Learn about the recent Indiana Supreme Court ruling on successor liability in asset acquisitions. Understand the exceptions that relieve business asset buyers from seller creditor claims in M&A deals.
M&A Stories
April 30, 2021
Introduction:
When acquiring the assets of a business, one crucial consideration is successor liability, which determines the extent of the buyer’s responsibility for the seller’s liabilities. In Indiana, a recent court case sheds light on two exceptions to the general rule of limited liability for buyers in asset purchases.
The Case:
The case involved a South Bend, Indiana seller of utility and cellular towers, who owed $10 million to a bank under a secured loan. In financial distress, the seller’s assets were worth about $3.1 million in liquidation value. In 2017, the buyer, a bank, foreclosed on the seller’s assets and continued operations without announcing the change publicly. Most of the seller’s employees, including senior management, were retained by the buyer.
The Lawsuit:
A creditor claimed it was owed money by the seller for work done but unpaid. The creditor pursued the buyer for the debt under Indiana’s successor liability doctrine, claiming the buyer qualified as a successor. The trial and intermediate appellate courts ruled in favor of the creditor. However, the Indiana Supreme Court unanimously reversed this decision, clarifying two exceptions to successor liability.
The Ruling:
The Indiana Supreme Court stated that in a typical asset purchase, the buyer assumes the assets but not the seller’s liabilities. However, two exceptions can make the buyer responsible for the seller’s debts: de facto merger and mere continuation. To apply these exceptions, continuity of ownership between the seller and buyer is necessary. As no ownership continuity existed between the seller and the buyer in this case, the court ruled in favor of the buyer, absolving it of liability for the creditor’s claim.
This case is referred to as New Nello Operating Co., LLC v. CompressAIR, Supreme Court Case No. 20S-CC-578, Supreme Court of Indiana, (Argued: December 3, 2020. Decided: April 22, 2021).
Conclusion:
In this significant ruling, the Indiana Supreme Court emphasized the importance of continuity of ownership when considering successor liability exceptions. While some states may not always require ownership continuity, this decision sets a precedent for businesses involved in asset acquisitions within Indiana. Buyers should be aware of the specific successor liability laws in their respective states to make informed decisions during M&A deals.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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