Court distinguishes the mere continuation successor liability tests of Michigan and New Jersey

Seller was headquartered in Parsippany, New Jersey and operated plants in New York, New Jersey, Florida and Texas. Seller provided commercial printing services. Buyer is a Des Moines-based multi-platform communications company.

On September 29, 2017, Buyer entered into an asset purchase agreement with Seller.

At that time, Seller leased from Lessor, a Salt Lake City based commercial financial services company, certain printing and related equipment which was in New Jersey and Florida and valued in excess of $3.5 million.

Prior to the closing of the asset purchase agreement, Seller and Buyer communicated with Lessor regarding the master lease agreement. According to Lessor, the day before the asset purchase agreement was executed, Seller and Buyer asked Lessor to consent to the “merger” and Buyer requested a copy of the master lease agreement. Lessor provided Buyer’s and Seller’s counsel with the master lease agreement. Lessor asked for copies of Buyer’s financial statements to verify its creditworthiness, but Buyer did not fully disclose its financial information and advised that Seller would continue to make the lease payments.

Nevertheless, Buyer did not purchase Seller’s interest in the equipment lease as that lease was expressly excluded from the acquisition by the terms of the asset purchase agreement.

Seller made the October, November, and December 2017 lease payments but then stopped. In late 2017, Seller’s CFO informed Lessor that Seller had become a shell company.

Lessor sued Buyer in a Michigan state court for breach of the master lease agreement against Buyer under a theory of successor liability. Buyer removed the lawsuit to a Michigan federal district court. Buyer asked the court to dismiss Lessor’s lawsuit against it because Buyer was not responsible for Seller’s equipment lease obligations.

Buyer denied that it was the successor to Seller, in part, because the asset purchase agreement specifically exempted the master lease agreement from the asset deal. Furthermore, Buyer claimed that Lessor could not sue Buyer in Michigan because Buyer had no contacts in Michigan. Buyer was not incorporated in Michigan and its principal place of business was in Des Moines, Iowa. It was undisputed that Buyer did not have any property, offices, employees, or bank accounts in Michigan.

Lessor disagreed and said that Buyer was a successor to Seller as a party to the equipment lease; and that Seller as the lessee agreed that any suit involving the master lease agreement be brought before the federal or state court in Oakland County, Michigan.

The court agreed that Buyer could be sued in Michigan if it has assumed the equipment lease under the asset purchase agreement; but it did not.  The court, applying Michigan law, said that Buyer, could still be sued in Michigan under its mere continuation rule, if the post-closing operations of the purchased business by Buyer was a mere continuation of Seller’s business. However, that was not the case here, because for Michigan’s mere continuation rule to apply, owners of Seller would have to have to be owners of Buyer. Neither Seller or its shareholder held any interest in Buyer.

Therefore, the court concluded that Buyer could not be sued in Michigan.

This case is referred to Varilease Finance, Inc. v. Earthcolor, Inc., Case No. 18-CV-11390, United States District Court, E.D. Michigan, Southern Division, (January 10, 2019).

Comment. This case may not be over for Buyer.  Lessor may be able to sue Buyer in New Jersey. And according to this Michigan federal court, New Jersey’s mere continuation rule that could make Buyer responsible for Seller’s equipment lease obligations does not require that Seller or an owner of Seller have an ownership interest in Buyer.

The lesson for a buyer of the business assets of a company is that buyer may be stuck with seller liabilities that buyer did not assume under several federal and state successor liability rules. Also, the state successor liability rules vary from state to state.

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



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Posted in asset buyer's assumption of seller's liabilities by contract, asset purchase agreement, asset seller's liabilities, assumed liabilities, assumption of a contract, buyer's assumption of seller liabilities in asset acquisition, excluded liabilities, mere continuation, seller owners equity interest in buyer, successor liability

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