The buyer of a company is sued for defamation by the seller’s owner for telling former seller employees that the seller’s owner had mishandled their health insurance premium contributions.
M&A Stories
May 22, 2023
Introduction:
In a unique legal case, a business buyer is being sued for defamation by the owner of the company they purchased. The lawsuit arises from statements made by the buyer to former employees of the seller, alleging that the owner had mishandled their health insurance premium contributions, leaving them uninsured.
The Background:
Before the acquisition, the seller provided health insurance to its employees by deducting a portion of their wages. However, due to financial difficulties, the seller terminated the health insurance coverage in December 2020 and filed for bankruptcy shortly after.
The buyer acquired the seller’s assets in January 2021 and subsequently hired the former employees, including the owner. In a meeting held in June 2021, the buyer’s management learned that the former employees had outstanding medical bills due to the lapse in health insurance coverage. When asked about the deducted money for healthcare, the employees were informed by the buyer that the seller’s owner was responsible for not remitting their health insurance premium contributions to the carrier, resulting in their uninsured status from mid-December 2020 to January 22, 2021.
Upon investigation, the buyer placed the seller’s owner on paid leave and ultimately terminated their employment in October 2021, as the owner had claimed to have sent the funds to the health plan manager.
The Lawsuit:
The owner filed a defamation claim, arguing that the buyer had falsely accused him of mishandling the employee health insurance premium contributions, causing harm to his reputation. The buyer sought to dismiss the defamation claim through a motion for summary judgment, requesting the court to rule in its favor.
The court granted the buyer’s motion for summary judgment, dismissing the defamation claim with prejudice. The court agreed that the buyer’s communication to its employees regarding the investigation of their concerns was subject to conditional privilege.
See Farber v. H & K Perforating QPI, LLC, Civil Action No. 3:21-CV-01723, United States District Court, M.D. Pennsylvania (May 10, 2023)
Comment: Buyers should exercise caution when discussing the previous management or owners of the acquired company with former employees after the completion of a sale. Careful wording and consideration of potential legal consequences can help prevent defamation claims.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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