Page 3 - John Hundley 2018

Corporate Law Roundup

Sharp Thinking

No. 146 Perspectives on Developments in the Law from Sharp-Hundley, P.C. January 2018

“Mere Continuation” Doctrine

Requires Common Ownership

By John T. Hundley, John@sharp-hundley.com, 618-242-0200

The absence of significant common ownership between the alleged predecessor and successor
dooms a creditor’s attempt to hold the latter responsible for the debts of the former under the “mere
continuation doctrine,” a panel of the Appellate Court in Chicago has held.

Ruling in Groves of Palatine Condo. Ass’n v. Walsh Contr. Co., 2017 IL
App (1st) 161036, the panel said the lack of significant common ownership
was “dispositive” of a creditor’s attempts to thwart a sale of assets by imposing
“successor liability.”

In Groves, K&K Iron Works, Inc. sold its assets to K&K Iron Works, LLC,
expressly excluding liabilities. Though the LLC continued to operate from the
same facilities the corporation had, for six years prior to the sale the
corporation had been owned by a holding company, in which the former
corporation’s owner’s interest had varied from 12.5% to .9%. The court refused
to find the LLC was simply the corporation with “different clothes.” Hundley

It said Illinois courts have “consistently required identity of ownership before imposing successor
liability” under the continuation exception. That being the case and the court finding that the indirect
ownership of the minority interest was “no identity of ownership that would make the LLC merely a
continuation of the corporation,” it ruled the attempt to impose successor liability was barred under
Illinois’ general rule for sale-of-assets cases.

That rule provides that the purchaser of assets is not liable for the liabilities of the seller except
(1) when there is an express or implied agreement of assumption; (2) when the transaction amounts
to a consolidation or merger; (3) where the purchaser is merely a continuation of the seller; or (4)
when the transaction is for the fraudulent purpose of escaping liability for the seller’s obligations.

Appellate Panel Pierces Veil Of LLC

Inadequate capitalization, a nonfunctioning “shareholder” and commingling of funds were the
factors upon which a panel of the Appellate Court’s Third District relied in “piercing the corporate veil”
in Benzakry v. Patel, 2017 IL App (3d) 160162.

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Sharp Thinking is an occasional newsletter of Sharp-Hundley, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp Thinking
shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein constitute
educational material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal advice on
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