Scarff Brothers, Inc. v. Bischer Farms, Incorporated

386 F. App'x 518

• Court: Court of Appeals for the Sixth Circuit
• Decided: July 15, 2010
• Docket: 08-1831
• Status: Unpublished

Opinions

ALICE M. BATCHELDER, Chief Judge.

In this contract dispute, Defendants-Appellants Bischer Farms, Inc., et al. (“Defendants”) appeal the district court’s award of contractual damages to Plaintiff-Appellee Scarff Brothers, Inc. (“Scarff Brothers”). For the reasons that follow, we affirm in part and vacate and remand in part.

I.

The facts of this case were ably set out by the district court in its opinion, Scarff Brothers, Inc. v. Bischer Farms, Inc., 546 F.Supp.2d 478, 477-84 (E.D.Mich.2008). Because neither party contests the district court’s findings of fact for the purpose of this appeal, only a short summary of the main elements is included.

A. Parties

Scarff Brothers is owned by two brothers, Lance and Howard Scarff, and is in the business of buying and selling cattle at market. Scarff Brothers places its cattle in feedlots across the country where the cattle are fed and cared for until they are ready for slaughter and sale at market. Bischer Farms, Inc. was one such feedlot. Bischer Farms, Inc. is owned by Melvin Bischer, Janet Bischer, Bradley Geiger and Pauline Geiger in equal shares. These individuals also own several other enterprises, including a concrete business, a field tile business, and a trucking company. Duane Geiger managed the feedlot at Bischer Farms, Inc. and worked with Scarff Brothers to issue monthly bills for the cattle’s care.

B. The Contract

The parties began doing business in August 2002 after orally agreeing to terms, and in 2003 attempted to put the terms of their agreement into writing. Because the parties could not produce an agreed-upon version of the writing at trial, however, the district court found the terms of their contract from their course of dealing. These terms are as follows. Bischer Farms, Inc. agreed to feed and care for Scarff Brothers’ cattle at an agreed maximum cost of gain per pound, insurance per head, and veterinary costs. Scarff Brothers tracked its cattle in lots with detailed handling and cost data attached, which Bischer Farms, Inc. used to bill Scarff Brothers for monthly costs by lot, discounted for any dead cattle, based on Duane Geiger’s information. “Finished,” or marketable, cattle were selected out of particular lots for slaughter and sale. When the last head in a lot was sold Bischer Farms, Inc. issued a “close out” invoice for the lot. This invoice accounted for all the cattle delivered to Bischer Farms, Inc. as either having died or been sold, and charged Scarff Brothers for any remaining costs.

During the course of their business relationship Scarff Brothers delivered sixty lots to Bischer Farms, Inc., the first forty of which were closed out in this manner. There were 7,194 cattle in those forty lots. Twenty-two cattle were reported to have died and 7,172 head were marketed. Lots forty-one to sixty included 2,840 head, with the last shipment to Bischer Farms, Inc. on January 27, 2004.

C. Missing Cattle

At some point in late 2003, Defendants discovered that they could not account for all the Scarff Brothers’ cattle that had been delivered to their lot. They initially suspected theft and fired Duane Geiger on January 30, 2004. On February 4th or 5th, Defendants informed Scarff Brothers that at least 100 head were missing. On February 11, 2004, Scarff Brothers came to inspect its cattle and Defendants told them that Duane Geiger had stolen the missing heads of cattle. A hand inspection done by both parties revealed 491 head unaccounted for. On February 12, 2004, Defendants reported the theft to the local sheriff. Soon after Scarff Brothers removed its cattle to other feed lots.

D. The Proceedings Below

Scarff Brothers sued in federal district court for breach of contract as well as various tort-related claims. Defendants counterclaimed for breach of contract. After years of contentious litigation the case proceeded to a bench trial lasting 24 half-days. After the conclusion of proofs the district court issued its opinion. It held that Bischer Farms, Inc. had breached its contract with Scarff Brothers; that Bischer Farms Partnership was a successor to Bischer Farms, Inc. and therefore the partnership and each partner were liable for the breach; and that all the related Bischer Farms entities and individuals were liable as alter egos. The district court dismissed Scarff Brothers’ other claims as well as Defendants’ counterclaim for breach of contract. The court found Defendants liable for $473,433.36 in damages.¹ This timely appeal followed.

II

Defendants make several arguments on appeal. First, they argue the district court erred by finding liability for breach of contract when Defendants stood in the position of agisters and therefore could only be liable for negligent losses. Next, Defendants contend that the district court erred in finding Bischer Farms Partnership liable as a successor to Bischer Farms, Inc. Finally, they argue that the district court erred in finding the various Bischer entities and individuals liable as alter egos for Bischer Farms, Inc.

A. Jurisdiction and Standard of Review

This action was properly brought in the district court under its diversity jurisdiction, 28 U.S.C. § 1332. This Court has jurisdiction over the appeal under 28 U.S.C. § 1291 following a final judgment by the district court. When sitting in diversity, a federal district court applies the substantive law of the state in which it sits and federal procedural law. Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996). On direct appeal after a bench trial we review the findings of fact for clear error and conclusions of law de novo. Dillon v. Cobra Power Corp., 560 F.3d 591, 599 (6th Cir.2009).

B. Breach of Contract

The district court found that Bischer Farms, Inc. breached its contract with Scarff Brothers. Bischer Farms, Inc. took contractual responsibility for the cattle delivered to them to feed, maintain, and finish the cattle to market. Scarff Brothers delivered 491 head of cattle to Bischer Farms, Inc. that subsequently went missing. Defendants attempted to explain the cattle’s disappearance by offering cattle ear-tags disinterred from a eomposter to prove, contrary to their own limited records, that some or all of the cattle had actually died on the feedlot. The district court found Defendants incredible and flatly rejected this theory. It found that the unaccounted-for disappearance of cattle constituted a breach of contract. The court also ruled in the alternative that, even if it had accepted Defendants’ extremely unlikely version of events, Bischer Farms, Inc. would have breached the contract by misrepresenting feed charges on at least 189 cattle.

Defendants argue on appeal that they cannot be held liable for the missing cattle because the duty of care required of them was governed by agistment law, not the contract.² An agistment is “a contract whereby a person, called an agister, has control of animals and retains possession of land.... [It] is a species of bailment.” In re Zwagerman, 115 B.R. 540, 547 (Bankr.W.D.Mich.1990) (internal quotations and citations omitted). Defendants claim that, for an agister, “[t]here is no liability without fault, contrary to the district court’s reasoning, even though the nature and scope of the obligations owed by the parties to each other are defined by contract.” The argument proceeds from the assumption that the contract does not govern the duty of care owed by the Defendants to Searff Brothers and, therefore, a common law solution must be found. Accordingly, Defendants insist that they cannot be held liable for the “lost” cattle unless they are found to have been at fault in the cattle’s disappearance. Because the district court did not determine what happened to the cattle, Defendants claim that no finding of fault was made, and urge this Court to reverse or at least remand the district court’s finding of breach.

Defendants’ efforts, however, are unavailing. In Johnston v. Miller, 326 Mich. 682, 40 N.W.2d 770 (1950), the Supreme Court of Michigan rejected a similar argument in a suit between the owner of a flock of sheep and the agister the owner paid to feed, house, and multiply the flock. The parties had entered into two complementary contracts using the language of a bailment, but requiring the agister to provide the owner with twice the number of sheep at the end of the contract. Id. at 770-71. In the end, the sheep did not reproduce as the agister had hoped, there were insufficient livestock to meet the obligations of the two contracts, and the agister refused to supply extra sheep to make up the difference. Id. No claim was made that the agister acted negligently in caring for the sheep. Id. at 770. The agister argued that he was a bailee of the sheep and therefore, in the absence of negligence, had only to return the sheep that remained from the original flock. Id. at 773. The trial court agreed, but the Supreme Court of Michigan reversed, citing 6 Am.Jur. 310 for the proposition that:

The fact that a bailee has exercised the degree of care imposed on him by law is immaterial where the issue concerns some additional obligation to which he has subjected himself by his contract, for no degree of care or vigilance, short of complete performance, will relieve him of such an obligation.

Id. at 774. The court held that the agister was free to assume any obligations not forbidden by law, and “[u]nder the contract [the agister] assumed a specific obligation from which he could not be discharged except by performance.” Id. See also Universal Underwriters Ins. Co. v. Kneeland, 235 Mich.App. 646, 599 N.W.2d 519, 526 (1999) (“We further observe that in a bailment situation, in the absence of a contractual duty to the contrary, a bailee is not an insurer of the property.” (emphasis added)).

Applying this principle to the case at hand, we conclude that any hypothetical agister status would not relieve Bischer Farms, Inc. of its contractual obligations to Scarff Brothers. Bischer Farms, Inc. and Scarff Brothers made a contract defined by their course of dealing under which Bischer Farms, Inc. freely assumed the obligation to “feed, maintain, and finish to market Scarff Brothers’ cattle.” Scarff Bros., 546 F.Supp.2d at 487. The duty of care assigned by the common law of agistment is “immaterial” where the contract sets out the obligations of the parties. The district court found that Bischer Farms, Inc. breached its duty when 491 head of cattle “disappeared while in the Bischers’ care.” Id. Any existing evidence to establish what happened to the cattle would be almost entirely — if not entirely— within Defendants’ control. If Defendants had produced reliable evidence that some or all of those 491 cattle had, in fact, died, then an analysis of the contract’s division of death-loss liability would be required. Here, however, Defendants’ attempted proof was an ever-evolving set of explanations that the district court wholly rejected, and that rejection was not clearly erroneous. By failing to account for 491 head of cattle, Bischer Farms, Inc. breached the contract. We therefore affirm the district court’s findings of a breach of contract and the damages award against Bischer Farms, Inc.³

C. Successor Liability

“The traditional rule of successor liability examines the nature of the transaction between predecessor and successor corporations.” Foster v. Cone-Blanchard Mach. Co., 460 Mich. 696, 597 N.W.2d 506, 509 (1999) (discussing general principles before addressing a products liability situation). Ordinarily, the succession is accomplished in one of two ways: merger or asset transfer. If the successor entity merges with the predecessor by acquiring its stock, the successor generally assumes the predecessor’s liabilities. If, however, the predecessor “sells its assets to [the successor], the purchaser is not responsible for the debts and liabilities of the selling corporation.” Antiphon, Inc. v. LEP Transport, Inc., 183 Mich.App. 377, 454 N.W.2d 222, 224 (1990). In a contract situation, successor liability can be found after an asset transfer, however, if one of four exceptions exists:

(1) when two or more corporations consolidate and form a new corporation, making no provision for the payment of the obligations of the old; (2) when by agreement, express or implied, a purchasing corporation promises to pay the debts of the selling corporation; (3) when the new corporation is a mere continuance of the old; (4) when the sale is fraudulent, and the property of the old corporation, liable for its debts, can be followed into the hands of the purchaser.

Id. at 224-25.

This case, however, does not fit neatly into either the merger or asset transfer rubric, partly because of Defendants’ refusal to cooperate in discovery.⁴ This is an unusual circumstance in which the predecessor, Bischer Farms, Inc., stopped doing business and was replaced by a new entity, Bischer Farms Partnership, with the same underlying owners, decision makers, employees, and business pursuits, but the two entities did not execute a merger or an “official” transfer of assets. Rather, the defendants merely effectuated a change in structure in order to take advantage of federal agricultural benefits available to partnerships. Bischer Farms, Inc. only exists pending the outcome of this litigation, and Bischer Farms Partnership has continued to do all the business the corporation used to do. Using the term loosely, the Bischers and Geigers undeniably intended that Bischer Farms Partnership would be the “successor” to Bischer Farms, Inc.

In Antiphon, the plaintiff, an importer and producer of sound-deadening materials, appealed a judgment of no cause of action for the defendant, a customs broker. 454 N.W.2d at 223. The defendant had claimed that the plaintiff owed shipping charges to the defendant for shipments made to Seamco, Inc., a corporation from which the plaintiff had purchased a manufacturing plant following a complex series of subsidiary spin-offs and mergers. Id. Plaintiff paid the money under protest, then filed suit to recover it. On appeal, the Michigan Court of Appeals noted how rarely these cases arise in Michigan, and analyzed the case under the general rule and the exceptions noted above. Id. at 224-25. The court affirmed the trial court’s holding of liability under the second exception. The court relied on evidence that the plaintiff paid the defendant for several invoices addressed to the subsidiary corporations involved in the sale, the defendant “dealt with the same personnel, the orders were placed in the same manner, the business operations were conducted in the same manner, and neither Seam-co nor any of its subsequent incarnations ever informed [the defendant] of the change in ownership of the ... plant.” Id. at 226. As the court framed the issue, “Seamco and [the plaintiff] engaged in activities that could reasonably lead [the defendant] to believe that the two companies were either related or that [the plaintiff] had assumed responsibility for the liabilities incurred by Seamco.” Id. at 224.

Relying on Antiphon, the district court here found Bischer Farms Partnership a successor to Bischer Farms, Inc., and therefore responsible for Bischer Farms, Ine.’s contract liability. Noting the second and third exceptions to the general rule, the court held that the dealings between the partnership and the corporation were sufficiently close that Scarff Brothers reasonably could have believed that the partnership was a successor to the corporation. As the successor corporation in Antiphon had done, the partnership here did the same business as the corporation, and had the same employees, address, phone numbers, and decision makers. The court also found evidence that the partnership assumed obligations for the corporation, cared for the same cattle (including Scarff Brothers’ cattle before they were taken from the farm), may have received money for some of the corporation’s cattle, and may have deposited checks written to the corporation in the partnership’s account. Furthermore, just as in Antiphon, the partnership never informed Scarff Brothers of a change in ownership. Relying on this evidence, the district court found Bischer Farms Partnership liable for the debts and liabilities of Bischer Farms, Inc., and held each of the partners — Melvin J. Bischer, L.L.C., Janet S. Bischer, L.L.C., and Pauline J. Geiger-Bischer, L.L.C.— liable under Michigan partnership law as well.

After careful review, we find we must vacate this portion of the district court’s order and remand for further consideration of this issue. While we find no error in the district court’s analysis under the two applicable exceptions from Antiphon, it is not clear from the district court’s opinion whether or not any transfer of assets took place between Bischer Farms, Inc. and Bischer Farms Partnership. The district court found that the partnership may have deposited checks written to Bischer Farms, Inc. and may have received money for the corporation’s cattle, but did not conclusively hold that any particular assets, be they cash, property, or goodwill, were transferred from the corporation to the partnership. Scarff Brothers’ difficulties in obtaining from the Bischer entities the evidence necessary to demonstrate any asset transfer are clear from this record, and we recognize that this evidence is entirely in the hands of the Bischers. But because the Antiphon exceptions are exceptions to the general rule governing successor liability where there has been an asset transfer, without such a transfer, the Antiphon exceptions have no bearing. The test for successor liability in Antiphon requires more than mere possibilities that such a transfer occurred.⁵

D. Alter Ego Liability

Michigan generally “treats a corporation as an entirely separate entity from its shareholders.” Soloman v. W. Hills Dev. Co., 110 Mich.App. 257, 312 N.W.2d 428, 431 (1981). Under “notions of equity,” however, courts will disregard the corporate form “when it is invoked to subvert the ends of justice.” Id. “Where a corporation is so organized and so controlled as to make it a mere instrumentality or an agent of another corporation, its separate existence” will be ignored. Shirley v. Drackett Prods. Co., 26 Mich.App. 644, 182 N.W.2d 726, 728 (1971). Also, courts may disregard the corporate form when “[t]he community of interest between corporation and shareholders may be so great that, to meet the purposes of justice, they should be considered as one and the same.” Solo-man, 312 N.W.2d at 431. Michigan requires a showing of “fraud, illegality, or injustice,” and that injustice “must in some manner relate to a misuse of the corporate form short of fraud or illegality.” Id. at 432.

In this circuit, we look to a number of factors to determine whether to disregard the corporate form, including: “(1) the absence of normal corporate formalities; (2) commingling of personal and corporate funds; (3) siphoning of corporate funds by a dominant stockholder; and (4) the fact that the corporation is merely a facade for the personal operations of the dominant stockholder.” United States v. Walton, 909 F.2d 915, 928 (6th Cir.1990) (internal citations omitted). No single factor is dis-positive as “each case is sui generis and must be decided in accordance with its own underlying facts.” Id.

The district court below cited the Shirley and Walton factors, but did not specify which of the criteria it relied upon in holding the corporation (Janet S. Bischer Farms, Inc., Bischer Tiling, Inc., Bischer Ready-Mix, Inc.), limited liability company (Melvin J. Bischer, LLC, Janet S. Bischer, LLC, Pauline J. Bischer-Geiger, LLC), and individual (Melvin Bischer, Janet Bischer, Bradley Geiger, and Pauline Geiger) defendants liable as alter egos for Bischer Farms, Inc.’s breach of contract. Scarff Bros., 546 F.Supp.2d at 494, 496. The district court instead relied on the “extensive and ongoing relationship” among the Defendants that demonstrated the “economic reality” that these entities were in fact a “single comprehensive business enterprise.” Id. at 495-96. The district court noted that the individuals did not differentiate themselves from the business entities in their own minds, used corporate funds to pay personal expenses, made frequent intercompany loans not at arms length, and shared employees, equipment, and cash. Id. at 496. Finally, the court held that to find “any single entity, whether drained of resources to sustain another family entity or enriched at the expense of another entity, is solely responsible to Scarff Brothers would not accord” with the economic reality of the enterprise. Id. Instead, “the liability of one entity is the liability of all.” Id.

While the district court’s analysis may satisfy the Shirley and Walton tests, the court did not make a finding of fraud, illegality, or injustice from the use of the corporate form as Saloman requires. Michigan requires such a finding to ensure that “an equal injustice or inequity” does not befall individuals who could otherwise be found liable as alter egos without making improper use of the corporate form. Soloman, 312 N.W.2d at 432.

III.

Accordingly, we affirm the judgment of the district court as to Bischer Farms, Inc.’s breach of contract. We vacate the district court’s finding of successor liability and remand for further proceedings consistent with this opinion. In doing so we note that the district court is, of course, free on remand to determine whether successor liability exists under either Antiphon or an alternate theory, including one based on more general principles of successor liability consistent with Michigan law, affording the respect due to state law by a federal court sitting in diversity. Finally, we vacate the finding of alter ego liability, and remand to the district court for a determination of whether any or all of the Bischer Farms entities or individuals engaged in such fraud, illegality, or injustice from the use of the corporate form as would support a finding of alter ego liability under Michigan law.

1 . The district court originally found Defendants liable for $610,530.27 but reduced the award in an order amending the judgment to account for the cost of caring for the cattle until their final removal from the feedlot.

2 . While it is likely that Defendants did not raise this issue before the district court below, for the purposes of this appeal this Court will assume without deciding that they did.

3 . We note that, contrary to the view expressed in the dissent, the fact that Scarff Brothers was unable to prove that Defendants ultimately benefited from the cattle is immaterial to this question, because that was an element specific to the statutory conversion claim. Just because Scarff Brothers could not prove that Defendants did not sell or keep the cattle for themselves does not change the fact that Bischer Farms, Inc. had the duty to care for the cattle, "lost" them, and did not provide any credible evidence as to what happened to them.

4 . We note the district court’s repeated difficulties with Defendants' "nonresponsive and selective discovery” which "required the parties to develop their case as new data materialized.” Scarff Bros., 546 F.Supp.2d at 476. This continued into trial, as Defendants sought to introduce newly discovered evidence four years into litigation and after weeks of trial. The combination of this discovery practice and Defendants' highly evasive witnesses made Scarff Brothers’ task of establishing proofs, particularly on potential asset transfers, very difficult. We further note that the district court, on remand, may determine that this objectionable conduct warrants a ruling that Defendants withheld evidence from the court, in which event, the district court could go on to consider whether any negative inferences arise from Defendants’ failure to produce evidence on this issue. See, e.g., Fed.R.Civ.P. 37(b); John B. v. Goetz, 531 F.3d 448, 460 (6th Cir.2008) (“The district court maintains authority to impose sanctions for discovery violations under the federal rules and pursuant to its inherent powers.”).

5 . We do not address the argument in the concurring and dissenting opinion that in order to find successor liability, the district court must also find that Scarff Brothers cannot recover in full from Bischer Farms, Inc. because it is not necessary to deciding the issue before us. We therefore express no opinion on whether or not that statement is correct as a matter of Michigan law.