In the world of buying and selling businesses, many believe that when one corporation acquires the assets of another corporation, the buyer does not acquire the liabilities of the selling corporation. Buyers and sellers should be careful before completing a transaction without appropriate consideration to the issues because there are four exceptions to this rule.
A successor will be liable for the debts of its predecessor when “(1) there is an expressed or implied assumption of liability; (2) the transaction amounts to a consolidation or merger; (3) the purchasing corporation is a mere continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape liability for debts.” The legal case that best discusses these points is Baltimore Luggage Co. v. Holtzman, 80 Md. App. 282, 562 A.2d 1286 (1989).
Two of these exceptions have been codified by the state. On the issue of consolidation or merger, “[t]he successor is liable for all the debts and obligations of each nonsurviving corporation.” MD. Code Ann., Corps. & Ass’ns § 3-114(e)(1) (1993 & Supp. 1997).
The fourth exception is also codified as the Maryland Uniform Fraudulent Conveyance Act. See Baltimore Luggage, 80 Md. App. at 290, 562 A.2d at 1290. This act provides: “Every conveyance made and every obligation incurred by a person who is or will be rendered insolvent by it is fraudulent as to creditors without regard to his actual intent, if the conveyance is made or the obligation is incurred without a fair consideration.” Md. Code Ann., Comm’l Law§ 15-204 (1990).”
When considering a transaction, be sure to consult your business attorney to work through all the appropriate issues before drafting a purchase and sale agreement. If you have further questions regarding successor liability, feel free to contact our office.
Good luck with your business deal!