Asset purchaser does not assume unknown liabilities

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“Even if the contract might be considered ambiguous regarding the liabilities assumed by Wisconsin Gas, the more reasonable, fair and just construction, which conforms with established business practices, is that Wisconsin Gas only assumed certain known liabilities.” Justice William A. Bablitch Wisconsin Supreme Court

A company that acquires the assets of another company via an asset purchase agreement is not liable for the unknown liabilities of the selling company, the Wisconsin Supreme Court held on May 13.

According to the court decision, in 1960, Wisconsin Gas Company (Wisconsin Gas) purchased the assets of the now defunct People’s Gas Company (People’s Gas), primarily consisting of a tract of real property. In 1962, Wisconsin Gas sold the tract to Columbia Propane, L.P. (Columbia Propane).

About 30 years later, environmental contamination was discovered on the property, which had been caused by the gas manufacturing operations of People’s Gas. The State of Wisconsin brought an action against Columbia Propane for this environmental contamination.

Columbia Propane then brought an action against Wisconsin Gas, claiming that Wisconsin Gas was liable for the environmental contamination because it had assumed all the liabilities of People’s Gas when it purchased its assets.

Wood County Circuit Court Judge Dennis D. Conway granted summary judgment in favor of Wisconsin Gas. Columbia Propane appealed, and the court of appeals reversed in a published decision, Columbia Propane v. Wiscon-sin Gas, 2002 WI App 9, 250 Wis.2d 582, 649 N.W.2d 819, concluding that the language in the asset purchase agreement between People’s Gas and Wisconsin Gas was ambiguous whether Wisconsin Gas agreed to assume unknown tort liabilities.

The Supreme Court accepted review, and reversed the court of appeals in a unanimous decision, written by Justice William A. Bablitch.

The General Rule

The general rule throughout the United States is that a “corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation,” subject to certain exceptions. Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977).

There are four exceptions to this general rule: “(1) when the purchasing corporation expressly or impliedly agreed to assume the selling corporation’s liability; (2) when the transaction amounts to a consolidation or merger of the purchaser and seller corporations; (3) when the purchaser corporation is merely a continuation of the seller corporation; or (4) when the transaction is entered into fraudulently to escape liability for such obligations.”

Wisconsin expressly adopted these rules in Fish v. Amsted Indus., Inc., 126 Wis. 2d 293, 298, 376 N.W.2d 820 (1985).

The Agreement

The only exception at issue in this case was the first — whether Wisconsin Gas expressly or implicitly agreed to assume liabilities of People’s Gas that were unknown to the parties at the time they entered into the contract.

The asset purchase agreement provided in relev
ant part, “Milwaukee [Wisconsin Gas] hereby agrees, subject to the terms and conditions of this Agreement and in reliance on the representations and warranties herein contained of People’s Gas, to purchase the Assets from People’s Gas at the date of closing as aforesaid and to assume all of the then outstanding debts, obligations, contracts and liabilities of People’s Gas, provided, that Milwaukee [Wisconsin Gas] shall have no liability with respect to the following: (ii) any obligations or liabilities incurred by People’s Gas after the closing.”

The parties disagreed over the meaning of the term, “then outstanding.” Columbia Propane argued that the language indicates that Wisconsin Gas assumed all pre-closing liabilities, including those that were unknown to the parties at the time they entered into the contract.

Wisconsin Gas argued that the language clearly illustrates that the parties’ intention was that Wisconsin Gas assume only those liabilities that were then known to the parties prior to closing.

The court agreed with Wisconsin Gas that the phrase “then outstanding” includes only liabilities that were known to the parties at the time they entered into the 1960 Agreement, for several reasons.

First, the court found that the phrase itself, “then outstanding,” indicates that the liabilities referred to were known at the time the parties contracted. The court stated, “it would be an odd construction to refer to unknown liabilities as ‘then outstanding;’ rather, unknown liabilities are more commonly referred to as ‘contingent’ or ‘unknown.’

The court also noted that the agreement included an extensive balance sheet of the assets and liabilities of People’s Gas and stated that People’s Gas had “no liabilities of any nature, whether accrued, absolute, contingent or otherwise, and whether for taxes, contract or tort claims or otherwise, for which adequate provision [had] not been made in Exhibit A or by insurance.”

Finally, the court stated, “it would be unreasonable to conclude that Wisconsin Gas would agree to assume unknown and potentially unlimited liabilities of People’s Gas in light of the limiting language in the Agreement; the representations by People’s Gas regarding the accuracy of its assets and liabilities; and a contract provision that required an updated valuation of the net book value of the assets (i.e. excess of assets over liabilities) as of the closing date in order to precisely calculate the exact purchase price.”

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Business Practices

The court went on to define the difference between an asset purchase and a stock purchase, citing numerous commentaries for the proposition that a key consideration in structuring an acquisition as an asset purchase is to limit liabilities.

Given that purpose, the court found it irrelevant whether the agreement is ambiguous. The court concluded, “even if the contract might be considered ambiguous regarding the liabilities assumed by Wisconsin Gas, the more reasonable, fair and just construction, which conforms with established business practices, is that Wisconsin Gas only assumed certain known liabilities.”

Accordingly, the court reversed the court of appeals, and upheld the trial court’s grant of summary judgment for Wisconsin Gas.

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David Ziemer can be reached by email.