Unnamed business that runs local science fiction/ fantasy conventions collapses one week before the latest convention is due to happen. About a half-week later, another established company in the same biz announces the it has bought up the assets and names used by previous company…and directs members, vendors and others that are owed money because the newest convention never happened to contact the previous owners to take care of the debt. Is this legal?
Old company is in Oregon and new owners operate out of Florida, if that makes a difference.
Well if a company goes bankrupt it’s assets are sold off to pay off the debtors. Anyone buying a stove or refrigerator from a failed restaurant surely isn’t responsible to the debtors of the prior establishment. I would imagine, this being IMHO, that under the right circumstances if you are simple buying the assets and not taking control of the old business you would likewise not be on the hook for those debts. I’ve very curious to see what our more knowledgeable posters have to say…
There was no bankruptcy-they assumed control of the entire company. It was a matter of a couple of days between the announcement that the convention was cancelled and the announcement that a new company was running everything.
If that is what the sale contract says, then yes. No one has to buy the debts of a failing company. The two parties negotiate the terms of the sale like anything else.
It would depend on the character of the debts: Debt financing may be secured or unsecured. Secured debt has collateral (a valuable asset which the lender can attach to satisfy the loan in case of default by the borrower). Conversely, unsecured debt does not have collateral and places the lender in a less secure position relative to repayment in case of default.
So the collateral for secured debt cannot be sold unless an agreement is made with the lender.
Assuming it works in the US like it does elsewhere, if they bought the assets of the company they would not be liable for the debts. They would just acquire stuff like the trading name, assets, phone number, customers and they would now be owned by another LLC. If they bought the shares in the original LLC they would own that company debts and all.
In response to a query I made on the new company’s Facebook page I got this
(bolding mine)One of those officers(the VP) has been hired on by the new company to handle local issues…and this new hire is the current live-in girlfriend of the former company’s owner.
Conventions are not usually incorporated, or are incorporated as a nonprofit. The debts of an unincorporated business are held by the owners. For a nonprofit, they’re held by the members of the Board of Directors.
You can sell the name or assets (assuming no bankruptcy), but since the debts were incurred by the nonprofit and attach to the Board of Directors, they are the ones on the hook. They can, though, use the money from the sale of the assets to pay the debts (assuming there was any money paid – this might be a sweetheart deal).
But if said assets are not sold off, but acquired by the new company…?
I believe doing that is normal. If the amount of the buyout is at least equal to the amount of debt the the original owner is taking with them, it’s a wash. Anything after that is profit (ignoring tax implications).
That gives the new owner a fresh slate, everything is at zero and any one that comes to them for money owed from before a certain date is directed to the previous owner.
If they were about to go bankrupt, this will save them and hopefully leave them with a few bucks at the end of it, if not, hopefully the amount of debt leftover at the end is small enough for them to take on personally.
I’m sure this gets very messy for the people that are owed money.
Normal and one of the great perfectly legal scams of the business world.
When I was sitting in bankruptcy court 7.5 years ago waiting for my case to come up, the woman ahead of me was a Vietnamese woman who had run a nail salon and declared bankruptcy.
However, as it turned out, she had ‘sold’ her assets for about 1/10th what they originally cost to a new company, owned by herself and a new partner, then began running the new company in the same location with only a slightly different name.
The Judge took one look at that and called bullshit. You can’t declare bankruptcy on your debts (even if half of them were to herself), sell off the assets cheap - to yourself, leaving your old business partners fucked over and out of luck; then continue doing business like nothing happened.
End Result: He threw out her bankruptcy case, refused to hear it and told her attorney that their whole setup stank to high heaven and she wasn’t going to get out of debt to her old business partners and the bank through cheating them like that.
The woman before her had only one issue with her case. She had failed to declare the value of her car, which was @ $10,000 when by the rules, you can only exclude somewhere around 1/10th of that in auto value. The judge told her attorney to go back to the drawing board and file corrected paperwork.
If you buy the assets of a company but not their debts, you should be paying significantly more than if you bought the entire company. While it’s certainly possible that the assets are worth a whole lot less than the amount of debt the company has, and this will indeed leave the creditors of the original company holding the bag, that’s part of the risk involved with lending money, including prepaying for services to be rendered in the future. Not everyone really thinks about that because most of the time when you’re prepaying the company has a fairly good reputation, but it’s something to keep in mind.
False dichotomy. If the assets are sold off, then they have been acquired by whoever bought them, which in this case would be the “new company”.
The only issue is whether the assets were transferred to the new company at below market value. If they were, then the liquidator of the old company, on behalf of its creditors, can challenge the transfer and seek to have it set aside as fraudulent.
I’m not an expert on US insolvency and corporations law, but I understand many provisions are similar to UK & Aus law, both of which I am familiar with.
From the information provided it sounds like asset stripping/a Phoenix company. Presuming a registered company and not a NFP as suggested upthread, If the amounts owing are enough to make the effort worthwhile the creditors are able to pursue insolvency action. Going down that road opens up some recourse;
- If it can be shown that the Co was trading while insolvent, the directors are in breach of their duties and could (theoretically) be held liable, or at least as a punitive measure they would be restricted from being a company director for a period.
- If the assets were sold at substantially less than market value, the court has the power to reverse the asset sale. (In the U.K. this can apply to a sale up to 6 months prior to insolvency, not sure in the US.)
Formal external insolvency is expensive though, so if this was a small convention, with assets worth a few grand say, it may be more expedient just to write it off?
There is no trading and there are no Directors. This guy had sole rights to the company name and its assets, and he relied on volunteers to run the conventions. If they got anything, it was a free membership or discount membership to the convention they worked at. It was just a small LLC that owes/owed money to a few hundred people.
Ok, so he basically had some debts, wasn’t making money from the operation even with all-volunteers, and decided to shut it down. After which someone else said “Hey, I’ll buy it from you to keep it running”. They negotiated a price between them and none of us know the terms other than that it left the original owner holding the debts.
Nothing unusual about that in the slightest.
Alright, let’s look at it this way.
Bob owns Bobs Conventions, LLC, whose sole business is putting on BobCon every year. He pays all the overhead, reservations, printing, insurance, paperwork, security, etc.
Last year BobCon had a losing year and Bob’s Conventions LLC is left holding $15,000 in debt. Now, this could be a problem with putting on this year’s con, since Bob has to come up with a lot of the money up front. He decides that he just can’t do it and decides to get out of the business.
So Bob announces that BobCon won’t be happening anymore. Bob’s Conventions could declare bankruptcy, as it really has no assets to speak of other than a couple of computers and a bunch of paperwork and forms. But Bob wasn’t really planning to do that, he was just going to pay off the debt and retire the business.
Now Susan decides that she doesn’t want to see BobCon go away, so she contacts Bob and says “I’ll buy the BobCon assets from you for $10,000, but I don’t want to buy Bob’s Conventions, LLC and assume it’s debts.”
Bob sells the IP assets but retains the LLC and it’s debts. He uses the $10k to pay off two-thirds of the debts, paying off the rest himself. Bob is happy because now he only has to pay $5k in debts out of his pocket, not the original $15k. Susan is happy because she now owns the convention. The fans are happy because BobCon goes on as planned under new management.
Sounds good…if “Bob” didn’t already have a long history of not paying off debts unless absolutely forced to do so. If the new company isn’t/doesn’t have to assume those debts, then I’m afraid close to a thousand fans are going to swallow the costs of travel, hotel and Con membership fees, and a large room of venders will have to swallow the table space cost too, along with merchandise shipping costs. The really bad part about this is that it makes it much harder for others to keep long established Conventions going. Hotels will be much harder to negotiate with, and vendors might decide that it just isn’t worth it to sign on-the profit margin is thin, and they have already been burned heavily. I guess we can file this one under “Life Sucks”.
If the new owner of BobCon establishes a reputation for being punctual in paying debts and being on top of things, everyone will be happy in the long run.
Vendors especially. “You mean we won’t spend a year badgering that asshole Bob for the money?”
Hell, if I was a regular fixture at a local con (I’m not), it was run by a guy who never paid his debts and I was a lottery millionaire (the only way I’ll ever be a millionaire), I would consider buying that person out just to run the con as a personal passion.
Not to mention “Hey, I OWN this con. You can’t kick me out!” 