Explore the legal implications of purchasing a business’s assets instead of the entire company. Learn how seemingly innocuous actions can lead to contract assumption and potential liabilities, as illustrated by a real case involving a bar purchase in Boise.
May 2, 2020
Introduction:
When purchasing a business, buyers often prefer acquiring its assets rather than the entire company. This allows them to choose which contracts they want to take on from the previous owner. Normally, a buyer explicitly selects contracts to assume in the asset purchase agreement. However, some contracts can be assumed based on the buyer’s actions after the deal is done.
The Situation:
Let’s take an example of a recent deal involving the purchase of a bar in Boise. The seller had a contract with a linen service provider that renewed automatically every 5 years, unless terminated during the final 90 days of the term.
The Problem:
The seller initially made the linen service agreement in 2011 and sold the bar in 2013. The new buyer kept using the linen service without formally agreeing to it. The supplier continued delivering and laundering linens while the buyer paid accordingly.
When the 5-year term ended in March 2016, neither party terminated the contract. The buyer even used the supplier’s services for an additional year before switching to a cheaper vendor.
The Consequence:
The supplier sued the buyer in an Idaho state court, claiming the buyer breached the contract. The buyer argued they hadn’t assumed the contract, but the court disagreed. The court ruled that the buyer’s behavior—receiving the linen services for 4 years—implied contract assumption. The court ordered the buyer to pay the supplier $51,000 for damages, legal fees, and costs.
The Result:
The buyer appealed the decision but lost in the Idaho Supreme Court.
Key Lesson:
For those buying business assets, it’s crucial to carefully review all important contracts before completing the purchase—even contracts you don’t plan to formally assume. Continuing any relationship with the other party, whether they’re a customer or supplier, could still make you responsible for those contracts in unexpected ways.
Case Reference:
This case is referred to as Alsco, Inc. v. Fatty’s Bar, LLC, Docket No. 46184 Supreme Court of Idaho, Boise, December 2019 Term (Opinion Filed: April 14, 2020).
By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.
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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