Successor Liability

“Liability imposed on the purchaser of assets for claims against the prior owner of the assets. The courts originally developed this doctrine to protect victims of personal injury torts, especially future tort claimants, where there has been a “de facto merger” or “mere continuation” of the old business by the new owner of the assets. There has been some recent extension, though less so than is generally thought, of this doctrine to include debts to providers of goods, services, or capital (lenders) to the old business.

Purchasers in section 363 sales usually attempt to include provisions in sale orders purporting to protect themselves against successor liability. Such provisions are usually unopposed, primarily because the potential victims of such provisions, many of whom have not even been injured yet, are not present in court to defend their rights. Some courts refuse to approve such provisions “on their own motion.” Even where they are initially approved by the bankruptcy court, other courts sometimes refuse to enforce them later, notwithstanding the mootness doctrine, often citing the theory that the bankruptcy court did not have jurisdiction to deprive parties of their claims without giving them an opportunity to be heard.”

This definition is courtesy of our friends at Polsinelli who publish the Devil’s Dictionary of Bankruptcy Terms. You can access the Devil’s Dictionary here.

For more information about successor liability, read Lender Liability Claims are Alive and Well: A Case Study,   Subchapter V of Chapter 11: A User’s Guide, and Determining Whether or Not to Seek Court Approval of a Sale in a Delaware Assignment for the Benefit of Creditors Case