De Facto Merger – New Nello Operating Co., LLC v. CompressAir

The Indiana Court of Appeals recently upheld the finding of a de facto merger in successor companies when allowing the enforcement of a judgment against the predecessor company. New Nello Operating Co., LLC v. CompressAir. The Court noted four exceptions to the general rule that when one corporation purchased the assets of another the buyer does not assume the debts and liabilities of the seller.

According to the Court, those four exceptions which allow for successor liability are:

(1) an implied or express agreement to assume liability;
(2) a fraudulent sale of assets done for the purpose of evading liability;
(3) purchase that is a de facto consolidation or merger; or
(4) where the purchaser is a mere continuation of the seller.

Successor liability can be implicated only when the predecessor corporation no longer exists in the case of dissolution or liquidation in bankruptcy.

In making a finding as to whether a de facto merger has occurred, the Court outlined the factors which are important as follows:

(1) continuing of ownership;
(2) continuing of management, personnel, and physical operation;
(3) cessation of ordinary business and dissolution of predecessors as soon as practically and legally possible; and
(4) assumption by the successor of the liability ordinarily necessary for the uninterrupted continuation of the business of the predecessor.

This case provides a reminder that when reorganizing a business, careful efforts should be made to make sure that the new business does not retain the liabilities of the old businesses unless intended.

James A.L. Buddenbaum is a partner of the law firm of Parr Richey Frandsen Patterson Kruse LLP with offices in Indianapolis and Lebanon, Indiana. He advises business, utility and municipal and hospital clients in the areas of corporate compliance, corporate governance, employment, real estate, commercial transactions and regulatory law as well as representing policyholders in insurance disputes. He has 30 years of experience representing rural electric and telephone cooperatives.

The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.