Business Owners Taking Legal Mulligans? Caution!

Successor Liability in Iowa

Successor Liability in Iowa

The Legal Mulligan You May Not Want to Take

While mulligans are commonplace on the golf course, they can spell trouble for business owners in the business world.  In particular, business owners who believe they can “start over” and avoid liability or debt held in their first company by “taking a mulligan” and starting a second company – which provides the same product or service as the first – are often setting themselves up for not only a penalty, but perhaps years of costly litigation.  A legal doctrine known as “successor liability,” allows Iowa courts to find a successor company (Second Co.) liable for the debts of a predecessor company (First Co.) in several circumstances.  Many successor liability cases involve business owners giving up on their first company and trying to “take another swing” by starting the business over with a second company (because of too much debt or other liabilities in First Co.) – the proverbial legal mulligan.  On November 6, 2013, the Iowa Court of Appeals published an opinion (here) addressing this legal mulligan – successor liability in Iowa.

In the November 2013 opinion, the Iowa Court of Appeals applied the well-established corporate law principle that allows Iowa courts to hold a successor company (Second Co.) liable for the debts of its predecessor (First Co.) when the successor company (Second Co.) is a “mere continuation” of the first.  According to several Iowa Courts, the following factors are considered under a “mere continuation” analysis: whether the successor company has the same or similar officers, directors, shareholders, and/or employees as the predecessor company; whether the successor company is in the same or similar business as the predecessor company; whether the successor company acquires the same or similar assets as the predecessor company; whether the successor company retains the same or similar name as the predecessor company; whether the successor company retains or uses the predecessor company’s books and records.  See e.g. C. Mac Chambers Co., Inc. v. Iowa Tae Kwon Do Acad., Inc., 412 N.W.2d 593 (Iowa 1987); Arthur Elevator Co. v. Grove, 236 N.W.2d 383 (Iowa 1975).  While each case is unique and no one factor is determinative, the foregoing examples illustrate some of the factors that Iowa courts will evaluate when asked to hold a successor company (Second Co.) liable for the debts or liabilities of a predecessor company (First Co.).

If you or someone you know are thinking about using a legal mulligan and taking another swing by “starting the business over,” a licensed attorney that practices in the area of corporate disputes can help you better understand the concept of successor liability as well as your rights, risks, and options.

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About Matthew McKinney

Attorney focused on civil and commercial litigation.
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