Successor Liability in the Customs Context

Dear Friends:

The U.S. Court of International Trade recently issued a decision concerning successor liability in the customs context that we thought you might find to be of interest. The case, United States v. Adaptive MicroSystems, LLC, et al., CIT Slip Op. 13-50 (April 10, 2013), involves the government’s efforts to collect $6.8 million in unpaid customs duties and penalties from a company after it acquired the assets of the debtor.

Background on Successor Liability Rules:

As a general rule, a corporation who purchases the assets (as opposed to the stock) of another corporation does not succeed to the liability of the selling corporation. There are two widely-recognized exceptions to that rule, however. These exceptions provide that the acquirer will be liable for the seller’s liabilities if (1) the acquirer is a “mere continuation” of the seller, or (2) the asset sale resulted in a “de facto merger.” Under the “mere continuation” exception, the successor is viewed as the same legal entity as the predecessor continuing its existence under a new name. Under the “de facto merger” exception, courts look for the presence of factors, such as: continuity of management; continuity of shareholders; the immediate dissolution of the selling corporation; and the buying corporation’s assumption of certain liabilities ordinarily necessary for the continuation of business operations.

Adaptive MicroSystems is a significant case because it addresses the “mere continuation” and “de facto merger” exceptions with regard to unpaid customs duties and penalties.

Summary of the Case:

Adaptive Microsystems, LLC (“Old AMS”) went bankrupt. A U.S. bank initiated a receivership action against the company. Shortly after entering receivership, CBP issued a pre-penalty notice of unpaid duties to Old AMS for intentionally or negligently misclassifying imports of light-emitting diode display panels. Having received no response from Old AMS, or the receiver, CBP issued a penalty notice demanding payment of approximately $6.8 million.

Old AMS was then bought from its receiver by AMS Acquisition, LLC, who then assumed the Adaptive Microsystems, LLC trade name to become “New AMS.” As a condition of the deal, New AMS was required to hire a substantial number of Old AMS’ employees in their old positions.

The sale, which was approved by a Wisconsin state court, transferred most of Old AMS’ corporate assets to New AMS. The court approved a provision exonerating New AMS from all liability “whether absolute or contingent, known or unknown” pending against the old company, and held that the sale transferred the assets “free and clear of all security interest, liens, claims, encumbrances or interests of any kind or nature.” The court did not address CBP’s potential claim in its order, however.

Six months after the sale, New AMS transferred shares of non-voting stock to its Vice President (who, incidentally, served as an Old AMS officer and was a part-owner of Old AMS’ parent company). Although that person did not have voting rights, he played an influential role in guiding the New AMS’ board of directors.

CBP filed suit in the U.S. Court of International Trade (“CIT”) to collect the unpaid duties and penalties on the theory that New AMS was liable for Old AMS’ debts because the transaction amounted to a “de facto merger.” Alternatively, CBP averred that New AMS was a “mere continuation” of Old AMS.

New AMS moved for summary judgment, arguing first, that the CIT should, in the interest of comity, recognize the Wisconsin state court’s order which freed New AMS from all liability, except those expressly assumed in the asset purchase agreement. Second, that the “de facto merger” exception to the general rule of successor liability did not apply because it acquired Old AMS’ assets using cash rather than stock. And third, that the company was not a “mere continuation” of its predecessor because there was no overlap between both directors and stockholders at the time of sale.

The CIT declined to rule in New AMS’ favor on the basis of comity alone, noting that the state court was likely unaware of CBP’s claim or the transfer of New AMS’ shares to its Vice-President (which happened after the sale was completed). It dismissed CBP’s “de facto merger exception” claim on the grounds that the transaction involved the transfer of cash, not shares. The CIT concluded that New AMS may be a “mere continuation” of its predecessor, however. In that regard, the court added that a reasonable jury could find that New AMS’ Vice-President’s ownership share and influence on New AMS’ board, coupled with the substantial overlap between the Old and New AMS, outweighs his non-voting status and the lack of shared directors in defining New AMS’ corporate identity.

Take-Aways:

Once again, the CIT demonstrated its willingness to follow the general rule for successor liability – and its exceptions – in the customs context. (For a more detailed discussion on successor liability under U.S. Customs law, click here.) In the context of an asset acquisition, this means that CBP may seek to hold the acquiring company liable if the facts necessary to satisfy the “de facto merger” or “mere continuation” exceptions are present.

Adaptive MicroSystems underscores the importance of including some customs compliance in the due diligence process – even if the deal is structured as an asset purchase. At the very least, the acquiring company should have a high-level understanding of the target’s customs activities (e.g., how much does it import, what preference claims or special programs are used, are any of the articles likely subject to ADD/CVD, percentage of value from related parties, etc.) and internal controls (e.g., do they have any?) to help protect the acquirer.

We regularly help companies with the customs and trade compliance due diligence process. If you have any questions about these issues, please let us know.

Best regards,

Ted

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