Under what circumstances can a successor company be liable for the debts of a predecessor company? A company does not become a successor company responsible for the debts of the so-called predecessor company merely by purchasing the earlier company’s assets. In the recent case of Crown Painting & Decorating, Inc. v. VBH Luxury, Inc., a subcontractor sought to recover monies due for work performed against a general contractor on the basis that it is a successor company to the previous contractor for which the work was performed.
Crown Painting & Decorating, Inc. subcontracted with Maxcon General Contracting Corp. to perform work at a building owned by VBH Luxury, Inc. The subcontractor’s work was completed in August 2002. In January 2003 the president of the general contractor, Maxcon, formed another corporation, Omnicon Interiors, Inc., of which he was also president. Maxcon did not pay the subcontractor as agreed and the subcontractor sued Maxcon for breach of contract. The subcontractor also sued Omnicon, claiming that as a successor company, it was liable for the debts of Maxcon.
According to the subcontractor, Omnicon not only had the same president as Maxcon, but performed the same work, had the same clients, the same secretary, the same telephone number and was “right around the corner” from Maxcon’s old place of business. Additionally, in March of 2004, in response to the subcontractor’s payment demands, the subcontractor was invited to go to Omnicon’s office and receive partial payments in the amounts of $1,500 and $750, with both checks paid from Onmicon’s bank account. Omnicon also acknowledged that Maxcon was “no longer doing business.”
Omnicon argued that it was formed after the subcontractor’s work was completed, that it had no involvement in the subcontractor’s work, that it never entered into any contracts with the subcontractor, and that Omnicon’s place of business was different than Maxcon’s. Based on these argument’s Omnicon moved for summary judgment, seeking to have the subcontractor’s claims against it dismissed.
The court denied Omnicon’s motion for summary judgment. In so doing, the court first noted that a corporation does not become a successor corporation responsible for the obligations of the predecessor merely by acquiring the latter’s assets. However, the court also pointed out that there are four ways in which a corporation may become liable for a predecessor’s obligations. The four ways are: (1) where the corporation expressly or impliedly assumed the predecessor’s tort liability; (2) where there was a consolidation or merger of seller and purchaser; (3) where the purchasing corporation was a mere continuation of the selling corporation; or (4) where the transaction is entered into fraudulently to escape obligations. The court determined methods three and four did not apply because Maxcon was never dissolved and the subcontractor never alleged fraud.
However, as to methods one and two, the court determined that Omnicon was possibly liable to the subcontractor under a successor liability theory. In so holding, the court focused on the subcontractor’s argument that Omnicon assumed Maxcon’s debt to the subcontractor by promising to pay and then partially paying the subcontractor. The court also focused on the similarities in ownership and business operations of Macon and Omnicon.
Since Omnicon was potentially liable under the successor liability theory, the court denied its motion for summary judgment.
Successor liability is often a bone of contention in the construction industry. Though courts are hesitant to extend liability to separate and distinct companies, this case illustrates that there are exceptions. The prudent contractor should be aware of these exceptions in conducting its business operations.
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