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Plaza Express Co. v. Middle States M. Freight

FEBRUARY 21, 1963.

PLAZA EXPRESS CO., INC., A CORPORATION, PLAINTIFF-APPELLEE,

v.

MIDDLE STATES MOTOR FREIGHT, INC., A CORPORATION, DEFENDANT-APPELLANT.



Appeal from the Municipal Court of Chicago; the Hon. ROBERT E. McAULIFFE, Judge, presiding. Judgment affirmed.

MR. JUSTICE FRIEND DELIVERED THE OPINION OF THE COURT:

Plaintiff brought suit to recover damage to the wall of a garage it leased at 1000 West 21st Street in Chicago, during the years 1946 and 1947. The evidence shows that Ralph Kinnear, d/b/a Middle States Motor Freight, moved into the property adjoining plaintiff's and began the practice of parking its trucks against the wall of plaintiff's terminal-garage. The rear of these trucks frequently struck this wall as they were being "backed" into position, with the result that, during a period beginning approximately in March of 1946 and ending in June of 1947, the wall became progressively weaker and had to be replaced. Under the terms of its lease, plaintiff was required to maintain the premises in good condition. Accordingly, in June of 1947 plaintiff had the wall replaced at a cost of $4,500, the lowest of three bids on the job, and subsequently brought this action to recover for the damages sustained. Judgment was entered on the jury's verdict of $4,500. Defendant appeals from the judgment and the denial of its post-trial motions, made in the alternative.

At the outset, it is perhaps well to indicate that the evidence clearly justified the jury in finding that the damage to plaintiff's wall was caused by trucks belonging to Middle States and its business patrons. The testimony of witnesses to the damage, as well as photographs of the damaged wall, substantiate this conclusion. In addition, there is evidence that in 1946 Middle State's terminal manager had the roof of plaintiff's terminal shored up, pursuant to repeated complaints that Middle States was knocking down the wall and causing the roof it supported to sag. This conduct constituted an admission on the part of Middle States that it was liable for the damage to plaintiff's terminal, and was admissible as evidence of such liability.

In June of 1947, after the damage complained of had ceased and some time before the filing of this action, Ralph Kinnear, d/b/a Middle States Motor Freight, incorporated as Middle States Motor Freight, Inc. In its motion for a directed verdict and post-trial motion, defendant corporation claimed that plaintiff has failed to prove that defendant assumed the liability of Middle States Motor Freight for the damage to plaintiff's wall. In support of this contention, defendant relies upon Chicago Smelting & Refining Corp. v. Sullivan, 252 Ill. App. 259 (1929), modifying 246 Ill. App. 538 (1927), which held that a corporation formed to take over the business of a partnership did not assume those notes of the partnership which were payable to the defendant, cross-claimant. When a statement of the assets and liabilities taken over from the partnership was shown to have specifically enumerated some notes of the partnership but not those in question, the court said (pp 261-262):

"The corporation having assumed to pay certain specified notes of the partnership as a part of the consideration of the partnership assets, under the evidence here shown cannot be held liable for any other notes of the partnership."

Defendant argues that the case at bar comes within the foregoing rule, since the journal entry of July 1, 1947 assumes the liabilities of Middle States Motor Freight but does not enumerate the potential liability to plaintiff as one of the liabilities assumed. To state this proposition is to refute it. The journal entry in question was filed before the Interstate Commerce Commission as part of defendant's application for a license to engage in trucking. It established the general ledger of the corporation, listing the assets taken over from Middle States Motor Freight, together with the liabilities assumed, and showing the capital stock subscribed for the excess of the assets received over liabilities assumed. At the time this journal entry was made, the present suit had not been filed and any liability was therefore speculative, at least as to amount. This being so, the failure of the corporation to include this uncertain claim in its opening journal entry is stripped of any implication that the corporation meant thereby to dissaffirm this liability, since it is most unlikely that a potential claim of uncertain amount would be given balance sheet recognition before entry of judgment on that claim. Failure to list this liability does not amount to a disaffirmance within the meaning of the Smelting decision.

Although the record fails to show that the defendant explicitly assumed the liability of Ralph Kinnear to the defendant, we think that an implied assumption of this obligation has been shown. As revealed by the opening journal entry of July 1, 1947, the depreciable assets of Ralph Kinnear were apparently placed on the books of the corporation at their existing book values, since the existing accumulated allowances for depreciation of those assets were carried over to the corporate accounts. This practice suggests merely a formalized transfer of existing account balances from one set of books to another, not the establishment of current asset values through the medium of a bona fide sale. It further appears from this journal entry that all of defendant's stock was to be issued in exchange for the net assets received from Ralph Kinnear. In the absence of proof to the contrary, we assume that Ralph Kinnear, who relinquished the assets, received the stock in return therefor. Further evidence that defendant's incorporation amounted to little more than Kinnear's "putting on a new coat" is to be had from defendant's terminal manager Gellatley, who testified that after incorporation the personnel remained the same and that the Chicago terminal remained the same.

The decision in Acorn Lumber Co. v. Friedlander Box Co., 240 Ill. App. 425 (1926) is in point. There the court held that where an individual proprietor transferred to a corporation all of the assets of his business in exchange for a majority of the stock of the corporation so formed, the corporation would be held to have assumed the liabilities of the proprietorship. The court indicated further at pages 430-431 that this rule applies "whether the business was originally conducted by an individual or a corporation which individual or corporation afterwards turned over all of his or its assets to a new corporation, nothing being paid but stock in the new corporation." In Greengard v. Katz, 270 Ill. App. 227 (1933), the court held that the defense of usury was available to a corporation formed to take over the business and liabilities of a partnership. At page 235 it is said:

"The undisputed evidence is that the Katzes and Einhorns agreed among themselves to incorporate for the purpose of continuing the business of conducting the garage, and the assets of the business were transferred to the corporation, each of the persons receiving his or her aliquot part of the capital stock of the business which was transferred to the corporation. As we said in Chicago Smelting & Refining Corp v. Sullivan, 246 Ill. App. 538, quoting from Andres v. Morgan, 62 Ohio St. 236: `The members of the partnership may be said to have simply put on a new coat.' See also Acorn Lumber Co. v. Friedlander Box Co., 240 Ill. App. 425."

This doctrine is well established in Illinois, as appears from the following cases: Interstate Finance Corp. v. Commercial Jewelry Co., 280 Ill. 116, 117 N.E. 440 (1917), affg 201 Ill. App. 568 (1916); Kraft v. Garfield Park Community Hospital, 296 Ill. App. 613, 16 N.E.2d 936 (1938); and Lemars Shoe Co. v. Lemars Shoe Mfg. Co., 89 Ill. App. 245 (1899).

We have found no Illinois authority which discusses the issue of whether a corporation, liable for the trade debts of its predecessor in accordance with the foregoing cases, can also be held to have assumed the tort liability of its predecessor, but can see no reason why this type of liability, like any other, may not be impliedly assumed, and there are authorities in other states which hold that it may. Wolff v. Shreveport Gas, Elec. Light & Power Co., 138 La. 743, 70 So. 789 (1916), held that where one corporation, liable in tort to third parties, conveys property to a new corporation which is a mere continuation of the old, the injured parties can recover against either corporation. After indicating that the successor corporation would be free of tort liability if it had been a bona fide purchaser of the old corporation, the court went on to say at 70 So. 789, 795:

"Where the purchaser is a new corporation, composed of the same shareholders as the old, the transaction, in no manner, affects the rights of the creditors of the old corporation, who may proceed for the recovery of the amounts due them against either corporation, or both; and that, whether the claims be founded in contract or tort, since the real debtor, though represented by two corporations instead of one, remains the same, in contemplation of law." (Emphasis added.)

In a similar vein, Barnes v. Liebig, 146 Fla 219, 1 So.2d 247 (1941), holds that a tort is a liability within the meaning of the rule which makes the "absorbing" corporation in a merger responsible for the liabilities of the "absorbed" corporation. 13 Am Jur § 1253, states at page 1137 that "an agreement to assume liabilities of a predecessor [corporation] includes tort liabilities."

More recently, Jones v. Eppler, 266 P.2d 451 (Okla 1953) squarely holds that a tort may be impliedly assumed within the meaning of the above discussed rules. On the facts of a ...


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