Crops v. WeCare Organics LLC, Pa. Super. LEXIS 91 ; 2025 PA Super 44
(Pa. Super., February 25, 2025) (Olson, J.)
Appellant, Denali Water Solutions, LLC, (“Denali”) appeals from the April 22, 2024 judgment entered in the Court of Common Pleas of Dauphin County. On appeal, Denali challenges the trial court’s determination that, under a theory of successor liability, Jonathan Campbell, in his own right and t/d/b/a Campbell Crops (collectively “Campbell”) was entitled to judgment against Denali in the amount of $120,472.00, together with pre-judgment and post-judgment interest.1 After careful review, we vacate the April 22, 2024 default judgment, together with the March 13, 2024 judgment, as well as the February 16, 2024 trial court order finding Denali liable to Campbell under the theory of successor liability. We remand this case for further proceedings in accordance with this decision.
As the general principle of corporation law, and citation sentence.
In addressing whether the de facto merger exception requires proof of continuity of ownership, our Supreme Court stated that, in cases rooted in, inter alia, breach of contract (as is the situation, in the case sub judice), “the de facto merger exception requires ‘some sort of’ proof of continuity of ownership or stockholder interest.” Id. “[S]uch proof is not restricted to mere evidence of an exchange of assets from one corporation for shares in a successor corporation. Evidence of other forms of stockholder interest in the successor corporation may suffice[.]” Id. For example, as the Fizzano Court explained, a shareholder may receive obligations, i.e., promissory notes, in lieu of shares of stock in the successor corporation. Id. Finally, the Fizzano Court stated that the de facto merger exception “including its continuity of ownership prong, will always be subject to the fact specific nature of the particular underlying corporate realities and will not always be evident from the formalities of the proximal corporate transaction. These realities may include an issue concerning which entity is actually the true predecessor corporation.” Fizzano, 42 A.3d at 969.
Denali contends that “Campbell failed to adduce sufficient evidence of continuity of ownership or dissolution of WeCare to be entitled to summary judgment.” Denali’s Brief at 15.
In short, we find that the continuity of ownership prong requires a trial court to scrutinize the transaction to determine if the shareholders of, or those having an equity interest in, the seller company retained the benefits of their ownership in the assets transferred to the purchaser company by obtaining an ownership interest in the purchaser company while the creditors of the seller company are left without any remedies to collect their debt. This type of analysis is in keeping with the equitable principles which form the basis of the de facto merger exception. See Fizzano, 42 A.3d at 968 (stating, “[t]he de facto merger exception is not strictly contractual because it is an equitable principle, ultimately designed to look beyond the contract” (emphasis omitted), citing Berg Chilling Sys., Inc. v. Hull Corp., 435 F.3d 455, 465 (3rd Cir. 2006)).
Therefore, based upon the record currently before the Court, Campbell is not entitled to summary judgment because he failed to establish the continuity of ownership prong of the de facto merger exception to successor liability.
We agree that no genuine issue of material fact exists as to whether WeCare was “defunct” and “inactive” as of August 25, 2020. A genuine issue of material fact remains, however, as to whether WeCare maintained its business operations after the close of the transaction (October 2016) until it became “defunct” some time prior to August 2020, sufficient enough to negate the cessation of ordinary business and dissolution prong of the de facto merger exception. The asset purchase agreement did not require WeCare to dissolve after the transaction but, rather, indicated an intent by the parties that WeCare would have sufficient business assets, including contracts and a revenue stream, to continuing operating. This intent is further evidenced by LeBlanc’s executive management agreement that permitted LeBlanc to remain as president of WeCare after the transaction. Fizzano, 973 A.2d at 1022. Hence, genuine issues of material fact exist as to the second prong of the de facto merger exception.
In sum, for the reasons set forth herein, we find that the trial court erred as a matter of law and abused its discretion in granting summary judgment in favor of Campbell and against Denali. In viewing the evidence in the light most favorable to Denali, as the non-moving party, factual disputes surrounding the continuity of ownership prong, as well as the cessation of ordinary business and dissolution prong, exist, as demonstrated by the record, that negate the trial court’s application of the de facto merger exception to successor liability and the granting of summary judgment. As such, we vacate the April 22, 2024 default judgment, together with the March 13, 2024 judgment entered against Denali and the trial court’s February 16, 2024 order granting summary judgment in favor of Campbell and against Denali. We remand this case for further proceedings in accordance with this decision.
