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Writer's pictureSamuel A. Mullman

Court of Appeals Refuses to Expand Corporate Continuation Doctrine and De Facto Merger Doctrine

Updated: Jul 15, 2022

The Court of Appeals offered guidance on the corporate continuation doctrine finding that the factors as stated at common law are the only factors to be considered, and that equitable considerations beyond those elements are not properly considered by a court. Pop 3 Ravinia, LLC v. Embark Holdco Management, LLC, A22A0127, 2022 WL 2234985 at *1 (June 22, 2022). Further, the Court of Appeals refused to expand the de facto merger doctrine by allowing debt forgiveness to be considered as a transfer of stock. Id. at *7.


The facts of the case, as with most cases involving the corporate continuation doctrine, are dense and convoluted. In its simplest form, Access Insurance Holdings, Inc, as tenant, entered into an agreement with CRT Ravinia, LLC, as landlord. Id. at *1. In 2016, CRT Ravinia, LLC assigned its interest to Pop 3 Ravinia, LLC (“Pop 3”), appellant. Id. That same year Access Insurance Holdings, Inc. assigned its interest to Access Holdco Management, LLC (“Access Holdco”). Id. Access Holdco administers policies and claims for insurance carriers. Id. Most of the policies Access Holdco serviced were issued by a single affiliated insurance carrier, Access Insurance Company. Id. In March 2018, Access Insurance Company was placed into a receivership and enjoined from selling insurance. Id. Access Holdco lost its primary source of revenue and defaulted on $55 million in secured debt. Id.


Access Holdco’s majority owner, private equity firm Altamont Capital Partners, LLC (“Altamont”), believed they could salvage its investment by purchasing the debt at the right price. Id. at *2. In May 2018, Altamont’s subsidiary, ACP Insurance Finance, Inc (“ACP”) purchased Access Holdco’s debt. Id. ACP, owned by Altamont, demanded over $21 million in debt payments from Access Holdco, owned by Altamont, after this purchase. Id.

In August 2018, Access Holdco initiated an assignment for the benefit of creditors in the Delaware Chancery Court (after converting from a Georgia LLC to a Delaware LLC). Id. Access Holdco then assigned its assets to fiduciary entities (“ABC Entities”), which in turn filed assignments for the benefit of creditors in the Delaware Chancery Court. Id. On the same day that the assignments for the benefit of creditors petition was filed, ABC Entities transferred Access Holdco’s assets to a newly formed company called Embark Holdco Management, LLC (“Embark”), the appellee. Id. Embark was wholly owned by Altamont albeit through four other corporate transfers/entities. Id.


HOLDING:


Pop 3 argued that Embark is liable for the rent owed by Access Holdco under successor liability as a result of the corporate continuation doctrine or the de facto merger doctrine. The Court narrowed the elements of the corporate continuation doctrine and found that a jury could conclude that Embark was a mere continuation of Access Holdco, however, because of how the sale of assets was conducted, there was no de facto merger. Id. at *7, *8.


CORPORATE CONTINUATION DOCTRINE:


The general rule is that a corporation does not become a successor simply from buying another corporation’s assets. Carswell v. Nat’l Exchange Bank, 165 Ga. 351 (4) (140 SE 755) (1927). The Georgia Supreme Court has listed four common-law exceptions to this general rule, which most jurisdictions recognize. Bullington v. Union Tool Corp., 254 Ga. 283, 284 (328 SE2d 726) (1985); Bud Antle, Inc. v. E. Foods, Inc., 758 F.2d 1451, 1456 (IV) (11th Cir. 1985). Under these exceptions, a purchasing corporation is a successor liable for the seller’s debts if “(1) there is an agreement to assume liabilities; (2) the transaction is, in fact, a merger; (3) the transaction is a fraudulent attempt to avoid liabilities; or (4) the purchaser is a mere continuation of the predecessor corporation.” Bullington, 254 Ga. at 284. Accord Wilson v. Wernowsky, 355 Ga. App. 834, 845 (3) (846 SE2d 101) (2020).


The common law continuation doctrine arises when “the new corporation assumes the liabilities of the old corporation when the new corporation, with the same or similar owners, continues the old corporation’s business.” Johnson-Battle Lumber Co. v. Emanuel Lumber Co., 33 Ga. App. 517, 517 (126 SE 861) (1925). The Georgia Court of Appeals has said that the doctrine applies when the old and new corporations share both (a) “a substantial identity of ownership” and (b) “a complete identity of the objects, assets, shareholders, and directors.” Dan J. Sheehan Co. v. Fairlawn on Jones Condo. Ass’n, Inc., 334 Ga. App. 595, 597 (1) (780 SE2d 35) (2015) (cleaned up); accord Wilson, 355 Ga. App. at 845 (3).


A “substantial identity of ownership” does not require complete identity and may involve merely “some” identity of ownership. Bullington, 254 Ga. at 284. In Georgia, courts have found a substantial identity of ownership where the new corporation succeeded to the assets of a partnership, even though only three of the four partners were stockholders in the new corporation. Pet Care Professional Ctr., Inc. v. BellSouth Advertising & Publ’g Corp., 219 Ga. App. 117, 118 (1) (464 SE2d 249) (1995). Similarly, courts have held that this element was satisfied where the new entity, an LLC, was formed by one of two members in the old LLC. Wilson, 355 Ga. App. at 845-46 (3).

On the facts above, Access Holdco and Embark have a substantial identity of ownership. Both entities have the same parent company. Specifically Altamont owned two-thirds of Access Holdco and all of Embark.

The identity-of-assets-and-objects element gets at whether the new company is running a business that just looks something like the old company’s business (not enough), as opposed to continuing to run the old’s company business. See Dan J. Sheehan Co., 334 Ga. App. at 597 (1). To assess this element, courts have compared things like the old and new entities’ operations, assets, employees, management, location, vendors, and clients. See Wilson, 355 Ga. App. at 845-46 (3)

Again, on the facts above, the asset transfer resulted in a seamless continuation of Access Holdco’s business, unencumbered by certain liabilities, including those under the least at issue in the litigation. Pop 3 Ravinia, LLC, 2022 WL 2234985 at *5. Embark was conducting the exact same business using the same assets, including computers, historical records, and email accounts as Access Holdco. Id. The management team at Embark was identical to Access Holdco as were the employees and personal, whose titles and seniority carried over from the old company. Id. Lastly, Embark carried on relationships with the same vendors as Access Holdco. Id.


Ultimately, the Court of Appeals therefore found that the trial court’s passing reference to the two elements above was an error. Id. Likewise, the inclusion of “other factors” by the trial court was an error. Id. Ultimately, no other factors are to be considered and the two elements above are the only considerations for a court. Id. This finding was based on an examination of every Georgia case applying the doctrine and finding that only the two elements were considered. See, e.g., Wilson, 355 Ga. App. at 845-46 (3); Dan J. Sheehan Co., 334 Ga. App. at 597-98 (1); First Support Svcs., Inc. v. Trevino, 288 Ga. App. 850, 853-54 (655 SE2d 627) (2007); Perimeter Realty v. GAPI, Inc., 243 Ga. App. 584, 593 (5) (c), (533 SE2d 136) (2000); Pet Care, 219 Ga. App. at 118 (1); Ney-Copeland & Assocs., Inc. v. Tag Poly Bags, Inc., 154 Ga. App. 256, 256 (267 SE2d 862) (1980); Johnson-Battle Lumber Co., 33 Ga. App. at 517. See also In re Acme, 484 B.R. at 491

Lastly, Embark attempted to make the argument that since Access Holdco was insolvent at the time of the transfer, there was no prejudice to Pop 3. The Court of Appeals rejected this argument and found that successor liability is not rejected based on insolvency. Pop 3 Ravinia, LLC, 2022 WL 2234985 at *6.


DE FACTO MERGER DOCTRINE:


The Georgia Court of Appeals has described a de facto merger as one company being “absorbed” into another. See Perimeter Realty, 243 Ga. App. at 593 (5) (c). Four elements are required to establish a de facto merger: (1) a continuation of the seller corporation’s enterprise, which involves “a continuity of management, personnel, physical location, assets, and general business operations”; (2) “a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, [which] ultimately com[es] to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation”; (3) the cessation and dissolution of the seller corporation “as soon as legally and practically possible”; and (4) the assumption by the purchaser of “those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.” Id. (citation omitted); accord Howard v. APAC-Ga., Inc., 192 Ga. App. 49, 50 (383 SE2d 617) (1989). The second element “established if the buyer pays for the assets with its own stock and that stock ends up being held by the shareholders of the seller, so that it becomes a constituent part of the buyer.” Perimeter Realty, 243 Ga. App. at 593 (5) (c) (internal citations omitted).


The Court of Appeals found that Pop 3 failed on the second element because there was no transfer of stock as the consideration paid for Access Holdco’s assets was debt forgiveness. Pop 3 Ravinia, LLC, 2022 WL 2234985 at *7. The Court of Appeals reasoned that if they allowed the debt forgiveness to satisfy the second element they would be collapsing the de facto merger test into the continuation doctrine. Id. The Court rejected merging the two doctrines and found that Pop 3 failed under the de facto merger doctrine. Id.

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