A Taxonomy and Evaluation of Successor Liability (Revisited)
182 Pages Posted: 8 Aug 2013 Last revised: 3 Sep 2013
Date Written: August 7, 2013
Successor liability does not consist of just one doctrine or exception to the general corporate rule of non-liability for asset purchasers, but of many. There are two broad groups of successor liability doctrines, those that are judge-made (the “common law” exceptions) and those that are creatures of statute. Both represent a distinct public policy that in certain instances and for certain liabilities, the general rule of non-liability of a successor for a predecessor’s debts following an asset sale should not apply. With regard to the judge-made doctrines, some commentators have asserted that they are basically a species of liability based upon fraud. Others have argued that they are based upon an inherently equitable notion that, in certain instances, the purchaser must take the bad (the liabilities) with the good (the assets). Still others, embracing a type of result-oriented formalism, have found that the liability arises out of an interest in the property sold that is akin to an in rem interest that is said to “run with the land.”
This article examines judge-made successor liability and offers a number of observations. First, our current judge-made successor liability law is a product of the rise of corporate law in the last half of the 19th century and early part of the 20th century. In fact, it appears to have developed because of, and in reaction to, the rise of corporate law. It may be better to characterize it as a part of that body of law, much like the “alter ego” or “piercing the corporate veil” doctrines, rather than as a simple creature of tort law, despite it being used as a tool by plaintiffs who are involuntary tort claimants.
Even in those jurisdictions that appear to have expanded the number of recognized categories of successor liability, there appears to be a long term trend to limit the applicability of the successor liability doctrines by stating the applicable standard in the form of a bright line rule or set of rules. This trend toward bright line rules threatens the original purpose of successor liability, which was born to serve as a counterbalance to corporate law’s limitation-of-liability protections afforded asset purchasers. Like the “alter ego” or “piercing the corporate veil” doctrines, it was originally a set of extremely fact-specific and context-sensitive standards based upon an examination of non-exclusive lists of flexible factors rather than rigid bright lines rules.
To serve its original purpose as a safety valve ensuring just results in the face of corporate law’s limitations on liability, successor liability should remain more flexible and fluid so that its applications can be adjusted as new forms of transactions are developed and pursued. It is natural for capital to be deployed, harvested, and redeployed in a manner that maximizes the externalities, the costs that society, not the invested capital, must bear. It is natural to attempt to separate liabilities by creating negative externalities for existing creditors and future claimants whenever possible. Successor liability stands as a doctrine to regulate or moderate this behavior and to prevent the dominance of corporate law principles in situations where injustice would result. This, in turn, can force the transferee and transferor to bargain and allocate the risk of unpaid and future claims between themselves.
Development of a bright line standard for successor liability sets the stage for avoiding that liability when asset purchasers are represented by competent counsel. Once a rigid standard or safe-harbor has emerged, the transaction can be structured so that the standard is avoided or the safe-harbor invoked. Successor liability emerged over one hundred years ago in reaction to the rise of insulation of capital from liability under corporate law. Since then there has been a trend toward uniform statements of the successor liability doctrines and transformation of flexible standards into rigid ones. This trend seems to indicate that corporate law, in the long run, is winning the struggle against these exceptions to the no-liability-for-asset-purchaser rule. Especially in the case of the future tort claims, corporate law thus encourages the externalization of these claims. As a result, it is future claimants and society who are left to bear these claims, rather than the parties who benefited from the act that gave rise to them.
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