S.C. Supreme Court Clarifies Successor Liability Standard

Court holds plaintiffs must prove three types of commonality

Liability of a successor entity under South Carolina’s “mere continuation” rule continues to require commonality of ownership. However, the door may have been opened for successor liability in the absence of commonality of in the future.

In Nationwide Mutual Insurance Company v. Eagle Window & Door, Inc., 2018 WL 3999905 (S.C., 2018), the trial court and court of appeals both held that Eagle Window & Door (“Eagle”) was a mere continuation of a prior company, and liable for that entity’s prior tortious conduct. Reversing those courts, and clarifying the doctrine of successor liability, the supreme court held that a plaintiff must prove commonality of officers, directors, and ownership, and that mere commonality of officers and directors was insufficient.

Factual Background

A general contractor, Gilliam Construction Company (“Gilliam”), used windows manufactured by Eagle & Taylor Company d/b/a Eagle Window & Door, Inc. (“Eagle & Taylor”) in the construction of a residence. The homeowners sued Gilliam, alleging the windows were defective. Gilliam and its insurer, Nationwide, settled for $210,000 and initiated a contribution action against several defendants, including Eagle, alleging it was liable for the obligations of Eagle & Taylor.

When it manufactured the windows, Eagle & Taylor was a wholly-owned subsidiary of AAPC.  Eagle & Taylor did business under two fictitious entities, neither which was incorporated: Eagle Window & Door, Inc., and Taylor Building Products, Inc. AAPC filed for bankruptcy and placed the assets of the fictitious entity, Eagle Window & Door, Inc., up for auction. An investment partnership, Linsalata, was the successful bidder, and formed a wholly owned subsidiary, EWD, to purchase and take title to the assets. EWD subsequently changed its name to Eagle Window & Door, Inc., against which the contribution action was brought.

Eagle continued substantially the same business of Eagle & Taylor, manufacturing and selling windows and doors, using the same facilities. Five Eagle & Taylor officers joined Eagle in similar capacities, including the president, Beeken. The remaining three slots were filled by Linsalata employees.

Before the asset sale, AAPC was the sole shareholder of Eagle & Taylor.  After the sale, Linsalata owned 88%, with the rest distributed to Eagle officers and investors. There was no direct continuation of the directors, although Beeken was later added as a director.

The Issue

Eagle defended the contribution suit on the ground that no successor liability flowed from Eagle & Taylor. Nationwide and Gilliam (collectively “Nationwide”) argued Eagle was a “mere continuation” of Eagle & Taylor, and that under the supreme court’s prior holding in Simmons v. Mark Lift Industries, Inc. 622 S.E. 2d 213 (2005)), it need only show commonality of officers, directors, or shareholders between predecessor and successor corporations.

Ordinarily, a successor or purchasing corporation is not liable for the debts of the predecessor or seller unless: (1) there was an agreement to assume such debt; (2) the circumstances surrounding the transaction amount to a consolidation or merger of the two corporations; (3) the successor company was a mere continuation of the predecessor; or (4) the transaction was fraudulent and for the purpose of defeating predators’ claims.  Here, the only possible theory to consider was the “mere continuation” theory.

Court Ruling

The S.C. Supreme Court held that the trial court’s analysis, which focused on Eagle’s name, location, website, and goodwill, was in error because it fell within the continuity of enterprise theory of successor liability, and that theory had been rejected in Simmons in cases where there was no commonality of officers, directors and shareholders. Notably, the court went on to note that, “while there arguably may be merits to expanding South Carolina’s successor liability test to include the continuity of enterprise theory, the question was not before the court, and had not been raised by Nationwide. (Note: The continuity of enterprise exception is significantly different from the mere continuation exception, with the focus on the continuity of the seller’s business operation, and not the continuity of management and ownership.)

Thus, the court appears to have left open the position argued by the dissent in Simmons — that a successor corporation which purchases the assets of a predecessor may be held liable in a product liability action for an allegedly defective product manufactured by the predecessor when an analysis of the facts and circumstances reveals it is appropriate to hold the successor liable as a mere continuation of the predecessor.

Continuity of Enterprise

What would this look like? The continuity of enterprise exception is an expansion of the traditional successor liability rules and focuses on whether there is a continuation of the seller’s business operations.

There is no requirement under this exception for continuity of ownership or management. It has not been widely adopted. The factors under the continuity of enterprise exception typically include

(1) continuity of key personnel, assets, and business operations;

(2) speedy dissolution of the predecessor corporation;

(3) assumption by the successor of those predecessor liabilities and obligations necessary for continuation of normal business operations;  and

(4) continuation of the corporate identity.

This is looks past the identity of shareholders and directors, and focuses on whether the business itself has been transferred as an ongoing concern.

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This blog post is provided as a courtesy for informational purposes. It is not legal advice for any specific situation.