Your corporate customer files Chapter 7 and
business starts anew with newly formed corporation:
Can you collect against newly formed business?

Your major corporate customer files Chapter 7, and you are holding a six figure balance. The customer shifts its business to another corporation with identical shareholders, directors, officers, employees, and place of business. Is your claim discharged? Can you collect against the new corporation even though your contract was with the former entity, as well as the delivery of goods?

As a starting point, debts are not discharged when a corporation files Chapter 7. In a Chapter 7, the bankruptcy trustee has the duty to collect property of the estate of a bankrupt corporation. However, the vendor may have its own alter ego claim against the newly formed corporation. Generally, when one corporation sells or transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the former. Piercing the corporate veil as between a bankrupt corporate customer and the recently formed corporation requires the vendor applying principles of alter ego and showing that although the business operates under two corporate structures, there is but one enterprise. A court needs to find that the corporations operate as one business and an injustice to the vendor would result by allowing the enterprise to escape the debt of its bankrupt entity.

Notwithstanding the unfairness to vendors of using bankruptcy and corporate formation to avoid debt, the tactic is popular. Vendors should be mindful that their struggling financial corporate customer may attempt this and that principles of alter ego and enterprise liability may preserve their claim.

Blakeley & Blakeley LLP - Trade Vendor Monthly News Flash - November 2002. This information is not intended to constitute legal advice, nor a substitute for legal advice. once again link Blakeley & Blakeley LLP.