Court Finds Buyer Not Liable for Seller Under Successor Liability Theory
December 27, 2019
When buying a business, purchasers must take into consideration the possibility of “successor liability” – that is, the buyer’s assumption of the seller’s liabilities and prior conduct upon purchasing a corporation.
In New York, the general rule is that a purchaser of the assets of another corporation is not liable for the seller’s liabilities (TBA Global, LLC v. Fidus Partners, LLC). However, there are exceptions.
Justice Emerson recently laid out these exceptions in Marcum LLP v. Fazio, Mannuzza, Roche, Tankel, Lapilusa, LLC where he decided plaintiff’s motion, seeking leave to amend a complaint to add a new party defendant corporation, PKF O’Connor, based on the theory of successor liability.
A corporation that purchases the assets of another corporation can be held liable for the seller’s liabilities where:
- the buyer expressly or impliedly assumed the predecessor’s tort liability;
- there was a consolidation or merger of seller and purchaser;
- the purchasing corporation was a mere continuation of the selling corporation; or
- the transaction is entered into fraudulently to escape such obligations.
Schumacher v. Shear Co.
Plaintiffs argued that there was a consolidation or merger of the seller (“FMRTL”) and PKF O’Connor’s predecessor in interest, O’Connor Davies, whereby O’Connor Davies expressly and impliedly assumed its predecessor’s tort liability.
The Court examined the recitals page of the corporations’ Business Combination Agreement which transferred FMRTL’s assets to O’Connor Davies in consideration of O’Conner Davies assuming FMRTL’s liabilities, which were defined as those liabilities “arising in the ordinary course” of the business. The Court further reviewed the corporations’ bill of sale which further included that O’Connor Davies agreed to assume FMRTL’s liabilities.
The Court found that according to the Agreement, O’Connor Davis only assumed liability for FMRTL’s liabilities arising in its ordinary course of business and did not impose liability for FMRTL’s litigation.
Interestingly, the Court looked to the bankruptcy courts to define “transactions in the ordinary course of business” and determined that such transactions are those “recurring, customary credit transactions that are paid in the ordinary course of debtor’s business” (Marcum LLP, citing Matter of Quebecor World [USA], Inc.).
Ultimately, the Court held that because litigation is not a recurring or customary transaction, O’Connor Davis did not assume liability for FMRTL’s litigation and any references to FMRTL’s litigation in the Agreement was merely a disclosure that did not create any assumption of liability.