The facts of the case are that the plaintiff, Renaissance Worldwide, had leased space in a Waltham building to one Sitara Networks, a voice-over internet company. Sitara arranged for a secured creditor to foreclose on its assets and then subsequently bought them back, reopening as a new entity, Converged Access. Renaissance, claiming to be owed $1.2 million in unpaid rent, brought suit seeking to hold the defendant, Converged Access, liable for the tenant's non-payment as corporate successor to the tenant.
The Court found that "(T)he transaction at issue was designed and engineered from the beginning to ensure that there would be a seamless transaction...with minimum disruption to the business." In essence, Converged "purchased" Sitara's assets by assuming Sitara's debt to Lighthouse (Capital Partners,) its secured creditor. In a well documented 19-page decision, the Court concluded that "(f)or these reasons, the credible facts as established at trial demonstrate that Renaissance has established Converged's liability for Sitara's debt to Renaissance as Sitara's corporate successor."
The decision in the case represents the first time that a lower Court has applied the key successor liability doctrine established by the Supreme Judicial Court in the case of Milliken& Co. v Duro Textiles, in which the SJC held that "New Duro" was responsible for the debts of "Old Duro" and had to pay its supplier, Milliken, the sum of $8.8 million.
The concept of successor liability smacks of fraudulent conveyance law and just plain old fraud. It has particular significance in environmental law as well as in creditor-debtor relationships, and it is a hot topic these days.
The lessons to be learned from Renaissance and other developing cases is that debtors can no longer avoid liability by the device of a friendly foreclosure of assets - real and/or personal property, that creditors have a viable basis for attacking devises calculated to avoid liability, and that attorneys must be diligent in their investigations of transactions involving the transfer of assets in cases in which the claims of creditors are sought to be avoided.
The successor liability cases are fact dependent and therefore require thorough investigation and careful analysis of the facts leading up to the transfer, the nature of the transfer, and the conduct of the new entity after it receives the assets. It may well be anticipated that these cases are the forerunners of a new series of cases more clearly defining this developing area of creditor/debtor law.
By: Eugene B. Berman, Esq.
