Private equity (PE) firms are built to find value in acquisitions. But when a deal closes, unexpected liabilities from the seller’s past can follow – even when the buyer never agreed to assume them. From civil False Claims Act liability to criminal liability involving sanctions or export-control violations, the range of regulatory risk is extensive. Recent case law and enforcement trends make clear that successor liability deserves a prominent place on every PE firm’s pre-closing checklist.

Successor liability: Buyer inherits seller’s 'baggage'

Successor liability is a doctrine under which a buyer of a business can be held responsible for the liabilities of the seller, even in a transaction structured as an asset purchase. The general rule, recognized by the U.S. Supreme Court more than a century ago in cases such as Fogg v. Blair, 133 U.S. 534, 538 (1890), is that a buyer of assets does not inherit the seller’s obligations simply by virtue of owning the assets. In practice, however, courts have carved out many exceptions to this general rule.

A buyer can be held liable under one or more of the following judicially created exceptions:

1. The buyer expressly or impliedly assumed the seller’s liabilities; 
2. The transaction amounts to a de facto merger or consolidation; 
3. The buyer is a mere continuation of the seller; or 
4. The transaction was structured fraudulently to escape obligations. 

Additional theories, including the product line exception (first recognized by the California Supreme Court in Ray v. Alad Corp., 19 Cal. 3d 22, 34 (1977)), and various statutory and regulatory exceptions covering unpaid taxes, environmental liabilities, and unfunded pension obligations, further expand the landscape of potential exposure.

Courts assign liability when the transferred business mirrors the predecessor

Courts across the country evaluate successor liability claims on a highly fact-specific basis, and the outcome often turns on how closely the post-acquisition business resembles the pre-acquisition one. 

In Avamer 57 Fee LLC v. Hunter Boot USA LLC, 241 A.D.3d 401, 407-08, 241 N.Y.S.3d 181, 189 (N.Y. App. Div. 1st Dep’t 2025), a New York appellate court – in accord with sister courts, both state and federal – identified the following factors under the “mere continuation” theory: whether substantially all assets were transferred; whether the predecessor was effectively extinguished; whether the buyer adopted an identical or nearly identical name; whether the buyer retained the same officers, directors, or employees; and whether the buyer continued the same business operations. In this case, two separate buyers acquired assets – but not the equity – of the seller. However, the landlord was still permitted to pursue successor liability claims for unpaid rent because enough of the above factors were plausibly present in the case.

In short, the more a buyer looks, acts, and operates like the seller, the greater the risk. Use of the same business name, phone number, domain name, trademarks, and vendors all increase the likelihood of a finding of successor liability. Issuing equity to the seller’s owners as part of the deal consideration, a common feature in private equity transactions, can also weigh against the buyer by establishing continuity of ownership. Recognizing the countervailing risks, buyers may calibrate the factors based on commercial realities – a weighty exercise in sophisticated business and legal judgment.

Regulatory and criminal exposure of private equity firms

Recently, private equity firms have been held responsible under a successor liability theory in various contexts.

• False Claims Act: An aerospace company and its private equity owner agreed to a $1.75 million settlement in July 2025 to resolve False Claims Act liability for violating government-prescribed cybersecurity requirements. The settlement involved improper sharing of Air Force-controlled unclassified information with an unauthorized software company.
• U.S. sanctions: On December 2, 2025, the U.S. Department of the Treasury’s Office of Foreign Assets Control announced an $11.49 million settlement with a Chicago-based private equity firm for 51 apparent violations of Russia-related sanctions. The PE firm, which specializes in data centers, maintained investments indirectly funded by a sanctioned Russian oligarch for four years following his 2018 designation.
• Money laundering: In June 2025, a PE-acquired company entered into a non-prosecution agreement with the DOJ and agreed to pay forfeiture totaling $3.3 million. The PE firm voluntarily disclosed money laundering, sanctions, and export control violations by its acquired company, which had reportedly conspired to make unlawful sales to foreign customers – falsifying export documents and engaging in international money laundering.

Diligence and deal structure prevent successor liability

Before signing, PE firms should conduct targeted due diligence on areas of heightened risk. On the criminal and regulatory front, due diligence should not only identify exposure but also inform how the deal is structured. As courts have made clear, ignorance is not a defense, so it is imperative to know what your firm is buying and structure the purchase accordingly to avoid the scourge of successor liability.