Fried & Bonder recently found itself in what is becoming a familiar situation: our opposing defendant corporation dissolved, filed for bankruptcy and reappeared under a new name. The bankruptcy action protected the dissolved entity from further litigation – though the “new” corporation continued business as usual.
Ordinarily, a successor entity does not assume the liabilities of its predecessor unless (1) there is an agreement to assume liabilities; (2) the transaction is, in fact, a merger; (3) the transaction is a fraudulent attempt to avoid liabilities; or (4) the successor is a mere continuation of the predecessor corporation.
The latter of these circumstances refers to the common law doctrine of “corporate continuity.” That doctrine applies where there is, between the predecessor and successor, a substantial identity of ownership, as well as identity of the objects, assets, shareholders, and directors. The corporate continuity doctrine is one of equity or fairness. In litigation, liability upon the successor entity is said to rest upon “the mere continuation” of the business.
The Georgia Court of Appeals just issued an opinion on the issue. Reversing summary judgment to the defendant in a recent case, the Honorable Sara L. Doyle, explained that when the new entity was formed:
[I]t had the same purpose, same subject property, same board of directors, same officers, same voting members, same unit owners, same physical location, same registered office, and same authority to assess dues on the same people to pay for the same expenses. For practical purposes, nothing changed except the name of the association: the subject property did not change, the corporate composition did not change, the voting membership did not change, and the dues assessment capacity did not change. Despite this, the trial court ruled that Sheehan had failed to show that the HOA and COA have the same assets on the ground that “there was no transfer of assets between the entities because the [HOA] never owned any assets since all of the common elements and limited common elements are owned by the unit owners as tenants in common.” But the doctrine of corporate continuity merely requires an “identity” of assets, and in the present factual context, the identity of assets is the same.
In Sheehan, plaintiff also attempted to allege a fraudulent transfer under the Uniform Fraudulent Transfer Act (“UFTA”). The UFTA, originally promulgated in 1918, was adopted in Georgia in 2002 and codified under O.C.G.A. § 18-2-70 et. seq.:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor.
In Sheehan, the Court of Appeals upheld summary judgment against the plaintiff on this issue because the defendant owned no assets (defined as certain forms of “property”) and, therefore could not transfer any. Thus, an element of the claim, a transfer of an asset, could not be met. Nonetheless, the two doctrines together (successor liability and fraudulent transfer) present powerful weapons for the plaintiff in the appropriate situation. In particular, individuals may be held liable for fraudulent transfers.
Last year, Fried & Bonder resolved an ownership dispute after refiling a new action, to collect an old judgment, against the successor entity of the original defendant. There, the original defendant dissolved soon after the case was tried and won in federal court. When a successor entity popped up conducting the old entities’ business, we refiled suit. Alleging both successor liability and fraudulent transfer, we ultimately resolved the dispute based, in no small part, on the pressures facing not just the newly formed entity, but the owners personally.
In our recent case, the newly bankrupt corporate defendant moved its assets – clients and machinery – to the new entity and continued to do business. We moved for leave to amend to add the new entity as a defendant under the successor entity. We also, once again, moved to add the owners as party defendants under the theory of fraudulent transfer. The motion was granted and discovery continues. Only now, the new corporation is potentially on the hook, along with its owners. And fraud, once proven, is non-dischargeable the next time they file bankruptcy.
Fried & Bonder will keep you posted, so check back often.