Fraudulent Transfer From Debtor Company To Newly Formed Entity In Same Business

Asset protection clients often deal with judgments against both themselves individually and their closely held business. Many of my clients believe that they can deal with their businesses’ liability and potential judgment by closing or bankrupting their business.

When I asked them how they plan to make a living after they close their business the response is something like, “I’ll just start a new business doing the same kind of work.” Not exactly. I’ve written before on this blog that when the debtor’s new business is nothing more than a name change or a successor business that uses the goodwill and other assets of the debtor business the creditor can levy upon the new business as the continuation or alter-ego of the debtor business.

I am addressing this problem again because I read recently a post on this subject dated September 29, 2010,  on The Sale of Business Law Blog. The blog discusses a court decision where the judge found that a newly formed business was liable for the debts of a closed debtor business where the new business, among other things, took the former business’ employees and customers and operated in the same physical location.

In most instances the only way to be sure a new business is protected from the debts of a former business is to file Chapter 7 bankruptcy for the former business. Any assets of the old business, including goodwill, would be part of the bankruptcy estate so that there should be no assets to transfer to a successor venture.

Last updated on May 22, 2020