It turns out that even lawyers sometimes have to pay their debts. In a recent Washington appellate case, a bank successfully sued an attorney to recover on a loan made to his law firm. Typically the owner of a law firm wouldn’t be held responsible for the corporate debts of a firm (except under a separate personal guaranty). But after the firm ceased operations, the lawyer continued to operate the firm in a manner that was determined to be a “mere continuation” of the prior business. As a result, he was held personally liable as a successor on the firm’s loan.
The result is particularly interesting because the lawyer, who had signed a personal guaranty of the law firm’s debts, declared bankruptcy on the day that he ceased operations of his law firm. The lawyer’s personal guaranty was ultimately discharged in the bankruptcy proceeding, and that ordinarily would have ended collection efforts against the lawyer individually.
But here, the lawyer was found to have simply continued the operations of his prior law firm the day after he filed for bankruptcy protection. He operated in the same location under the same lease as the prior law firm. He used the same office equipment, furniture, and inventory. He used the same contact information as his prior law firm, including the same website, letterhead, email address. He used the same employees. And he even held himself out in various contracts as if he was still the law firm. Furthermore, he did so without paying the prior law firm any money or other consideration for the use of these assets. On these facts, the trial court determined (and on appeal, the decision was affirmed) that the lawyer was a “mere continuation” of the law firm, and that his post-bankruptcy activities of operating the law firm subjected him to successor liability.
The lawyer was also held liable at trial for attorneys’ fees incurred by the bank under the loan agreements, even though the lawyer didn’t personally sign any of the loan agreements. Attorney fee liability is usually a matter of contract (unless imposed by statute or operation of law), and the lawyer argued that since he never signed the loan contract in his personal capacity he shouldn’t be personally liable for attorneys’ fees. The Court of Appeals rejected that analysis, reasoning instead that when a successor becomes liable under a contract based on the “mere continuation” theory, that includes contractual liability for attorneys’ fees.
The appellate decision is a welcome confirmation that lenders continue to have remedies against successor transferees who try to shirk their debts by merely transferring assets to another entity and continuing to operate the same business. It also serves as a cautionary tale to lenders about the potential challenges in pursuing even seemingly clear-cut successor liability claims, as the bank only prevailed after a three-day trial and after spending several hundred thousand dollars on attorneys’ fees and costs.