When a bank makes a loan, it underwrites the deal to determine whether the risk of repayment is reasonable. Banks don’t consider the risk of acquiring the business that is being financed. All too often, of course, when a loan goes bad, the Bank ends up with its collateral, and occasionally, must essentially operate that collateral, which could be the business that was the Bank’s customer.
There are numerous risks involved in succeeding to a failed business. Bankers are very good at their own business, but in my experience, most bankers are not very good at running hotels, apartments, packing sheds or — perish the thought — construction companies. When foreclosure is the only way out, the Bank must carefully consider the consequences of its enforcement actions or find that it has unwittingly assumed a sea of liabilities. My partner, Joe Demko, wrote about the surprises of successor liability and how to avoid them in the article below which was published in the Daily Journal’s California Lawyer. Although he penned the article in 2007 after a trial he had won on the topic, the issues he wrote then still ring true today.
Avoiding Surprises of Successor Liability
by Joseph Demko
When one business purchases all or most of the assets of another business in California, the buyer is generally not liable for claims against the seller.
However, there are a few exceptions. Under the doctrine of successor liability, a buyer may be liable for claims based on a seller’s actions even though the basis for the claims arose prior to the sale.
The doctrine is an equitable one, generally decided by a court instead of a jury, although questions may arise if a claim is joined with other actions, such as fraudulent transfer, that may entitle the complaining party to a jury trial. (See, Wisden v. Superior Court, 124 Cal. App. 4th 750 (2004).)
Express or implied assumption. Successor liability may be imposed when the buyer expressly or impliedly assumes some of the seller’s liabilities. Generally, the courts look to the language or absence of language in the purchase agreement to determine this.
An implied assumption may exist, for example, if there has been express exclusion of some liabilities but not all of them–and there is no disclaimer in the purchase agreement of the assumption of any liability that is not assumed. There is not a great deal of case law on what constitutes an implied assumption. Therefore, great care is needed to explicitly provide for assuming only those liabilities that the buyer intends to assume–along with an express provision disclaiming the assumption of all liabilities, claims, debts, or obligations other than those expressly assumed. Otherwise, the new owner may end up inadvertently taking on liabilities that he or she never intended to assume.
This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.
Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.
Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.
Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.
JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.
NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]
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