August 28, 2018
How to successfully pierce the corporate veil has been shrouded in a degree of mystery in South Carolina, to both those in pursuit of and those defending against the action. However, our Supreme Court has recently made strides in clarifying the requirements for practitioners. Following closely on the heels of its recent decision formally adopting the single business enterprise theory, the court provided another well-reasoned opinion clarifying successor liability. Nationwide Mutual Insurance Company and Gilliam Construction Company, Inc. v. Eagle Window & Door, Inc., 2018 WL 3999905 (August 22, 2018).
A number of years ago, Gilliam constructed a home in which it installed windows manufactured by Eagle & Taylor Company, d/b/a Eagle Window & Door, Inc. At the time of the manufacture and sale of the windows, Eagle & Taylor was a wholly owned subsidiary of American Architectural Products Company (AAPC). Eagle & Taylor did business as two fictitious entities, one of which was Eagle Window & Door, Inc. That company was never incorporated.
In a somewhat common fact pattern, AAPC filed for bankruptcy protection as a result of which it placed all assets of the fictional Eagle Window & Door, Inc. up for auction. The successful bidder was Linsalata Capital Partners Fund, IV, L.P. (Linsalata). Linsalata formed EWD Acquisition Co., a wholly owned subsidiary to take title to the assets. Upon the transfer of the assets, EWD changed its name to Eagle Window & Door, Inc. (Eagle), following which Eagle undertook essentially the same business, manufacturing and selling windows and doors in the same facilities used by Eagle & Taylor. After resolving a product liability suit for defective windows, Gilliam, and its insurer, Nationwide, brought this action against Eagle seeking contribution, alleging successor liability. The trial court found Eagle was a “mere continuation” of the predecessor entity and therefore responsible for contribution, which was affirmed by the Court of Appeals. The matter was before the Supreme Court pursuant to Eagle’s Petition for Writ of Certiorari.
Some years ago, the South Carolina Supreme Court established the law on successor liability in Simmons v. Mark Lift Industries, Inc. 366 S.C. 308, 622 S.E.2d 213 (2005), which the court revisited here. The Simmons court found, generally, a successor corporation is not liable for the obligations of its predecessor, subject to four exceptions:
- an agreement to assume the predecessor’s debts;
- circumstances of the transaction equate to a consolidation or merger of the two entities;
- the successor is a mere continuation of its predecessor; or
- the transaction was fraudulent or intended to wrongfully defeat creditors’ claims.
While a product liability claim based on successor liability may be maintained when the defendant corporation purchased the assets of seller through a court approved bankruptcy sale, it can only be maintained if the claimant successfully establishes one of the four exceptions above. With no evidence to support the other tests in Eagle, the court focused on “mere continuation,” which is applicable only with commonality of ownership; the predecessor and successor corporations have substantially the same officers, directors or shareholders. Id.
Here, following the sale of the assets, Linsalata owned the vast majority of the shares. The former president of Eagle & Taylor ultimately became a director of Eagle, but only following the asset purchase. Finally, five of the eight officers of Eagle & Taylor assumed similar roles with Eagle, with the three remaining officer positions being filled by Linsalata appointees. Based on that commonality, plaintiffs argued Eagle was a mere continuation of its predecessor. The court rejected that argument, clarifying its earlier opinion in Simmons.
The original iteration of the mere continuation test, articulated in Simmons, provides the exception is applicable where the predecessor and successor corporations have substantially the same officers, directors or shareholders. However, Simmons also refused to expand the exception to cases in which there is not commonality of officers, directors and shareholders. Here, the court acknowledged the syntactic confusion caused by the use of “or,” and clarified the test. The mere continuation exception is available only when there is commonality of ownership; in corporate parlance, without commonality of officers, directors and shareholders, there is no commonality of ownership. Consequently, the plaintiffs’ claims here failed.
The court was careful to remind that the law favors the free disposition of assets. Thus, the mere continuation test is a strict one by design. However, recognizing the need for flexibility, the court underscored control as an essential element of the exception. While ownership and control ordinarily co-exist, directors or officers may have such control and influence that their mere continued involvement following an acquisition establishes successor liability. Consequently, parties who are victim to a corporate sale motivated by efforts to escape the predecessor’s obligations, may take comfort that with sufficient evidence of fraudulent intent, the successor corporation will not avoid liability even if the mere continuation test is not otherwise met.
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Cheryl D. Shoun is a trial attorney and certified mediator whose experience includes construction law, insurance defense, personal injury defense, employment litigation and medical malpractice. As a frequent writer, she serves as editor for Nexsen Pruet's TIPS: Torts, Insurance and Products Blog.