Kulka v. Nemirovsky
182 A. 692, 321 Pa. 234 (1936)
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Rule of Law:
A successor corporation that acquires all the assets of a predecessor partnership is liable for the partnership's debts when there is a substantial identity of ownership between the two entities. In such cases, a creditor may follow the partnership's assets into the hands of the corporation to satisfy a claim.
Facts:
- Samuel Nemirovsky, his wife Goldie, and his son Morrison operated a secondhand machinery business as a partnership called Samuel Machinery Company.
- Joseph Kulka had a pending tort claim against the Samuel Machinery Company partnership.
- While Kulka's claim was ongoing, the partners formed a new corporation named The Samuel Machinery Company, Inc.
- The partners executed a bill of sale transferring all assets of the partnership to the newly formed corporation.
- The members of the partnership—Samuel, Goldie, and Morrison Nemirovsky—were the sole owners and shareholders of the new corporation.
- The corporation was formed using only the assets of the partnership, with no new capital investment.
Procedural Posture:
- Joseph Kulka sued Samuel Nemirovsky (doing business as Samuel Machinery Company) in a state trial court for trespass.
- A jury returned a verdict of $10,000 for Kulka.
- The trial court entered a judgment notwithstanding the verdict (n.o.v.) for the defendant, Nemirovsky.
- Kulka, as appellant, appealed to the Supreme Court of Pennsylvania, which reversed the judgment n.o.v. and reinstated the jury's verdict.
- To collect the judgment, Kulka levied on property held by The Samuel Machinery Company, Inc.
- The corporation filed a property claim, initiating a new proceeding to determine ownership.
- The trial court, sitting without a jury, found that the property was subject to Kulka's judgment.
- The Samuel Machinery Company, Inc., as appellant, appealed that decision to the Supreme Court of Pennsylvania.
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Issue:
Is a corporation that acquires all the assets of a partnership liable for the partnership's pre-existing debts when the owners of the corporation are identical to the members of the partnership?
Opinions:
Majority - Chief Justice Kephart
Yes, a corporation is liable for a predecessor partnership's debts when it acquires all of the partnership's assets and is composed of the same individuals. The court will disregard the fiction of a separate corporate entity when a corporation is merely the same individuals cloaked in a new legal guise. There is no valid reason to apply a different rule for corporate succession to a partnership than for succession to another corporation or an individual. When partners transfer all partnership assets to a corporation they exclusively own, they deprive partnership creditors of their right to have those assets applied first to their claims. Therefore, a creditor may follow the assets directly into the hands of the corporation to enforce payment, as the transaction is in substance merely a change of name, not a transfer to a bona fide purchaser.
Analysis:
This case extends the doctrine of successor liability, often applied in corporation-to-corporation transfers, to the context of a partnership that incorporates. It affirms the principle that courts will look past the corporate form to the substance of a transaction to prevent injustice. The decision establishes that owners cannot use the legal formality of incorporation to shield business assets from pre-existing liabilities. This precedent solidifies creditor protections by ensuring that a change in business structure, without a genuine change in ownership, does not defeat the rights of those with claims against the enterprise.
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