Court Examines New York’s Successor Liability Doctrines De Facto Merger vs. Mere Continuation

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Dive into the complexities of New York’s successor liability doctrines in our latest M&A blog post. This in-depth analysis examines the recent case of Avamer 57 Fee LLC v. Hunter Boot USA LLC, where the court navigated the nuances of de facto merger and mere continuation doctrines. Learn how the 2023 asset sale of a distressed company led to a legal battle over unpaid rent and what it means for future M&A transactions. Stay informed on how these doctrines are applied in New York and the implications for buyers and sellers in asset sales. Perfect for entrepreneurs, business owners, CFOs, lawyers, and anyone involved in mergers and acquisitions.

M&A Stories

July 25, 2024

In the world of M&A, buying the assets of a business often allows buyers to cherry-pick which liabilities they want to assume. However, sometimes buyers find themselves entangled in legal disputes over unassumed liabilities, particularly when the business continues post-transaction.

A notable example is the 2023 sale of a distressed company known for its iconic Wellington Boot. In this case, a major American corporation (Buyer A) acquired the company’s intellectual property, including the Hunter Boot brands, while another American firm (Buyer B) purchased the existing inventory. No equity changed hands in this deal.

Buyer A then licensed Buyer B, its long-time partner, to develop the brand in the United States. Post-closing, the seller’s landlord sued the seller, Buyer A, and Buyer B in a Manhattan state trial court for unpaid rent. Neither buyer had assumed the seller’s lease obligations.

The landlord argued that the buyers were liable under New York’s successor liability doctrines of de facto merger and mere continuation. The buyers sought to dismiss the claims, asserting the landlord had not provided sufficient facts to support these doctrines. The trial court sided with the buyers and dismissed the claims.

The court determined that the transactions did not constitute a de facto merger under New York law since no equity was involved, meaning neither the seller nor its owners retained any equity in the buyers post-closing.

Additionally, the court found no mere continuation of the seller’s business. It highlighted that New York’s mere continuation doctrine typically applies when a company purchases substantially all the assets of another business and continues the seller’s operations with some or all of the seller’s officers and directors.

While many states recognize these doctrines, their application can vary. For instance, some states might apply the de facto merger doctrine even if the seller or its owners do not hold a post-closing equity interest in the buyer. It’s crucial to consult applicable state laws when considering successor liability issues.

Case Reference: Avamer 57 Fee LLC v. Hunter Boot USA LLC,  Index No. 653898/2023, Motion Seq. Nos. 002, 003, Supreme Court, New York County, (June 25, 2024).

https://scholar.google.com/scholar_case?case=1843064520343694893&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2022

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connectingwith business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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 de facto merger exception, mere continuation, problems with successor liability Tagged with: , , , , , , , , , , , , , , , , , , ,

M&A Seller Learns a Painful Lesson on Defending Indemnification and Setoff Claims

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Discover the critical lessons from a real M&A legal dispute where a seller’s failure to adhere to post-closing dispute procedures led to significant financial consequences. This blog delves into the importance of indemnification provisions, the role of representations and warranties, and the impact of environmental and operational breaches on M&A transactions. Learn how meticulous attention to M&A agreement procedures can safeguard against costly disputes and ensure smoother business transitions.

M&A Stories

July 22, 2024

When buying a business, the buyer seeks assurance that there are no hidden problems. This is typically achieved through the seller making representations and warranties about the business’s condition, subject to any disclosures in the M&A documents. Additionally, the seller often agrees to settle pre-closing vendor invoices.

Written M&A agreements provide the buyer with recourse if undisclosed issues arise post-closing. The buyer can recover losses from the seller through the agreement’s indemnification provisions. Often, the buyer also has the right to offset losses against amounts owed to the seller after closing.

In this case, a seller supplied brake plates to its sole South Korean customer. The customer agreed to purchase the assets of the seller’s Alabama-based brake-plate facility after the seller faced financial difficulties. The buyer paid the seller $7 million at closing and a $4 million note, payable in ten annual installments.

The parties signed an asset purchase agreement, which included comprehensive seller representations and warranties about the facility and a promise from the seller to pay outstanding vendor invoices. The buyer was entitled to recover losses resulting from breaches of these representations, warranties, and covenants. The agreement also allowed the buyer to set off losses against the $4 million note payments.

After closing, the buyer discovered inoperable assets and environmental issues that breached the seller’s representations and warranties, along with unpaid vendor invoices, breaching the seller’s covenant to pay them. The buyer followed the purchase agreement’s procedures for indemnification and setoff, giving the seller timely notice of its indemnification claim and intention to set off losses against the note, claiming indemnification for losses exceeding $500,000.

The seller had the right to dispute these actions by making timely objections with detailed reasoning but failed to follow the procedures. Consequently, the buyer set off the claimed losses against the note.

The seller then sued the buyer in an Alabama trial court. The case ultimately reached the Alabama Supreme Court, which ruled in favor of the buyer. The court held that the seller could not dispute the merits of the buyer’s claims or the setoff against the note because it did not contest these actions according to the procedures outlined in the purchase agreement. Additionally, the court determined that the seller had to pay the buyer’s reasonable attorney fees.

The lesson here is clear: post-closing dispute procedures in M&A agreements must be followed meticulously. In this case, the seller’s failure to adhere to these procedures not only barred it from disputing the buyer’s actions but also resulted in paying the buyer’s legal fees. 

Case Reference: Alabama Plating Technology, LLC v. Georgia Plating Technology, LLC,  Nos. SC-2023-0250, SC-2023-0271, Supreme Court of Alabama, (June 21, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connectingwith business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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.

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M&A Asset Buyer Enforces Acquired Seller Employment Agreement’s Arbitration Provision

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Discover the intricacies of enforcing arbitration provisions in employment agreements post-acquisition in this detailed M&A legal blog. Delve into a real-world case where a major chipmaker’s asset acquisition led to a legal battle over age discrimination and disability law violations. Learn how the court’s decision impacts employment agreements, the enforceability of arbitration provisions, and the transfer of contractual rights under corporate law. This blog is a must-read for M&A professionals, legal experts, and business leaders navigating the complexities of asset acquisitions and employment law.

M&A Stories

July 16, 2024

In mergers and acquisitions, buyers often choose to purchase a company’s assets rather than its equity to avoid assuming all its liabilities. This practice was exemplified in a recent case involving a $6 billion asset acquisition by a major chipmaker of a smaller San Jose-based rival in 2018. The transaction included the seller’s employment agreements, and a senior sales manager’s agreement contained an arbitration provision.

The buyer terminated the senior sales manager in 2023, citing the elimination of his position. The 67-year-old employee, suspecting the termination was due to his serious heart condition that required multiple hospitalizations, filed a lawsuit against the buyer in a California federal district court, alleging age discrimination and violation of disability laws.

The buyer moved to stay the court proceedings and compel arbitration, relying on the arbitration provision in the employment agreement. The employee had signed both the employment and arbitration agreements while with the seller.

The court ruled that the arbitration provision clearly covered the former employee’s claims. The employee argued that the arbitration provision was not binding since the seller did not sign the employment agreement. The court stated that only evidence of the employer’s intent to be bound was necessary, which was present in this case, though not explicitly detailed in the judge’s opinion.

The employee also contended that the arbitration provision was unenforceable by the buyer because the employment agreement was with the seller when it was a corporation. The seller had since reorganized into a limited liability company (LLC) before the asset purchase. The court clarified that under Delaware corporate law, the rights and obligations of the predecessor corporation’s contracts automatically transfer to the successor LLC.

Lastly, the employee argued that the arbitration agreement was unfair. The court disagreed, noting that the arbitration agreement explicitly excluded disputes that cannot be legally subjected to arbitration.

A key takeaway for employers is the importance of signing employment agreements to avoid similar disputes. 

Case Reference: Fiorentine v. Marvell Semiconductor Inc.,  Case No. 24-cv-01136-MMC, United States District Court, N.D. California, (June 14, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connectingwith business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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.

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M&A Buyer Blocks Seller’s Bankruptcy Discharge Over $225K Non-Compete Violation

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In this engaging M&A blog post, we dive into a compelling legal case where a buyer successfully blocked a seller’s bankruptcy discharge over a $225,000 non-compete violation. Through this case study, we highlight the crucial importance of adhering to non-competition agreements in mergers and acquisitions. Business owners and legal professionals will gain insights into the severe consequences of breaching non-compete covenants and understand how bankruptcy cannot always shield violators from hefty judgments. Stay informed about M&A legalities to safeguard your business interests effectively.

M&A Stories

June 29, 2024

In mergers and acquisitions, business owners often agree to non-competition covenants to protect the goodwill of the purchased business. However, some sellers choose to compete against the sold business post-closing, leading to serious consequences that cannot always be avoided through bankruptcy.

This case involves a company that manufactured filters for septic tanks. During negotiations, one of the seller’s owners wanted a clause allowing him to make and sell competing products, but the buyer refused, and the clause was excluded from the non-compete agreement.

After the sale, the seller began producing and selling competing products, violating the non-compete and infringing on the product patent sold to the buyer. The buyer, upon discovering this, sent a cease-and-desist letter, which the seller ignored. The buyer subsequently secured a $225,000 judgment for willful patent infringement from a federal district court.

The seller then sought to discharge the judgment through bankruptcy, but the buyer objected, arguing that the seller’s actions were willful and malicious. The bankruptcy court sided with the buyer, ruling that the $225,000 judgment could not be discharged in bankruptcy.

This case highlights that M&A sellers face significant risks when disregarding non-compete agreements. Intentional competition post-closing can result in substantial monetary damages that may not be discharged in bankruptcy. 

Case Reference: In Re Hornback,  CASE NO. 20-10794(1)(7) A.P. NO. 21-01020, United States Bankruptcy Court, W.D. Kentucky, (Signed February 21, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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.

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M&A Seller Objects to Buyer’s Inclusion of Discretionary Bonuses in Post-Closing Working Capital True-Up

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Discover the intricate dynamics of M&A transactions through a recent Delaware Court of Chancery decision that underscores the complexities of working capital adjustments. In a $345 million acquisition, a dispute over the inclusion of discretionary bonuses in post-closing working capital calculations highlights the critical need for precise contract language. Follow this real-world example to understand the legal nuances and resolution processes that can impact your next deal. This blog is essential reading for entrepreneurs, business owners, CFOs, CEOs, board members, and legal professionals navigating the M&A landscape.

M&A Stories

June 29, 2024

In many M&A transactions, the purchase price is adjusted based on the difference between the estimated closing working capital and the actual closing working capital. Typically, the seller prepares this estimate, and after the deal closes, the buyer calculates the actual working capital. Disagreements often arise between the seller and buyer over these calculations, triggering a dispute resolution process that involves referring the matter to an independent accountant for resolution.

A recent Delaware Court of Chancery decision highlights this process in the $345 million acquisition of a consumer financial services company. The agreement stipulated a purchase price adjustment based on the variance between the estimated and actual working capital at closing.

Post-closing, the buyer calculated that the working capital included $1.3 million in bonuses. The seller disputed this, asserting that the actual bonuses at closing amounted to $300,000. The buyer contended that the $1.3 million represented the prorated share of discretionary bonuses for the year, which were neither paid nor known at the time of closing.

The seller wanted this dispute referred to the independent accountant for resolution as per the agreement. However, the buyer sought a court determination on whether discretionary bonuses should be included in the working capital calculation.

The court sided with the buyer, ruling that the contract language regarding the bonus component of working capital was ambiguous. Thus, the court will address this issue first before referring the matter to the independent accountant for final determination.

This case underscores the importance of clearly defining in the purchase agreement whether discretionary bonuses should be included in the working capital calculation. 

Case Reference: Curo Intermediate Holdings Corp. v. Sparrow Purchaser, LLC,  C.A. No. 2023-0371-NAC, Court of Chancery of Delaware, (June 5, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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 purchase price adjustment, working capital adjustment Tagged with: , , , , , , , , , , , , , , , , , , , ,

Buyer of Financially Distressed Community Hospitals Battles FTC Antitrust Challenge

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Dive into the intricate legal landscape of M&A with our latest post, “Buyer of Financially Distressed Community Hospitals Battles FTC Antitrust Challenge.” Explore the complexities faced by a major nonprofit hospital chain as it navigates the acquisition of financially troubled community hospitals in Charlotte, North Carolina. This insightful analysis covers the strategic hurdles, legal battles, and antitrust scrutiny imposed by the Federal Trade Commission (FTC). Perfect for legal professionals, healthcare executives, and M&A enthusiasts, this post unravels the challenges of navigating mergers and acquisitions in the healthcare sector under the current regulatory climate. Stay informed on the latest developments and strategic considerations in M&A law.

M&A Stories

June 27, 2024

Many community hospitals are grappling with financial challenges, partly due to the rise of outpatient competitors. These struggling institutions often become targets for acquisition by larger healthcare systems. However, such strategic moves frequently face antitrust scrutiny from the Federal Trade Commission (FTC).

A recent case highlights this issue. A large public hospital chain attempted to sell its financially troubled community hospital and psychiatric hospital in the Charlotte, North Carolina area to a major nonprofit hospital chain.

The financial performance of the seller’s hospitals had been in decline for years, unable to compete effectively with the area’s dominant hospital chain or the buyer’s hospitals, which also held a significant market share.

Despite being on the market, the buyer was the sole bidder. In early 2023, an agreement was reached to sell the hospitals for $320 million. However, in early 2024, the FTC filed a lawsuit in a North Carolina federal district court to block the transaction, pending an administrative proceeding that could extend for two more years.

Following discovery and a seven-day evidentiary hearing, the court denied the FTC’s request for a preliminary injunction. The court acknowledged that the buyer’s post-acquisition market concentration would exceed FTC merger guidelines but emphasized the likelihood that the seller’s hospitals would fail within the next three to five years without the acquisition.

Despite the court’s decision allowing the deal to proceed, the victory was short-lived. The FTC appealed, and the Court of Appeals halted the closing pending the appeal. The FTC argued that the trial court erred in allowing the deal to proceed based on the foreseeable failure of the seller’s hospitals, asserting that the correct standard should be their imminent failure.

Ultimately, the buyer terminated the deal. This case underscores a critical lesson for strategic buyers of community hospitals: under the current administration, antitrust concerns present significant hurdles to closing such transactions. 

Case Reference: Federal Trade Commission v. Community Health Systems, Inc.,  Civil Action No. 5:24-CV-00028-KDB-SCR, United States District Court, W.D. North Carolina, Statesville Division, (June 5, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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.

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M&A Buyer Challenges Seller’s NY Anti-Reliance Clause in Fraud Suit

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Explore the intricacies of M&A transactions through the lens of a recent legal battle in Brooklyn, where a buyer challenges a seller’s anti-reliance clause after a business deal goes awry. This insightful blog delves into the importance of clearly defining representations and warranties in purchase agreements, the implications of New York law on anti-reliance clauses, and practical tips for buyers and sellers to safeguard their interests. Whether you’re an M&A professional, legal expert, or simply curious about the legal aspects of business acquisitions, this post offers valuable lessons from a real-world case.

M&A Stories

June 19, 2024

M&A sellers often seek to limit their exposure to representations and warranties in purchase agreements. A common strategy is the inclusion of an anti-reliance clause, where the buyer disclaims reliance on any seller representations and warranties outside the written agreement.

In a recent case, a buyer purchased the assets of a Brooklyn bagel store, only to find that the business did not perform as expected. The buyer then sued the seller in a Brooklyn trial court for fraud, claiming they were misled by the seller’s statement that the business generated $250,000 in net income.

The seller sought to dismiss the suit via summary judgment, arguing that the anti-reliance clause in the purchase agreement precluded the buyer from relying on any oral representations about the store’s net income.

However, the trial court denied the seller’s motion. Under New York law, an anti-reliance clause must specifically identify the subject matter of the seller’s oral representations and warranties that the buyer cannot rely upon. In this case, the anti-reliance clause only pertained to the store’s assets and subleases, with no mention of net income.

Thus, the buyer’s lawsuit survived this pre-trial challenge, allowing the litigation to proceed.

Including anti-reliance clauses is a common practice for sellers. Buyers, on the other hand, should ensure that all critical seller representations and warranties are explicitly stated in the purchase agreement to protect their interests. 

Case Reference: I & M Kosher Catering LLC v. Bhng Inc.,  Index No. 523834/2019, Motion Seq. No. 3, Supreme Court, Kings County, (May 30, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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 anti-reliance clause, fraud in business sale Tagged with: , , , , , , , , , , , , , , , , , , ,

M&A Health Care Seller Fights Large Buyer over Medicare and Medicaid Reconciliation

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In this blog post, we delve into the complexities of selling a healthcare business, particularly focusing on a recent M&A legal dispute involving Medicare and Medicaid receivables. Discover how a Montana-based home health and hospice provider clashed with a large Alabama-based healthcare giant over the reconciliation of pre-closing receivables. We explore the legal intricacies, the court’s ruling, and how better planning might have prevented the conflict. This case study offers valuable insights for anyone involved in healthcare mergers and acquisitions, shedding light on the potential pitfalls and strategic considerations in managing regulatory compliance and financial agreements.

M&A Stories

June 16, 2024

Selling a healthcare business presents unique challenges, particularly when it comes to receivables. A significant portion of a seller’s revenue often derives from Medicare and Medicaid, and due to the complex billing rules and high volume, there can be substantial delays between when services are provided, billed, and reimbursed.

This issue was at the heart of a recent M&A dispute involving a large, publicly traded, Alabama-based provider of integrated health services acquiring a Montana-based provider of home health and hospice care services.

The size disparity between the buyer and seller was notable. The buyer operates 138 hospitals, 241 home health locations, and 82 hospices across 39 states and Puerto Rico, ranking as the fourth-largest home health provider in the nation. The seller ran nine home health and 11 hospice locations across Montana, Alaska, Colorado, Idaho, Washington, and Wyoming.

A key part of the acquisition agreement addressed the collection of Medicare and Medicaid receivables for services provided in billing cycles ending before and overlapping the closing date. According to the agreement, the seller would collect these receivables and immediately transfer them to the buyer, who would then allocate the seller’s share.

Post-closing, the buyer informed the seller that it was withholding $556,000 of the seller’s share of receivables, citing violations of Medicare and Medicaid regulations by the seller in billing for services before the closing. The seller objected, arguing that these billings were collected before the closing and were not part of the reconciliation. Instead, the seller claimed the buyer was making an indemnification claim for breaches of representations and warranties related to regulatory compliance. Under the indemnification provision, the buyer could only claim 50% of its damages, leading the seller to demand $325,000, factoring in the 50% indemnification cap and prejudgment interest.

The buyer refused, leading to a suit in New Haven, Connecticut federal district court. The seller sought a prejudgment remedy, aiming to secure $325,000 of the buyer’s assets in case it won the lawsuit.

The court ordered the attachment, agreeing with the seller that the dispute concerned receivables collected before the closing, not uncollected receivables at the closing.

Reflecting on the case, it’s clear that the seller might have avoided this conflict by arranging to collect receivables post-closing and placing them in escrow. This would have obviated the need for a prejudgment attachment, as the funds would have been secured in escrow. 

Case Reference: Frontier Home Health And Hospice, LLC v. Eh Health Home Health Of The Northwest,  Civil Case No. 3:23-CV-01215 (JCH), United States District Court, D. Connecticut, (May 8, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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 receivables Tagged with: , , , , , , , , , , , , , , , , , , , , ,

M&A Bankruptcy Auction Buyer’s Liability to Another Bidder

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Discover the complexities of M&A transactions within bankruptcy contexts in our latest blog post, “M&A Bankruptcy Auction: Buyer’s Liability to Another Bidder.” This insightful piece delves into a recent case where a prospective buyer of a distressed business navigates the challenges of proprietary information misuse and contractual breaches during a bankruptcy auction. Learn about the legal ramifications, strategic considerations, and court rulings that impact both buyers and sellers in these high-stakes environments. This post is essential for anyone involved in mergers and acquisitions, particularly those dealing with distressed assets and bankruptcy proceedings.

June 13, 2024

Buying a distressed business in bankruptcy offers significant advantages, primarily the ability to acquire assets free from most existing liabilities. However, this benefit does not protect against liabilities created by the buyer during the purchase process.

The distressed business buy-buy BABY, part of the Bed, Bath and Beyond bankruptcy, was recently auctioned. A prospective buyer developed proprietary forecasts, financial models, and strategic analyses for the bidding and post-acquisition phases.

Needing financial support, the prospective buyer partnered with a New Jersey-based supplier of the distressed business. Their agreement explicitly barred the supplier from bidding on the assets independently. The prospective buyer shared its analysis with the supplier, who then breached the agreement by successfully bidding for the business separately, securing its trademark, business data, and internet properties for $15.5 million.

In response, the prospective buyer sued the supplier in a Manhattan federal district court for misappropriating trade secrets. The supplier moved to dismiss the case, arguing that the issue should have been raised in bankruptcy court, citing the legal doctrine of res judicata and an injunction in the bankruptcy sales order prohibiting challenges to the auction.

The federal district court denied the supplier’s motion to dismiss, ruling that the prospective buyer’s claims were independent of the auction and not barred by res judicata or the injunction. 

Case Reference: Go Global Retail, LLC v. Dream On Me, Inc. No. 23-cv-7987 (AS), United States District Court, S.D. New York, (April 26, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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.

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Cleveland Honda Dealer’s Unsuccessful Bid for Expansion

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In this blog post, we delve into the intricate world of M&A in the automotive industry, focusing on a Cleveland Honda dealer’s challenging journey to expand its footprint. We explore the legal complexities that arise when an automaker denies consent for a dealership acquisition and the subsequent legal battles faced by the buyer. From filing protests to navigating appellate courts, this post provides a detailed narrative of the legal hurdles and strategic maneuvers involved. Perfect for readers interested in the legalities of M&A, franchising disputes, and the automotive sector.

June 11, 2024

Acquiring a car dealership is a complex process involving the buyer, the seller, and the automaker. The initial agreement is between the buyer and the seller, but final approval rests with the automaker. What happens if the automaker denies consent for the acquisition? What recourse does the buyer have?

This dilemma faced a Cleveland Honda dealer attempting to buy another Honda dealership 20 miles away within the same metro area. Despite the buyer’s own dealership being profitable, it had the lowest sales among the seven Cleveland Honda dealerships, raising concerns about its performance.

Honda refused to consent to the sale, citing the buyer’s declining sales and poor performance. These issues posed a risk of franchise termination if not promptly addressed.

Determined, the buyer filed a protest with the Ohio Motor Vehicle Dealers Board, arguing that Honda’s refusal was unreasonable. The board ruled against the buyer, leading to an unsuccessful appeal in a Columbus state trial court.

Persisting, the buyer took the case to the Ohio appellate court. However, the appellate court dismissed the buyer’s arguments, siding with Honda.

It’s unclear why the buyer believed it could overturn Honda’s decision. 

Case Reference: Frye v. Am. Honda Motor Co., Inc. No. 23AP-490, Court of Appeals of Ohio, Tenth District, (Rendered on April 23, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recent legal problems of buyers 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

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