LEGAL UPDATE

 
Successor Company Liability: What An Asset Purchaser Needs to Know

By: Douglas B. Lang, Esquire1
Angelo & Banta, P.A.
 

When a prospective corporate purchaser is considering a purchase of some or all of the assets of an existing Florida corporation, extreme care should be undertaken to avoid inadvertently assuming the liabilities of the predecessor corporation. This article will discuss the risk of incurring such liability when a corporation acquires the assets of another business entity.2

In a sale of corporate assets, the acquiring business may purchase some or all of the corporate assets, and the transferred assets may include tangible property such as machinery and equipment and intangible property such as accounts receivable or trade secrets.3 In an asset purchase, the liabilities and responsibilities of each party would be set forth in the parties' agreement4. A corporation that sells its assets may continue in existence, may be dissolved, or may be merged with the entity that purchased its assets.5

A corporation that acquires the assets of another business entity does not as a matter of law assume the liabilities of the prior business.6 Florida follows the traditional corporate law rule which does not impose the liabilities of the selling predecessor upon the buying successor company unless (1) the successor expressly or impliedly assumes obligations of the predecessor, (2) the transaction is a de facto merger, (3) the successor is a mere continuation of the predecessor, or (4) the transaction is a fraudulent effort to avoid liabilities of the predecessor.7 The imposition of liability upon a successor corporation is based on the notion that no corporation should be permitted to commit a tort or breach of contract and avoid liability through corporate transformation in form only.8 All of the theories under which successor liability will be imposed by Florida courts will be discussed below with the exception of express or implied assumption of the predecessor’s liabilities. Express or implied assumption theory is not discussed because it is generally a straightforward matter of contract and can arise as a matter of law by merger or statutory consolidation.9

1. De Facto Merger

A de facto merger occurs where one corporation is absorbed by another, but without compliance with the statutory requirements for a merger. To find a de facto merger there must be: (a) continuity of the selling corporation evidenced by the same management, personnel, assets and physical location; (b) a continuity of the stockholders, accomplished by paying for the acquired corporation with shares of stock; (c) a dissolution of the selling corporation; and (d) an assumption of the liabilities. All of these events need not occur at the same time.10 The crucial question is whether there has been a change in form, but not in substance. The finder of fact may look to any other factors reasonably indicative of commonality or of distinctiveness. "The bottom-line question is whether each entity has run its own race, or whether there has been a relay-style passing of the baton from one to the other."11

Liability may also arise where all the stock of the predecessor is purchased and the predecessor’s assets are stripped by the acquiring corporation. In Kelly v. American Precision Industries, Inc.,12 an action for personal injuries was brought against a successor corporation on the theory that it had assumed liability of its predecessor in delivering allegedly defective garbage truck. The Court ruled that a successor corporation was responsible for liability of a predecessor corporation in delivering an allegedly defective garbage truck where the successor purchased all of predecessor's stock and stripped it of all its assets, with the benefit going solely to the successor, which was tantamount to a de facto merger.

2. Continuation Theory

Under the mere continuation theory, liability is imposed when the successor corporation is merely a continuation or reincarnation of the predecessor under a different name.13 The key is that there is a change in form, but not in substance.14

A continuation of business resulting in liability of the successor corporation for its predecessor's debts occurs when the successor corporation is merely a continuation or reincarnation of the predecessor corporation under a different name.15 The "purchasing corporation must not merely be a 'new hat' for the seller, with the same or similar entity or ownership."16 While having common attributes does not automatically impose liability on a successor corporation, merely repainting the sign on the door and using new letterhead certainly gives the appearance that the new corporation is simply a continuation of the predecessor corporation.17

In Serchay v. NTS Fort Lauderdale Office Joint Venture,18 an accounting firm organized as a professional association was found liable for debts of dissolved accounting firm on theory of successor liability. The Court found that the successor entity was a clear continuation of the dissolved company because it had the same assets, management, personnel, stockholders, location, equipment, and clients.

However, in Bernard v. Kee Mfg. Co., Inc.,19 a Court declined to impose product liability on a successor corporation under a continuation theory even though it had purchased the assets of the manufacturer of a defective product and continued the product line under the same trade name. Continuation theory liability was not found because the successor had discontinued the allegedly defective product model after acquisition.

3. Fraudulent Transfer of Assets

Under the Uniform Fraudulent Transfer Act (UFTA), any transfer made with "actual intent to hinder, delay or defraud" any present or future creditor is a fraudulent transfer.20 Because of the difficulty in proving actual intent of a fraudulent transfer, case law and the UFTA look to indicia of fraudulent intent commonly referred to as "badges of fraud."21 The fraudulent nature of the transaction may be found to exist in the transfer of assets of a corporation to a successor corporation without consideration or for grossly inadequate consideration where there has been a prejudice of creditors for the benefit of the same individuals who constitute the beneficial owners of both of the corporations involved.22

However, mere knowledge that the seller is indebted to another or even knowledge of the existence of a valid and pending cause of action against the seller may be insufficient to show the purchaser's participation in a fraudulent conveyance.

Fraud is generally a question of fact for the fact-finder. Courts will carefully scrutinize the evidence alleged in deciding whether there is sufficient evidence of fraudulent transfer to withstand a summary judgment motion or directed verdict. Florida courts will not hesitate to dismiss a fraudulent transfer claim as a basis for successor liability before verdict where the evidence fails to support such claim. For example, in Reina v. Gingerale Corp.23 the Court found that a successor corporation was not liable for predecessor's debts and liabilities under fraudulent transaction exception to successor corporation rule even though the successor had actual knowledge at time of sale of a pending suit against the predecessor. The Court found that nonetheless, the claim was not sufficiently supported by factual allegations to withstand summary judgment motion.

4. Applicability to Some Specific Types of Claims

Florida courts apply the traditional corporate rule in determining product liability of a successor corporation.24 The purchaser of the assets of a manufacturing firm, as successor to the manufacturer which allegedly caused injury in question could be held liable on strict liability claim under traditional corporate law rule, where the assets where acquired from the predecessor included manufacturing plant, inventory, goodwill, and right to use same trade name unless the successor corporation did not assume liabilities or obligations of its predecessor and had discontinued manufacture of the defective product model.25

Liability may also be imposed on a successor manufacturer for personal injuries suffered by an employee of predecessor injured by a defective product. Florida courts allow an injured employee to sue her employer in tort, despite claim of workers' compensation exclusivity, when that employer is a corporate successor to the manufacturer of allegedly defective product that caused injury and product was manufactured before a corporate merger. The courts hold that under such circumstances the successor corporation cannot claim any inherited immunity from the manufacturer.26

Finally, the Florida Supreme Court has also determined that a successor corporation can be held liable for punitive damages based upon the conduct of a predecessor. In Celotex Corp. v. Pickett,27 the court indicated that when a corporation, such as Celotex here, voluntarily chooses a formal merger, it will take the "bad will" along with the "good will” and will be subject to the imposition of punitive damages based upon the conduct of the predecessor.28 While not yet specifically addressed by the Florida Supreme Court it is also likely that the Courts would hold a successor liable for punitive damages where it found a de facto merger, a fraudulent transfer of assets to a successor, a continuation of the predecessor or an assumption of the predecessor’s liabilities.

Conclusion

There are very real dangers associated with the purchase of assets, including being exposed to punitive damages based upon the predecessor’s conduct. Careful drafting of documents is critical to avoid assuming such liabilities. However, as shown above, careful drafting alone is not enough. One must recognize that the closer the identity between the predecessor and successor in the assets, management, personnel, stockholders, location, trade name, equipment, and clients, the more likely that successor liability will be found. Even if there are sufficient dissimilarities to avoid liability under a de facto merger or continuation theory, the purchaser should avoid transactions where grossly inadequate consideration is paid by a successor corporation to the prejudice of creditors under circumstances which benefit the same individuals who constitute the beneficial owners of each of the corporations involved. By following this path, a prospective asset purchaser will significantly reduce potential liability for the predecessor’s debts and tortious conduct.
1 © 2005 All rights reserved. This article is for general information purposes. The article does not constitute or contain legal advice. This article should not be considered as a legal opinion by the author or by the firm of Angelo & Banta, P.A., as a substitute for legal counsel.
2 This article does not address, among other issues, the enforceability of non-compete provisions in employment agreements by successor corporations, nor parent-subsidiary transactions. These subjects may be covered in a future article.
3 See § 607.1202(1), Fla. Stat. (2004) ("A corporation may sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property . . . .").
4 See William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations, § 7122 (perm. ed., rev. vol. 1990) ("The general rule . . . is that where one company sells or otherwise transfers all its assets to another company, the latter is not liable for the debts and liabilities of the transferor. . . . An express agreement, or one that can be implied, to assume the other company's debts and obligations, is necessary . . . .")
5 See Best Towing & Recovery, Inc. v. Beggs, 531 So. 2d 243, 245 (Fla. 2d DCA 1988) (noting that pursuant to an agreement, a transfer of assets may immediately dissolve a corporation).
6 See Bernard v. Kee Mfg. Co., 409 So. 2d 1047, 1049 (Fla. 1982).
7 See Sens v. Slavia, Inc., 304 So. 2d 438 (Fla.1974)
8Amjad Munim, M.D., P.A. v. Azar, 648 So. 2d 145, 154 (Fla. 4th DCA 1994). See also Chicago Title Ins. Co. v. Alday-Donalson Title Co. of Florida, Inc., 832 So.2d 810 (Fla. 2nd DCA 2002)
9 Florida corporation law provides that the effect of a merger or consolidation i.e. share exchange is “the surviving corporation shall thenceforth be responsible and liable for all the liabilities and obligations of each corporation party to the merger”. West's F.S.A. § 607.1106. We note that “A professional corporation or limited liability company organized under this act shall exchange shares or merge only with other domestic professional corporations or limited liability companies organized under this act to render the same specific professional service, and a merger or consolidation with any foreign corporation or
limited liability company is prohibited”. West's F.S.A. § 621.13
10 Id. at 153-54 (citations omitted)
11 300 Pine Island Assoc. v. Steven L. Cohen & Assoc., 547 So. 2d 255, 256 (Fla. 4th DCA 1989) (citation omitted)
12 438 So.2d 29 (Fla. 5th DCA 1983)
13Amjad Munim, M.D., P.A. v. Azar , supra at 154.
14 Id.
15 Munim, 648 So. 2d at 154 (citing Bud Antle, Inc. v. E. Foods, Inc., 758 F.2d 1451, 1458 (11th Cir. 1985 ) (en banc)).
16 Id.
17 Lab. Corp. v. Prof'l Recovery Network, 813 So. 2d 266, 269 (Fla. 5th DCA 2002)
18 707 So.2d 958 (Fla. 4th DCA 1998)
19 409 So.2d 1047,1048 (Fla.1982).
20 § 726.105(1)(a), Fla. Stat. (2004).
21 § 726.105(2), Fla. Stat. (2004); Cleveland Trust Co. v. Foster, 93 So. 2d 112 (Fla. 1957).
22 Munim, 648 So. 2d at 154.
23 472 So.2d 530 (Fla. 3rd DCA 1985)
24 Bernard v. Kee Mfg. Co., Inc., 409 So.2d 1047 (Fla.1982).
25 Id.
26 Id. at 18-19
27 490 So.2d 35 (Fla. 1986)
28 Id.
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