Purchasing the assets of a distressed company can appear to be a clean way to acquire value while avoiding unwanted liabilities. Buyers often assume that because they are not purchasing the entity itself, they will not inherit the seller’s debts, leases, or obligations. That assumption can be dangerously wrong.
Although asset buyers generally do not assume seller liabilities, courts recognize several important exceptions under which successor liability may be imposed. A buyer may be held responsible where:
- the buyer expressly or impliedly assumes liabilities;
- the transaction constitutes a de facto merger or consolidation;
- the buyer is a “mere continuation” of the seller; or
- the transaction is a fraudulent attempt to avoid the seller’s obligations, including asset transfers for inadequate value.
The most common and least anticipated risk arises under the “mere continuation” doctrine, which focuses less on transaction documents and more on what happens after closing.
What Courts Look At
Courts evaluating successor‑liability claims often consider whether:
- substantially all of the seller’s assets were transferred;
- the seller quickly ceased operations;
- the buyer adopted the same or a similar business name or brand;
- key managers or employees were retained; and
- the buyer continued the same business operations.
While no single factor is decisive, the combination can expose a buyer to significant unexpected liability.
Recent Reminder
In a recent New Jersey case, a court allowed successor‑liability claims to proceed where an apparel company acquired all assets of a shoe company, continued operating the same product line under the same name, and publicly announced plans to retain the seller’s management team. Although the case remains pending, it illustrates how easily an asset acquisition can be recharacterized as a continuation of the seller’s business.
Bottom Line
Buying the assets of a distressed company—particularly while continuing operations—poses legal risks that cannot be eliminated by contract language alone. Post‑closing conduct, branding, staffing, and public messaging matter.
Asset purchases involving troubled sellers should always be structured and executed with experienced legal counsel. The cost of careful planning is minimal compared to the potential exposure from unintended successor liability.
