Successor Liability Law - Avoiding the Surprises of Successor Liability
When a bank makes a loan, it underwrites the deal to determine whether the risk of repayment is reasonable. Banks don't consider the risk of acquiring the business that is being financed. All too often, of course, when a loan goes bad, the Bank ends up with its collateral, and occasionally, must essentially operate that collateral, which could be the business that was the Bank's customer.
There are numerous risks involved in succeeding to a failed business. Bankers are very good at their own business, but in my experience, most bankers are not very good at running hotels, apartments, packing sheds or -- perish the thought -- construction companies. When foreclosure is the only way out, the Bank must carefully consider the consequences of its enforcement actions or find that it has unwittingly assumed a sea of liabilities. My partner, Joe Demko, wrote about the surprises of successor liability and how to avoid them in the article below which was published in the Daily Journal's California Lawyer. Although he penned the article in 2007 after a trial he had won on the topic, the issues he wrote then still ring true today.
Avoiding Surprises of Successor Liability
by Joseph Demko
When one business purchases all or most of the assets of another business in California, the buyer is generally not liable for claims against the seller.
However, there are a few exceptions. Under the doctrine of successor liability, a buyer may be liable for claims based on a seller's actions even though the basis for the claims arose prior to the sale.
The doctrine is an equitable one, generally decided by a court instead of a jury, although questions may arise if a claim is joined with other actions, such as fraudulent transfer, that may entitle the complaining party to a jury trial. (See, Wisden v. Superior Court, 124 Cal. App. 4th 750 (2004).)
Express or implied assumption. Successor liability may be imposed when the buyer expressly or impliedly assumes some of the seller's liabilities. Generally, the courts look to the language or absence of language in the purchase agreement to determine this.
An implied assumption may exist, for example, if there has been express exclusion of some liabilities but not all of them--and there is no disclaimer in the purchase agreement of the assumption of any liability that is not assumed. There is not a great deal of case law on what constitutes an implied assumption. Therefore, great care is needed to explicitly provide for assuming only those liabilities that the buyer intends to assume--along with an express provision disclaiming the assumption of all liabilities, claims, debts, or obligations other than those expressly assumed. Otherwise, the new owner may end up inadvertently taking on liabilities that he or she never intended to assume.
This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.
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