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Successor liability: Mere continuation revisited

In Martin v. TWP Enterprises Inc., the Maryland Court of Special Appeals re-applied the long-standing principle that “a corporation which acquires the assets of another corporation is not liable for the debts and liabilities of the predecessor corporation.” Baltimore Luggage Co. v. Holtzman, 80 Md. App. 282, 290 (1989) (also applied in Ramlall v. MobilePro Corp., 202 Md. App. 20, 34-35 (2011); Smith v. Navistar Intern. Transp. Corp., 737 F. Supp. 1446, 1448 (D. Md. 1988).

Exceptions to the general rule exist where:

  1. there is an expressed or implied assumption of liability

    (Maryland Code, Corporations and Associations § 3-115(c)(1); Isle of Thye Land Co. v. Whisman, 262 Md. 682, 706-07 (1971));

  2. the transaction amounts to a consolidation or merger

    (Maryland Code, Corporations and Associations § 3-114(f)(1); Ramlall v. MobilePro Corp., 202 Md. App. 20, 34-37 (2011));

  3. the purchasing corporation is a mere continuation of the selling corporation

    (Nissen Corporation v. Miller, 323 Md. 613 (1991); Academy of IRM v. LVI Environmental Services, Inc., 344 Md. 434 (1997)); or

  4. the transaction is entered into fraudulently to escape liability for debts

    (Maryland, Commercial Law, §§ 15-201 et seq.; Colandrea v. Colandrea, 42 Md. App. 421 (1979).

     

Baltimore Luggage, 80 Md. App. at 290 (references added)

The Court in Martin examined the third exception, “mere continuation”, in the context of a business transaction determined not to satisfy the exception at trial.  Compiling from limited Maryland case law on the issue, the Court enumerated five factors to consider as ‘indicia of continuation’:

(1) any change in ownership and management, (2) the continued existence of the selling corporation, (3) the adequacy of consideration, (4) the transfer of any “instrumental” employees from the predecessor to the successor, and (5) the purpose of the asset sale.

Martin at p. 28.  Applying those factors, the Court declined to overturn the trial court’s decision that the buyer was not a mere continuation, and therefore had no successor liability.

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