Martin v. TWP Enterprises Inc.

LEAHY, J. This appeal springs from the collapse of Best & Brady Components, LLC (“Best & Brady”) — a lumber manufacturing company that opened for business in March of 2010. Phillip Martin (“Martin” or “Appellant”) was a minority owner and assumed management of Best & Brady’s daily operations under a two-year employment contract. Immediately after its formation Best & Brady encountered numerous problems and began losing money. Best & Brady was never profitable, and, by May 2011, ran out of cash.

Shortly thereafter, TWP Enterprises, Inc., (“TWP” or “Appellee”) bought the ephemeral company’s assets. On October 7, 2013, Martin filed a complaint in the Circuit Court for Montgomery County, Maryland, against Best & Brady and TWP seeking unpaid wages and compensation under his employment contract. 1 After obtaining a default ³⁷ judgment against Best & Brady, 2 Martin pursued TWP for satisfaction of the judgment. The circuit court held a bench trial on August 5 and 6, 2014, on the sole issue of TWP’s successor liability. Martin claimed that TWP was a mere continuation of Best & Brady and, therefore, liable under the “mere continuation” exception to the general rule that successor corporations do not assume the liabilities of selling corporations.

The circuit court disagreed, finding that TWP is not a mere continuation of Best & Brady and, therefore, was not liable for the default judgment against Best & Brady. Maryland law establishes that the function of the “mere • continuation” exception is to prevent corporations from purchasing assets solely for the purpose of placing those assets out of the reach of the predecessor’s creditors. We hold that a court may consider the purpose of the asset sale and the adequacy of consideration as additional factors in its analysis of whether the “mere continuation” exception should apply. We affirm the circuit court’s determination in this case that TWP is not a mere continuation of Best & Brady.

BACKGROUND Martin is the third-generation owner of a family lumber distribution business, Best Building Components, LLC (“BBC”). Headquartered in Maugansville, Maryland, BBC distributes lumber and sells home heating oil wholesale. Before 2010, BBC also manufactured roof trusses and other ³⁸ engineered wood products (“EWP”). 3 TWP, a Maryland stock corporation formed in 1999, is a retailer of lumber and hardware in the greater Washington, D.C. Metropolitan area and was a customer of BBC. Prior Negotiations Martin testified during the trial held on August 5 and 6, 2014, that, in 2009, he entered into discussions with the President and CEO of TWP, Michael Cassidy (“Cassidy”), and the Treasurer, James Twigg (“Twigg”), about forming a business partnership for the dual purpose of providing support for Martin, whose EWP business was not showing a profit following the 2008 collapse of the housing industry, and developing a reliable source of EWP and roof trusses for TWP.

In early November 2009, the parties signed an “Outline Letter,” or letter of intent, which was amended to reflect that TWP and Martin had agreed to involve Jeff Brady, principal owner of Brady Fabrications, Inc., another roof truss manufacturer, in the discussions and negotiations. On December 7, 2009, the parties exchanged an “Acquisition Term Sheet” for TWP and BBC. The Acquisition Term Sheet evidenced TWP’s intent to assemble assets purchased from BBC, assets of TWP, and “potentially others” and combine them to form a new limited liability company that would eventually become Best & Brady. TWP would contribute money to the venture through Truss Investors, LLC (“Truss”) — a newly formed, wholly-owned subsidiary of TWP. 4 Because a number of Martin’s customers were lumber companies that competed with TWP, TWP “disguised” its involvement in the business venture by creating Truss.

Through its ³⁹ subsidiary, Truss, TWP would purchase certain assets from Martin and BBC, among others, and operate Best & Brady out of Woodbine, Maryland, which was the location of Brady Fabrication, Inc. Truss would own the majority interest in Best & Brady, and Martin was to be an employee. Terms of Employment The terms of Martin’s employment with Best & Brady were set out in an offer letter a few weeks before the company was formally created. The offer letter from Cassidy, TWP’s President and CEO, was dated February 1, 2010, and was countersigned by Martin in March 2010. The letter guaranteed Martin’s employment of a “part time nature” for two years following “closing” on the purchase of BBC’s and Brady Fabrication’s assets. 5 Martin was to receive a monthly salary of $10,000.00 over the two-year period.

Martin’s principal objective was to integrate the roof truss manufacturing and EWP businesses of BBC and Brady Fabrications into Best & Brady. Thus, his responsibilities included maintaining customer relationships, securing ongoing business, developing and growing ongoing sales relationships, maintaining ongoing distributor relationships, developing a marketing plan, supervising staff, and implementing an annual strategic business planning process. The offer letter also allowed Martin to act as a “purchasing agent” and to supply wood from his wholesale lumber business for the roof truss plant. The offer letter also addressed the requisites of a termination: In the event that Best & Brady Components terminates you prior to 24 months following the closing without cause, Best & Brady will continue to pay the terminated individual a monthly amount of $10,000 less taxes and other withholding required by law, until such a time as the second year would have been completed.

If you are terminated for ⁴⁰ cause, which will be narrowly defined ... neither Best and Brady nor TW Perry will have any obligation to pay the remainder. The offer letter further stated: For the purposes of clarity, nothing in this letter, nor in any other written or unwritten policies or practices of the Company create, nor are they intended to create an express or implied contract, covenant, promise, or representation of continued employment, nor of any particular assignment or position, for any employee. Employment with the Company is “at-will,” which means that employment may be terminated at any time at the option of either the employee or the Company for any reason not prohibited by law. No officer, manager, supervisor, employee, or representative of the Company other than the President and the CEO, has the authority to change the at-will nature of the employment relationship and then, only in writing.

BBC Assets Purchase In March 2010, Martin, as sole shareholder of BBC, entered into an “Asset Purchase Agreement” for the purpose of selling BBC’s assets to Best & Brady. Best & Brady agreed to purchase various assets of BBC, including trucks and equipment, inventory, intellectual property, and customer lists and records, for a sum of $139,570.00, payable in cash and a 7.5% membership interest in Best & Brady. BBC would continue to operate, and Martin agreed to change BBC’s name to one “not ... confusingly similar” to “Best Building Components, LLC.” As evidenced by the written integration plan provided on TWP letterhead, Best & Brady was an integration of Brady Fabrications, Inc., and BBC. Martin testified that, following the integration Best & Brady’s “back office” operations— including accounting, hiring, IT, credit checks, and payroll— were conducted in large part by employees of TWP, who were ⁴¹ paid by TWP. 6 Martin managed Best & Brady’s sales force and occasionally referred to himself as “President” of Best & Brady.

The Operating Agreement Best & Brady’s Operating Agreement, effective March 9, 2010, established two classes of members for Best & Brady. “Class A” members consisted of Martin, Brady, and Dave Walstad (a third potential investor who later decided not to participate in the venture). Martin owned 7.5%, Brady owned 10%, and Walstad was to own 2.5% of Best & Brady. Truss was the sole “Class B” member, owning an eighty percent interest in Best & Brady. All class members agreed to contribute cash and assets to Best & Brady in exchange for their membership interests.

Under the Operating Agreement Truss was authorized to set the number of managers of Best & Brady, and had the “exclusive right” to designate or replace at-will managers. Advance written consent of Truss was required for any significant management decisions for Best & Brady, which Truss had “sole and absolute discretion” to make. Best & Brady’s managers were Martin, Brady, Cassidy, Twigg, and Gary Bowman (“Bowman”). Cassidy, Twigg, and Bowman were senior employees or officers of TWP.

Failing Fast Best & Brady encountered a number of problems following its start up in March 2010. 7 Best & Brady had difficulty completing orders on time and had to subcontract orders out to other distributors. On September 30, 2010, management met at TWP offices to discuss “firm revenue projections,” ⁴² “plans to increase revenues,” immediate cost-cutting options, and “operational improvements.” Best & Brady brought in Henry Whitlow, a business consultant, to provide suggestions for improving sales. Around this time, Best & Brady’s managers, including Martin, discussed a reduction in all salaries. On October 18, 2010, Martin sent Cassidy a chart showing, among other salary cuts, a 20% pay cut for his base salary.

In October 2010, Martin’s pay was cut $4,670.00 per month, and, although Martin attempted to negotiate a note for the deficit, no note was ever created. It is unclear from the record how long the pay cut lasted. However, in January 2011, Cassidy e-mailed Twigg and Martin stating that he talked to Martin that day about cutting Martin’s pay again and allowing him to recoup the balance conditioned on Best & Brady’s ability to pay off its expenses. In response, Martin agreed to “sunset” a portion of his salary, but he disagreed that recouping the balance could be made conditional on Best & Brady’s “ ‘performance’ issues.” Martin cited his employment agreement and argued that the “wording puts the ultimate payment of the 10,000 x 24 out of the reach of ‘performance’ issues as long as Best & Brady exists to pay it, these payments (even if deferred) are the obligation of Best & Brady.” In March 2011, Truss and several TWP senior employees lent Best & Brady $425,000.00.

Despite this loan, Best & Brady ran out of cash by the end of May, and no party was willing to provide the company an additional infusion of capital. In May 2011, TWP began absorbing additional accounting and administrative costs, as well as a percentage of the labor costs. Around that time, the managers of Best & Brady — including Martin, Brady, Cassidy, and Twigg — met to consider numerous options, including bankruptcy and orderly liquidation of the business. Martin was strongly opposed to filing for bankruptcy because Best & Brady owed Martin approximately $300,000.00 as a trade creditor through his company BBC. ⁴³ On May 25, 2011, in order to cut costs further, Cassidy requested the names of Best & Brady employees that could be let go.

On May 31, after the above mentioned manager’s meeting that Martin attended, a list was provided to Cassidy with Martin’s name that stated he was “[n]o [l]onger employed with Best & Brady-Phil [Martin] is already aware of this.” There is disagreement in the record as to whether Martin voluntarily resigned during the meeting or whether Martin, as he claims, was fired. Martin continued selling materials for Best & Brady as a commissioned salesman and acting as its vendor. Martin testified that he no longer attended management meetings. Best & Brady Assets Purchase A few months later Best & Brady management made the decision to sell the assets of the failing company to TWP.

On August 31, 2011, Martin and Brady both signed a “Certificate and Consent of Members and Release.” The document provided that Martin would resign as an officer and co-manager of Best & Brady, transfer all of his membership interest to Truss, and that: Notwithstanding anything to the contrary contained in the Organizational Documents, the Members hereby authorize the Company to (i) transfer all of its assets to [TWP] in exchange for TWP’s assumption of all outstanding debt of the Company as set forth on Exhibit “A” attached hereto; and (ii) execute and deliver such assignments, bills of sale, documents and other agreements ... to effectuate the transfer. The “Bill of Sale,” effective August 31, 2011, signed by Cassidy, Martin, Brady, Twigg, and Bowman, encapsulated the parties’ agreement to assign certain “Purchased Assets” from Best & Brady to TWP. Among those purchased assets were equipment and tangible assets, rebates due from all vendors, all contracts, claims and rights relating to or arising out of the business, and all customer lists, customer records and information relating to the business. The “Liabilities Assumed” as set forth in “Schedule A” included accounts payable, line of ⁴⁴ credit, taxes payable, accrued liabilities and note payable equipment.

Ultimately, TWP assumed $1,162,160.00 in liabilities, including approximately $300,000.00 owed to Martin as a trade creditor. In its memorandum opinion, the court summarized what occurred next: TWP continued in the business of truss design and manufacture, operating from Woodbine, Maryland. For a time, it did business as “Best and Brady” or “B & B.” Mr. Brady became an employee of TWP but not an owner. TWP continued to provide “back office” support.

TWP no longer had an in-house sales staff for the truss business and relied on independent salesmen of which [Martin] was one. Mr. Butcher no longer supervised the independent salesmen. Some of BBC’s former employees now worked for TWP. TWP sold to some of the same clients, some of whom had been transitioned to B & B from BBC.

TWP continued to use the same software as [Best & Brady] and the same sales report format. Martin continued to be a vendor to TWP. Martin’s Compensation Claim During his employment with Best & Brady, Martin received $78,153.79 in regular salary in 2010, and $45,476.27 in regular salary in 2011. In 2011, Martin received an additional $20,005.52 from Best & Brady as compensation for his commissioned sales.

In 2012, Martin received an additional $20,080.34 from TWP as compensation for his commissioned sales. 8 Martin received a total of $163,715.92 in compensation from Best & Brady or TWP from 2010 through 2012. However, Martin testified that he was only willing to credit Best & Brady for compensation he received during the 24 month period outlined in his employment agreement. 9 According to ⁴⁵ Martin’s computations, the compensation he received during this time totaled to $147,169.51, leaving $92,830.49 remaining of his claim from the $240,000 compensation guaranteed in his employment agreement. The Complaint On October 7, 2013, Martin filed a complaint against Best & Brady and TWP, alleging in Count I that Best & Brady violated the Maryland Wage Payment and Collection Act. Martin claimed that Best & Brady violated the Act by (1) unilaterally reducing his wages without his written consent or any other authorization, and (2) failing to pay him the wages due to him under the Agreement.

Martin sought treble damages amounting to $279,000.00. In Count II Martin alleged Best & Brady breached the Employment Agreement by failing to pay him the guaranteed compensation due and demanded $93,000.00 in compensatory damages. In Count III, Martin claimed that TWP was liable for Best & Brady’s violation of the Act under the “theory of successor liability” because TWP was a mere continuation of Best & Brady. TWP filed an answer on December 10, 2013, denying any obligation to pay Martin and reserving the right to plead any defenses available to Best & Brady if TWP was found liable.

Following notice from Montgomery County Circuit Court that Best & Brady had not filed an answer or request for default — Martin filed a motion for an order of default against Best & Brady, which was granted by the Circuit Court for Montgomery County on January 10, 2014. Following an ex parte hearing, the court entered an order of judgment on March 12, 2014, in favor of Martin against Best & Brady, in the principal sum of $278,490.00 with interest in the sum of $11,064.24. ⁴⁶ On March 14, 2014, TWP filed a motion for summary judgment, arguing that there was no genuine dispute as to any material fact and that TWP was entitled to judgment as a matter of law. Martin filed an opposition to the motion on April 1, 2014 and the court denied summary judgment on April 8, 2014. On June 13, 2014, TWP filed a memorandum before trial arguing that (1) TWP is not a mere continuation of Best & Brady and, therefore, is not liable to Martin, (2) Martin is estopped from pursuing his claim because he agreed to modify his contract when he actively participated in the sale of Best & Brady, and (3) “Martin is not entitled to treble damages under Md.Code, L & E § 3-507.2 because the bulk of his claim is for breach of contract damages, not wages, and because the wage component was withheld in good faith.” On July 28, 2014, Martin filed his own memorandum before trial, arguing that, because TWP continued operating Best & Brady after the purchase from the same location, with the same employees, under the same trade name, that TWP was a mere continuation of Best & Brady and assumed the liabilities of Best & Brady.

At trial Martin testified that after the completion of the sale he had no way of knowing what happened to Best & Brady; however, he claimed there was no noticeable change in the operation of Best & Brady. Martin offered the testimony of Gregory Martin (no relation to Martin), a self-employed roof truss salesman and co-owner of BBC. Gregory Martin was hired as an employee of Best & Brady in March of 2010 as a road salesman. He was employed by Best & Brady as a commissioned salesman at the time of the asset sale between Best & Brady and TWP.

Gregory Martin testified that there was no announcement that Best & Brady was under new ownership or management, operations of Best & Brady remained the same, Best & Brady’s name appeared on the vehicles used by the company, and all paperwork continued using the Best & Brady name and logo. However, during cross-examination, Gregory Martin admitted that the checks ⁴⁷ he received “had a different name,” and he began receiving tax forms from TWP. Martin examined Edward Quinn, the majority owner and chairman of TWP, who had stated in his deposition that he thought Best & Brady still existed. However, during testimony, Mr. Quinn clarified that “[t]he line of business continues.

The entity is different.” Mr. Quinn testified that the ownership structure, operation, and management had changed, with Brady taking over as general manager. Cassidy further clarified that the roof truss business had become a “new division inside of [TWP].” Cassidy and Brady acknowledged a change in management from Martin to Brady after the asset sale to TWP. The trial judge entered her opinion and order on September 29, 2014, concluding that “Martin has demonstrated no basis upon which to hold TWP liable for non-payment of wages or breach of contract by [Best & Brady].” After observing the general rule that a corporation that acquires the assets of another corporation is not liable for the debts and liabilities of the predecessor corporation, the court noted that it was “not persuaded that the ‘mere continuation exception’ applie[d] to affix liability on TWP.” The court’s opinion was based on its findings that (1) there was no evidence that the transaction was for the purpose of avoiding liability to Martin; (2) TWP provided Best & Brady adequate consideration; and (3) while there was substantial overlap in management, control, and ownership, this overlap was not determinative “given the degree of overlap that always existed between Best & Brady and TWP.” 10 Martin filed a notice of appeal on October 28, 2014. Martin presents the following issues on appeal, which we have reworded slightly for clarity: 11 ⁴⁸ I. Did the trial court err by applying the fraud exception rather than the “mere continuation” exception to the general rule that a successor corporation is not liable for the debts and liabilities of its predecessor corporation?

II

Did the asset purchase by TWP of its own subsidiary, Best & Brady, and continuation of TWP under the same or similar management as Best & Brady, impose liability upon TWP for Best & Brady’s debts under the “mere continuation” exception? DISCUSSION Standard of Review On appeal of an action tried without a jury, an appellate court is bound by the circuit court’s findings of fact unless they are clearly erroneous. Md. Rule 8-131 (c); see also Cunningham, v. Feinberg, 441 Md. 310, 321-22 , 107 A.3d 1194 (2015). The trial court’s legal determinations and conclusions of law typically receive no deference and are reviewed de novo.

See Shih Ping Li v. Tzu Lee, 437 Md. 47, 57 , 85 A.3d 144 (2014); State v. Neger, 427 Md. 582, 595 , 50 A.3d 591 ⁴⁹ (2012). However, where the mixed question of law and fact has a heavier factual component, as does the case at hand, it is subject to a “clearly erroneous” review. Farmers Bank of Maryland v. Chicago Title Ins. Co., 163 Md.App. 158, 188 , 877 A.2d 1145 (2005) (citing State v. Jones, 103 Md.App. 548, 590 , 653 A.2d 1040 (1995) rev’d on other grounds sub nom.

Jones v. State, 343 Md. 448 , 682 A.2d 248 (1996)). Application of the “mere continuation” exception to the general rule against successor liability requires an examination of the corporate entities involved, including a factual comparison of the selling corporation to the purchasing corporation. See 1 Fletcher Cyc. Corp. § 48 (“In determining whether a successor corporation is an alter-ego of a former corporation and thus liable for the former corporation’s debts and liabilities, a court may analyze the following factors with respect to the two entities: (1) centralized control of labor relations; (2) common management; (3) interrelation of operations; and (4) common ownership and financial control.”). 12 The circuit court’s determination of successor liability and the applicability of the “mere continuation” exception is a mixed question of fact and law, with a heavier factual component, entailing review by this Court for clear error.

Successor Liability Generally, “a corporation which acquires the assets of another corporation is not liable for the debts and liabilities of the predecessor corporation.” Baltimore Luggage Co. v. Holtzman, 80 Md.App. 282, 290 , 562 A.2d 1286 (1989); see also ⁵⁰ Ramlall v. MobilePro Corp., 202 Md.App. 20, 34-35 , 30 A.3d 1003 (2011); Smith v. Navistar Intern. Transp. Corp., 737 F.Supp. 1446, 1448 (D.Md.1988); 15 Fletcher Cyc. Corp. § 7122 (2015) (“The general rule, which is well settled, is that where one company sells or otherwise transfers all of its assets to another company, the latter is not liable for the debts and liabilities of the transferor.”).

This general rule has applied, where asset transfers were made in good faith for fair consideration, to foreclose actions for damages for breach of contract. Id. We recognize four exceptions to the general rule. In Maryland, the predecessor corporation’s debts and liabilities become the obligation of 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.

Baltimore Luggage, 80 Md.App. at 290 , 562 A.2d 1286 (internal citations omitted); see also Nissen Corp. v. Miller, 323 Md. 613, 617 , 594 A.2d 564 (1991). The gravamen of these exceptions is the protection of creditors’ rights upon a transfer of assets. Baltimore Luggage, 80 Md.App. at 297 , 562 A.2d 1286 . The first exception, applicable where the successor corporation either expressly or impliedly assumes liability, is codified in part and recognized in Maryland case law.

The “express” prong of the first exception is codified at Maryland Code (1975, 2007 Repl. Vol.), Corporations and Associations (“C & A”), § 3-115(c)(l), which provides that “the successor is liable for all debts and obligations of the transferor to the extent provided in the articles of transfer.” 13 The “implied” prong was first recognized in Isle of Thye Land Co. v. Whisman, a ⁵¹ case in which the Court of Appeals determined that a successor corporation can impliedly assume liability, under certain circumstances, for a contractual obligation of a predecessor corporation. 262 Md. 682, 706-07 , 279 A.2d 484 (1971). In Isle of Thye, the articles of transfer evidencing the sale of all of the predecessor corporation’s assets to the successor corporation was never filed with the State. Id. at 706 , 279 A.2d 484 .

Yet the Court of Appeals determined that the successor corporation was still liable under a land sale contract entered into by the predecessor where, inter alia, the successor corporation “attempted to exercise options reserved under the contract ...” to acquire additional land. Id. at 707 , 279 A.2d 484 . The second exception, applying to circumstances involving a consolidation or merger, is codified at C & A § 3 — 114(f)(1). 14 In Ramlall v. MobilePro Corp., we observed that, where two corporations are merged, the legislature has made clear that the resulting corporation remains liable for “all debts and obligations of each nonsurviving corporation.” 202 Md.App. 20, 34-37 , 30 A.3d 1003 (2011) (quoting C & A § 3-1147(f)(l)). The fourth exception, aimed at the fraudulent transfer of assets, is codified at Maryland Code (1975, 2013 Repl.

Vol.), Commercial Law (“Comm.”), §§ 15-201 et seq. respectively. 15 ⁵² This exception was applied in the seminal case, Colandrea v. Colandrea, 42 Md.App. 421 , 401 A.2d 480 (1979), in which Mrs. Colandrea syphoned valuable assets from the predecessor corporation that she and her husband founded, to a new company she started following their divorce, leaving the predecessor corporation without sufficient assets to satisfy its debt to her ex-husband. Id. at 432-33 , 401 A.2d 480 . This Court determined there was a fraudulent conveyance satisfying Comm. § 15-207, where, coupled with Mrs. Colandrea’s intent to defraud, the predecessor corporation paid the operating expenses of the successor corporation for the first year without receiving any consideration. Id. at 438-39, 401 A.2d 480 .

The Court disregarded the corporate entity of the predecessor corporation and held the successor corporation liable for the debt to the ex-husband. Id. at 439, 401 A.2d 480 . The third exception has not been codified in Maryland. Our common law directs that the “mere continuation” exception applies to hold liable “the purchasing corporation [that] maintains the same or similar management and ownership but wears a ‘new hat.’ ” Baltimore Luggage, supra, 80 Md.App. at 297 , 562 A.2d 1286 (quoting Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451, 1458 (11th Cir.1985)).

The exception permits recovery against the successor corporation where the successor is essentially the same corporate entity as the predecessor corporation. The exception is “designed to prevent a situation whereby the specific purpose of acquiring assets is to place those assets out of reach of the ⁵³ predecessor’s creditors.” Id. (Emphasis added). We turn now to examine Appellant’s questions and the theory of liability underlying this third exception as first applied in Baltimore Luggage, 16 and further developed in Nissen Corporation v. Miller, 823 Md. 613 , 594 A.2d 564 (1991), and Academy of IRM v. LVI Environmental Services, Inc., 344 Md. 434 , 687 A.2d 669 (1997).

I. Factors Considered Under the “Mere Continuation” Exception The circuit court found that the purpose of Best & Brady’s sale of assets to TWP was not to place the assets beyond Martin’s reach, but rather to “salvage ... a failing business,” and, therefore, the “mere continuation” exception did not apply. Martin argues that ascertaining the purpose of an asset sale is a function in applying the fraud exception — the fourth exception to the general rule against successor liability — and that, by examining the purpose, the circuit court improperly blended the “mere continuation” exception with the fraud exception in this case. Further to this point, ⁵⁴ Martin argues that the circuit court erred by examining the consideration involved and by determining that TWP’s purchase of Best & Brady’s assets was “not without adequate consideration.” Martin contends that whether or not there was adequate consideration may be relevant in a fraudulent transaction exception analysis but should not be dispositive of whether the “mere continuation” exception applies. Martin asserts that the circuit court