2004 Fall, 26. Bielagus v. EMRE: New Hampshire Rejects Expansion of Traditional Test for Corporate Successor Liability Following an Asset Purchase.

• Author: By Michael J. Zaino

New Hampshire Bar Journal

2004.

2004 Fall, 26.

Bielagus v. EMRE: New Hampshire Rejects Expansion of Traditional Test for Corporate Successor Liability Following an Asset Purchase

New Hampshire Bar Journal Fall 2004, Volume 45, Number 3 Bielagus v. EMRE: New Hampshire Rejects Expansion of Traditional Test for Corporate Successor Liability Following an Asset Purchase By Michael J. Zaino INTRODUCTION

Under traditional corporation law, a firm that buys the assets of another firm does not thereby incur liability to the seller's creditors. According to the New Hampshire Supreme Court, this general rule is implicit in New Hampshire law. In particular, this rule is implied in RSA 293-A:12.01, which permits "free alienability of corporate assets in the regular course of business . . . to maximize their productive use."1 Provided that the transaction complies with the requirements of the Business Corporation Act,2 the only statutory basis for imposing liability on the buyer would be a violation of the Fraudulent Transfer Act.3 Application of the Fraudulent Transfer Act would result in liability in cases of actual fraud, purchase for less than reasonably equivalent value, or an insider preference. However, there is a rich body of case law creating other exceptions to the general rule under the collective label "successor liability." Under the successor liability theories, if an asset acquirer is deemed the "successor" of the transferor, then the acquirer is liable for the transferor's debts as though it were the transferor. In essence, successor liability is an exercise of the court's equitable power to elevate substance over form. Four theories of successor liability are commonly listed together and invoked indiscriminately in tort, contract, labor, and environmental in modern New Hampshire cases. A fifth, the "product line" theory in products liability cases, is closely related.

Disappointed creditors understandably press for broad application of successor liability. In Bielagus v. EMRE of New Hampshire, the Supreme Court recently put a firm limit on successor liability on ordinary commercial contracts. In the process, the Court rejected one common theory of successor liability and its underlying rationale for both tort and contract claims.4

THEORIES OF SUCCESSOR LIABILITY

Generally, an acquirer of corporate assets will be deemed the transferor's "successor" for liability purposes if one of four circumstances is found to exist. First, an express or implied agreement between the contracting parties to assume the obligations of the transferor. Second, the asset acquisition amounts to a de facto merger of the two corporations. Third, the acquirer of the assets is a "mere continuation" of the transferor. Fourth, the transfer of assets is entered into fraudulently in order to escape liability for the transferor's debts.5

The first circumstance, express or implied agreement, is a matter of contract law. It can, however, lead to unexpected liability in poorly documented or executed transactions.6 The second circumstance, de facto merger, is used when the form of the transfer does not accurately portray its substance and a court decides that the new organization is simply the older one in a new guise.7 The third circumstance, mere continuation, focuses on the continuation of the ownership of the original entity rather than continuation of the business operations. It is in substance a reorganization rather than a sale.8 The fourth circumstance, fraudulent transfer, focuses on whether the transfer is a sham or fraud on the creditors.9 This is not necessarily limited to situations where fraudulent transfer statutes would apply,10 nor is the remedy limited by the value of the assets transferred.11

A minority of jurisdictions have added a fifth circumstance, known as the product line exception. Under the product line exception, liability is imposed on the purchaser of a corporation's assets.12 Under this theory, a successor corporation, which continues to manufacture a predecessor's product line, assumes strict tort liability for defects in units of the same product line.13 In 1988, the New Hampshire Supreme Court rejected the product line theory of successor liability in Simoneau v. South Bend Lathe, Inc.14

MERE CONTINUATION V. SUBSTANTIAL CONTINUITY

There are narrow and broad versions of the continuation theory of successor liability, and the choice between them was central to the decision in Bielagus. The trial court applied an expanded version of the mere continuation exception. This broader "continuity of the enterprise," or "substantial continuity,"15 theory of successor liability used by the trial court was previously applied by the United States District Court for the District of New Hampshire in Kleen Laundry,16 a Comprehensive Environmental Response, Compensation, and Liability Act 17 (CERCLA) case. The broad continuity theory of successor liability has long been used in certain labor disputes,18 and more recently in CERCLA and products liability law cases.19

While the "mere continuation" rule requires that the seller and successor have essentially the same owners, the "substantial continuity" theory does not.20 Rather, the fact-finder determines whether a successor corporation is a continuation of its predecessor by examining other factors, including: (1) retention of the same employees; (2) retention of the same supervisors; (3) retention of the same production facilities; (4) production of the same product; (5) use of the same name; (6) continuity of assets; (7) continuity of business operations; and (8) representation as the same corporation to others.21 None of these is material under the traditional "mere continuation" rule. They are, however, relevant to the traditional de facto merger...