The deal is closed. The champagne has been popped. Then, a letter arrives.
- It’s the State of New Jersey demanding $50,000 in unpaid sales tax from three years ago.
- It’s a former employee suing for harassment that happened before you arrived.
- It’s a supplier demanding payment for invoices the seller swore were “paid in full.”
You bought the assets, not the debts… right?
Not always. While an Asset Purchase (vs. Stock Purchase) generally protects you from old liabilities, New Jersey law has specific exceptions where the “ghosts” of the old business can haunt the new owner. This is known as Successor Liability.
The General Rule: Asset vs. Stock
- Stock Purchase: You step into the seller’s shoes completely. You own the assets AND the liabilities.
- Asset Purchase: You buy the equipment and client list. The old legal entity (the seller’s LLC) keeps the debts.
However, the “Asset Purchase Shield” can be pierced if:
- Implied Assumption: You acted like you were taking the debt (e.g., telling a vendor “I’ll take care of it”).
- De Facto Merger: You kept the same location, same employees, same management, and same products. The court may say it’s effectively the same company.
- Mere Continuation: Similar to above, preventing owners from just “flipping” a debt-ridden company into a new shell to escape creditors.
- Fraud: The transaction was designed specifically to defraud creditors.
The Bulk Sales Act Trap
In New Jersey, the most common undisclosed liability is tax.
NJ has a Bulk Sales Law. If you buy a business and fail to file a C-9600 form with the state before closing, you become personally liable for all the seller’s unpaid state taxes.
It doesn’t matter what your contract says. The State of New Jersey does not care about your indemnity clause. If you missed this filing, the liability attaches to the assets you bought.
If you are facing this, you need immediate tax and business transaction counsel to negotiate with the Division of Taxation.
Enforcing Indemnification
If a third-party creditor (like a vendor or a plaintiff in a lawsuit) sues you for the seller’s debt, your first line of defense is your Indemnification Clause.
You must officially notify the seller of the claim.
“Pursuant to Section 8.1 of the Asset Purchase Agreement, you are required to defend and indemnify Buyer against this claim.”
If the seller refuses to hire a lawyer to defend you, you may have to pay for the defense yourself and then sue the seller for reimbursement + legal fees.
Handling Successor Liability Claims
When a creditor sues you for the old owner’s debt, they are hoping you just pay it to make it go away.
Don’t.
You need to file a motion to dismiss based on the fact that you are a “Bona Fide Purchaser for Value.” You need to prove:
- You paid a fair price (it wasn’t a fraudulent transfer).
- There is no common ownership between you and the seller.
- The seller still exists as a separate legal entity (and the creditor should go sue them).
Legal Reference: Successor liability is complex. The Wikipedia entry on Successor Liability breaks down the traditional exceptions that courts look for.
Protection for the Future
If you are currently looking at buying a business, ensure your attorney conducts a UCC Lien Search, a Judgment Search, and Tax Clearance search.
If you have already bought it and the liabilities are piling up, we can help you build a firewall to protect your new investment from the old owner’s mistakes.
