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What is the liklihood of a creditor successfully persuing a new business that was opened immediately after an old business filed

Asked in Farmington, MI - almost 3 years

I was the owner of a PLLC. Its bank accounts were being garnished after a judgment was obtained, so the PLLC filed chapter 7. The PLLC then relinquished all assets. The new corporation now has a different name, a different TIN, different operating equipment, even a different phone number. Could creditors still pursue this business claiming that it is an extension of the old, even though the only similarity is the physical address? I even changed the website address and the wall colors.

Attorney Answers (4)

Thomas R. Morris

Thomas R. Morris

Farmington Hills Chapter 7 Bankruptcy Attorney

Licensed in MI

Answered almost 3 years ago. Credtors can pursue the new company because under our legal system anyone can sue anybody else for anything. Whether a creditor would be successful in doing so is another matter, and the answer to that question is not simple because the law regarding successor liability is not simple. However, based upon your statement that the only connection between the old and new companies is a physical addresss (and your involvement, apparently) it does not appear that there is a basis for successor liability.

Give me a call if you require legal representation.
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Michael W. Bartnik

Michael W. Bartnik

Troy Estate Planning Attorney

Licensed in MI

Answered almost 3 years ago. You were skating on thin ice, and a lot will depend on other facts that you need to discuss with your attorney. There are at least two major problems with your approach.

As I analyze this, your first main problem was having your Michigan Professional Limited Liability Company file a chapter 7 liquidation without analyzing your personal liability for any of the company’s obligations, whether they were financial debts such as the telephone contract and building leases, or professional obligations such as a claim by a current or former patient for medical or dental malpractice.

Only individuals can obtain a discharge, or full relief from obligations and debts, 11 USC 727 (a) (1). And not all debts and obligations are discharged in bankruptcy.

So, your company filed this Chapter 7, a bankruptcy estate was created by law, and all of the old company’s assets were transferred to the trustee who is obliged to liquidate those assets and pay claims. However, none of those debts were discharged or eliminated as to the old company since the company cannot obtain a discharge.

More important, the PLLC Chapter 7 did not eliminate any of your personal liability. So your creditors may still go after you to the extent there is a separate basis for liability, such as a malpractice claim or if you signed the personal guarantees on the lease.

Your second major problem was the failure to use the bankruptcy code to sell the company assets to a new entity. You are justifiably worried about the successor liability issues. You are a medical professional with patients citing a checklist of items that you think absolve you from personal liability. In point of fact, there are a number of “badges of fraud” that the courts may use in a proper case to make their subjective analysis under the facts of the case to decide whether or not a conveyance in fraud of creditors occurred.

Under this analysis, the factors you list may or may not protect your new company. For example, depending on other facts involved, a judge might rule against the new PLLC that there is successor liability based on the continuation of the same management, the same professionals, the same patients and the same location.

You imply there are somewhat different ownership interests in the new entity. You and your attorneys, and the new entity attorneys, should have considered a bankruptcy sale of assets without liabilities under 11 USC 363 to properly notify all potential creditors and pass the business assets such as patients and receivables on to the new entity without any of the obligations of the old company, along the lines of the “old” and “new” General Motors bankruptcy from 2009.
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James S. Tupitza

James S. Tupitza

West Chester Real Estate Attorney

Answered almost 3 years ago. I have two questions. Does the new business have the phone number of the old? DOes the new business have the goodwill of the old?

DISCLAIMER The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change. Attorney is licensed to practice law only in the Commonwealth of Pennsylvania. Responses are based solely on Pennsylvania law unless stated otherwise.
James S. Tupitza
212 West Gay Street
West Chester, PA 19380
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Charles Ross Smith III

Charles Ross Smith III

Sandusky Bankruptcy Attorney

Answered almost 3 years ago. "Goodwill" is the the reputation of the business in the community it services, among other things. It is possible for the new entity to purchase the goodwill and the even the phone number of the old business. This requires properly drafted agreements. The price does not have to be large. Very likely the major component of the value of the previous business, was your personal services, not goodwill.

Without a proper agreement, a creditor could claim that the new business was really just the old business carrying on the same as before. Creditors rarely do this, because it's expensive and it's easier to write off a bad debt. This would probably happen in a personal debt situation, with an ex-wife for instance, or in the case of a large debt. Good luck.

Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.
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