Wisconsin Successor Liability
The Wisconsin common law doctrine of successor liability protects a buying entity that purchases the assets of a selling entity.1 The Wisconsin Supreme Court has stated the general rule in Wisconsin is that “a corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation.”2 In addition to the presumption of non-liability, a buying entity typically includes a non-liability provision in the asset purchase agreement (“APA”). The non-liability provision in the APA has been recognized by courts as a mechanism to ensure that the buying entity is not exposed to the selling entities liabilities.3
The general presumption of successor non-liability, however, is not absolute. There are four well-recognized exceptions in Wisconsin case law.4 The first exception arises when the purchasing entity expressly or impliedly agreed to assume the selling entity’s liability. The second exception arises when the transaction amounts to a consolidation or merger of the purchaser and seller. The third exception arises when the buying entity is merely a continuation of the seller entity. Finally, the fourth exception arises when the transaction is entered into fraudulently to escape liability for such obligations.
Springer v. Nohl Electric Products Corporation
In 2018, the Wisconsin Supreme Court recently revisited successor liability and the fraudulent transaction exception in the case of Springer v. Nohl Electric Products Corporation.5 In this case, the plaintiff, Penny Springer, brought suit against a number of defendants after her husband had died in 2007 from mesothelioma.6 Springer sued several companies, alleging that the companies had been “negligent in mining, merchandising, manufacturing, supplying, installing, distributing, or selling the asbestos products” in which her husband was exposed.7
Powers’ Corporate History
Among the companies sued by Springer was Powers, who was named as the successor company to Fire Brick Engineers Company, Inc. Fire Brick Engineers Company (“FBE1”) originally started in 1940, and manufactured and distributed asbestos-containing refractory and foundry supplies.8 In 1983, a new company was formed by a group of investors, which was also called Fire Brick Engineers Company (“FBE2”).9 FBE2 was formed for the purpose of acquiring FBE1’s assets through an asset purchase agreement, and FBE2 accepted some, but not all, of FBE1’s liabilities.10 After several years, FBE2 was merged with Curtis Industries, and the name of the company was changed to Powers Holdings, Inc. Powers then started doing business under the name of Fire Brick Engineers Company.11
The Lower Courts’ Decisions
At the Circuit Court level, Powers Holdings, Inc. (“Powers”) and Fire Brick Engineers Company filed a Motion for Summary Judgment.12 Powers argued that there was no evidence that it had distributed or sold asbestos-containing products, and, even though it acquired the assets of FBE1, there was no basis to impose liability on Powers as a successor company.13 The Circuit Court held that there was no genuine issue of material fact and that no exception to the general rule that successor liability of the seller corporation existed in Wisconsin law, and granted summary judgment for Powers.14
Springer subsequently appealed the circuit court’s granting of summary judgment in favor of Powers.15 Springer argued that circuit court erred when it held that no factual dispute existed as to Powers’ liability as a successor company to FBE1.16 Springer contended that the evidence shows a factual dispute as to whether the transaction between FBE1 and FBE2 was fraudulent.17
Powers’ Motion to Dismiss
Powers argued that Springer had brought an action against the wrong company because Powers was not responsible for the liabilities of the previous corporations.18 Powers argued that it was not responsible for the liabilities of the previous corporations based upon corporate successor non-liability.19 Powers further argued that Springer had not pleaded any legal theory by which FBE2 or Powers could be responsible for FBE1’s liabilities.20 Springer had argued that Powers was liable as a successor corporation to FBE1, and the transaction between FBE1 and FBE2 in 1983 was for the purpose of “fraudulently
escaping liability for FBE1’s obligations.”21 Powers moved for summary judgment, which was granted by the circuit court.22 On appeal, Springer argued that the Wisconsin Uniform Fraudulent Transfer Act (“WUFTA”) was the proper way of analyzing the fraudulent transaction exception to successor non-liability.23 The court of appeals agreed, and reversed and remanded the case to the circuit court to for a trial, and instructed the circuit court to have the jury apply the WUFTA to determine if the transaction between FBE1 and FBE2 was indeed fraudulent.24 Powers then petitioned the Wisconsin Supreme Court for review of the court of appeals decision.25
The main argument by Powers on appeal was that the WUFTA did not govern the fraudulent transaction exception, and the court of appeals had erred in holding that it did.26 The sole issue for the court to decide in this case was whether the WUFTA governs the fraudulent transaction exception to the rule of successor non-liability.27 This issue gave the court the opportunity to address both successor non-liability and the fraudulent transaction exception.
The court starts its discussion of successor non-liability with the general rule that “a corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation.”28 This rule, according to the court, has the practical justification of protecting “a bona fide purchaser from liabilities caused by a predecessor corporation of which the bona fide purchaser was unaware of at the time of acquisition,” and having the presumption of non-liability promotes the marketability of assets .29
The presumption, however, has limits. The court highlights four well-recognized exceptions to the rule:
- When the purchasing corporation expressly or impliedly agreed to assume the selling corporation’s liability;
- When the transaction amounts to a consolidation or merger of the purchaser and selling corporations;
- When the purchaser corporation is merely a continuation of the seller corporation; or
- When the transaction is entered into fraudulently to escape liability for such obligations.30
The court only addresses the fourth exception, when the transaction is entered into fraudulently to escape liability for the obligations of the selling corporation. This exception has received little attention from Wisconsin courts, even though the exception is over a century old.31
The WUFTA and the Fraudulent Transaction Exception
The court holds that the purpose of the fraudulent transaction exception “is to discover the actual intent of those who engineered the transfer of assets from the old company to the new,” and that the WUFTA does not govern the fraudulent transaction exception.32 The fraudulent transaction exception has been shaped throughout hundreds of years of case law, dating back to England, and the WUFTA has existed independently from this case law.33 Further, the fraudulent transaction exception and WUFTA have different purposes. The fraudulent transaction exception prevents companies from avoiding liabilities incurred by predecessor companies, while the WUFTA is designed “to assist creditors in collecting on claims that may be frustrated by recent asset transfers.”34
This difference is also found in two specifics of the WUFTA. First, the statute of limitations under the WUFTA is one year, in most cases.35 This would be inadequate under the fraudulent transaction exception, because the injuries could arise years after the corporation is sold. Second, the WUFTA’s remedies focus on the conveyed assets, instead of the successor company.36 The WUFTA is not adequate to cover the purpose and the policies of the fraudulent transaction exception, and the court holds that common law still governs.37 After discussing whether the circuit court or court of appeals had any issues remaining with respect to Powers, the court held (5-2) that the WUFTA does not control fraudulent transaction cases, and reversed the decision of the court of appeals, dismissing Powers from the case.38
In its holding, the Wisconsin Supreme Court was able to revisit successor non-liability in Wisconsin. The last time that the Wisconsin Supreme Court had addressed successor liability was in 1985, and the court’s decision in Springer solidified the presumption that a corporation is not responsible for the liabilities of the selling corporation. Further, the court was able to make the seldom-visited fraudulent transaction exception a little clearer.
What does this mean for practitioners?
The Wisconsin Supreme Court’s ruling held that the common law still governs the fraudulent transaction exception, not any statute. However, the Springer decision seems to show that a purchaser’s risk of successor liability claims made by creditors after completing an asset purchase transaction are further reduced in Wisconsin. Based on this decision business purchasers should not easily overlook the long-term benefits and risk reduction provided by asset purchase transactions, especially if Wisconsin law governs the transaction as current law is friendly towards purchasers. Further, as in any transaction, practitioners should be aware of the possibility of fraudulent conduct and investigate the intent of the parties to ensure a court would not consider the transaction to be fraudulent.
- Fish v. Amsted Industries, Inc., 126 Wis. 2d 293, 298, 376 N.W.2d 820, 823 (1985) (holding that the defendant did not assume responsibility for unknown liabilities after purchasing a corporation through an asset purchase agreement). Fish is considered the first case in which the Wisconsin Supreme Court recognized that Wisconsin follows the general rule that a buying corporation is not liable for the liabilities of a selling corporation.
- Columbia Propane, L.P. v. Wisconsin Gas Co., 2003 WI 38, ¶ 23, 261 Wis. 2d 70, 661 N.W.2d 776 (holding that there was not a sufficient amount of identity between the manufacturer of power press and the successor corporations to impose liability on the successor corporations for the injuries caused by the power press).
- Fish, 128 Wis. 2d at 298.
- Springer v. Nohl Electric Products Corporation, 2018 WI 48, 381 Wis. 2d 438, 912 N.W.2d 1. The Supreme Court issued this opinion on May 15, 2018.
- Id., at ¶ 2.
- Id., at ¶ 3.
- Springer v. Gen. Refractories Co., No. 10CV622, 2015 WL 13448672, at *1 (Wis. Cir. Ct. 2015), rev’d sub nom. Springer v. Nohl Elec. Prod. Corp., 2016 WI App 57, 370 Wis. 2d 787, 882 N.W.2d 870, rev’d, 2018 WI 48, 381 Wis. 2d 438, 912 N.W.2d 1
- Springer v. Nohl Elec. Prod. Corp., 2016 WI App 57, ¶ 5, 370 Wis. 2d 787, 882 N.W.2d 870
- Springer, 2018 WI 48 at ¶ 2
- Springer, 2016 WI App 57 at ¶1
- Springer, 2018 WI 48 at ¶ 2
- Springer 2016 WI App 57 at ¶ 15.
- Id., at ¶ 4.
- Id., at ¶ 7.
- Id., at ¶ 5.
- Id., at ¶ 7.
- Id. The court of appeals ordered the circuit court to instruct the jury to use the “badges of fraud” test from the WUFTA.
- Id., at ¶ 12.
- Id., at ¶ 14.
- Id., at ¶ 15.
- Id., at ¶ 16 (citing Fish v. Amsted Industries, Inc., 128 Wis. 2d 293, 298,386 N.W.2d 820, 823 (1985))
- Id., at ¶ 17.
- Id., at ¶ 26.
- Id., at ¶ 27. The court goes into a discussion on the common law history of the fraudulent conveyance exception, analyzing a few cases from 16th century England and from the U.S. in the early 20th century.
- Id. The court stated that the WUFTA is asset-focused, and doesn’t account for the legislative policies that are found in Wisconsin business-related statutes. The fraudulent transaction exception, on the other hand, had “organically” arisen in response to Wisconsin corporate law. Id., at ¶ 28.
- Id. The fraudulent transaction exception, on the other hand, focuses on the successor corporation, and not the corporation’s assets. The WUFTA’s remedies focus on recovering the asset or recovering the asset’s value, while the fraudulent transaction exception focuses on holding the successor corporation liable.
- Id., at ¶ 13. The common law, according to the court, has been shaped in response to Wisconsin corporate law, while the WUFTA was created independently of the corporate case law.
- Id., at ¶ 30.