The demise of one company creates financial opportunity for another. When one company jettisons a failing venture, another can profit through the acquisition of equipment and raw inventory at liquidation prices. The most common vehicle to accomplish such a transfer is an Asset Purchase Agreement (“APA”), which typically excludes from the transfer all of the seller’s liabilities. This often leaves the seller with inadequate cash (the sale proceeds) to satisfy the seller’s debts and, consequently, a host of angry creditors scrambling for payment.

The General Rule

Wisconsin courts have long held that a good-faith buyer of assets does not become obligated to pay the liabilities of the seller. The textbook example is a small company that is subject to a large class action lawsuit for product defects. While the company’s equipment may have value, buyers would not purchase the equipment if doing so would bring liability stemming from the product liability lawsuit. As a result, this general rule protects the marketability of the seller’s assets – both for the benefit of the seller and the seller’s creditors – by allowing the buyer to purchase the equipment free from the liabilities.

The Exceptions

However, like all rules, there are numerous exceptions. One such exception provides that a buyer may become liable for the seller’s liabilities (referred to as “successor liability”) when the sale of assets is entered into for the fraudulent purpose of escaping liability of the seller. But how does a court measure the fraudulent intent of the parties?

Prior to May of 2018, some lower courts looked to another body of law – the Wisconsin Uniform Fraudulent Transfer Act (the “UFTA”) – as the benchmark to recognize whether there was fraud in the underlying transaction. The UFTA, which is a limited tool designed to help creditors collect claims, identifies several “badges” of fraud [such as whether the buyer was an insider of the seller, whether the transfer was concealed, whether the transfer was of substantially all of the seller’s assets, and whether the consideration was reasonably equivalent to the value of the asset], the existence of which can be used to support a finding of fraud. In practice, because APAs are often private documents between parties with some prior relationship, the UFTA analysis opens the door for opportunistic creditors (who would otherwise receive nothing from the failed seller) to claim fraud and then argue that the buyer should have “successor liability” and be held liable for all liabilities of the seller.

The Clarification

In Springer v. Nohl Electric Products Corp., the Wisconsin Supreme Court clarified that the “badges of fraud” analysis under the UFTA is not applicable in determining common-law successor liability claims against the buyer. While a mere showing of “badges of fraud” under the UFTA might be enough for a creditor to challenge the transfer of a specific asset under the UFTA, such a showing is not enough to impose successor liability on the buyer.

What does this mean for companies who want to buy assets from a competitor? The Springer decision should further reduce the risk of successor liability claims by disgruntled creditors. At least in Wisconsin, creditors can no longer rely on mere “badges of fraud” under the UFTA to succeed on such a claim. Instead, creditors must plead and present evidence that meets a higher standard: that the buyer and seller intentionally acted with a fraudulent purpose.

More information on Asset Purchase Agreements and successory liability claims may be obtained from the Business Team at Conway, Olejniczak & Jerry.

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Law Firm of Conway, Olejniczak & Jerry, S.C.

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