APA Setoff Provision Applies Only to Liquidated Indemnification Claims

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March 19, 2020

Introduction

A buyer of a business often discovers problems with the business after the closing. And this risk is often covered by seller indemnification obligations.

In some cases, the purchase price was paid at the closing and the buyer is left with seller’s promise to indemnify the buyer for buyer’s loss. But often a significant portion of the purchase price has been deferred for payment after the closing.

Can the buyer, in such a case, refuse to make a post-closing seller payment until the indemnification issues are settled? Or at least reduce the amount of the payment by the cost of fixing the problem?

The answer depends upon the language in the purchase agreement.

The deal

This deal involved the purchase of the assets of an online business. The transaction was evidenced by a comprehensive asset purchase agreement that included seller representations and warranties about the business. A significant portion of the purchase price was paid after the closing.

The lawsuit

The buyer discovered problems with the business after the closing and stopped making purchase price payments; claiming that the seller had significant indemnification liability for the problems.

The dispute ended up in a Louisiana state trial court. There the key issue boiled down to whether the buyer had the right to withhold purchase price payments. Buyer said it did and pointed to a setoff provision in the APA which said that the buyer could “set off or recoup any indemnification payments owed to it by Seller …”

The seller argued that the buyer’s claims were unliquidated and not “owed” and thus the buyer was not entitled to setoff “unliquidated” claims against post-closing purchase price payments. The trial court agreed with the seller and the decision was affirmed on appeal by a state intermediate appellate court.

This case is referred to as Admin-Media, LLC v. AC OF Lafayette, LLC,, No. 19-691, Court of Appeal of Louisiana, Third Circuit (March 11, 2020).  

Comment

Not surprised with the outcome. Probably better outcome if the setoff language gave the buyer the right to set off indemnification claims against post-closing seller payments, as determined in good faith by the buyer, using commercially reasonable discretion.

However, the seller might pushback when negotiating the setoff language, by asking for the right to challenge the determination and resolve the dispute by arbitration.

By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291 

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