J. F. Anderson Lumber Co. v. Myers
206 N.W.2d 365, 296 Minn. 33 (1973)
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Rule of Law:
A corporation that purchases the assets of another corporation is not liable for the transferor's debts unless one of four exceptions is met: (1) the purchaser expressly or impliedly agrees to assume the debts; (2) the transaction is a de facto consolidation or merger; (3) the purchaser is a mere continuation or reorganization of the seller; or (4) the transaction was fraudulent or for inadequate consideration to escape liability.
Facts:
- Richard T. Leekley, Inc., a construction company owned solely by Richard T. Leekley and his wife, became liable for a judgment debt to Miller and Janet Myers following a dispute over a home remodeling project.
- After the trial but before the judgment was formally entered, Leekley and his wife formed a new corporation named Leekley's, Inc.
- Leekley's, Inc. performed the same type of construction business as the original corporation, and Leekley and his wife were its sole stockholders and officers.
- The first corporation, Richard T. Leekley, Inc., was insolvent with debts exceeding $40,000.
- The insolvent corporation transferred two trucks and other equipment to Leekley's, Inc. for $1,788.58, which was considered adequate consideration and was paid to the first corporation's creditors.
- The first corporation ceased doing business after the asset transfer.
- Richard Leekley stated that Leekley's, Inc. was formed to start a new corporate entity that did not have the debts of the first corporation.
Procedural Posture:
- J. F. Anderson Lumber Company initiated a mechanics lien foreclosure action in a Minnesota state trial court against homeowners Miller and Janet Myers and builder Richard T. Leekley, Inc.
- Myers filed a cross-claim against Richard T. Leekley, Inc. for damages.
- The trial court entered judgment in favor of Myers on their cross-claim against Richard T. Leekley, Inc. for $9,371.60.
- After the trial court's order but before entry of final judgment, Myers moved to amend the judgment to include the newly formed Leekley's, Inc. as an additional judgment debtor.
- The trial court granted the motion and amended the judgment, making Leekley's, Inc. also liable for the debt.
- Leekley's, Inc. (the appellant) appealed the amended judgment to the Minnesota Supreme Court, with Myers (the appellees) defending the trial court's decision.
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Issue:
Is a newly formed successor corporation, which continues the same business with the same owners as an insolvent predecessor, liable for the predecessor's judgment debts when there was no merger or assumption of debt, and the predecessor's assets were transferred for adequate consideration, even if the admitted motive for forming the new corporation was to escape the predecessor's debts?
Opinions:
Majority - O. Russell Olson, Justice
No. A successor corporation is not liable for the debts of its predecessor under these circumstances. The general rule is that a corporation that purchases the assets of another is not liable for the transferor's debts. The court reviewed the four standard exceptions to this rule and found that none applied. There was no express or implied agreement by Leekley's, Inc. to assume the debts of Richard T. Leekley, Inc., nor was there a statutory merger or consolidation. The court narrowly interpreted the 'mere continuation' exception as referring principally to a formal corporate reorganization, holding that continuity of business, name, and management alone is insufficient to impose liability. Finally, the transaction was not fraudulent because the tangible assets were transferred for adequate consideration, and the court rejected the trial court's theory that Leekley's personal reputation constituted a corporate asset ('good will') transferred without consideration. The motive to avoid the predecessor's debts, absent fraud, is not a basis for imposing liability.
Analysis:
This decision reinforces the traditional, strict view of corporate successor liability, emphasizing the legal separateness of corporate entities. It establishes that continuity of ownership and business operations is not, by itself, sufficient to make a new corporation liable for an old one's debts under the 'mere continuation' doctrine. The ruling provides a clear shield for entrepreneurs seeking a 'fresh start' with a new corporation, so long as asset transfers from the old entity are not fraudulent and are made for adequate consideration. Consequently, creditors may find it difficult to collect from a successor corporation unless they can specifically prove a de facto merger, debt assumption, or a fraudulent transaction designed to cheat them.
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