Circuit Finds No Successor Liability from Buying Assets and Continuing the Business

Through a properly structured purchase of a debtor’s assets at a private foreclosure sale, a purchaser has no successor liability to a debtor’s unpaid creditors, the Eighth Circuit held.

The buyer and the debtor were both in the business of roasting coffee. The buyer declined to purchase the assets directly from the debtor because due diligence revealed that the debtor had substantial liabilities. 

Later, the debtor’s secured bank lender declined to roll over a maturing $5 million debt. According to the September 19 opinion by Circuit Judge James B. Loken, the bank “demanded repayment in full, foreclosed when [the debtor] failed to pay, and sold its collateral [to the buyer] at a private foreclosure sale” for about $2 million. The agreement between the bank and the buyer specifically said that the buyer would not be liable for any debts owing by the debtor.

Judge Loken said the price was “commercially reasonable.” The foreclosure and sale left the bank still owed more than $3 million. The foreclosure rendered the debtor unable to pay an unsecured claim of some $2.7 million owing to the debtor’s supplier of green coffee.

The coffee supplier sued the buyer in federal district court based on claims of successor liability, among other theories. The district court granted summary judgment in favor of the buyer, dismissing the successor liability claim and everything else.

Judge Loken upheld the district court top to bottom. Regarding successor liability, he found “no prior case imposing successor liability” and said that “prevailing law [is] to the contrary.”

Judge Loken began with the “well-settled general rule” adopted “virtually” everywhere that the sale of all assets does not make the buyer liable for debts of the seller. There are exceptions for cases involving a de facto merger, fraud, or a “mere continuation” of the seller’s business.

To decide whether one business is a continuation of another, Judge Loken said, “the test is whether there is a continuation of the corporate entity of the transferor — not whether there is a continuation of the [seller’s] business operation.”

There was no continuation, Judge Loken said, because the sale was an arm’s-length transaction with no continuity of ownership or management after the sale. Even though the buyer kept the employees and retained the seller’s top executives for a few months, “this is common after such acquisitions and is not evidence of ‘mere continuation’ of the company,” Judge Loken said.

With regard to the fraud exception, Judge Loken noted how the buyer had purchased the assets from the bank, not from the debtor. “There is nothing inherently wrongful or fraudulent,” he said, “in purchasing assets at a foreclosure sale, free of encumbrances, rather than directly purchasing the assets.”

Judge Loken latched onto an additional reason for upholding dismissal: The unpaid supplier suffered no prejudice because the bank was not paid in full, leaving nothing for unsecured creditors.

Judge Loken upheld dismissal of the successor liability claim because the unpaid supplier “presented insufficient evidence of mere continuation or fraud.”