Successor liability generally describes the result of a court’s application of various legal theories to an acquisition transaction to hold the buyer responsible for liabilities the buyer did not explicitly agree to assume. Two of the significant theories of successor liability include the de facto merger doctrine and the continuity of enterprise doctrine.

The de facto merger doctrine holds the buyer responsible for liabilities not expressly assumed under the theory that the result of the acquisition is essentially a merger of the buyer and the seller. The elements of a de facto merger are 1) continuity of management, personnel, physical location, assets and general business operations, 2) continuity of shareholders, 3) cessation of the seller’s ordinary business operations and its dissolution as soon as legally possible and 4) the buyer’s assumption of the seller’s obligations ordinarily necessary for the uninterrupted continuation of the seller’s normal business operation.

The continuity of enterprise doctrine does not require proof of the continuity of shareholders. Instead, this doctrine holds the buyer responsible for liabilities the buyer did not explicitly agree to assume under the theory that the buyer has essentially continued the seller’s business. The elements of a continuity of enterprise finding are 1) continuity of the outward appearance of the seller’s enterprise, management, personnel, physical plant, assets and general business operations, 2) the seller’s prompt dissolution following the transfer of assets and 3) the buyer’s assumption of the seller’s liabilities and obligations ordinarily necessary for the uninterrupted continuation of the seller’s normal business operations.

Some courts have also found buyers strictly liable for defects in products previously manufactured and distributed by sellers under a variation of the continuity of enterprise doctrine that, in essence, holds that responsibility for such liabilities was the price the buyer had to pay for the seller’s good will and the buyer’s ability to enjoy the fruits of that good will.

What structural steps can the buyer take to minimize the likelihood of a successor liability finding?

The buyer should obtain guidance regarding the development and treatment of theories of successor liability under the laws of jurisdictions that could potentially govern the acquisition transaction to select a reasonable jurisdiction with less expansive successor liability doctrines. The buyer should also analyze and implement potential acquisition structures with the aim of avoiding elements that contribute to a successor liability finding. The buyer may, for example, significantly reduce or eliminate common personnel and business locations since continuity of the seller’s business into the buyer’s period of ownership is a common theme in current successor liability doctrines. In addition, the buyer could require the seller to delay liquidation proceedings for a reasonable period of time to avoid a finding of prompt dissolution. While business considerations will significantly impact the acquisition structure and the integration of the acquired assets into the buyer’s operations, the buyer should remain mindful of structural components under the buyer’s control that can minimize a successor liability finding.

What contractual provisions can the buyer include to reduce the risk of successor liability?

The buyer should negotiate for an unambiguous listing of the liabilities the buyer is acquiring through the inclusion of clauses in the acquisition agreement specifically setting forth the liabilities assumed by the buyer (i.e. at the closing, the buyer shall assume and agree to discharge only those liabilities of the seller set forth on Schedule 1) and clauses explicitly providing that liabilities not assumed by the buyer are retained by the seller (i.e. every liability of the seller not assumed by the buyer shall remain the sole responsibility of and shall be retained, paid, performed and discharged solely by the seller). The terms of the acquisition agreement should clearly state that unexpected liabilities are the seller’s responsibility.

In addition, the buyer should seek to incorporate provisions in the acquisition agreement requiring the seller to comprehensively indemnify the buyer for unexpected liabilities, including liabilities accruing to the buyer as a result of a finding of successor liability (i.e. the seller will indemnify and hold harmless the buyer for any loss, liability, claim, damage or expense, whether or not involving a third party, arising from or in connection with any liability arising out of the ownership or operation of the acquired assets prior to the closing other than the assumed liabilities). The buyer should also consider including an arrangement whereby the parties will place a portion of the acquisition consideration in escrow to meaningfully support the seller’s indemnification obligations.

The buyer should consult with appropriate counsel on a case-by-case basis regarding additional and/or alternative contractual provisions to include in the acquisition agreement to further reduce the risk of successor liability.

How do depositions fit into the overall course of litigation?

All parties to a lawsuit have a period of time after the suit is filed to conduct discovery, which simply means the discovery of the facts about the case in order to prepare for trial. Discovery is accomplished through interrogatories, which are answers to written questions under oath, and through depositions of witnesses. A deposition is testimony under oath, and there is no judge present. The deposition will be taken in an attorney’s office, with lawyers present for all parties. A court reporter will administer the oath and will prepare a transcript of the questions, answers and objections.

Remember that this is an adversarial proceeding. The opposing lawyer is not your friend, and this is not an opportunity to tell your side of the story. The opposition is represented by an attorney whose sole purpose is to persuade a jury that his client is right and that you are wrong. The deposition is not for your benefit; it is to afford the opposition a chance to question you regarding your actual knowledge and evaluate you as a witness, including whether you appear truthful and if a jury would like you.

It is important to be properly dressed in business attire. Wear something that you would wear to a meeting with upper-level management. Avoid trendy clothes, and dress neatly and professionally.

How should you prepare yourself or an employee prior to a deposition, and what materials should be reviewed?

At a minimum, you must review any and all documents or records that were authored by you that pertain to the subject matter of the litigation. Don’t forget to review with legal counsel any e-mails, written statements or taped statements on the subject. There is a problem if your deposition testimony is inconsistent with prior statements, records or e-mails that you have authored.

Additionally, you should review any interrogatories that have been answered by you or company representatives, in addition to discussing plaintiff’s legal theory and the alleged facts that support that theory.

If you have not been asked to bring any documents but believe that you have documents within your possession or control that might be helpful, discuss this issue with counsel prior to your preparation for deposition.

How should someone testifying at a deposition respond to opposing counsel’s questions?

Remember, this is an adversarial proceeding. Your purpose at deposition is to respond to specific questions, assuming that there is no objection by your counsel. This is not the time to volunteer or provide the opposition with any additional information beyond what the question calls for.

The goal can be accomplished by listening carefully to the question and answering only the question that is asked. If you have any doubt about what you are being asked, tell the opposing counsel that you do not understand the question. If you can answer the question with a simple ‘yes’ or ‘no,’ do so.

It is imperative that you do not guess or testify about matters that are not within your personal knowledge. If you do not remember, say so. It does not help anyone if you speculate. Testify to facts, and never give an opinion unless asked for it. This would be voluntary information, and in the vast majority of cases, it is not helpful to your side.

If you are asked about a specific document, ask to see the document prior to answering. Also, if your counsel begins to speak, stop testifying. Your counsel will advise you if you can continue your answer.

The opposition may attempt to summarize your testimony or interrupt you. If the summation of your testimony by the opposition is not exactly true in all respects, say you do not agree with the summation. If you have been interrupted while giving an answer, advise counsel that you have not finished your answer and insist upon finishing. At least make the record clear that you have not fully answered the question.

At any time during the deposition, you may request to consult with your attorney. However, this should be done only as a last option.

It is best to be polite and courteous to the opposition. If the opposition is rude or discourteous, let your lawyer handle those issues. Your job is to stay focused, listen to the questions and provide brief and truthful responses. The failure to tell the truth not only exposes you to potential criminal prosecution for perjury but also will undoubtedly seriously damage your case.

What are the first steps to take if your business receives a letter?

Acknowledge the letter right away. Read it carefully. Call your lawyer and your insurance broker. Many types of commercial insurance policies specifically require notification of any claim or potential claim. Perhaps you are worried that your rates will go up if you submit the claim. Your broker can advise you on this matter. He or she will consider factors such as the size of the claim and your prior loss history to determine how the claim will affect underwriting and the ramifications of reporting it. You and the agent can then decide together if you must submit the claim.

Will your rates go up if you file a claim?

This depends on many factors. Again, talk to your agent or broker. Communication is the key quality of a good agent. An agent is not helpful if he or she is not responsive and does not return your phone calls. Try to develop and maintain a good relationship with your agent so that when things go wrong, you can feel confident knowing he or she will be there for you.

Why is it so important to act promptly?

There are two types of policies:

• An occurrence policy. Coverage triggers the date the loss occurs. This type usually has a requirement that the incident be reported promptly or as soon as practical or possible.
• A claims made policy. This coverage triggers when the claim is actually reported to the insurer. If you know there is a claim out there, you should report it right away. If you wait, and during that time your policy renews, you may not be covered because it was not reported in time. If you delay, you are jeopardizing coverage.

What if the claim is filed and coverage is denied?

There are many different reasons an insurer can deny coverage, but each should be based upon the specific facts of the loss and the carrier’s interpretation of the policy. In the context of our discussion here, we are hoping to avoid a situation where the carrier takes the position that the insured failed to provide a timely notice of the claim. If that is the case, the insured could file a declaratory judgment action (lawsuit) asking the court to determine each party’s rights and obligations under the insurance contract. In a case where the insurer contends notice was late and, as a result, there is no coverage, it will be up to the insured to show that the delay in notifying the insurer did not prejudice the rights of the insurer. Generally, the longer the delay, the better the insurer’s chances are of prevailing in this type of lawsuit.

For instance, if the insured does not notify the carrier of the claim until after a trial, the insurer has lost its rights to manage the defense of the case, to participate in the trial and/or to settle the case.

What happens if the business is served with a lawsuit instead of a letter?

Plaintiffs’ lawyers often put language in the complaint that will trigger insurance coverage. If you are served with a lawsuit, notify your lawyer and insurance agent immediately. It is also very important to retain any documents related to the subject matter of the litigation. In Ohio, there is a separate cause of action called spoliation of evidence. This arises if one party willfully destroys evidence after it has knowledge that litigation may ensue and the other party would have relied on that evidence.

It is usually advised at the beginning of litigation, or when a claim is filed, to take the proper steps to ensure that no information that has anything to do with the matter is destroyed, such as all of the information in computer systems, including metadata and deleted information.

Any final words of advice?

Make sure you have complete copies of your policies with endorsements and keep copies of your old policies indefinitely. You also should have a basic understanding of what types of claims are covered and what types are not and a good grasp of the amount of your deductable. Above all, if you receive a letter or are served with a lawsuit, act right away.

As a creditor, prejudgment remedies are options you have for maximizing the chances of recouping at least some of the money that is owed to you. These remedies are often used in instances where there is a danger that the debtor will not have the money or property by the time a final judgment is rendered. Because they indicate to the debtor that you are serious about collecting what is owed, in many instances, the dispute may be resolved quickly.

What is the purpose of prejudgment remedies?

First, they put pressure on the account debtor to pay what is owed to the creditor.

Second, if the pressure is not motivating enough, then the remedy provides the client the ability to procure a lien on assets of the account debtor so that when the client ultimately receives a judgment, it will stand ahead in priority of other creditors.

What are the most commonly used prejudgment remedies?

The most commonly used prejudgment remedy is an attachment lien, whereby a lien is sought that attaches to both known personal and real property of the account debtor. An attachment lien is only as good as the knowledge you have as to where the assets exist. If you are a creditor, you should know where the debtor banks and you should have an idea of where other assets — like real estate and other tangible property — are located.

A prejudgment freeze or injunction is an option that prevents the debtor from transferring or otherwise converting assets. It is commonly used when the debtor has intentionally been involved in some wrongdoing.

The third possible remedy is a receiver, who handles disbursement of the debtor’s accounts receivable and may administer other assets for the benefit of the creditor. The receiver can also control the debtor’s real property to maintain and preserve its value and to collect rents.

All three tactics are very invasive because they impact the debtor’s cash flow and ability to transfer assets.

Is there a point to threatening a prejudgment remedy before actually using one?

You might want to threaten — but on the other hand you might not, because you may not want to tip off the account debtor. When a debtor becomes aware of prejudgment remedy intentions, it could move its assets or find a different way to manage cash.

What are the risks of using a prejudgment remedy?

The main risk is that your action may put the debtor out of business and you will never get all the money owed to you. But if the company is that fragile, it is unlikely that you will ever get paid anyway. Some of these remedies can be obtained without giving any notice whatsoever to the debtor. As a result, there are safeguards built into the process that allow a debtor to recover damages if the creditor does not proceed with care. So you have to have your ducks in order from a legal prospective to get what you’re asking for.

Of course, there are legal fees. Seeking a prejudgment remedy is not incredibly expensive, but the expense is not insignificant.

What are the procedural hurdles?

Prejudgment remedies work as well as the creditor’s knowledge of the account debtor’s assets. The better the knowledge, the better they work.

Prejudgment remedies are also very fast to implement. If you can demonstrate that there’s some nefarious conduct by the debtor (for example, secreting assets, moving accounts or converting collateral of creditors), then you can seek the remedy through the courts on extremely short notice — 24 to 48 hours. If you cannot show any questionable conduct, two to three weeks’ notice of the proposed action will be required. It really depends on the local rules, and it depends on the facts and exigencies of the case.

What is the key to procuring a prejudgment remedy?

The key is demonstrating to the court that you are likely to succeed on the merits of your collection action. To get a prejudgment remedy, you have to file a lawsuit to commence the action. The lawsuit must be based upon a contractual relationship with the debtor. Then you are asking through a motion to the court for the prejudgment remedy so that you can perfect an interest in some personal or real property prior to getting the judgment.

A prejudgment remedy is a provisional remedy. Immediately after final judgment, you then ask the court, again through a motion, to release the assets that you attached to satisfy the judgment.

Depending on the situation, you may have an interesting, little-known option: Force your customer into involuntary bankruptcy and collect when the assets of your customer are liquidated.

This is a very aggressive maneuver and an alternative to the garden-variety breach-of-contract collection action. Frankly, it is also less expensive. The legal fees involved in preparing and prosecuting an involuntary bankruptcy petition are a fraction of what a breach-of-contract action and post-judgment collection activity can cost.

How can an involuntary bankruptcy petition result in getting money that is owed to you?

An involuntary bankruptcy is placing a company or an individual into a potential Chapter 7 [bankruptcy]. The involuntary petition is filed by one creditor if the ‘alleged debtor’ has 12 or fewer total creditors or by three creditors if the debtor has more than 12 creditors.

In order to petition the court in such a manner, the money owed by the alleged debtor must not be disputed (subject to a bona fide dispute by the debtor), unliquidated (amount owed is unknown or subject to a future event) or contingent (much like a guaranteed debt that is not yet owed).

When the petition is filed, the company or individual in question becomes an ‘alleged debtor’ and has 30 days to respond by asserting either (1) that the involuntary petitioners are not true creditors or (2) that the alleged debtor is generally paying debts as they become due.

The alleged debtor does have one other strategic option: namely, agree that it should be in bankruptcy. Instead of a Chapter 7 liquidation, the alleged debtor can consent to an order for relief and elect to attempt a Chapter 11 reorganization. Chapter 11 of the U.S. Bankruptcy Code provides a breathing spell for the debtor, during which negotiations can take place to try to resolve creditor difficulties. The debtor can terminate burdensome contracts and leases, recover assets and rescale its operations in order to return to profitability and pay its debts over time.

Why should a company use the involuntary bankruptcy strategy?

It is an extremely powerful tool that is often overlooked because it is not well known.

Let’s say a company does not pay what is owed to you. Assuming you find out that it has more than 12 creditors, you have a choice. You can file a collection lawsuit in state court and try to collect upon that judgment, or you can locate two other creditors who have not been paid and the three of you could place your common debtor into involuntary bankruptcy. If the debtor does not have a defense, its assets will be liquidated and your debt may be paid, along with the debts of other creditors. Note that the debt will be paid to the extent that there are unencumbered assets with which to pay creditors.

However, this strategy does not come without risks. If your claim is subject to a real dispute by your debtor — which ultimately shows the court that the involuntary petition was wrongful — you can be assessed significant sanctions. So creditors have to be extremely certain that their claims and the claims of any other petitioners are valid — not disputed, unliquidated or contingent.

How difficult might it be to locate other creditors?

The process of finding other creditors is easy in this day of the Internet. You could do an online credit search, a search through the Better Business Bureau or use a variety of other means, including the use of third-party services or investigators to locate other outstanding creditors.

What role do bankruptcy trustees play in the involuntary bankruptcy process?

If the alleged debtor does not have a defense to the involuntary bankruptcy petition and the alleged debtor does not voluntarily opt for a Chapter 11, then a trustee is appointed to liquidate all its assets. If value of the assets in liquidation is less than what is owed to all creditors, the creditors will share pro rata in whatever money the trustee generates when the trustee liquidates the assets. The trustee has other powers to recover assets transferred prior to bankruptcy, a discussion of which is beyond the scope of this interview.

How common is this strategy? Isn’t it fairly unusual?

It is becoming more acceptable as it is becoming more known. Creditors are getting very frustrated with the garden-variety breach-of-contract process, which includes waiting up to a year for a judgment, trying to collect on the judgment, and perhaps getting delayed or stonewalled by the debtor.

Involuntary bankruptcy is a very quick process. The alleged debtor has to respond to the petition filing within 30 days, and within 60 to 90 days, it can be adjudicated a debtor, ultimately to be liquidated by a court-appointed trustee.

What is preliminary injunctive relief, and why is it beneficial?

Preliminary injunctive relief is frequently referred to as extraordinary relief because it is sudden and powerful. Traditionally, a preliminary injunction is a court order that preserves the status quo and requires one of the parties to refrain from doing certain acts pending trial. An injunction is extremely useful when there’s really no way to calculate or recover the full value of the damages suffered by your business at trial. Also, preliminary injunctions often save companies litigation costs by encouraging settlement talks. To get a preliminary injunction, the moving party must show it is likely to prevail at trial. As a result, injunction motions provide the parties with a preview of the court’s thinking. A party may want to avoid the expense of a full-blown trial if it knows the court is leaning in favor of the other party.

When should business owners seek preliminary injunctive relief?

It’s commonly requested in cases of unfair competition, trademark, copyright or patent infringement. It is also requested in real estate and certain employment law cases. For example, if an ex-employee starts a competing firm using your company’s trade secrets, such as a customer list, it may be impossible to determine the revenue loss your company has suffered due to misappropriation of the trade secret. Preliminary injunctive relief would be appropriate in that case. You should seek an order from the court to stop the former employee from using the customer list. You can also seek an order requiring the former employee to return or destroy all copies of the list. You will have to prove the customer list was confidential and that the list had economic value due to its secret nature. In other words, you must show the list is not ordinary, publicly available information, but rather information that gives you a competitive advantage over others who do not have it.

Alternatively, let’s say a competitor falsely advertises that taste tests show its product is definitely superior to your company’s product. Obviously, this would hurt your company’s brand and trademark value, but it would be hard to quantify the amount of harm. Preliminary injunctive relief would be appropriate here as well.

Is preliminary injunctive relief an option in real estate disputes?

Absolutely. Suppose your company receives a foreclosure notice, and the trustee is alleging that your company defaulted on its mortgage payments. It may be that the lender’s payment history is incorrect, or perhaps the underlying loan agreement is subject to legal challenge. You can seek an immediate injunction to halt the foreclosure process and preserve your company’s rights in the property.

Even if your business is in fact behind on its mortgage payments, injunctive relief may still be appropriate if the trustee did not follow all procedures for a foreclosure sale. Getting the injunction to prevent the foreclosure sale may allow your company time to refinance the loan or negotiate a settlement with the lender.

What steps should business owners take to seek preliminary injunctive relief?

First, determine the pros and cons of seeking injunctive relief. If you decide to move forward with a request for preliminary injunction, an attorney will need to file a lawsuit on your behalf. Next, the attorney will file either an application for a temporary restraining order or a motion for a preliminary injunction. A preliminary injunction can only be issued after notice to the other side and a full hearing. A temporary restraining order may be issued more quickly and without notice to the other side in some instances. However, a temporary restraining order only lasts for a brief time. Courts will often deny a request for injunctive relief if there is excessive delay in bringing the motion. So, if you think your company may need injunctive relief, you should act now.

How have e-mails become potential sources of litigation for companies?

Every e-mail message has the potential to become evidence in a lawsuit because it documents a communication between people. This is especially important because people are often careless about what they put in e-mail messages. Since e-mails are time-stamped when they are sent and are difficult to alter, they can be very useful evidence. So be cautious in what you put in e-mails because they may be read by many people other than the intended recipients, including lawyers, judges and juries.

Is a confidentiality notice in an e-mail enough to ensure that what is contained in the e-mail is kept confidential?

No. Just because you put a confidentiality notice at the bottom of my message, that’s not binding upon someone unless he or she has agreed with me to keep our communications confidential. The bigger problem is when a message gets accidentally e-mailed to someone else or it gets forwarded. Someone who is a third- or fourth-level recipient has no obligation to me unless he or she has a separate agreement with me to agree to keep my e-mails confidential. And even if there is a confidentiality agreement, if someone is subpoenaed, the subpoena sometimes trumps the confidentiality agreement. (If you do have a confidentiality agreement, it would be wise to include in that agreement a requirement that the other party notify you that he or she has received a subpoena. That way, you get the opportunity to step in and oppose the subpoena.)

Do companies have an obligation to preserve e-mails or other electronic evidence when a lawsuit is threatened?

Yes. Once companies or individuals are sued or anticipate litigation, they have an obligation to preserve all relevant records including e-mail. The sanctions for parties who fail to do this can be staggering. If you are involved in a lawsuit, if you think you’re going to be suing someone, or if you think there will be litigation brought against you, you have a duty to preserve relevant e-mail.

What proactive steps can a company take to ensure it avoids any litigation regarding e-mails?

There is no way to ensure e-mails won’t be part of a lawsuit. In fact, such a large percentage of business communication today is done by e-mail that it’s very unusual for e-mail not to be part of the evidence in a lawsuit. But there are ways companies can minimize their risks.

First, companies should educate their employees about e-mail and the potential uses to which their messages could be put. This education should start with a reminder to avoid the ‘reply to all’ button whenever possible. They must adopt policies to control what employees are writing in e-mail messages. The lesson that e-mail should be treated more like a thoughtfully drafted business letter than a watercooler conversation should be firmly instilled into employees’ minds. Employees should also be told that management reserves the right to review all e-mail messages sent or received on company e-mail accounts, and improper e-mailing can be grounds for discipline.

Second, companies need to adopt and enforce e-mail retention/destruction policies. Unless there is a compelling business need to save e-mail messages forever, companies should establish a reasonable period after which all e-mail messages will be permanently deleted (to the extent possible) from company computers and servers. But remember that these policies must be suspended when litigation is anticipated, since the duty to preserve evidence trumps even the most reasonable document destruction schedule.

What steps should a company take after a subpoena has been received?

Immediately upon receipt of the lawsuit, management and IT staff should sit down with their lawyer for a planning meeting to establish three things: One, which e-mail users’ accounts might have relevant e-mails? Two, where are those e-mail messages stored? On the server? On a backup tape? On a BlackBerry? On the user’s laptop? On the user’s home computer? And three, how can e-mails be gathered and reviewed most efficiently

What types of evidence are most susceptible to spoliation claims?

Spoliation occurs when a company has lost or destroyed evidence that it knew — or should have known — to preserve for a lawsuit. Awareness of potential litigation imposes a duty on the manager or the corporate officers to preserve evidence that may relate to that lawsuit.

The evidence in question might include electronic records like e-mail, personnel files and physical objects. In the case of electronic evidence, specific federal laws address the preservation of backup materials and e-mail correspondence. Sometimes it’s not even enough to preserve an electronic copy of e-mail. In discovery, the opposing counsel may want to examine the computer hard drive — and if you have failed to preserve that, you may have created a potential spoliation issue.

What sanctions might be imposed by a court?

Generally, spoliation of evidence is something that is proven by way of a motion or declaration to the court. One party in the lawsuit requests a sanction be imposed on the party that cannot provide pertinent evidence.

The scope of that sanction depends on a determination of why the evidence is missing. Is it missing because it was accidentally destroyed through no fault of the defendant? Was it purposely destroyed? You will face a much higher level of sanction in the latter case.

Sanctions could be anything from having an evidentiary presumption imposed against your side or not being able to dispute certain issues all the way up to striking an answer and imposing a default judgment. Sometimes monetary sanctions are awarded, as well.

Examples of evidence spoliation?

In an employment case alleging sexual harassment, there may be an issue about whether certain communications between a manager and the plaintiff employee were preserved.

In one instance, the hard drive crashes and pertinent e-mails are unable to be resurrected. Nothing intentional was done. If that complainant tries to seek an evidentiary sanction, he or she will have a really hard case to make. In all likelihood, a court will not impose evidentiary sanctions.

In contrast, if the exchange of e-mail is deleted from the system by the manager, then there may be a presumption that it was done purposely. The jury will be informed as such, and the defendant will be barred from making certain evidentiary and testimony objections. Depending on the severity of the event, the defendant may have a liability finding against him or her. There is not an assumption of guilt, but it’s an issue that courts take testimony on, and there may be a full hearing with expert testimony on how the materials were deleted and why no backup is available.

For instance, if deleting information from a server is a four-step process that requires a supervisory password, then evidence suggests that a corporation or officer purposely ordered the information to be deleted, because it’s not something that could be done by accident.

A judge is not likely to impose sanctions for vagaries of electronics breaking down or for accidents. But there are likely sanctions for purposeful acts, and there may be substantial repercussions.

What steps can a company take to discourage spoliation of evidence?

Every company should have policies and procedures in place regarding the preservation and destruction of its business records. High-level officers should be aware when potential claims arise and immediately take steps to preserve all potential evidence.

Instruct employees to maintain not only computer-based information but also physical devices — like computer hard drives — that would have potential relevance to a lawsuit. Even if you cannot foresee a lawsuit, as soon as you’re served, those steps must be taken.

Most importantly, take every precaution to assure that courts have access to all information — bad facts as well as good facts — so you have the best opportunity to represent your company’s interests.

If I hear that a client is declaring bankruptcy, what should I do first?

The safest thing is to confirm that filing by contacting the debtor and obtaining a case number and/or name and telephone number of the debtor’s attorney. Alternatively, most attorneys can confirm the filing through the bankruptcy court’s online filing system, PACER.

Failing to confirm a filing can have adverse consequences. Not only is any action taken in the pursuit of collection voidable post-filing, such action may open you to monetary liability. Actions taken in pursuit of debt collection — even actions as simple as filing a lien — violate the Bankruptcy Code’s ‘automatic stay’ provisions and are voidable.

What is ‘proof of claim’?

In the business world, to receive payment for services rendered or products supplied, you submit an invoice. In a bankruptcy proceeding, creditors file a proof of claim. You should attach any and all documents that support your claim. For example, if the claim is based on a promissory note, attach the note. If the debt is secured by collateral, attach confirming documents, such as a Uniform Commercial Code Financing Statement (UCC-1). A proof of claim is deemed allowed upon filing with no more action to be taken unless and until an objection is filed as to the claim.

This does not mean that you will receive all or any money from the debtor. Rather, it establishes your claim and its position within the hierarchy of claims payment. You do not have unlimited time to file proof of claim. In a Chapter 7 (liquidation) case, the deadline is usually 90 days after the first meeting of creditors. In Chapter 11 (reorganization) cases, the court sets the deadline.

How do I move up in the payment hierarchy?

Vigilance in the processing and protection of your claim before bankruptcy is filed is key to your position in the hierarchy of claims payment under the Bankruptcy Code. Where your claim falls in terms of payment is entirely dependent upon the classification of your debt prior to the bankruptcy filing. So, if your debt is secured, your claim will have priority, i.e., be paid before general unsecured creditors. This does not mean that your claim will be paid in full, or even at all.

Conversely, failure to properly perfect and record your security interest may cause your claim to be classified as unse-cured, which is close to last in line for payment. Further, because the bankruptcy trustee (or the debtor in Chapter 11 cases) can avoid any transfer of an interest in the debtor’s property (such as filing a UCC-1 or other lien documents) that occurred up to 90 days before the filing, it is important to ensure that you are timely taking the necessary steps to perfect your security interests and thereby protect any potential claim should the debtor file for bankruptcy protection.

What is this going to cost me?

This depends on numerous variables that should be analyzed in considering how best to proceed. Just because a debtor files for bankruptcy protection does not mean you should throw up your hands and write off the debt. Chances are you will not receive 100 cents on the dollar. But, if you take the necessary steps during the course of your everyday business activities to perfect and protect your claim, chances are good that you will receive some return.

In any case, consult a bankruptcy attorney who can explain the process and your options and help you determine an appropriate course of action.

Successor liability generally describes the result of a court’s application of various legal theories to an acquisition transaction to hold the buyer responsible for liabilities the buyer did not explicitly agree to assume. Two of the significant theories of successor liability include the de facto merger doctrine and the continuity of enterprise doctrine.

The de facto merger doctrine holds the buyer responsible for liabilities not expressly assumed under the theory that the result of the acquisition is essentially a merger of the buyer and the seller. The elements of a de facto merger are 1) continuity of management, personnel, physical location, assets and general business operations, 2) continuity of shareholders, 3) cessation of the seller’s ordinary business operations and its dissolution as soon as legally possible and 4) the buyer’s assumption of the seller’s obligations ordinarily necessary for the uninterrupted continuation of the seller’s normal business operation.

The continuity of enterprise doctrine does not require proof of the continuity of shareholders. Instead, this doctrine holds the buyer responsible for liabilities the buyer did not explicitly agree to assume under the theory that the buyer has essentially continued the seller’s business. The elements of a continuity of enterprise finding are 1) continuity of the outward appearance of the seller’s enterprise, management, personnel, physical plant, assets and general business operations, 2) the seller’s prompt dissolution following the transfer of assets and 3) the buyer’s assumption of the seller’s liabilities and obligations ordinarily necessary for the uninterrupted continuation of the seller’s normal business operations.

Some courts have also found buyers strictly liable for defects in products previously manufactured and distributed by sellers under a variation of the continuity of enterprise doctrine that, in essence, holds that responsibility for such liabilities was the price the buyer had to pay for the seller’s good will and the buyer’s ability to enjoy the fruits of that good will.

What structural steps can the buyer take to minimize the likelihood of a successor liability finding?

The buyer should obtain guidance regarding the development and treatment of theories of successor liability under the laws of jurisdictions that could potentially govern the acquisition transaction to select a reasonable jurisdiction with less expansive successor liability doctrines. The buyer should also analyze and implement potential acquisition structures with the aim of avoiding elements that contribute to a successor liability finding. The buyer may, for example, significantly reduce or eliminate common personnel and business locations since continuity of the seller’s business into the buyer’s period of ownership is a common theme in current successor liability doctrines. In addition, the buyer could require the seller to delay liquidation proceedings for a reasonable period of time to avoid a finding of prompt dissolution. While business considerations will significantly impact the acquisition structure and the integration of the acquired assets into the buyer’s operations, the buyer should remain mindful of structural components under the buyer’s control that can minimize a successor liability finding.

What contractual provisions can the buyer include to reduce the risk of successor liability?

The buyer should negotiate for an unambiguous listing of the liabilities the buyer is acquiring through the inclusion of clauses in the acquisition agreement specifically setting forth the liabilities assumed by the buyer (i.e. at the closing, the buyer shall assume and agree to discharge only those liabilities of the seller set forth on Schedule 1) and clauses explicitly providing that liabilities not assumed by the buyer are retained by the seller (i.e. every liability of the seller not assumed by the buyer shall remain the sole responsibility of and shall be retained, paid, performed and discharged solely by the seller). The terms of the acquisition agreement should clearly state that unexpected liabilities are the seller’s responsibility.

In addition, the buyer should seek to incorporate provisions in the acquisition agreement requiring the seller to comprehensively indemnify the buyer for unexpected liabilities, including liabilities accruing to the buyer as a result of a finding of successor liability (i.e. the seller will indemnify and hold harmless the buyer for any loss, liability, claim, damage or expense, whether or not involving a third party, arising from or in connection with any liability arising out of the ownership or operation of the acquired assets prior to the closing other than the assumed liabilities). The buyer should also consider including an arrangement whereby the parties will place a portion of the acquisition consideration in escrow to meaningfully support the seller’s indemnification obligations.

The buyer should consult with appropriate counsel on a case-by-case basis regarding additional and/or alternative contractual provisions to include in the acquisition agreement to further reduce the risk of successor liability.