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                   THE SUPREME COURT OF NEW HAMPSHIRE

                              ___________________________


Rockingham
No. 2014-0465


                                   CELESTICA, LLC

                                          v.

                COMMUNICATIONS ACQUISITIONS CORPORATION

                                Argued: April 9, 2015
                          Opinion Issued: October 14, 2015

       Pierce Atwood LLP, of Portsmouth (Michele E. Kenney on the brief and
orally), for the plaintiff.

       Bernstein, Shur, Sawyer & Nelson, P.A., of Manchester (Andru H.
Volinsky and Talesha L. Caynon on the brief, and Ms. Caynon orally), for the
defendant.

      BASSETT, J. Following a bench trial in Superior Court (Delker, J.), the
court denied the petition of the plaintiff, Celestica, LLC (Celestica), requesting a
declaration that the defendant, Communications Acquisitions Corporation
d/b/a Whaleback Managed Services (CAC), is obligated to pay the balance of a
judgment that Celestica had obtained against another business, the assets of
which CAC had purchased at public auction. Specifically, the trial court ruled
that, when CAC purchased the assets of Whaleback Systems Corporation
(Whaleback), the transaction did not amount to a de facto merger between the
two companies. On appeal, Celestica argues that the trial court erred by not
imposing successor liability upon CAC under the de facto merger doctrine. We
affirm.

I. Factual Background

       The trial court found the following facts, which are not in dispute on
appeal. Whaleback was founded to provide telecommunications services
through Voice Over Internet Protocol (VOIP) to small and mid-sized businesses.
Whaleback, which operated primarily from Portsmouth, was funded by a group
of venture capital firms. The primary investors in Whaleback were: (1) Ascent
Venture Partners IV, LP (Ascent), which owned 53.1% of the stock; (2) Egan
Managed Capital III, LP (Egan), which owned 22.7%; and (3) Castile Ventures
III, LP (Castile), which owned 17.8%. Fifteen other individuals owned the
remaining 6.4% of the Whaleback stock.

      Whaleback was also funded through a series of secured loans. Horizon
Technology Funding Company, LLC (Horizon) lent Whaleback $3 million
(Horizon Loan), and was the primary secured lender. Horizon held a security
interest in all of Whaleback’s assets, “including equipment, inventory, accounts
receivable, and intellectual property rights.” Subordinate to Horizon’s secured
interest, the three primary shareholders of Whaleback — Ascent, Egan, and
Castile — also provided secured loans to Whaleback in the amounts of $4.8
million, $2 million, and $1.2 million respectively.

       In 2011, after Whaleback defaulted on the Horizon Loan, the investors
began looking for new sources of funding. Hercules Technology Growth Capital
offered to lend Whaleback $2 million, provided that the equity investors
invested an additional $700,000 in the company. Ascent, however, responded
that it would provide only $50,000 of additional capital. Castile and Egan
declined to invest more capital as long as Whaleback continued to operate
under its existing business model. Hercules eventually withdrew its offer.

       Soon thereafter, Whaleback board members Roger Walton, of Castile,
and Michael Shanahan, of Egan, discussed forming a new company to acquire
Whaleback’s assets. Walton had a background in information technology, and
believed that Whaleback had valuable technology but had a flawed business
model. Walton and Shanahan met with Karil Reibold, the CEO of Whaleback,
to discuss the future of the company. The three men then approached Horizon
with a proposal whereby Castile and Egan would create a new company and
purchase Whaleback’s assets from Horizon. Under the proposal, Castile and
Egan would pay Horizon $500,000, plus $50,000 in legal fees and costs. The
plan also contemplated that Horizon would pay $125,000 to keep Whaleback
operating until the sale closed, at which time Castile and Egan would
reimburse Horizon for this expense.



                                       2
       The parties ultimately agreed to the following terms, which were
memorialized by a Letter of Intent (LOI) dated November 15, 2011. Castile and
Egan would fund Whaleback’s operations between the signing of the LOI and
the closing. Horizon would conduct a public auction of Whaleback’s assets.
The minimum bid at the auction was set at $600,000, and any interested
bidder would be required to submit a $60,000 deposit on the day before the
auction. Castile and Egan also had a right of first refusal, allowing them to
match any higher bid. If they chose not to match a higher bid, Castile and
Egan would receive a refund of any money invested in Whaleback to keep it
operational between the LOI and closing.

      On November 15, the same day that the LOI was signed, Horizon sent a
notice to Whaleback stating that Whaleback was in default on the Horizon
Loan, thus triggering Horizon’s right to sell all of Whaleback’s assets at
auction. Notice of the public auction was sent to all secured lenders and to
Celestica. Notice was also published in the Manchester Union Leader and the
Boston Globe, and posted on the auctioneer’s website.

       At the November 29 auction, CAC, the new company formed by Castile
and Egan, was the only bidder for Whaleback’s assets. * It bid $600,000. Prior
to the December 7 closing, George Vaughn, who was hired to serve as CEO of
CAC, worked with Reibold to keep Whaleback running, because “if there was
an interruption in the business for any length of time then all of [Whaleback’s]
customers would be lost.” Thus, to ensure that it could provide uninterrupted
service to its customers prior to the closing, CAC honored some of the debts
owed by Whaleback to existing vendors. Vaughn was ultimately responsible for
deciding which of Whaleback’s contracts that CAC would honor during the
interim period.

       The asset sale closed as planned. CAC “acquired all of . . . Whaleback’s
assets, including the good will, existing customers, equipment, and intellectual
property,” free from any of Whaleback’s liabilities, including the judgment that
Celestica had obtained against Whaleback. After the closing, Whaleback had
no assets. Whaleback was not formally dissolved because it did not have
sufficient funds to pay for its dissolution.

      In 2012, Celestica filed a petition for declaratory judgment in superior
court, seeking a declaration that the asset sale between Whaleback and CAC
constituted a de facto merger of the two companies. Celestica asked the trial
court to rule that, under the theory of successor liability, CAC was “fully and

*The actual bidder at auction was a predecessor of CAC named Communications Acquisitions,
LLC. However, because the distinction between the two companies does not matter for purposes
of this opinion, we refer to both entities as “CAC.”




                                              3
completely” liable for the judgment that Celestica had obtained against
Whaleback. Following a three-day bench trial, the trial court declined to
impose successor liability on CAC. This appeal followed.

II. Standard of Review

       Celestica first argues that we should review the trial court’s decision de
novo because it “does not challenge the facts found by the trial court, but
rather, the significance attributed to the facts and legal conclusions drawn
from them.” CAC counters that the imposition of successor liability is an
equitable remedy within the sound discretion of the trial court, and, therefore,
the trial court’s ruling is owed deference on appeal. We agree with CAC.

      Claims of successor liability, including the application of the de facto
merger doctrine, are equitable in nature. See Bielagus v. EMRE of N.H., 149
N.H. 635, 639 (2003). “The propriety of affording equitable relief in a particular
case rests in the sound discretion of the trial court.” Axenics, Inc. v. Turner
Constr. Co., 164 N.H. 659, 669 (2013) (quotation omitted). “We review the trial
court’s factual findings under the clearly erroneous standard to determine if
they are supported by evidence presented at trial.” Bielagus, 149 N.H. at 639.
We will not overturn the trial court’s decision regarding equitable relief absent
an unsustainable exercise of discretion. See Conant v. O’Meara, 167 N.H. __,
__ (decided May 15, 2015).

      “To show an unsustainable exercise of discretion, [Celestica] must
demonstrate that the court’s ruling was clearly unreasonable or untenable to
the prejudice of [its] case.” Axenics, 164 N.H. at 669. “Although the award of
equitable relief is within the sound discretion of the trial court, that discretion
must be exercised, not in opposition to, but in accordance with, established
principles of law.” Id. (quotation omitted). “Our inquiry is to determine
whether the evidence presented to the trial court reasonably supports the
court’s findings, and then whether the court’s decision is consonant with
applicable law.” Bielagus, 149 N.H. at 639 (quotation omitted).

III. The De Facto Merger Doctrine

      A general precept of commercial law is that “a corporation purchasing
assets of another corporation is not liable for the seller’s debts.” Id. at 640.
“This rule . . . allows, in the regular course of business, free alienability of
corporate assets to maximize their productive use.” Id. “There are judicially
recognized exceptions to this rule, however, intended to prevent corporations
from evading their business obligations to creditors by selling their assets.” Id.
“Under the de facto merger exception, successor liability will be imposed if the
parties have achieved virtually all of the results of a merger without following
the statutory requirements for merger of the corporations.” Id. at 640-41



                                         4
(quotation omitted); see RSA 293-A:11.07(a) (Supp. 2014) (describing the
circumstances in which a merger between two entities becomes effective). In
Bielagus, we enumerated four non-exclusive factors to be considered when
determining whether a purported sale of assets is, in fact, a de facto merger.
Bielagus, 149 N.H. at 640-43. Those factors are whether:

          (1) There is a continuation of the enterprise of the seller
      corporation, so that there is continuity of management, personnel,
      physical location, assets, and general business operations.
          (2) There is a continuity of shareholders which results from the
      purchasing corporation paying for the acquired assets with shares
      of its own stock, this stock ultimately coming to be held by the
      shareholders of the seller corporation so that they become a
      constituent part of the purchasing corporation.
          (3) The seller corporation ceases its ordinary business
      operations, liquidates, and dissolves as soon as legally and
      practically possible.
          (4) The purchasing corporation assumes those obligations of the
      seller ordinarily necessary for the uninterrupted continuation of
      normal business operations of the seller corporation.

Id. at 642 (quotation omitted). “The factor that usually tips the scales in favor
of finding a merger is continuity of ownership, usually taking the form of an
exchange of stock for assets.” Id. (quotation omitted). In addition to the four
factors, “[t]he fact-finder may look to other factors indicative of commonality or
distinctiveness with the corporations.” Id. at 641.

      A. Continuation of the Enterprise of the Seller Corporation

       The trial court first considered whether “[t]here is a continuation of the
enterprise of the seller corporation, so that there is continuity of management,
personnel, physical location, assets, and general business operations.” Id. at
642. The trial court observed that “[t]his factor superficially supports the
conclusion that [CAC] was a mere continuation of [Whaleback].” However, it is
apparent from the trial court’s order that, upon closer analysis, it found that
this factor did not weigh in favor of imposing successor liability. Celestica
argues that the trial court erred when it “tried to explain away the facts
showing a continuity of the enterprise,” which, it argues, “are controlling.” We
disagree.

      Although the trial court observed that Whaleback and CAC “looked like
the same company immediately before and after the sale,” it made numerous
factual findings in support of its conclusion that the enterprise of CAC
materially differed from that of Whaleback. For instance, with regard to
continuity of management, the trial court credited the testimony of Walton,



                                        5
Castile’s member on the Whaleback board of directors, that immediate
turnover of management would have been detrimental to the value of the assets
that CAC purchased. Walton testified that “if there was any disruption in
service as a result of firing management or employees, the customer base
would immediately disappear and the value of the company would be lost.”
The trial court found that “within 14 months of the foreclosure sale virtually
the entire management team was replaced,” and that only the Chief Technology
Officer remained employed by CAC.

      Further, prior to the asset sale, Castile and Egan each held only one of
six seats on Whaleback’s board of directors. After the closing, Castile and
Egan held a total of three of four seats on CAC’s board of directors, giving them
control of the CAC board. As the trial court noted, “before the sale Castile and
Egan did not control . . . Whaleback either through equity ownership or on the
Board of Directors,” but “[a]fter the sale Castile and Egan [controlled] the new
company from both positions.”

       As for personnel, the trial court found that Whaleback had employed 28
staff members, and that, at the time of the trial, only half of those employees
worked for CAC. The trial court recounted Walton’s testimony that “it took
time to identify which employees continued to provide valuable services and to
replace those who were not productive without disrupting service to the
customers.” Additionally, employees’ stock options in Whaleback were
cancelled, and each employee was granted new stock options in CAC “based on
the employee’s value to” CAC.

       In regard to continuity of CAC’s business operations, the trial court
referenced Walton’s testimony that Whaleback’s financial problems stemmed
not from its services or technology, but rather from its “poor control over the
cash flow.” To that end, CAC brought in a new CEO, Vaughn, and gave him
full control over spending. CAC also reduced its payments to resellers, who
acted as middlemen between CAC and its customers, from 20% of the
customer’s contract to 10%, a change that “dramatically improved” CAC’s
revenue stream. CAC also moved to a “cloud-based” system to provide
upgrades to customers remotely, as opposed to individually servicing each
customer’s computer. Although Whaleback had developed the remote upgrade
system, it did not invest the resources to implement it.

        Additionally, in April 2013, CAC moved its operations from the facilities
that Whaleback had used in Portsmouth and in Bedford, Massachusetts, to
new locations in Boston and Virginia. The trial court found that the new
facilities “were an upgrade and involved a completely different generation of
equipment and technology from that used by . . . Whaleback in the prior
facilities.”




                                        6
      Finally, the trial court found that Castile and Egan “invested an
additional $1.1 million in equity and $200,000 in loans into [CAC] in order to
implement the new business model.” The trial court observed that “[t]his
money was necessary not just to keep Whaleback from bankruptcy but also to
transition to new co-location facilities and to migrate customers to a new
cloud-based technology.” Moreover, these investments do not include the
additional money that Castile and Egan spent to keep Whaleback operational
between the auction and closing.

       Given these factual findings — none of which are in dispute on appeal —
there is ample evidence in the record to support the trial court’s conclusion
that the continuation-of-the-enterprise factor did not weigh in favor of imposing
successor liability.

      B. Continuity of Shareholders

       The second Bielagus factor is whether “[t]here is a continuity of
shareholders which results from the purchasing corporation paying for the
acquired assets with shares of its own stock, this stock ultimately coming to be
held by the shareholders of the seller corporation so that they become a
constituent part of the purchasing corporation.” Bielagus, 149 N.H. at 642.
“In traditional corporate law, the key factors to finding a de facto merger are
the exchange of stock and continuity of ownership, because shareholders are
the indirect beneficiaries of any increase in a corporation’s assets or any
decrease in its liabilities.” Id. at 643. “The existence of these factors suggests
an asset sale is not actually a bona fide business transaction . . . .” Id.

      Celestica first argues that the trial court’s order “suggest[s]” that a “de
facto merger requires uniformity of ownership between the old and new
company.” We disagree with Celestica’s interpretation of the trial court order.
See Choquette v. Roy, 167 N.H. __, __, 114 A.3d 713, 718 (2015) (“The
interpretation of a trial court order is a question of law, which we review de
novo.”). The trial court did not rule that uniformity of ownership is required to
demonstrate a de facto merger. Rather, after recognizing that a de facto merger
could be found absent uniformity, the trial court declined to find that, simply
because Castile and Egan were shareholders in both companies, this factor
favored imposing successor liability.

       The trial court, after observing “that [Celestica] is correct that a
foreclosure sale, in and of itself, does not terminate the successor liability
inquiry,” went on to examine the circumstances surrounding the sale,
concluding that, despite the fact that “Castile and Egan were shareholders in
both companies, there was a bona fide change in ownership as a result of the
foreclosure sale.” There is ample evidence to support this finding. Prior to the



                                        7
closing, Castile and Egan owned 17.8% and 22.7%, respectively, of the stock in
Whaleback. Castile and Egan paid $600,000 in cash for Whaleback’s assets,
and after the closing, Castile owned 66.7% of CAC, and Egan owned 33.3%. As
the trial court noted, Castile changed from “the smallest institutional
shareholder in . . . Whaleback to holding an outright majority of the new
company.” Importantly, Ascent, Whaleback’s majority shareholder, did not
have an equity interest in CAC, nor did 15 other investors in Whaleback.

      In light of these findings, Celestica has not demonstrated that the trial
court erred in finding that the continuity-of-shareholders factor weighed
against imposing successor liability.

      C. Cessation of the Business of the Seller Corporation

       The trial court next considered the third Bielagus factor: whether the
“seller corporation ceases its ordinary business operations, liquidates, and
dissolves as soon as legally and practically possible.” Bielagus, 149 N.H. at
642. The trial court noted that “on its face this factor tends to support
imposing successor liability” because “[t]here is no question that . . .
Whaleback functionally ceased operations without any capital after the
foreclosure sale.” Nevertheless, the trial court observed that “good will and an
existing customer base” were valuable assets and, had “Whaleback’s property
been liquidated and its operations ceased[,] Horizon would have lost these two
valuable assets.” Accordingly, the trial court did not give this factor much
weight. Celestica argues that the trial court erred in doing so. We disagree.

      Celestica first argues that the trial court erred when it stated that this
case is similar to Bielagus. However, the trial court did not state that this case
was similar to Bielagus in all respects; rather it cited Bielagus in support of the
proposition that a debtor’s liabilities may be “cut off” in some cases in which
the buyer continues the business operations of the seller. Indeed, in that
particular respect, this case is similar to Bielagus, a case in which the
purchaser bought and continued operations of the seller’s residential real
estate business, the trial court ruled that the sale did not amount to a de facto
merger, id. at 638-39, and we upheld that determination, id. at 644.

      Celestica also asserts that the trial court erred by determining that it
would have constituted waste if CAC had not carried on Whaleback’s business
operations, a consideration that Celestica maintains is “irrelevant” to the de
facto merger doctrine. We disagree. As we observed in Bielagus, “[i]nherent in
an asset transfer is the purchaser’s right to operate in the business to which
the assets are suited . . . . Corporations purchase assets in order to use them;
to do otherwise would constitute waste.” Id. at 642 (quotation omitted). We
are not persuaded that the trial court erred in considering whether waste
would have resulted if CAC had not carried on Whaleback’s business



                                         8
operations or in assigning minimal weight to this factor in its Bielagus
analysis.

      D. Assumption of Seller Corporation’s Obligations

      The fourth Bielagus factor is whether “[t]he purchasing corporation
assumes those obligations of the seller ordinarily necessary for the
uninterrupted continuation of normal business operations of the seller
corporation.” Id. Celestica argues that the “trial court misapplied this de facto
merger factor, concluding that there [was] no successor liability because [CAC]
assumed only critical business liabilities of . . . Whaleback.” Once again, we
disagree with Celestica’s reading of the trial court order.

        The trial court found that CAC assumed only those liabilities that it
deemed necessary to ensure continued operation of the company. It
specifically observed that CAC “did not blindly assume [Whaleback’s]
liabilities,” but “agreed only to maintain those obligations which were crucial to
preserve the company’s good will and continued customers.” Importantly, the
trial court noted that, “[h]ad CAC assumed liability for some non-essential
debts, such as those to the insiders, this factor would weigh heavily in favor of
[a] finding of successor liability.” Here, the trial court reasonably concluded
that, because it had found that Castile and Egan “lost millions of dollars in
secured debt” — as had other investors — the assumption of only critical
business liabilities was not a factor weighing in favor of finding successor
liability. Thus, the trial court’s analysis was more detailed and nuanced than
Celestica contends: the trial court did not rule that, simply because CAC
assumed only the liabilities necessary to continue Whaleback’s operations,
successor liability should not be imposed. We are not persuaded that the trial
court erred in its analysis of this factor.

      E. Other Factors

       Finally, in Bielagus, we stated that, in addition to the four enumerated
factors, the “fact-finder may look to other factors indicative of commonality or
distinctiveness with the corporations.” Id. at 641. Here, the trial court
considered the circumstances of the foreclosure sale itself, and concluded that
CAC’s purchase was the product of arms-length negotiations which resulted in
adequate consideration being paid for the assets. Celestica argues that
considerations such as adequacy of consideration and absence of collusion
between Horizon and CAC were improperly considered by the trial court and
are irrelevant to the de facto merger inquiry. We disagree.

      “A primary purpose of the de facto merger exception is to protect
dissenting shareholders or creditors from a transaction that is a ploy to avoid
the seller’s liabilities.” Devine & Devine Food v. Wampler Foods, 313 F.3d 616,



                                        9
619 n.3 (1st Cir. 2002). “Courts commonly appeal to this doctrine where the
asset transfer in question was neither an arms-length bargain nor supported
by adequate consideration.” Id. (emphasis added); see also Bielagus, 149 N.H.
at 643 (stating that continuity of ownership is an important factor given its
tendency to demonstrate that “an asset sale is not actually a bona fide
business transaction”).

        Here, the trial court determined that the asset sale was bona fide and
that “this circumstance weighs in favor of the finding that there is no successor
liability.” The trial court found that “Horizon’s lawyer testified credibly that he
negotiated at arms-length with CAC’s lawyers and Horizon’s only interest was
in minimizing its losses.” To that end, the primary secured lender, Horizon,
which had the undisputed right to foreclose and sell Whaleback’s assets, held a
widely advertised public auction, at which Celestica could have bid. Also,
Horizon required a starting auction bid of $600,000, an increase of $100,000
from the original proposal by Castile and Egan to buy Whaleback’s assets. The
trial court noted that, given the amount of Whaleback’s secured debt, if
Whaleback’s business had been liquidated, Celestica, as an unsecured
judgment creditor, would not have received any money. We are not persuaded
that the trial court erred when it found that the circumstances surrounding the
foreclosure sale supported its conclusion that there was no de facto merger.

        Finally, Celestica argues that the trial court “[c]onflated” the de facto
merger doctrine with the successor liability doctrines of fraud and “mere
continuation.” We disagree. In fact, as courts in other jurisdictions have
observed, there is a substantial overlap between the doctrines giving rise to
successor liability. See, e.g., National Gypsum Co. v. Continental Brands
Corp., 895 F. Supp. 328, 336 (D. Mass. 1995) (referring to “de facto merger”
and “mere continuation” as “[s]light variations on the theme of fraudulent
conveyance” and stating “[w]hile these two labels have been enshrined
separately in the canonical list of exceptions to the general rule of no successor
liability, they appear, in practice to refer to the same concept and courts have
often used the two terms interchangeably” (citation omitted)); Cargo Partner AG
v. Albatrans, Inc., 352 F.3d 41, 45 n.3 (2d Cir. 2003) (“Some courts have
observed that the mere-continuation and de-facto-merger doctrines are so
similar that they may be considered a single exception.”). Accordingly, we
conclude that the trial court did not err in its analysis or application of the
doctrines that give rise to successor liability.

IV. Conclusion

       Accordingly, we hold that there is ample support for the trial court’s
conclusion that CAC is not merely Whaleback “reincarnated as a different
entity,” and that the trial court sustainably exercised its discretion when it




                                        10
refused to impose successor liability on CAC and denied Celestica’s request for
declaratory relief.

                                                       Affirmed.

      DALIANIS, C.J., and HICKS, CONBOY, and LYNN, JJ., concurred.




                                      11
