Successor Corporation Liability is Expanded by Connecticut Court

April 1, 1997 Advisory
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In August 1996, a Connecticut superior court issued a decision that added the product line exception to the general rule that a purchaser of a business that acquires all or substantially all of the assets of the seller does not become liable for the seller's liabilities unless the purchaser specifically assumes the liabilities.

In Sullivan v. A.W. Flint Company, Inc., the court ruled that if a plaintiff in a product liability suit is able to show that:

  1. the purchaser has acquired substantially all of the seller's assets, leaving the seller as no more than a corporate shell;
  2. the purchaser is holding itself out to the general public as a continuation of the seller by producing the same product line under a similar name; and
  3. the purchaser is benefiting from the seller's goodwill, then the product line exception shall be applicable to the transaction thereby allowing the plaintiff to sue the purchaser for injuries resulting from products that the seller manufactured and put into the stream of commerce.

The superior court in A.W Flint relies heavily on the first prong of the three prong test set forth above, stating that if an adequate remedy against the seller remained available to the plaintiff (e.g. the seller remains in business), then the plaintiff would not be able to take advantage of the product line exception and look to the purchaser for relief.

The other exceptions to the general rule that the purchaser of the assets of a business is not responsible for the seller's liabilities are:

  1. the transaction amounts to a merger or consolidation of the two firms;
  2. the purchaser is a mere continuation of the seller;
  3. the transaction is entered into fraudulently for the purpose of escaping liability; and
  4. there is an absence of adequate consideration.

If a Connecticut court finds that any of the exceptions to the general rule are applicable to the situation before it, then the court can hold a purchaser responsible for the seller's liabilities notwithstanding the fact that the asset purchase agreement between the purchaser and seller expressly disclaims all or specifically listed liabilities of the seller.

Practice Pointer

Since the Supreme Court of Connecticut has not yet ruled on the applicability of the product line exception, it remains to be seen whether it becomes firmly established in this state. Future purchasers of assets should, however, look to more than the language of the asset purchase agreement for insulation against the seller's liabilities. Greater discounts of the purchase price to account for future liabilities escrow arrangements and insurance policies may all be methods whereby purchasers can gain greater protection.