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Martin v. TWP Enters. Inc.

Court of Special Appeals of Maryland

February 24, 2016

PHILLIP MARTIN,
v.
TWP ENTERPRISES INC.

Page 362

         Appeal from the Circuit Court for Montgomery County. Anne K. Aibright, JUDGE

         ARGUED BY: Michael G. Campbell (Miller, Miller & Canby Chartered on the brief) all of Rockville, MD. FOR APPELLANT

         ARGUED BY: Charles H. Fleiseher (Brian Carlin, Oppenheimer, Fleischer & Quiggle, PC on the brief) all of Bethesda, MD. FOR APPELLEE

         ARGUED BEFORE Krauser, C.J., Berger, Leahy, JJ. Opinion by Leahy, J.

          OPINION

Page 363

         [227 Md.App. 36] 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 [227 Md.App. 37] judgment against

Page 364

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 [227 Md.App. 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

Page 365

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 [227 Md.App. 39] subsidiary, Truss, TWP would purchase certain assets from Martin and BCC, 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 BCC'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 [227 Md.App. 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

Page 366

$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 [227 Md.App. 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," [227 Md.App. 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 13, 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

Page 367

" '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.

          [227 Md.App. 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 [227 Md.App. 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. ...

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