Successor Liability

Successor Liability

August 08, 2005 | By Keith Martin in Washington, DC

SUCCESSOR LIABILITY was not a problem when a lender foreclosed on a business.

In some states, when someone buys the assets of a business, he or she is exposed potentially to any back taxes that the company selling the assets failed to pay. Buyers usually ask for a certificate from the state tax department confirming that no back taxes are owed.

Kentucky tried to collect back sales taxes from a company that bought the assets of a Papa John’s pizza franchise. The original franchisee defaulted on a loan. The lender foreclosed on the assets and sold them to
someone else, who resumed operating the business under the name Papa John’s. The original franchisee owed the state $45,000 in delinquent sales taxes, plus penalties and interest.

Kentucky law requires anyone buying a business to “withhold sufficient of the purchase price to cover [any delinquent taxes] until the former owner produces a receipt from the [state] showing that it has been paid or certificate stating that no amount is due.”

There was no withholding in this case, perhaps because the buyer bought the assets from a lender and had no direct contact with the original franchisee. 

A Kentucky appeals court held that because of that, there was no successor liability. The court said there was no opportunity to withhold since the lender — who had contact with the original franchisee — paid nothing for the business assets when it foreclosed on them.

The case is LKS Pizza v. Commonwealth of Kentucky. The court released its decision on July 15.