“Liability of Successor Corporation/De Facto Merger”

Luxury Homes and Estates in Florida

A corporation deep in debt often will try to eliminate liability by merely incorporating under a different name. In many circumstances the law will allow creditors of the defunct corporation to recover from the new corporation.

Generally, Florida law does not impose the liabilities of a predecessor corporation on a successor corporation unless:

1. The successor expressly or impliedly assumes obligations of the predecessor;
2. The transaction is a de facto merger;
3. The successor is a mere continuation of the predecessor; or
4. The transaction is a fraudulent effort to avoid the liabilities of the predecessor.
The case of Laboratory Corporation of America v. Professional Recovery Network ETC provides an excellent review of this area of law. In that case, a company owned exclusively by one shareholder, officer and director ran up a sizable debt in the amount of $500,000. Once the creditor demanded payment the owner discarded the corporation. He started a new corporate entity wherein he remained the sole shareholder, officer and director. The new entity engaged in the same business, had the same customers, the same employees and same telephone, fax numbers, accounting system and computerized database as the prior corporation.

The court made short shrift of this obvious effort to defraud creditors.

In determining whether or not a new corporate entity is part of a fraudulent scheme to avoid liabilities the court adopts several tests.

First, the court will examine whether or not reasonable value has been paid for assets that are transferred to the new corporation.

Second, the court will examine whether a de facto merger occurred wherein one corporation was merely absorbed by another (i.e. there is a continuity of the selling corporation evidenced by such things as the same management, personnel, assets, location, stockholders, customers, employees and location of operations).

By adopting these simple tests the court determines whether fraudulent intent exists to avoid payment to creditors.

Abandoning one corporation on Friday and starting a new corporation continuing the same business on the following Monday will most likely be determined a sham. Creditors should not be discouraged by such transparent maneuverings.

Visit our website for more information on this subject.

Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.