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Successor Liability in the Purchase of a Business: Fraudulent Transfer of Assets (Part 5 of 8)

When purchasing a business, buyers often prefer that the transaction be structured as an asset purchase rather than a stock purchase. In a stock purchase, the buyer purchases the target company as an entity, and therefore assumes the seller’s liabilities, since the company being acquired retains all of its liabilities as a matter of law. By restructuring the transaction as an asset purchase rather than a stock purchase, a buyer is provided with a much greater level of protection against liability for the target company’s obligations.

The law in most jurisdictions has traditionally held that when one company sells all of its assets to another, the buyer does not become liable for the debts and liabilities of the selling company. This is still true to a large extent, and we frequently recommend structuring a transaction as an asset purchase in order to protect the buyer from the liabilities of the business being acquired.

However, over the past several years, the theory of successor liability has evolved and expanded as a result of a series of clashes between the policy in favor of allowing a company to sell its assets in an unrestricted manner, balanced against other policies, such as providing a source of relief for injured parties or other claimants. As a result, in some cases, a purchaser of assets may be held liable for certain liabilities of the seller. Whether or not an entity buying the assets of another may be held liable for the liabilities of the seller is highly fact specific, and may depend upon the type of liability at issue, the jurisdiction in which the claim is made, and other factors which the courts may take into account in balancing these conflicting policies.

In this eight part series, we review exceptions to the general rule that a purchaser of the assets of a business is not responsible for liabilities incurred by the seller prior to the sale.

Part Five: Fraudulent Transfer of Assets

Under the Uniform Fraudulent Transfer Act (“UFTA”), which has been adopted in most states, any transfer made with “actual intent to hinder, delay or defraud” any present or future creditor is a fraudulent transfer that may be set aside or result in liability for the parties to the transfer.  The fraudulent nature of the transaction may be found to exist if the transfer of assets of a corporation to a successor corporation is done without consideration or for grossly inadequate consideration in a way that benefits the parties to the transaction rather than the creditors of the selling corporation.  However, mere knowledge that the seller is indebted to another or even knowledge of the existence of a valid and pending cause of action against the seller has been found to be insufficient to show the purchaser’s participation in a fraudulent conveyance.  Fraud is generally a question of fact, and courts will carefully scrutinize the evidence in deciding whether there is sufficient evidence of a fraudulent transfer before imposing liability.  We sometimes recommend an appraisal or fairness opinion be obtained to confirm that fair value is being paid for the assets, if there are concerns of allegations of a fraudulent conveyance.

(Read Part 4: Continuity of Enterprise…)

(Watch for Part 6: Product Line…)

If you have questions about how to structure the purchase or sale of a business, please contact KDDK attorney Jeffrey K. Helfrich at jhelfrich@KDDK.com or (812) 423-3183, or contact any member of the KDDK Business Law Practice Team.

About the Author

Jeffrey K. Helfrich

 

Jeff Helfrich is a business attorney with more than 30 years’ experience whose practice includes mergers and acquisitions, real estate, commercial finance, business organizations, and healthcare law. Jeff represents businesses locally and nationwide in a variety of general business matters, including the formation of new businesses, the purchase and sale of businesses, the negotiation of business and real estate contracts, and resolving shareholder disputes. Jeff has also represented banks as well as commercial borrowers in the negotiation, preparation and review of loan documentation.