Baltimore Luggage Co. v. Holtzman

ROSALYN B. BELL, Judge. The Baltimore Luggage Company, a Rhode Island Corporation (Baltimore Luggage (RI)), appeals from a judgment of the Circuit Court for Baltimore County awarding Samuel J. Holtzman’ $72,176 for fringe benefits accrued under his employment agreement. Baltimore Luggage (RI) presents four issues: —Had Baltimore Luggage (RI), as a successor corporation, assumed the obligations contained in Holtzman’s 1975 employment agreement? —Was Baltimore Luggage (RI) liable for the obligations of Holtzman’s employment agreement under Maryland’s Bulk Transfers Act? —Should Holtzman have been estopped from claiming a contractual relationship with Baltimore Luggage (RI)? —Assuming that Baltimore Luggage (RI) is liable for Holtzman’s expenses by virtue of the employment agreement, did the trial court err in its calculation of damages? ²⁸⁵ We reverse based on the first two issues; hence, we need not and will not address the second two issues. We begin with a brief review of the relevant facts.

Baltimore Luggage began as a family business. Holtzman’s father was chief executive officer until 1936 when Holtzman, the plaintiff in this action, took over in that capacity. Holtzman remained the chief executive officer of the company from 1936 until 1983. In 1976, 100 percent of the stock of Baltimore Luggage was sold.

The stock was ultimately wholly acquired by Carl Marks & Company, Inc. The acquiring company assumed both the name and business of Baltimore Luggage. This corporation, Baltimore Luggage (MD), later became a New York corporation known as Bait-Lug Divesting Corp. (Bait-Lug) and exists today. Holtzman continued as chief executive officer of Baltimore Luggage (MD) despite the change of ownership. On November 1, 1983, Baltimore Luggage (MD), then owned by Carl Marks & Co., Inc., sold its assets and liabilities to a Rhode Island corporation, which assumed the name and business of the Baltimore Luggage Corporation (MD).

Robert Davidoff acted on behalf of Carl Marks & Co., Inc. in the transaction. The sale of assets and liabilities of Baltimore Luggage (MD) was memorialized by an Agreement for Purchase and Sale of Assets. Holtzman was neither a party to, nor knew of this agreement. The agreement provided that Baltimore Luggage (MD) (as controlled by Carl Marks & Co.), the transferring company, would indemnify and hold the buyer harmless as against any obligations arising under Holtzman’s employment agreement. 1 It was also agreed that the ²⁸⁶ purchaser would waive compliance with the Bulk Transfers Act, §§ 6-101 et seq., Md.Com.Law Code Ann. (1975), presumably pursuant to § 6-103(6) 2 or (7) 3 , although the actual contract is silent on this point. 4 There was therefore no notification to Holtzman or any other creditors that the company’s assets were being sold.

Holtzman learned of the transfer after the assets were already transferred. No articles of transfer were ever filed with the Maryland State Department of Assessment and Taxation. The controversy in the instant case centers around Holtzman’s employment agreement. He entered into the original agreement in July of 1975 with Baltimore Luggage (MD) to serve as its chief executive officer for a five-year period and, following this term, as a consultant and advisor to the company for five years.

This agreement was amended and modified three times. On November 1, 1983, the date of the transfer of assets and liabilities, Holtzman’s employment contract provided his employment as chief executive officer would terminate on the earlier of December 31, 1985 or 360 days following receipt of written notice by either party to end the term, whichever was earlier. The agreement also provided that Holtzman would remain on as a consultant for ²⁸⁷ five years, and would continue to receive his fringe benefits. 5 Employees of Baltimore Luggage (MD) were informed of the sale and the appointment of Joseph Schuster as president and chief executive officer in a notice dated November 1, 1983 from Davidoff, the vice president of Carl Marks & Co. Holtzman neither received prior notice nor did Davidoff mention the transfer in a phone conversation with Holtzman on November 1. On November 4, 1983, Holtzman submitted his written resignation as chief executive officer to Davidoff in accordance with the terms of his employment agreement.

After the transfer of assets occurred, Carl Marks & Co. retained a stock interest in Baltimore Luggage (RI). 6 As earlier mentioned, the original Baltimore Luggage (MD) ultimately became known as Bait-Lug Divesting Corp. A meeting between Davidoff and Holtzman took place on November 9, 1983 to discuss the asset transfer and its effect on Holtzman's employment agreement, including the continued payment of fringe benefits. Holtzman understood that his employment agreement would be honored in ²⁸⁸ all respects as noted by him in a letter dated November 22, 1983 to Davidoff. 7 Payments for the assets were made regularly by Baltimore Luggage (RI) in accordance with the contract of sale. The payments to Holtzman were deducted by Baltimore Luggage (RI) from the regular payments being made to Bait-Lug. Holtzman continued to receive his contractual salary along with his existing fringe benefits for the 360-day period following his resignation.

Regular deductions were made and were included in the W-2 furnished to Holtzman by Baltimore Luggage (RI). At the conclusion of the 360-day termination period, Baltimore Luggage (RI) notified Holtzman in writing that the employment phase of the employment agreement was coming to a close and the monthly consultant’s fee would be remitted each month until the contract expired. Baltimore Luggage (RI) continued to pay Holtzman’s fringe benefits during the consulting phase until February, 1985, at which time Davidoff instructed Baltimore Luggage’s (RI) comptroller to discontinue paying the fringe ²⁸⁹ benefits. It is undisputed that Baltimore Luggage (RI) continues to pay Holtzman’s monthly consultant’s fee and provides Blue Cross and Blue Shield medical coverage for both Holtzman and his wife.

These items are deducted from Baltimore Luggage’s (RI) regular payments to Bait-Lug. Bait-Lug, formerly Baltimore Luggage (MD), became a defunct Maryland corporation around October, 1985. It was not considered a legal entity in the State of Maryland, as recently as March 10, 1988. Apparently, prior to trial, it reincorporated and was, as of the trial, a New York corporation.

Baltimore Luggage (RI) continues its business in the sale of luggage, although it has ceased manufacturing and is now an importer. Holtzman filed his complaint in September, 1986, claiming that Carl Marks & Co. and Baltimore Luggage (RI) were obliged to continue paying his fringe benefits under his employment agreement. 8 Baltimore Luggage (RI) and its co-defendant, Carl Marks & Co., filed motions to dismiss and cross-motions for summary judgment. Marks’s motion to dismiss was granted. The issue before the trial court was whether or not Baltimore Luggage (RI) was, in fact, responsible under the initial employment agreement that Holtzman had with Baltimore Luggage (MD).

There was no dispute as to the consultant fees. The only issue concerns payment of Holtzman’s fringe benefits. The trial judge found the employment agreement binding upon Baltimore Luggage (RI) as a continuation of Baltimore Luggage (MD), concluding that Holtzman was a creditor of Baltimore Luggage (RI). A judgment in favor of Holtzman was entered in the amount of $72,176.

It is from this judgment that Baltimore Luggage (RI) appeals. We first discuss whether and when a successor corporation assumes the liabilities and obligations of its predecessor. Next, we discuss the applicability of Maryland’s Bulk Transfers Act to the instant case. Finally, we discuss the predecessor corporation’s capacity to sue or be sued in this case. ²⁹⁰ SUCCESSOR CORPORATION LIABILITY Maryland Corps. & Ass’ns Code Ann. § l-101(u)(4) (1975, 1985 RepLVol.), defines a successor corporation as a vendee, lessee or other transferee in a transfer of assets.

A transfer of assets is any sale, lease, exchange or other transfer of all or substantially all of the assets of a corporation. § l-101(v). Baltimore Luggage (MD) transferred all of its assets, with the possible exception of an automobile, to what would become Baltimore Luggage (RI) on November 1, 1983. Therefore, Baltimore Luggage (RI) is the successor corporation of Baltimore Luggage (MD). The next step is to determine whether Baltimore Luggage (RI), as a successor corporation, is liable for Holtzman’s employment contract.

The general rule of corporate liability is that, ordinarily, a corporation which acquires the assets of another corporation is not liable for the debts and liabilities of the predecessor corporation. There are, however, four exceptions to this general rule. The debts and liabilities of the predecessor corporation are imposed on the successor corporation when (1) there is an expressed or implied assumption of liability; (2) the transaction amounts to a consolidation or merger; (3) the purchasing corporation is a mere continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape liability for debts. Golden State Bottling Co. v. National Labor Relations Board, 414 U.S. 168 , 182-83 n. 5, 94 S.Ct. 414 , 424 n. 5, 38 L.Ed.2d 388 (1973).

See 15 W. Fletcher, Cyclopedia of the Law of Private Corporations § 7122 (rev. perm. ed. 1983); 19 Am.Jur.2d, Corporations §§ 2704-2722 (1986). While Maryland has not articulated the general rule of a successor corporation’s liability, it is implicit in the Maryland statutes and case law. Insofar as the exceptions for consolidation or merger and fraud are concerned, Maryland has codified these exceptions. Maryland Corps. & Ass’ns Code Ann. § 3-114(e)(1) (1975, 1985 Repl.Vol., 1988 Cum.

Supp.), provides that, when there is a consolidation or merger, the successor is liable for all the debts and obligations of each nonsurviving corporation. Additionally, the Maryland Uniform Fraudulent Conveyance Act, Md. Com.Law Code Ann. §§ 15-201 et seq. (1975, 1983 Repl.Vol., 1988 Cum.Supp.), implicitly recognizes that a successor cor ²⁹¹ poration may be held liable for the obligations of its predecessor. For example, § 15-209(a)(2) allows a creditor of the transferor to attach or levy on the property conveyed to the transferee, if the transfer is fraudulent.

No allegations regarding fraud or merger, however, were made by the parties nor do we find any evidence to establish these exceptions. Accordingly, we will only address whether exceptions (1) and (3) have been implicitly recognized in Maryland’s case law or code and whether they apply in the case sub judice. —Express Assumption of Liability— Regarding the first exception, § 3-115(c)(1) of the Md. Corps. & Ass’ns Code Ann. (1975, 1985 Repl.Vol.), provides that a successor corporation is “liable for all the debts and obligations of the transferor to the extent provided in the articles of transfer.” 9 In the instant case, no articles of transfer were filed with the State Department of Assessments and Taxation. Holtzman argues, therefore, that the failure to file articles of transfer rendered Baltimore Luggage (RI) liable for his employment contract. Holtzman, however, provides us with no authority for this contention nor does he show in what way he was prejudiced by the failure to file.

In order to resolve this question, we must determine whose interests are protected by the filing of the articles of transfer. When there is a sale of substantially all of a corporation’s assets, articles of transfer must be filed with the State Department of Assessments and Taxation. Md. Corps. & Ass’ns Code Ann. § 3-107 (1975, 1985 Repl.Vol.). The purpose of the filing requirement is to insure that creditors are properly informed of the sale of the debtor’s assets.

Antigua Condominium Ass’n v. Melba Investors Atlantic, Inc., 307 Md. 700, 729 , 517 A.2d 75 (1986). Unless the statutory requirements contained in Md. Corps. & Ass’ns Code Ann. §§ 3-101 et seq. are met, the sale of substantially all the assets of a Maryland corporation is ineffective as to creditors. Prince George’s Coun ²⁹² try Club, Inc. v. Edward R. Carr, Inc., 235 Md. 591, 596 , 202 A.2d 354 (1964). Thus, where a corporation does not file the articles of transfer, as required by law, the transfer- or remains liable for the obligation assumed prior to the transfer.

Isle of Thye Land Co. v. Whisman, 262 Md. 682, 706-07 , 279 A.2d 484 (1971). In the instant case, the failure to file the articles of transfer would give Holtzman recourse against the transferor, Baltimore Luggage (MD) (now Bait-Lug), not Baltimore Luggage (RI). Additionally, Holtzman was informed of the transfer of assets around November 2, 1983, the day after the Agreement for Purchase and Sale of Assets was dated. Even assuming that Holtzman is a creditor, we do not see how Holtzman was prejudiced by the failure to file the articles of transfer in light of the fact that he was fully informed of the transfer.

Moreover, Title 3, Subtitle 1 of Md. Corps. & Ass’ns Art. imposes no limitation for compliance with filing the articles of transfer. Thus, Baltimore Luggage (RI) could still file the articles of transfer and be in compliance with the statute. See Beccio v. Tawnmoore Apartments, Inc., 265 Md. 297, 303 , 289 A.2d 311 (1972) (creditor of transferor corporation could not attack tardy compliance with articles of transfer statutes). In the absence of articles of transfer, we conclude that the sales agreement would be equivalent to the articles of transfer.

See G.E. Frisco v. Aetna Ins. Co. of Hartford, Connecticut, 235 Md. 472, 477 , 201 A.2d 781 (1964) (chattel mortgage and assignment of lease equivalent to articles of transfer required under Md.Code Ann. Art. 23, § 72 (1957), now § 3-115 of Md.Corps. & Ass’ns Code Ann.). This being so, we look to the sales agreement to determine whether Baltimore Luggage (RI) intended to assume Holtzman’s employment contract. Article 1.03.1B of that contract specifically states that the seller, Baltimore Luggage (MD), “shall retain all liabilities ... to Sam Holtzman on account of his employment agreement____” (Emphasis added.) Thus, it is clear from the sales agreement that Baltimore Luggage (RI) did not expressly assume the liabilities of Holtzman’s employment contract. ²⁹³ —Implied Assumption of Liability— Holtzman argues, however, that the instant transaction falls within the first exception because Baltimore Luggage (RI) impliedly assumed the obligations of his employment contract.

Holtzman relies on Isle of Thye Land Co. v. Whisman, 262 Md. 682 , 279 A.2d 484 (1971), to support his argument. Isle of Thye involved the acquisition of a tract of land from Whisman by a promoter, Triska, who later formed a corporation known as Isle of Thye Land Co. Subsequently, Isle of Thye transferred all of its assets to Prestwick, Inc. without filing articles of transfer. When defaults occurred under the original contract of sale, the administrator of Whisman’s estate demanded that Triska, Isle of Thye and Prestwick honor their contractual obligations and filed suit. The Court of Appeals held that Triska was a promoter and that Isle of Thye had adopted and ratified the Whisman-Triska contract.

Therefore, Isle of Thye became bound to perform the contractual obligations and Triska was no longer personally liable. Isle of Thye, 262 Md. at 698 , 279 A.2d 484 . The Court further held: “... Prestwick [was] also liable to perform the obligations of the contract inasmuch as Dr. Whisman’s estate was a creditor of Isle of Thye on the date of the transfer to Prestwick; and Article 23, § 72(2) [now Md.Corps. & Ass’ns Code Ann. § 3-115 (1985) ] as it was in effect on the day of the transfer provided: ‘The debts and obligations of the transferor shall be assumed by the transferee to the extent, if any, provided in the articles; but regardless of the terms of the articles, no such sale, lease, exchange or transfer shall impair the rights of any creditor of the transferor, including any rights under the Sales in Bulk Act.’ “Moreover, the lower court properly determined that Prestwick, like its predecessor corporation — Isle of Thye — assumed the obligation under the contract when Prestwick attempted to exercise the options reserved under the contract to acquire Dr. Whisman’s reserved six acre tract.

The lower court also properly found that Triska’s knowledge of the contract and its obligations should be imputed to Prestwick, then substantially his alter ego.” ²⁹⁴ Isle of Thye, 262 Md. at 707 , 279 A.2d 484 . Thus, Isle of Thye implicitly recognizes the first exception to the general rule: a successor corporation may impliedly assume the obligations of its predecessor. The instant case, however, is distinguishable. The transfer of assets from Isle of Thye to Prestwick was a mere paper transaction to provide a “clean” corporation for the purpose of securing a loan.

Prestwick was held by essentially the same owners as its predecessor, Isle of Thye. In the instant case, the transfer from Baltimore Luggage (MD) to Baltimore Luggage (RI) was an actual transfer of assets. The transfer occurred in an arms length transaction between two separate and distinct business entities whose owners are not identical. Furthermore, since Triska acted as a promoter for both Isle of Thye and Prestwick, the Court found that the corporations were the alter egos of Triska.

Thus, Triska’s liabilities were imposed on Isle of Thye and Prestwick. Here, there was no promoter and thus no promoter liabilities to be imposed on a successor corporation. The obligations of Holtzman’s employment contract were incurred by and remained the obligation of Baltimore Luggage (MD) (now Bait-Lug). The Agreement for Purchase and Sale of Assets did not transfer this liability to the buyer and thus Baltimore Luggage (RI) did not assume this liability.

Moreover, Prestwick received the direct and substantial benefits of the Triska-Whisman contract, namely the real estate assets. Additionally, Prestwick attempted to exercise its option to purchase additional acreage. Although Holtzman continued to perform certain duties during the termination phase of his employment contract, a new chief executive officer took over immediately. Baltimore Luggage (RI) never sought to exercise any of its options under that agreement, including the option to use Holtzman as a consultant.

Thus, Baltimore Luggage (RI) never received a direct and substantial benefit from Holtzman’s employment contract. While Holtzman did not compete, there was no testimony that Baltimore Luggage (RI) made any requests of Holtzman in this regard. Finally, in Isle of Thye , Prestwick never represented to Whisman that Prestwick would not assume the obligations of his contractual agreement. Nor did Whisman have occa ²⁹⁵ sion to confirm such an understanding.

Holtzman, however, was aware that Baltimore Luggage (RI) did not and would not assume the obligations of his employment contract. Moreover, Holtzman confirmed his understanding of this situation in his letter of November 22, 1988. Thus, we hold the facts of the instant case do not fall within the exception as outlined in Isle of Thye . Holtzman also alleges that the conduct of Baltimore Luggage (RI) after the asset transfer constitutes an implied assumption of his employment contract.

In order for a promise to be implied on the part of a corporation to pay the debts of another corporation, the conduct or representations relied upon by the party asserting liability must indicate an intention of the buyer to pay the debts of the seller. The presence of such an intention depends on the facts and circumstances of each case. 15 W. Fletcher, supra § 7124. In the instant case, Holtzman cites the following as evidence of Baltimore Luggage’s (RI) intention to pay his contract: A. Baltimore Luggage (RI) paid a $25,000 bonus to Holtzman in November of 1983. B. Baltimore Luggage (RI) paid Holtzman his contractual salary as chief executive officer from November 1, 1983 through November 4, 1984.

C. Baltimore Luggage (RI) considered Holtzman to be its employee by issuing W-2 wage and tax statements to Holtzman for 1983 and 1984. D. Prior to entering into the advisory and consultative phase of the employment agreement, Baltimore Luggage (RI) paid for all of Holtzman’s fringe benefits. E. Baltimore Luggage (RI) notified Holtzman on November 1, 1984 that the initial phase of his contract expired and he was once again assured by Baltimore Luggage (RI) that he would continue to receive his monthly consultant’s fee of $3,125 “until the contract expires.” This notification coincided directly with the express termination provision of Holtzman’s employment agreement. F. Baltimore Luggage (RI) continued to pay Holtzman’s fringe benefits during the advisory and consultative phase of his employment agreement through February, 1985. ²⁹⁶ G. Baltimore Luggage (RI) continues to pay Holtzman his monthly consultative’s fees in the amount of $3,125.

H. Baltimore Luggage (RI) continues to provide Blue Cross and Blue Shield medical coverage. Although these facts could be interpreted to support an intention to assume Holtzman’s employment contract, the circumstances under which these payments were made negate any such interpretation. We explain. The record clearly indicates that, although payments were made by Baltimore Luggage (RI) to Holtzman, those payments were in turn deducted from the payments by Baltimore Luggage (RI) to Bait-Lug for the purchase of the assets.

In essence, Baltimore Luggage (RI) was reimbursed by Bait-Lug for the payments made to Holtzman. Moreover, Holtzman, himself, never considered that Baltimore Luggage (RI) assumed the obligation for his contract. This is evidenced by his letter dated November 22, 1983 in which he acknowledged that Baltimore Luggage (RI) would pay his consulting fees on behalf of Baltimore Luggage (MD), but Baltimore Luggage (RI) had not assumed the obligation of his employment agreement. In conclusion, we hold that there was neither an express nor implied assumption of liability by Baltimore Luggage (RI) of Holtzman’s employment agreement. —Mere Continuation Exception— The third exception to the general rule of nonliability occurs where the successor corporation is a mere continuation of the seller. 10 Although this exception is not codified or