Oops...Corporate Debt Gets Personal
Updated: May 11
A law firm which was a corporation was sued by a former client for fraud committed by a non-shareholder associate. Four years after judgment was entered -for the client, the law firm was dissolved. The sole shareholder continued the practice in his own name. The former client tried to collect by suing the individual lawyer who defended by saying =the debt was the corporation's debt, not his personally. The court found the sole proprietorship was a mere continuation of the old corporation. The debt was now owed personally by the former shareholder.
WHY THIS IS IMPORTANT… Many think you can avoid liabilities in the sale of a business by buying assets instead of stock. Frequently this is true. Practically every state, however, makes exceptions to that rule. The "mere continuation" exception applies in many states if it is found that the transaction has the purpose of avoiding the payment of the liabilities being pursued.