Theories Of Successor Liability When Incorporating An Existing Business

Allen Matkins
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Allen Matkins

How Do I Hold You Liable?  Let Me Count The Ways . . .

When the owner(s) incorporate an existing business, the corporation is not necessarily a tabula rasa with respect to the creditors of the business being incorporated.  Indeed, a creditor of the business may try to hold the corporation or its assets liable under several possible theories, including:

  • Express assumption;
  • Implied assumption;
  • Estoppel (see, e.g., Reid v. F.W. Kreling's Sons' Co., 125 Cal. 117, 57 P. 773 (1899));
  • Failure to comply with the Bulk Sales Law (discussed in this post);
  • Uniform Voidable Transactions Act (Cal. Civ. Code §§ 3439-3439.14 (fka Uniform Fraudulent Transfer Act));
  • De facto merger;
  • "Mere continuation" (See Ray v. Alad Corp., 19 Cal. 3d 22, 136 Cal. Rptr. 574, 560 P. 2d 3 (1977);
  • Alter Ego;
  • Conversion statutes (e.g., Cal. Corp. Code §§ 15911.09(b)(2) & 17710.09(b)(2)).

A creditor's success under any of these theories will, of course, depend upon a variety of factors, including the nature of the creditor's claim, the mechanism by which the corporation is created, and/or even the intent of the transferor.  Thus, while there may be a multiplicity of theories, success is by no means assured.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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