BUSINESS ORGANIZATIONS

Somerset Legal Journal headnotes from approximately 1991 through the present.

For earlier cases, please visit the Somerset County Law Library.  

 

PARTNERSHIPS – DISSOLUTION

 

Generally, an action for dissolution of partnership is an action in equity that is between one or more partners, and not the partnership itself.  Baker v. Leasure, 59 Som.L.J. 456 (2002) (Gibson, J.).

 

PARTNERSHIPS – PARTY TO CIVIL ACTION

 

A partnership cannot be named as a party to a proceeding unless there is an equitable ground upon which to join the partnership as a party to a proceeding, as required by 42 Pa.C.S.A. §2129.  Baker v. Leasure, 59 Som.L.J. 456 (2002) (Gibson, J.).

 

CORPORATE OFFICER PERSONAL LIABILITY – PARTICIPATION THEORY

 

Where a party enters into a contract with a corporation, no action will lie against the shareholder of that corporation individually for a breach of that contract. Miele v. Tradewinds Group, Inc. and Paula Shaffer, 64 Som.L.J. 86 (2009) (J. Klementik).

 

The breach of the contract is the breach of a promise made by the corporation, and not by the breach of any promise extended by the corporate officer. Miele v. Tradewinds Group, Inc. and Paula Shaffer, 64 Som.L.J. 86 (2009) (J. Klementik).

 

Shareholders, officers, and directors are not held liable for the corporation’s breach of contract, absent an establishment of participation theory or the successful assertion of the equitable doctrine of piercing the corporate veil. Miele v. Tradewinds Group, Inc. and Paula Shaffer, 64 Som.L.J. 86 (2009) (J. Klementik).

 

Under the participation theory, “a corporate officer can be held liable for misfeasance,” i.e., the improper performance of an act, but not for “mere nonfeasance,” i.e., the omission of an act which a person ought to do.  Miele v. Tradewinds Group, Inc. and Paula Shaffer, 64 Som.L.J. 86 (2009) (J. Klementik).

 

CORPORATIONS – ALTER EGO

 

In order to determine whether a successor corporation has been established as an ‘alter ego' of a former corporation, and thus may be held liable for the former corporation's debts and liabilities, the following factors are analyzed with respect to the two entities: (1) centralized control of labor relations; (2) common management; (3) interrelations of operations; and (4) common ownership and financial control.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.).

 

Critical factors to consider in making a determination as to alter ego status include who has active or substantive control, as well as the similarities that exist between the two businesses.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

Courts should consider whether the old and new employers share substantially identical management, business purpose, operation, equipment, customers and supervision, as well as ownership.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

CORPORATIONS – FRAUDULENT TRANSFER OF ASSETS

 

The Uniform Fraudulent Transfer Act, section 5105, provides in part as follows: A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.).

 

Section 5105 of the Uniform Fraudulent Transfer Act sets forth two additional requirements which both need to be met in order for a finder of fact to determine whether a transfer of assets between parties was fraudulent: (1) did the debtor make the transfer or incur the obligation without receiving a reasonably equivalent value in exchange for the transfer, and (2) was the debtor insolvent at that time or did it become insolvent as a result of the transfer or obligation?  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

Both additional requirements of section 5105 of the Uniform Fraudulent Transfer Act must be met in order for the Court to hold that the transfer was fraudulent and violative of that act.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

Inadequacy of price does not mean an honest difference of opinion as to price, but a consideration so far short of the real value of the property as to startle a correct mind, or shock the moral sense.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

At the very least, a debtor, not a third person, must receive some indirect benefit from the transfer and this benefit must be fairly concrete.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

The consideration received must be something more than the consideration necessary to create a contract, and it must be secured or satisfied.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

Factors to consider in analyzing whether fair consideration was given in a transaction include whether the transaction was conducted at arms-length; whether the property or value was transferred to the debtor; whether the debtor received additional and valuable benefits as a result of the transaction; whether the debtor was rendered execution proof; and whether the transaction was made in good faith.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

An arms-length transaction is a transaction negotiated by unrelated parties, each acting in his or her own self-interest.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

An arms-length transaction is the basis for a fair market value determination.   Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

Section 504(a) of the Pennsylvania Uniform Fraudulent Conveyance Act provides that a transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (a) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business transaction, or (b) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

In order to prove fraud, a showing of the debtor's intent to defeat or delay the rights of creditors is necessary.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

Subsection 5104(b) provides eleven (11) factors to use in analyzing a debtor's intent to defeat or delay the rights of creditors.   Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

Pennsylvania courts have held that the required actual intent to hinder, delay or defraud a creditor may be established by the use of circumstantial evidence.              Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.).

 

Intent to defraud may also be inferred from the conduct of the parties occurring after the transfer, which may also be used to show such intent from the inception of the transaction. Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.).

 

CORPORATIONS - NON-PROFIT CORPORATIONS

 

Upon petition of any person whose status as, or whose rights or duties as, a member, director, member of another body, officer or otherwise of a non-profit corporation are or may be affected by any corporate action, the court may hear and determine the validity of such corporate action.  15 Pa.C.S.A. 5793(a).  Roaring Run Development Council v. Penn's Woods Council, Inc., Boy Scouts of America, 52 Som. 372 (1994).

 

CORPORATIONS – REPRESENTATION

 

A corporation may only appear and be represented in court by an attorney at law admitted to practice before the court.  Hinebaugh v. Star-Lite Roller Skating Center, 52 Som.L.J. 17 

 

The only exceptions to this rule are 1) in small claims court with informal rules of procedure and 2) in stockholders' derivative actions.  Hinebaugh v. Star-Lite Roller Skating Center, 52 Som.L.J. 17

 

CORPORATIONS – SUCCESSOR CORPORATIONS

 

It is a general rule that when a corporation sells all of its assets to another corporation, the latter is not responsible for the seller corporation's debts or liabilities.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

There are exceptions to this general rule and a successor corporation will be held liable for the debts and liabilities of the predecessor corporation if: (1) the successor corporation either expressly or impliedly agreed to assume the liabilities of the transferor corporation; or (2) the sale or transaction amounts to a consolidation or merger; or (3) the successor corporation is merely a continuation of the transferor corporation; or (4) the transaction was fraudulently entered into in order to escape liability; or (5) the sale or transfer was not made for adequate consideration and provisions were not made to protect creditors of the transferor corporation.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

Where the successor corporation has been established to merely ‘continue' the former corporation's operations, or to escape the former corporation's liability, courts have imposed successor corporation liability.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

The mere fact of transference is insufficient to hold the successor corporation responsible for the liabilities of the transferor corporation.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

Courts in this Commonwealth analyze whether a successor corporation is merely a continuation of the predecessor corporation by using the alter ego test.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.). 

 

In order to determine whether a successor corporation has been established as an ‘alter ego' of a former corporation, and thus may be held liable for the former corporation's debts and liabilities, the following factors are analyzed with respect to the two entities: (1) centralized control of labor relations; (2) common management; (3) interrelations of operations; and (4) common ownership and financial control.  Diamond Reo v. Mid Pacific Industries, Inc. v. Osterlund, Inc., 59 Som.L.J. 282 (2001) (Gibson, J.).