Changing a Business Name to Avoid Judgment
Changing a business name to avoid judgment is risky.
When a judgment is entered against a business, the business owners will sometimes form a new business entity, open a bank account in the name of the new business, and transfer the equipment and other assets of the old business to the new business. The owners will then simply continue to operate the business under the name of the new entity. They mistakenly believe that because the judgment is against the old business, the judgment creditor cannot seize the assets of the new business.
Changing a Business Name to Avoid Judgment
Jiffy Market, Inc., a Missouri corporation, did just that in the late 1990s and got nailed by the judgment creditor, Sunbelt Environmental Services, Inc. Jiffy hired Sunbelt to clean up a gasoline spill. Sunbelt then sued Jiffy for not paying for its work and obtained a judgment for $67,524.20. In the course of trying to collect on the judgment, Sunbelt learned that the owner of Jiffy formed a new corporation, called Ozark Mountain Associates, Inc. (OMA), transferred the assets of Jiffy to OMA, and ran Jiffy’s business under OMA.
Fraudulent Transfers
In response, Sunbelt filed a motion for “creditor’s bill”, alleging that the asset transfer was done to defraud Jiffy’s creditors, including Sunbelt. Sunbelt also asked for a judgment declaring that all the assets in the possession of Jiffy, OMA, or their owner be subject to execution to satisfy the judgment. The court entered judgment piercing the corporate veil of both Jiffy and OMA and found that both corporations and its owners were liable for payment of the $67,524.20 judgment.
The court based its ruling on both Missouri’s Fraudulent Transfer Act (Act) and on the Missouri common law action of “fraudulent conveyance”. The Act and the common law action prohibit transfers of assets done “with actual intent to hinder, delay, or defraud any creditor”. The prohibition includes transferring assets to avoid seizure by a judgment creditor, also known as asset stripping. Depending on the circumstances, a court can permit a judgment creditor to seize such assets transferred to the new business.
Piercing the Corporate Veil
Changing a business name to avoid judgment typically causes the old business to become insolvent, as bank balances and assets are transferred to the new business entity. Such conduct can also be deemed fraudulent. Insolvency and fraud are the two ingredients necessary to piece a corporate, or LLC, veil. When the veil is pierced by the court, judgment is entered against the owners of the business. The judgment creditor can then seize the personal assets of the owners and the assets of the old and new business. It can take a lot of legal work to obtain a judgment for fraudulent transfer and to pierce a corporate veil, but the Act permits a winning judgment creditor to recover the attorney’s fees incurred by the judgment creditor and in some cases punitive damages.
Sunbelt was successful in its lawsuit against Jiffy and OMA. The court in that case pieced the corporate veil of both Jiffy and OMA, making both of those businesses and their owners liable for Sunbelt’s judgment. Sunbelt could then seize the personal assets of any of the owners and of either business. Changing a business name to avoid judgment is risky, as judgment creditors have recourse against both the owners and the businesses involved in changing the name of a business to avoid judgment.
This article is for general informational purposes only, and it is not intended as legal advice. Sewell Law provides experienced and professional litigation services. Please contact Michael Sewell at (314) 942-3232 or at michael@sewelllaw.net to discuss your legal matter.
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