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The recent final report and
recommendations of the ABI
Commission to Study the Reform of
Chapter 11 proposes that successor
liabilities under federal labor laws, such
as the FLSA, pass through 363 sales
so that buyers are not able to escape
them. For the moment, however, courts
appear to be moving toward protecting
against successor liability to facilitate
bankruptcy sales that maximize value.
Finally, in the context of the product
line theory of successor liability, even
California may not apply the doctrine
when the sale has been conducted
through the 363 process. The rationale
for this outcome is that the buyer is not
causing the loss of the tort plaintiff’s
remedies against the seller, but instead,
this loss is a result of bankruptcy law. 10
Successor liability comes in many
shapes and sizes, and purchasers in
distress scenarios often find themselves
caught by surprise when they are
sued by the creditors (sometimes
known, sometimes unknown) of
their seller after the fact for liabilities
that were expressly excluded in the
purchase agreement. The potential for
successor liability claims should be
a major consideration in structuring
acquisitions in the distress space. J
1 560 P.2d 3 (Ca. 1977).
2 See generally G. W. Kuney, “A Taxonomy
and Evaluation of Successor Liability
(Revisited),” Univ. of Tenn. Legal Studies
Research Paper No. 220 (Aug. 7, 2013)
(available at SSRN: ssrn.com/abstract=2307190
or dx.doi.org/10.2139/ssrn.2307190); P. Joy
and J. Basile, “What You Don’t Know Can
Hurt You, Successor Liability and Sec. 363
Asset Sales,” 24 BBLR 128 (Jan. 26, 2012).
3 Teed v. Thomas & Betts Power Solutions,
LLC, 711 F.3d 763, 769 (7th Cir. 2013).
4 LKS Pizza, Inc. v. Com. ex rel. Rudolph , 169
S. W.3d 46 (Ky. App. 2005)(buyer at foreclosure
is not a successor for purposes of state sales tax
but otherwise would be); Continental Ins. Co.
v. Schneider, Inc., 810 A.2d 127 (Pa. Super. 2002)
(finding successor liability possible despite UCC
sale); State v. Standard Oil Co., 313 N. E.2d 838
(Ohio 1974)(no successor liability for deed in
lieu); Bank of Commerce v. Woods, 585 S. W.2d
577 (Tenn.1979)(sales tax successor liability for
deed in lieu, and potentially for foreclosure).
6 632 F.3d 89 (3d Cir. 2011).
7 2014 WL 3542133 (July 17, 2014).
8 711 F.3d 763 (7th Cir. 2013).
9 322 F.3d 283 (3rd Cir. 2003) (finding that
the buyer of T WA’s assets in a 363 sale was
not subject to successor liability for federal
employment discrimination claims).
10 Kline v. Johns-Manville, 745 F.2d 1217
(9th Cir.1984); Nelson v. Tiffany Indus. ,
Inc., 778 F.2d 533 (9th Cir. 1985).
Bobby Guy is a deal lawyer who specializes in
fixing, buying, and selling struggling companies,
especially in the healthcare industry. He is a
shareholder with Polsinelli P.C. and a founding
member of the firm’s Nashville office. He can be
reached at 615-259-1511 or email@example.com.