New Hampshire Plastics, Inc. v. Katimarc Corporation

A-1923-97T1 (N.J. Super. App. Div. 1998) (Unpublished)
  • Opinion Date: October 23, 1998

CORPORATIONS; SUCCESSOR LIABILITY—A corporation that acquires a majority of another company’s shares and broadly assumes its business, leaving it with no assets and no ability to continue, has successor liability for the obligations of the other company.

A creditor sought to collect a debt from a company that it claimed was a successor corporation to one of its delinquent customers. In general, where one company sells or otherwise transfers all of its assets to another company, the transferee is not liable for the commercial debts of the transferor company. Exceptions to this rule are: (1) the buyer expressly or impliedly agrees to assume the debts; (2) the transaction amounts to a consolidation or merger; (3) the successor is merely a continuation of its predecessor; or (4) transaction is entered into fraudulently in order to escape responsibility for the debts. The lower court concluded that the corporation being charged was liable for the debts of the creditor’s customer because the corporation so dominated the customer that it had no separate existence. The Appellate Division sought to determine if the evidence revealed either a de facto merger or a continuation of the debtor’s original business. The factors that are considered in either case are: (1) continuity of management, personnel, physical location, assets, and general business operations; (2) a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; (3) assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the predecessor’s business; and (4) continuity of ownership/shareholders. Not all these factors need be present for a de facto merger or business continuation. The crucial inquiry is whether there was an “intent on the part of the contracting parties to effectuate a merger or consolidation rather than a sale of assets.”

The Appellate Division agreed with the lower court’s finding of abundant credible evidence to support successor liability. The successor corporation agreed to acquire 61% of the debtor company’s stock. The other shareholders of the debtor continued to work, but with only 39% ownership. The successor’s president, on behalf of the successor company, assumed control of all of the debtor’s purchasing, took possession and control of the debtor’s corporate books, and retained the sole power to sign the debtor’s checks. When it was clear that the debts could not be paid in full, the successor’s president and the two individual shareholders of the debtor negotiated arrangements with various creditors. In substance, the transaction left the debtor with no assets and no ability to pay debts. Even payments that belonged to the debtor company were directed to the successor and treated as a repayment of a loan. Further, the successor took over a particularly large proposal made by the debtor to one of its own customers and thereby received the profits even after the debtor ceased operations. In summing up the reasons why the Court found that the successor corporation had liability for the debts of the debtor company, it held that there was: (1) a transfer of a controlling interest; (2) a broad assumption of the debtor company’s assets and liabilities; and (3) a joinder of the officers of the two companies. Those facts were sufficient, in the Court’s view, to constitute a de facto merger and a continuation of the debtor company’s operations.