920 F. Supp.
1080, 1087 (D. Haw. 1996); Greenfield & Co. of N.J. v. SSG Enters. ,
516 A.2d 250, 257 (N.J. Super. Ct. 1986). Proof of "[actual]
[m]alice, in the sense of spite or ill will, is not [only not]
required," Mesolella, 508 A.2d at 669-70, it is immaterial, see
Texas Beef Cattle Co. v. Green, 921 S.W.2d 203, 211 (Tex. 1995)
("[I]f the trial court finds as a matter of law that the defendant
49
had a legal right to interfere with a contract, then the defendant
has conclusively established the justification defense, and the
motivation behind assertion of that right is irrelevant."); see
also Belden Corp. v. InterNorth, Inc. , 413 N.E.2d 98, 101 n.1 (Ill.
App. Ct. 1980); Kan-Sa You v. Roe, 387 S.E.2d 188, 192 (N.C. Ct.
App. 1990).
Since the successor liability claim was dismissed
improvidently, see supra Section II.B.2(d), the tortious interfer-
ence claim against Considine should have been submitted to the jury
as well. Since a party normally cannot "interfere" with his own
contract, see Baker v. Welch, 735 S.W.2d 548, 549 (Tx. App. 1987),
Considine's status as Anson's CEO and controlling shareholder is
pertinent. As its contracting agent, Considine is Anson, and thus
had a qualified privilege to terminate the Peters contract.
Nonetheless, specialized rules apply to tortious
interference claims against corporate agents. Agency liability is
precluded only if the agent either acted in the "best interests" of
its principal (viz., Anson), see Texas Oil Co. v. Tenneco, Inc.,
917 S.W.2d 826, 831-32 (Tx. App. 1994), or, at the very least, did
not act solely to advance his own personal interests, see Stafford
v. Puro, 63 F.3d 1436, 1442 (7th Cir. 1995) ("Directors and
officers are not justified in acting solely for their own benefit
or solely in order to injure the plaintiff because such conduct is
contrary to the best interests of the corporation."); Powell v.
Feroleto Steel Co. , 659 F. Supp. 303, 307 (D. Conn. 1986); Phillips
v. Montana Educ. Ass'n, 610 P.2d 154, 158 (Mont. 1980); see also
50
Holloway v. Skinner, 898 S.W.2d 793, 796 (Tex. 1995) (noting that
the personal benefit exception is the logically necessary corollary
to the "rule that a party cannot tortiously interfere with its own
contract").
Since Anson was insolvent, see infra Section II.B.2(f),
Considine's own investment in Anson was negligible at best, and the
trial record discloses that he not only acted intentionally to
evade Anson's obligation to Peters, but at the same time negotiated
for himself a $200,000 consulting fee. Thus, the circumstantial
evidence and the Considine memoranda to Fleet generated a
trialworthy issue as to whether Considine acted with "legal
malice." See Mesolella, 508 A.2d at 669-70; see, e.g., Dallis v.
Don Cunningham & Assocs., 11 F.3d 713, 717-18 (7th Cir. 1993)
(upholding jury verdict against corporate officer who had directed
corporation not to pay plaintiff his sales commissions, and where
the officer's "own compensation . . . skyrocketed" during the
relevant time period); see also, e.g., Chandler v. Bombardier
Capital, Inc., 44 F.3d 80, 83 (2d Cir. 1994) (upholding jury
verdict against corporate officer who induced plaintiff's dismiss-
al, then personally took charge of plaintiff's department). This
is not a call the district court could make on a motion for
judgment as a matter of law.
On the other hand, the tortious interference claim
against Fleet fails because Peters did not name Fleet as a
defendant in this count, nor move to amend when Fleet brought the
omission to Peters' attention. Cf. supra note 23. Even if Peters
51
had not abandoned its claim, moreover, it cites no apposite
supporting case law. See Carlton, 923 F.2d at 3 (plaintiff who
selects federal forum not entitled to trailblazing interpretations
of state law). Fleet unquestionably had a valid legal right to
foreclose on Anson's assets in March 1993, and the total Anson
indebtedness to Fleet exceeded the proven value of the Fleet
collateral. As this constituted an independent and legally suffi-
cient "justification" for the Fleet foreclosure, a finding of
"legal malice" appears to have been precluded as a matter of law.
See Friendswood Dev., 926 S.W.2d at 282 ("justification" is the
exercise of one's own legitimate legal rights); cf. Keene Lumber
Co. v. Levanthal, 165 F.2d 815, 820 (1st Cir. 1948) (finding
tortious interference where defendants made false representations
to unsecured creditor, and attempted to avoid the unsecured
creditor's claims by foreclosing upon sham chattel mortgages).
f. Breach of Fiduciary Duty
Finally, Peters claims that Considine breached a
fiduciary duty to Peters, since the value of the shareholders'
investment in an insolvent company is negligible, and the
corporation's directors thereafter become trustees of "the
creditors to whom the [company's] property . . . must go." Olney
v. Conanicut Land Co., 16 R.I. 597, 599 (1889) (emphasis added);
see Unsecured Creditors' Comm. v. Noyes (In re STN Enters.), 779
F.2d 901, 904-05 (2d Cir. 1985); Association of Mill and Elevator
Mut. Ins. Co. v. Barzen Int'l, Inc. , 553 N.W.2d 446, 451 (Minn. Ct.
App. 1996); Whitley v. Carolina Clinic, 455 S.E.2d 896, 900 (N.C.
52
Ct. App. 1995). Considine responds that Peters failed to establish
that he converted any of the Anson assets to his personal use, and
further that he could not have done so, because Fleet had a
comprehensive lien on all operating assets. We disagree.
A breach of fiduciary duty need not amount to a conver-
sion in order to be actionable. "[D]irectors and officers [of
insolvent corporations] may not pursue personal endeavors inconsis-
tent with their duty of undivided loyalty to . . . the
corporations' stockholders and creditors." American Nat'l Bank of
Austin v. MortgageAmerica Corp. ( In re MortgageAmerica Corp. ), 714
F.2d 1266, 1276 (5th Cir. 1983); see National Credit Union Admin.
Bd. v. Regine, 749 F. Supp. 401, 413 (D.R.I. 1990) (as a fiduciary,
director must "place the interests of the corporation before his
own personal interests"). Whereas, the present record discloses,
for example, that Considine negotiated a $200,000 consulting fee
for himself as part of the October 1993 agreement, see supra
Section I, and Peters received nothing. Therefore, the jury must
determine whether Considine breached his duty as an Anson director:
If, then, the director be a trustee, or one
who holds a fiduciary relation to the credi-
tors, in case of insolvency he cannot take
advantage of his position for his own benefit
to their loss. The right of the creditor does
not depend on fraud or no fraud, but upon the
fiduciary relationship.
Olney, 16 R.I. at 602.
In addition, Peters maintained, without citing to Rhode
Island authority, that Fleet must be held answerable for inducing
Considine to breach his fiduciary duty to the bypassed Anson credi-
53
tors. Fleet correctly counters that it cannot be held liable,
however, since its comprehensive lien on the Anson operating assets
precludes a finding that Peters was a "creditor[] to whom the
[company's] property . . . must go." Olney, 16 R.I. at 599.
Moreover, even assuming the Rhode Island courts were to recognize
such a cause of action, Peters would have had to show that: (1)
Considine breached a fiduciary duty; (2) Fleet knowingly induced or
participated in the breach; and (3) Peters sustained damages from
the breach. Whitney v. Citibank, N.A., 782 F.2d 1106, 1115 (2d
Cir. 1986). We are unable to discern how Peters could succeed on
a tortious inducement-to-breach claim which is essentially "analo-
gous to a cause of action for intentional interference with
contractual relations." Id. Thus, for the reasons discussed in
relation to the tortious interference claim against Fleet, see
supra Section II.B.2(e), we affirm the dismissal of the present
claim as well.
III
CONCLUSION
Accordingly, the district court judgment is affirmed
insofar as it dismissed all claims against Fleet; the judgments in
favor of C & J and Considine are affirmed, except for the successor
liability claim against C & J and the claims for tortious interfer-
ence with contract and breach of fiduciary duty against Considine,
which claims are remanded to the district court for further
54
proceedings consistent with this opinion.
SO ORDERED.
We note also that though we have adverted to various
numerical figures, drawn from the trial record, to demonstrate in
broad outline that Peters did generate trialworthy factual disputes
appropriately left to the trier of fact, we do not suggest that the
court, on remand, is in any way bound by these figures, as
distinguished from the legal principles espoused in our opinion.
55
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Ed Peters v. C & J Jewelry, Counsel Stack Legal Research, https://law.counselstack.com/opinion/ed-peters-v-c-j-jewelry-ca1-1997.