James Sullivan v. Running Waters Irrigation, Inc

• Court: Court of Appeals for the Seventh Circuit
• Decided: January 9, 2014
• Docket: 13-1308
• Status: Published

Opinion

In the

United States Court of Appeals For the Seventh Circuit ____________________ No. 13‐1308 JAMES T. SULLIVAN, ET AL., Plaintiffs‐Appellees,

v.

RUNNING WATERS IRRIGATION, INC., AND JV EQUIPMENT LEASING, LLC, Defendants‐Appellants. ____________________

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 09‐CV‐2329 — Elaine E. Bucklo, Judge. ____________________

ARGUED OCTOBER 1, 2013 — DECIDED JANUARY 9, 2014 ____________________

Before CUDAHY, RIPPLE, and HAMILTON, Circuit Judges. CUDAHY, Circuit Judge. This case is about two interrelated companies that challenge the application of successor liabil‐ ity under ERISA, pursuant to a Rule 25(c) motion that substi‐ tuted the companies as judgment debtors, without an evi‐ dentiary hearing. On appeal, RWI and JV challenge (1) whether the district court properly applied the multifactor ERISA successorship test to find that an “interest” had been 2 No. 13‐1308

transferred within the meaning of Fed. R. Civ. P. 25(c); and (2) whether the district court’s resolution of the 25(c) substi‐ tution without an evidentiary hearing was proper. We now affirm. I. The predecessor business entity, Alpine Irrigation Com‐ pany (Alpine), was a residential irrigation business owned by Robert Zeh (Robert) from 1961 until it closed in 2009. In the years preceding its closing, Alpine was in arrears on pen‐ sion fund payments to the Chicago Journeyman Plumbers Union (the Union). After a Joint Arbitration Board awarded it $56,269.97, the Union filed suit to compel the award under both the Labor Management Relations Act of 1947 (LMRA), 29 U.S.C. § 185, and the Employee Retirement Security Act of 1974 (ERISA), 29 U.S.C. §§ 1132(e)(1). In order to enforce the judgment against Alpine, the Union’s trustee James Sullivan sought citations to discover Alpine’s assets. The discovery citations proved fruitful. During his depo‐ sition, Robert admitted that his son, Jeffery Zeh (Jeffery), knew more about Alpine’s assets and operations than Rob‐ ert. Jeffery was then deposed and revealed his sole owner‐ ship of two companies that were established contemporane‐ ously with Alpine’s closing, Running Waters Irrigation, Inc. (RWI) and JV Equipment Leasing, LLC (JV) (collectively the Appellants). RWI primarily services, but occasionally in‐ stalls, lawn irrigation systems. JV’s sole business is leasing to RWI six pieces of equipment, which it purchased from Al‐ pine. The remainder of Alpine’s unsold equipment remains on RWI’s property. No. 13‐1308 3

Alpine and RWI share a number of undisputed similari‐ ties: RWI operates out of Jeffery’s home, Alpine’s prior busi‐ ness address; RWI utilizes Alpine’s office and storage space; all but one of RWI’s employees worked for Alpine; and final‐ ly, with very few exceptions, RWI relies on Alpine’s custom‐ er list to service Alpine’s past customers. Almost all of RWI’s customers are former Alpine customers. For these reasons, Sullivan moved to impose judgment against RWI and JV as successors. When the magistrate judge denied the motion for lack of a procedural mechanism through which to substitute the parties, Sullivan filed a mo‐ tion under Federal Rule of Civil Procedure 25(c). In his Sec‐ ond Report and Recommendation (Second R&R), the magis‐ trate judge determined that the Appellants were successors under ERISA and that Rule 25(c) provided an appropriate procedure to enable the substitution of the Appellants for Alpine. The district court adopted the Second R&R and granted Sullivan’s motion to substitute. The court deter‐ mined that the Appellants’ objections to the Second R&R failed to successfully rebut the magistrate judge’s key find‐ ings that: Jeffery exercised control over all entities; RWI hired five out of six former Alpine employees; all entities operated out of Jeffery’s house; there was substantial over‐ lap in customer lists; and, the timing of Alpine’s closure and RWI’s incorporation suggested its intention to take over Al‐ pine’s operations. On appeal, the Appellants assert that the district court’s factual findings fell short of satisfying ERISA’s successorship test. The Appellants specifically refute that Jeffery ever had notice of Alpine’s liability and reject factual findings con‐ tributing to the substantial continuity determination. The 4 No. 13‐1308

Appellants also assert that they were denied Due Process because the Rule 25(c) motion was granted without a full ev‐ identiary hearing. The district court had jurisdiction pursuant to 28 U.S.C § 1331. This court has jurisdiction under 28 U.S.C. § 1291. We review the district court’s adoption of the magistrate judge’s findings of fact for clear error and the substitution of a trans‐ feree under Federal Rule of Civil Procedure 25(c) for abuse of discretion. However, because this discretion is only trig‐ gered upon the determination that an entity has transferred an interest within the meaning of Rule 25(c), which requires applying law to the facts, we review the district court’s find‐ ing of substantial continuity de novo. See Luxliner P.L. Export Co. V. RDI/Luxliner, Inc., 13 F.3d 69, 72 (3d Cir. 1993)(“A Rule 25(c) decision is generally within the district court’s discre‐ tion. To determine whether an entity is a transferee of inter‐ est so as to trigger this discretion, however, a district court’s mission is one of applying law to facts.”)(citations omitted). II. Rule 25(c) allows the substitution of parties if an “inter‐ est” is transferred, but relies on other substantive law to de‐ fine “interest.” Normally, a corporation purchasing the as‐ sets of another corporation does not assume the obligations of the transferor. Panther Pumps & Equipment Co., Inc. v. Hy‐ drocraft Inc., 566 F.2d 8, 24 (7th Cir. 1977). However, there are several important exceptions. One such exception has devel‐ oped in the context of ERISA actions, like this one, to recover delinquent pension fund contributions. See Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323, 1327–29 (7th Cir. 1990). No. 13‐1308 5

The Appellants assert that only a substantial transfer of assets can trigger substitution under Rule 25(c), and because JV acquired only six pieces of equipment from Alpine and RWI acquired no assets directly from Alpine, no interest has been transferred. However, Artistic Furniture does not re‐ quire a formal purchase of assets to establish successor liabil‐ ity in the ERISA context. See id. The ERISA test specifically allows the plaintiff to proceed against the subsequent purchaser of the violator’s business, even if it is a true sale, provided that two conditions are sat‐ isfied: (1) the successor had notice of the claim before the ac‐ quisition; and (2) there is substantial continuity of operation of the business before and after the sale. See Artistic Furni‐ ture, 920 F.2d at 1329. It was through this test that the district court determined an “interest” was transferred from Alpine to RWI and JV, justifying this Rule 25(c) substitution. Notice Notice can be proven by showing actual knowledge, as well as evidence that allows the fact finder to imply knowledge from the circumstances. See Golden State Bottling Co. v. NLRB, 414 U.S. 168, 173 (1973). Notice can be implied from variety of circumstances, such as common control or proximity. See Artistic Furniture, 920 F.2d at 1329. Plenty of such evidence exists here. The district court found that Jef‐ fery—as the holder of a leadership position in each compa‐ ny, the son of Alpine’s owner and the owner of the property on which all these companies were located—had enough knowledge to satisfy this notice requirement. In fact, during Richard’s deposition, he indicated that Jeffery would have more information concerning the assets and status of Alpine than he would—a clear indication that Jeffery was intimately 6 No. 13‐1308

familiar with Alpine’s operations. The facts adopted by the district court provide ample circumstances from which to imply Jeffery was aware of Alpine’s delinquency. The dis‐ trict court did not clearly err by adopting these factual find‐ ings and concluding that notice existed. Substantial Continuity Substantial continuity requires a fact‐centered analysis. The facts in this case point clearly toward continuity of busi‐ ness. The Appellants’ primary contention regarding the dis‐ trict court’s substantial continuity finding relies on viewing the alleged successors as isolated entities. RWI contends that it never purchased any of Alpine’s assets, while JV contends that its purchase of Alpine’s assets was merely part of a piecemeal sale, insufficient to establish continuity. JV further rejects the continuity finding on the basis that it is a leasing company rather than an irrigation company. The purported independence of these three entities is contradicted by the facts adopted by the district court, which taken as a whole, show that RWI, JV and Alpine had similar leadership, em‐ ployees, customers, office space, equipment and services. As to RWI, the Appellants concede that it operates out of the same location as Alpine, is in the same or similar busi‐ ness, uses Alpine’s employees and office equipment and has almost all of the same clients. Moreover, the district court found that Jeffery held a leadership position in each compa‐ ny. The Appellants dispute this finding, claiming that Jeffery was never an officer of Alpine. However, the court based its decision on tax returns, company credit cards in Jeffery’s name and Robert’s depositions concerning Jeffery’s in‐ volvement. This evidence does not support a conclusion that No. 13‐1308 7

the court clearly erred in finding that Jeffery held leadership positions at each company. RWI contends that it does not conduct the same business as Alpine. It argues that Alpine “serviced and installed” irri‐ gation systems, while RWI services and consults for irriga‐ tion systems. This distinction is wholly artificial, highlighted by the fact that almost every one of RWI’s customers is a former customer of Alpine and receives similar services. The district court did not err in finding that both Alpine and RWI are in the same or a substantially similar business. JV characterizes the equipment transfer from Alpine to JV as a piecemeal sale of assets, which under Tweed v. Thom‐ as & Betts Power Solutions, LLC, is insufficient to establish continuity. 711 F.3d 763, 768 (7th Cir. 2013). In a similar vein, RWI contends that it is not a successor because it acquired no assets or equipment from Alpine. Viewed in isolation, these assertions as to the unrelated nature of these entities might be persuasive. However, these are artificial distinc‐ tions, which do not mask the substantial interrelatedness of RWI, JV and Alpine. The factual basis for substantial conti‐ nuity is quite clear in this case. In fact, the Appellants do not contest the district court’s finding that “Jeffery Zeh struc‐ tured his companies such that JV would buy Alpine’s assets and lease them back to RWI in servicing Alpine’s former cli‐ ents.” Despite the Appellants’ assertions that these entities are wholly distinct, it is clear that together JV and RWI took on every aspect of Alpine’s former business. On the facts availa‐ ble, we find nothing which would suggest that the district court improperly concluded that there was substantial con‐ tinuity between RWI, JV and Alpine. 8 No. 13‐1308

III. The Appellants assert denial of Due Process because the Rule 25(c) motion was granted without a hearing. They rely on Golden State Bottling Company, Inc. v. National Labor Rela‐ tions Board, 414 U.S. 168 (1973), and Panther Pumps & Equip‐ ment Co., Inc. v. Hydrocraft, Inc., 566 F.2d 8 (7th Cir. 1977), to argue that a Rule 25(c) motion entitles a potential successor to an evidentiary hearing per se. But, the Appellants fail to show how such precedent applies in the absence of a request for a hearing or a showing of what such a hearing would disclose. Initially, it is worth noting that the cases relied upon by the Appellants do not hold that an evidentiary hearing is mandatory to resolve every Rule 25(c) substitution. In nei‐ ther Golden State nor Panther Pumps was there an absence of an evidentiary hearing—neither court was required to re‐ solve such an issue. The Appellants are asking us to deny a court’s discretion to require an evidentiary hearing and in‐ stead make such a hearing mandatory. We decline to impose such a requirement on the basis of dicta. This is especially true when the language of Rule 25(c) contemplates resolu‐ tion solely on motion. Fed. R. Civ. P. 25(c). In any event, for the following reasons, this case does not meet the generally accepted conditions for a mandatory rule. A court has discretion to deny an evidentiary hearing if the Appellants cannot show that an evidentiary hearing would have an articulable bearing on the material issues in dispute. Cf. U.S. v. 8136 S. Dobson St., Chicago Ill., 125 F.3d 1076, 1086 (7th Cir. 1997) (denying an evidentiary hearing for a Rule 60(b) motion); Duncan Foundry & Mach. Works, Inc. v. N.L.R.B., 458 F.2d. 933, 935 (7th Cir. 1972) (same in the con‐ No. 13‐1308 9

text of NLRB review). Here, the district court found that the Appellants’ objections to the Second R&R did not rebut its material factual findings, nor did the objections address the applicable legal test. The Appellants do not identify what they believe would have been revealed on cross‐ examination, what questionable evidence there was or what credibility determinations needed to be made. Thus, it is un‐ clear why the briefing process was insufficient to present or rebut material facts such that an evidentiary hearing was necessary to adequately resolve this motion. Therefore, it was within the district court’s discretion to resolve the Rule 25(c) motion by reviewing and adopting the Second R&R, promulgated without an evidentiary hearing. See e.g., Pink‐ ston v. Madry, 440 F.3d 879, 983–94 (7th Cir. 2006). Moreover, it was the Appellants’ responsibility to request an evidentiary hearing. Pursuant to Fed. R. Civ. Pro. Rule 72(b), the Appellants did file objections to the Second R&R. However, these objections need to be specific enough to alert the district court as to what issues are actually in dispute. Johnson v. Zema Systems Corp., 170 F.3d 734, 741–42 (7th Cir. 1999). At no point in the Appellants’ objections do they specifi‐ cally object to the absence of an evidentiary hearing. The Appellants’ objections are not based on the procedural suffi‐ ciency of a fully briefed motion, but on substantive questions of law and fact. The Appellants come closest to such an objection in their conclusion: RWI and JV are entitled to their day in court and not via substitution under Rule 25C(c) … . RWI and JV 10 No. 13‐1308

have the right to answer the allegations against them, conduct discovery and have a trial, all of which will be washed away if the R&R is adopted. It is not as if Plaintiffs are without a remedy; they can simply file a complaint to pursue their claim. Such a conclusory statement, however, is not a request for an evidentiary hearing. More importantly, it is insufficient to show what such a hearing would produce or why the pro‐ ceedings before the magistrate judge were inadequate. By this we are not requiring heightened specificity in re‐ questing an evidentiary hearing. We simply believe that un‐ der any standard the objections made here do not sufficiently convey the Appellants’ dissatisfaction with the sufficiency of the procedures below as opposed to general dissatisfaction with the outcome. Thus, the Appellants never made clear to the district court what an evidentiary hearing would have disclosed. Finally, at oral argument, the Appellants challenged the sufficiency of the proceedings below because the magistrate judge’s Second R&R contained credibility observations with respect to Jeffery, which were based on transcripts of a depo‐ sition that was taken before Sullivan brought the 25(c) mo‐ tion. Thus, the Appellants argue that a decision maker’s credibility assessment based on the cold record is not appro‐ priate—an evidentiary hearing is required for such determi‐ nations. While the credibility conclusions have been inap‐ propriately included in the Second R&R, two factors per‐ suade us that this argument is not determinative. First, as discussed above, there is ample evidence showing substan‐ tial continuity, it is unlikely that the absence of the credibility observations would disturb this. Second, the Appellants No. 13‐1308 11

never objected to these observations; they have thus waived appellate review of this issue. See Zema Systems, 170 F.3d at 739 (“If a party objects in the district court on some issues and not others, he waives appellate review of the issues to which he has not objected.”). Unlike the foregoing discus‐ sion, specificity is not at issue here. The Appellants’ objec‐ tions to the Second R&R were devoid of any reference to the magistrate judge’s observations on Jeffery’s credibility. IV. Taken as a whole, the facts adopted by the district court create a clear picture of notice and continuity, satisfying the ERISA test. The district court did not err in concluding that an interest had been transferred from Alpine to RWI and JV within the meaning of Rule 25(c). The district court did not abuse its discretion when it resolved the 25(c) motion with‐ out an evidentiary hearing when the Appellants made no request for such a hearing or showed why such a hearing was necessary. We AFFIRM.