Business Buyer Sues Seller for Undisclosed Poor Unemployment Insurance Experience Rating

Introduction

An asset business buyer can sometimes see its post-closing unemployment or workers compensation insurance experience rating unexpectedly jump after acquiring a business.

The deal

In this case, a company with a normal New York unemployment insurance experience rating acquired the assets of another company. The acquisition agreement included many provisions designed to minimize the buyer’s successor liability risks.

This included: an identification of the seller risks that buyer assumed; and a promise from the seller to take care of the rest of its liabilities. Seller also represented and warranted that it was in compliance with all applicable laws; that it had paid all its taxes; that it had disclosed to the buyer all of its liabilities on its financial statements, other than certain liabilities that accrued after the last balance sheet that were in the ordinary course of business, or that were scheduled on an exhibit to the acquisition agreements.

The seller also promised in its agreement to take care of all of its taxes; and to indemnify the buyer for any loss it suffers arising out of (a) any inaccuracy in or breach of a seller representation or warranty; (b) any default by the seller of any of the promises it had made to the buyer in the acquisition agreements; and (c) the failure of the seller to take care of any of its liabilities not expressly assumed by the buyer.

The lawsuit

After the closing, the buyer was notified by the state of New York that its unemployment insurance experience rating was significantly raised as a result of acquiring the seller’s business, which had a poor experience rating; resulting in higher unemployment insurance premiums for the buyer. Buyer had not known about the seller’s bad experience rating.

The buyer and seller ended up in a state New York court over this issue. Both the buyer and the seller tried to resolve the dispute before the judge by summary judgment. The court denied both the buyer and seller motions; saying that the court needed to see more facts.

However the court at the end of the decision talked about how the buyer never had a chance to deal with this issue before the closing because the seller did not disclose the problem to the buyer: “(the buyer) … contends that … (the seller’s) … failure to disclose its negative balance with the Department of Labor constitutes a violation of its obligations under section 3.20 of the APA to disclose any debts, liabilities or financial obligations not listed in its 2009 financial disclosure. … (The seller’s) … argument that … (the buyer) … could have addressed the consequences of the transfer of the negative account balance by negotiating a different purchase price for the asset transfers is undermined by the fact that the existence of … (the seller’s) … negative balance was never disclosed to” the buyer.

This case is referred to MRC 56 Corp. v. Weeks-Lerman Group, LLC, Docket No. 650201/2018, Motion Seq. No. 001, Supreme Court, New York County, (July 3, 2019)  https://scholar.google.com/scholar_case?case=5067779680365733048&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017

Comment 

Part of due diligence for a buyer in an asset acquisition is to ask if there is any risk that buyer’s workers compensation or unemployment insurance will go up as a result of the seller’s experience rating.

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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Posted in seller's unemployment experience rating, seller's workers compensation experience rating, successor liability, Uncategorized

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