Welco Industries, Inc. v. Applied Companies
67 Ohio St. 3d 344 (1993)
Rule of Law:
A corporation that purchases the assets of another is not liable for the seller's unassumed contractual obligations unless one of four traditional exceptions applies: (1) express or implied assumption of liability, (2) the transaction is a de facto merger, (3) the buyer is a mere continuation of the seller's corporate entity, or (4) the transaction is fraudulent. The 'mere continuation' exception for contract claims requires a continuation of the corporate entity through common identity of ownership, not merely a continuation of the business operations.
Facts:
- Welco Industries, Inc. ('Welco') and Applied Mechanics, Inc. ('Applied') were engaged in a contractual dispute, resulting in a counterclaim by Applied against Welco.
- Vickers, Inc. ('Vickers'), a corporation with no shared ownership with Welco, negotiated to purchase Welco's assets.
- Vickers purchased substantially all of Welco's assets for approximately $8,300,000 in cash.
- The asset purchase agreement expressly disclaimed Vickers' assumption of any liability related to Applied's counterclaim against Welco.
- Following the sale, Vickers continued to operate the business at the same physical plant, with the same employees, and producing the same product line as Welco.
- After the asset sale, Welco changed its name to Wesche Electric Company and continued to exist as a corporate entity.
Procedural Posture:
- Applied Mechanics, Inc. brought a claim against Vickers, Inc. in an Ohio trial court to enforce a contractual counterclaim it had against Welco Industries, Inc.
- Vickers filed a motion for summary judgment, arguing it was not a successor in liability.
- The trial court granted summary judgment in favor of Vickers.
- Applied, as appellant, appealed to the intermediate court of appeals.
- The court of appeals reversed the trial court's grant of summary judgment, holding that genuine issues of material fact existed.
- Vickers, as appellant, appealed the reversal to the Supreme Court of Ohio.
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Issue:
Does the 'mere continuation' exception to the rule of corporate successor nonliability apply to a purchaser of corporate assets for cash, making the purchaser liable for the seller's unassumed contractual obligations, when there is no continuity of ownership between the two corporations?
Opinions:
Majority - Moyer, C.J.
No. The 'mere continuation' exception does not apply to make a cash-for-assets purchaser liable for the seller's unassumed contractual obligations where there is no continuity of ownership. The traditional exceptions to successor nonliability will not be expanded for contract claims because contract law prioritizes the intentions of the contracting parties, predictability, and the free transferability of corporate assets. Unlike tort law, which is guided by public policy, expanding liability in contract cases would blur the critical distinction between an asset purchase and a stock purchase, chilling the market for corporate acquisitions. The basis of the traditional 'mere continuation' theory is the continuation of the corporate entity itself—such as having the same owners—not merely the continuation of the business operations. Here, Vickers and Welco were stranger corporations with no common ownership, the transaction was a cash purchase, not a de facto merger, and there was no evidence of fraud. Therefore, Vickers is not liable for Welco's contractual obligations to Applied.
Dissenting - A. William Sweeney, J.
Yes. The 'mere continuation' exception should be expanded to include a continuity-of-enterprise analysis, which could make the purchaser liable for the seller's contractual obligations. The dissent argues that when a successor corporation shares significant features with its predecessor (such as employees, location, and assets), there is no logical basis for treating an asset purchase differently from a de facto merger. Requiring the dissolution of the predecessor is an artificial distinction that allows companies to evade liability by maintaining a shell corporation. The dissent proposes a test based on continuity of management, assumption of ordinary business obligations, and how the successor presents itself to the public. Under this expanded view, genuine issues of material fact existed as to whether Vickers was a continuation of Welco, and summary judgment was therefore inappropriate.
Analysis:
This decision reinforces a strict, formalistic approach to successor liability in the context of contract law in Ohio, drawing a sharp line between contract and tort claims. By rejecting the expanded 'continuity of enterprise' test for contract disputes, the court prioritizes predictability and the freedom of contract for corporate transactions. This ruling provides a clear safe harbor for corporations structuring asset acquisitions, ensuring that a bona fide, arm's-length cash purchase will not expose the buyer to the seller's unassumed contractual liabilities, so long as there is no continuity of ownership. The case signals to corporate planners that the structure of the transaction is paramount and will be respected by the courts in commercial disputes.
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