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Joseph
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Category: California Employment Law
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If I have a civil judgment against me in the name of a business

Customer Question

If I have a civil judgment against me in the name of a business and myself. If I sell the business will the new business owner be affected?? the business is in Puerto Rico. thanks..
Submitted: 1 year ago.
Category: California Employment Law
Expert:  Joseph replied 1 year ago.
I did write this answer in your previous question, but I've reprinted the answer below for your convenience:

The judgments would create liabilities for the business and would mean that the new business owner will more than likely have to pay the judgments that are made against the business.

A change of owners will likely not be considered sufficient to divest the current owner of the business' past liabilities for wage claims.

If they are unpaid, certain assets of the business (in long run) could eventually have a lien put on them and/or seized to satisfy the judgments against the business.

Honestly, I am not familiar with small claims courts in Puerto Rico, but either you or a representative of the business, or a lawyer would definitely need to be present at the hearing. You would need to present records of the time that the ex-employees lived for free and the amount of rent that would be owed due to them not paying.

I would definitely advise that you speak with a Puerto Rican lawyer about filing small claims cases, as well as your concerns for the business' liability after the new owner takes over. But, in the vast majority of instances, changes of ownership will not eliminate the business' past liabilities. Only bankruptcy would actually potentially accomplish eliminating the liability for these wage claims.

For instance, if a business owed a loan taken out by the previous owner, if the business is bought by a new owner, the owner not only gets the business but the liability and responsibility for the loan. The same goes with judgments against the business.

Finally, you should be upfront about the judgments to the new business owner who is purchasing the business from you. Otherwise, the new owner could potentially sue you for misrepresentation, breach of contract, and/or fraud for failing to disclose the business' current liabilities.

Since the judgment is against you and the business, they are all the more likely to go after the business to satisfy them (which is customary anyway), but especially if you are in Texas and cannot have the judgment enforced against you and your personal assets.
Expert:  Joseph replied 1 year ago.
This is called successor liability. You can read more about it here:

http://www.acumenlawgroup.com/publication-categories/purchasing-a-business-how-to-avoid-inadvertent-assumption-of-a-sellers-liabilities/

Customer: replied 1 year ago.
I agree! Is there any way around this? What if this corporation is dissolved and a completely new business is opened up under a different name, different owners etc. So basically the only thing that will be the same is the address..
Kind of like shutting a mcdonalds down and re opening a burger king at the same location.. Even showing a new building lease, new owners etc.. If the business that has a judgment against it completely shuts down how can a judgement be enforced??
Expert:  Joseph replied 1 year ago.
Honestly, the suggestion that you made above wouldn't probably work either, since the main sale of the business is its assets.

I'm not sure what you have in mind, but if the transfer of ownership is also considered to be the "for the fraudulent purpose of escaping liability for the seller’s obligations" then that also creates successor liability for the new business, as that is one of the four ways successor liability is created:

(i) there is an express or implied agreement of assumption;
(ii) the transaction amounts to a de facto consolidation or merger of the buyer or seller corporation;
(iii) the purchaser is merely a continuation of the seller; or
(iv) the transaction is for the fraudulent purpose of escaping liability for the seller’s obligations.

(I don't mean to imply anything fraudulent is going on, or that this is the reason for the transfer of ownership, but if the court deems that this was then it could still go after the assets of the new business to satisfy the debt of the old business).

Also, it may qualify as a de facto merger if:

The de facto merger doctrine is usually implicated where (i) the buyer retains the same management, employees, location, and general business operations as the seller; (ii) the seller becomes a shareholder of the buyer; and (iii) the seller dissolves its operations shortly after the sale.

Whether or not 'the business' itself is being transferred, if all assets of the business are moved to the new business, the debts will more than likely be transferred as well.

But, if you want a second opinion, I suggest that you repost your question in Business law, or better yet ask an attorney in Puerto Rico , as I'm not sure what differences there are in corporate law in Puerto Rico obviously.

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