Opinion ID: 450477
Heading Depth: 1
Heading Rank: 6

Heading: Corporate Liability for the Debts of a Predecessor

Text: 28 As a general rule, a corporation that purchases or otherwise acquires the assets of a second corporation does not assume the debts and liabilities of the second corporation. Kemos, Inc. v. Bader, 545 F.2d 913, 915 (5th Cir.1977); accord Carswell v. National Exchange Bank of Augusta, 165 Ga. 351, 140 S.E. 755 (1927). Most jurisdictions recognize four exceptions to this rule, however, and will hold the buying corporation liable for the seller's debts if (1) the buyer expressly or impliedly agreed to assume such debts; or (2) the transaction amounts to a de facto merger of the buyer and seller; or (3) the buying corporation is a mere continuation of the selling corporation; or (4) the transaction is entered into fraudulently in order to escape liability for such debts. Acheson v. Falstaff Brewing Corp., 523 F.2d 1327, 1329-30 (9th Cir.1975). See, e.g., Travis v. Harris Corp., 565 F.2d 443, 446 (7th Cir.1977); Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F.Supp. 834, 838 (S.D.N.Y.1977); McKee v. Harris-Seybold Co., 109 N.J.Super. 555, 264 A.2d 98, 101-02 (Law Div.1970), aff'd 118 N.J.Super. 480, 288 A.2d 585 (App.Div.1972). Another exception, which courts often incorporate into one of the previous four, to-wit: the fraudulent transaction exception, is the absence of adequate consideration for the sale or transfer. McKee, 264 A.2d at 102. Although Georgia courts have not expressly adopted all of these exceptions, early Georgia cases indicate agreement with the majority rule. See Carswell, 140 S.E. at 758. 29 All four of these exceptions require a transfer of assets in order to hold the acquiring corporation liable. The existence of such a transfer is a disputed issue of fact in this case; and under the trial court's instructions to the jury, it cannot be determined whether the jury found such a transfer to have occurred. There was evidence from which the jury might have found such a transfer to have taken place during the operation of the management agreement. The jury might have found that Eastern controlled B & B's assets and used them for its own operations. There was also some testimony that Eastern retained some of B & B's assets after the management agreement was terminated. Assuming that Eastern's control and retention of such assets was sufficient to raise a jury question on the issue of transfer of assets, Eastern's contention that the district court should have directed a verdict in its favor on this issue would be without merit. 30 Even with that assumption, Eastern can be held liable for B & B's pre-existing debts only if Bud Antle has proven the applicability of one of the exceptions listed above. Bud Antle did not raise in its complaint all of the exceptions. Only the fraud and de facto merger exceptions were raised expressly in independent counts, and only the de facto merger exception reached the jury. The exceptions for fraud and the express or implied assumption of debts, therefore, are not before this court. 31 The trial court's instructions to the jury appear to combine the de facto merger and mere continuation exceptions. The trial court listed the four exceptions to the general rule as follows: 32 A, there is an express or implied assumption of liability, B, the transaction is fraudulent, C, the transfer is not entirely in good faith, or D, the company acquiring the assets or property is a mere continuation of the old corporation. 33 The district court did not expressly include the de facto merger exception in this list, but it referred to the merger issue as the main question for the jury to decide. After listing the four exceptions, the court told the jury that it should consider a laundry list of factors in determining whether one of the companies involved in this case is a mere continuation of the old corporation. When the court then recited the list of factors to the jury, it told them to consider the factors [i]n determining whether or not one corporation merged with or became a part of or was absorbed by another corporation. Although the de facto merger and mere continuation exceptions are related and have similar characteristics, most courts have treated them as separate theories. See, e.g., Travis, 565 F.2d at 446-47; Armour-Dial, Inc. v. Alkar Engineering Corp., 469 F.Supp. 1198, 1201 (E.D.Wisc.1979); McKee, 264 A.2d at 101-06. This court will address them separately as well. 1. De Facto Merger 34 Although the Georgia courts have not recently addressed the concept of de facto merger, Georgia likely would follow the majority view concerning the requirements and applicability of the de facto merger doctrine. The Eighth Circuit recently set out the elements that must be present to find a de facto merger: 35 (1) There is continuation of the enterprise of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations. 36 (2) There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation. 37 (3) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible. 38 (4) The purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation. 39 Keller v. Clark Equipment Co., 715 F.2d 1280, 1291 (8th Cir.1983), cert. denied, --- U.S. ----, 104 S.Ct. 713, 79 L.Ed.2d 176 (1984). 40 It is undisputed that one of these four elements was not present in this case: a continuity of shareholders resulting from the acquiring corporation paying for the acquired assets with shares of its own stock. Several courts have held that [a] consolidation or merger always involves a transfer of the assets and business of one corporation to another in exchange for its securities. Good v. Lackawanna Leather Co., 96 N.J.Super. 439, 233 A.2d 201, 208 (Ch.Div.1967). See, e.g., Leannais v. Cincinnati, Inc., 565 F.2d 437 (7th Cir.1977); Travis v. Harris Corp., 565 F.2d 443 (7th Cir.1977). 1 At the very least, there must be some sort of continuation of the stockholders' ownership interests. See Atlas Tool Co., Inc. v. C.I.R., 614 F.2d 860, 871 (3d Cir.), cert. denied, 449 U.S. 836, 101 S.Ct. 110, 66 L.Ed.2d 43 (1980). The reason for this requirement is that corporate liability adheres not to the nature of the business enterprise but to the corporate entity itself. Fehl v. S.W.C. Corp., 433 F.Supp. 939, 945 (D.Del.1977). The corporate entity and its shareholders ultimately are responsible for the disposition of the corporation's assets and the payment of its debts. Travis, 565 F.2d at 447. Even if the corporation sells to another corporation its entire business operation and all its assets, in exchange for some consideration other than stock, the two corporate entities remain distinct and intact. The corporate entities have not merged, and each is liable for its own debts, absent fraud or one of the other exceptions listed above. 41 Where the assets are sold for cash [rather than stock], no basic fundamental change occurs in the relationship of the stockholders to their respective corporations, ... and absent continuity of shareholder interest, the two corporations are strangers, both before and after the sale. 42 Id. (citations omitted). 43 In the case at bar, the evidence was undisputed that no transfer of stock took place. Therefore, there could not have been a de facto merger to make Eastern liable for B & B's debts. The district court should have directed a verdict in Eastern's favor on the issue of de facto merger. 2. The Mere Continuation Exception 44 The mere continuation exception applies when the purchasing corporation is merely a continuation or reincarnation of the selling corporation. Armour-Dial, Inc., 469 F.Supp. at 1201. In other words, the purchasing corporation is merely a new hat for the seller, with the same or similar management and ownership. McKee, 264 A.2d at 106. In determining whether one corporation is a continuation of another, the test is whether there is a continuation of the corporate entity of the seller--not whether there is a continuation of the seller's business operation. Travis, 565 F.2d at 447. Therefore, [t]he key element of a 'continuation' is a common identity of the officers, directors and stockholders in the selling and purchasing corporations. Leannais v. Cincinnati, Inc., 565 F.2d 437, 440 (7th Cir.1977). But see Rivers v. Stihl, Inc., 434 So.2d 766, 771-72 (Ala.1983) (applies a basic continuity of enterprise test in the context of products liability). 45 The evidence was undisputed that there was no such continuation of management or ownership in the case at bar. None of B & B's officers, directors, or stockholders ever became an officer, director, or stockholder of Eastern. Although some of B & B's officers may have been employed by Eastern, mere employment is insufficient to warrant application of the continuation exception. See Travis, 565 F.2d at 447 (discussing Lopata v. Bemis Co., Inc., 383 F.Supp. 342 (E.D.Pa.1974), vacated 517 F.2d 1398 (3d Cir.), on remand 406 F.Supp. 521 (E.D.Pa.1975)). Therefore, Eastern was not, as a matter of law, a continuation of B & B, and the district court should have directed a verdict in Eastern's favor on this issue.