North Carolina Supreme Court – DuPont Reorganization Gets Personal (Jurisdiction)
On 4 November 2022, the North Carolina Supreme Court upheld a Business Court decision in State ex rel. Stein v. E.I. DuPont de Nemours & Co. denying E.I. DuPont de Nemours and Company’s (“DuPont”) motion to dismiss under Rule 12(b)(2). The court reasoned that the Due Process Clause permits personal jurisdiction over out-of-state corporate successors based on the contacts of the in-state predecessor company. The court found two grounds by which the DuPont successors should be held liable for DuPont’s debts and liabilities. First, the court found that the reorganized DuPont de Nemours, Inc., which exists as a distinct entity, and its affiliate, Corteva assumed liabilities of DuPont for the products at issue in the case. Second, the court found that there were sufficient facts alleged in the complaint to determine that DuPont’s conduct was fraudulent in nature and designed to defraud its creditors.
On a national level, DuPont was found liable in several cases for its use of PFOA, a variety of per- and polyfluoroalkyl substances (“PFAS”). PFAS are harmful agricultural chemicals, nicknamed “forever chemicals,” some of which were produced by Fayetteville Works in Fayetteville, North Carolina. The cases against DuPont resulted in judgments totaling approximately $980 million against the company. In response, DuPont undertook a restructuring program to protect its remaining assets.
As part of that restructuring program, DuPont transferred its Performance Chemical Business, including its production of PFAS to Chemours, a wholly-owned subsidiary of DuPont. In transferring this part of the business, DuPont intentionally undervalued Chemours to limit liability and the newly restructured DuPont de Nemours, Inc. held Corteva, which in turn held the predecessor DuPont. The newly reorganized DuPont de Nemours, Inc. retained the Specialty Products business, and the Agricultural Business was transferred to Corteva. The Business Court found that as part of the restructuring, DuPont de Nemours, Inc. and Corteva agreed to assume liability for Specialty Products and Agricultural Business, respectively. In addition, the Business Court was unpersuaded with DuPont de Nemours, Inc.’s argument that the wholly-owned and under-valued Chemours agreed to accept all of DuPont’s PFAS liabilities. The Business Court reasoned that Chemours’ assumption of liability did not preclude Corteva or DuPont de Nemours, Inc. from assuming those same liabilities, and the North Carolina Supreme Court noted that “nothing in the record suggests that Chemours validly assumed all PFAS-related liabilities to the exclusion of all parties.”
In 2020, North Carolina sued DuPont and its affiliates including Chemours and DuPont de Nemours, Inc., alleging that DuPont “knowingly operated a plant in North Carolina that released harmful chemicals called [PFAS] into the environment for over forty years.” DuPont de Nemours, Inc. and Corteva moved to dismiss North Carolina’s claims of negligence, trespass, public nuisance, fraud, and fraudulent transfer for lack of personal jurisdiction. The companies argued that they were Delaware holding companies and did not conduct business in North Carolina.
The North Carolina Supreme Court disagreed. The court was persuaded by decisions from federal courts and other jurisdictions that reached the same conclusion as to whether specific jurisdiction would apply to successor companies based on the predecessor’s contacts with the forum state. The court reasoned that jurisdiction is proper where a successor company, or alter ego, is essentially the same entity as the predecessor. In so doing, the court considered the “realities of modern corporate law and the ever increasing frequency of corporate reorganizations.”
The court, citing Budd Tire Corp. v. Pierce Tire Co., maintained that it remains true that “in North Carolina, ‘[a] corporation which purchases all, or substantially all, of the assets of another corporation is generally not liable for the old corporation’s debts or liabilities.’” The court also reiterated exceptions to Budd Tire where: “(1) there is an express or implied agreement by the purchasing corporation to assume the debt or liability; (2) the transfer amounts to a de facto merger of the two corporations; (3) the transfer of assets was done for the purpose of defrauding the corporation’s creditors, or; (4) the purchasing corporation is a ‘mere continuation’ of the selling corporation.” The court found that two of the four Budd Tire exceptions applied. Namely, the court found that there was an agreement to assume the liability of the predecessor company and the transfer of assets was done for the purpose of defrauding creditors.
As an alternative theory, the court also considered an argument for jurisdiction based on the U.S. Supreme Court’s decision in Calder v. Jones. The Court in Calder held that a defendant who commits intentional, tortious actions in one state “expressly aimed” at an individual in another state may be subject to the jurisdiction of the courts in the state in which the injury was suffered. Both the Business Court and North Carolina Supreme Court declined to determine whether Calder would offer another avenue to personal jurisdiction under the facts of the DuPont case.
As North Carolina courts apply the North Carolina Supreme Court’s holding in DuPont in future cases, we anticipate questions regarding the line between merely purchasing a business and the enumerated exceptions from Budd Tire. We similarly anticipate legal challenges to the wording of agreements regarding the assumption of liability in reorganizations and acquisitions.
If you have questions about the DuPont holding or this blog post, please contact us at (828)252-5555.