Successor Liability Research Articles

Real Property

This Article covers Real Property cases from Southwestern Reporter (Third) volumes 633 through 652 and federal cases during the Survey period that the authors believe are noteworthy to the jurisprudence on the applicable subject. A number of significant cases, mostly from the Texas Supreme Court, have been handed down during this survey period. The due process requirements for the scope of inquiry for substituted service have been promulgated in MAP Resources. Additional procedural issues for service on financial institutions, which were decided differently by various state and federal courts, were resolved in Moss. The Texas Supreme Court provided helpful guidance on the measurement of consequential damages in Signature, and offered a cautionary tale to practitioners about the drafting of consequential damage waivers in James. In another cautionary tale to practitioners, the Tyler Court of Appeals in Tiner addressed the enforceability of a fixed price 100-year option contract. Likewise, in Rancho Viejo, following guidance from the Texas Supreme Court, the San Antonio Court of Appeals narrowly interpreted a restrictive covenant to allow construction of a solid waste facility. The narrow interpretation of restrictive covenants was again reiterated by the Texas Supreme Court in JBrice. The supreme court has also addressed, in a case of first impression, the issue of implied revocation of an outstanding offer in Tauch. In premises liability cases, it also discussed the “dual capacity” for successor liability in Eagleridge, and the “necessary use” doctrine in Sandridge. The Texas Attorney General issued guidance on the meaning of “person” for purposes of nonjudicial foreclosures. Unfortunately, the limitations period for equitably subrogated lien claims, under Howard I and its prodigy, continued in Howard III. From a governance perspective, the Texas Supreme Court refined the fiduciary duties of directors in the Poe decision. Regulatory takings were addressed in Schrock, but with significant possible changes in jurisprudence raised in the concurring opinions. Additionally, the Texas Supreme Court jumped on the Dallas to Houston highspeed train project in defining an interurban electric railway.

Successor Liability Theory in Insolvency Law

Successor Liability Theory in Insolvency Law

A Comprehensive Framework for Conflict Preemption in Federal Insolvency Proceedings

Weighing the purposes of insolvency proceedings against applicable state regulations protecting public interests is normatively challenging. The federal goals of maximizing distributions to creditors and rehabilitating debtors are anathema to following state laws that increase a debtor’s expenses in the name of public health and safety. In cases ranging from coal producers to retailers, conflict preemption issues out of the tension between federal insolvency laws and state laws. Consider the faulty ignition switch claims in the General Motors bankruptcy case. Does the asset sale in GM’s bankruptcy case eliminate state-law successor liability? The creditors of GM benefit from a higher sale price if the sale extinguishes the claims but it would violate applicable state law. The general lack of express and field preemption in federal insolvency proceedings funnels questions like this one into conflict preemption. Unfortunately, neither courts nor commentators have created a framework for evaluating conflict preemption in federal insolvency proceedings. They have only identified a potpourri of factors. Parties pay the price through uncertainty manifesting as increased litigation. As state regulations proliferate, the need for a comprehensive framework will only become more acute. This article fills the void by conforming the relevant Supreme Court precedent and the federal insolvency saving clause (28 U.S.C. § 959(b)) to establish a framework for evaluating conflict preemption when both the saving clause is triggered and when it is not. In the process, it resolves the circuit split over whether the saving clause applies in liquidating cases. It also contributes to preemption scholarship by identifying the saving clause as a specific saving clause and clarifying implications of this status – the elimination of the obstacle prong of conflict preemption when the saving clause is triggered.

Certainty in Coming Clean: Establishing an FCPA Safe Harbor for Self-Reporting Companies

The Foreign Corrupt Practices Act (“FCPA”) is a wide-reaching rule designed to ensure accountability and deter companies and individuals from making corrupt payments (i.e. bribes) to foreign officials. The FCPA’s grasp is far-reaching: covering any American citizen, resident, or national and any issuers and their officers, directors, employees, agents, or stockholders. It even covers foreign nationals or companies who “engage in any act in furtherance of a corrupt payment while in the territory of the United States.” Even if someone never steps foot in the US, they may still be accountable if they are found to be aiding and abetting or conspiring with someone who is found liable under FCPA. FCPA liability attaches to a parent company when its subsidiary is found to have participated in corrupt payments, and companies are also liable under a theory of successor liability. Because of the wide reach of liability, the millions of dollars in potential fines, and the small likelihood of getting caught, companies are incentivized to not self-report FCPA violations. While it is true that companies who self-report and have demonstrated a “culture of compliance” may be given some leniency, they still face heavy penalties and no certainty of any tangible benefits. Because FCPA liability attaches at both the company and individual level, individuals within companies often turn on each other as they are incentivized to shift the blame from themselves. This is even rewarded by the U.S. Securities and Exchange Commission (“SEC”) under the Dodd-Frank Act’s FCPA Whistleblower Provision allowing a monetary reward for turning a company or an individual in. This Article argues that companies and individuals should be granted a safe harbor when they self-report FCPA violations under certain circumstances. This safe harbor should be explicitly clear in order to properly incentivize self-reporting — unlike the current standard that allows the SEC unfettered discretion in whether to reward self-reporters, and companies can never be sure ex ante whether they will receive any benefit.

From Policy Confusion to Doctrinal Clarity: Successor Liability from the Perspective of Big Data

Few corporate law doctrines have undergone more radical change but remain without clear restatement than successor liability. While other doctrines have received sustained empirical and theoretical attention, successor liability remains confused and understudied. This Article presents for the first time a large-scale empirical study of approximately 2,100 successor liability decisions. Employing quantitative machine learning and “big data” processing techniques, the Article develops a new theoretical taxonomy that reflects the underlying textual structure manifested across each of the 2,100 decisions’ full texts. The new taxonomy postulates that courts apply successor liability doctrine to effectuate four aims: (1) to carry out a federal statutory mandate, (2) to rectify liability evasion, (3) to allocate risk, and (4) to support bankruptcy values. The taxonomy is used to clarify the normative ambiguity surrounding application of de facto merger and to mitigate between the competing policies of asset alienability on the one hand and protection for involuntary tort creditors or satisfaction of contract law principles on the other.

Marine Hose: Tough Legality Review, Limited Inclination to Reduce Cartel Fines

The Marine Hose cartel judgments question the Commission’s approach to successor liability and continuous infringements but confirm the tendency of the General Court to re-assess the fines imposed without necessarily reducing them.

A Taxonomy and Evaluation of Successor Liability (Revisited)

Successor liability does not consist of just one doctrine or exception to the general corporate rule of non-liability for asset purchasers, but of many. There are two broad groups of successor liability doctrines, those that are judge-made (the “common law” exceptions) and those that are creatures of statute. Both represent a distinct public policy that in certain instances and for certain liabilities, the general rule of non-liability of a successor for a predecessor’s debts following an asset sale should not apply. With regard to the judge-made doctrines, some commentators have asserted that they are basically a species of liability based upon fraud. Others have argued that they are based upon an inherently equitable notion that, in certain instances, the purchaser must take the bad (the liabilities) with the good (the assets). Still others, embracing a type of result-oriented formalism, have found that the liability arises out of an interest in the property sold that is akin to an in rem interest that is said to “run with the land.” This article examines judge-made successor liability and offers a number of observations. First, our current judge-made successor liability law is a product of the rise of corporate law in the last half of the 19th century and early part of the 20th century. In fact, it appears to have developed because of, and in reaction to, the rise of corporate law. It may be better to characterize it as a part of that body of law, much like the “alter ego” or “piercing the corporate veil” doctrines, rather than as a simple creature of tort law, despite it being used as a tool by plaintiffs who are involuntary tort claimants.Even in those jurisdictions that appear to have expanded the number of recognized categories of successor liability, there appears to be a long term trend to limit the applicability of the successor liability doctrines by stating the applicable standard in the form of a bright line rule or set of rules. This trend toward bright line rules threatens the original purpose of successor liability, which was born to serve as a counterbalance to corporate law’s limitation-of-liability protections afforded asset purchasers. Like the “alter ego” or “piercing the corporate veil” doctrines, it was originally a set of extremely fact-specific and context-sensitive standards based upon an examination of non-exclusive lists of flexible factors rather than rigid bright lines rules.To serve its original purpose as a safety valve ensuring just results in the face of corporate law’s limitations on liability, successor liability should remain more flexible and fluid so that its applications can be adjusted as new forms of transactions are developed and pursued. It is natural for capital to be deployed, harvested, and redeployed in a manner that maximizes the externalities, the costs that society, not the invested capital, must bear. It is natural to attempt to separate liabilities by creating negative externalities for existing creditors and future claimants whenever possible. Successor liability stands as a doctrine to regulate or moderate this behavior and to prevent the dominance of corporate law principles in situations where injustice would result. This, in turn, can force the transferee and transferor to bargain and allocate the risk of unpaid and future claims between themselves.Development of a bright line standard for successor liability sets the stage for avoiding that liability when asset purchasers are represented by competent counsel. Once a rigid standard or safe-harbor has emerged, the transaction can be structured so that the standard is avoided or the safe-harbor invoked. Successor liability emerged over one hundred years ago in reaction to the rise of insulation of capital from liability under corporate law. Since then there has been a trend toward uniform statements of the successor liability doctrines and transformation of flexible standards into rigid ones. This trend seems to indicate that corporate law, in the long run, is winning the struggle against these exceptions to the no-liability-for-asset-purchaser rule. Especially in the case of the future tort claims, corporate law thus encourages the externalization of these claims. As a result, it is future claimants and society who are left to bear these claims, rather than the parties who benefited from the act that gave rise to them.

DOJ and the SEC issue much‐anticipated FCPA guidance

PurposeThe purpose of this paper is to explain the joint guidance on the US Foreign Corrupt Practices Act (FCPA or the Act) published on November 14, 2012 by the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC).Design/methodology/approachThe paper explains the principal provisions of the Act covered in the joint guidance, where the joint guidance sheds light, and where it leaves uncertainty. Key issues covered are jurisdiction; corrupt intent, knowledge and willfulness; the “business purpose” test; gifts, travel and entertainment expenses; charitable contributions; definitions of foreign officials and instrumentalities; third parties; facilitating payments; extortion/duress; successor liability; accounting provisions; compliance programs; compliance monitors; and prosecution, resolution and declination decisions.FindingsWhile it is unprecedented in federal law enforcement that the DOJ and SEC have provided the public with such detailed information on their joint FCPA enforcement approach and priorities, the guidance does not break new ground and generally reaffirms positions the agencies have previously espoused in other contexts. The guidance leaves open some difficult issues facing compliance officers and practitioners.Originality/valueThe paper provides expert guidance by experienced financial services lawyers.

General Court Rules on Successor Liability and Apportionment of Group Liability in the Gas Insulated Switchgear Cartel

On 3 March 2011, the General Court handed down its judgments in three appeals brought against a decision of the European Commission which imposed fines for participation in an illegal collusive tendering cartel in the market for gas insulated switchgear projects. In the Areva and the Siemens Österreich rulings, the Court provided guidance on the liability of companies involved in corporate transfers as well as the Commission's duties in apportioning liability among those companies.

Successor Liability and Insurance Coverage Issues: Past, Present, and Future

Successor Liability and Insurance Coverage Issues: Past, Present, and Future

De Facto Merger, Federal Common Law, and Erie: Constitutional Issues in Successor Liability

For many decades, the Supreme Court has directed that federal courts limit the creation of federal common law, and instead use state common law to fill in the gaps in federal statutes. Contrary to this directive, federal courts have developed rules of corporate successor liability for obligations pursuant to CERCLA and other federal statutes. Although other commentators have explored this inconsistency, none have taken the position that the creation of federal common law preempts state corporate de facto merger analysis. This Article discusses the Erie doctrine and federal common law with a focus on the preemption of the state de facto merger doctrine and the resulting impact on mergers and acquisitions. The creation of a federal common law of successor liability implicates the Constitutional requirements of separation of powers, due process, and the direct mandate of the Supreme Court.

Rising Phoenix-Like from the Ashes: An Argument for Expanded Corporate Successor Liability under CERCLA

Rising Phoenix-Like from the Ashes: An Argument for Expanded Corporate Successor Liability under CERCLA

Successor Liability and Asymmetric Information

The doctrine of successor liability transfers tort liability arising from the seller's past conduct from the seller to the buyer. If the buyer has as much information about the liability as the seller, all beneficial acquisitions take place and the seller takes the efficient level of precaution. However, if the seller has more information about the liability than the buyer, not all beneficial acquisitions are consummated and the seller takes a suboptimal level of precaution. I argue that, in the presence of information asymmetry, the courts should increase the damages against the (potential) seller to provide better incentives to take precaution while decreasing the damages against the buyer to encourage more beneficial asset sales.

Successor Liability and Asymmetric Information

The doctrine of successor liability transfers tort liability arising from the seller's past conduct from the seller to the buyer. If the buyer has as much information about the liability as the seller, all beneficial acquisitions take place and the seller takes the efficient level of precaution. However, if the seller has more information about the liability than the buyer, not all beneficial acquisitions are consummated and the seller takes a suboptimal level of precaution. I argue that, in the presence of information asymmetry, the courts should increase the damages against the (potential) seller to provide better incentives to take precaution while decreasing the damages against the buyer to encourage more beneficial asset sales.

Capital Requirements in United States Corporation Law

This paper focuses on corporation law in the United States as it relates to capital contributions and capital maintenance. In other words, the paper addresses the provisions of corporation law relating to (1) the obligation of investors to contribute to the corporation a specified amount of capital and (2) the obligation of the corporation to maintain a specified amount of capital (and not to pay it back to the stockholders in the form of dividends or payments to repurchase or redeem shares). Traditionally, the amount of capital that must be contributed to and maintained by a corporation is called the legal capital of the corporation. Thus, I refer here to the rules relating to these matters as legal capital rules. The paper is divided into three parts. First, I outline the history and evolution of legal capital rules in the United States. Although these rules have been de-emphasized in recent years, particularly in the Model Business Corporation Act (MBCA) and the states that follow it, the legal capital rules remain on the books of numerous states and continue to be litigated from time to time. Second, I describe and analyze the legal capital rules currently in force in the major commercial jurisdictions, including Delaware, New York, and California. In addition, I will describe the rules as currently set forth in the MBCA. Third, I describe the various rules that have taken the place of the legal capital rules in the United States. These include federal securities law, fraudulent transfer statutes, bulk sale statutes, veil piercing doctrine, successor liability doctrine, fiduciary duty doctrine relating to corporations operating on the edge of insolvency, and a variety of corporation statutes relating to particular transactions such as sales of assets and dissolution. I do not address any industry-specific capital rules such as those relating to banks, brokers, or insurance companies. This paper was written at the request of the Working Group on Legal Capital in Europe, a group of German legal scholars chaired by Professor Marcus Lutter of the University of Bonn. The group was formed to study the abolition of legal capital rules as contemplated by the Commission of the European Union under the Second Directive on Company Law. This paper will be published together with other papers prepared for the group in both English and German in a free standing volume.

Successor corporation insurance coverage: From imposition of successor liability to enforcement of settlement agreements against insurance companies who breach duties owed to insureds

Keith J. Broady is a shareholder in the Minneapolis law firm Abdo and Abdo, P.A., practicing in the areas of business and environmental litigation and law. He represented Gopher Oil in defense of environmental claims and in the prosecution of an insurance declaratory judgment action including sewing as lead counsel through two jury trials and numerous appeals. He thanks Steven R. Hedges and Timothy C. Matson, also attorneys with Abdo and Abdo, P.A., for their assistance in the underlying litigation and with this article. Copyright © 2000 by Keith J. Broady. All rights reserved. In 1973, Gopher Oil was formed as a corporation to purchase an existing oil distributing business. The acquired company had previously re‐refined waste oil. This line of business was discontinued in 1971. In the early 1990s Gopher Oil was named a defendant in various environmental cleanup lawsuits based upon the re‐refining operations of the predecessor company from the mid‐1950s through the early 1970s. Copies of the predecessor's insurance policies were not to be found and all of the key employees, including the former owners, were deceased. After eight years of litigation, including defending several claims and attempting to locate and establish insurance coverage, Gopher Oil recovered over $3.3 million dollars from the predecessor's insurance company.

Taking Future Claims Seriously: Future Claims and Successor Liability in Bankruptcy

Treatment of contingent tort liabilities when a business is sold presents a particular challenge for corporate and bankruptcy law. In this article, I focus on the precarious position of future tort claimants-those who may be harmed by a manufacturer's defective product after the manufacturer has sold its business and disappeared. By the time the future claimant's injury occurs, she may be left with no means of recovery. While the article focuses primarily on the bankruptcy sale context, a discussion of the nonbankruptcy context provides important background. With respect to the nonbankruptcy context, I discuss the doctrine of successor liability and the controversy concerning its various proffered rationales. I conclude tentatively that a cost internalization approach is the most plausible. One consequence of a cost internalization approach is that its applicability in the insolvency context is questionable. If the manufacturer is insolvent at the time of sale, then any acquirer should take free of successor liability risk. Insolvency means that the manufacturer's equity capital has already been exhausted at the time of sale. Therefore, any costs shifted by virtue of the acquirer's discounted bid price would simply be shifted from one set of the manufacturer's creditors to another. While there is good reason to prefer future claimants over the manufacturer's shareholders-which under a cost internalization theory is the effect of successor liability if he manufacturer is solvent-there may not be good reason to prefer future claimants over other creditors of the manufacturer. This observation, coupled with the transaction costs that successor liability creates, suggests that the doctrine should not apply in the insolvency context. In the bankruptcy sale context, proper treatment of future claims and any attendant successor liability rights is also an unsettled question.I argue (1) that future claims should always be accounted for in the bankruptcy proceeding in which a business is transferred, and (2) that once that is accomplished, attendant successor liability rights may properly be eliminated. Inclusion of future claimants in bankruptcy's common pool is necessary in order to provide complete relief to the debtor and assure survival of the going concern. It also vindicates bankruptcy's norm of equal treatment. Provided future claims are included in the bankruptcy distribution, that should be their exclusive remedy. They do not deserve a second recovery that post-bankruptcy successor liability would provide. Neither of these prescriptions, however, is a given under current law.In the mass tort context, future claims are included in bankruptcy because they must be in order for the business to survive, but otherwise they are ignored. Recent reform proposals seem to condone such inconsistent, result-oriented treatment of future claims in bankruptcy, as theorists call for a approach. I argue that in the bankruptcy sale context, a flexible approach merely enables exploitation of future claimants. Much like the situation outside of bankruptcy, a flexible approach enables other parties to leave losses with future claimants if that strategy will maximize returns to those other parties. With respect to disposition of successor liability claims following bankruptcy, the courts are in disarray. That future claims are ordinarily ignored in bankruptcy has caused certain courts to proclaim that future claimants' successor liability rights may never be affected by bankruptcy. I suggest that this view stems from a misapprehension concerning the proper rationale for successor liability. From a cost internalization perspective, it becomes clear that as long as future claims are accounted for in bankruptcy, successor liability rights should not survive. Finally, I discuss implementation of mandatory inclusion of future claims in the bankruptcy sale context. I propose a low cost alternative to the mass tort model, which I refer to as Commensurate Discounted Assumption.

Corporate successor liability plus lender liability: A poison pill with a one‐two financial knockout punch

(1989). Corporate successor liability plus lender liability: A poison pill with a one‐two financial knockout punch. Environmental Claims Journal: Vol. 1, No. 4, pp. 453-466.

Successor Liability in Bankruptcy: Some Unifying Themes of Intertemporal Creditor Priorities Created by Running Covenants, Products Liability, and Toxic-Waste Cleanup

The state creates property, and (consistent with due process of law) the state takes it away. This article will focus upon a type of property destruction-foreclosure-that is integrally related to creditor priorities both in and out of bankruptcy. Foreclosure theory is understudied and underdeveloped. It is neglected particularly when unusual forms of property are involved, many types of which have only recently been invented. This article will concern itself specifically with the foreclosure of what I will call servitudes-personal obligations that are imposed upon the owners of encumbered items simply by virtue of their being in possession of these items.' Servitudes are not mortgages or liens. The encumbered items are not necessarily collateral for debts of their owners. Rather, servitudes are strictly personal obligations that may be enforced as such against servitude-debtors only by the usual means of injunction or execution of money judgments. The servient property merely signals whom the plaintiff may sue to enforce a contractual or tort duty. This article will discuss three kinds of servitudes. First, it will consider the contractually created servitude on land. Second, it will consider the recently created products-liability servitude that may impose on owners of factories

Postdissolution Product Claims and the Emerging Rule of Successor Liability

Postdissolution Product Claims and the Emerging Rule of Successor Liability