## Facts

- Cambridge Townhomes, LLC developed a townhome condominium project, and Polygon Northwest Company served as general contractor.
- Polygon subcontracted with Gerald Utley, who operated as a sole proprietor under the name “P.J. Interprize”; the subcontract included an indemnity clause favoring Polygon.
- Utley later incorporated as P.J. Interprize, Inc. (P.J. Inc.) and executed a new contract under the corporate name while continuing essentially the same business under his control.
- After completion, the homeowners’ association asserted construction defects; Polygon settled and sought to shift responsibility to subcontractors.
- Utley filed Chapter 7 bankruptcy individually and later received a discharge.
- Polygon sued P.J. Inc. and other subcontractors, but initially did not sue Utley individually or the sole proprietorship.
- The bankruptcy court authorized Polygon to pursue claims against Utley as a sole proprietor to the extent of available insurance.
- The trial court ruled the bankruptcy discharge barred successor-based claims tied to Utley’s sole-proprietor conduct, rejected amendment, and foreclosed treating P.J. Inc. as a “mere continuation” of the sole proprietorship.
- The Court of Appeals reversed, and the Washington Supreme Court granted review.

## Issues

1. Whether a corporation may be held liable under Washington’s “mere continuation” successor-liability exception when the predecessor business was a sole proprietorship.
2. Whether a Chapter 7 discharge of the sole proprietor bars claims limited to available insurance proceeds and/or bars successor-liability claims against the later-formed corporation.
3. Whether the trial court abused its discretion by denying leave to amend the complaint to plead successor liability.

## Decision

- The Washington Supreme Court affirmed the Court of Appeals and remanded.
- The court held that a corporation may, as a matter of law, be a “mere continuation” of a predecessor sole proprietorship; whether P.J. Inc. was a mere continuation was a fact question for further proceedings.
- Utley’s Chapter 7 discharge did not bar Polygon from pursuing claims against Utley limited to available insurance, consistent with the bankruptcy court’s authorization.
- The discharge also did not bar Polygon’s successor-liability theory against P.J. Inc. for pre-incorporation conduct associated with the sole proprietorship.
- The trial court erred by denying Polygon’s motion to amend; Washington’s liberal amendment policy favored allowing the pleadings to conform to the asserted theories absent undue delay, bad faith, or prejudice.

## Legal Principles

- A successor entity generally is not liable for a predecessor’s obligations after an asset transfer, subject to exceptions, including when the successor is a “mere continuation” of the predecessor.
- The “mere continuation” doctrine turns on continuity of ownership, management, and business operations; it is not categorically limited to corporate-to-corporate successions.
- A Chapter 7 discharge eliminates the debtor’s personal liability but does not necessarily bar actions seeking recovery only from available liability insurance when permitted by the bankruptcy court.
- Discharge of the predecessor’s personal liability does not automatically eliminate successor-liability claims asserted against an alleged successor entity.
- Leave to amend pleadings should be freely granted absent a showing of undue delay, bad faith, or prejudice.

## Conclusion

The court ruled that Washington’s “mere continuation” successor-liability doctrine can apply when a sole proprietorship incorporates and continues the same business, and that the proprietor’s Chapter 7 discharge does not preclude insurance-limited claims or successor-liability claims against the alleged successor; the defendant was entitled to amend its pleadings and proceed on those theories on remand.


Cambridge Townhomes, LLC v. Pacific Star Roofing, Inc., 166 Wash. 2d 475, 209 P.3d 863 (Wash. 2009)