When two companies enter into a transfer of assets, the company purchasing the assets is the successor corporation and the company selling the assets is the predecessor corporation. A transfer of assets is any sale, lease, exchange or other transfer of all or substantially all of the assets of a corporation. MD Corps. & Ass’ns Code Ann. §1-101(v). Generally, a corporation that acquires the assets of another corporation is not liable for the debt and liabilities of the predecessor corporation. Baltimore Luggage Co. v. Holtzman, 80 Md.App. 282, 290 (1989). There are four exceptions to this general rule of successor liability. Successor corporations are obligated for the debts and liabilities of the predecessor corporation when: 1) there is an express or implied assumption of liability; 2) the transaction amounts to a consolidation or merger; 3) the purchasing corporation is a mere continuation of the selling corporation; or 4) the transaction is entered into fraudulently to escape liabilities for debts. Id.
Express or Implied Assumption of Liability
Maryland has codified the first part of this exception by statue. The Corporations and Associations Article, §3-115 (c)(1), states, “the successor is liable for all the debts and obligations of the transferor to the extent provided in the articles of transfer.” The statute further defines articles of transfer to mean articles of sale, articles of lease, articles of asset exchange, or articles of transfer. MD Corps. & Ass’ns Code Ann. §1-101(c). Unless the successor corporation expressly assumes liability in the articles of transfer, the corporation will not be liable for the predecessor’s debts. When there is not articles of transfer between the parties, it has been held that a sales agreement is considered equivalent. Baltimore Luggage Co., 80 Md.App. at 292. Failing to file articles of transfer with the Maryland State Department of Assessment and Taxation will not excuse a successor corporation from assumption of debts expressed in the contract or sales agreement. Isle of Thye Land Co. v. Whisman, 262 MD. 682 (1971).
Even without an express assumption of liabilities, the successor corporation under certain circumstances may still be held liable for debts if it is deemed to have impliedly assumed the liabilities of the predecessor corporation. In order for this to occur, the party asserting liability must show its reliance upon conduct or representations of the successor corporation which indicates an intention by it to pay the debts of the seller. Baltimore Luggage Co.,80 Md.App. at 295. There is no hard and fast rule as to what evidence of conduct or representations will show an intention on the part of the successor corporation to take on the predecessor’s debts. The circumstances and facts are reviewed by the court on a case-by-case basis. Id.
Consolidation or Merger
Like the express assumption of liability exception discussed above, Maryland has also codified the second exception to the general successor liability rule. Discussing the effects of a merger or consolidation, section 3-114(e)(1) of the Corporations and Associations Article states, “the successor is liable for all the debts and obligations of each nonsurviving corporation, partnership, limited partnership, limited liability company, and business trust.” MD Corps. & Ass’ns Code Ann. §3-114(e)(1). The language is clear and unambiguous that “all debts and obligations” are assumed. Maryland legislature has imposed this condition of liability upon those entities wishing to consolidate or merge under section 3-114 of the statute, and the entities by doing so, are thereby consenting to be bound by those statutory conditions. Richard Ramlall v. Mobilepro Corp., et al., 202 Md.App. 20 (2011).
Mere Continuation
Perhaps the most discussed exception to the general rule of successor liability is the mere continuation exception. The policy behind this exception is to protect the rights of creditors when there is a transfer of assets. Under the mere continuation exception, the creditor is allowed to recover from the successor corporation whenever the successor corporation is substantially the same as the predecessor corporation. Baltimore Luggage Co.,80 Md.App. at 297. ‘Substantially the same’ is described as a “change in form without a significant change in substance” and, when the purchasing corporation maintains the same or similar management and/or ownership of the predecessor while wearing a “new hat.” Id. The purpose of this exception is to provide a remedy for the creditor when the sole purpose for the transfer of assets is to remove the assets from the reach of the predecessor’s creditors. Id.
The mere continuation exception is also referred to as the continuity of entity exception. Nissan Corp. v. Miller, 323 Md. 613,618 (1991). The Court in Nissan made an important distinction between continuity of entity versus continuity of enterprise. Continuity of enterprise refers to continuation of the business operations and activities. Id. Continuity of entity, on the other hand, refers to a continuation of the corporate entity, achieved through continuation of directors, management, shareholder interest, and ownership interest. Id at 620. Often times where continuity of entity is found, there has been inadequate consideration tendered for the transfer of assets. Id. The continuity of entity is the heart of the mere continuation exception. While continuity of enterprise standing alone is not enough to prove mere continuation, it should be considered along with the other factors of continuation listed above. Baltimore Luggage Co.,80 Md.App. at 297.
Fraudulent Transactions
Maryland case law that specifically analyzes the fourth exception to the general successor liability rule is lacking. Creditors can, however, look to the Maryland Uniform Fraudulent Conveyance Act in the Commercial Law Article for protection of rights when assets are transferred with intent to defraud or without fair consideration. Baltimore Luggage Co.,80 Md.App. at 618 quoting Smith v. Navistar Int'l Transp. Corp., 737 F. Supp. 1446, 1449 (D. Md. 1988).
Under the Maryland Uniform Fraudulent Conveyance Act, a transaction wherein no fair consideration is exchanged for assets is considered prima facie fraudulent. MD Comm. Code Ann. §15-204; 15-201 et seq.; In re Colandrea, 17 B.R. 568 (1982). Fair consideration is defined as: “in exchange for the property or obligation, as a fair equivalent for it and in good faith, property is conveyed or an antecedent debt is satisfied” or “ the property or obligation is received in good faith to secure a present advance or antecedent debt in an amount not disproportionally small as compared to the value of the property or obligation.” MD Comm. Code Ann. §15-203. Once a transaction is proven fraudulent, creditors with matured claims may either have the conveyance set aside or attach to and levy against the property conveyed. MD Comm. Code Ann. §15-209. If the creditor’s claim has not yet matured, the creditor may proceed in court and petition to restrain the defendant from disposing of the property, appoint a receiver to take charge of the property, or set aside the conveyance. MD Comm. Code Ann. §15-210.
The policy behind all four exceptions to the general successor liability rule is the protection of creditor’s rights. There is a common theme found present throughout these exceptions; unless the corporation expressly or impliedly assumes debt, or merges under MD Corps. & Ass’ns Code Ann. §3-114(e)(1), if the transaction is made at arm’s length, in good faith, and for fair consideration, liabilities of the predecessor corporation will not become the successor corporation’s obligation.
