You recently restructured your business and dissolved your previous entity. Now that you’ve continued your new endeavors, you’ve received a Complaint against your original entity. Do you need to defend your claim?
Corporate restructuring is a common aspect of business. You may have dissolved your previous entity for completely innocuous reasons – it was not profitable, you no longer do business with your prior partners, or you sought to work in an entirely new field. Either way, you decided it was best to end your previous entity and start a new business. Typically, corporate law dictates that there is no successor liability when a new entity is formed.
However, just because you dissolve a business doesn’t mean that your former entity is free or protected from legal action. Under Fla. Stat. § 605.0709(2)(b)2, a dissolved LLC in Florida may prosecute and defend actions.
What is successor-entity liability or continuation of business theory?
As a result, Florida allows for claims against a “new” entity that is seen as nothing more than an alter ego or successor the entity that was left behind.
Florida law imposes liability on a successor entity for the torts of its predecessors where:
- the successor expressly or impliedly assumes obligations of the predecessor,
- the transaction amounts to a de facto merger,
- the successor is a mere continuation of the predecessor, or
- the transaction is a fraudulent effort to avoid the liabilities of the predecessor.
Based on these factors, courts are looking to see if a successor-entity is merely a continuation of the predecessor business.
Florida courts will sit and compare the two entities to assess the above factors. Based on its assessment, you will be forced to defend your claim under the name of your entity or risk default.
Did the management and personnel remain essentially the same?
A key question is whether management and personnel remain essentially the same in the successor-entity. When management and personnel remain essentially the same, then even if there is a change in location, liability can still be found. Centimark Corp. v. A to Z Coatings & Sons, Inc. and A to Z Coatings, Inc., 2007 U.S. Dist. LEXIS 93805 (M.D. Fla. 2007). Florida courts look to see if there are common identities among the officers, directors, managers, and owners of the two entities. If all of the individuals remain the same, a court willy likely determine that the “new” entity is nothing more than a continuation of the previous entity; thus, it could be held liable in subsequent suit.
Did the new entity assume the obligations of the previous entity?
Similarly, courts will look to see whether the new entity has either expressly or implied assumed the obligations of the previous entity based on its contract for work in the matter and/or based on its course of dealings. This issue turns on the terms of the underlying contract in the matter. Where a contract does not explicitly disclaim or state “the predecessor’s liabilities are not being assumed,“ then your new entity will have to worry about opposing counsel arguing that it falls within the predecessor liability umbrella
Did a de facto merger occur between the two entities?
A successor entity is liable for the debts and liabilities of its predecessor where there is a merger or consolidation of the two entities. In addition to the factors described above, Florida courts look to see if there is continuity between the entities, continuity of stockholders, a dissolution of the selling entity, and the assumption of liabilities by the purchaser.
So, how do I protect against successor-entity liability?
These questions are necessary the subject of intense factual inquiries.
Businesses can challenge the factual inquiry by being proactive at the time of sale or dissolution with the assistance of a licensed attorney. An attorney can advise the business to pursue numerous strategies, including but not limited to the following:
- When possible, consider changing employees and issuing new contracts to individuals in the new entity to prevent the maintenance of common officers, directors, managers, and owners.
- When applicable and practicable, do not honor outstanding purchase orders or contractual obligations and establish modified contractual obligations.
- Ensure the previous entity is dissolve or liquidated.
- If part of a purchase agreement, ensure the purchase contract explicitly disclaims or stats that “the predecessor’s liabilities are not being assumed.”
These approaches are deceptively simple. It is unwise to proceed without the assistance of an attorney, as the attorney will be best suited to advise you regarding which strategies are best suited for your current dissolution or sale needs.
Where do I start?
If you are worried about successor-entity liability for any potential claims, it may be necessary to contact a licensed attorney to strategize and assess whether any future entities will be held liable. A licensed attorney can also help your business form a dissolution or sale plan that will prevent successor-entity liability in compliance with typical law.
If you have already been served, it will be necessary to hire counsel to assist with the litigation process and respond to the Complaint. While suit is pending, your attorney can advise on the strengths and weaknesses of the factual inquiry and whether you should maintain the current suit.
Reach out to us if you are interested in learning more about successor-entity liability or assessing the claims and defenses for any pending suit against your previous entity.