Corporate doctrines continue to be applied to limited liability companies. A recent example is application of the no successor liability rule to an LLC in Milliken v. Duro Textiles, LLC, 887 NE 2d 244 (Mass. May 30, 2008).
The traditional corporate law principle followed by most courts, including Iowa, holds that the liabilities of a selling corporation (LLC) are not imposed upon the successor corporation (LLC) which purchased its assets.
There are four exceptions to this rule: (1) the successor entity agrees to assume the liabilities of the predecessor; (2) the transaction is a de facto merger (Iowa doesn't recognize this exception); (3) the successor is a "mere continuation" of the predecessor; or (4) the transaction is fraudulent.
The Milliken case dealt with the mere continuation exception. The court also noted that many courts consider the de facto merger and mere continuation exceptions interchangeably, which may be the reason Iowa doesn't bother with the de facto merger exception.
Under both exceptions the courts compare the owners, management, assets, operations and physical locations of the predecessor and the successor. No single factor is dispositive and the facts must be considered on a case-by-case basis. It is a classic substance over form test or as one court put it, is the buyer "merely a 'new hat' for the seller?"
In Milliken the court concluded that New Duro, as the successor was called, was merely a new hat for Old Duro. The secured lenders owned 51% of Old Duro and all of New Duro, which they created to acquire the assets of Old Duro (but not the unsecured liabilities). Management was the same between the old and new companies, operations were the same, and the physical location was the same. Old Duro ceased its old line of business and became the landlord to, you guessed it, New Duro. The court imposed Old Duro's unsecured obligations on New Duro.
The lesson here, particularly for lenders, is not to assume that form will prevail over substance and secured lenders are not impervious to the equitable power of the courts.
The most recent Iowa case on successor liability is Pancratz v. Monsanto, 547 NW 2d 198 (Iowa 1996). In that case the Iowa Supreme Court reaffirmed its commitment to the majority rule that "a corporation that purchases the assets of another corporation assumes no liability for the transferring corporation's debts and liabilities." The Iowa Supreme Court also recognized the exceptions noted in Milliken (other than de facto merger).
The Pancratz case is also significant for the fact that the Iowa Supreme Court refused to create another exception for no successor liability to product liability cases.
-Marc Ward
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