VRP Law Group, P.C.

A Boutique Business, Employment and Intellectual Property Law Firm

Corporate Asset Transactions are Subject to Continuation Rule and Fraud Exceptions for Successor Liability to Attach!

A corporation that purchases assets from a seller is generally not responsible for the liabilities or loans relating to the assets that are transferred. The general corporate rule favors against liability of the new owners in a simple asset transaction. However, an asset transaction is not something that is guaranteed to avoid successor liability. If there is commonality in ownership of stocks or units, management, officers or directors of the Successor company, then the Successor Company does not escape liability and maybe liable for unpaid payroll taxes, mortgages on the real estate, property tax liens, salary or payroll expenses, retirement benefits or anything else that would be on the books of the selling entity.

This general rule stems from the continuation rule, which, does not apply to arm’s length transactions. In an arm’s length transaction the buyer is generally not held responsible for any liabilities if, there is an intervening owner or company that breaks the chain of ownership. Moreover, commonality of employees is not sufficient to demonstrate commonality for purposes of the continuation rule. The only, other instances, wherein, the Successor Company is liable have to do with the following circumstances: 1) fraud is for the purpose of escaping liabilities or debts of the selling entity by the buyers; 2) where the sale involves the consolidation or merger of the buying entities and the selling entities; 3) where the buyer signs and assumption of liabilities agreement or an assumption of agreement.

The reality is that in Illinois the Continuation Doctrine is often, applied to instances where the Seller has commonality of ownership of stocks or units, officers, managers, or control of operations with the immediate Buyer. However, in instances, where there is an intervening buyer or an intervening seller, and there exists a commonality of ownership of stocks or units, officers, managers or control of operations the continuation rule may apply if, the intervening entity is a mere straw man to escape the liabilities. Unfortunately, this requires a fairly similar allegation and analysis relating to the exception for fraud.

Thus, in corporate litigation or transactions, the corporate attorney and corporate litigation counsel must be cautious in making sure that the transaction is fully explored during discovery and there is an allegation of fraud in additional to mere continuation of the selling entity. Moreover, a review of the corporate transaction and deal documents along with the liens on the assets the original seller, the ownership and accounts of the intervening buyer/seller, and the final buyer’s books of accounts and commonality of ownership of stocks or units, officers, managers or control of the intervening and the original entities must be examined to figure out the applicability of either, the continuation doctrine or the fraud exception for successor liability to attach.

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