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New Company May Be Liable For Old Company’s Debts

On Behalf of | May 30, 2014 | Business Disputes

Under New Hampshire law, a successor entity may be held liable for a predecessor’s debt when: (1) buyer expressly or impliedly agrees to assume such liability; (2) the transaction amounts to a de facto consolidation or merger; (3) the buyer entity is merely a continuation of the seller entity; <spanclass+”bold”>or (4) the transaction is entered into fraudulently for purposes of escaping liability. Bielagus v. EMRE of N.H., 149 N.H. 635 (2003). The factual scenario where this successor liability could be implicated was seen in the March 2013 judicial decision from the New Hampshire state court business docket case PlasTech Machining & Fabrication, Inc. v. StemTech, Ltd. et al, in which PlasTech, after obtaining a judgment in the amount of $44,428.26 against StemTech sought to collect the judgment from its shareholder Paul Harris under the theory that he was the alter ego of StemTech and StemTech’s successor, FSC Precision, Ltd. In that case, FSC was found to be a mere continuation of StemTech. FSC continued to do business, as StemTech had, under the tradename FlowerTech and that trade name was registered under both state and federal law to Harris. Neither corporation had any directors or officers other than Harris and operated at the same place of business, used the same website of FlowerTech and after FSC was created, referenced testimonials given to StemTech. Harris was the sole employee of both corporations during these times and operated in the same business and the court found it being inescapable that FSC held itself out as being the same entity of StemTech and therefore was a mere continuation of StemTech and as such liable for the $44,428.26 judgment owed to PlasTech.

The Court further found that Harris used both corporations merely as a shell for his own personal business. For example, Harris had debits on the StemTech account for the Secondary School admission test, and snowmobiles as well as purchases from Apple’s ITunes store, Walmart, Stop & Shop, Comcast cable, and Starbucks. The Court noted that there was no doubt that Harris led PlasTech to believe it was dealing with a corporation while using StemTech’s assets to benefit Harris personally and was personally liable for StemTech’s debt to Plastech. The Court further found that StemTech was plainly used to promote fraud because it continued to do business after StemTech was administratively dissolved by the New Hampshire Secretary of State.

That case from the business docket provides clarification and it is unlikely that judges will allow a corporate shell game to avoid liability for debts whether it be creating a new corporation to avoid the old corporation’s debts or using one or more corporations’ checking account as the owner’s personal account. The same would apply to other legal entities like limited liability companies. Furthermore, there is a risk that if the company continues to do business after it has been administratively dissolved for failing to pay its annual fees that a court may find that the shareholder or member thereafter is personally liable in that either the entity was used to promote fraud or does not even exist anymore.

In my experience of representing creditors, I do find that none of the judges have any patience for such games being played by debtors and when presented with the proper evidence it will find corporate shareholders or LLC members personally liable for their entity’s debts or a successor entity liable when it is merely a continuation of the former entity. With that being said, an asset purchase agreement between one entity and another in an arms-length transaction with a truly new owner generally results in that new owner taking the assets free of any liabilities that the new owner did not specifically agreed to accept responsibility thereof. Additionally that same court on May 28, 2014 in the case of Greg Gendron Associates, Inc. v. Nashua Circuits, Inc. and Robert V. Moncada, Sr. found that allegations that Moncada undercapitalized Nashua Circuits and misrepresented the corporate ability to honor its commitments was not enough to make him personally liable for the contract sales commissions due to Greg Gendron Associates, LLC., particularly when it failed to allege how the supposed insolvency of Nashua Circuits or misuse of the corporate form injured it.

J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].