A judgment against a company is only as good as the company behind it. When the debtor sees the judgment coming, he shuts the old entity down and reopens the same business under a new name. Same customers, same employees, same equipment, same phone number, different paper. The old company keeps the judgment and nothing else. The new company keeps everything of value, and the client is told there is nothing left to collect. Texas law does not accept that so easily.
The debtor thinks he has just walked through a loophole. He has not, although the analysis of why he has not takes a little explaining. The transfer of assets from the old company to the new one is itself a transaction subject to TUFTA, and that is where the new entity’s exposure starts.
Why the Debtor Thinks This Works
The reasoning is intuitive. The old company is a separate legal entity. A judgment against the old company does not automatically attach to the new company. The new company is technically a different legal person. So far so good.
What the debtor missed: the transfer of assets from the old company to the new one is itself a transaction. And under Texas fraudulent transfer law, that transaction is reachable.
The Fraudulent Transfer Theory
When a business hands its customers, contracts, equipment, inventory, accounts receivable, and goodwill to a new entity for little or nothing, the old company has made a fraudulent transfer of business assets. That transfer is voidable under TUFTA.
We sue the new entity directly. The theory is straightforward. The new entity received the assets. The old company received nothing of real value in return. The old company was insolvent at the time of the transfer (which is why the debtor was moving things in the first place). All three elements of a constructive fraud claim, checked.
The new entity faces a money judgment for the value of what it received. And the owners of the new entity, usually the same people who owned the old company or close to it, face personal liability as transferees too. The wife who is named as the sole shareholder of the new LLC is now a defendant. The business partner who came along to the new company is now a defendant.
What the debtor designed as a clean break from the judgment is, in our experience, a substantially larger case than the original judgment. The new entity, its owners, and any insiders who participated in the transfer can all end up as defendants, and the total exposure across that group is often a multiple of the original liability.
Successor Liability: A Parallel Theory
Texas also recognizes “successor liability.” It is a separate doctrine from fraudulent transfer, with its own elements, but it often applies to the same facts.
The general rule is that a company buying assets does not inherit the seller’s liabilities. The exception is when the buyer is essentially a continuation of the seller. Same ownership, same management, same operations, same customers, same physical assets, same trade name. Different paper.
Mere Continuation
When the new company is just the old one wearing a new hat, Texas courts can treat the new company as the legal successor to the old one. The creditor of the old company gets a direct claim against the new company without needing to prove the asset transfer was fraudulent. The continuity itself is the basis.
De Facto Merger
When the asset transfer functioned like a merger but was not structured as one (the old entity is wound down, the new entity takes everything, the same ownership interests carry forward), courts can find a de facto merger. The successor company picks up the old company’s liabilities.
In a lot of our cases, the fraudulent transfer theory and the successor liability theory overlap. We plead both and let the court pick. Whichever one fits the facts best gets us to the result we need.
What These Cases Look Like in Practice
Most of the proof in these cases is documentary. Texas corporate filings, assumed-name filings, UCC records, deed records, and tax filings generally trace the path from the old company to the new one clearly. Customer testimony fills in what the records do not show: when they were told to change their billing address, who is running the office now, whether anything actually changed for them.
The hardest part is usually not proving the case. The hardest part is finding all the people who need to be defendants. The new LLC, its owners, the spouses who hold paper interests, the controllers of any related entities. We name everyone the facts reach.
Frequently Asked Questions
What if the new company has different owners on paper?
Different on paper is not the same as different in fact. We look at who actually controls the new company, who funded it, who benefits from it, who runs the day-to-day. A spouse, a partner, or an adult child holding the paper ownership while the debtor runs the show is a common pattern and is reachable.
What if the new company paid something for the old company's assets?
"Something" is not enough. The test is reasonably equivalent value. Pennies on the dollar fails the test. A fair-market deal with independent parties may not. The price has to be real.
Can we get a TRO against the new company while the case is pending?
Yes. If the new company is operating and the assets are about to keep being run down or transferred again, a TRO is available on emergency notice. We have used TROs in these cases to stop ongoing dissipation.
Does this theory work if the old company went through bankruptcy?
It depends. The bankruptcy may have included an asset sale that was court-approved. A sale under section 363 of the bankruptcy code may be cleansed of certain claims. The analysis gets complicated when bankruptcy is in the picture. Call us early.
What if years have passed since the transfer?
The four-year TUFTA limitations period applies, with the one-year-from-discovery extension. Old transfers are not automatically out of reach. We look at the dates carefully.
What if I never had a judgment against the old company, just an unpaid invoice?
You can still pursue the new entity. The underlying debt does not need to be in judgment form for the fraudulent transfer claim to proceed.
Can we sue the people who left jobs at the old company and went to the new one?
The employees themselves usually are not defendants. They did not receive an asset, they received a paycheck. The defendants are the new entity and the owners. The employees become witnesses.
Successor liability and fraudulent transfer claims involving business transfers are technical, with several theories that can apply. This page describes the framework. The specific theories that fit your case need to be worked out with a lawyer who has the facts.
The Texas Fraudulent Transfer Statutes are complicated affairs. These pages are meant to explain the law in terms that are as simple as we can make them. Sometimes we have ignored limited exceptions and other quirks in the law so that the general concepts could be conveyed clearly. Your situation needs to be carefully analyzed. No two situations are identical and you need legal advice before making an important decision. Use this website as a guide only.