The Supreme Court of Pennsylvania has held that an entity that purchased assets in a foreclosure sale may be held liable for debts of the predecessor company.The court noted in Continental Insurance Co. v. Schneider, Inc., No. 23 WAP 2003 (Pa. S.Ct., decided May 17, 2005) that its holding is consistent with the case law of several other states.

Continental Insurance Co. had provided general liability, automobile and workers’ compensation insurance to approximately 40 companies owned and controlled by Frank Schneider. In the 1980s, Mr. Schneider’s companies accumulated $35 million in debt, and the companies’ secured creditors, Pittsburgh National Bank (now PNC Bank), Mellon Bank and Equitable Bank (now National City Bank) sold the Schneider assets for $15 million at a private consensual foreclosure sale, pursuant to section 9-504 of the Pennsylvania UCC.

The purchaser of the assets was an entity named Vanadium Enterprises Corporation. Continental alleged this company was owned by Mr. Schneider’s son and effectively was controlled by Mr. Schneider. An unsecured creditor to the Schneider companies, Continental sought to impose successor liability on the Vanandium companies.

Generally, a purchasing or receiving company is not responsible for the debts and liabilities of the selling company. There are four exceptions under which successor liability may apply: 1) the purchaser agrees to assume liability; 2) the transaction amounted to a consolidation or merger; 3) the purchasing corporation was merely a continuation of the selling corporation; 4) the transaction was fraudulently entered into to escape liability.

Continental sought to impose liability based upon the third exception.

The Vanandium Group argued that the exceptions to successor liability should not be available where the assets of the predecessor company were not sold directly to the alleged successor but were sold by creditors through a UCC foreclosure sale.

The state supreme court recognized that under the UCC, an unsecured creditor is not permitted to assert a lien on assets that have been sold pursuant to a section 9-504 foreclosure sale against the purchaser of that collateral. But the court distinguished the assertion of a lien with imposition of successor liability.

Pennsylvania’s Superior Court had held that successor liability could apply because UCC provisions are supplemented by other principles of law and equity.

The supreme court agreed: “[A] UCC foreclosure sale does not extinguish potential successor liability claims.” The court noted that courts in New Jersey, North Carolina and Indiana have concluded similarly.

The decision opens the door for unsecured creditors to pursue their claims following foreclosure sales. Potential for successor liability may, however, impede the sale of assets and reduce their value.