A buyer of a business can sue a seller for fraud in an “as is where is” deal

Occasionally, a buyer of a business wants a company so badly that the buyer will agree to an “as is where is” deal. That is, a deal where seller makes no or few representations and warranties about seller’s business.

In such a case, the buyer is more dependent than ever on “kicking the tires” or performing due diligence.  However, once the company is bought, the buyer usually has few options to recover buyer’s investment if the business turns out to be a turkey.

Nevertheless, the business buyer in this case, was permitted by the Delaware Court of Chancery to sue the seller for misleading buyer about the company’s serious environmental problems.  Here is what happened in this transaction which closed May 9, 2000:

In performing due diligence associated with the Asset Purchase Agreement, … (Buyer) … requested information regarding any environmental problems, complaints or issues associated with the Premises. … (Seller) … provided some documents to … (Buyer) … indicating the DEP had issued in April 2000 an air emissions permit for a plant (the “Plant”) located on the Premises. … (Seller) … also disclosed one document indicating there were odor complaints in 1996. The document indicated that the DEP had investigated and found no wrongdoing. Otherwise, … (Seller) … failed to disclose any complaints or governmental action concerning odor emissions from the Plant.

In late 2000, DEP issued a Notice of Non-Compliance to … (Buyer) … based on odor emissions from coating equipment used in the manufacturing of tape. As a consequence of DEP’s enforcement action, … (Buyer) … was compelled to reduce its coating operations on the Premises by 50%.

Thereafter, … (Buyer) … obtained records from the Gloucester Department of Public Health and the DEP that show dozens of odor complaints and substantial DEP and Board of Health involvement in operations at the Plant since March of 1997, when … (Seller) … took direct control of plant operations. … (Seller) … was aware of but failed to disclose the existence of these complaints and the involvement of regulatory agencies related to environmental issues. …

On May 7, 2001, … (Buyer) … presented … (Seller) … with a claim under the Asset Purchase Agreement as a result of losses experienced in connection with the coating and related equipment.

Seller said that it was not liable because the asset purchase agreement expressly said that this was an “as is where is” deal.  This means that it made no representations and warranties about the environmental condition of the business.  The Court disagreed, finding that the applicable state law permits buyer to sue seller for damages resulting from seller’s fraud, even though it was an “as is where is” deal:

The case of Sheehy v. Lipton, is instructive. In that case, a purchaser of land that was subsequently discovered to contain hazardous waste brought an action against the seller and the seller’s agent alleging, among other things, misrepresentation. The purchaser based the misrepresentation claim on the fact that he had inquired whether the property had any potential problem with hazardous waste. The seller’s agent told the purchaser: “Don’t worry about it.” …

The seller argued that … (it had no responsibility for the misrepresentation) … because the purchaser “`recognize[d] that [s]eller makes no warranties whatsoever,’ and that he `has not been influenced to enter into this transaction nor has he relied upon any warranties or representations not set forth in this agreement …” as stated in an “as is” contract provision. The seller also argued that “the plaintiff, an experienced businessman who had the benefit of legal counsel before he signed the purchase and sale agreement, could not have relied on any statement that might have been made about the land.” ]The Massachusetts Appeals Court rejected these arguments. The court held: “Massachusetts case law rejects the assertion of `as is’ and like clauses as an automatic defense to allegations of fraud  or deceit. The same public policy that in general sanctions the avoidance of a promise obtained by deceit strikes down all attempts to circumvent that policy by means of contractual devices. In the realm of fact it is entirely possible for a party knowingly to agree that no representations have been made to him, while at the same time believing and relying upon representations which in fact have been made and in fact are false but for which he would not have made the agreement.”

This Delaware Court of Chancery case is referred to as Gloucester Holding Corp. v. US TAPE (2003) 832 A. 2d 116 and can be found at: https://scholar.google.com/scholar_case?case=1144880945733338861&q=%22asset+purchase+agreement%22+gloucester&hl=en&as_sdt=906000008000001e00c00003c000003c00000000000000000000000010a0e0f2040408082141cb00100000020000002004

Comment. The buyer could have saved itself a lot of time and money by doing an independent investigation of the environmental condition of the business before closing the deal. Also, the result in this case would have been the same if California law applied.  See Kenneally v. Bank of Nova Scotia, 711 F. Supp. 2d 1174 – Dist. Court, SD California 2010 and can be found at https://scholar.google.com/scholar_case?case=14753142991492105922&q=+Kenneally+v.+Bank+of+Nova+Scotia,+711+F.+Supp.+2d+1174,+1187+(S.D.+Cal.+2010)&hl=en&as_sdt=2006

By John McCauley: I help people start, grow, buy and sell their businesses.

Email:        jmccauley@mk-law.com

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

Telephone:      714 273-6291

 

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