A: No. If you have an asset sale in bulk it could be conceived as a possible "Fraudulent Transfer." Language in a credit ap does not always cover all future contingencies but a Personal Guarantee is better. Notwithstanding a provision that obligates the officers and directors to notify the credit grantor of any change in financial status would expose them to breach and damages. 

Joe Marino 

Marino & Meyers

Clifton NJ 

A: Language in the credit application that puts the burden on applicant to disclose any financial problems/inability to pay or the sale of assets within 30-45 days of any transfer. Thereafter, have language that purports to be a personal guarantee if the financial problems and/or sale of assets are not reported, in writing, to a specific fax number or by certified mail. In the event either of the above are not reported or timely reported, the officers/directors agree to be personally liable for the debts to the creditor.  

  Andrew Totz

Totz, Ellison, & Totz 

Houston TX 

A: When a corporation sells its asset's to another corporation, the purchasing corporation is generally not liable for the debts and other liabilities to the seller. Although Michigan case law on successor liability is not extensive, a number of exceptions to the general rule have been recognized. A purchasing corporation is liable for the debts and liabilities of the seller where (1) the two corporations consolidate or merge to form a new corporation without providing for the obligations of the selling corporation; (2) the purchasing corporation expressly agrees to pay the debts of the selling corporation; (3) the new corporation merely continues the selling corporation; (4) the sale is fraudulent and the property of the selling corporation can be followed to the purchasing corporation. 

Note that some courts have held there is a fifth exception involving transactions where there is inadequate consideration for the sale or transfer. This exception is sometimes viewed as an element of one of the other exceptions.

Based on previous cases, the trial court based its finding of successor liability on the doctrine of equitable estoppel. The court of appeals concluded that the trial courts equitable estoppel theory actually fit within the second exception cited above because the successor corporations conduct gave rise to an implied acceptance of liability and the creditor reasonably relied on this implied acceptance to its detriment.

The Michigan Supreme court has held that where the successor expressly assumes all liabilities of the predecessor, under the second exception cited above, the predecessors jurisdictional contacts can be imputed to the successor for purposes of determining personal jurisdiction, provided that the exercise of personal jurisdiction is reasonable. The Shannon court listed the factors to be considered in determining whether there is a merger (which would impose liability on the successor corporation) regardless of what the parties call the transaction. A merger has occurred if (1) There is a continuation of the enterprise of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations. (2) There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation. (3) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible. (4) The purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.

Where the sale is of assets for cash, the courts look at the same factors, with the exception of item (2). Under the mere continuation exception, the courts look for evidence of a continuity of ownership, officers, and directors and similarities in staff, products marketed, customers, and the use of trade names between the new and old corporations. When the successor business retains some of the predecessor's employees but substantially reduces the number of people employed and changes the business focus, the new corporation is not a mere continuance of the old.

Language for credit apps should include the payment in full exception, guaranty, and right to pull credit reports in addition to the usual stuff, and could include a statement that customer agrees the new entity will be liable for any credit purchases if a mere successor or continuance of the old business reflected in this application. 

Steven A. Harms

Muller, Muller, Richmond, Harms, & Myers'

Birmingham MI

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