M&A’ Red Flags for the United States #1

Management may find the current environment tempting to purchase companies out of bankruptcy. Thus, we like to draw the reader’s attention to the case MPI Acquisition, LLC v. Northcutt, where the U.S. court held that federal bankruptcy law preempts state law successor liability theories, so as to bar a plaintiff from bringing a successor liability suit against a company that had purchased assets pursuant to a bankruptcy court order declaring the assets free and clear of liabilities. But be aware that bankruptcy court orders do not in all cases assure immunity from successor liability claims
under state law, and that the language in the bankruptcy court order is very important in protecting the buyer against such claims. To be on the safe side, we strongly recommend to seek additional protection against successor liability claims by including in the order approving the sale a reservation by the bankruptcy court of jurisdiction over any such claims.