October 10, 2016
A financially distressed business presents an opportunity and bargain for persons interested in purchasing its assets. With the threat of foreclosure by its creditors at its doorstep, the business becomes an inspired seller. However, there are several concerns when a distressed business is exploring its options to sell its assets. The two concerns are: (1) successor liability law and (2) fraudulent transfer law. Although both of these concerns present a problem for a financially distressed business, they can be avoided or limited by sage legal advice. To avoid these two doctrines completely, filing a bankruptcy and conducting a 363 sale of the business’s assets is often a cost effective approach that minimizes risks.
I. Successor Liability
When a purchaser acquires a seller’s assets, the general rule is that the purchaser is not responsible for any of the seller’s obligations existing at the time of the purchase. As with all general rules, there are exceptions. A purchaser will be liable for the seller’s obligations that existed before consummation of the sale: “(1) where there is an express or implied assumption of liability; (2) where the transaction amounts to a consolidation or merger; (3) where the transaction was fraudulent; (4) where some of the elements of a purchase in good faith were lacking, or where the transfer was without consideration and the creditors of the transferor were not provided for; or (5) where the transferee corporation was a mere continuation or reincarnation of the old corporation.” Foster v Cone-Blanchard Mach Co, 460 Mich 696, 702; 597 NW2d 506 (1999).