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Feb 28, 2008

Debtor's Liability to New Owner after Transfer of Business and Trade Name

A developer recently contacted me concerning a dispute with a supplier of building materials. The developer purchased building materials from a supplier with payment to be forwarded 30-days after receipt of the materials. This is a common practice when a supplier has a long-term relationship with a developer, provides a consistent flow of supplies to a developer, and the developer is solvent.

Here comes the problem. The supplier was sold and the business and trade name was transferred to a new owner. The problem arose when the developer paid the old owner, who the manufacturer believed was still the owner of the supplier, for the building materials.

The developer paid the old owner at the business office of the supply business without noticing any difference in ownership and without being informed by the old owner of the change of circumstances.

As expected, the new owner charged the client for the supplies, since the new owner claims that the old owner, through the sales contracts, transferred all rights including the credits for the shipped supplies to the new owner.

The old owner is nowhere to be found and likely collected from multiple creditors leaving the new owner with credits that were reflected in the sale price of the supply business.

Article 25 of the Korean Commercial Code states that:
(1) A trade name may be transferred on in cases where business is discontinued or it is transferred together with the business.
(2) Transfer of a trade name shall not be effective as to third persons unless it has been registered.


The business trade name was properly transferred and registered by the new owner under Article 25.

However, Article 43 states that:
. . . a performance made to the transferee in respect of any obligation that has arisen from the business of the transferor shall be valid, in cases where the obligor effecting the performance has acted in good faith and without gross negligence.


Therefore, since the old owner did not inform the developer of the transfer, the payment was made at the companies business address - the developer is not liable to to the supplier.

To clarify for the author of another law blog who seemed a little confused - The transferee-old owner was paid by the obligor-developer and acted in good faith and without gross negligence, since the developer paid at the company office and was never informed of the transfer -thus the developer is not liable.

The converse and what the court will look to is the bad faith of the old owner. The deceptive practice of taking the money at the business office of the company will alleviate the burden on the plaintiff to prove good faith. I was trying to state this in my former post, but I assumed a level of understanding that I should have not assumed.

A letter from a law firm explaining the law on the matter would usually settle these types of disputes and often the business relationship can still continue.

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SeanHayes@ipglegal.com