The certificate of deposit was deposited by the seller with the state of Tennessee to secure its self-insured worker’s compensation program.
M&A Stories
August 23, 2022
Introduction
When acquiring a business’s assets, it’s crucial to accurately document the items being purchased. A recent case involving the sale of America’s oldest tailor-made clothing manufacturer highlights the importance of clarity in acquisition documents.
The Deal
In 2014, a local businessman formed an acquisition subsidiary to rescue a 134-year-old clothing manufacturer in Chattanooga, Tennessee, that had filed for bankruptcy in 2013 due to pension funding issues. The buyer and seller agreed to sell all assets, including a self-insured workers’ compensation program. The seller had a certificate of deposit (CD) that served as security for the compensation program, which they had deposited with the state of Tennessee.
The Oversight: Both the buyer’s and seller’s financial officers were aware of the CD. However, they didn’t anticipate that the state would release the CD’s balance of $350K in 2021, after the expiration of the statute of limitations on workers’ compensation claims. Consequently, the CD was not included in the detailed list of purchased assets in the acquisition documents.
The Lawsuit
When the CD’s balance was released to the seller’s bankruptcy trustee, the buyer requested the $350K but was denied. Subsequently, the buyer filed a lawsuit against the trustee in bankruptcy court, seeking ownership of the CD.
The Court Ruling: The court ruled in favor of the buyer, stating that the intention of both parties was to transfer all assets. Despite not being explicitly listed in the acquisition documents, the court awarded the $350K CD to the buyer.
See In Re HC Liquidation, Inc., No. 1:13-bk-16079-SDR, Adversary Proceeding No. 1:18-ap-1005-SDR, United States Bankruptcy Court, E.D. Tennessee, (Signed November 13, 2019).
Conclusion
To avoid such issues in future acquisitions, buyers should specify purchased assets as “all assets, other than specifically described excluded assets.” They can then provide a detailed list of assets that are included, but not limited to, in a schedule attached to the asset purchase agreement. This approach ensures clarity and helps prevent disputes over unanticipated assets.
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 book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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