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Court Rejects Substantial Continuity Test for Successor Liability


In U.S. ex rel. Bunk v. Birkart Globalistics, the U.S. District Court for the E.D. of Virginia held that the "traditional rule," and not the more relaxed "substantial continuity" test prevalent in the labor context, governs whether a successor in interest can be held responsible for damages and penalties assessed under the False Claims Act against its predecessor (though acknowledging that the courts are split over which test applies). Under the "traditional" rule, the successor in interest does not assume the liabilities of the corporation from which it acquires the assets unless the plaintiff can establish that one of four exceptions applies: (1) the successor expressly or impliedly agreed to assume such liabilities, (2) the transaction can be considered a de facto merger, (3) the successor can be considered "a mere continuation of the predecessor" (meaning that only one corporation remains, with identical stock, stockholders, and directors), or (4) the transaction was fraudulent.

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