SUCCESSOR LIABILITY OR NONLIABILITY?
A NORTH CAROLINA PERSPECTIVE
H. Denton Worrell
ABSTRACT
Modern society has been built upon the bedrock of the modern corporation. Without this
basic legal framework, the Rockefellers, Fords, and other industrial pioneers would arguably
not have succeeded in elevating our nation to its great position today. Indeed, the evolution of
the corporation has been regarded as perhaps the single most important legal development of
the twentieth century. But with it has come an ever increasingly complex world of mergers and
acquisitions, from stock purchase, to various mergers structures, to sale of asset transactions.
Much has changed from the days of Meinhard v. Salmon, to the KKR–RJR Nabisco buyout, to
the latest Facebook–WhatsApp acquisition.
With these increasing complexities, successor liability, or rather successor nonliability, is
of paramount concern. Corporations strive to understand the underlying risks and liabilities of
an acquisition, and thus price deals accordingly. As a general rule, under a traditional merger
the surviving corporation takes on the liabilities of the dissolved corporation. However,
structured as a “sale of assets” transaction, the purchasing corporation does not normally take
on the seller’s liabilities. But should corporations be allowed to circumvent liability by simply
choosing to adopt a sale of assets transaction over say a reverse triangular merger? How does
this affect our society? How have courts balanced public policy with this doctrine?
This essay begins by discussing the current General Motors saga regarding its failure to
recall faulty ignition switches resulting in thirteen deaths, and its recent invocation of the
successor nonliability doctrine. Should GM be allowed to avoid liability to these victims and
hide behind this doctrine? Although the GM situation is quite complex, this essay strives to
answer these difficult questions by reviewing the evolution of the successor nonliability doctrine,
the underlying policy rationales, and in particular, analyzes how North Carolina courts have
addressed these issues.

J.D. Candidate 2015, Wake Forest University School of Law. This essay is current as of May 8, 2014.
SUCCESSOR LIABILITY OR NONLIABILITY?
INTRODUCTION
In current news, General Motors (“GM”) has been under fire for failing to recall or warn
of defective ignition switches, which have been linked to thirteen deaths and thirty-one front car
crashes.1 CEO Mary Barra recently acknowledged on Capitol Hill that “the company took too
long to act.”2 Instead of making good on its mistake, GM now seeks to avoid liability by hiding
behind its 2009 bankruptcy reorganization, claiming that the assets of the “new GM” are
protected from liabilities from the sale of assets from the “old GM.”3 GM essentially argues
under the doctrine of “successor nonliability”—that the purchaser is absolved from future
liabilities as a result of the sale. But does this doctrine make good public policy sense? GM—an
American institution—a company that our tax payers bailed out from the recession and fought to
keep alive by extending loans time and time again, now wants to bite the hand that fed it? Surely
the law will not deny those injured recovery. . . . But it may.
Although the area of bankruptcy law is quite complex, and multiple issues are present in
the recent GM saga, this essay will analyze the doctrine of successor nonliability on a smaller
scale scale, looking particularly at North Carolina law and the ways in which North Carolina
courts have balanced the equities of public policy. The essay will also struggle to answer the
question, in a very basic sense, had the GM case arisen in North Carolina, would the North
Carolina courts apply the successor nonliability doctrine to protect GM, or allow recovery for the
injured parties?
Part I discusses the basic framework behind mergers and successor nonliability. Part II
delves into the traditional exceptions to the successor nonliability doctrine and North Carolina’s
versions, while Part III considers jurisdictions that have expanded the doctrine and their
underlying rationales, and provides a closer look at recent North Carolina decisions. Lastly, the
Conclusion summarizes the findings and provides a closing answer to the difficult, hypothetical
GM question.
I. AN OVERVIEW OF SUCCESSOR NONLIABILITY
A company can acquire another entity under a number of different methods, including a
stock purchase, various merger arrangements, or a sale of assets.4 Each method has its own
advantages and disadvantages, however for purposes of avoiding future liability, the sale of
assets method has been viewed as the best choice to avoid unwanted liabilities of the target
1
Christopher Jenson, In General Motors Recalls, Inaction and Trail of Fatal Crashes, N.Y. TIMES (Mar. 2, 2014),
http://nyti.ms/1eSPvCy.
2
Cost to Fix Faulty General Motors Ignition Switch behind 13 Deaths was 57 Cents: Congress, ASSOCIATED PRESS,
(April 1, 2014), http://nydn.us/1pK6OvF.
3
Hillary Stout & Bill Vlasic, Hoping to Fend Off Suits, G.M. is to Return to Bankruptcy Court, N.Y. TIMES (May 1,
2014), http://nyti.ms/1iPkztH; see also, Krishner, GM Seeks Lawsuit Protection for Conduct that Occurred before
2009 Bankruptcy, HUFFINGTON POST (April 16 2014), http://www.huffingtonpost.com/2014/04/16/gm-seekslawsuit-protection_n_5157238.html (“Claims from before the bankruptcy would go to "Old GM," called Motors
Liquidation Co., while claims after the bankruptcy would go to the new General Motors Co.”).
4
Michael T. Kafka, Corporate Successor Liability in Minnesota and Other Jurisdictions: A Legal Landscape Where
Even Purchasers of Assets should Tread with Caution, 26 HAMLINE L. REV. 1, 3 (2002); ROBERT B. THOMPSON,
MERGERS AND ACQUISITIONS: LAW AND FINANCE 28–34 (2010) (discussing various acquisition methods).
2
SUCCESSOR LIABILITY OR NONLIABILITY?
corporation.5 This concern is referred to as “successor liability,” although courts and authors
more commonly refer to the resulting protection as “successor nonliability.” Both terms refer to
the same substantive issue—whether or not liability extends to the successor entity in any of the
above transactions. Both terms are used throughout this essay.
Successor liability concerns often arise in the areas of products liability, environmental
liability, labor relations, bankruptcy, and tax,6 and is mostly composed of state common law
case-by-case decisions.7 This has lead to varied treatment by jurisdictions and often parties are
left without a clear understanding of the liabilities at the end of a deal.8 Courts apply a wide
range of remedies and are sometimes compelled to rewrite a business deal after the fact and
allocate liability outside the parties original intentions.9 But does the doctrine itself make sense?
Should corporations be allowed to circumvent liability by simply choosing to adopt a sale of
assets transaction over say a reverse triangular merger?
Proponents of avoiding successor liability through the sale of assets method point to the
need for free alienability of corporate assets and the need for transactional clarity and certainty
for business parties.10 Opponents note necessary remedies for injured parties—that without
successor liability those injured may be left without an avenue for recovery.11 How do the courts
balance these competing interests? Does public policy countervail?
The short answer is that courts struggle to balance these interests. Public policy wins—
but that is a misnomer, because courts often frame their holdings in terms of public policy, but
with different underlying rationales. So at best we are left with a “sometimes yes, sometimes
no” answer. To better understand this, the essay will first turn to traditional limited liability
doctrine and the public policy considerations courts use when determining to disregard the
corporate form, or rather “pierce the corporate veil.”
A.
Limited Liability Doctrine
The evolution of the corporation has been regarded as perhaps the single most important
legal development of the twentieth century.12 Although corporations affect many parts of our
society, from the business sector to our environment, their dominance must certainly be credited
to the concept of limited liability. Limited liability has promoted the free flow of capital to
business and revolutionized our economy, in part by encouraging riskier ventures that might not
have been taken if stockholders were personally liable.13 Recent statutes continue to encourage
5
Kafka, supra note 4.
Id. at 3.
7
John H. Matheson, Successor Liability, 96 MINN. L. REV 371, 372 (2011).
8
Id. at 373.
9
Id.
10
Id. at 371 (discussing successor liability policy).
11
Id. at 373–74.
12
David H. Barber, Piercing the Corporate Veil, 17 WILLIAMETTE L. REV. 371–72 (1981).
13
See ALAN PALMITER & FRANK PARTNOY, CORPORATIONS, A CONTEMPORARY APPROACH 302 (2010) (discussing
the need of manufacturing firms to limit liability as opposed to the traditional partnership form); Thomas H. Noe &
Steven D. Smith, The Buck Stops Where? The Role of Limited Liability in Economics, FED. RESERVE BANK OF
ATLANTA, ECON. REVIEW, First Quarter 1997, at 54–55 (discussing the historical impact of limited liability on our
economy).
6
3
SUCCESSOR LIABILITY OR NONLIABILITY?
small-scale entrepreneurs to invest, and also promote investment in larger public corporations by
avoiding the additional costs that would be needed to closely monitor managers.14 Providing
many smaller investors the ability to own shares of a corporation without incurring personal
liability provides the investors with the ability to diversify and reduce risk.15 In turn, corporate
managers are given more freedom to innovate and take on projects they might otherwise have
avoided.16 Without this basic legal framework, the Rockefellers, Fords, and other industrial
pioneers would arguably not have succeeded in elevating our nation to its great position today.
However, at the very base of both contract and tort law are the ideas that no one should
be bound to contractual obligations they did not voluntarily assume, and that no one should be
liable for torts they did not commit.17 So how has the court balanced these ideas against a policy
of encouraging capital formation and free alienability of corporate assets? Let us gain some
insight to answer that question by looking at how the courts decide when it is appropriate to
disregard the corporate form and peel back mighty protections of limited liability.
B.
Public Policy behind Disregarding the Corporate Form
For lack of a better term, limited liability is not without limit. The same risk-taking
incentives that limited liability provides can also cause conflicts at both the macro and micro
economic levels.18 Considered rare, courts have declined to recognize the corporate form under
certain circumstances. This process is commonly referred to as “piercing the corporate veil,” or
“disregarding the corporate entity,” and is an equitable doctrine created by the courts in order to
“prevent fraud and achieve justice.”19 Judge Easterbrook has described it as a strong step, “like
lightning, it is rare [and] severe.”20 Courts struggle in defining terminology and exact formulas
for piercing the veil, often using terms like “alter ego,” “alias,” or “mere instrumentality.”21
It is not the purpose of this essay to delve into an exhaustive study of piercing the
corporate veil doctrine, however, the courts’ purposes and rationales behind employing the
doctrine do provide insight into the way in which courts balance seemingly countervailing public
policies: the promotion of free alienability of corporate capital on the one hand, against adequate
remedies for injured plaintiffs on the other.
The basis for this argument stems from two, often conflicting viewpoints regarding the
nature of the corporation. One view is that the corporation is a privilege granted by the state and
treated as an artificial entity operated by its members.22 Under this view the corporation has a
responsibility to operate in accordance with the public interest, and the form should only be
14
PALMITER & PARTNOY, supra note 13 (noting current trend in LLC and LLP statutes).
Id. at 303
16
Id.
17
Matheson, supra note 7, at 381 (citations omitted).
18
Noe & Smith, supra note 13, at 55.
19
1 RUSSELL M. ROBINSON, II, ROBINSON ON NORTH CAROLINA LAW § 2.10 (2013); PALMITER & PARTNOY, supra
note 13, at 300.
20
Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89, 89
(1985).
21
PALMITER & PARTNOY, supra note 13, at 299.
22
1 WILLIAM MEADE FLETCHER, FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 41 (2014).
15
4
SUCCESSOR LIABILITY OR NONLIABILITY?
pierced or disregarded in the event of abuse.23 Another view is that the corporation is merely a
contract between individuals, as such the parties should be left with the private freedom to
contract.24 Under this view the corporation should only be disregarded when parties have
violated their original contract.25
Courts are reluctant to disturb the corporate form—a corporation’s independent and
separate existence is not disregarded lightly.26 A court’s ruling to disregard the corporate form is
founded in equity, and although a bright line test for piercing the veil may sound appealing to the
corporate world, such test can not simply address all the circumstances that may require
disregard of the corporate entity to overcome injustice.27 So under what circumstances do courts
find it necessary to “overcome injustice?”
Courts commonly consider fraud, illegality, contravention of contract, public wrong and
inequity when determining to pierce the corporate veil.28 Courts distill these considerations into
four basic factors: (1) inadequate capitalization, (2) disregard of corporate formalities, (3)
domination and control, and (4) excessive fragmentation.29 In all of these, courts fall back to a
sense of fairness, and often the individual consciences of judges who may be unmindful of the
original justifications for limited liability are at play. 30
Piercing claims can be brought under both tort and contract liability theories. On their
face, cases involving involuntary tort claimants, or rather victims who had very limited
opportunity to protection themselves from a corporation that causes them a loss, certainly appeal
to the notion of injustice, perhaps more so than voluntary contract claimants, who at least had an
opportunity to protect themselves and who knew they were dealing with a limited liability
corporation.31 However, even in these situations courts have been extremely reluctant to pierce
the corporate veil, despite seemingly strong public policy to justify doing so.
For example, in Walkovzsky v. Carlton,32 the New York Court of Appeals upheld the
corporate form against injured tort victims, despite strong public policy against doing so. Judge
Keating in his strong dissent noted that a corporation doing business without any sufficient basis
of financial responsibility, where capital is “illusory or trifling” compared with the risk of loss,
should be denied protections of the corporate form.33 He further pointed to legislative statutes
and intent, and that in no way was the corporate form intended to shield individuals with intent
of avoiding responsibility to the public.34
23
Id.
Id.
25
Id.
26
ROBINSON, supra note 19, § 2.10.
27
Id.
28
FLETCHER, supra note 22.
29
ROBINSON, supra note 19.
30
STEPHEN B. PRESSER, PIERCING THE CORPORATE VEIL § 1:1 (2013).
31
See PALMITER & PARTNOY, supra note 13, at 305, 315 (discussing claimants).
32
223 N.E.2d 6 (N.Y. 1966).
33
Id. at 11 (Keating, J. dissenting) (citation omitted).
34
Id. at 13 (Keating, J. dissenting).
24
5
SUCCESSOR LIABILITY OR NONLIABILITY?
North Carolina on the other hand has made quite clear that the corporate form may not be
used to defeat the public interest or circumvent public policy.35 The North Carolina Supreme
Court has noted that those responsible for the existence of the corporation are prevented from
using it to accomplish an unconscionable result, and the court will disregard the form to prevent
fraud and achieve equity.36 A violation of statutory duties is not protected by the corporate
form.37
Although no North Carolina decisions expressly declare or list public policy exceptions
for piercing the corporate veil, it is clear that North Carolina is similar to other jurisdictions in
providing an equitable remedy where the corporate form is used to justify a wrong, protect fraud
or defend crime, as well as violate public policy or statute of the State.38 Given North Carolina’s
strong view regarding declared public policy and statutory duties, it seems likely the State would
have agreed with the dissent in Walkovzsky and allowed for recovery.
Having considered some of the underlying public policy justifications to pierce the
corporate veil, let us now turn back to successor nonliability and study how courts “pierce” the
nonliability doctrine, so to speak.
II. “PIERCING” A SALE OF ASSETS: EXCEPTIONS TO SUCCESSOR NONLIABILITY
Corporate law distinguishes between the application of successor liability to traditional
merger and sale of assets transactions. As a general rule, in a merger the surviving corporation
takes on the liabilities of the dissolved corporation.39 However, as discussed in Part I, in a sale
of assets transaction the purchaser does not normally take on the seller’s liabilities.40 This is
commonly referred to as the doctrine of “successor nonliability.” As we will see, North Carolina
follows similar suit.41
Courts are willing to pass liability on to the successor purchaser, or rather “pierce the veil
of successor nonliability,” under four traditional circumstances. Courts frame these four as
exceptions to the successor nonliability doctrine as follows: (1) fraudulent transfer, (2) express or
implied assumption of liability, (3) de facto merger, and (4) the mere continuation doctrine.42
Even Delaware, known as “a bastion of pro-corporate and legislative decisions,” recognizes each
of these exceptions.43 Let us first turn to these exceptions, their general application, and a look at
their application under North Carolina law.
35
State ex. rel. Cooper v. Ridgeway Brands, Mfg., LLC, 666 S.E.2d 107, 113 (N.C. 2008) (citation omitted).
Id. (citations omitted).
37
Id. at 114 (citations omitted); see also State v. Louchheim, 250 S.E.2d 630 (N.C. 1979) (allowing criminal charges
to proceed against a shareholder despite his argument that his conduct was that of the corporation).
38
Ridgeway Brands, 666 S.E.2d at 114; Henderson v. Sec. Mortg. & Fin. Co., 160 S.E.2d 39, 44–45 (N.C. 1968);
Estridge v. Denson, 155 S.E.2d 190, 197 (N.C. 1967); Woodson v. Rowland, 373 S.E.2d 674, 677–78 (N.C. Ct.
App. 1988).
39
10 FLETCHER, supra note 22, § 4880.
40
Id.
41
See Becker v. Graber Builders, Inc., 561 S.E.2d 905, 909 (N.C. Ct. App. 2002) (citation omitted); Coltrain v. Gen.
Am. Life Ins. Co., 7 S.E.2d 504 (1940).
42
Matheson, supra note 7, at 383; see also ROBINSON, supra note 19, § 25.05.
43
Matheson, supra note 7, at 388; but see Hariton v. Arco Elecs., Inc., 188 A.2d 123 (Del. 1963) (rejecting de facto
merger doctrine in the context of shareholder appraisal rights).
36
6
SUCCESSOR LIABILITY OR NONLIABILITY?
A.
Fraudulent Transfer
Not surprisingly, a sale of assets based on fraud is invalid. A typical fraudulent transfer
arises when a company sells its assets in order to avoid liability owed to creditors on its debts.44
The Restatement of Products Liability, for example, recognizes that a fraudulent sale of assets
can be set aside, and points to underlying state law to define a fraudulent sale.45
North Carolina law relies on fraudulent conveyance principles in defining its transfer
exception to successor liability.46 Grossly inadequate consideration, as well as other
circumstances indicating a purpose to avoid the claims of creditors, will result in a fraudulent
transfer and liability will be imposed on the successor.47 However, North Carolina courts
typically dispense with fraudulent conveyance analysis absent much discussion of rationale.48
Recently, the North Carolina Business Court discussed the inadequate consideration
requirement and noted its roots in the “trust fund” doctrine.49 When an insolvent corporation has
debts outstanding, a court of equity will treat the remaining assets as a trust fund, and compel the
return of any distributions to stockholders or other asset sales, except those made to bona fide
creditors or purchasers for value.50 The heart of the fraud analysis, trust fund doctrine, and
consideration requirement seem to be founded in the traditional public policy that no man should
be able to profit from his wrongful deed.
B.
Express or Implied Assumption of Liability
Under the general theory that a buyer does not take on successor liability in a sale of
assets transaction, so too a buyer has the ability to pick and choose which liabilities to accept.
With an express agreement parties simply contract and agree to the liability arrangement. Often
an acquirer will take on liabilities of the target in order to maintain continuity in existing credit
arrangements and to move forward in an interrupted manner.51 Unwanted liabilities are
expressly excluded in the sale documents.52
44
Matheson, supra note 7, at 384.
See RESTATEMENT (THIRD) OF TORTS: PRODUCTS LIABILITY § 12 cmt. e (1998).
46
ROBINSON, supra note 19, § 25.05.
47
See Norman Owen Trucking, Inc. v. Morkoski, 506 S.E.2d 267, 270–71 (N.C. Ct. App. 1998) (citing Aman v.
Walker, 81 S.E. 162, 162 (N.C. 1914) (summarizing North Carolina fraudulent conveyance principles)); see also
ROBINSON, supra note 19, § 25.05.
48
See ROBINSON, supra note 19, § 25.05 (citations omitted).
49
Lattimore & Assocs., LLC v. Steaksauce, Inc., No. 10 CVS 14744, 2012 NCBC 32, 2012 NCBC LEXIS 34, at
*58–59 (N.C. Super. Ct. May 25, 2012) (discussing McIver v. Young Hardware Co., 57 S.E. 169, 172 (N.C. 1907)).
50
Id. at 58 (citing McIver, 57 S.E. 169).
51
Matheson, supra note 7, at 386. For example a buyer may wish to maintain current contracts and credit
arrangements attached to the assets purchased. See also Gwinnett Hosp. Sys., Inc. v. Massey, 469 S.E.2d 729, 729
(Ga. Ct. App. 1996) (holding a buyer could be liable for a tort action resulting from the seller’s prior conduct where
an express agreement between the parties recited unambiguous language that the buyer assumed all liabilities and
obligations “whether known or unknown, contingent or otherwise”).
52
Matheson, supra note 7, at 386.
45
7
SUCCESSOR LIABILITY OR NONLIABILITY?
Implicit assumption of liability arises when there is evidence of the purchaser’s
assumption of the seller’s liabilities, such as through the purchaser’s conduct or
representations.53 For example, where a buyer takes on an obligation beyond the limits of the
sale of assets agreement, a court could find implied successor liability for all of the seller’s
liabilities.54 Courts apply general principles of contract interpretation in evaluating parties’
intentions. North Carolina law recognizes both the express and implied limitations to successor
nonliability and here seems to base its public policy on the freedom of parties to contract.55
C.
De Facto Merger
In a traditional merger, the acquirer takes on the liabilities of the target.56 Under the de
facto merger doctrine, the court imposes successor liability on the buyer where a sale of assets
transaction amounts to what would normally be considered a merger.57 The de facto merger
doctrine serves as a check on the process to avoid an acquirer simply structuring a merger as a
sale of assets in order to avoid successor liabilities.
Although originally applied in the area of dissenting shareholder rights to appraisal and
valuation, the de facto merger doctrine has expanded to other corporate contexts.58 Jurisdictions
vary in their tests, but generally require four factors to be present in order to classify the
transaction as a de facto merger: (1) ownership continuity; (2) a termination and cessation of the
acquired business as soon as possible after the sale; (3) assumption of the liabilities necessary for
uninterrupted continuation of the acquired business; and (4) continuity of personnel,
management, location, and assets and operation.59 Some states have stricter element based tests,
while others apply a looser balancing of factors test.60 The de facto merger has been noted as the
judicial response to situations where a sale of assets transaction results in the seller being
financially incapable of satisfying the claims of its creditors or victims of its torts.61
North Carolina appellate courts have yet to hold a decision based solely on the de facto
merger doctrine, although the courts routinely refer to it in dicta as an exception to successor
53
Id. (citing 10 FLETCHER, supra note 22, § 7124).
Id. See also Lockheed Martin Corp. v. Gordon, 16 S.W.3d 127, 138 (Tex. App. 2000) (applying Delaware law)
(holding no implied assumption of liabilities where buyer disclaimed any liability or obligation not disclosed on
seller balance sheet or that seller did not disclose absent consent and a writing as of the date of sale).
55
Budd Tire Corp. v. Pierce Tire Co., 370 S.E.2d 267, 269 (N.C. Ct. App. 1988) (recognizing express or implied
agreement by the purchasing corporation to assume the liability as an exception to successor nonliability); Stellar
Ins. Grp, Inc. v. Cent. Cos., LLC, No. 2:06cv11, 2007 U.S. Dist. LEXIS 81159, at *11–12 (W.D.N.C. 2007)
(holding mere knowledge of liabilities was insufficient to extend implied successor liability to purchaser of assets).
56
Matheson, supra note 7, at 387.
57
See id.
58
See Farris v. Glen Alden Corp., 143 A.2d 25 (Pa. 1958) (outlining the de facto merger doctrine under
Pennsylvania law in the context of a complex reverse asset sale); Hariton v. Arco Elecs., Inc., 188 2d. 123 (Del.
1963) (limiting the de facto merger doctrine where asset sale statutes and merger statutes are independent and a
corporation complying with one complies with the law).
59
Mattheson, supra note 7, at 387.
60
Id. at 389.
61
Lattimore & Assocs., LLC v. Steaksauce, Inc., No. 10 CVS 14744, 2012 NCBC 32, 2012 NCBC LEXIS 34, at
*56 (N.C. Super. Ct. May 25, 2012) (citing 20 AM. JUR. PROOF OF FACTS 2D 609 § 1 (2012)).
54
8
SUCCESSOR LIABILITY OR NONLIABILITY?
nonliability.62 The North Carolina Business Court recently referred to a plaintiff’s de facto
merger claim as a “case of first impression,” but dismissed the claim on other grounds.63
However, in a much earlier case the North Carolina Supreme Court relied on similar principles
and held that an assumption of liabilities by the successor in a sale of assets for the purpose of
continuing the same business was not an event that would start a new statute of limitations.64
Although absent from these opinions, its seems that simple fairness principles are at play.
D.
Mere Continuation Doctrine
Under the mere continuation doctrine a buyer is not allowed to avoid successor liability
by simply changing its name or form.65 Courts have characterized this idea as a purchasing
corporation merely wearing a “new hat” of the seller.66 Essentially a purchaser should not be
able to hide from successor liability simply by form, where in substance the selling corporation
continues.
Although jurisdictional requirements vary, in general the mere continuation doctrine is
only applicable where (1) only one corporation survives after the sale of assets, (2) there is
general continuity of business operations, and (3) there is overlap of management and
stockholders between the two corporations.67 Courts are inconsistent in their application of these
factors, however courts often find evidence of the only one surviving corporation exists
sufficient to hold a buyer “substantially similar” and a mere continuation of the seller.68
North Carolina’s version of the mere continuation doctrine focuses on the traditional
factors of (1) a sole surviving corporation and (2) overlap in stockholders and directors, but adds
two additional factors—(3) inadequate consideration for the purchase, and (4) lack of some of
the elements of a good faith purchaser for value.69 Although a current case search yields no
appellate case dispositions based solely on the mere continuation doctrine, the North Carolina
Supreme Court has recognized its principles in an earlier case, and current case law demonstrates
discussion in dicta.70 Absent supporting case law, it seems reasonable to conclude public policy
rationale based on fairness and perhaps avoiding misrepresentation is at play.
62
See Budd Tire Corp. v. Pierce Tire Co., Inc., 370 S.E.2d 267 (N.C. Ct. App. 1988) (recognizing the de facto
merger doctrine exception); G.P. Publ’ns, Inc. v. Quebecor Printing – St. Paul, Inc., 481 S.E.2d 674 (N.C. Ct. App.
1997); Becker v. Graber Builders, Inc., 561 S.E.2d 905 (N.C. Ct. App. 2002); Joyce Farms, LLC v. Van Vooren
Holdings, Inc., No. COA12-773, 2014 N.C. App. LEXIS 234, at *1 (Mar. 4, 2014).
63
Steaksauce, 2012 NCBC LEXIS at *41–44.
64
ROBINSON, supra note 19, § 25.04 (discussing McNeill v. Mays Mfg. Co., 114 S.E. 698 (N.C. 1922)).
65
Mattheson, supra note 7, at 392.
66
Id. (quoting Bud Antle, Inc. v. E. Foods Inc., 758 F.2d 1451, 1458 (11th Cir. 1985) (holding party liable under
successor mere continuation theory as wearing “simply a ‘new hat’”).
67
See PALMITER & PARTNOY, supra note 13, at 352 (discussing mere continuation doctrine). See also Mattheson,
supra note 7, at 392.
68
Mattheson, supra note 7, at 392.
69
G.P. Publ’ns, Inc. v. Quebecor Printing – St. Paul, Inc., 481 S.E.2d 674, 680 (N.C. Ct. App. 1997); Budd Tire
Corp. v. Pierce Tire Co., 370 S.E.2d 267, 269 (N.C. Ct. App. 1988).
70
A recent Westlaw search for “mere continuation” yields twelve cases discussing the doctrine, but none providing
a holding based solely on the doctrine. The doctrine was essentially outlined by the North Carolina Supreme Court
in McAlister v. Am. Ry. Express Co., 103 S.E. 129, 130–32 (N.C. 1920), and more recently discussed in Budd Tire,
370 S.E.2d at 269. See also Bryant v. Adams, 448 S.E.2d 832, 839 (N.C. Ct. App. 1994) (discussing the factors
under North Carolina’s mere continuation doctrine).
9
SUCCESSOR LIABILITY OR NONLIABILITY?
In summary, although lacking binding case law under several exceptions above, North
Carolina has nonetheless indicated it follows the traditional exceptions to successor nonliability.
Unfortunately, the available case law discusses public policy little. However, as we will see
below, courts have been more will to discuss public policy in considering expansions to
successor nonliability.
III.
EXPANDING RECOVERY: FURTHER EXCEPTIONS TO SUCCESSOR NONLIABILITY
Several jurisdictions have expanded the traditional exceptions to successor nonliability in
order to provide recovery to a broader class of persons. In particular, the “continuity of
enterprise” and “product line” exceptions have emerged, which require lower burden of proof
than those of the traditional four listed in Part II. Authors and courts vary regarding the
justification for the expansions—some refer to the evolution of strict liability in the 1970’s and
the court’s willingness to impose liability outside the bounds of negligence, while others classify
the expansion as an “exception to the exception” in order to avoid certain unfair results.71
A.
Continuity of Enterprise Exception
The continuity of enterprise exception expands the mere continuation doctrine by shifting
the focus to the continuation of the seller’s business operations, rather than the sole focus on
whether the seller’s corporate entity continued after the sale.72 This approach allows the court to
impose successor liability based on the totality of the transaction where the successor’s business
operations are so similar to that of the predecessor that it is in effect continuing the predecessor’s
enterprise.73 Courts have applied the expansion “in contexts where the public policy vindicated
by recovery from the implicated assets is paramount to that supported by the traditional rules
delimiting successor liability.”74
This doctrine was first established in 1976 by the Michigan Supreme Court in Turner v.
Bituminous Casualty Co.75 The court justified the expansion as it closed a loophole that would
otherwise have allowed a successor purchaser to escape liability under a sale of assets where he
transacted with stock instead of cash. The court reasoned that under a cash transaction, the
purchase would have been considered a de facto merger exception, and just because the
transaction was not cash, should not mean the successor should escape liability.76 The court
71
See Mattheson, supra note 7, at 393–95 (discussing strict liability doctrine evolution and the effect on courts’
willingness to extend successor liability); Kafka, supra note 4, at 8 (“other courts have viewed it as merely an
exception to the general rule of nonliability”) (citations omitted).
72
Kafka, supra note 4, at 8.
73
Matteson, supra note 7, at 396.
74
U.S. v. Mexico Feed & Seed, Inc., 980 F.2d 478, 487–88 (8th Cir. 1992) (referring to the expansion as the
“substantial continuity test” and noting its use in labor relations, products liability, and federal environmental
regulation).
75
244 N.W.2d 873 (Mich. 1976).
76
Id. at 883.
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SUCCESSOR LIABILITY OR NONLIABILITY?
went on to expand the list of factors under the mere continuation doctrine to encompass a
broader approach.77
North Carolina, on the other hand, has rejected the continuity of enterprise exception.78
The North Carolina Appellate Court rejected the expansion in the context of a reasonable sale
under UCC § 9-504, noting that to allow “successor liability based on factors other than
inadequate consideration and identity of ownership might have a chilling effect on potential
purchasers who would have to be concerned that by acquiring a foreclosed business, they would
also acquire liabilities they never intended to assume.”79 This is particularly interesting because
the court found that public policy, the free flow of capital to purchase businesses and assets in
and out of bankruptcy, outweighed the benefit of a lower standard allowing more injured
plaintiffs to recover.
The court went on to note that “while a strong public policy supports the discharge of
subordinate claims after a UCC foreclosure sale, the law must not encourage the elevation of
form over substance.”80 The court reasoned no public policy was served by applying an
expanded test over the traditional mere continuity test. Although in dicta, the appellate court
also addressed a proposed expansion of the mere continuity test in other contexts, such as
environmental litigation, but noted that the traditional test was sufficient.81
Furthermore, the North Carolina Business Court recently refused to eliminate the
continuity-of-ownership requirement under the mere continuation doctrine and declined to
speculate as to other “possible factual scenarios that might invoke ‘mere continuation’ liability
without continuity of ownership.”82 The court also held that a successor’s use of the term
“merger” in its dealings with customers and employees, instead of the term “sale of assets,” was
alone insufficient to justify liability.83
These cases clearly demonstrate North Carolina’s persistent view in limiting an
expansion of successor nonliability, and a public policy of favoring narrow exceptions to
successor nonliability.
B.
Product Line Exception
77
Id. at 882–84; see also Kafka, supra note 4, at 8 (discussing additional factors considered under the continuity of
enterprise exception).
78
G.P. Publ’ns, Inc. v. Quebecor Printing – St. Paul, Inc., 481 S.E.2d 674, 681–82 (N.C. Ct. App. 1997) (rejecting
the broader “substantial continuity” test in the context of a reasonable sale under UCC § 9-504). But see Glynwed,
Inc. v. Plastimatic, Inc., 869 F. Supp. 265 (D.N.J. 1994) (noting existing case law overwhelmingly confirms that an
intervening foreclosure sale under UCC § 9-504 affords an acquiring corporation no automatic exemption from
successor liability).
79
Quebecor Printing, 481 S.E.2d at 682 (emphasis added).
80
Id.
81
Id. (noting other jurisdictions had applied the broader substantial continuity test without fully appreciating the
rationale behind it, and thus in error).
82
Lattimore & Assocs., LLC v. Steaksauce, Inc., No. 10 CVS 14744, 2012 NCBC 32, 2012 NCBC LEXIS 34, at
*41–44 (N.C. Super. Ct. May 25, 2012).
83
Id. at *74.
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SUCCESSOR LIABILITY OR NONLIABILITY?
Similar to the continuity of enterprise exception, the product line exception also expands
the mere continuity theory. The product line exception test analyzes the operations of the
successor, ahead of the strict requirement that a corporate entity exist after the sale transaction.
Whereas the continuity of enterprise test reviews the quality and purpose of business activity
after the sale of assets, the product line exception test delves further by reviewing the products,
or product lines, that result from the sale of assets to determine if they are identical to those
assets before the sale.84
The California Supreme Court first created this exception in 1977 in Ray v. Alad Corp.85
in the context of strict products liability.86 The successor purchaser would have avoided liability
for the continued manufacture of its ladder product line (which was made under the same
product name and utilized the same employees) because it failed to meet an exception to
successor nonliability. The court found this patently unfair to litigants who were later injured
using the ladders, and noted that the mere continuation exception should be expanded for several
reasons: (1) because injured plaintiffs now had no method of recovery against the original
manufacturers; (2) because the successor had the ability to “spread the risk”; and (3) because the
burden of liability imposed on the purchaser was warranted given the benefits he enjoyed from
the goodwill of the continued product line name and prior success.87
North Carolina has not yet addressed the product line exception. 88 California’s reasoning
sounds appealing—essentially providing recovery to a class of users otherwise neglected.
However, given North Carolina’s consistent refusal to extend the mere continuity exception, it
seems unlikely the State would broaden the exception to successor nonliability. At this point it
appears that North Carolina favors a narrower rule, a narrower exception to successor
nonliability, and is perhaps more inclined to support a public policy of corporate form over
broader recovery for litigants.
C.
Expanded De Facto Merger
Some states have expanded the de facto merger doctrine by lessening the underlying
requirements. For example, the Third Circuit Court has disregarded the requirement that a
selling corporation dissolve after the sale of assets in order to invoke the doctrine.89 The court
noted that with the modern complexities of corporate transactions,
it is no longer helpful to consider an individual transaction in the abstract and
solely by reference to the various elements therein determine whether it is a
84
See Kafka, supra note 4, at 12 (discussing the two tests).
560 P.2d 3 (Cal. 1977).
86
Id. at 11 (“a party which acquires a manufacturing business and continues the output of its line of products under
the circumstances here presented assumes strict tort liability for defects in units of the same product line previously
manufactured and distributed by the entity from which the business was acquired”).
87
Id. at 8–9; see also Mattheson, supra note 7, at 399 (discussing the Ray court decision).
88
Cf. Pendergrass v. Card Care, Inc., 424 S.E.2d 391, 395 (N.C. 1993) (acknowledging mere continuation claim in
the context of product liability, but declining to extend on other grounds).
89
Knapp v. N. Am. Rockwell Corp., 506 F.2d 361, 368–370 (3d Cir. 1974). But see Terry v. Penn Central Corp.,
668 F.2d 188 (3d Cir. 1981) (refusing to extend the doctrine where elements were not met and legislature had
changed the law regarding appraisal rights in wake of Farris v. Glen Alden Corp., 143 A.2d 25, 28 (Pa. 1958)).
85
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SUCCESSOR LIABILITY OR NONLIABILITY?
‘merger’ or a ‘sale’. Instead, to determine properly the nature of a corporate
transaction, we must refer not only to all the provisions of the agreement, but also
to the consequences of the transaction and to the purposes of the provisions of the
corporation law said to be applicable.90
Although the North Carolina Appellate Court has yet to formally apply the de facto
merger doctrine, given the court’s reluctance to expand the mere continuance exception, or to
address the product line issue, and the State’s concern regarding the chilling effect on the free
flow of capital, it seems unlikely the court would expand the doctrine.
CONCLUSION
Courts have struggled to draw the successor nonliability line and jurisdictions vary in
their approaches. Underlying the doctrine are two public policies seemingly at odds with each
other: the promotion of free alienability of corporate capital on the one hand, and adequate
remedies for injured plaintiffs on the other. Courts that favor broader recovery appear to be
more willing to extend exceptions to successor nonliability. Courts that favor free alienability do
not. Limited liability and piercing the corporate veil doctrines provide additional insight into the
struggle, but even then courts have difficulty in fully explaining their reasoning.
Although North Carolina has not dealt directly with several of the successor nonliability
exceptions, a public policy has emerged. Where other courts have expanded the exceptions,
North Carolina has stood firm, noting its concern for a chilling effect against would-be
purchasers, and presumably the economic implications that would follow. The court has
discussed the importance of substance over form, but is reluctant to change well established
principles. In this sense North Carolina appears to favor free alienability over broader recovery.
Although the original GM question is quite large, and certainly includes other
considerations (such as bankruptcy law, the social policy behind a loan of taxpayer money to a
failing institution, and others) in the pure successor liability context, North Carolina would likely
follow a strict interpretation of successor nonliability. Given the State’s public policy view,
absent actual fraud or fulfillment of a traditional successor nonliability exception, North Carolina
would likely disregard recovery for the injured drivers and find for GM.
90
Knapp, 506 F.2d at 368 (citing Farris, 143 A.2d at 28).
13