Successor Liability When Customers Reincorporate

When a customer owes you money, can its owner transfer assets to a new corporation and start over debt-free?  Or will the new company inherit the debt to you? This article will discuss successor liability in collections — what it is and when it applies.

Successor Liability In General

The general rule in collections is that when a company purchases another’s assets, it doesn’t inherit the seller’s debts.  Unless you have a lien on the assets, you probably won’t have any recourse against the transferee.  However, New Jersey’s successor liability doctrine is an exception to the general rule. 

The Successor Liability Doctrine

Unlike the general rule, the successor liability doctrine holds a transferee liable in 4 circumstances, where:

1. 1. the transferee accepts the transferor’s debts, as in a statutory merger;
   2. the transfer is deemed a de facto merger;
   3. the transferee is a mere continuation of the transferor’s business; or
   4. the transferor makes a fraudulent conveyance to avoid its debts.

In a common scenario, the owner forms a new corporation, transfers the assets and claims the new entity isn’t responsible for the debts. 

In that situation, No. 1 clearly doesn’t apply.  The new company is trying to avoid the debts, not assume them.  But 2 and 3 will apply if the old and new companies are essentially the same operation. De facto merger and mere-continuation focus on substance over form — for example: do they have the same owners and key personnel?  Do they have the same location and a similar name?  Are they using the same domain name, and the same phone number and email?

And No. 4 probably applies here as well.  A conveyance is fraudulent if the transferor makes it to hinder, delay, or defraud any creditor — such as transferring assets to a new corporation in order to avoid one’s debts.

While a transferee doesn’t normally inherit the transferor’s debts, the successor liability doctrine prevents a business from racking up liabilities, moving its assets to a new corporation and then starting over debt-free to avoid collections.

For more information on accounts receivable collections, or if you’d like to discuss a specific collection issue, call me at 856-667-1669 or contact me here.

This material is for informational purposes only and should not be construed as legal advice.  No person should rely on this information without seeking the advice of an attorney.