United States v. Adaptive Microsystems, LLC

Slip Op. 13- 50

UNITED STATES COURT OF INTERNATIONAL TRADE

Before: Nicholas Tsoucalas, Senior Judge
___________________________________
UNITED STATES, :
:
Plaintiff, :
:
v. : Court No.: 12-00122
:
ADAPTIVE MICROSYSTEMS, LLC, AMS :
CHAPTER 128, LLC, and AMS HOLDINGS :
CHAPTER 128, INC., :
:
Defendants. :
:

OPINION and ORDER
Held: Defendant Adaptive MicroSystems, LLC’s motion for summary
judgment is granted in part and denied in part. Defendant’s motion
for sanctions is denied.
Dated: April 10, 2013
Stuart F. Delery, Principal Deputy Assistant Attorney General;
Jeanne E. Davidson, Director, Patricia M. McCarthy, Assistant
Director, Civil Division, United States Department of Justice,
(Daniel B. Volk, J. Hunter Bennett, Nelson Ryan Richards); Brian M.
Holt, Of Counsel, Office of the Associate Chief Counsel, United
States Customs and Border Protection, for the United States,
Plaintiff.
Reinhart Boerner Van Deuren, s.c., (David G. Peterson) for
Adaptive MicroSystems, LLC, Defendant.

TSOUCALAS, Senior Judge: Defendant Adaptive MicroSystems, LLC

(“New AMS”) moves for summary judgment pursuant to USCIT Rule 56 on

plaintiff United States Department of Homeland Security, Customs

and Border Protection’s (“Customs”) claim for unpaid import duties

and penalties under sections 592(c) and (d) of the Tariff Act of

1930, as amended, 19 U.S.C. §§ 1592(c), (d) (2006). New AMS’s Mem.
Court No. 12-00122 Page 2

Supp. Mot. Summ. J. 2 (“New AMS’s Mem.”). New AMS also moves to

impose sanctions under USCIT Rule 11, alleging Customs acted

unreasonably in filing and continuing to pursue this action. New

AMS’s Mem. Supp. Mot. Sanctions 4 (“New AMS’s Sanctions Mem.”).

Customs opposes both motions, and no other party joins in the

motions or opposition.

BACKGROUND

New AMS seeks summary judgment on Customs’s allegation that it

is responsible for the debts of a now-defunct Wisconsin company

named Adaptive MicroSystems, LLC (“Old AMS”). Customs avers that

Old AMS intentionally or negligently misclassified imports of light

emitting diode display panels and related components (“LED panels”)

from Malaysia under duty-free tarriff headings from July 2005 until

April 2010. Pl.’s Compl. 2 & Ex. A; see Answer of Michael S.

Polsky to Pl.’s Compl. 3. During all or some of that time, Thomas

Mandler (“Mr. Mandler”) owned a 15.8% share of another Wisconsin

company called Adaptive MicroSystems Holdings, Inc. (“Old AMS

Holdings”), which in turn owned 95% of Old AMS. Thums Aff. 1st Ex.

6 at 2, 5. Mr. Mandler was also an Old AMS officer during that

period, serving as its executive vice president. Thums Aff. 2d at

2.

On April 20, 2011, US Bank National Association (“US Bank”)

initiated a receivership action against Old AMS and Old AMS
Court No. 12-00122 Page 3

Holdings pursuant to Chapter 128 of the Wisconsin Statutes.1

Complaint, US Bank Nat’l Assoc. v. AMS Chapter 128 LLC,

2011CV005894 (Wis. Cir. Ct. Milwaukee Cnty. Apr. 20, 2011). The

Milwaukee County Circuit Court (the “Milwaukee Court”) appointed

Michael S. Polsky (“the Receiver”) as the receiver for Old AMS and

Old AMS Holdings six days later. Thums Aff. 2d Ex. 1 at 1–2.

Customs acknowledges that the Receiver provided notice of his

appointment and the existence of the receivership action on May 5,

2011. Pl.’s Resp. New AMS’s Mem. Ex. A at 1 (“Pl.’s Resp.”).

Customs chose not intervene in the receivership action due to

its priority creditor status under 31 U.S.C. § 3713, see Pl.’s

Resp. Ex. A at 2, leaving US Bank as the creditor with highest

priority among those participating. Thums Aff. 2d Ex. 1 at 2. On

June 9, 2011 — more than one month after Old AMS entered

receivership — Customs issued a pre-penalty notice of unpaid duties

to Old AMS describing the same alleged misconduct at issue in this

suit. Pl.’s Resp. Ex. A at 1. Having apparently received no

response from Old AMS, Old AMS Holdings, or the Receiver, Customs

issued a penalty notice on July 27, 2011 demanding payment of

outstanding duties and penalties totaling about $6.8 million. Id.

at 1–2.

At the Milwaukee Court’s direction, the Receiver conducted an

1
New AMS describes receivership under Chapter 128 as “the
Wisconsin State functional equivalent of a federal Chapter 7
bankruptcy.” New AMS’s Mem. at 2.
Court No. 12-00122 Page 4

auction on August 2, 2011 in an attempt to sell Old AMS’s assets.

Thums Aff. 2d Ex. 1 at 2. The auction produced three bids

inconsistent with the auction terms and no bids at or above the

estimated liquidation value of the assets. Id. US Bank refused to

consent to any of the bids, leading the Receiver to decline

acceptance of each. Id.

On August 9, 2011, the Receiver entered into a purchase

agreement with a Wisconsin company named AMS Acquisition, LLC (“AMS

Acquisition”), id. at 2–3, whereby AMS Acquisition would “operate

the business of [Old AMS] and its affiliates.” Id. Ex. 3 at § 1.1.

The court-approved sale transferred most of Old AMS’s assets2 to

AMS Acquisition at a price above their estimated liquidation value.

Id. Ex. 1 at 2–3. The deal also required AMS Acquisition to hire

a substantial number of Old AMS’s employees in their old positions,

including the appointment of Mr. Mandler as executive vice

president. Thums Aff. 1st Ex. 3 at 10. The record is unclear as

to whether any officers besides Mr. Mandler retained their

positions. See id.; Thums Aff. 2d Ex. 3 at §§ 6.9(a), (g).

The Milwaukee Court described the sale as “the product of good

2
AMS Acquisition purchased all of Old AMS’s tangible and
intangible property except: stock in Thai and German subsidiaries,
cash, potential legal claims, insurance policies, leased equipment,
and certain real estate holdings in Wisconsin. Thums Aff. 1st Ex.
3 at 3; Thums Aff. 2d Ex. 1 at 2–3. AMS Acquisition also agreed to
rent Old AMS’s office space in Milwaukee, Thums Aff. 1st Ex. 3 at
4–5, which New AMS thereafter bought in a court-approved sale on
September 20, 2012. Thums Aff. 2d at Ex. 2.
Court No. 12-00122 Page 5

faith negotiations at arm’s length and without collusion.” Thums

Aff. 2d Ex. 1 at 3. However, the Milwaukee Court did not address

Customs’s potential claim in its order, providing no indication as

to whether it was aware of the penalty notice when it approved the

sale.3 See id. Exs. 1, 2. In this context, the court approved of

a provision exonerating AMS Acquisition from all liability,

“whether absolute or contingent, known or unknown” that may be

looming against Old AMS, and held specifically that the sale

transferred the assets “free and clear of all security interest,

liens, claims, encumbrances, or interests of any kind or nature.”

Id. Ex. 1 at 4 (emphasis and strikethrough omitted).

Old AMS, Old AMS Holdings, and AMS Acquisition all changed

their corporate names after completing the sale. Thums Aff. 1st at

1–2. Old AMS and Old AMS Holdings became AMS Chapter 128, LLC and

AMS Holdings Chapter 128, Inc., respectively, while AMS Acquisition

assumed the “Adaptive MicroSystems, LLC” trade name to become New

AMS. Id. New AMS is owned by a Wisconsin company named AMS

3
New AMS asserts that “the [Milwaukee Court] had all the
facts before it.” New AMS’s Mem. at 11. However, New AMS cites no
record evidence in support of this claim and the court is unable to
find any on its own. Neither the pre-penalty notice nor the
penalty notice appear on the Milwaukee Court docket, and there are
no entries showing conclusively that Customs’s potential claim was
raised at all in the receivership action. US Bank Nat’l Assoc.,
2011CV005894, Nos. 1–215. The docket does include one entry for a
“CONTINUED HEARING AS TO FEDERAL PRIORITY” after the sale on
September 22, 2011, but the entry contains no further specification
as to whether it refers to a potential United States government
claim, and if so, whether the claimant is Customs, the Internal
Revenue Service, or some other federal entity. Id. No. 146.
Court No. 12-00122 Page 6

Holdings, LLC, which at the time of the receivership sale had no

relationship whatsoever with Old AMS or Old AMS Holdings. Id. at

2–4.

After the sale, however, New AMS transferred 400 shares of

class B stock to Mr. Mandler, entitling him to 2% of New AMS’s

profits but no voting rights. Thums Aff. 2d Ex. 4 at 1–2. The

stock vests 100 shares at a time for each year Mr. Mandler remains

employed with New AMS, beginning on October 1, 2011. At present,

200 of Mr. Mandler’s 400 shares have vested. Id. at 5.

On May 3, 2012, Customs initiated the present action against

New AMS, Old AMS, and Old AMS Holdings, alleging that “[u]pon

information and belief, New [AMS] purchased some portion of Old

[AMS] out of receivership and is liable for Old [AMS]’s debts.”

Pl.’s Compl. 2. New AMS now moves for summary judgment and

sanctions, arguing that it “did not succeed to Old [AMS]’s alleged

liability for unpaid duties and penalties” and that “[t]he facts .

. . are undisputed as they relate to New [AMS]’s purchase of Old

[AMS]’s assets and non-assumption of liabilities.” New AMS’s Mem.

at 7; see New AMS’s Sanctions Mem. at 4. In response, Customs

insists that the facts demonstrate, “at the very least,” the

existence of a genuine issue of material fact as to whether New AMS

falls into one of the four common law exceptions to the Wisconsin
Court No. 12-00122 Page 7

general rule against successor liability.4 Pl.’s Resp. at 4–5.

JURISDICTION and STANDARD OF REVIEW

When reviewing a motion for summary judgment, “the Court

evaluates ‘the pleadings, the discovery and disclosure materials on

file, and any affidavits’ in order to determine whether there is

any ‘genuine issue as to any material fact’ and, if none exists,

whether the ‘movant is entitled to judgment as a matter of law.’”

United States v. Trek Leather, Inc., 35 CIT __, __, 781 F. Supp. 2d

1306, 1310 (2011) (quoting USCIT R. 56(c)); see Celotex Corp. v.

Catrett, 477 U.S. 317, 322–23 (1986). An issue of fact is material

“if it could affect the outcome of the suit under the governing

law.” Trek Leather, Inc., 35 CIT at __, 781 F. Supp. 2d at 1310

(citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).

“The non-moving party is ‘entitled to have both the evidence viewed

in the light most favorable to it and all doubts resolved in its

favor.’” Mazak Corp. v. United States, 33 CIT __, __, 659 F. Supp.

2d 1352, 1356 (2009) (quoting Guess? Inc. v. United States, 944

F.2d 855, 858 (Fed. Cir. 1991)).

ANALYSIS

I. Comity

As a preliminary matter, New AMS argues that the court “should

respect the Order from the Chapter 128 proceedings under the

4
The parties agree that Wisconsin substantive law governs the
successor liability issue.
Court No. 12-00122 Page 8

principle of comity.” New AMS’s Mem. at 7 n.5. New AMS is

presumably referring to the Milwaukee Court’s “conclusion[] of law”

that New AMS “shall not be liable for any of the Receiver’s, [Old

AMS Holdings]’s or [Old AMS]’s debts, liabilities or obligations,

except those expressly assumed” in the asset purchase agreement.

Thums Aff. 2d Ex. 1 at 4 (emphasis omitted).

“When there is parallel state and federal litigation . . .

[c]omity or abstention doctrines may, in various circumstances,

permit or require the federal court to stay or dismiss the federal

action in favor of the state-court litigation.” Exxon Mobil Corp.

v. Saudi Basic Indus. Corp., 544 U.S. 280, 281–82 (2005). Other

than cursory references to the interest of comity, New AMS does not

articulate any legal standard that counsels or obliges the court to

defer judgment in this matter. See New AMS’s Mem. at 7 n.5, 11;

New AMS’s Reply Supp. M. Summ. J. 7 (“New AMS’s Reply”).5 The

Milwaukee Court did not have an opportunity to consider the

transfer of New AMS shares to Mr. Mandler because the shares did

not change hands until after it issued the order. Thums Aff. 2d

Ex. 4 at 1–2. Furthermore, the Milwaukee Court apparently did not

consider any potential claim Customs may have held on the estate of

5
Without explanation, New AMS cites to one case with a
passing reference to comity in dicta. See New AMS’s Mem. at 7
n.5, 11 (citing Washington Int’l Ins. Co. v. United States, 25 CIT
207, 218, 138 F. Supp. 2d 1314, 1326 (2001)); New AMS’s Reply at 7
(citing Washington Int’l Ins. Co., 25 CIT at 218, 138 F. Supp. 2d
at 1326).
Court No. 12-00122 Page 9

Old AMS at the time of the sale. See id. at Exs. 1, 2; US Bank

Nat’l Assoc., 2011CV005894, at Nos. 1–215. Lastly, Customs was not

a party to the Milwaukee Court proceeding and therefore did not

have a full opportunity to be heard on the asset sale or any

successor liability issues.

As the court sees little reason to defer to a state court

judgment rendered before significant facts emerged and in the

absence of a party asserting a claim in this action, it declines to

rule in New AMS’s favor on the basis of comity alone.

II. Successor Liability

“In Wisconsin, the general rule is a corporation who purchases

the assets of another corporation does not succeed to the liability

of the selling corporation.”6 Compuware Corp. v. Innovatec

Commc’ns, LLC, No. 03-C-429, 2005 WL 2076717 at *14 (E.D. Wis. Aug.

24, 2005) (citing Columbia Propane, L.P. v. Wis. Gas Co., 661

N.W.2d 776, 784 (Wis. 2003)). “Important policies underlie the

general rule,” including consistency with “the fundamental

principle[s] of justice and fairness” and the promotion of “free

alienability of corporate assets.” Gallenberg Equip., Inc. v.

Agromac Intern., Inc., 10 F. Supp. 2d 1050, 1053 (E.D. Wis. 1998),

6
Although many of the entities involved here are limited
liability companies, not corporations, “the [successor liability]
rule and its exceptions are applicable[] irrespective of whether a
prior organization was a corporation or a different form of
business organization.” Tift v. Forage King Indus., Inc., 322
N.W.2d 14, 16 (Wis. 1982).
Court No. 12-00122 Page 10

aff’d, 191 F.3d 456 (7th Cir. 1999) (quoting Leannais v.

Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977)) (internal

quotation marks omitted). Nevertheless, there are four exceptions

to the general rule. A purchasing corporation succeeds to the

selling corporation’s liabilities (1) when the purchaser expressly

or impliedly agrees to assume the seller’s liability; (2) when the

transaction amounts to a consolidation or merger; (3) when the

purchaser is a “mere continuation” of the selling corporation; or

(4) when the transaction is a fraudulent attempt to escape

liability for such obligations. Id. Customs argues that summary

judgment is not proper as material issues remain as to the second

and third exceptions.7 Pl.’s Resp. at 4–5.

“Exceptions (2) and (3) are tests of identity under which the

substance and effect of business transformations are examined ‘to

determine whether the original organization continues to have life

or identity in a subsequent and existing organization . . . .’”

Parson v. Roper Whitney, Inc., 586 F. Supp. 1447, 1449 (W.D. Wis.

1984) (quoting Tift, 322 N.W.2d at 17). These exceptions target

business realities as they exist notwithstanding formalistic

differences between the buying and selling entities. See Leannais,

7
Because the parties have conducted minimal discovery at this
stage, the court recognizes that new facts may emerge later in the
action that present a triable issue of fact on these or other
matters. See Whitford v. Boglino, 63 F.3d 527, 530 (7th Cir. 1995)
(A “district court may, in its discretion, allow a party to renew
a previously denied summary judgment motion or file successive
motions, particularly if good reasons exist.”).
Court No. 12-00122 Page 11

565 F.2d at 439–40. “A court merely need determine that the

[buyer], despite business transformations, is substantially the

same as the original [entity].” Fish v. Amsted Indus., Inc., 376

N.W.2d 820, 824 (Wis. 1985) (quoting Tift, 322 N.W.2d at 17).

A. De Facto Merger

Customs does not dispute that the transfer at issue fails to

meet the traditional definitions of merger and consolidation.

Pl.’s Resp. at 5; see Leannais, 565 F.2d at 439–40 (defining merger

and consolidation). Instead, it argues that the present

circumstances give rise to an issue of material fact as to whether

the transaction “amounts to a merger.” Sedbrook v. Zimmerman

Design Group, Ltd., 526 N.W.2d 758, 760 (Wis. Ct. App. 1994)

(emphasis omitted); see Pl.’s Resp. at 5. New AMS counters that

the transaction did not amount to a merger because it acquired Old

AMS’s assets using cash rather than stock. New AMS’s Reply at 2.

Wisconsin courts employ a four-factor analysis to determine

whether a transaction is a “de facto merger” within the merger-

consolidation exception:

(1) the assets of the seller corporation are acquired
with shares of stock in the buyer corporation, resulting
in a continuity of shareholders; (2) the seller ceases
operations and dissolves soon after the sale; (3) the
buyer continues the enterprise of the seller corporation
so that there is a continuity of management, employees,
and business location, assets, and general business
operations; and (4) the buyer assumes those liabilities
of the seller necessary for the uninterrupted
continuation of normal business operations.

Smith v. Meadows Mills, Inc., 60 F. Supp. 2d 911, 917 (E.D. Wis.
Court No. 12-00122 Page 12

1999) (quoting Sedbrook, 526 N.W.2d at 760–61). Courts describe

the stock transfer factor as the “key” feature of a de facto

merger. Sedbrook, 526 N.W.2d at 760–62; see Leannais, 565 F.2d at

439–40 (“[A] ‘de facto merger’ may be found if the consideration

given by the [buyer] be shares of its own stock.”).

Customs argues that New AMS’s relationship to Old AMS is

sufficient to satisfy the stock transfer factor because, “although

New [AMS] purchased Old [AMS]’s assets with cash rather than shares

of stock,” it is undisputed “that there is at least some continuity

of shareholders.” Pl.’s Resp. at 6. Further, Customs asserts that

Wisconsin courts have only rejected the de facto merger exception

in cases where there was no shared ownership between buying and

selling corporations. Id. Customs also argues that there is no

legal authority explicitly stating that non-voting shares or a

delay in exchanging shares “are irrelevant for successor liability

purposes.” Id. at 7.

Courts interpreting Wisconsin law consistently refuse to apply

the de facto merger exception when no shares have changed hands,

regardless of the extent to which the other factors may be

satisfied. E.g., Smith, 60 F. Supp. 2d 911 (no de facto merger

despite substantial continuity of business operations between buyer

and seller because buyer paid in cash). Once some stock is

exchanged, however, Wisconsin law is less clear on how much the

second, third, and fourth factors may counterbalance an incomplete
Court No. 12-00122 Page 13

stock transfer. See Sedbrook, 526 N.W.2d at 762 & n.3 (transfer of

minority stock interest can be sufficient to establish the presence

of a de facto merger, depending on other factors); Schawk, Inc. v.

City Brewing Co., 662 N.W.2d 679, 2003 WL 1563767 at *4 (Wis. Ct.

App. 2003) (unpublished opinion noting that “not every factor need

be present”).

Even assuming Wisconsin law is as expansive as Customs

insists, the uncontroverted facts demonstrate that Mr. Mandler did

not receive his shares as consideration for the receivership sale.

See Restatement 2d of Contracts, § 71 (2012) (defining

consideration as a “bargained for” exchange). The sale of assets

in Chapter 128 receivership is an exchange between the assigned

receiver and the purchaser, see Wis. Stat. § 128.02(3)(b) (2013);

Thums Aff. 1st at Ex. 1, and there is no evidence to suggest that

the Receiver sought stock for Mr. Mandler’s personal portfolio as

a condition of sale. Indeed, New AMS president Dennis Thums states

that “there were no plans or agreements in place to allow [Mr.

Mandler] to become a shareholder” at the time of the asset

purchase. Thums Aff. 2d at 2. Customs acknowledges that Mr.

Mandler received his ownership stake six months after the Wisconsin

court approved the asset sale, Pl.’s Resp. at 7, indicating that

the stock exchange was unrelated to the negotiation of the deal

itself. Lastly, Customs does not present any evidence that

contravenes record evidence characterizing Mr. Mandler’s stock as
Court No. 12-00122 Page 14

a deferred employment package unrelated to the asset purchase. See

Thums Aff. 2d at 2.

Because the undisputed facts are insufficient as a matter of

law to support a conclusion that New AMS offered Mr. Mandler shares

in consideration to the Receiver for Old AMS’s assets, the de facto

merger exception cannot apply. Accordingly, New AMS’s motion for

summary judgment is granted with respect to the de facto merger

exception.

B. Mere Continuation

New AMS argues that it is “not a mere continuation of [Old

AMS]” because it has a somewhat different business model than Old

AMS, has a new president who was never affiliated with Old AMS, and

has a completely different set of directors and shareholders — the

only exception being Mr. Mandler, who acquired his shares six

months after the asset purchase agreement. New AMS’s Mem. at 8–9.

Customs, on the other hand, argues that New AMS is a mere

continuation of Old AMS because there is “significant overlap”

between the two companies, specifically in that New AMS hired

“substantially all” of Old AMS’s employees, continued operating

under a “similar business” model, and most importantly, retained

Mr. Mandler as both an owner and officer. Pl.’s Resp. at 11–12.

As these differences constitute a genuine issue of fact material to

whether New AMS can be considered a mere continuation of Old AMS,

New AMS’s motion must be denied insofar as it relates to this
Court No. 12-00122 Page 15

exception.

“The key element of a continuation is a common identity of the

officers, directors and stockholders in the selling and purchasing

corporations.” Parson, 586 F. Supp. at 1450 (quoting Leannais, 565

F.2d at 441) (internal quotation marks omitted). Thus, the test is

not whether the business operations continue, but whether the

purchaser is simply a “continuation of the corporate entity” of the

seller. Id. The Wisconsin Supreme Court unambiguously rejected

“modified theories of continuity crafted by other courts,”

including the product line and continuity of enterprise exceptions.

Smith, 60 F. Supp. 2d at 918. Nevertheless, Wisconsin courts will

consider factors like continued enterprise if there is overlap in

ownership and control. See Gallenberg, 10 F. Supp. 2d at 1053–54.

New AMS insists that Wisconsin law requires an “identity of

officers, directors and stockholders.” New AMS’s Reply at 6

(emphasis in original). This phrasing implies that New AMS is

arguing that the mere continuation exception only applies where

buyers share at least one officer, one director, and one

stockholder with their sellers. See id. at 6–7. Accordingly, New

AMS concludes that the lack of overlap between directors and the

lack of overlap between ownership interests at the time of the

asset sale indicates that there is no issue of material fact as to

the mere continuation exception. Id.

New AMS’s interpretation of Wisconsin law is not persuasive.
Court No. 12-00122 Page 16

Wisconsin courts do not require absolute identity between

controlling forces in the buying and selling corporation. See,

e.g., Home Indem. Co v. Farm House Foods Corp., 770 F. Supp. 1339

(E.D. Wis. 1991) (applying the mere continuation exception where

predecessor and successor companies shared a “majority” of

officers, directors, and shareholders); Nelson v. Hebert Const.

Co., 482 N.W.2d 670 (Wis. Ct. App. 1992) (unpublished opinion

finding lack of “substantial identity” in a situation with slight

overlap between predecessor and potential successor company).

Further, the crux of the mere continuation analysis is not in

measuring the specific numbers of shared officers, directors, and

stockholders as New AMS suggests — rather, it is in determining

whether the combined effect of some shared control and ownership,8

along with other considerations, establish that the selling

corporation is merely “changing hats” through the sale. See

Gallenberg, 10 F. Supp. 2d at 1054. Though neither party

identifies authority directly on point, these two settled aspects

of Wisconsin law render it unlikely that a Wisconsin court would

require at least one officer, director, and owner in common between

the buying and selling companies as a prerequisite for applying the

mere continuation exception. See Smith, 60 F. Supp. 2d at 918

8
Wisconsin courts will not apply the mere continuation
exception “in the complete absence of continuity in stockholders,
directors and officers.” Parson, 586. F. Supp. at 1450–52
(emphasis added); see Sedbrook, 526 N.W.2d at 761.
Court No. 12-00122 Page 17

(treating “management and control” as characteristics distinct from

“continuity of ownership” for purposes of the mere continuation

exception); cf. IGL-Wisc. Awning, Tent & Trailer Co. v. Greater

Milwaukee Air & Water Show, Inc., 520 N.W.2d 279, 280–81 (Wis. Ct.

App. 1994) (affirming trial court finding of “identity of

management and control” under mere continuation exception where

director and vice president of prior non-profit company was one of

several founders of the successor non-profit company).

Here, one owner of Old AMS, Mr. Mandler, now holds a class B

ownership interest in New AMS. Thums Aff. 2d Ex. 4 at 1–3.

Although New AMS does have a different set of directors than Old

AMS, a reasonable interpretation of meeting minutes on the record

show Mr. Mandler playing an active and influential role in guiding

New AMS’s board of directors. See id. at 4–6. New AMS employs

“substantially all” of same people as Old AMS to carry out those

business operations, including Mr. Mandler and possibly other Old

AMS officers. See Thums Aff. 1st Ex. 3 at 10; New AMS’s Mem. at

8–9 (mentioning directors and owners, but not officers).

Furthermore, New AMS acquired substantially all of Old AMS’s

assets, Thums Aff. 2d Ex. 1 at 2–3, and operates a similar business

under the same trade name out of some of the same physical

addresses. New AMS’s Mem. at 4; Thums Aff. 1st Ex. 3 at 4–5. On

these facts, a reasonable jury could find that Mr. Mandler’s

ownership share and influence on New AMS’s board — coupled with the
Court No. 12-00122 Page 18

otherwise substantial overlap between Old AMS and New AMS —

outweighs his non-voting status and the lack of shared directors in

defining New AMS’s corporate identity. See Mazak, 33 CIT at __,

659 F. Supp. 2d at 1356 (quoting Guess? Inc., 944 F.2d at 858).

Although new undisputed facts may emerge through additional

discovery showing that Mr. Mandler has a de minimis influence on

New AMS’s corporate identity, the record is insufficient at present

to support that conclusion as a matter of law. See id.; Whitford,

63 F.3d at 530. Consequently, New AMS’s motion for summary

judgment must be denied as to the mere continuation exception.

III. SANCTIONS

Eleven days after Customs filed its response to the motion for

summary judgment, New AMS moved to impose USCIT Rule 11 sanctions.

New AMS asserts that “[d]espite repeated requests to dismiss, and

despite conclusive proof that New [AMS] bears no liability in this

lawsuit and [Customs’s] claims against it are baseless, [Customs]

has continued to pursue its claims against New [AMS].” New AMS’s

Sanctions Mem. at 4. New AMS further alleges that Customs should

be sanctioned because “[i]t appears that [Customs’s] pre-filing

investigation was insufficient.” Id. at 6.9

9
New AMS also “wonders at [Customs’s] motives for including
New [AMS] in this suit,” alleging that “[t]o the extent that
[Customs] sued New [AMS] . . . in hopes that New [AMS] might pay to
be dismissed from this litigation, the claims against New [AMS]
were brought for an improper purpose.” New AMS’s Sanctions Mem.
at 7. New AMS provides no legal or factual support for this
additional charge other than its own insistence that it cannot be
Court No. 12-00122 Page 19

USCIT Rule 11 “is identical to Federal Rule of Civil Procedure

Rule 11[,] . . . and it therefore is appropriate to look to

decisions under the latter in interpreting and applying” the

former. Precision Specialty Metals, Inc. v. United States, 315

F.3d 1346, 1353 (Fed. Cir. 2003) (quoting A. Hirsh, Inc. v. United

States, 948 F.2d 1240, 1246 (Fed. Cir. 1991)) (internal quotation

marks omitted). “In general, ‘the standard for triggering the

award of fees under Rule 11 is objective unreasonableness.” Murray

v. Town of N. Hempstead, 853 F. Supp. 2d 247, 276 (E.D.N.Y. 2012)

(quoting Margo v. Weiss, 213 F.3d 55, 65 (2d Cir. 2000)). “To

determine whether an attorney’s prefiling inquiry was reasonable,

a court must consider all the circumstances of a case.” Cooter &

Gell v. Hartmarx Corp., 496 U.S. 384, 401 (1990); see View Eng’g,

Inc. v. Robotic Vision Sys., Inc., 208 F.3d 981, 984–87 (Fed. Cir.

2000) (discussing reasonableness of prefiling inquiry in the

context of a patent dispute).

Contrary to New AMS’s assertions, Customs is not pursuing a

baseless or frivolous claim. As described above, the complex

procedural posture and unsettled legal and factual backdrop of this

case demonstrate that, at a minimum, Customs raises issues of

material fact at this stage. Furthermore, Customs presents

evidence showing that New AMS holds itself out to the public as the

held liable for Old AMS’s debts. See id. The court will not
impose sanctions solely on the basis of New AMS’s confidence and
speculation.
Court No. 12-00122 Page 20

same entity as Old AMS, boasting “Over 30 Years of Building

Business with Indoor and Outdoor LED Displays!” on its website, and

claiming to have been established in 1978 in an online job posting.

Pl.’s Resp. New AMS’s Sanctions Mem. Exs. A, E (“Pl.’s Sanctions

Resp.”). When investigating New AMS, counsel for Customs contacted

New AMS president Dennis Thums, who insisted that New AMS had “NO

common ownership” with Old AMS, id. Ex. B at 2, even though he knew

that Mr. Mandler owned a portion of both. Thums Aff. 2d at Ex. 4.

Customs also presents evidence showing that it offered to dismiss

the action against New AMS “if [New AMS] could establish that [its]

owners . . . had no connection to Old [AMS],” Pl.’s Sanctions Resp.

at 6, which New AMS ultimately could not on account of Mr.

Mandler’s ownership interest. Id. Exs. B, C. Customs therefore

acted reasonably in deciding to lodge and to pursue its claim

against New AMS.

Parties cannot be expected to bend at the threat of sanctions

based solely on opposing counsel’s confidence in its own position.

See Cooter & Gell, 496 U.S. at 399 (“Rule 11 sanctions are not tied

to the outcome of litigation; the relevant inquiry is whether a

specific filing was, if not successful, at least well founded.”).

The requirement of zealous representation means that parties should

at least have the discretion to pursue a claim based on complex

facts and unsettled law — including the present action — even if

that claim ultimately fails on the merits. Therefore, New AMS’s
Court No. 12-00122 Page 21

motion for sanctions must be denied in its entirety.

CONCLUSION

New AMS’s motion for summary judgment is granted in part. As

it has failed to demonstrate that it is entitled to judgment as a

matter of law on the “mere continuation” exception to the general

rule against corporate successor liability under Wisconsin law,

however, New AMS’s motion for summary judgment must also be denied

in part. Furthermore, New AMS’s USCIT Rule 11 motion to impose

sanctions is denied in its entirety because it fails to raise any

viable basis on which to sanction Customs for filing and continuing

to pursue this action.
Court No. 12-00122 Page 22

ORDER

In accordance with the foregoing, it is hereby

ORDERED that defendant Adaptive MicroSystem LLC’s motion for

summary judgment is DENIED with respect to the mere continuation

exception to the general rule against successor liability; and

ORDERED that defendant Adaptive MicroSystem LLC’s motion for

summary judgment is GRANTED in all other respects; and

ORDERED that defendant Adaptive MicroSystem LLC’s motion for

sanctions is DENIED in its entirety.

/s/NICHOLAS TSOUCALAS
Nicholas Tsoucalas
Senior Judge

Dated: April 10, 2013
New York, New York