07-000374 Naples Fertilizer And Garden Center Partnership vs. Smallwood Design Group/Smallwood Landscape, Inc., And Hartford Fire Insurance Company, As Surety Status: Closed Recommended Order on Wednesday, August 15, 2007.

Summary: Respondent purchased agricultural products after selling its assets to another corporation and owes $12, 817.17 to the seller; and surety must pay any deficiency.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

NAPLES FERTILIZER AND GARDEN )

CENTER PARTNERSHIP, )

)

Petitioner, )

)

vs. ) Case No. 07 - 0374

)

SMALLWOOD DESIGN )

GROUP/SMALLWOOD LANDSCAPE, )

INC., AND HARTFORD FIRE )

INSURANCE COMPANY, AS SURETY, )

)

Respondents. )

)

RECOMMENDED ORDER

The A dministrative L aw J udge (ALJ) assigned to this case by

the Division of Administrative Hearings (DOAH) conducted the

final hearing on June 14, 2007, in Naples, Florida .

APPEARANCES

For Petitioner: Darrin M. Phillips , Esquire

Darrin M. Phillips, P.A.

350 Fifth Avenue South, Suite 200

N aples , Florida 3 4102

For Respondent s: (No Appearance)

S TATEMENT OF THE ISSU ES

The issue s pr esented are whether Respondent, Smallwood

Design Group/Smallwood Landscape, Inc. (Smallwood or the

company ), owes Petitioner $12,817.17 for agricultural products

and, if so, whether the surety is liab le for any deficienc y .

PRELIMINARY STATEMENT

On November 6, 200 6 , Petitioner filed an Amended

Agricultural Products Dealer Complaint (Complaint) with the

Department of Agriculture and Consumer Services ( Department ) .

T he Department referred the matter to DOAH to conduct an

administrative he aring .

Neither of the r espondents appeared at the hearing.

Petitioner presented the testimony of one witness and submitted

six exhibits for admission into evidence. The identity of the

witness and exh ibits and any attendant rulings are set forth in

the Transcript of the hearing filed on June 29, 2007.

Petitioner timely filed its P roposed R ecommended O rder

(PRO) on July 3, 2007. Smallwood did not file a PRO.

Respondent, Hartford Fire Insurance Company , filed a letter on

July 11, 2007, which the ALJ deems to b e a PRO filed more than

ten days after the date the Transcript was filed with DOAH .

FINDINGS OF FACT

1. Petitioner is a Florida corporation licensed by the

Department as a “ dealer in agricultural products , ” within the

meaning of S ubsection 604.15(2), Florida Statutes (2006)

(agricultural dealer). 1 The license number and business address

of Petitioner are 68954 and 3930 14 th Street North, Naples,

Florida 34103.

2. Smallwood is a Florida corporation licensed by the

Department as a n agricultural dealer pursuant to l icense

number 68513. The sole shareholder and registered agent for

Smallwood is Ms. JoAnn Smallwood . The business address for

Smallwood is 2010 Orange Blossom Drive, Naples, Florida 34109.

3. Hartford Fire Insurance Company (Hartford) is the

surety for Smallwood pursuant to bond number 21BSBCI1473 issued

in the amount of $100,000 (the bond) . The term of the bond is

December 9, 2005, thr ough December 9, 200 6 .

4. Petitioner conducts a garden center business that, in

relevant part, sells agricultural products, d efined in

Subsectio n 604.15(1). Petitioner sells products at wholesale

and retail to businesses and consumers in the Naples area.

5. Smallwood purchased agricultural products from

Petitioner f rom 1983 until s ometime in 2006 . The purchases were

made in the ordinary course of Smallwood's architect ural

landscape construction and horticultural management business

(landscape business) .

6 . The terms of purchase required payment from Smallwood

within 30 days. Any monthly balance that remained unpaid after

45 days was subject to int erest at a monthly rate of 1.5 percent

and an annual rate of 18 percent . 2 With one exception, Smallwood

paid Petitioner within 60 days of delivery.

7 . The exception to Smallwood's pay ment history with

Petitioner is the subject of this proceeding. From May 11

through September 26, 2006, Smallwood did not pay Petitioner

$12,817.17 for 66 invoices involving 440 items ( pallets or

pieces ) of sod that Petitioner delivered to Smallwood . 3 Th e sod

consisted of varieties id entified in the record as: Flora tam,

Seville, Zoysi a, Croton, and Fountain Grass. 4

8 . Smallwood does not deny t hat Petitioner should be paid

$12 ,817.17 . However , Smallwood alleges that Petitioner has

filed its claim again st the wrong party.

9. Smallwood alleges that , on June 13, 2006, another

corporation purchased the assets of Smallwood , including the

right to conduct the la ndscape business in the name of

Smallwood , and assumed Smallwood's liability to Petitioner for

an y prior purchases . S ubsequent purchases are allegedly the

obligation of the successor corporation .

10 . Ms. Smallwood filed a Response to Amended Claim wit h

the Department on January 7, 2007 (the Response) . The Response

identifies the successor corp oration as S partan Partners, Inc. ,

an Illinois corporation , located at 350 Pfingsten Road,

Suite 109, Northbrook, Illinois 60062 (Spartan), and alleges

that Petitioner’s claim is not valid because:

[Smallwood] sold its assets and has not been

engaged in b usiness since June 13, 2006.

Specifically, pursuant to an Asset Purchase

Agreement, [Smallwood] sold its assets

(including its name) to Spartan . . . , and

thereafter, Spartan continued operating the

business for a period of time and then sold

some of the assets and ceased operations.

(emphasis supplied)

Smallwood . . . does not have knowledge of

the accounts of Spartan, which continued

doing business under the Smallwood name

after the sale of assets on June 13, 2006.

If items purchased from [Petitioner] have

not been paid for, Spartan is the

responsible and liable party. (emphasis

supplied)

11 . The Response filed in January of 2007 was not the

first time Petitioner had seen the Smallwood defense. Smallwood

sent Petitioner a form letter , dated Septembe r 14, 2006 , that :

contained a salutation addressing “All Vendors of [Smallwood] , ”

referenced the "Termination of Credit Arrangements and

Guaran ties , " and was signed by Ms. Smallwood on behalf of

Smallwood (notice letter). The notice letter provided i n

rel evant part :

The purpose of this letter is to advise you

that the assets of [Smallwood], including

the company name, were sold to Spartan . . .

as of June 13, 2006. Since [Smallwood] sold

all of its assets, that corporate entity is

no longer actively engag ed in any business .

The business known as [Smallwood] is now

conducted by [Spartan]. . . . (emphasis

supplied)

As a result of the sale of assets and the

fact that [Smallwood] is no longer actively

engaged in business , the relationship or

agreement you ha d with that particular

corporate entity is hereby terminated and of

no further force and effect. If you are

continuing to do business with [Spartan],

you should, if you have not done so already,

make or confirm your business arrangements

with that entity. Furthermore, if I signed

any document that could be construed as a

personal guaranty of payment for any

obligations of [Smallwood], please consider

this letter to be a formal revocation,

cancellation and termination of any such

document. (emphasis suppl ied)

Petitioner's Exhibit 3 (P - 3).

12 . Part of the Smallwood defense is supported by the

evidence. Smallwood did sell its assets to Spartan .

13 . The Asset Purchase Agr eement between Smallwood and

Spartan was admitted into evidence as Petitioner’s Ex hibit 2

(P - 2). The Agreement shows that Spartan purchased the assets of

Smallwood on June 13, 2006, for $1.030 million , of which

$883,602.11 was allocated to accounts receivable due the seller.

14 . The seller is identified in the Asset Purchase

Agreemen t as Ms. Smallwood and the company. The seller received

$895,500.00 in cash at the closing .

15 . The remaining part of the Smallwood defense involves

two allegations. First, Smallwood alleges t hat Spartan assumed

a liability of $3,834.43 for 23 purchase s of sod by Smallwood

from May 11 through June 13, 2006. Second, Smallwood alleges

that Spartan owes Petitioner $8,982.74 for 43 purchases of sod

from June 14 through September 26, 2006.

16 . If the evidence were to support both allegations, the

result ma y effectively dep rive Petitioner of an administrative

remedy. The corporate documents attached to the Asset Purchase

Agreement do not show that Spartan complied with the bond and

license requirements in Subsection 604.19 prior to conducting

the landscape business in th e name of Smallwood. Spartan sold

the assets needed to satisfy a judgment against Spartan, Spartan

is a foreign corporation , and Spartan no longer conducts the

landscape business in Florida.

17 . I t would be unnecessary to determine whether Smallwood

or Spartan is liable for the $12,817.17 if: the ter ms of the

bond were to allow an assign ment of the bond to Spartan , and the

Asset Purchase Agreement were to show that the bond was one of

the contracts assigned to Spartan or one of the assets p urchased

by Spartan. The bond would cover both Smallwood and Spartan in

such a case, and a determination of which shell hid the

proverbial pea would be moot .

18 . A copy of the bond did not find its way into the

record . Petitioner did not submit a copy o f the bond for

admission into evidence , a nd the Department did not transmit a

copy of the bond when the agency referred the matter to DOAH.

The copy of the Asset Purchase Agreement admitted into evidence

does not include a schedule of the contracts assign ed to Spartan

or a schedule of the assets sold to Spartan.

19 . A finding that Spartan expressly assume d Smallwood's

liability to pay Peti tioner $3,834.43 for sod deliver ed from

May 11 through June 13, 2006 , is not supported by the evidence .

In relevant part, the Asset Purchase Agreement provides:

At Closing, Purchaser shall assume those

liabilities of Company specifically defined

and listed on the Schedule 1.6(b) attached

hereto (“Assumed Liabilities”), and

Purchaser shall not assume, incur,

guarantee, o r be otherwise obligated with

respect to any liability whatsoever of

Company other than as so stated. . . .

(emphasis not supplied)

Purchaser shall cause Stockholder

[Ms. Smallwood] to be released as guarantor

or obligor under the . . . Assumed

Liabilitie s. . . .

P - 2 at 2.

20 . Sc h edule 1.6(b) is missing from t he copy of the A sset

Purchase Agreement that was admitted in to evidence . Even if a

complete exhibit were to show that Spartan assumed Smallwood's

liability to Petitioner , neither of the responden ts submitted

evidence or cited legal authority to support a finding t hat such

an assumption release d Smallwood from its obligation to

Petitioner or otherwise extinguished that obligation . Nor is

there any evidence t hat Petitioner acquiesced in an assumpti on

by Spartan or other wise rel eased Smallwood from the obligation

to p ay Petitioner for sod delivered prior to June 13, 2006.

21 . The remaining allegation in the Smallwood defense is

that Spartan, rathe r than Smallwood, purchased the sod

Petitioner deliv ered between June 13 and September 26, 2006 . It

allegedly is Spartan that owes Petitioner $8,982.74 .

22 . The remaining allegation implicitly argues that , after

June 13, 2006, Smallwood was no longer a viable corporation with

the legal capacity to purch ase sod from Petitioner b ecause t he

asset sale resulted in wha t courts describe as a “de facto

merger” of Smallwood into Spartan or a “mere contin uation of

business” by Spartan. The law pertaining to these two doctrines

is discussed in the Conclusions of Law, but certain factual

findings are relevant to both doctrines.

23 . T he Smallwood defense is a mutation o f the do ctrines

of "de facto merger" and "mere continuation of business , " either

of which have be en utilized by courts to hold a successor

corporati on liable for the obligations of the corporate

predecessor. The Smallwood defense takes the relevant judicial

doctrines a step further. The defense implicitly assumes that

if a "de facto merger" or "mere continuation of business"

occurred as a result of the asset sale, Smallwood "merged" into

Sparta n , and Smallwood was no longer a viable corporate entity

with the legal capacity to purchase sod from Petitioner.

24 . Two facts preclude the application of either judicial

doctrine to the sale of Smallwood 's assets . First, there is no

commonality or continuity of ownership interests between

Smallwood and Spartan. Spartan did not acquire some or all of

the stock of Smallwood, and Ms. Smallwood did not become a

shareholder in Spartan. The two corporations do not share

common directors or officers.

25 . The second fact involves the purchase price paid for

the Smallwood assets . The purchase price does not suggest a

c ozy relationship betwe en Smallwood and Spartan that otherwise

may have persuade d a court to dis regard the separate corporate

existence of Smallwood after the asset - sale . No evidence

suggests that the price paid was not the fair market value of

the Smallwood assets negotiated at arm s length between a willing

buyer and a willing seller.

26 . Smallw ood remained in existence as a viable Florida

corporation after the asset - sale on June 13, 2006 . No legal

impediment prevented Smallwood from purchasing sod from

Peti tioner, and Smallwood had the legal capacity to do so. The

p urchases may have breached t he terms of the Asset Pu rchase

Agreement , but the legal capacity of Smallwood to purchase sod

from Petitioner i s not driven by contractual arrangements

between Smallwood and private third parties .

27 . Smallwood remained in existence as a Florida

corporati on at least through January 7, 2007, when Ms. Smallwood

filed the Response with the Department. T he Response does not

allege as a fac tual matter that Smallwood had been liquidated

and was no longer in existence as a Florida corporation ; or that

the $895,5 00 the seller received for the sale of assets was no t

in corporate solution and available to pay invoices submitted by

Petitioner . The Response merely state s that Smallwood was not

actively engaged in the conduct of business .

28 . Smal lwood was actively engage d in the landscape

business after June 13, 20 06. Smallwood maintained its

customary banking account ; continue d t o issue checks imprinted

with the company name; paid Petitioner for goods that Petitioner

delivered to Smallwood before May 11, 2006 ; ac cepted without

objection or disclaimer 43 invoices totaling $8,982.74 that were

billed t o the company for sod delivered to the company at the

company's business address ; issued the notice letter to its

creditors ; and purported to terminate credit agreement s and

guarantees .

29 . Prior to receiving the notice letter, Petitioner had

no reason to believe that Smallwood was not conducting the

landscape business . The fac e of Smallwood remained unchanged .

30 . Ms. Smallwood continued to operate the landscape

business pursuant to a long - term employment contract with

Spartan. Spartan signed Mr. Keith Whipple, another key employee

of Smallwood, to a similar contract. Copies of the employment

contract s are attached to the Asset Purchase Agreement . 5

31 . Betwe en June 13 and September 14, 2006, Ms. Smallwood

continued to sign Smallwood checks imprinted with the company

name and issued on the Sm allwood business account .

Ms. Smallwood signed the checks as the authoriz ed representative

of Smallwood. Smallwood ac cept ed 35 invoices issued to the

company for $7,007 .13 and deliveries of the sod at the company's

customary business address .

32 . The notice letter was dated September 14, 2006, but

Petitioner received the letter on or about September 26, 2006 .

Between Se ptember 14 and 26, 2006, Smallwood accepted eight

invoices for sod purchased for $1,975.61 .

33 . The evidence does not show when Smallwood actually

mailed the notice letter , and Petitioner did not stamp the

notice letter with the date it was received. Th e c hief

o perating of ficer for Petitioner testified at the hearing but

does not recall the date Petitioner actually received the notice

letter. However, the witness testified that Petitioner stopped

all sales to Smallwood immediately upon receipt of the no tice

letter to allow time for Petitioner to complete a credi t check

of Spartan . Th e trier of fact finds the relevant testimony to

be credible and persuasive .

34 . The failure to timely disclose the identity of Spartan

as a successor entity operating in t he name of Smallwood misled

Petitioner, if not other creditors. 6 Between June 13 and

September 26, 2006, Petitioner extended credit for purchases of

$8,982.74 before Petitioner had the opportunity to ensure the

credit worthiness of Spartan and, if desired , to obtain a

written guarantee from the individual offi cers and shareholders . 7

35 . Smallwood, rather than Spartan, purchased sod from

Petitioner from May 11 through September 26, 2006. Smallwood

owes Petitioner $12,817.17.

36 . Hartford does not claim that the terms of the bond do

not ensure payment of the purchases made by Smallwood.

Hartford ’s sole objection in its PRO is that the bond proceeds

must be paid directly to the Department rather than to

Petitioner. Hartford correctly cites Subsection 60 4.21(8) in

support of its objection.

CONCLUSIONS OF LAW

37 . DOAH has jurisdiction over the parties to and the

subject matter of this proceeding . §§ 120.569 and 1 20.57(1) .

DOAH provided the parties with adequa te notice of the hearing.

Neither of the res pondents appeared at the hearing.

38 . The burden of proof is on Petitioner. Florida

Department of Transportation v. J.W.C. Company, Inc. , 396 So. 2d

778 (Fla. 2d DCA 1981). Petitioner must show by a preponderance

of the evidence that Petitioner is en titled to the remedy

c laimed in the Complaint.

39 . Petitioner satisfied its burden of proof. Prior to

receiving the notice letter from Smallwood , Petitioner sold sod

to Smallwood in 66 transactions for an aggreg ate sales price of

$12,817.25. Smallwood has not paid any of the amount due . It

is undisputed that t he terms of the bond ensure payment of

purchases by Smallwood .

40 . The Smallwood defense is a twist of the judicial

doctrines of "de facto merger" and "mere continuation of

business , " which court s have utilized to hold successor

corporations liable for the obligations of the corporate

predec e ssor. The defense implicitly assumes that if a "de facto

merger" or "mere continuation of business" occurred on June 13,

2006, Smallwood did not have the leg al capacity to purchase sod

from Petitioner after the "merger . "

41 . Two methods are generally used to acquire corporate

assets . In one method, the acquiring corporation purchases the

stock of the predecessor and, as the new shareholder, succeeds

to the o wnership of the assets of the acquired corporation

(stock acquisition) . In the other method, the predecessor sells

its assets to the acquiring corporation, but the shareholders of

the prede cessor retain their stock, and the predecessor remains

a viable co rporate entity until liquidation (asset acquisition) .

42 . A successo r corporation in a stock acquisition is

subject to the liabilities of the acquired corporation. A

successor corporation in an asset acquisition generally is not

subject to the liabiliti es of the selling corporation. Compare

Corporate Express Office Products, Inv. V. Phillips , 847 So. 2d

406, 412 (Fla. 2003) (successor in a stock acquisition entitled

to enforce non - compete agreements of employees of predecessor) ,

and The Celotex Corporat ion v. Pickett , 490 So. 2d 35, 38

(Fla. 1986) (imposing liability for punitive dam ages on

successor corporation after corporate merger) , with Bernard v.

Kee Manufacturing Company, Inc. , 409 So. 2d 1047, 1049 - 1050

(Fla. 1982) (refusing to impose products l ia bility on successor

after asset acquisition).

43 . Spartan acquired the assets of Smallwood through an

asset acquisition. In such cases, Florida courts generally do

not impose the liabilities of the selling predecessor upon the

buying successor unless : the successor cor poration assumes the

obligations of the predecessor; the transaction is a "de facto

merger , " the successor is a "mere continuation of business" of

the predecessor , or the transaction is a fraudul ent effort to

avoid liabilities . Bernard , 409 So. 2d at 1049; Orlando Light

Bulb Services, Inc. v. Laser Lighting and Electrical Supply,

Inc. , 523 So. 2d 740, 742 (Fla. 5th DCA 1988).

44 . The evidence is insufficient to show that Spartan

expressly or impliedly assumed the liabilities of Smallwoo d.

No allegation is made that the asset acquisition was a

fraudulent effort to avoid the liabilities of Smallwood.

45 . The judicial doctrines of "de facto merger" and "mere

continuation" are distinct concepts. Munim v. Azar , 648 So. 2d

145, 153 (Fla. 4th DCA 1994) . However, a prerequisite for the

application of either doctrine is a common identity of officer s ,

directors, and shareholders. Serchay v. NTS Fort Lauderdale

Office Joint Venture , 707 So. 2d 958, 960 (Fla. 4th DCA 1998);

300 Pine Island As sociates, LTD. v. Cohen & Associates, P.A. ,

547 So. 2d 255, 256 (Fla. 4th DCA 1989). Smallwood fails the

"com monality of interests" test bas ed on previous findings .

46 . O ther factors may indicat e a commonality of interests

between a predec essor and su ccessor corporation . Orlando Light

Bulb , 523 So. 2d at 743 n.1; 300 Pine Island , 547 So. 2d at 256.

One issue courts have examined is whether the successor

corporation paid fair market value for the assets of the

predecessor . Krogen Express Yachts, LLC v. Nobili , 947 So. 2d

581, 584 (Fla. 4th DCA 2007); Jacksonville Bulls Football, LTD.

v. Blatt , 535 So. 2d 626, 629 (Fla. 3d DCA 1988). Smallwood

fails the "fair market value" test based on previous findings.

47 . An owner of property generally has the r ight to

dispose of property as the owner sees fit. However, no transfer

may be made which prejudices the rights of existing creditors.

Jacksonville Bulls Football , 535 So. 2d at 629.

4 8 . Smallwood sold i ts property to Spartan without

disclosing the s ale for approximately 105 days. Between the

dates of sale and disclosure, Petitioner e xtended $12,817.17 in

credit to Smallwood , and Smallwood owes Petitioner that amount.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that the Department enter a final order

directing Smallwood to pay $1 2,81 7. 17 to Petitioner, and, in

accordance with Subsection 604.21(8), requiring Hartford to pay

over to the Department any amount not paid by Smallwood .

DONE AND ENTERED t his 15th day of August, 2007 , in

Tallahassee, Leon County, Florida.

S

DANIEL MANRY

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

( 850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 15th day of August , 2007 .

ENDNOTES

1/ All subsection, section, and chapter references are to

Florida S tatutes (2006) unless otherwise stated.

2/ The 45 - day period is calculated from the terms of the

invoices in evidence. The invoices provide that a monthly

finance charge of 1.5 percent is charged after 30 days if the

invoice is not paid by the 15th of t he month following the 30 -

day due date.

3/ The total of $12,817.17 is the sum of the amounts alleged in

paragraphs 2 through 4 of Petitioner’s PRO. The sum of the

amounts alleged in paragraphs 2 through 4 is less than the total

of $12,817.25 alleged in paragraph 5 of Petitioner’s PRO and

less than the total of $12,867.25 alleged in the Complaint.

4/ The invoices in evidence show that the unpaid claim is for

sod. The invoices do not include a charge for pallets or crates

used to deliver the sod.

5/ T he initial terms of employment are subject to automatic

renewal.

6/ The evidence is not sufficient to support a finding that

Smallwood intentionally misled Petitioner or other creditors.

Nor is such a finding required to resolve the matters at issue

in this proceeding.

7/ The evidence does not include a written guarantee signed by

Ms. Smallwood.

COPIES FURNISHED :

Edward K. Cheffy, Esquire

Cheffy Passidomo Wilson & Johnson

821 Fifth Avenue South, Suite 201

Naples, Florida 34102

Christopher E. Green , Chief

Bureau of License and Bond

Division of Marketing

Department of Agriculture and

Consumer Services

407 South Calhoun Street, MS 38

Tallahassee, Florida 32399 - 0800

Darrin M. Phillips, Esquire

Darrin M. Phillips, P.A.

350 Fifth Avenue South, Suite 200

Naples, Florida 34102

Alberta L. Adams, Esquire

Mills, Paskert, Divers, P.A.

100 North Tampa Street, Suite 2010

Tampa, Florida 33602

Richard Ditschler, General Counsel

Department of Agriculture and

Consumer Services

407 South Calhoun Street, Suite 520

Tallahassee, Florida 32399 - 0800

Honorable Charles H. Bronson

Commissioner of Agriculture

Department of Agriculture and

Consumer Services

The Capitol, Plaza Level 10

Tallahassee, Florida 32399 - 0810

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.