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Successor Liability Under the WPLA

— June 12, 2015

A big concern of a company purchasing another company is liabilities. Generally, the transfer of assets does not mean the transfer of liabilities. The sale of corporate assets is a transfer of an interest separable from the corporate entity and does not result in a transfer of unbargained-for liabilities from the seller to the purchaser. The purchasing corporation receives the protection traditionally accorded any purchaser of property: the bona fide purchaser who gives adequate consideration and who lacks notice of prior claims against the property acquires no liability for those claims. Hall v. Armstrong Cork, Inc., 103 Wash. 2d 258, 262, 692 P.2d 787, 790 (1984)

There are four exceptions to the traditional rule that have been developed to protect the rights of commercial creditors and dissenting shareholders following corporate acquisitions: (a) the purchaser expressly or impliedly agrees to assume liability; (b) the purchase is a de facto consolidation or merger; (c) the purchaser is a mere continuation of the seller; or (d) the transfer of assets is for the fraudulent purpose of escaping liability. 15 W. Fletcher, Private Corporations ss 7118-7123 (rev. ed. 1973).

Express/Implied Assumption of Liability

Express assumption of liability typically is a contract containing specific language attributing liability to a corporation. Implied assumption of liability is not so clearly defined. The presence of such an intention depends on the facts and circumstances of each case. “[I]n order that a promise may be implied, on the part of a corporation, to pay the debts of another corporation, to the property of which it has succeeded by a valid purchase, the conduct or representations relied upon must show such an intention.” Uni-Com Nw., Ltd. v. Argus Pub. Co., 47 Wash. App. 787, 801, 737 P.2d 304, 312 (1987) In Uni-Com, the Court considered two main factors in determining whether implied liability exists: (1) the effect of the transfer upon creditors of the predecessor corporation; (2) admissions of liability on the part of officers or other spokesmen of the successor corporation. Id. But, the mere fact that the new corporation has voluntarily paid some of the debts of the old corporation is no ground for inferring that it assumed the latter’s debts. Id.

De Facto Consolidation or Merger

A merger or consolidation occurs when there is a union between two or more corporations that results in either the absorption of one by the other or the creation of a new corporation. Payne v. Saberhagen Holdings, Inc., 147 Wash. App. 17, 25-26, 190 P.3d 102, 107-08 (2008) After a merger, whether statutory or de facto, the surviving company is responsible for the merged (or subsumed) company’s liabilities. Id. De facto merger is a judicial framework for analyzing the substance of a transaction over its form. Id. A court considers four factors in a de facto merger analysis: (1) continuity of the business (including personnel and management, physical location, operating, use of brand names); (2) continuity of ownership; (3) seller’s existence ceasing as soon as legally and practically possibly; and (4) if the purchaser expressly or impliedly assumes the seller’s obligations. Id. While not all four elements must be present to find an asset purchase constitutes a de facto merger, continuity of ownership has repeatedly been held essential. Id.

Mere Continuation of Seller

The fact that a purchaser continues the operations of a seller can be used to establish liability in the surviving entity in limited circumstances based on the facts of the case. But the mere fact that the purchaser continues the operations of the seller does not of itself render the purchaser liable for the obligations of the seller; in order to impose liability on the purchaser, it must be shown that the purchaser represents “merely a ‘new hat’ for the seller.” McKee v. Harris-Seybold Co., 109 N.J.Super. 555, 264 A.2d 98, 106 (1970) Cashar v. Redford, 28 Wash. App. 394, 397, 624 P.2d 194, 196 (1981)

Product Line Liability

In addition to the traditional bases of successor liability (agreement to assume liability, de facto merger, mere continuation, fraud), Washington recognizes product line liability when the following elements are present: (1) the successor acquires substantially all of the predecessor’s assets; (2) holds itself out as a continuation; and (3) benefits from the predecessor’s good will.Martin v. Abbott Laboratories, 102 Wash.2d 581, 689 P.2d 368 at p. 384

Market-Share Liability/Enterprise Liability

In addition to these theories of liability the Washington Supreme Court has adopted a somewhat unique rule of market-share alternate liability in DES cases. To date, the Court has refused to extend this theory into other contexts. The theory distorts market liability by providing that the “substantial” market share bears joint responsibility for 100 percent of plaintiff’s injuries. Martin v. Abbott Labs., 102 Wash. 2d 581, 602, 689 P.2d 368, 381 (1984)

Under the Sindell court’s market-share theory, a plaintiff need only join a sufficient number of manufacturers to represent a “substantial share” of the market. Once the plaintiff has met this threshold requirement, the burden of proof shifts to each defendant to exculpate itself by showing that it could not have supplied the offending drug. Those defendants that are unable to prove their innocence are liable for the plaintiff’s damages. Martin v. Abbott Labs., 102 Wash. 2d 581, 600-01, 689 P.2d 368, 380 (1984) Sindell v. Abbott Laboratories, 26 Cal.3d 588, 607 P.2d 924, 163 Cal.Rptr. 132, cert. denied, 449 U.S. 912, 101 S.Ct. 285, 66 L.Ed.2d 140 (1980).

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