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Successor Liability in Washington

What if a company that owes you money shuts its doors and re-opens at a new location as a "different" company?

What if your company incurs an unexpected debt that it cannot afford to pay and you want to continue the business while discharging the debt?  Can you re-open as a new business entity with a new name and leave the obligation for that debt with the old company? 

The general rule in Washington is that an entity that purchases the assets of another entity is not liable for the seller's debts.  There are, however, at least four exceptions to this general rule.

The buyer can be held liable for the seller or seller's debts when (1) the buyer expressly or impliedly agrees to be bound; (2) the buyer is just a "mere continuation" of the seller; (3) the buyer is the result of a de facto merger with the seller, or (4) there was a fraudulent transfer from the seller to the buyer. 

Although typically couched in the language of a buyer and seller, these exceptions apply even when there is no "sale" but merely a transfer of assets. 

Implied Assumption:  Whether a successor implicitly agrees to be bound by an obligation is dependent upon the facts and circumstances of each case, including any connection between the assets transferred and the debt. 

Mere Continuation:  As Courts have held, the "nub of the inquiry" for mere continuation liability is whether the successor is just a "net hat" for the predecessor.  Is the successor just the same company but with a different name?  The courts look at whether there is common ownership, continuity of management, employees, assets, etc., and whether sufficient consideration was paid for any assets transferred. 

De Facto Merger:  De facto merger is a lot like mere continuation, except that courts have set out more specific elements, which may or may not be mandatory. 

A de facto merger exists when:

 

(1) there is a continuation of the enterprise of the seller in terms of continuity of management, personnel, physical location, assets, and operations;

 

(2) there is continuity of shareholders;

 

(3) the seller ceases operations, liquidates, and dissolves as soon as legally and practicably possible; and

 

(4) the purchasing corporation assumes the obligations of the seller necessary for the uninterrupted continuation of business operations

Fraudulent Transfer:  A successor can be liable for its predecessor's debts if there was a fraudulent transfer.  A transfer of assets can be fraudulent because it was for inadequate consideration and/or because the intent behind the transfer was to escape a liability.

Note that fraudulent transfer liability under common law successor liability principles typically renders the successor liable for the entire liability, regardless of the value of the assets transferred.  In contrast, the Uniform Fraudulent Transfer Act (UFTA) typically renders the successor liable for the value of the asset transferred, or it can undo the transfer and recover the asset. 

While these are the most common means of reaching a successor, they are not the only means.  If you would like assistance in this area of the law, please contact Matt Adamson at 206-344-5280.  During his career at Jameson Babbitt, Mr. Adamson has been involved in numerous cases involving alleged successor liability, both on the side of the alleged debtor and the creditor.   

STANDARD DISCLAIMER STATEMENTS MADE IN THIS POST ARE MADE SOLELY TO INITIATE DIALOGUE AND INSPIRE YOUR INDEPENDENT INQUIRIES AND RESEARCH AND MAY NOT BE RELIED UPON AS LEGAL ADVICE. 

 

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