The Indiana Supreme Court on Thursday struck down lower court rulings in favor of an unpaid contractor that performed work for a South Bend business, finding that because the business’s assets are now owned by a bank rather than the prior company, the new bank-owned business is not liable for the bill.
The ruling involves CompressAir’s $44,689.66 judgment for unpaid piping work on the facilities of Nello Operating Co., which makes utility and cellphone towers. Founded in 2002, the company ran into money trouble in 2016 and defaulted on a loan from Fifth Third Bank.
Four of Nello’s senior officers who held at least 95% shares of the company had signed personal guarantees on the loan. With liquidation looming, the bank agreed to acquire the company’s assets in a strict-foreclosure agreement for $3.7 million and form New Nello Operating.
Afterward, those senior officers continued working for the company, whose operations carried on much as they had. “New Nello continued operating from Old Nello’s former location without publicly announcing either the transition or the transfer of assets from Old Nello. New Nello retained about ninety percent of Old Nello’s employees, including senior management,” Justice Geoffrey Slaughter wrote. “… As part of the transition, the New Nello entities agreed not to enforce the personal guarantees against Old Nello’s four senior officers, all of whom agreed to remain in their positions at New Nello Operating.”
These facts had led the St. Joseph Circuit Court to rule for CompressAir, a decision affirmed by the Court of Appeals. The COA observed, “even though there was no continuity of ownership in the present case, there was continuity of management, as the entire management team from Old Nello continues in the same roles in New Nello.”
The Supreme Court chucked those holdings Thursday, though, in New Nello Operating Co., LLC v. CompressAir, 20S-CC-578, finding the lack of common ownership between Old and New Nello dispositive.
“In a typical asset purchase, the buyer acquires the seller’s assets but not its liabilities. The general rule is not absolute, however, and this case turns on two exceptions. The first exception arises when the acquisition of assets amounts to a de facto merger; the second, when the buyer is a mere continuation of the seller. If either exception applies, the buyer is on the hook for all the seller’s liabilities,” Slaughter wrote.
“… (W)e hold that continuity of ownership is necessary for the de-facto-merger and mere-continuation exceptions to apply. Because there was no continuity of ownership between Old Nello and New Nello, we reverse the trial court’s entry of judgment for CompressAir and remand with instructions to enter judgment for New Nello,” the unanimous court held.
“If Fifth Third had foreclosed on Old Nello’s assets, CompressAir would have received nothing as an unsecured creditor,” Slaughter wrote. “CompressAir is no worse off with New Nello initiating the foreclosure instead of Fifth Third. It would seemingly subvert the rationale underlying the de-facto-merger exception to treat such foreclosures differently or to penalize New Nello for keeping the company afloat and its employees paid by deploying the assets for their most economically productive use. Because CompressAir cannot show continuity of ownership between Old Nello and New Nello, the de-facto-merger exception does not apply.”