Successor Liabiliy California

BUYER (PURCHASER) LIABILITY

A person or company buys / purchases a business (“Buyer”) from a person or company (“Seller”). Buyer buys all or most of the Seller’s assets, property and goodwill. Or Buyer buys all or most of Seller’s corporation’s stocks.

Does the Buyer also receive the Sellers debts and liabilities? Can the creditor or tort victim successfully sue the new owner?

Here is the General Rule: In California, when one business purchases all or most of the assets of another business, the new owner (Buyer) is not liable or responsible for the claims against the former owner (Seller).

But rules have exceptions. Here are a few exceptions.

Buyer and Seller can definitely, specifically, and clearly agree that Buyer will assume (be responsible for) all of Seller’s liabilities.

The Buyer may impliedly (indirectly) assume (be responsible to pay) Seller’s liabilities. How?

Let's say Seller owes money to six creditors (Creditors 1, 2, 3, 4, 5, and 6). An agreement might say something to the effect that Buyer is not responsible to Seller’s Creditors 1, 2, and 3 (but the agreement is silent (does not mention anything) about Creditors 4, 5, and 6); further, the agreement does not have a disclaimer, that is, it does not say that “Buyer is responsible and liable to Seller’s Creditors A, B, and C, but Buyer is not liable to Creditors 4, 5 and 6.”

To prevent the Buyer from inadvertently and/or unexpectedly responsible to pay for Seller’s Creditors 4, 5 and 6, the agreement must explicitly state which debts are being assumed and which debts are not, and an express provision that disclaims the assumption of any other debts, obligations, claims and liabilities.

The Buyer and Seller consolidate or merge their businesses without adequate consideration (value paid or exchanged).

The Buyer is, in reality, a continuation of the Seller, and there is not adequate consideration (value) paid by the Buyer.

Seller sells to Buyer with a fraudulent purpose, i.e., with an actual intent to hinder, delay or defraud any creditor; that is the Seller seeks to escape paying the creditor by, for example, Seller corporation or LLC sells to Buyer and then dissolves the corporation or LLC. Or, another example is where the Seller (debtor) was insolvent, and did not receive adequate consideration (value) from the Buyer.

The bottom line, the moral of the story is that when you buy or sell a business, be sure to explicitly have provisions that clearly and specifically addresses the issue of “successor liability,” that is whether or not the Buyer assumes any, all, or none of the liabilities, including any explicit disclaimers as necessary.

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