Nationwide Mutual Insurance Company v. Eagle Window & Door, Inc., 424 S.C. 256 (S.C. Sup. Ct. 2018)
No successor liability of bankruptcy purchaser in a contribution action; officer, director and shareholder continuity are required for a “mere continuation” analysis. Commonality of officers, standing alone, does not render liability.
Homeowners brought a construction defect suit against a builder and an insurer that was ultimately settled. The builder and insurer then initiated a contribution action seeking repayment of the settlement proceeds from manufacturer; however, the manufacturer was a wholly-owned subsidiary whose parent sold substantially all its assets to a new purchaser as part of bankruptcy auction. As a result of this sale, the new purchaser owned 88% of outstanding shares of the manufacturer with the rest distributed to other officers and various investors. The purchaser’s vice president became the sole director of the manufacturer then eventually added additional directors, including the former president of the manufacturer. Out of the manufacturer’s eight officers, five assumed similar roles after the sale.
Though a purchasing corporation ordinarily is not liable for the debts of a seller, an exception does exist if the successor company is a “mere continuation” of the predecessor. The insurer argued the mere continuation exception of successor non-liability should apply because it retained substantially the same name, produced the same products, and benefitted from the predecessor’s history. Both sides relied heavily on Simmons v. Mark Lift Industries. The insurer asserted the mere continuation test in Simmons requires commonality of officers, directors, or shareholders, while the purchaser argued the test requires all three to be substantially the same. The trial court entered judgment in favor of the insurer finding the purchaser was a mere continuation of the manufacturer because five of the eight officers were serving in the same capacity and the former president now sits on the board of directors. The court of appeals affirmed this decision and found commonality of officers was sufficient to establish successor liability.
The South Carolina Supreme Court reversed, stating the court of appeals erred by finding the carryover of corporate officers resulted in a mere continuation when there was no commonality of shareholders and directors. The court held that focusing on the name, location, website and goodwill of the manufacturer is irrelevant to the analysis and is part of the “continuity of enterprise” theory that was expressly rejected by the Simmons majority. Instead, the language of Simmons is “clear and unequivocal” and requires a commonality of officers, directors and shareholders. In this case, there was no evidence supporting any shareholder continuity. Further, the former president of the manufacturer did not enjoy the role of director previously and the former sole director of the manufacturer had no role at the company after the acquisition. Thus, because the officers were the only group where commonality existed between the predecessor and purchaser, the purchaser was not a mere continuation of the manufacturer.
The mere continuation test is a strict one with a high burden for the plaintiff to meet, but this is intentional. Corporate law generally favors the free transfer of assets and disfavors successor liability. The court did note that there may be merits to expanding South Carolina’s successor liability to include the enterprise theory, but that was not the question before the court.