Asset Purchase of Spa Shields Buyer from Seller Employee Claim

Introduction

You want to buy an existing business. You select your target business, a purchase price and payment terms. Now what?

You talk to your accountant, lawyer or other adviser about how to do the deal. Your adviser asks you if the business is operated as a corporation or LLC (limited liability company). You say that it is a corporation or LLC.

That leads to a discussion of managing the risk of doing the deal.  And usually the first risk management issue in doing a deal is whether you will buy the assets of the business from the corporation or LLC or buy the stock of the corporation (or equity of the LLC).

What do you do? Well, buying stock means that you get all the company’s assets; but you also get all the company’s liabilities. If you buy the assets of the business, you can pick and choose which assets you want and which liabilities you will assume (subject to some significant exceptions).

The deal

In this case a couple wanted to buy an existing spa business that was conducted as a corporation. They formed a corporation and purchased the assets of the spa and assumed only certain of the spa’s liabilities that were described in the asset purchase agreement.

The deal closed in November 2013.

The lawsuit

After the closing a former employee of the seller corporation sued the buyer and the seller’s owner in a New York state court. The employee claimed that she was sexually assaulted by seller’s owner in May of 2013.

The buyer asked the court to throw out employee’s claim against the buyer in a motion for summary judgment. The buyer proved it was formed and purchased the spa 5 months after the alleged sexual assault; and the asset purchase agreement’s description of the seller liabilities assumed by the buyer did not include any liability to the employee. Furthermore, the buyer stated that neither the buyer nor its owners ever had an interest in the seller corporation; nor did the seller corporation or the seller owner have any interest in the buyer corporation.

The employee offered no evidence to counter buyer’s proof other than a reference in the first paragraph of the asset purchase agreement to the seller’s owner as the buyer. The court was not impressed with what was probably a typographical error, noting that the buyer corporation clearly signed the asset purchase agreement as the buyer, and the bill of sale clearly transferred the spa assets to the buyer.

The employee argued that it should be permitted to continue the lawsuit so it could conduct more discovery to see if the seller’s owner had some interest in the spa business owned by the buyer. The court said no and threw out the employee’s claim against the buyer.

The court concluded that the evidence provided by the buyer clearly established that the buyer purchased the assets of the spa long after the alleged assault; and the buyer did not assume the seller’s liability to the employee.

This case is referred to Wilkow v. Araque, Docket No. 154300/2014, Motion Seq. No. 002, Supreme Court, New York County, (March 11, 2019) https://scholar.google.com/scholar_case?case=6871192005474678056&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017.

Comment

In addition, the court granted the buyer $2,500 as sanctions against the employee’s lawyers for filing a frivolous claim against the buyer.

The buyer owners also managed this risk by forming a corporation to buy the assets. Otherwise, the buyer owners would have exposed their personal assets to the employee’s lawsuit.

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

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

Telephone:      714 273-6291

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