Spring 2007 - #4. Successor Liability in Vermont.

Author:by George W. Kuney, Esq.
 
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Vermont Bar Journal

2007.

Spring 2007 - #4.

Successor Liability in Vermont

THE VERMONT BAR JOURNAL SPRING 2007

Successor Liability in Vermontby George W. Kuney, Esq.

Introduction

Successor liability is an exception to the general rule that, when one corporate or other juridical person sells assets to another entity, the assets are transferred free and clear of all but valid liens and security interests. When successor liability is imposed, a creditor or plaintiff with a claim against the seller may assert that claim against and collect payment from the purchaser. Historically, successor liability was a flexible doctrine, designed to eliminate the harsh results that could attend strict application of corporate law. Over time, however, as successor liability doctrines evolved, they became, in many jurisdictions, ossified and lacking in flexibility. As this occurred, corporate lawyers and those who structure transactions learned how to avoid application of successor liability doctrines.(fn1) This article summarizes what has become of various species of nonstatutory successor liability in Vermont.(fn2)

There are two broad groups of successor liability doctrines, those that are judge-made (the "common law" exceptions) and those that are creatures of statute. Both represent a distinct public policy that, in certain instances and for certain liabilities, the general rule of nonliability of a successor for a predecessor's debts following an asset sale should not apply. This article addresses the statues of the first group, judge-made successor liability in Vermont.

The current judge-made successor liability law is a product of the rise of corporate law in the last half of the nineteenth century and early part of the twentieth century. It appears to have developed because of and in reaction to the rise of corporate law. It may be better to characterize it as a part of that body of law, much like the "alter ego" or "piercing the corporate veil" doctrines,(fn3) rather than as a creature of tort law, although it is used as a tool by plaintiffs who are involuntary tort claimants.

Many sources and authorities list four, five, or six basic types of situations in which judge-made successor liability has sometimes been recognized--(1) express or implied assumption, (2) fraud, (3) de facto merger, (4) mere continuation, (5) continuity of enterprise, and (6) product line, for example.(fn4) In fact, the matter is more complicated than that. Each of these species of successor liability has, within it, different sub-species with different standards and variations in the jurisdictions that recognize them. Some use a list of mandatory elements while others are based on a non-exclusive list of factors and considerations to be weighed and balanced in a "totality of the circumstances" fashion. Some that began as an approach consisting of a flexible list of factors have evolved into one consisting of one or more mandatory elements. In any event, to state that there are only four, five, or six categories is to oversimplify the matter.(fn5)

The State of Successor Liability in Vermont

When examined in detail, the types of successor liability can be classified into five general species, each of which is specifically defined on a jurisdictionby-jurisdiction basis. The five categories of successor liability addressed in this article are: (1) intentional assumptions of liabilities; (2) fraudulent schemes to escape liability; (3) de facto mergers; (4) the continuity exceptions--mere continuation and continuity of enterprise; and (5) the product line exception.

When examining successor liability, one should keep in mind that there is variance and overlap between the species and their formulation in particular jurisdictions. The label a court uses for its test is not necessarily one with a standardized meaning applicable across jurisdictions. Accordingly, it is dangerous to place too much reliance on a name; the underlying substance should always be examined.

1. Intentional (Express or Implied) Assumption of Liabilities

Intentional assumption of liabilities, express or implied, is probably the simplest of the successor liability species. Imposing liability on a successor that by its actions is shown to have assumed liabilities is essentially an exercise in the realm of contract law, drawing on doctrines of construction and the objective theory of contract.(fn6) Vermont recognizes the express or implied assumption of liability as an exception to the traditional rule of non-liability in asset sales.(fn7)

2. Fraudulent Schemes to Escape Liability

Fraudulent schemes to escape liability by using corporate law limitation-ofliability principles to defeat the legitimate interests of creditors illustrate an example of the need for successor liability to prevent injustice. If a corporation's equity holders, for example, arrange for the company's assets to be sold to a new company in which they also hold an equity or other stake for less value than would be produced if the assets were deployed by the original company in the ordinary course of business, then the legitimate interests and expectations of the company's creditors have been frustrated.(fn8) By allowing liability to attach to the successor corporation in such instances, the creditors' interests and expectations are respected. The challenge, of course, is defining the standard that separates the fraudulent scheme from the legitimate one.

Vermont recognizes the fraud exception to successor liability.(fn9) Interestingly, the court thus appears to have split the traditional fraud analysis into two types, actual fraud and constructive fraud, the later of which appears to have only one element-- inadequate consideration--rather than the more common two alternative element approach of the Uniform Fraudulent Transfer Act.(fn10)

3. De Facto Merger

In a statutory merger, the successor corporation becomes liable for the predecessor's debts.(fn11) The de facto merger species of successor liability creates the same result in the asset sale context to avoid allowing form to overcome substance. A de facto merger, then, allows liability to attach when an asset sale has mimicked the results of a statutory merger except for the continuity of liability. The main difference between the sub-species of de facto merger in various jurisdictions is how rigid or flexible the test is. In other words, how many required elements must be shown to establish applicability of the doctrine? On one end of the spectrum is the lengthy, mandatory checklist of required elements. On the other, the non-exclusive list of factors to be weighed in a totality of the circumstances fashion.

The court in Cab-Tek, Inc. v. EBM, Inc. addressed the distinction between consolidation and de facto merger.(fn12) Consolidation occurs when the...

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