Business Disputes

Assessing Successor Liability or Continuation of Business Theory


Closely-held owners may erroneously assume that a corporation or other closely-held limited liability entity may be left to die, without formality, and that these same owners may simply pick right up and start anew, using the same people, offices, etc.  While Florida law clearly takes a strict view when it comes to piercing of the veil claims, consistent with Delaware case law, claims may still be brought, claiming that a “new” entity is nothing more than the alter ego or successor to the entity that was left behind.  As a general rule, Florida law does not impose the liabilities of a predecessor entity on a successor entity unless (1) the successor expressly or impliedly assumes obligations of the predecessor, (2) the transaction amounts to a de facto merger, (3) the successor is a mere continuation of the predecessor, or (4) the transaction is a fraudulent effort to avoid the liabilities of the predecessor. 

Under continuation of business theory, courts are looking to see if a successor entity is merely a continuation or reincarnation of the predecessor, usually under a different name, and the key is to see if there is common identity of officers, directors, managers, and owners in the two entities being compared.  When management and personnel remain essentially the same, then even if there is a change in location, liability can still be found.  Centimark Corp. v. A to Z Coatings & Sons, Inc. and A to Z Coatings, Inc., 2007 U.S. Dist. LEXIS 93805 (M.D.Fla. 2007); see also, Patin v. Thoroughbred Power Boats, Inc., 294 F.3d 640 (5th Cir. 2002)(applying Florida law and finding that a mere continuation of business will be found where one corporation is absorbed by another, as evidenced by an identity of assets,

In a recently issued decision, in Spa Creek Servs., LLC v. S.W. Cole, Inc., Case No. 5D15-3520, 2017 Fla. App. LEXIS 15536, 42 Fla. L. Weekly D 2288 (Fla. 5th DCA 10/27/17), the court there addressed a pest control business (S.W. Cole) that was operating throughout Central Florida, that in 2002 entered into an asset purchase agreement with Spa Creek, a Florida LLC also operating a pest control business in the region.  The asset purchase agreement contained merger and assignment clauses, requiring that the obligations associated with the agreement could not be assigned to any third party without the prior written consent of all of the parties, except that Spa Creek, as the purchaser, could assign its obligations to a third party purchaser of the same principal assets, subject to payment of all obligations due to the seller, S.W. Cole, as a condition of that closing.  Confidentiality, non-solicitation, and non-competition agreements were entered into, and S.W. Cole was precluded from engaging in the pest control business in certain counties, and while it could conduct business in other counties, it could not do so in a way that tortuously interfered with Spa Creek and its employees.  SW Cole was also barred from hiring or soliciting its former employees to leave Spa Creek and work for any other entity.

            At some point later, Spa Creek sues S.W. Cole for tortiously interfering with these agreements and breaching the same.  After bringing forth its lawsuit, Spa Creek then sold nearly all of its assets to another pest control company, while retaining the chose in action in this case.  Then, Spa Creek assigned its remaining assets and liabilities, including the lawsuit against S.W. Cole, to SC Services, a SPE (special purposes entity formed as a Delaware LLC solely for the purposes of prosecuting the lawsuit).

            Then, while the suit was pending, SC Services was dissolved through the filing of a certificate of cancellation in Delaware.  This left the defendants to claim that the assignment of the chose in action did not survive SC Services dissolution.  They also argued that the assignment from Spa Creek to SC Services was void because of the assignment clauses in the original asset purchase agreement requiring prior written consent from S.W. Cole.   In concluding that they were right, the trial court (granting summary judgment)  focused on the fact that the entity had dissolved.

            On appeal, the 5th DCA determined that the trial court erred.  The assignment clause in the asset purchase agreement required consent for assignments of the agreement and any obligations associated with the agreement. The agreement itself relates to performance and did not relate to the chose in action for the breach of contract claim.  The assignment was only of the chose in action for breach of the agreements and not of the agreements themselves.  As the appellate court notes, the chose in action for breach of contract accrued at the time of the alleged breach, and the chose in action for tortious interference with contract accrued when S.W. Cole allegedly solicited and hired its former employees away from Spa Creek, and both occurred before the original complaint was filed in January 2004.  Thus, the accrued choses in action were assignable, and the trial court erred as a matter of law in granting summary judgment on this point.

            The appellate court also found that the trial court erred when it relied on Delaware law to conclude that the filing of a certificate of cancellation precluded SC Services from pursuing the “assigned” chose in action from Spa Creek.  Under Delaware law, the dissolution of the corporation and the filing of the certificate of cancellation are separate steps: dissolution occurs first, followed by winding up of corporate affairs, and finally the certificate of cancellation is filed. Thus, Delaware permits the dissolved limited liability company to “prosecute and defend suits, whether civil, criminal or administrative” only until the filing of the certificate of cancellation. See Del. Code Tit. 6, § 18-803(b)(2012). The final effect of the filing of the certificate of cancellation is made clear by the provision in the statute of a means to correct the premature filing of the certificate of cancellation so as to re-enable the dissolved limited liability company to finish winding up its affairs. Del. Code tit. 6, § 18-203(b). 

However, as the appellate court notes in Spa Creek, under Florida’s new limited liability act, the law now requires the filing of a statement of termination after the limited liability company has finished winding up its affairs, but the act does not prohibit the dissolved entity from continuing to prosecute or defend court proceedings after that point.  See Section 605.0709(7).  Thus, the cancellation of the articles of organization in Florida (before 2014) and the filing of a statement of termination (after 2014) simply do not carry the same consequences that the filing of the certificate of cancellation does in Delaware. 

Under F.S. § 605.0709(2)(b)2, a dissolved LLC in Florida may prosecute and defend actions.  Under F.S. § 605.0707(4), it is upon the filing of articles of dissolution that the LLC is to cease conducting its business but continue solely for the purpose of properly winding up its affairs in accordance with Florida LLC law.  Dissolution simply does not prevent commencement of a proceeding by or against the LLC.  See F.S. § 605.0717(1)(b). location, management, personnel, and stockholders”).

 

If you have concerns or questions about any of these alternative legal theories and wish to consult with the Tufts Law Firm, please contact us.