Georgia state trial and intermediate appellate court held that the buyer who paid “reasonably equivalent value” for most of the assets of seller’s business, was not responsible for the insolvent seller’s corporate headquarters lease because the buyer did not assume the lease nor was the acquisition voidable as an actual or constructive fraudulent transfer.
M&A Stories
July 14, 2022
Introduction:
When a buyer acquires assets from a financially troubled seller, there are unique risks involved, such as potential claims from the seller’s creditors. In this particular case, a Georgia state trial and appellate court ruled that a buyer who paid a fair price for most of the seller’s assets was not responsible for the seller’s corporate headquarters lease. The court found no evidence of fraudulent transfer in the acquisition.
The Deal:
The seller’s business focused on sleep studies and medical equipment distribution, operating several sleep lab locations in Georgia and South Carolina. In 2014, the seller signed a 65-month lease for their corporate headquarters in Atlanta, where administrative staff worked. The clinical sleep studies were conducted at various lab locations.
The buyer, also in the sleep lab business, negotiated with the financially troubled seller in 2016. The buyer purchased most of the seller’s assets, including patient records and tangible personal property, but not the cash on hand or accounts receivable. The buyer also agreed to assume some of the seller’s liabilities but did not take over the corporate headquarters lease.
The Lawsuit:
Subsequently, the seller defaulted on the corporate lease, leading the landlord to sue the buyer to recover their loss. The landlord claimed that the acquisition should be considered a fraudulent transfer. However, the buyer argued that the transaction was legitimate and filed a motion for summary judgment.
Court Ruling:
The trial court granted the buyer’s motion for summary judgment, and the appellate court upheld the decision. Both courts found that the buyer and seller engaged in a fair transaction for reasonably equivalent value, with no evidence of fraudulent intent.
This case is referred to as Windward Campus Owner v. Good Night Med., A21A1192, Court of Appeals of Georgia, (March 10, 2022).
Takeaways for Buyers Acquiring Distressed Businesses:
1. Demonstrating Fair Value: Buyers must provide evidence that they are paying fair value for the assets they acquire from distressed sellers. Employing respected and independent appraisers to assess the assets can bolster this claim.
2. Consider Bankruptcy Purchase: Buyers may also consider acquiring the distressed business through bankruptcy proceedings, particularly under the Small Business Reorganization Act, which offers cost advantages for sellers with debt below $7.5 million. Such a purchase would require approval from a bankruptcy court.
In conclusion, this case highlights the importance of conducting fair and arms-length transactions when acquiring assets from a financially troubled seller. Buyers should take appropriate measures to demonstrate fair value and consider bankruptcy options when purchasing distressed businesses.
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