A de facto merger existed between two companies operated under a “continuity of management,” the Indiana Court of Appeals ruled Monday, upholding a judgment against the successor entity.
Founded in 2002, Old Nello was created by Dan Ianello and employed officers Jason Lambert, Robert Rumpler and Kevin Brisson, who owned 95 – 99% of the company’s shares.
Old Nello hit rough waters in 2016 after an office consolidation in South Bend took longer, and cost more, than expected, leaving the company in deep debt. To resolve the problem, Old Nello took out a $10 million secured loan with Fifth Third Bank, a $3.4 million loan with a secondary secured creditor, and a $1.4 million debt obligation to the City of South Bend’s Industrial Revolving Loan Fund.
Old Nello officers each executed personal loan guarantees in connection with the Fifth Third loan, but the bank eventually demanded that its notes were due and payable, and prepared to foreclose on the note and liquidate Old Nello’s assets.
Meanwhile, CompressAir, who had installed compressed air and oxygen piping at the South Bend facility, sued Old Nello and sought to recover $39,000 for unpaid services. By the summer of 2017, six other creditors had also filed complaints seeking payment for outstanding bills.
In response, Michael Clevy of private equity firm Beckner Clevy Partners created New Nello Acquisition Co. to purchase Fifth Third’s note, buying the $10 million note for $3.765 million, which was more than Clevy’s $3.1 million estimate of Old Nello’s liquidation value. New Nello Acquisition then formed New Nello Operating Co. as a wholly-owned subsidiary, and the two entered into a strict foreclosure agreement with Old Nello.
New Nello began operating the same business as Old Nello, working from the same location, retaining the same employees and using the same website. New Nello, operating under the name “Nello,” made no public announcement of the assumption of Old Nello’s business to either the general public or the employees for fear of marketplace upheaval.
After acquiring Old Nello’s assets and business, New Nello negotiated with Old Nello’s vendors and creditors deemed were essential to the operation and paid them. Negotiations continued with CompressAir to come up with a payment plan, but the latter was unaware of the changes between Old Nello and New Nello.
The St. Joseph Circuit Court granted $44,689.66 to CompressAir, who subsequently filed proceedings supplemental naming New Nello as a garnishee defendant upon learning of the transaction. CompressAir then asked the trial court to enter judgment against New Nello as the successor to Old Nello.
The trial court ultimately concluded New Nello was a mere continuation of Old Nello and that there was a de facto merger of the companies, prompting New Nello to appeal in New Nello Operating Co., LLC. v. CompressAir, 19A-CC-603. Affirming the trial court, the Indiana Court of Appeals found the facts of the case “clearly support a finding of a de facto merger.”
“Even though there was no continuity of ownership, we do not consider this to be fatal to a finding of a de facto merger. … And 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,” Judge Paul Mathias wrote for the appellate panel. “… And although Old Nello was apparently never officially dissolved, all of its assets were acquired by New Nello. Old Nello is therefore a defunct corporation, even if not legally dissolved.
“… The de facto merger exception to the general rule that a corporation that purchases the assets of another corporation does not assume the liabilities of the former corporation therefore applies, and the trial court properly found that New Nello is liable for the $44,689.66 judgment obtained by CompressAir against Old Nello,” the panel concluded.