Corporate successor liability is a nuanced area of law, often entangling issues of contracts, corporate structure, and equity. The recent decision in PAE National Security Solutions, LLC v. Constellis, LLC (Va. Ct. App. Jan 7, 2025) serves as a reminder that when a company acquires another’s assets, the acquiring company does not automatically assume the seller’s debts and liabilities unless an exception applies. As articulated in La Bella Dona Skin Care, Inc. v. Belle Femme Enterprises, LLC, 294 Va. 243 (2017), Virginia recognizes four exceptions to the general rule:
- Express or Implied Assumption of Liabilities: The buyer explicitly or implicitly agrees to assume the seller’s obligations;
- De Facto Merger or Consolidation: The circumstances surrounding the transaction warrant a finding that there was a consolidation or de facto merger of the two corporations;
- Mere Continuation: The buyer is a continuation of the seller, often sharing leadership, operations, or other characteristics; or
- Fraudulent Transaction: The sale is a sham designed to defraud creditors.
In the PAE case, the court examined these exceptions and found no grounds to impose successor liability.
The opinion relates the following factual background. PAE’s claim against the predecessor company, Strategic Social, LLC (“S2”) arose from a breach of contract related to a subcontract between the parties. In 2013, PAE’s predecessor, A-T Solutions, Inc., entered into a subcontract with S2 to provide logistical support and training services for a larger contract that S2 held with the Iraqi government. The primary purpose of this subcontract was to support the Basra Surveillance Camera Project, a security initiative funded by the Iraqi government. A-T Solutions performed its contractual obligations and invoiced S2 accordingly. However, S2 failed to pay two of
Under the terms of the subcontract (at least according to PAE), S2 was obligated to pay A-T Solutions regardless of the Iraqi government’s payment status. Despite this, S2 maintained that it could not fulfill its payment obligations due to non-payment by the Iraqi government and initiated litigation in Iraq to recover the funds. PAE, as A-T Solutions’ successor, pursued its breach of contract claim against S2 in an attempt to recover the unpaid invoices. The case became more complicated when an entity owned by Constellis acquired S2’s parent company, raising the question of whether Constellis, as the successor entity, should also be held liable for the unpaid amounts under the subcontract. The trial court ruled in favor of PAE on the breach of contract claim against S2 but denied successor liability against Constellis, LLC, setting the stage for the appellate review.
The core issue on appeal was whether Constellis, LLC—a parent company twice removed from the subcontractor—could be held liable under a theory of successor liability. PAE’s sole theory of successor liability was that Constellis, LLC, impliedly or expressly assumed the liability. The court affirmed the trial court’s conclusion that Constellis was insulated from liability due to its distinct corporate structure and lack of direct assumption of liabilities (express or implied).
First of all, it was Constellis, Inc., that had purchased S2, not Constellis, LLC. The LLC (which was the entity involved in the appeal) was merely the parent company. The LLC owned Constellis Holdings, Inc., which owned Constellis, Inc. Parent corporations are generally not liable for the acts of their subsidiaries. (See United States v. Bestfoods, 524 U.S. 51, 61 (1998)). Constellis, LLC did not purchase S2 Holdings, and nowhere in the purchase agreement did the parties explicitly state that Constellis, LLC would assume the liabilities of either S2 Holdings (the seller) or S2 Holdings’s subsidiary (S2), let alone the liabilities of Constellis, Inc. (the purchaser).
Moreover, although assumption of liabilities can sometimes be inferred from the conduct of the purchasing corporation and the circumstances surrounding the transaction, there were no such circumstances here. Successor liability cannot be imposed on the basis of vague or tangential conduct. Although Constellis, LLC’s in-house counsel communicated with the plaintiff about the underlying litigation, this alone did not create an implied agreement to assume liability. Virginia law requires clear evidence of conduct or agreements that demonstrate an intent to accept obligations. Conduct that would indicate an implied agreement might include “adopting contract rights, completing existing contracts, purchasing inventory, purchasing trade accounts, occupying existing premises, hiring former employees of the selling corporation, and seeking and receiving payment pursuant to the purchased company’s contract,” the court wrote.
The Court concluded that Constellis, LLC was a distinct legal entity from the subsidiary directly involved in the subcontract. Noting that “limited liability is the rule, not the exception,” the court held that even if Constellis, Inc. could be held liable, “successor liability…cannot be imposed on a parent company by virtue of the imposition of successor liability on that parent company’s subsidiary,” absent grounds for piercing the corporate veil.
The PAE decision illustrates Virginia’s cautious approach to successor liability. While the law acknowledges that certain transactions may justify holding a successor accountable, the threshold for such claims remains high. This ensures predictability in corporate transactions while deterring attempts to misuse corporate structures to avoid liabilities.