Legal Updates

Rights Of First Refusal and Rights Of First Offer in Commercial Leases from a Landlord’s Perspective (PDF)
By: Florian S. Ellison, Esq.
Angelo & Banta, P.A.

The Closely-Held Business: Key Issues Owners Should Have In Writing (PDF)
By: David F. Hanley, Esq.
Angelo & Banta, P.A.

Recent Developments In Florida Homestead Law (PDF)
By: Philip M. Hanaka, Esq.
Angelo & Banta, P.A.

Successor Company Liability: What An Asset Purchaser Needs to Know

When a prospective corporate purchaser is considering a purchase of some or all of the assets of an existing Florida corporation, extreme care should be undertaken to avoid inadvertently assuming the liabilities of the predecessor corporation. This article will discuss the risk of incurring such liability when a corporation acquires the assets of another business entity.

In a sale of corporate assets, the acquiring business may purchase some or all of the corporate assets, and the transferred assets may include tangible property such as machinery and equipment and intangible property such as accounts receivable or trade secrets. In an asset purchase, the liabilities and responsibilities of each party would be set forth in the parties’ agreement. A corporation that sells its assets may continue in existence, may be dissolved, or may be merged with the entity that purchased its assets.

A corporation that acquires the assets of another business entity does not as a matter of law assume the liabilities of the prior business. Florida follows the traditional corporate law rule which does not impose the liabilities of the selling predecessor upon the buying successor company unless (1) the successor expressly or impliedly assumes obligations of the predecessor, (2) the transaction is a de facto merger, (3) the successor is a mere continuation of the predecessor, or (4) the transaction is a fraudulent effort to avoid liabilities of the predecessor. The imposition of liability upon a successor corporation is based on the notion that no corporation should be permitted to commit a tort or breach of contract and avoid liability through corporate transformation in form only. All of the theories under which successor liability will be imposed by Florida courts will be discussed below with the exception of express or implied assumption of the predecessor’s liabilities. Express or implied assumption theory is not discussed because it is generally a straightforward matter of contract and can arise as a matter of law by merger or statutory consolidation.

1. De Facto Merger

A de facto merger occurs where one corporation is absorbed by another, but without compliance with the statutory requirements for a merger. To find a de facto merger there must be: (a) continuity of the selling corporation evidenced by the same management, personnel, assets and physical location; (b) a continuity of the stockholders, accomplished by paying for the acquired corporation with shares of stock; (c) a dissolution of the selling corporation; and (d) an assumption of the liabilities. All of these events need not occur at the same time. The crucial question is whether there has been a change in form, but not in substance. The finder of fact may look to any other factors reasonably indicative of commonality or of distinctiveness. “The bottom-line question is whether each entity has run its own race, or whether there has been a relay-style passing of the baton from one to the other.”

Liability may also arise where all the stock of the predecessor is purchased and the predecessor’s assets are stripped by the acquiring corporation. In Kelly v. American Precision Industries, Inc., an action for personal injuries was brought against a successor corporation on the theory that it had assumed liability of its predecessor in delivering allegedly defective garbage truck. The Court ruled that a successor corporation was responsible for liability of a predecessor corporation in delivering an allegedly defective garbage truck where the successor purchased all of predecessor’s stock and stripped it of all its assets, with the benefit going solely to the successor, which was tantamount to a de facto merger.

2. Continuation Theory

Under the mere continuation theory, liability is imposed when the successor corporation is merely a continuation or reincarnation of the predecessor under a different name. The key is that there is a change in form, but not in substance.

A continuation of business resulting in liability of the successor corporation for its predecessor’s debts occurs when the successor corporation is merely a continuation or reincarnation of the predecessor corporation under a different name. The “purchasing corporation must not merely be a ‘new hat’ for the seller, with the same or similar entity or ownership.” While having common attributes does not automatically impose liability on a successor corporation, merely repainting the sign on the door and using new letterhead certainly gives the appearance that the new corporation is simply a continuation of the predecessor corporation.

In Serchay v. NTS Fort Lauderdale Office Joint Venture, an accounting firm organized as a professional association was found liable for debts of dissolved accounting firm on theory of successor liability. The Court found that the successor entity was a clear continuation of the dissolved company because it had the same assets, management, personnel, stockholders, location, equipment, and clients.

However, in Bernard v. Kee Mfg. Co., Inc., a Court declined to impose product liability on a successor corporation under a continuation theory even though it had purchased the assets of the manufacturer of a defective product and continued the product line under the same trade name. Continuation theory liability was not found because the successor had discontinued the allegedly defective product model after acquisition.

3. Fraudulent Transfer of Assets

Under the Uniform Fraudulent Transfer Act (UFTA), any transfer made with “actual intent to hinder, delay or defraud” any present or future creditor is a fraudulent transfer. Because of the difficulty in proving actual intent of a fraudulent transfer, case law and the UFTA look to indicia of fraudulent intent commonly referred to as “badges of fraud.” The fraudulent nature of the transaction may be found to exist in the transfer of assets of a corporation to a successor corporation without consideration or for grossly inadequate consideration where there has been a prejudice of creditors for the benefit of the same individuals who constitute the beneficial owners of both of the corporations involved.

However, mere knowledge that the seller is indebted to another or even knowledge of the existence of a valid and pending cause of action against the seller may be insufficient to show the purchaser’s participation in a fraudulent conveyance.

Fraud is generally a question of fact for the fact-finder. Courts will carefully scrutinize the evidence alleged in deciding whether there is sufficient evidence of fraudulent transfer to withstand a summary judgment motion or directed verdict. Florida courts will not hesitate to dismiss a fraudulent transfer claim as a basis for successor liability before verdict where the evidence fails to support such claim. For example, in Reina v. Gingerale Corp. the Court found that a successor corporation was not liable for predecessor’s debts and liabilities under fraudulent transaction exception to successor corporation rule even though the successor had actual knowledge at time of sale of a pending suit against the predecessor. The Court found that nonetheless, the claim was not sufficiently supported by factual allegations to withstand summary judgment motion.

4. Applicability to Some Specific Types of Claims

Florida courts apply the traditional corporate rule in determining product liability of a successor corporation. The purchaser of the assets of a manufacturing firm, as successor to the manufacturer which allegedly caused injury in question could be held liable on strict liability claim under traditional corporate law rule, where the assets where acquired from the predecessor included manufacturing plant, inventory, goodwill, and right to use same trade name unless the successor corporation did not assume liabilities or obligations of its predecessor and had discontinued manufacture of the defective product model.

Liability may also be imposed on a successor manufacturer for personal injuries suffered by an employee of predecessor injured by a defective product. Florida courts allow an injured employee to sue her employer in tort, despite claim of workers’ compensation exclusivity, when that employer is a corporate successor to the manufacturer of allegedly defective product that caused injury and product was manufactured before a corporate merger. The courts hold that under such circumstances the successor corporation cannot claim any inherited immunity from the manufacturer.

Finally, the Florida Supreme Court has also determined that a successor corporation can be held liable for punitive damages based upon the conduct of a predecessor. In Celotex Corp. v. Pickett, the court indicated that when a corporation, such as Celotex here, voluntarily chooses a formal merger, it will take the “bad will” along with the “good will” and will be subject to the imposition of punitive damages based upon the conduct of the predecessor. While not yet specifically addressed by the Florida Supreme Court it is also likely that the Courts would hold a successor liable for punitive damages where it found a de facto merger, a fraudulent transfer of assets to a successor, a continuation of the predecessor or an assumption of the predecessor’s liabilities.

Conclusion

There are very real dangers associated with the purchase of assets, including being exposed to punitive damages based upon the predecessor’s conduct. Careful drafting of documents is critical to avoid assuming such liabilities. However, as shown above, careful drafting alone is not enough. One must recognize that the closer the identity between the predecessor and successor in the assets, management, personnel, stockholders, location, trade name, equipment, and clients, the more likely that successor liability will be found. Even if there are sufficient dissimilarities to avoid liability under a de facto merger or continuation theory, the purchaser should avoid transactions where grossly inadequate consideration is paid by a successor corporation to the prejudice of creditors under circumstances which benefit the same individuals who constitute the beneficial owners of each of the corporations involved. By following this path, a prospective asset purchaser will significantly reduce potential liability for the predecessor’s debts and tortious conduct.

For more information on this topic, please contact Thomas P. Angelo at tpa@angelolaw.com.

Toxic Mold Litigation

Mold is a fungus that can grow if given the right conditions. It needs dampness in a humid environment on a substance such as wood, fiber, or drywall. All such conditions and materials are commonly found in residential and commercial buildings throughout Florida. Toxic mold contamination of residential and commercial structures in Florida has been alleged to have caused serious health problems. Although some mold may not be toxic or significant enough to warrant a claim of damage, large gray or black dusty patches of mold and related spores found behind walls, around air-conditioning vents and near windows or other areas of water intrusion or condensation may be stachybotrys or mycotoxins. While these types of mold growth may not effect everyone the same way, they have been alleged to cause headaches, respiratory problems, skin irritation, sore throats, and other more serious ailments. Property insurance companies have been quick to try and exclude coverage for mold-related damages as they renew their policies, but property owners may have recourse against other parties. Thus, property owners with mold and dampness issues should carefully consider hiring a law firm with not only insurance claim-related experience, but with experience navigating through the contractors, architects and other construction and design professionals who may have designed or built the structure which permitted water intrusion resulting in toxic mold growth.

We have significant experience in this developing area of the law, and work with experts in this new field of consumer and insurance law in addressing mold related damages. We welcome any inquires you may have in this area.

If you would like additional information, please contact the firm’s managing partner, Thomas P. Angelo at tpa@angelolaw.com.

Rights of Tenants in Bankruptcy of Landlords

The Seventh Circuit Court of Appeals recently decided a case that affects the rights of a tenant with respect to a bankruptcy of its landlord. The question addressed by Precision Industries, Inc. v. Qualitech Steel SBQ, LLC (7th Cir., 2003) is whether the possessory interest of a tenant survives a sale of property by the bankruptcy trustee.

Qualitech Steel owned and operated a steel mill on land in Pittsboro, Indiana. Precision leased a portion of the land from Qualitech and built a warehouse and other improvements. Qualitech subsequently filed a Chapter 11 bankruptcy petition and all of its assets were sold by the trustee. The Court approved the sale, free and clear of all liens, claims, encumbrances and interests. When Precision and the purchaser failed to come to agreement on a new lease, the Court deemed the existing lease to be rejected by the purchaser’s failure to timely assume the lease. The Court of Appeals ruled that the possessory interest of a tenant may be extinguished by a sale free and clear of all interests. The Court ruled that the protection provided to a lessee under a rejection of the lease may not apply to a sale by the trustee.

As a result, tenants should object to bankruptcy sales and request adequate protection. While the Court did not specify what would constitute adequate protection, tenants should be aware that the failure to request relief may result in forfeiture of their leasehold estate. Tenants should also review their leases for appropriate notice and bankruptcy protection language.

Lenders should also review their leasehold mortgages and related loan documents in light of the Precision Industries decision. In addition to common leasehold mortgagee protection provisions typically found in the leasehold mortgage, leasehold mortgagees should seek additional protections by requiring notice of pleadings and schedules in connection with any bankruptcy proceeding by or against the lessee or lessor, and should be granted the right to act on the lessee’s behalf in such a proceeding.

For more information on this topic, please contact Philip M. Hanaka at pmh@angelolaw.com.

Model Release for Civil Cases

Recently, the Trial Lawyers section of the Florida Bar tried to devise a way to keep settlements from getting slowed to the point of failure by devising a solution to the common pitfall at the end of a case: the development of a Model Release.

Many times cases get hung up on issues that must be resolved before any settlement can be considered final, and those issues are frequently either not addressed, as the parties consider the monetary issues more important. However, it is the duty of the counsel on both sides to take these issues that might seem to be “loose ends” and tie them down to get a matter fully concluded.

The proposed Release provisions can be found at the following website: www.flatls.org. It offers different passages that might be applicable in different types of cases, depending upon any particular factual situation, to assist in resolution. However, as with all forms of this type, the user should be reminded that these are merely forms to be used as a guideline for the creation of a more comprehensive, final form Release that is tailored to the particular case and its relevant details. The forms on the site can be downloaded in many formats, including Adobe Acrobat, Word and WordPerfect.

The Model Release is broken down into readily usable segments, such as attorney fee claims, dismissals, and indemnity provisions. It is useful in application and in the abstract, since it reveals some of the potential aspects that should be considered when settling any particular case. This standard was a bit ambiguous and uneven, due to the “lack of justiciable issue” element of the test. Recently, however, the statute was amended to provide a more clear set of standards, namely, to permit fee recovery if at any time during a civil proceeding or action the court finds that the losing party or the losing party’s attorney knew or should have known that a claim or defense was not supported by the material facts necessary to establish the claim or defense; or was not supported by the application of then-existing law to those material facts. The standard is now not only more clear, but the threshold has been lowered for those seeking to use this provision to recover fees incurred under such circumstances. Thus, while the goal is to eliminate bogus claims and defenses and permit a quicker resolution to cases, it should now be easier to convince a court of one’s entitlement to the recovery of fees under the revised statute.

For more information on this topic, please contact James Carpenter at: jwc@angelolaw.com.

Perfection of Liquor License Liens

Under Florida Law, the first party to properly record a liquor license lien typically has priority over subsequent lienors. However, there are some instances where third parties without a valid recorded liquor license lien can successfully challenge that priority.

To perfect a liquor license lien (the “Lien”) under Florida Law, the secured party shall file (within ninety (90) days of the date of creation of the lien or security interest) a “Mortgagee’s Interest in Spiritous Alcoholic Beverage License” with the Department of Business and Professional Regulation (the “Division”) under Chapter 561.65, Florida Statutes, together with (i) a copy of the promissory note (outlining the terms of the agreement) and (ii) a copy of the security agreement (specifically pledging the alcoholic beverage license by number). The Florida Supreme Court has held that a duplicate filing under the Uniform Commercial Code (via UCC-1 filed with the Secretary of State) is not necessary to perfect the Lien (see United States v. R. McGurn, 596 So.2d 1038; (Fla. 1992). Notwithstanding this ruling, secured parties continue to file a UCC-1 at the State level for precautionary reasons.

In addition to conducting a traditional Division lien search, a secured party should conduct a thorough investigation of the ownership rights of the party pledging the license (including researching the ownership rights of any predecessor in interest to the current owner and requesting copies of all agreements, options, leases and/or management agreements on file with the Division).

One case of particular interest is, Lachance v. Desperado’s of Holly Hills, Inc., 760 So.2d 1023 (Fla. 5th DCA 2000). In Lachance, the Fifth DCA ruled that a landlord who had assigned a liquor license to a tenant had priority over a third party lender (“Lender”) that made a loan to the tenant and filed a liquor license lien with the Division based on reverter language contained in the lease between the landlord and tenant. The landlord had not filed a lien on the license but had provided a copy of the lease containing the reverter language to the Division. The Lender had conducted its due diligence and received a search of the Division’s lien records. The search confirmed that there were no liens on file against the license but did not mention the lease. The court held that the landlord was not required to file a lien on the license as it at all times owned an equitable interest in the license which trumped any subsequent lien filings. The court reasoned that the Lender had no rights against the license and could not foreclose on same as it was on constructive notice of the lease and landlord’s right to the license.

Should you have any questions regarding the perfection of liquor license liens or other issues regarding security interests in Florida, please contact Thomas P. Angelo at: tpa@angelolaw.com.