BUYER CAN’T HOLD OWNER OF SELLER COMPANY LIABILE FOR POST-CLOSING COMPETITIVE ACTIVITES OF HER GRANDSON

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Court holds that Oklahoma does not permit a buyer to hold the owner of the selling company responsible under a noncompete for the competitive actions of her grandson (a non-owner of the company).

M&A Stories

March 23, 2023

Introduction

A buyer can usually require the owner of a company selling its assets to promise not to compete against the business after the closing.

The deal

This deal involved the sale of the assets of a small manufacturing company. In the asset purchase agreement, the seller’s owner promised to not compete against the buyer and to indemnify the buyer for damages if the owner or certain members of her family competed against the purchased business.

After the closing the owner’s grandson formed a company to compete against the sold business. He also persuaded the former seller general manager, to leave his employment with the buyer and work for grandson’s company.

The lawsuit   

The buyer sued the seller owner for damages, for the competitive actions of her grandson. The owner argued that she cannot under Oklahoma law be responsible for the actions of her grandson.

The court agreed: “Under Oklahoma law, which expressly controls here, contracts in restraint of trade are generally void, subject to a few exceptions.” One of the exceptions is when the goodwill of a business is sold. In that case the selling company and its owner can agree to not compete against the buyer to protect the goodwill as long as the terms are reasonable.

However, the court held that this exception did not permit the owner to be responsible for the competitive actions of a nonowner: “… (The buyer) … fails to cite to any authority indicating that the rule of reason test permits a party to contract, on behalf of a non-signatory, not to engage in a competing form of business. Thus, the Court is unable to conclude that the rule of reason test permits a finding that … (the seller’s owner) … is liable under the APA based solely on the actions of her … (her grandson) …”

See Aceco Valves, LLC v. Wolf, Case No. CIV-21-368-D, United States District Court, W.D. Oklahoma (March 17, 2023).

Comment

 The owner could be held accountable for damages for any competitive actions undertaken by her. Thus, the case continues.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in enforceability of non-owner noncompete Tagged with: ,

TWO NONCOMPETES IN M&A DEAL. ONE AS OWNER OF SELLER AND ONE AS BUYER EMPLOYEE.

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The seller owner quits working for the buyer four years after closing and immediately goes to work for competitor. The seller argues that one year post employment noncompete in employment agreement was not valid because two years post-closing noncompete in noncompetition agreement was signed after the employment agreement.

M&A Stories

March 21, 2023

Introduction

An owner of a seller of a business often goes to work for the buyer after the closing. As part of the deal the owner often executes an employment agreement with the buyer that contains a noncompete. The owner often also agrees not to compete with the buyer for several years after the closing, either in a purchase agreement provision or in a separate noncompetition agreement.

The deal

The seller in this deal supplied water, wastewater, storm drainage, and fire protection products and services to commercial and governmental customers in Minnesota and South Dakota. It agreed to sell the assets of its business to the buyer.

A part of the deal a seller shareholder agreed to be a sales rep for the buyer in an employment agreement where he agreed to not compete with the buyer within 150 miles of the offices he worked out of,  for a year after termination of employment.

Also, as part of the deal, but four days later, the shareholder executed a noncompetition agreement where he agreed to not compete with the buyer for two years after the closing in Minnesota, Wisconsin, North Dakota, South Dakota, and Iowa.

The lawsuit   

The shareholder quit working for the buyer four years after the closing and immediately began to work for a competitor which was located withing 150 miles of one of the shareholder’s offices which he worked out of for the buyer.

The buyer sued the shareholder for breach of the noncompetition agreement. The shareholder asked the federal district court to dismiss the claim. It argued the noncompetition agreement expired two years earlier, and the one year post employment noncompete in the employment agreement was invalid because the noncompetition agreement was signed 4 days after he signed the employment agreement, and thus the noncompetition agreement superseded the restrictive covenants in his employment agreement.

The district court agreed with the shareholder and dismissed the claim. The buyer appealed to the Court of Appeal.  That court reversed and sent the case back to the district court for further litigation.

The appellate court said that the one year post employment noncompete provision was only invalid if the noncompetition agreement addressed the same buyer concerns. And there was a good chance that the two noncompetition covenants dealt with different buyer concerns.

The buyer probably wanted the one year post employment noncompete in the employment agreement to protect against the risk that the shareholder would quit and take buyer trade secrets to use in competing with the buyer withing a 150 mile radius of the offices the shareholder worked out of.

On the other hand, the buyer probably wanted a two year post-closing noncompete to protect the goodwill of the seller business that it had purchased. And the five state noncompetition area for protecting the goodwill, was much larger than the employment agreement’s 150 mile noncompete radius.

If that is the case, then the fact that the two year post-closing noncompetition agreement was signed four days after the employment agreement did not mean that the buyer intended the one year post employment noncompete in the employment agreement to be superseded by the noncompetition agreement.

See Core and Main, LP v. McCabe, No. 22-1138, United States Court of Appeals, Eighth Circuit (Submitted October 19, 2022. Filed March 1, 2023).

Comment 

The buyer could have included a provision in the later signed noncompetition agreement that said that it did not supersede the noncompete provision in the employment agreement.

Also, states like California, prohibit an employer from requiring an employee to agree not to compete after employment termination.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in problems with employees Tagged with: ,

BUYER HAD NO FURTHER OBLIGATION TO PAY SELLER AN EARNOUT

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The buyer had purchased seller’s cloud-based secure messaging IP in part, for a royalty-based earnout. The buyer emerged from a bankruptcy reorganization free of the earnout obligation.

M&A Stories

March 20, 2023

Introduction

A seller of a business worries about losing an earnout if the buyer goes bankrupt.

The deal

The seller in this deal sold its leading cloud-based secure messaging and enterprise data integration platform to the buyer. The purchase price included a significant royalty-based earnout.

One year later the buyer filed for Chapter 11 bankruptcy protection. The buyer’s confirmed bankruptcy plan assumed some executory contracts and rejected others. The rejected contracts did not include “intellectual property contracts, licenses, royalties, or other similar agreements …”

The lawsuit   

After the bankruptcy court confirmed the buyer’s bankruptcy plan, the seller moved for a declaration that the buyer had assumed, rather than rejected, the earnout provision in the purchase agreement, because it was a royalty. The bankruptcy court denied the motion, concluding that the buyer only assumed ongoing intellectual property arrangements on which the business depended. The earnout  was not such a royalty, but instead “a form of deferred compensation . . . for assets that had already been conveyed in full …The mere use of the term royalty fee . . . to characterize one aspect of the consideration for an outright purchase … did not transform … (the seller’s) … entitlement into the sort of licensing or intellectual property ongoing arrangement that” the buyer’s assumption encompassed…” The seller appealed to both a federal district court and court of appeal and lost.

See QMAX, Inc. v. Fusion PM Holdings, Inc., https://casetext.com/case/iqmax-inc-v-fusion-pm-holdings-inc-2, United States Court of Appeals, Second Circuit (March 1, 2023).

Comment

 Just a reminder that there is a significant risk that the seller may never receive the portion of a purchase price not paid at closing.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in problems with earnouts Tagged with: ,

SELLER OF ACCOUNTING PRACTICE MUST PAY BROKER FEE EVEN THOUGH BROKER TERMINATED THE ENGAGEMENT

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The seller sold his practice to a buyer brought to the seller by the broker within the three year “tail period” after broker terminated the engagement with the seller.

M&A Stories

March 17, 2023

Introduction

A seller of a business often hires a business broker or investment banker to help sell the business. The engagement agreement usually requires payment of the broker or banker fee for a buyer brought to the seller which results in a sale within a “tail period” after termination of the engagement.

The deal

The seller owned an accounting practice. He hired a business broker to help him sell the practice. The broker brought several prospective buyers to the table. The seller instructed the broker to have the prospects submit new offers to create a bidding war. The broker said he did not work that way and terminated the broker engagement.

The seller sold his practice to one of the prospects brought in by the broker within 3 years of the termination of the broker agreement. The broker requested payment of the ten percent fee and the seller refused.

The lawsuit   

The broker sued the seller in an Illinois trial court, pointing to the broker agreement which said a fee was earned if the seller sold the practice to a buyer identified by the broker, within three years of termination of the broker agreement. The seller disagreed saying that the broker was not entitled to the fee because he materially breached the agreement by terminating the engagement.

The trial court ruled for the broker and the seller appealed. The appellate court also said that the broker had not materially breached the broker agreement because the broker had a right to terminate the agreement,

See APS Holmes Group, LLC v. Sorkin, No. 1-21-1668, Appellate Court of Illinois, First District, First Division, (February 27, 2023).

Comment 

The broker agreement did not have a provision that expressly gave the broker the right to terminate the agreement. However the appellate court said that contracts in Illinois are terminable at will unless otherwise stated.

The court also ordered the seller, as the losing party, to pay the broker’s legal fees and costs.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in Problem with Investment Banker/Broker/Finder Fee Tagged with: ,

BUYER OF LIGHTWEIGHT TRACKABLE PALLET MAKER SUE FORMER SELLER EMPLOYEE COMPANY FOR TRADE SECRET THEFT

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Court rules that former seller employees stole seller trade secrets and are using them to compete against the buyer.

M&A Stories

March 16, 2023

Introduction

A buyer of a business runs the risk that the seller’s employees will compete against the buyer of the business, with stolen seller trade secrets. Here the risk was managed with the use of seller confidentiality agreements with its employees.

The deal

The seller made “state-of-the-art shipping pallet and matching business applications for using the innovative pallet.” It sold its assets out of bankruptcy to the buyer for $5 million. The assets included valuable trade secrets.

The pallet was a multi-component shipping pallet made of an engineered wood core structure coated with a proprietary polymer to give it strength and rigidity. The seller’s trade secrets included the identification and sourcing of the engineered wood used in the pallet, the development and sourcing of the proprietary polymer used in the pallet, the methods for assembling and manufacturing the pallet, the development, incorporation and use of a proprietary tracking device in the pallet, and the business methods to track the movement of the pallet.

The lawsuit   

After the closing, a company formed by former seller employees started to compete with the purchased business. The buyer sued the former seller-employee company for theft of trade secrets and asked the court for a preliminary injunction, to order the competing company to stop using the trade secrets.

The court noted that the former employees had signed confidentiality agreements, where they promised the seller to not to disclose or use the seller’s trade secrets. It was also clear that the competing company could not have begun competing operations so quickly without the seller’s trade secrets.

The court issued the preliminary injunction, finding that the former seller-employee company likely is using the seller’s trade secrets.

See Palltronics, Inc. v. Paliot Solutions, Inc., Case No. 22-12854, United States District Court, E.D. Michigan, Southern Division, (February 27, 2023).

Comment 

A buyer of a company with valuable trade secrets will want to make sure that the seller’s employees won’t use the seller’s trade secrets to compete with the buyer. Confidentiality agreements did the trick in this case.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in trade secret misappropriation by former seller employee Tagged with: ,

BUYER OF ASSETS OF HOMEBUILDING COMPANY MUST RETURN TO SELLER THE UNUSED PORTION OF A $250K WARRANTY DEPOSIT

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The asset purchase agreement did not say that the unused portion of the deposit was to be returned to the seller. The court said the unused portion of the deposit was refundable and a refund two years after the closing was reasonable.

M&A Stories

March 15, 2023

Introduction

It’s risky to not have a key term in an agreement.

The deal

The seller was a homebuilder. It sold its assets to the buyer. The asset purchase agreement obligated the buyer to perform warranty services for homes sold before the closing. The deal required the seller to leave $250K of the purchase price as a “deposit” to fund the warranty services.

The lawsuit   

The parties ended up in a Georgia federal district court. In the lawsuit, the seller sued to recover the unused portion of the deposit. The buyer asked the court to dismiss the seller’s claim because the purchase agreement did not require the buyer to return any portion of the deposit.

The court denied the buyer’s motion to dismiss the claim, finding that the use of the word “deposit” meant that it was refundable and finding that the second anniversary of the closing was a reasonable date for return of the unused portion of the deposit.

See American Southern Homes Holdings, LLC v. Erickson, Case No. 4:21-CV-95 (CDL), United States District Court, M.D. Georgia, Columbus Division, (August 19, 2022).

Comment 

The seller could have made it much easier on itself having the agreement expressly say that the unused portion of the deposit was to be returned to the seller on a date certain.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in Problems with Deposits Tagged with: ,

BUSINESS SELLER LOSES RIGHT TO KEEP $605K DEPOSIT FOR FAILURE TO COMPLY WITH PROCEDURE FOR TERMINATING $12.1 MILLION DEAL

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The seller did not follow purchase agreement when it (a) sent notice of termination of the deal to buyer by electronic mail and (b) failed to give buyer ten business days to cure the default.

M&A Stories

March 13, 2023

Introduction

A buyer of a business sometimes puts up a significant cash deposit that can be forfeited to the seller under certain circumstances. But the procedures for deposit forfeiture must be followed by the seller.

The deal

The seller in this case owned a chain of nursing homes in Iowa. The seller’s founder died, and the business ended up in bankruptcy.

The buyer agreed to purchase the nursing home chain for $12.1 million. As part of the deal the buyer put up a $605K cash deposit.

The buyer agreed to sign management agreements for each of the nursing homes by a date certain. The buyer failed to sign the management agreements by the deadline. The seller then emailed a notice of termination. The nursing home was then sold to another buyer.

The lawsuit   

The buyer demanded a return of the $605K cash deposit. The seller refused and the buyer asked the court for the deposit.

The court ordered the deposit to be returned to the buyer. The seller could have kept the deposit had it followed the procedure for termination in the purchase agreement. The seller did not do so. It made two mistakes.

First, the seller sent the termination notice by email. Electronic mail was not permitted. Only notice “in writing, and delivered by either hand delivery, overnight courier, or Regular First Class U.S. Mail, postage prepaid …” Second, the seller was required to give the buyer the opportunity to sign the management agreements withing ten business days of receiving a proper termination notice. In fact, the buyer did sign the management agreements withing the ten business day period following the defective email notice.

See In Re QHC Facilities, LLC, Case No. 21-01643-als11, United States Bankruptcy Court, S.D. Iowa, (Filed January 26, 2023).

Comment 

The lesson for buyers and sellers is simple. Notice provisions in purchase agreements are “boilerplate” but they can have serious consequences if not followed.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles 

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in termination of M&A agreement Tagged with: ,

PROBLEM WITH DIVESTITURE: SELLER DIVESTS WORKERS COMP SOFTWARE DIVISION TO AN EMPLOYEE, WHO THEN USES SELLER’S HEALTHCARE SOFTWARE DIVISION TRADE SECRETS

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The asset purchase agreement excluded the healthcare intellectual property from the deal.

M&A Stories

March 6, 2023

Introduction

Selling a division or product line of a business carries with it a risk of post- closing fights over what assets were purchased by the buyer.

The deal

The seller had two business units: one provided consulting and actuarial services such as data analysis and predictive analytics to the healthcare insurance market. The other to the workers compensation insurance market.

The buyer’s owner had worked for the seller for seven years as the head of the worker compensation’s business unit’s predictive analytics practice. He wanted to expand the worker’s compensation predictive analytics tool to the health insurance market.

The workers compensation predictive analytics tool was similar to the seller’s healthcare predictive analytics tool. Rather than have the workers compensation predictive analytics tool compete internally with the healthcare software business, the seller offered to sell the worker’s compensation software business to the buyer’s owner outright.

The asset purchase agreement expressly excluded the healthcare intellectual property from the deal: “All rights, title and interest (including any and all intellectual property rights) in and to the data, information, data summaries, and know-how provided by or originating in any part from Seller’s health practice.”

The lawsuit   

After the closing, the seller discovered that the buyer was using the healthcare trade secrets in its business. The seller claims its healthcare trade secrets include confidential methods for importing and processing health insurer accounts, formulae involved in assigning group risk scores, and pricing, sales and marketing methodologies.

The seller sued the buyer, including a claim for misappropriation of its trade secrets. The buyer, in a summary judgment motion, asked the court to dismiss the trade secrets, claiming that the trade secrets were jointly developed by the healthcare and workers compensation units.

The court refused to dismiss the buyer’s trade secret claim because there was a genuine issue of material fact that can not be resolved at this preliminary stage of the litigations.

See Milliman, Inc. v. Gradient AI Corp., Civil Action No. 21-10865-NMG, United States District Court, D. Massachusetts, (Filed January 19, 2023).

Comment 

This case is an example of how it can be hard to separate one business unit’s assets from the rest of the business. Was there a better way to describe the trade secrets that the seller wanted to exclusively retain?

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in problems with divestitures Tagged with: ,

BUYER OF ASSETS OF ALFALFA BUSINESS FAILS. SELLER REPOSSESS $1.7 MILLION OF EQUIPMENT LEASED TO BUYER AND IS SUED BY BUYER

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The equipment was secured by a seller debt. As part of the deal the seller leased the encumbered equipment to the buyer. After seller repossession, the buyer unsuccessfully claimed that it owned the equipment.

M&A Stories

February 28, 2023

Introduction

This business acquisition involved valuable farm equipment, that was secured by a seller debt.

The deal

The seller in this deal grew, processed, sold, and purchased hay and alfalfa for export to Asian markets. The buyer agreed to buy the assets of the business for $3 million cash.

The assets included two valuable pieces of equipment that secured seller debt. The first was a “press” which was used to bale alfalfa,” and secured a debt of $1.2 million. The second was a set of 13 trucks powered by liquified natural gas (LNG trucks), which secured a debt of $478K.

The buyer and seller did not try to ask the secured lender to consent to the transfer of the equipment and debt to the buyer. Instead, the seller leased the equipment to the buyer. The buyer’s rent would service the seller’s debt.

Two years after the closing, the buyer ceased operation of the business and began liquidating its assets, and it made no more payments to the seller. The seller took possession of the equipment, sold the press for $1.5 million and kept the trucks.

The lawsuit   

The buyer sued the seller for damages, claiming that it owned the equipment. The trial court said that the buyer only leased the property and dismissed the suit. The buyer appealed and the appellate court agreed with the trial court: “the lease agreements provided that the Hunterwood Press and LNG trucks remained the ‘sole property’ of the seller.”

The appellate court also upheld the trial court’s order to the buyer to pay the seller’s legal fees. (The parties agreed in the deal documents that if there was a dispute in court, the loser would have to pay the winner’s legal fees).

See HayDX, Inc. v. Ichida, No. E076124, Court of Appeals of California, Fourth District, Division Two, (Filed January 10, 2023).

Comment 

The seller might have avoided litigation had the documents been clearer as to the rights and obligations of the buyer and seller if the buyer stopped paying rent. The appellate court:The parties’ several written contracts are not, to say the least, a model of clarity.”

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in problems with seller's lender Tagged with: ,

SELLER’S EMPLOYMENT AGREEMENT ARBITRATION PROVISION DID NOT APPLY TO FORMER SELLER EMPLOYEE SUIT AGAINST BUYER

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Seller outside sales reps agreed to arbitration. Buyer purchased seller’s assets. Buyer hired sales reps who later sue buyer for overtime. Buyer can’t use seller arbitration provision to force sales reps into arbitration.

M&A Stories

February 15, 2023

Introduction

Here is another problem for a business buyer that came out of the pandemic.

The deal

The seller in this deal was FTD, the floral wire service company. Two outside sales reps for the seller signed a FTD employment agreement that had a binding arbitration agreement.

The seller filed for bankruptcy in 2019 and sold its assets to the buyer. The sales reps were hired by the buyer.

The outside sales reps worked outside of the office until the pandemic. Then they were required to work remotely in their homes.

The lawsuit   

The sales reps ultimately left the buyer. They then filed a overtime lawsuit against the buyer in a Chicago federal district court. The sales reps were not entitled to overtime under the federal wage and hours law when working outside of buyer’s office. But they claimed that they were when they worked remotely out of their homes.

The buyer asked the court to order the sales reps into binding arbitration, pointing to the seller arbitration provision. The court denied the request because the sales reps had agreed to arbitration with claims against the seller, but not the buyer.

See Virgilio v. FTD, LLC, Case No. 1:22-CV-02628, United States District Court, N.D. Illinois, Eastern Division, (January 10, 2023).

Comment 

The court suggested that the seller’s arbitration provision may have bound the sales reps in this case had it also applied to seller’s successors and assigns. But it did not: “the relevant ‘employment relationship’ is between the employees and ‘the Company.’ … ‘Company’ refers to … (the seller) only, not to its assignees, successors, heirs, or transferees.”

A better lesson for the buyer? Have the sales reps sign new employment agreements with the buyer that contain a binding arbitration provision.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles 

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in problems with employees Tagged with: ,

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