What Happens to a Lawsuit if a Company is Sold?

What happens to a lawsuit if a company is sold?

A surprising goal for many business owners is not the continued business ownership but the eventual sale of the business. However, some companies are sold due to more nefarious reasons, like trying to get out of paying a settlement from a pending lawsuit.

How a business is sold can vary dramatically depending on the purchase and sale agreement. When a company is sold, ownership is transferred. This means the previous owners no longer have a legal obligation to the business. The new owners get all the benefits as well as all the obligations.

Depending on the type of business and structure of the sale, this may shift liability. However, that does not mean that a consumer is left without recourse. Even if a company is sold, a consumer may still be able to hold it liable for any harm suffered. This includes harm caused by its products.

What about if a business goes bankrupt?

One of the unforeseen circumstances that a business may face is the inability to repay outstanding debts or obligations, sometimes due to lawsuit settlements. If that occurs, instead of a business owner deciding to sell the business, the business may choose to file for bankruptcy. When a business files for bankruptcy, federal bankruptcy laws govern what will happen to the assets of the business.

There are two types of bankruptcy available for businesses, Chapter 7 bankruptcy, and Chapter 11 bankruptcy. A company files for Chapter 7 bankruptcy if it is going out of business. Under Chapter 7 bankruptcy, a trustee is appointed to liquidate the company’s assets and use the money to pay off its debts.

Under Chapter 11 bankruptcy, the company seeks to reorganize its business and, in particular, restructure its debt obligations. The company continues to operate, with most major business decisions being subject to the bankruptcy court’s approval. A successful bankruptcy process would enable the company to emerge with debt obligations it can better handle.

Unfortunately for consumers, companies have found a way to manipulate the bankruptcy process to their advantage, meaning they may often be able to get away with not paying their lawsuit settlements to those who earned their justice.

If a company has injured you and declared bankruptcy, you may still be able to hold them responsible. An experienced attorney will understand the laws and can navigate the legal process involved in suing a business that has declared bankruptcy.

Spun off into a new company?

Sometimes a company decides to spin off into a new business. In a spinoff, a parent company distributes shares of a subsidiary to the parent company’s shareholders so that the subsidiary becomes a separate, independent company. When a company is spun off, it cuts its ties with its parent company.

Of significance is the fact that the parent company is no longer liable for the obligations of the new company. The new business may suffer without the parent company’s resources; meanwhile, the parent company is no longer responsible for the lawsuits the new company is now facing.

Can you sue a closed business?

Another way a business may seek to avoid liability is by shutting down. Unfortunately for the business and fortunately for the consumer, closing down a business does not stop consumers from filing lawsuits against the company.

Most states have laws about filing lawsuits against closing or closed businesses. An experienced attorney will understand the laws and can navigate the legal process involved in suing a closed business.

Lawsuits against sold or bankrupt businesses

Mass torts can cost companies billions of dollars. Instead of being accountable for the harm the companies have caused consumers, companies scramble to shield themselves from liability.

Johnson & Johnson

Johnson & Johnson is the largest healthcare company in the world. Since 2009, thousands of women have filed talcum powder lawsuits against the company for negligence and failure to disclose the dangerous association between its baby powder and cancer risk.

In response to the litigation, Johnson & Johnson created a spinoff company and, utilizing state law, transferred most of the lawsuit liability to the spinoff while protecting Johnson & Johnson’s assets. The spinoff then filed for bankruptcy. Many saw this as a move to avoid or delay justice for consumers who were alleging harm.

3M

3M is a large and diverse company that has been accused of manufacturing and selling earplugs even after becoming aware that they were defective. The company has been trying to shift the mass tort claims to bankruptcy court for resolution. While the company claims that this could be beneficial for both parties, many see 3M’s tactics and those of Johnson & Johnson as a form of bankruptcy grifting.

Bankruptcy grifting refers to the use of bankruptcy courts by solvent, nondebtor companies and individuals facing mass-litigation exposure. One lawyer and author has commented that bankruptcy grifters act as parasites, receiving many of the substantive and procedural benefits of a host bankruptcy but incurring only a fraction of the associated burdens. In addition to Johnson & Johnson and 3M, other lawsuits where “bankruptcy grifting” has been observed include the Purdue Pharma and USA Gymnastics suits.

We Help Hold Businesses Accountable

Guardian Legal Network knows that the process of filing a lawsuit and obtaining a settlement can feel overwhelming. That is why we connect people like you with the right legal team that understands the different types of tort cases and how to file a tort claim.

Do not let the tactics of big businesses get in the way of you seeking the justice that you deserve. Contact us today if you believe you’ve been wronged by a company that’s been bought and sold. Don’t worry about gathering proof on your own; Guardian Legal Network is here to help you.

References

• Simon, Lindsey D. “Bankruptcy Grifters.” The Yale Law Journal, February 2022, https://www.yalelawjournal.org/article/bankruptcy-grifters. Accessed August 18, 2022.
• Brubaker, Ralph. “Mandatory Aggregation of Mass Tort Litigation in Bankruptcy.” The Yale Law Journal, 28 February 2022, https://www.yalelawjournal.org/forum/mandatory-aggregation-of-mass-tort-litigation-in-bankruptcy. Accessed August 18, 2022.
• “Investor Bulletin: Bankruptcy for a Public Company.” U.S. Securities and Exchange Commission, 31 March 2015, https://www.sec.gov/oiea/investor-alerts-bulletins/ib_bankruptcy.html. Accessed August 18, 2022.
• “Spin-Offs.” Investor, https://www.investor.gov/introduction-investing/investing-basics/glossary/spin-offs#:~:text=In%20a%20%22spin%2Doff%2C,on%20a%20pro%20rata%20basis. Accessed August 18, 2022.