WisBar News: Common Law, Not Statute, Controls on Successor Liability Fraud Issue:

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  • WisBar News
    May
    15
    2018

    Common Law, Not Statute, Controls on Successor Liability Fraud Issue

    Joe Forward

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    Supreme Court

    May 15, 2018 – The Wisconsin Supreme Court has ruled (5-2) that Wisconsin’s Uniform Fraudulent Transfer Act does not control the outcome of a lawsuit alleging that a successor company is liable for the negligent handling of asbestos-containing products.

    Penny Springer filed a lawsuit against several companies in 2010, three years after her husband died from mesothelioma. She alleged that her husband was exposed to asbestos as an employee in the 1960s, which caused his sickness and death.

    Of the companies Springer sued, Powers Holdings Inc. (Powers) was among them. Powers was a successor company to the company that acquired the assets and some liabilities of the company that Springer’s husband worked for in the 1960s.

    Springer invoked the “mere continuation” and “de facto merger” exceptions to Wisconsin’s successor non-liability rule, which generally allows a successor company to disclaim the liabilities of a predecessor company under an asset purchase agreement.

    Powers responded that Springer sued the wrong company because when the company changed hands in 1983, the successor company did not agree to successor liability for this type of legal claim – the seller entity was still responsible for those.

    Ultimately, Springer asserted that Powers could be liable for the negligence of the predecessor because the 1983 asset purchase agreement violated Wisconsin’s Uniform Fraudulent Transfer Act (WUFTA), at Wis. Stat. chapter 242.

    A circuit court granted summary judgment in favor of Powers, concluding the successor company could not be liable for the negligence of the predecessor company. However, a state appeals court reversed for a determination on the WUFTA issue.

    In Springer v. Nohl Electric Products Corp., 2018 WI 48 (May 15, 2018), the Wisconsin Supreme Court (5-2) reversed the appeals court, concluding that WUFTA “does not govern the ‘fraudulent transaction’ exception to the rule of successor non-liability.”

    The majority noted the common law rule: a successor company purchasing the assets of another corporation “does not succeed to the liabilities of the selling corporation.”

    Four exceptions apply to this “successor non-liability rule”, including one “when the transaction is entered into fraudulently to escape liability for such obligations.” The majority noted the fourth exception has received “sporadic attention” the last 100 years.

    However, for this exception to apply, the transfer must have the “fraudulent purpose” of escaping liability. “The finder of fact must consider all circumstances tending to illuminate whether the transfer was entered into for the fraudulent purpose of escaping liability for the transferor’s obligations,” wrote Justice Daniel Kelly.

    Justice Kelly, for the majority, also noted that WUFTA “exists independently from this common law history, and fulfills a purpose quite separate from that of the fraudulent transactions exception to the rule of successor non-liability.”

    That is, whereas WUFTA “is designed to assist creditors in collecting on claims that may be frustrated by recent asset transfers, the fraudulent transaction exception is a doctrine that prevents successor companies from avoiding obligations incurred by their predecessors.” In other words, the WUFTA does not apply here, Kelly explained.

    “[W]e conclude that chapter 242 has not supplanted the common-law fraudulent transaction exception to the rule of successor non-liability,” Justice Kelly wrote.

    Consequently, the majority ruled that Springer had no viable claim based on common law successor liability. “[T]he complaint alleges nothing with respect to the asset transfer between the [predecessor company] and its successors, the very thing that could potentially make Powers liable,” Justice Kelly wrote. “So Mrs. Springer’s pleadings are silent on the only theory of liability she now advances in her case.”

    Dissent

    Justice Shirley Abrahamson dissented, joined by Justice Ann Walsh Bradley, concluding “the majority confusingly muddles what does and does not constitute indicia of fraud for purposes of the fraudulent transfer exception to the general rule against successor liability.” She said courts may consult WUFTA in this type of case.

    Also, unlike the majority, Abrahamson would have remanded the case to address the sufficiency of Springer’s amended complaint, rather than dismissing it out of hand.

    “The majority sua sponte raises and decides this issue without affording Springer an opportunity to address the issue or seek leave to amend her complaint,” she wrote.