Sometimes business owners reach for creative solutions in order to keep their businesses afloat. And those solutions can include an attempt to avoid debts. But Indiana’s courts have built a body of law to deal with these situations, and having a new business take over for the old will not work if it qualifies as a de facto merger.
Dan Ianello founded a business the Court calls “Old Nello” in 2002. Old Nello was in the business of manufacturing utility and cellular telephone towers, and was managed and owned by Ianello, Lambert, Rumpler, and Brisson.
Old Nello consolidated its operations into a new building in South Bend in 2016. But this project was more expensive than anticipated, and Old Nello was in dire financial straits in the latter half of 2016. This included a $10 million loan from Fifth Third Bank, a $3.4 million loan from Live Oak Capital, and a $1.4 million loan from South Bend. The owners had personally guaranteed these loans, and Fifth Third demanded that its loan be paid back in November 2016.
Live Oak thought it may lose its investment, and asked an investor, Clevy, to see if there was a way to continue Old Nello’s business. But Clevy was unable to come up with a workable solution, and Fifth Third was ready to liquidate Old Nello’s assets.
In the meantime, CompressAir installed thousands of feet of piping in Old Nello’s new building and had not been fully paid. CompressAir filed suit against Old Nello for the balance in March 2017.
Clevy formed New Nello in April or May 2017 and bought Fifth Third’s note. New Nello then entered into a strict foreclosure agreement with Old Nello and began operating the same business as Old Nello with the same management.
The CompressAir suit proceeded, resulting in a judgment against Old Nello. CompressAir then filed proceedings supplemental against New Nello as a garnisheedefendant. The trial court found that New Nello was a continuation of Old Nello and that there was a de facto merger. It entered judgment against New Nello, and New Nello appealed.
Before the Court could get into the heart of the matter on appeal, it had to address the standard of review. The Court had previously held that findings of fact and conclusions of law were unnecessary in proceedings supplemental, but the trial court did so in this case. CompressAir argued that a general standard of review, rather than the one applicable to findings of fact and conclusions of law should apply. The Court disagreed, noting that while findings and conclusions were not required, they were also not disallowed.
As for the substantive issues on appeal, the Court found that the facts “clearly” supported the trial court’s finding that there was a de facto merger. An asset transfer may be treated as a de facto merger “where the economic effect of the transaction makes it a merger in all but name.” Factors supporting a finding of de facto merger include:
Even though New Nello was owned by different persons than Old Nello (the management), there was continuity of management and operations. New Nello used the same website, made no public announcement to the general public or its employees, and held itself out as the same company by claiming to have been founded in 2002. While Old Nello still existed, it was in name only, as it sold its assets to New Nello.
Companies who get into financial trouble cannot avoid their debts merely by reincorporating with the same management while doing the same business. If New Nello wanted to avoid its debts, then it needed to make more changes than having an investor start a new company. This may mean hard choices for the business, but that is what must be done if the company wants to avoid liability without bankruptcy.
1. Findings of fact and conclusions of law are not required in proceedings supplemental.
2. If a trial court issues findings of fact and conclusions of law in proceedings supplemental, then the standard of review will be the one that applies to findings and conclusions.
3. A change in ownership does not preclude a court from finding a de facto merger in proceedings supplemental.
4. If a new company is started to avoid debts of an old company, then it must take steps to clarify that it is a new company under new management.