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In denying a motion to compel arbitration, a federal district court in Illinois applied the rule against successor liability to an arbitration agreement entered into by a company that later sold its assets to another company.
In Joseph Huber Brewing Co., Inc. v. Pamado, Inc., No. 05 C 2783, 2006 WL 2583719 (N.D. Ill. Sept. 5, 2006), Huber and Central Distributing Company (CDC) entered into a distribution agreement that contained an arbitration clause. CDC later dissolved and sold some of its assets to Pamado. Following the sale of assets, Pamado acted as Huber’s distributor.
When the relationship soured, Huber initially sued for breach of contract but later moved to compel arbitration pursuant to the distribution agreement.
The Court denied Huber’s motion to compel based on the rule against successor liability. Under that rule, a corporation which buys another corporation’s assets is not liable for the contractual obligations of the transferor corporation. There are exceptions to the rule, but the Court found that none of the exceptions were applicable.
In considering the arguable exceptions, the Court found that Pamado did not agree to assume the obligations of the distribution agreement because the written transfer agreement did not address intangible assets, such as distribution rights, in any way. The Court also found that Pamado was not a continuation of CDC because there was a change of managerial control, CDC existed for more than a month after the sale, and there was adequate consideration for the transfer.
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