Successor Corporate Liability - Can an Insolvent Corporation Shut Down its Doors, Re-Open Under a New or Similar Name and Continue Business as Usual?

In this post I briefly discuss the standards by which New Jersey Courts are to apply in determining whether a corporation is the successor-in-interest to, or alter-ego of, a previously existing but defunct corporate entity. 

The issue often presents itself when an insolvent closely held corporate entity (such as construction companies or other privately held small businesses)  looks to rid itself of trade debt without effectively shutting down the business and losing valuable assets, customers, contracts or good will.  Unscrupulous business owners may attempt to accomplish this seemingly impossible feat by engaging in fraudulent asset transfers - essentially taking the assets from the debt-ridden business and transferring them over to a new business often established under another family member's name without paying anything to the former business - intended to avoid creditors.   

My firm is presently pursuing this exact claim in a matter captioned, C.L. Industries, Inc. vs. Baires Pool Plastering, LLC, et als., Superior Court of New Jersey, Law Division, Union County, Docket No.: UNN-L-0716-12.   In that case we represent a judgment creditor who is alleging that a pool contractor shut down his old business after my client obtained a judgment and re-opened a new business operating in the exact same industry.  What makes my client's case particularly unique is that this contractor did a very sloppy job of hiding his footprints.   For example, he opened the new business under essentially the same name as the former business, kept the old business website, phone number, and business office, admitted to transferring the assets from the old business to the new business, and promptly deactivated the former company shortly after my client started pursuing post-judgment collection procedures.

On July 19, 2012 my law firm filed a motion requesting the Court to rule as a matter of law that the new corporation is the successor-in-interest to, or alter ego of, the former now defunct corporation.  Click here to read the detailed legal brief that we filed.

Ordinarily, “where one company sells or otherwise transfers all of its assets to another company, the transferee of those assets is not ordinarily liable for the debts of the transferor company, including those arising out of the transferor's tortious conduct.” Ramirez v.Amsted ndustries, Inc.,86 N.J. 332, 340 (1981) (citations omitted).  However, there are notable exceptions that will render the transferee liable for the debtors of the transferor where: (1) the purchasing corporation expressly or impliedly agrees to assume such debts and liabilities; (2) the transaction amounts to a consolidation or merger of the seller and purchaser; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently in order to escape responsibility for such debts and liabilities.  Ibid.  (Emphasis added).

A fifth exception has been adopted in products liability cases where the successor corporation undertakes to manufacture essentially the same products as the predecessor. Id. at 347-48.

 “In determining whether a particular transaction amounts to a de facto consolidation or mere continuation, most courts consider four factors: (i) continuity of management, personnel, physical location, assets, and general business operations; (ii) a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; (iii) assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor; and (iv) continuity of ownership/shareholders.”)(internal citations omitted);

Glynwed, Inc. v. Plastimatic, Inc., 869 F. Supp. 265, 275-276 (D.N.J. 1994)(internal citations omitted).

I will post the outcome of my client's motion after the Court issues its ruling which is expected to occur in the latter part of August.