In Vision Pharma, LLC v. Sunrise Pharmaceutical, Inc., No. 2:13-cv-04692, 2018 WL 3085213 (D.N.J. June 20, 2018), the court held that despite plaintiff’s failure to formally transfer the assets of a New Jersey entity, including the rights under the contracts being sued on, to a new Florida entity, the Florida entity nonetheless had standing to assert breach of contract claims against defendant.
Plaintiff Vision Pharma, LLC alleged that after initially doing business in New Jersey through a New Jersey entity, it moved from New Jersey to Florida, dissolved the New Jersey entity and reincorporated in Florida using the same name and Federal Tax Identification Number. Plaintiff contended that the entities were identical, including their members and assets, but for their state of incorporation. Defendant Sunrise Pharmaceutical, Inc. filed a motion to dismiss, arguing in part that plaintiff, the Florida entity, lacked standing to bring its claims because it had no rights under the contracts with defendant because they were signed by the New Jersey entity. In response, plaintiff argued that it is the successor-in-interest to the New Jersey entity under a de facto merger and/or mere continuation theory.
According to the court, the de facto merger and mere continuation theories are most often applied in the context of corporate successor liability and are exceptions to the general rule that where a company sells its assets, the purchaser is not liable for the seller’s debts and liabilities. In deciding whether a de facto merger or mere continuation has occurred, courts consider four factors: (1) continuity of management, personnel, physical location, assets, and business operations; (2) cessation of business operations and dissolution of the predecessor as soon as possible; (3) assumption by the successor of the liabilities ordinarily necessary for the continuation of the predecessor’s business; and (4) continuity of ownership. Id. at *4. “Not all of these factors need be present for a de facto merger or continuation to have occurred. The crucial inquiry is whether there was an ‘intent on the part of the contracting parties to effectuate a merger or consolidation rather than a sale of assets.’” Id. (quoting Luxliner P.L. Exp., Co. v. RDI/Luxliner, Inc., 13 F.3d 69, 73 (3d Cir. 1993)).
The court held that the doctrine applied. The Members of the New Jersey entity continued as the members of the Florida entity and held identical membership interests. Moreover, both before and after the relocation to Florida, plaintiff was operated as the same company originally organized as the New Jersey entity, with identical management, personnel, assets and general business operations. The court found that this was especially evident from the purchase orders, packing slips, and invoices exchanged between plaintiff and defendant which were virtually identical for both entities aside from the change of address. And, plaintiff maintained in its papers and represented during oral argument that it had assumed the liabilities of the New Jersey entity.
The court found that holding plaintiff lacked standing would promote form over substance and would be fundamentally unfair. Indeed, defendant failed to raise any issue with the New Jersey entity’s relocation to and reincorporation in Florida until plaintiff filed its complaint. Prior to that time, defendant acknowledged plaintiff as a successor of the New Jersey entity by continuing to provide the same services to plaintiff without objection. In fact, defendant sent packing slips and invoices to the new Florida address.
Plainly, course of dealing is key in evaluating a lack of standing defense after an alleged asset transfer. A party may not escape liability for its obligations even where there was no formal transfer of assets to the transferee seeking to vindicate its rights.
At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact John Haarlow at 312.419.6900 or email@example.com.