Keith Broady spoke on August 26, 2015 for the national webinar presented by The Knowledge Group on Successor Liability: What you Need to Know.
Issues relating to whether one company or individual can be held liable for the debts of another company are frequently encountered by businesses. There is a presumption of corporate separateness that precludes companies from liability for the debts of other companies. But the presumption is subject to challenge under many different circumstances and legal theories.
Alter Ego Doctrine
The alter ego doctrine provides that the legal fiction of the separate corporate entity may be rejected in the case of a corporation that is controlled by another to the extent that it has independent existence in form only and is used as a subterfuge to defeat public convenience, to justify wrong, or to perpetuate a fraud.
Pierce the Corporate Veil
To allow a corporate veil to be pierced requires a court to a) analyze whether the corporation functioned as the mere instrumentality of the principals a party is attempting to reach by piercing the corporate veil, and b) determine if injustice or fundamental unfairness would occur if the corporate veil were left intact. Generally the doctrine of piercing the corporate veil has been used to attempt to hold shareholders or owners of companies liable for the debts of a company.
A purchaser of corporate assets is not responsible for the liabilities of the selling corporation unless:
- The purchaser expressly or impliedly has agreed to assume such liability.
- The transaction amounts to a consolidation or merger (de facto merger).
- Purchasing corporation is merely a continuation of the selling corporation.
- The transaction is entered into fraudulently to escape liability.
Courts have used the above theories of successor liability to impose liability upon the successor company regardless of any “fault” on the part of the company or entity that purchased or succeeded to the assets or business of another company or entity.
Successor liability claims have been decided by courts in many different circumstances including product liability cases, environmental liability cases, and under the Foreign Corrupt Practices Act.
Business owners and managers should be aware there are risks of being held liable for the debts of another company in many different circumstances.