LA 1st Circuit Warns on Successor Liability in Business Purchase

In the recently decided Giles v. Oak Lane Memorial Park, LLC, et al, the Louisiana 1st Circuit held that the successor purchaser to a cemetery company’s assets could not avoid liability for the predecessor’s liabilities.  This decision builds upon jurisprudence stemming all the way back to the 1973 U.S. Supreme Court decision in Golden State Bottling Co., Inc. v. National Labor Relations Board which held that when a corporation sells all of its assets to another, the later is not responsible for the seller’s debts or liabilities, except where:

1. The purchaser expressly or impliedly agrees to assume the obligations;
2. The purchaser is merely a continuation of the selling corporation; or
3. The transaction is entered into to escape liability.

Case Study

In Giles, Oak Lane Memorial Park, LLC (“OLMP”), which operated a cemetery, sold a portion of land to the Giles family.  Later, when OLMP appeared that it would default on its mortgage, it sold all of its land, buildings and improvements to National Information Services, Inc. (“NIS”).  According to the president and owner of NIS, the sale was rushed because the parties were aware of the mortgage default.  During the shuffle surrounding the sale, the land which the Giles had purchased for future use had been seized and sold at sheriff’s sale.

Ms. Giles’ suit named both OLMP and NIS and sought damages and other relief for breach of contract and unjust enrichment.  The trial court held that Ms. Giles was entitled to rescission of the earlier sale and to the return of the entire purchase prices as well as general damages against OLMP and NIS. NIS appealed the decision partially on the basis that it was not liable as a successor entity.

The 1st Circuit affirmed the trial court’s decision based on the three exceptions listed above.  It found that, although Ms. Giles only had to prove one of the three conditions existed to hold NIS liable, all three exceptions applied in this case.

First, the court held that NIS purchased both the real estate and the cemetery business and that since the cemetery business’ principal source of income is the proceeds from the sale of burial land, it had at least impliedly agreed to assume OLMP’s obligations.

Second, since testimony revealed that NIS bought “everything…the entire operation” and that the name “Oak Lane Memorial Park, LLC” continued to be used in business documents, NIS was merely a continuation of OLMP.

Finally, since NIS personnel admitted that all parties were aware of the impending litigation regarding OLMP’s default, the trial court did not err in finding that the sale had been an attempt for OLMP to escape liability.

Takeaways

Louisiana jurisprudence has remained consistent for nearly fifty years that questions regarding successor liability will be analyzed using the test laid out in Golden State Bottling Co., Inc.  Therefore, it’s important to consider a few factors when purchasing a business, especially when the business is “in distress.”  First, are you aware of impending litigation or claims against the predecessor company?  If so, are you willing to accept liability in order to purchase the business?

While those decisions have to be made on a case-by-case basis, if you are purchasing all of the assets of an existing business, keep in mind that the following factors can weigh heavily in favor of successor liability:

• Continuity of the Identity of the Business
• Continuity of Existing Business Relationships
• Commonality of Personnel