American Paper Recycling Corp. v. IHC CORP.
2010 U.S. Dist. LEXIS 40051, 2010 WL 1634064, 707 F. Supp. 2d 114 (2010)
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Rule of Law:
Under Massachusetts law, a corporation that purchases the assets of another corporation is not liable for the seller's contractual obligations unless the transaction constitutes a de facto merger. A de facto merger is not established when there is no continuity of shareholders or management, and the seller corporation continues to exist as a viable entity after the sale.
Facts:
- On November 6, 1990, Ivy Hill Corporation (Ivy) entered into a Waste Paper Sales Contract with American Paper Recycling Corporation (APR), agreeing to sell APR its entire accumulation of waste paper.
- Between 1991 and 2006, APR and Ivy executed ten amendments to the contract, whereby APR provided Ivy with equipment and financing in exchange for Ivy extending the contract term.
- The final amended contract was set to expire on December 31, 2020.
- On April 9, 2009, Ivy's parent company sold substantially all of Ivy’s assets to MPS/IH, LLC (MPS) through an Asset Purchase Agreement (APA).
- The APA specifically listed and excluded the Waste Paper Sales Contract with APR from the assets being transferred to MPS.
- Consideration for the sale consisted primarily of over $23 million in cash, with Ivy's parent receiving a small (less than 3.2%), non-voting stock interest in MPS's parent company.
- After the asset sale, Ivy did not dissolve but changed its name to IHC Corporation (IHC) and continued to operate as a commercial landlord, leasing property to MPS.
- On April 16, 2009, MPS notified APR that it was terminating recycling services at the former Ivy plants and would instead use its existing contractor, Wilmington Paper Corporation.
Procedural Posture:
- American Paper Recycling Corporation (APR) filed suit against IHC Corporation (IHC) and MPS/IH, LLC (MPS) in Bristol Superior Court, a state trial court.
- Defendants removed the case to the U.S. District Court for the District of Massachusetts, a federal trial court, based on diversity jurisdiction.
- APR filed an Amended Complaint alleging, among other things, breach of contract by IHC and MPS, and tortious interference by Wilmington Paper Corporation.
- Defendants moved to dismiss the Amended Complaint.
- The court denied the motions to dismiss and ordered a period of limited discovery focused on the nature of the asset acquisition.
- Following discovery, the parties filed cross-motions for summary judgment.
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Issue:
Does an asset purchase agreement constitute a de facto merger, thereby imposing the seller's contractual liabilities on the buyer, when the agreement explicitly excludes the contract, there is no continuity of shareholders, officers, or directors, and the seller corporation remains in existence post-transaction?
Opinions:
Majority - Stearns, District Judge.
No. An asset purchase agreement does not constitute a de facto merger when the key elements of a merger are absent. The general rule in corporate law is that a purchaser of assets does not assume the seller's liabilities. The court analyzed the transaction under the four-factor test for the de facto merger exception: (1) continuity of the enterprise, (2) continuity of shareholders, (3) cessation of the seller's operations, and (4) assumption of obligations necessary for business continuation. The court found none of the factors weighed in favor of a de facto merger. There was no continuity of enterprise because MPS did not retain Ivy's key management, officers, or directors. The 'key requirement' of shareholder continuity was absent, as the deal was overwhelmingly a cash-for-assets transaction, not a stock-for-assets exchange that would make the seller's owners part of the buyer. The seller corporation, Ivy (now IHC), did not dissolve but remained a viable entity capable of being held liable for its own obligations. Finally, while MPS continued the core business, it made significant operational changes. Therefore, MPS is not bound by the contract it explicitly excluded from the purchase.
Analysis:
This case reinforces the traditional corporate law principle that asset purchasers are generally shielded from seller liabilities. It clarifies the application of the 'de facto merger' doctrine in Massachusetts, emphasizing that courts will look past the form of a transaction to its substance, but will not find a merger without substantial continuity of ownership (shareholders) and control (management). The decision underscores that parties can successfully structure transactions to exclude specific unwanted liabilities, provided the seller corporation remains a viable entity and the consideration is not primarily the purchaser's stock. This provides a clear roadmap for corporate acquisitions where the buyer seeks to acquire productive assets without being encumbered by all of the seller's pre-existing obligations.
