Thursday, August 6, 2009

Successor Liability

Last month I took a very large default judgment against a local construction company. Their attorney claims that they have "gone out of business" and that a "new corporation" is now in control. I sometimes drive by their office/warehouse which is located on prime real estate right on a local highway. They seem to be operating at full strength. They have about a dozen vans and trucks out front with their name on them, along with what appears to be a large amount of inventory, equipment, tools, etc.

A search of the Secretary of State's website reveals that my defendant corporation is dissolved, but that there are several different, newer corporations in existence. The new corporations' names are all very similar to that of my defendant and they are all seem to be run by the same people. I have served the president of my corporate defendant with a citation to discover assets and I believe that he is also the president of the new corporations.

In preparation for his citation, I have been researching the areas of fraudulent conveyances and successor liability. Conveyances of assets from one party to another can be set aside if a court finds that there was an intent to defraud the creditors of the transferring party. A discussion of the laws relating to fraudulent conveyances will be discussed more fully in a later post.

This post deals with successor liability. Successor liability comes into play when one company buys the assets of another company. Generally, the purchaser tries to buy those assets free and clear of the seller's debts and liabilities. When successor liability is imposed, a creditor of the seller can proceed against the assets of the purchaser.

There are four categories of successor liability recognized by Illinois courts. See Vernon v. Schuster, 179 Ill.2d 338 (1997). I will comment briefly on each.

Intentional assumption of liabilities

To make this determination, you need to look to the purchase contract between the two organizations. The general rule is that the purchaser does not assume the liabilities of the seller absent a specific contractual agreement to the contrary.

De facto mergers

The courts will look to whether there was a continuation of the enterprise of the seller corporation. For instance, is there a continuity of management, personnel, physical location, assets, or general business operations? Are the owners of the old corporation now working at the new corporation? Etc. If so, you may argue that it is a de facto merger and that successor liability should attach.

The business continuation exception

For this theory, the courts will look to see if there is a continuity of ownership in the two organizations. For instance, is there a continuity of officers, directors, or shareholders? If so, you can argue that the new company is simply a continuation of the old company. This argument should be used when the assets were seemingly purchased for fair market value. If they were not, see the last category.

Fraudulent schemes to escape liability

If the seller's shareholders sell the assets of the company for less than fair market value to another company in which they also hold an ownership interest, or to other "insiders," the courts can impose successor liability.


Brian D. Moore said...


How did this turn out?

Michael W. Huseman said...

I eventually pierced the corporate veils so that I had personal judgments against the 2 shareholders of all of the corporations (and their wives who were also involved in some of the asset transfers). Then all 4 of them filed personal bankruptcy. There were no real assets in the corporations. All vehicles and real estate were leased and not owned. To make a long story short, I probably only collected 10 cents on the dollar before everyone filed BK.