If a corporation acquires all or a substantial part of the assets (property) of a corporation and assumes no liabilities, is the buyer free from the liabilities of the predecessor?  In a Massachusetts corporation, not always. 

            This blog post and the following post will set forth the instances where courts will impose liability on the successor, even if the buyer and seller agree that there is no assumption of liabilities and the agreement transferring assets specifically states that no liabilities are assumed.  A 1991 case, Guzman v. MRM/Elgin set forth four areas where a court will impose successor liability.  The Massachusetts Supreme Judicial Court stated:

Most jurisdictions, including Massachusetts, follow the traditional corporate law principle that the liabilities of a selling predecessor corporation are not imposed upon the successor corporation which purchases its assets, unless (1) the successor expressly or impliedly assumes liability of the predecessor, (2) the transaction is a de facto merger or consolidation, (3) the successor is a mere continuation of the predecessor, or (4) the transaction is a fraudulent effort to avoid liabilities of the predecessor.[1]

Looking at these 4 areas:

  1. Assumption of liability.

            Of course, the parties can expressly agree that the successor will assume some or all of the seller’s liabilities.  In addition, the assumption of liabilities can be implicit.  The First Circuit stated that a prima facie case could be established if the purchaser “manifests its assent to assume [the contract] . .  . where the corporation accepts the benefit of [that] contract with knowledge of its terms.” [2]  Thus, the parties to the deal can, by their actions thereafter manifest an intention that some or all the liabilities of the seller will be assumed, and a court will impose those liabilities of the seller on the buyer.

  • De Facto Merger.

            In this case a court will impose liability because it found that the asset sale had the effect of a merger.  I will discuss this in my next post. 

  • The successor is in fact the “mere continuation” of the seller.

            For the most part, the de facto merger exception and the mere continuation are similar.  A 2020 Supreme Judicial Court case, Smith v. Kelley, is illustrative of the “mere continuation” exception on it own.  A creditor, defrauded by an employee of the owner of a professional corporation (“PC”) was able to proceed against a sole proprietorship started by the owner, a Mr. Kelley.  After a judgment was entered against the PC, Mr. Kelley, the sole shareholder of the PC, opened a sole proprietorship.  He had existing clients of the PC amend their fee agreements so that all future work was done by the proprietorship.  Among other things, the proprietorship worked out of the same office, had the same email address and a similar letterhead.  Not long after the proprietorship was established, the PC filed for bankruptcy.  The bankruptcy court found that equipment, inventory and supplies had been transferred from the PC to the  proprietorship, as had some to the PC’s receivables,  The Court held that in the “unique circumstances” of that case the proprietorship was the mere continuation of the PC:

While we respect the integrity of corporate structures, we nonetheless find it troubling “that by merely changing its form, without significantly changing its substance, a single corporation can wholly shed its debts to unsecured creditors, continue its business operations with an eye toward returning to profitability, and have no further obligation to pay such creditors.” , , , The application of the doctrine of successor liability is “designed to remedy this fundamental inequity.” . . . The “essence” of this doctrine is that, “[u]nder principles of equity, a court will consider a transaction according to its real nature, looking through its form to its substance and intent.”  If the entity remains essentially the same, despite a formalistic change of name or of corporate form, successor liability may be imposed.[3]

  • The court finds the transaction fraudulent.

            There has been little case law in Massachusetts in this area and some of it is questionable.   

Conclusion

            When faced with an injured party or creditor, a Massachusetts court has a host of equitable remedies with which to impose successor liability.   The foregoing deal with more obvious impositions of successor liability, but the de facto merger—where courts equate certain asset sales with mergers—which I will discuss in my next post, effect some surprising results.  I discuss successor liability in more detail in §25.4 of my treatise on corporations found here, and which may also be accessed on Westlaw™.


[1]           Guzman v. MRM/Elgin, 409 Mass. 563, 567 (1991).

[2]           Devine & Devine Food Brokers, Inc. v. Wampler Food Brokers, Inc., 313 F. 3d 616,  618 (1st Cir.  2002).

[3]           Smith v. Kelley, 484 Mass. 111 (2020).