Indiana High Court Requires Continuity of Ownership in Successor Liability Claim

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Business asset buyer not liable to seller creditor under Indiana’s de facto merger or mere continuation successor liability exceptions to the successor liability doctrine.

M&A Stories

April 30, 2021

Introduction

Successor liability is an important issue when pricing a business asset acquisition. Generally, a buyer is only responsible for seller liabilities assumed in the asset purchase agreement. However, there are some federal and state successor liability risks.

The deal

The South Bend, Indiana seller in this case manufactured utility and cellular towers. The buyer was a bank that the seller owed $10 million to under a bank loan that was secured by a first lien on the … (the seller’s) … assets. The … (the seller’s) … owners had personally guaranteed the loan.

The seller was in financial difficulty. The liquidation value of the … (the seller’s) … assets was about $3.1 million.

In November 2017, the seller agreed to the buyer acquiring the … (the seller’s) … assets by foreclosure. “Afterward, … (the buyer) … continued operating from … (the seller’s) … former location without publicly announcing either the transition or the transfer of assets from … (the seller) …. (The buyer) … retained about ninety percent of … (the seller’s) … employees, including senior management. Although senior management had owned the lion’s share (at least ninety-five percent) of … (the seller’s) … shares, none of … (the seller’s) … shareholders owned any equity interest in … (the buyer) … As part of the transition, … (the buyer) … agreed not to enforce the personal guarantees against … (the seller’s) … four senior officers, all of whom agreed to remain in their positions at … (the buyer).”

The lawsuit

A creditor had installed piping in the seller’s South Bend facility in early 2016 but had not been fully paid for its work. It made a claim against the buyer in an Indiana trial court. Both the trial court and the intermediate appellate court held the buyer liable to the creditor under Indiana successor liability doctrine, even though none of the seller owners had an ownership interest in the buyer.

The Indiana Supreme Court, in a unanimous decision reversed: “In a typical asset purchase, the buyer acquires the seller’s assets but not its liabilities. The general rule is not absolute, however, and this case turns on two exceptions. The first exception arises when the acquisition of assets amounts to a de facto merger; the second, when the buyer is a mere continuation of the seller. If either exception applies, the buyer is on the hook for all the seller’s liabilities … (W)e hold that continuity of ownership is necessary for the de-facto-merger and mere-continuation exceptions to apply. Because there was no continuity of ownership between … (the seller) … and … (the buyer) …, we reverse the trial court’s entry of judgment for … (the creditor) … and remand with instructions to enter judgment for … (the buyer) …”

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). 

Comment

Generally, successor liability requires that the seller owner has an ownership stake in the buyer. But some states don’t always require continuity of ownership.

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 

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Posted in continuity of enterprise exception, continuity of ownership, de facto merger exception, successor liability Tagged with: ,

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