One of the underpinnings of corporate law is that a purchaser of assets is not normally liable for the liabilities of the predecessor while a stock purchaser will take on the pre-existing liabilities. Courts have fashioned four exceptions to the no liability for asset purchaser rule. The exceptions are:
- express or implied assumption of liability
- de facto merger
- fraud
- mere continuation
During the 1990s, courts also began applying a 5th test to environmental cases known as the “Continuity of Enterprise” theory which had its origins in product liability and labor law. (Note-visit our corporate transaction page for more detailed information on successor liability).
Like piercing the corporate veil, successor liability is an equitable remedy where the court decides if fairness requires ignoring the corporate form. Courts are loathe to disregard the corporate form and plaintiffs generally need to produce substantial evidence that will offend the court’s sense of justice to convince the court to impose liability on a corporate entity that would not generally be liable under traditional norms of corporate law.
One basis that has been successfully used by plaintiffs to impose successor liability on purchasers of corporate assets has been when the seller is dissolved or no longer in existence after the sale to the purchaser. In these transactions, the buyer will often trade on the goodwill of the seller by holding itself out as a continuation of the business and may even retain the same employees and facilities. The courts will look to see if the injured party is deprived of a remedy by the transaction. For example, a customer may seek damages for a product manufactured by the seller but injured after the purchaser owned the business. If the seller is no longer viable and the purchaser otherwise is holding itself as the same business, the court may conclude that the equities of the case are such that the purchaser should be held liable for the plaintiff’s injury even though the purchaser did not manufacture the particular product that caused the plaintiff’s injury. In the environmental context, the “damage” is often environmental contamination caused by the predecessor’s operations.
What happens if the seller is still around? Can the purchaser still be liable? In US v NCR Corp, 2011 U.S. Dist. LEXIS 14653 (E.D.Wi. 12/19/2011), NCR sold its Appleton Paper Division to a predecessor of defendant Appleton Papers, Inc (API). The purchase and sale agreement contained an assumption clause and a schedule to the agreement disclosed that the division facilities “may be operating in violation” of applicable laws and that they have received notices that have resulted in “fines and corrective actions”. EPA subsequently determined that the facility in Wisconsin had resulted in PCB contamination of river sediments and filed a lawsuit against NCR. In 1995, NCR filed a lawsuit against API as successor. The parties agreed to a two-step settlement. First, they agreed to split the first $75MM in liability and submit the allocation of liability for costs above that threshold to binding arbitration. The arbitration panel found that API was liable for 60& and NCR 40% for costs above $75MM.
The federal government sought a preliminary declaration that API was liable as a successor. In July 2011, the federal district court for the eastern district of wisconson ruled that the equitable purposes underlying successor liability did not apply in this case because there was no fraud or injustice, and NCR remained solvent.
The court sought reconsideration on the basis of the express assumption of liability in the contract, arguing that the continued existence of the seller was irrelevant for purposes of this particular exception to the rule of non-asset purchaser liability. The court agreed, finding that this was really a contract case that did not invoke the concerns for preventing injustice that were at the core of the successor liability theory. The court said that CERCLA 107(e) did not prevent contracting parties from allocating liability among themselves (though they cannot “eliminate” liability with respect to the government). The court also said the existence of the seller was not a relevant concern in an assumption agreement.
Turning to the agreement, the court found that API’s predecessor was put on notice of potential environmental issues. Though CERCLA had not yet been enacted, the language was broad enough to include iability that might arise in the future. Moreover, the court found that by entering into a settlement agreement that led to arbitration, API had essentially altered the terms of the 1978 agreement when it agreed to be bound by the terms of the arbitration panel.