The conventional wisdom is that when you buy the assets of another business you are insulated from the seller’s liabilities. The basis of this “wisdom” is rapidly eroding. Recent statutory and case law developments blur the difference between buying assets and buying the business, and the instances of and theories for subjecting the asset purchaser to the debts and obligations of the seller are growing.
Successor liability is when a purchaser of some or all of the assets of a seller is later held liable for the claims and liabilities of the seller. These are generally sales outside of the usual and ordinary course of the seller’s business. Traditionally, if the buyer obtained clear title to the assets, did not participate in a scheme with the seller to defraud its creditors, paid fair market value and complied with any bulk sale stop order, the buyer did not face liability. Certain statutes, like bankruptcy, Family Medical Leave Act and many employment related laws, can make an asset purchaser liable for all or certain debts and obligations of the seller. Particular seller agreements, such as collective bargaining, pension plans and financing could be enforced against the purchaser of assets or the purchased assets. Illinois courts recognize an increasing number of theories to enable creditors to hold an asset purchaser liable for some or all of the seller’s debts, including alter ego, continuing operation and substantial relatedness theories. Transactions that render the seller insolvent, sales for less than fair market value, and sales to insiders are particularly problematic.
There are numerous protections an asset purchaser can employ. These include obtaining bulk sale approvals, purchasing through court-ordered receivers or bankruptcy trustees, holding back or escrowing a part of the purchase price, requiring the seller to maintain insurance coverage, and due diligence in preparation for the closing. Particular types of claims or industries may render purchasers more susceptible to successor liability than others, and the failure of the seller to have adequate capitalization, insurance, or to provide full disclosure could be red flags of potential successor liability exposure, especially when the seller is going out of business or relocating. As in most cases, if it’s too good to be true, it may not be.
At Brooks, Tarulis & Tibble, LLC we counsel corporations and individuals on the acquisition of assets and businesses, and identifying and protecting purchasers against potential successor liability claims. If we can assist you or provide further information, please contact me.
Douglas C. Tibble
dtibble@napervillelaw.com
