By: Dean A. Langdon
When a small business falls on hard times, the owners often look for ways to start over. While no one can take away the entrepreneur’s business acumen, when creditors take back equipment, machinery, facilities or receivables, keeping a business going is tough. There are ways to improve the chances for future success if you know what to do. However, you may also run afoul of laws intended to protect creditors. These laws protect creditors from fraudulent transfers or imposing liability on a new business for debts of the failed business. A recent case involving a large family grain farming operation (about 100,000 acres) in Michigan highlights what creditors can (and cannot) do to try and interfere with starting over.
Facts of the Case
The Boersen family farmed grain in western Michigan. The parents and one of their sons (Dennis) used 3 different entities to own and operate the business. In 2016, poor crops and low prices resulted in an inability to get credit for the 2017 season. Creditors took back equipment and real property, effectively ending the business. One supplier (Helena Agri-Enterprises) sued and obtained a judgment against the business (and Dennis) for around $15 million dollars.
In 2018, Dennis’s wife (Stacy) created new companies and tried to start farming but was unable to. In 2019, Stacy and Nick (Dennis and Stacy’s son) tried again, creating new companies. These new companies were able to obtain credit using the production history of the land. They resumed farming using leased land and equipment. Helena then added the new companies, Stacy and Nick to their lawsuit. The lawsuit claimed a) the old companies transferred property to the new companies, which should have been used to pay the old companies’ creditors; and b) the new companies were successors to the old companies and should be liable for the old companies’ debts. The trial court denied Helena’s claims and Helena appealed to the Sixth Circuit. The Sitxth Circuit agreed with the trial court that neither the new companies, Stacy or Nick were liable for the debts of the old companies.[1]
No Voidable Transfers
Michigan has adopted the Uniform Voidable Transfers Act (UVTA). This Act defines when transfers from a debtor to a third party can be avoided and recovered by creditors. If a company transfers it assets to a third party to keep from paying creditors, creditors can sue the third party to get that property back. Kentucky has also adopted the UVTA. While the Sixth Circuit relies on Michigan law, the same reasoning should apply in Kentucky.
Helena first argued that the new companies were leasing some of the same equipment and land that the old companies used. However, neither the company leasing the equipment or the company leasing the land ever owed any money to Helena. Therefore, any transfers weren’t from a “debtor” of Helena and Helena had no right to try and avoid the transfers. Second, Helena argued that the new companies use of the production history of the land which the old companies used to farm was an avoidable transfer. The court disagreed, holding that the production history was a fact (or set of facts) which no one owned, and weren’t transferred by anyone.
No Successor Liability
Helena also argued that the new companies were just successors of the old companies. However, that legal theory requires there be some common ownership between the old companies and new companies. Neither Stacy nor Nick had any ownership or management rights with the old companies. And none of the owners or officers of the old companies were employed by or owned any part of the new companies. Although Nick had worked on the family farms since he was 14 years old, and the new companies advertised their operations as a “passing down” of the business, he did not own or manage the old companies. As the Court said: “Without more, the debts of the father do not become the debts of the son.”
Lessons to be Learned
Creditors can’t take your skills, knowledge and abilities, but you may have to find new resources to capitalize on those assets after a business struggles or fails. Consider limiting management and ownership rights to one or two family members. This way others could step up and use what they have learned to run a new company. Make sure all company formalities are followed and that owners and managers of old companies don’t have ownership or management rights in the new companies. Not every family business can transition successfully through financial distress but knowing what is (and is not) permissible will improve the chances for a successful transition.
[1] Helena Agri-Enterprises, LLC v. Great Lakes Grain,LLC, et al., Sixth Circuit Case No. 20-1671.
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