Buyer fights responsibility for a $1.5 million judgment against an asset seller of a business

Customer is a foreign business organized under the laws of Nigeria, with its principal place of business in Lagos, Nigeria. Seller is a Louisiana Liability Company that was in the business of shipbuilding in Louisiana, until January 4, 2014. Buyer is a Virginia Limited Liability Company, with its principal place of business in Fairfax, Virginia.

On October 2, 2013, Customer sued Seller in a Louisiana federal district court to recover a deposit it paid to Seller, for a vessel that it never received.

In a January 1, 2014 Asset Purchase Agreement and Cash Sale, Buyer acquired the assets of Seller and certain liabilities. At the time of the asset purchase, Seller was owned solely by Seller Owner.

Prior to the asset purchase, Buyer Owner formed Buyer, in Virginia. He was not an owner or member of Seller. Buyer is wholly owned by Buyer Parent Company, a Delaware corporation. Buyer Owner owns 81% of the outstanding stock of Buyer Parent Company He provided the capital, as well as contacts for the business.

Seller Owner Son is the son of Seller Owner. Although he was an employee of Seller, he was not an owner or member of Seller. He owned 19% of the outstanding stock of Buyer Parent Company He provided 25 years of education, knowledge, and experience to the business.

Most of the employees of Seller were retained by Buyer, including supervisory personnel. Seller Owner was not an employee or owner but was a board member and consultant.

Buyer continued to be in the shipbuilding business at the same physical location.

On January 12, 2016, after a trial on the merits, Customer obtained a judgment against Seller in the amount of $1.5 million, plus attorneys’ fees in the amount of $60K, and post-judgment interest. Customer was unsuccessful in collecting this judgment.

Customer then sought to enforce its January 12, 2016 judgment against Buyer, as a mere continuation of Seller. Buyer denied that it had successor liability for the judgment.

Based upon the above facts, and before a full-blown trial, Customer asked the court to hold Buyer liable for the debt Seller owned to Customer. The court said not so fast.

Under applicable Louisiana law, the general rule is that where Seller sells or transfers all its assets to Buyer, Buyer is not liable to Customer for the debt and liability of Seller. However, there are four exceptions to this general rule:

1) Buyer expressly or impliedly agreed to assume the Seller’s liability to the Customer,

2) The circumstances surrounding the transaction warrant a finding that there was a de facto merger of Seller and Buyer,

3) Buyer was merely a continuation of the Seller (the mere continuation exception), or

4) The transaction is fraudulent in fact.

Customer contended that the third exception applied, and that Buyer was a mere continuation of Seller. Thus, Customer contended that Buyer was responsible for the Seller liability owed to Customer.

The court said that there were eight factors typically considered in determining if Buyer was a mere continuation of Seller:

(1) Retention of the same employees;

(2) Retention of the same supervisory personnel;

(3) Retention of the same production facility in the same physical location;

(4) Production of the same product;

(5) Retention of the same name;

(6) Continuity of assets;

(7) Continuity of general business operations; and

(8) Whether the successor holds itself out as the continuation of the previous enterprise.

Having reviewed the evidence, the court said that while many of the factors favored Customer’s position, the court could not find, as a matter of law, at this time that Buyer, is a mere continuation of Seller. The court found, instead, that a trial on the merits was appropriate, so that it may fully evaluate and weigh each factor and judge the credibility of the witnesses who appear at trial.

This case is referred to Hadassa Investment Security Nigeria, LTD. v. Swiftships Shipbuilders, LLC, Civil Action No. 16-1502, United States District Court, W.D. Louisiana, Lafayette Division, (December 28, 2018).

Comment. The lawsuit filed by Customer against Seller was a matter of public record before Buyer purchased Seller’s assets. The court records would have shown a claim by Customer to recover a $500K deposit it paid to Seller for a ship that Seller later sold to another customer.

However, after the closing, Customer amended its complaint to ask for treble damages under the Louisiana Unfair Trade Practices Act. That jumped up Buyer’s risk on this lawsuit from $500K to $1.5 million; and the risk materialized in the form of a $1.5 million judgment against Seller that Customer now seeks to recover from Buyer.

Finally, most states would require in applying the mere continuation exception (in determining whether Buyer is responsible for this Seller Debt) that Seller Owner have an ownership interest in Buyer or a Buyer affiliate in order to stick Buyer with this debt. Apparently, that is not true under Louisiana law. The actual exception applied here (which does not require Seller Owner ownership in Buyer) is really an exception not recognized in many states called the continuity of enterprise exception.

By John McCauley: I help people start, grow, buy and sell their businesses.



Telephone:      714 273-6291

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Posted in asset purchase agreement, Buyer beware, continuity of enterprise exception, mere continuation exception, successor liability

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