The new owner of a window-maker that was auctioned off in a bankruptcy sale isn’t liable for defective windows the company made before being liquidated, even though the company kept mostly the same officers after being sold, the South Carolina Supreme Court has ruled. The decision overturns a 2016 ruling by the state’s Court of Appeals.
A Landrum couple sued the contractor that had built their home, alleging damage resulting from shoddy windows. After a settlement, the contractor and its insurance company, Nationwide, came after Eagle & Taylor Company, who made the windows, to recoup some of the payout.
Eagle & Taylor had been the wholly owned subsidiary of American Architectural Products Company when the house was built, but AAPC went belly-up in 2000, and Eagle & Taylor was auctioned off to Linsalata Capital in an asset sale. It now does business as Eagle Window & Door, continuing to work out of the same facilities as before the sale, and branding itself on its website as a continuation of the old company.
Typically in an asset sale—as opposed to a stock sale, where the buyer purchases shares in a corporation rather than specific assets—the assets are sold to the buyer free and clear of any liabilities. There are some exceptions, though, to keep companies from trying to wriggle free of their debts through legal jiggery-pokery. One exception is that successor companies will be liable for the predecessor’s debts when the new outfit is a “mere continuation” of the old one.
Come meet the new boss
The aggrieved contractor, Gilliam Construction Company, argued that the new Eagle was basically the old Eagle, with just a few new feathers—out of Eagle & Taylor’s eight officers, five assumed similar roles as officers with Eagle after the asset sale. A Spartanburg County Circuit Court Judge, and later a divided panel of the Court of Appeals, both agreed. But in a unanimous Aug. 22 opinion, the Supreme Court reversed, saying that the lower courts had misconstrued the meaning of one of its earlier opinions.
The Supreme Court addressed the “mere continuation” exception in its 2005 decision in Simmons v. Mark Lift Industries, Inc. But like a smudged window, the court’s guidance was not entirely clear. The Simmons majority held (in a somewhat jumbled footnote) that a successor company is a mere continuation of its predecessor only if the two have substantially the same officers, directors, and shareholders, whereas one dissenting justice would have applied the exception whenever companies have the same officer, directors or shareholders.
Justice Kaye Hearn, writing for the court, said that in Eagle’s case, two of the three requirements weren’t met. After the asset sale, AAPC went from owning all of the shares to owning none, and the sole director of the company before the sale was not kept on afterwards. So under a proper application of Simmons, the two companies were not a mere continuation.
Hearn said that the trial court’s ruling had focused heavily on Eagle’s name, location, website, and goodwill—just the sort of theory of successor liability that the Simmons majority flatly rejected. She noted that a separate exception exists to protect creditors when companies engage in outright fraud.
“Although the mere continuation test is a high burden for a plaintiff to meet, it is intentionally so, as corporate law generally favors the free transfer of assets and disfavors successor liability,” Hearn wrote. “However, our successor liability doctrine affords protection for plaintiffs in those cases where a corporate sale is driven by a desire to escape the predecessor’s liabilities and obligations. Where the changing of corporate hats is tainted by such fraudulent intent, the successor corporation remains liable, even when the test for mere continuation is not otherwise satisfied.”
A double-headed Eagle
In theory, AAPC would still be on the hook for Eagle & Taylor’s old liabilities. But in practice, since AAPC went bankrupt almost two decades ago, Gilliam and Nationwide will just have to take the lumps.
Dana Sinkler and Ainsley Fisher Tillman, both of Charleston, represented Eagle. Tillman said that the ruling was significant because the court has now clarified a holding that was previously only contained in a blip of a footnote that was itself confusing, and made clear that, in South Carolina, there is a presumption of non-liability for a successor corporation which has purchased the assets of an unrelated corporation. In this case, she said, the purchasing company was a “stranger” to the selling company, with no commonality of ownership.
“The trial court and the Court of Appeals, however, improperly looked to the fact that the windows continued to be manufactured in the same plant, with the same management, same design, etcetera, and thus found and imposed liability on the purchasing corporation for the windows designed and manufactured by the predecessor,” Tillman said. “The Supreme Court held that such factors are irrelevant to the analysis, which properly requires an examination of the corporate entity, as opposed to the product line or corporate enterprise.”
Jason Imhoff and Ginger Goforth, both of The Ward Law Firm of Spartanburg, represented Gilliam and Nationwide. The firm did not respond to a request for comment on the ruling.
The 13-page decision is Nationwide Mutual Insurance Co. v. Eagle Window & Door, Inc. (Lawyers Weekly No. 010-082-18). The full text of the decision is available online at sclawyersweekly.com.