Legal Definitions - dump-buyback

Dump-Buyback (also known as asset dump and buyback) is a highly questionable business practice where owners attempt to avoid significant business debts by strategically transferring assets. This scheme typically involves two main phases:

• The "Dump" Phase: The owners of a financially struggling business sell its valuable assets (like equipment, property, or inventory) at a significantly reduced price to a closely associated party, such as a friend, family member, or another entity they control. Crucially, the original owners often provide the financing for this sale.
• The "Buyback" Phase: Shortly after, the original owners establish a new business entity. This new entity then "buys back" the assets from the associated party, now free from the original business's debts. The original, debt-laden business is subsequently dissolved, leaving its creditors unpaid.

The primary goal of a dump-buyback is to shed the original business's financial obligations while retaining control and use of its core assets under a new, debt-free structure. Depending on the specific circumstances, state laws, and judicial interpretation, engaging in a dump-buyback scheme can be considered fraudulent and may lead to severe legal penalties for the individuals involved.

Examples of Dump-Buyback:

• Manufacturing Company Scenario: "Precision Parts Inc." is a manufacturing company burdened by a large bank loan for its machinery and significant debts to raw material suppliers. The owner, Mr. Chen, is facing imminent bankruptcy.

  Mr. Chen "sells" all the company's specialized machinery and remaining inventory to his cousin's newly formed shell company, "New Horizon Manufacturing," for a fraction of its market value. Mr. Chen personally provides the loan for his cousin to make this purchase. Precision Parts Inc. is then dissolved. A few weeks later, Mr. Chen establishes "Chen's Advanced Components," which then "buys back" the machinery and inventory from New Horizon Manufacturing. Chen's Advanced Components now operates with the same assets but without Precision Parts Inc.'s original bank debt or supplier obligations.

  This illustrates a dump-buyback because Mr. Chen used a related party (his cousin's company) to acquire assets at a low price, financed by him, only to reacquire them under a new business, effectively shedding the original company's debts to the bank and suppliers.

• Retail Business Scenario: "Fashion Forward Boutique" owes significant amounts to clothing designers and its landlord. The owner, Ms. Rodriguez, realizes the business is unsustainable with its current debt load.

  Ms. Rodriguez arranges to "sell" all of Fashion Forward's high-end inventory, display fixtures, and customer list to her long-time friend, who sets up a new online store called "Chic Finds." The sale price is heavily discounted, and Ms. Rodriguez provides a personal loan to her friend to facilitate the transaction. Fashion Forward Boutique declares bankruptcy and closes. Shortly after, Ms. Rodriguez launches "Style Haven," a new retail venture. Style Haven then purchases the inventory and fixtures from Chic Finds, effectively resuming business with the same assets but without the previous debts to designers and the landlord.

  This is a dump-buyback because Ms. Rodriguez transferred the valuable assets of her failing boutique to a friend at a reduced price, financing the deal herself. She then reacquired these assets through a new business, avoiding the debts of the original Fashion Forward Boutique.

• Service Industry Scenario: "Global Insights Consulting" has accumulated substantial debt from office leases, IT equipment financing, and unpaid contractor fees. The partners, Mr. Lee and Ms. Davis, are looking for a way out.

  Mr. Lee and Ms. Davis "sell" the firm's client contracts, proprietary software licenses, and office furniture to a new entity, "Strategic Solutions Group," which is secretly owned by Ms. Davis's brother. The sale is for a nominal sum, and the partners provide the capital for the brother's purchase. Global Insights Consulting is formally dissolved, leaving its creditors unpaid. Within a month, Mr. Lee and Ms. Davis launch "Apex Advisory," which then acquires the client contracts, software, and furniture from Strategic Solutions Group. Apex Advisory effectively continues the consulting business with the same operational assets and client base, but without the original firm's lease obligations, equipment loans, or contractor debts.

  This exemplifies a dump-buyback as the partners used a related party (Ms. Davis's brother's company) to transfer the core assets and client relationships of their indebted consulting firm at a low price, financed by them. They then reacquired these assets through a new firm, Apex Advisory, thereby circumventing the original firm's financial obligations.