Woodrick v. Jack J. Burke Real Estate, Inc.

A-3095-96T2, 1997 WL 754552 (N.J. Super. App. Div. 1997)
  • Opinion Date: December 9, 1997

CORPORATIONS; SUCCESSOR LIABILITY—When an asset purchase transaction amounts to a consolidation or merger of the companies, or if the purchasing entity is merely a continuation of the selling entity, the transferee may be liable for the debts of the transferor.

A real estate broker that had abandoned its defense had a default judgment entered against it. The seller that brought the suit was then permitted to amend the complaint to add an additional real estate company, claiming it was liable for the final default judgment as a successor entity to the real estate company originally named. The new company sought to vacate the default judgment and be allowed to defend the case on its merits. The seller urged that the doctrine of issue preclusion be invoked to prevent relitigation of the issue of corporate successor liability, since such liability had been established in a prior, unrelated case against the same parties. The judge refused to apply issue preclusion and decided the case on its merits, holding that the successor company’s purchase of the assets of the original real estate company was a de facto merger, resulting in a continuation of the predecessor’s business. On that basis, the judge held the successor company liable for the full amount of the judgment.

The Appellate Court found it well settled that where one company transfers assets to another, the transferee is not liable for the debts of the transferor, including those arising out of tortious conduct. There is an exception when the transaction amounts to a consolidation or merger of the companies, or if the purchasing corporation is merely a continuation of the selling corporation. The Court listed four factors used to determine whether a transaction amounts to a de facto consolidation or a mere continuation: (1) continuity of personnel, physical location, assets and general business operations, (2) cessation of ordinary business and dissolution of the predecessor as soon as possible, (3) successor assumption of liabilities, and (4) continuity of ownership/shareholders. The Appellate Division then looked to the asset purchase agreement between the two real estate companies, wherein the acquiring company undertook certain liabilities but not others. The Court also found that the selling company was dissolved following the purchase. The acquiring company argued that its general continuation of the business of the acquired company was not enough by itself to warrant corporate successor liability. However, the Court stated that not all of these factors have to be present since the real inquiry is whether there was intent by the contracting parties to effectuate a merger or consolidation, and not simply a sale of assets. Existing case law has stated that liability attaches when the acquiring corporation simply represents a “new hat” for the seller. Other cases have held that even if the usual elements of a de facto merger are absent, continuation may be found where the facts indicate an intent for the successor to assume all benefits and burdens of the predecessor’s business. Citing these cases, and choosing to focus on the practical effect of a transaction rather than on its form, the Court held that a corporate successor could not avoid liability by simply structuring a cash-for-assets sale. In this case, the Court found that: (1) the successor company assumed a significant portion of the liabilities, (2) the predecessor ceased to exist after the transaction, and (3) the structure of the transaction indicated an intent to absorb and continue the operations of the existing real estate company. The Court concluded that the intent was to effectuate a merger, and therefore the acquiring company should be liable for the debts of the predecessor.

Although it had already decided the case on its merits, the Court turned to whether issue preclusion should have been applied to collaterally estop the successor company from relitigating the issue of liability. Collateral estoppel bars relitigation of any issue that was actually determined in a prior action. Mutuality of estoppel limits invocation of collateral estoppel to the parties involved in the original litigation. Although the successor company was a party to the initial action, the seller had to establish that the issue: (1) was identical to the issue in the prior action, (2) was actually litigated in the prior action, (3) had been determined by a valid and final judgment, and (4) was essential to the prior judgment. The Court then stated that all of these elements were satisfied except the third, since the prior judgment was vacated. Since it was not a valid and final judgment, the trial judge properly refused to estop the acquiring company from relitigating the issue of corporate successor liability.