Court: Court of Appeals for the Third Circuit; March 10, 2010; Federal Appellate Court
Essex Insurance Company appeals a declaratory judgment from the U.S. District Court for the Middle District of Pennsylvania, which mandated Essex to defend and indemnify Greenway Center, Inc. (GCI) in a wrongful death lawsuit brought by Annette Maione. The District Court concluded that GCI and Winco Acquisitions, Inc. (Winco), the former operator of the Greenway Center, underwent a de facto merger. Winco, insured under a 1997 policy with Essex, operated the Center until it closed after the death of Mark Willet, who had checked in for treatment. GCI, incorporated in 1998, later took over operations and was sued by Maione in 1999. GCI sought a declaratory judgment against Essex in 2008, leading to a bench trial where the District Court initially found that issue preclusion applied due to a prior state court finding of GCI as Winco's successor. However, this was reversed on appeal, which led to a remand for a determination of GCI's successor status.
On remand, the District Court established that Winco's license was revoked post-Willet's death, leading to the Center's closure in 1997, and that Winco had filed for bankruptcy before GCI's incorporation. While a reorganization plan existed that would transfer stock to GCI, no actual transfer occurred, and GCI did not acquire any of Winco's assets. Heath Management Associates (HMA) managed the Center during this transition, reopening it in 1998 under a management agreement with Winco, but HMA, Viacare, and GCI operated under different corporate structures with no overlap in leadership. HMA held Winco's license, which remained officially under Winco's name, and the majority of Winco’s employees were replaced when the Center reopened. The court concluded that GCI is not a successor to Winco under Pennsylvania law, resulting in the decision to vacate the District Court’s judgment and remand for further proceedings.
HMA operated the Center independently from Winco's stockholders or owners, as mandated by the Department of Health (DOH), which required Winco’s management to refrain from involvement in the Center's operations following its shutdown. Meetings held between 1998 and 2000 by the boards of HMA, Viacare, and GCI excluded Winco representatives, leading to GCI’s executive director making decisions for Winco. Despite being the licensee and named insured on relevant insurance policies, Winco did not participate in the Center's operations and merely served as a shell, with its shareholders having abandoned it. Winco retained contracts with counties for patient referrals to ensure continuity, remaining active due to ongoing legal proceedings and convenience for contractual obligations.
Maione's lawsuit against Winco was dismissed as time-barred after the statute of limitations expired, following her initial error in suing GCI. On June 28, 2000, GCI obtained the license to operate the Center, which consistently retained its identity as the Greenway Center, including unchanged premises, letterhead, and phone number. The District Court found that a de facto merger occurred between Winco and GCI under Pennsylvania law, considering four factors: (1) continuity of ownership, due to HMA effectively managing Winco; (2) cessation of ordinary business and practical dissolution of Winco, which had no active shareholders or operations; (3) assumption of necessary liabilities for business continuity, with contracts remaining under Winco’s name but executed by HMA and GCI; and (4) continuity of management and operations at the same physical location. The Court ruled in favor of GCI, requiring Essex to defend and indemnify GCI in Maione's wrongful death case, leading to Essex's timely appeal of the decision.
A district court's findings of fact from a bench trial are reviewed under a clearly erroneous standard, while legal conclusions are assessed under plenary review. Governed by Pennsylvania law, the court aims to interpret how the state's highest court would resolve specific legal issues, utilizing guidance from state intermediate appellate courts and federal court decisions when necessary.
In Pennsylvania, the general rule states that a purchasing company is not liable as a successor when it acquires all or substantially all of another company's assets. However, an exception exists for situations deemed a "de facto merger," where the purchasing company is essentially a continuation of the selling corporation. Four factors are considered to establish a de facto merger: 1) continuity of ownership; 2) cessation and dissolution of the predecessor's business; 3) assumption of necessary liabilities by the successor; and 4) continuity in management, personnel, location, and operations.
Continuity of ownership is the most critical factor, with the absence of this element creating a strong presumption against successor liability. The Pennsylvania Superior Court reinforces that without stock transfer for assets, the transaction cannot be treated as a merger.
The District Court incorrectly concluded that a de facto merger occurred between GCI and Winco due to a lack of evidence supporting continuity of ownership. GCI did not acquire Winco's assets, nor was there any transfer of stock. Winco's owners did not manage the Center post-closure or participate in its operations after it reopened under HMA’s management, which further supports the absence of continuity of ownership. The District Court's reference to HMA running the Center does not imply ownership transfer, as overlapping management does not equate to ownership continuity. Consequently, the legal connection between GCI and HMA is irrelevant in establishing a de facto merger with Winco.
GCI argues that the transition of operations at the Center from Winco to HMA and then to GCI demonstrates continuity of ownership. However, it is established that there was no continuity of ownership between Winco and HMA, and subsequently GCI, as there was no stock transfer, asset purchase, or evidence linking Winco’s ownership to GCI. This lack of continuity prevents the application of the de facto merger doctrine.
Additionally, the factors typically considered in assessing de facto merger—such as the dissolution of the predecessor, assumption of liabilities, and continuity of management—do not support GCI's position. Winco was never dissolved and could still respond to legal actions. GCI did service some of Winco’s contracts but did not assume its liabilities or purchase its service agreements. Although the general operations and location of the Center remained consistent under GCI, the management and personnel largely changed.
Consequently, GCI cannot be deemed a continuation of Winco, leading to the conclusion that GCI cannot benefit from Essex’s insurance policy as Winco’s successor. The District Court's decision is reversed, and the case is remanded for further proceedings. The insurance policy in question was issued to Winco and expired before GCI began operations. The jurisdiction of the District Court is based on diversity due to the parties' different citizenships and the amount in controversy exceeding $75,000. GCI's reference to the Fizzano case is deemed irrelevant as it pertains to an asset purchase scenario, while no such purchase occurred here. The District Court's earlier rejection of GCI's other recovery theories is not under appeal.
