Page 39 - Sharp-Hundley 2012

Sharp Thinking

No. 75 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. October 2012

New Corporation Sometimes May Be

Held Liable for Old Corporation’s Debts

Directors Owe Fiduciary Duty to Creditors When Corporation Becomes Insolvent

By John T. Hundley, Jhundley@lotsharp.com, 618-242-0246

A court may hold that a new corporation is liable for the debts of a predecessor corporation where the
common shareholders are sufficient to exercise control of the new corporation, an Appellate Court panel
in Chicago has ruled, rejecting an argument that the ownership of the two corporations had to be identical.

The panel in Workforce Solutions v. Urban Serv. of Am., Inc., 2012 IL App (1st) 111410, also found
that directors of the predecessor might be personally liable for its debts because of alleged breaches of a
fiduciary duty to manage the corporation in the interests of creditors once it had become solvent. It also
refused to find an independent cause of action for alleged discovery violations.

“Mere Continuation” Doctrine at Issue: At issue in Workforce was the
“mere continuation” doctrine which functions as an exception to the general rule that
a corporation which merely purchases the assets of another (as opposed to merging
with it, or acquiring its stock) does not become responsible for the predecessor’s
debts. 1 That exception applies “when the purchasing corporation is merely a
continuation or reincarnation of the selling corporation,” the panel said, citing Pielet v.
Pielet, 407 Ill. App. 3d 474 (2010). “The purchasing corporation is the mere
continuation of the selling corporation when ‘the purchasing corporation maintains the
same or similar management and ownership but merely wears different clothes.’”

The panel acknowledged that “identity of ownership” usually is a key element in
establishing this exception. However, citing Dearborn Maple Venture, LLC v. SCI Ill.
Serv., Inc., 2012 IL App (1st) 103513, it said that “the continuity of shareholders
necessary to a finding of mere continuation does not require complete identity
between the shareholders of the former and successor corporations.” Rather, the
panel said, differences in shareholders are “consistent with mere continuation as long
as the former owners retain a controlling interest in the successor entity.”

Because the trial court had sought “complete unity” between the ownership of the old and new
corporations, the panel reversed the decision in favor of the defendants and sent the case back for
analysis under the more liberal standard.

1
Other exceptions include (1) where there is an express or implied agreement to assume the liabilities, (2) where the
transaction amounts to a consolidation or merger, and (3) where the transaction is for the fraudulent purpose of escaping
liability for the seller’s obligations. For further information on the non-liability rule and exceptions thereto, see Hundley,
Business Expansion Through Asset Acquisition: Some Problems Posed By Product Liability Doctrines, 77 ILL. B.J. 492
(1989).

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Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
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