How Successor Liability May Disrupt The Best Laid Plans Of Cyber Ninjas

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A recent news article noted that Cyber ​​Ninjas, the firm employed by the Arizona Senate to conduct its ill-fated review of the 2020 election, would first shut down, but then will Re-formed as a new firm with essentially the same workers doing the same job, This is because cyber ninjas are currently facing a $50,000 daily fine was imposed by an Arizona judge for his contemptuous failure to turn over certain electoral review records. But will it work for Cyber ​​Ninjas II, or will the new firm be called upon to avoid this liability? Maybe not.

US law has long recognized the concept of “successor liability,” which means that a successor entity may be liable for claims and judgments against its predecessor. The idea behind this concept is to prevent a company like Cyber ​​Ninja from doing exactly what it wants to do, i.e., shutting down the erstwhile company in order to cut its liabilities and then creating a new one doing basically the same thing. To start a liability-free company. ,

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On the bottom corner consider a local pizza place called ABC Pizza LLC which is very successful at making pizza. However, Pizza Place gets into a dispute with one of its suppliers, and goes to court and faces a major judgment. Instead of paying the supplier’s judgment, the owners of ABC Pizza LLC reorganize it as DEF Pizza LLC and it continues to do business with the same employees on the same corner and making the same pizzas. In that event, the court will impose a successor obligation to hold DEF Pizza LLC liable for the judgment against ABC Pizza LLC.

Inheritance obligation is a concept that is an adjunct to alter ego obligation, which is an amorphous concept as found in our law. There are a number of factors that a court may properly consider, and deciding whether or not successor liability exists is ultimately one of the particular facts and circumstances of a given case. However, there is some certainty that in order to establish successor liability, a creditor would need to prove at least two things: first, the same person or persons owned or controlled both the predecessor entity and the successor entity, and Second, an unequal result will be obtained that the unit separation of the predecessor and the successor is respected.

As a first element, news reports seem to suggest that Cyber ​​Ninja’s founder, Doug Logan, will be create new company, and thus it would be relatively easy to establish common ownership or control. The second element, that it would be disparate to identify cyber ninjas as separate from the new company, is more problematic for the reason that what constitutes an unequivocal outcome is often difficult.

Circumstances that the court should consider would also include whether the employees are the same for both companies. that Logan said that he Intends to re-hire former Cyber ​​Ninja employees for his new company There shall be evidence in favor of the successor liability. That the new company would apparently be in the same business as the cyber ninjas would likely be further evidence that the new company would simply be a successor entity. But most important will be Logan’s own public statement that he’ll be essentially just re-creating Cyber ​​Ninja with a different name—as close to an acknowledgment of successor liability as one would find.

A court may also take into account the nature of the liability against cyber ninjas, which is a fine of $50,000 per day for contempt of court for refusing to return certain documents. Few things are taken so seriously by the courts as contempt of their orders, and it would probably be too heavy in the court’s analysis to decide whether to impose this liability on a new entity.

Some may wonder whether the bankruptcy of the predecessor company can cut the liability in such a way that the liability does not follow that of the new company. Generally, bankruptcy can wash out the claim against the predecessor company, thus allowing the business owner to start a new company without the liabilities of the old one. The downside is that the bankruptcy filing creates a bankruptcy asset, and if the predecessor is being liquidated in Chapter 7 proceedings (as in Chapter 11 proceedings reorganized), a bankruptcy trustee will be appointed who will. Will liquidate all assets. of the predecessor company and thus makes it more difficult for the successor company to start.

In a way, it doesn’t get anywhere in its current apparent desire for cyber ninjas not to hand over documents as ordered by the court. If Cyber ​​Ninja goes bankrupt, a bankruptcy trustee will be appointed to handle the cyber ninjas. Bankruptcy trustees can come up with documents to both satisfy a court order, noting that bankruptcy will not block a contempt order, and waive any attorney-client privileges on the part of cyber ninjas. That could be in relation to documents, or even just communication with your own attorneys that involves recalculations. Therefore, bankruptcy doesn’t really get cyber ninjas anywhere, and it would be a surprise if they filed for bankruptcy.

But let’s say Cyber ​​Ninja doesn’t go bankrupt, but just dissolves. This actually makes things worse for Mr. Logan, as the dissolution of an entity would also breach the entity’s liability shield for its owners and make them directly liable for the entity’s liabilities. This would mean that any owner of Cyber ​​Ninja could be liable for a contempt order up to $50,000 per day. So this is also not an option.

A more practical approach would be for cyber ninjas to go back to court and try the so-called impossible defense, which basically means that the person or entity committing the contempt cannot be punished for that contempt if they do not have the means to comply with the order, i.e., such compliance is impossible. The problem here for cyber ninjas is in showing, because they really have to show that they can’t get along. Any About the documents they are ordered to produce, and in this day and age of electronic records this almost never happens.

All that leaves Cyber ​​Ninja with trying to do what they’re doing now, which is to stop doing business under the name Cyber ​​Ninja, but then essentially turn the same company into a single company with the same owners. doing the same thing, more or less, a few people in control, and the same employees, and thus ignoring the contempt order. But it will also result in contempt liability flowing on to the new company.

There is also the possibility that the judge will enforce the contempt order directly on Mr. Logan and anyone else in charge of cyber ninjas, which is the most logical next step for the court. But we will have to wait and see if it materialises. The bottom line is that if cyber ninjas just think they can change their name and continue doing business, it’s probably a misconception.

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