Indiana Federal Court Finds De Facto Merger Giving Rise To Successor Liability for Contract Obligations
May 20, 2018
Lesson. Depending upon the facts, a newly-formed company can be liable for a separate, but related, company’s debts under Indiana’s “successor liability” doctrine.
Case cite. Continental Casualty v. Construct Solutions, 2017 U.S. Dist. LEXIS 76396 (S.D. Ind. 2017) (pdf).
Legal issue. Whether Company 2 was a successor company of Company 1 and thus responsible for Plaintiff’s contract damages because Company 2 was either a “de facto merger” or a “mere continuation” of Company 1.
Vital facts. Continental Casualty was a breach of contract action. About a year after Defendant Company 1 signed the contract, the owner incorporated Defendant Company 2. Both companies were commercial roofing operations. Company 1’s people controlled the operations of Company 2. The same individual was the president of, and owned, both companies. Both operated from the same location. Company 2 assumed the trade name of Company 1.
Procedural history. Continental Casualty was Judge Tonya Walton Pratt’s opinion on Plaintiff’s motion for summary judgment. Plaintiff asked for a judgment against Defendant Company 2 as the successor company for Defendant Company 1. In other words, Plaintiff sought to hold Company 2 liable for Plaintiff’s losses under its contract with Company 1.
Generally, in Indiana, a successor company may liable for the obligations of its predecessor if it’s a “de facto consolidation or merger” or where the successor is a “mere continuation of the seller.”
Indiana looks at the following factors to make such a determination:
1. Continuity of ownership,
2. Continuity of management, personnel and physical operation,
3. Cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible, and
4. Assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor.
Holding. The Court granted summary judgment in favor of Plaintiff.
Policy/rationale. The same person owned both companies. The same person was the president of both companies, which were both operated from the same location. Company 1 dissolved in early 2015, before Company 2 was formed. Plus, the companies adopted each other’s trade names and provided the same roofing services. The Court concluded that these uncontested facts were sufficient to establish that Company 2 was a de facto merger with Company 1 and, thus, was “liable as a successor company to amounts owed under the [subject contract].”
Related post. Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part II