• Successor Liability: In Light of Recent Case law-Not Much Help to Creditor’s in Ohio
  • September 30, 2013 | Author: Hannah F.G. Singerman
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
  • Often commercial creditor’s find that during the process of collecting debtors from a failing corporation, said corporation ceases to exist and a new entity takes its place.  The question becomes can this new entity be liable for the old entities’ debts?  In Ohio, successor liability for corporations is very limited compared to other states.1

    In Ohio, a successor corporation may only be held liable for the debts of its predecessor if one of four situations occurs: (1) the buyer corporation expressly or impliedly agrees to assume the debts of the previous corporation; (2) whether the sale of the assets of the processor to the successor is a de facto merger; (3) whether the buyer corporation is merely a continuation of the seller corporation; or (4) the transaction is entered into fraudulently for the purpose of escaping liability.2

    The first situation is clear as there should be evidence of an agreement in a discoverable agreement.  The fourth situation is held to the general standard of a fraudulent transfer which is encompassed by its own developed case law.  It is noted that for the fraudulent transfer situation to be relevant, there usually must be clear evidence of collection activity by the creditor prior to the transfer to the new person or entity.  The second and third situations have evolved narrowly under the case law.

    A de facto merger is decided based on the presence or absence of four factors: (1) whether there was a continuation of the prior personnel and business activity; (2) whether there was continuity of shareholders based upon a sale of assets in exchange for stock; (3) whether the existing company was immediately dissolved; and (4) whether the new entity assume the ordinary liabilities and obligations of the existing company.3   Though the four facts are titled factors, many courts see them as conjunctive, requiring the presence in some manner of all four.4  Thus, to satisfy the standard, courts are looking for a situation where the new company does the same business with the same people as the previous, is owned by similar people, and uses the same vendors, immediately after the old company is dissolved.  Though the factors may be seen as conjunctive, the first two still appear to courts as the most important.

    The third situation, mere continuation, has also been viewed narrowly by courts in recent times.  For a mere continuance one needs to show that essentially there is a continuation of the corporation itself in the new corporation, not just the business, i.e. the same people must own both corporations and the new corporation is just a reincarnation of the old.5  A mere continuation is a reorganization of the old corporation.6  Further, there is law that states that in a mere continuation, the new company must receive the assets of the old.7  A continuation cannot occur in a situation where the old company is liquidated and the new company starts fresh.8

    Thus, with such limited options after a corporation’s assets are sold, creditors must best be advised, in Ohio, especially in light of the most recent case law, not only to seek proper personal guarantees for debts, but must seek and secure collection of debts quickly so that the assets are not ferreted away, beyond reach.  Speed of collection may be a key for creditors as the law, at least in states like Ohio, is hostile the concept of successor liability.  Thus, it is best to at least be able to aggressively pursue collection prior to any new company being formed than to wait.

    1. See Flaugher v. Cone Automatic Mach. Co. (1987), 30 Ohio St.3d 60 (refusing to adopt California and other states’ more liberal view of successor liability).
    2. See Flaugher, supra.
    3. See Dana Partners, LLC v. Koivisto Constructors & Erectors, Inc., Case No. 2011-T-0029 (Dec. 31, 2012), 2012 Ohio 6294 (Ohio App. 11th Distr.)(Citing State ex rel H.C.F. Inc. v. Ohio Bur. Of Worker’s Comp. (1998), 80 Ohio St.3d 642).
    4. See, e.g., Dana Partners, LLC, and H.C.F, Inc., supra
    5. Rondy & Co., Inc. v. The Plastic Lumber Co., et al., C.A. No. 25548 (November 9, 2011), 2011 Ohio 5775 (Ohio App. 9th Dist.)(internal citations omitted).
    6. See id.
    7. See id.
    8. See id.