Legal Question in Business Law in California

Who is Liable for Debt - New Business Owner or Previous Owner?

A local gym continued to deduct membership payments from my checking account for some time after I cancelled. When I confronted the gym, they at first refused to disclose the owner's name. Upon contacting him, he claimed that since the debits occurred immediately before transfer of ownership, he was not liable but the previous owner was. Previous owner and current owners basically point at each other. Doesn't the new owner purchase the assets as well as the debts of a business? Or does this depend on the content of the contract between old and new owners? Who is liable, or should I simply name both as defendants, letting the judge sort it out? It's a small claim, about 240 dollars.

Asked on 7/13/00, 9:33 pm

2 Answers from Attorneys

Paul McMeans Law Office of Paul E. McMeans

Re: Who is Liable for Debt - New Business Owner or Previous Owner?

The answer depends on facts not given in your question.

If the seller of the business was incorporated, the

business may have been sold by selling all the stock

of the company, or the seller may have sold the assets of the

company alone. In California, the courts generally recognize

that a sale of assets does not transfer the liabilities (except

for some types of liabilities -- not including general contract debts).

If the company was incorporated, the the seller sold all the stock to a

new owner, the corporation's debts continue, and the corporation is

still on the hook, even with a new owner. The earlier response (recommending suing

both parties and having the court sort it out ) may work, but is not without risk -- if the party

that is held not liable is vindictive decides to do so, they may

sue for malicious prosecution. For a mere $240, I would recommend chalking this up to experience

and forget about it. Even small claims is a lot of hassle, and the risk of a malicious prosecution

claim against you by one of the other parties is in my view not worth the potential recovery.

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Answered on 9/13/00, 1:42 am

John Hayes The John Hayes Law Offices

Re: Who is Liable for Debt - New Business Owner or Previous Owner?

You have the right idea. I would recommend that you name both owners and the business name as defendants in your small claims lawsuit. Let the judge decide who is liable.

Good luck.

John Hayes, Esq.

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Answered on 9/08/00, 7:35 pm

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