Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part II
April 08, 2013
This follows-up Part I, from March 29th, dealing with veil piercing from one company to another (alter ego doctrine) in order to recover a debt. Please click on Part I for introductory information about the subject case, Ziese & Sons v. Boyer. Today’s post focuses on the second theory of recovery – successor liability.
Successor liability, generally. Plaintiff Ziese’s second contention was that defendant Group was liable for Corporation’s debt based upon certain exceptions to the general rule against successor liability, which centers upon the fraudulent sale of assets. (Although the Ziese opinion did not rely upon Indiana’s Fraudulent Transfer Act, these kinds of cases are very similar to one another.) Importantly, successor liability “is implicated only when the predecessor corporation no longer exists, such as in the case of dissolution or liquidation in bankruptcy.”
Indiana’s general rule is that, when one corporation purchases the assets of another, the buyer does not assume the debts or liabilities of the seller. There are four exceptions:
1. An implied or express agreement to assume liabilities;
2. A fraudulent sale of assets done for the purpose of evading liability;
3. A purchase that is a de facto consolidation or merger; or
4. Where the purchaser is a mere continuation of the seller.
Ziese focused upon the second and fourth exceptions.
Exception 2 - fraudulent sale. Regarding the second exception, Indiana courts look to eight badges of fraud, which are different than the eight badges of fraud applicable to the veil piercing theory discussed in Part I:
1. The transfer of property by a debtor (defendant) during the pendency of a suit;
2. A transfer of property that renders the debtor (defendant) insolvent or greatly reduces his estate;
3. A series of contemporaneous transactions which strip the debtor (defendant) of all property available for execution;
4. Secret or hurried transactions not in the usual mode of doing business;
5. Any transaction conducted in a manner differing from customary methods;
6. A transaction whereby the debtor (defendant) retains benefits over the transferred property;
7. Little or no consideration in return for the transfer; and
8. A transfer of property between family members.
Indiana courts examine these badges to determine whether a fraudulent asset sale took place. In Ziese, the Court concluded that genuine issues of material fact existed as to whether Ziese could recover under this theory. There was evidence that Group acquired assets of Corporation without giving consideration for them.
Exception 4 - mere continuation. The other exception at issue in Ziese was the “mere continuation” (a/k/a "direct continuation") concept that explores “whether the predecessor corporation should be deemed simply to have re-incarnated itself, largely aside of the business operations.” The focus is upon whether there is a continuation of shareholders, directors and officers into the new corporate entity. (Remember – successor liability only applies when one entity purchases the assets of another entity.) After analyzing the evidence in Ziese, the Court held that there were genuine issues of material fact regarding whether Group was a mere continuation of Corporation. Thus the Court remanded all claims for trial.
The Ziese opinion provides an excellent outline of Indiana law regarding the doctrines applicable to recovering debts owed by one corporation from a separate, yet connected, corporation. The Court’s analysis is a road map for the proof needed to prevail on these claims or, conversely, to defeat them.