Judgment creditors face unique challenges when attempting to collect a debt from a corporate entity as opposed to an individual. Among many challenges, one is what to do when a debtor corporation or LLC ceases to exist. It should come as no surprise that corporate entities are not always around forever. They are often merged with other entities, dissolved, or abandoned. While that may spell the end of the road for creditors, it is not necessarily the case.
The law provides, in certain situations, a mechanism for creditors to pursue a successor entity or an officer of the defunct entity.
In the event of a merger, the surviving entity may remain responsible for the debts of the merged entity. The courts will consider whether the surviving entity has continuity of ownership, management, or control with the merged entity and whether it has assumed the liabilities of the merged entity.
If there is a new corporate entity that is a “mere continuation” of the old, then a creditor may be able to recover from the new entity. The new corporation or LLC may be a mere continuation if there is no significant difference in the business other than the corporate identity. The determination boils down to whether the new entity is running the same business and has the same owners, customers, and assets.
An officer of a corporation or LLC that was suspended or administratively dissolved at the time the debt was incurred may be personally liable for the debt. Additionally, there are instances where a creditor can “pierce the corporate veil” to reach the assets of individuals who operate corporate entities that did not follow required corporate formalities.
It is the exception, not the rule, that enables creditors to reach the assets of a debtors’ successor entities and officers. However, in the right circumstances these additional remedies can be helpful in recovering otherwise uncollectible debts.
Each case is different, and it is best to seek the advice of counsel in determine the best approach to achieve your desired result. If you would like to discuss your collections and litigation needs, we are always happy to talk via telephone, video conference, or in person.