Today I want to talk about a lesson to learn from Danny, whose company (“Buyer”) purchased an RV business from Doug’s company (“Seller”). It was a simple deal. In March of 2013, Buyer purchased RV business assets from Seller. Buyer also leased the RV business facility and land from Doug’s trust:
… the insurance coverage required by the parties’ lease, which required … (Buyer) … to maintain insurance coverage in the amount of the replacement value of any improvements erected on the property. Replacement-value insurance covers the cost of replacing a structure, whereas actual-cash-value insurance takes depreciation into consideration and essentially covers only market value of the structure.
Buyer did not buy the required and more expensive replacement value insurance; he purchased cheaper actual-cash-value insurance. Then disaster struck: “In April 2014, a tornado struck the Mayflower property, causing substantial damage.”
The cost to replace the facility was about $600 K. The insurance carrier paid the actual-cash-value to Buyer; which was only $450 K. Buyer offered Seller the $450 K on the condition that Seller release Buyer for liability to pay for the $150 K uninsured portion of the loss. Seller refused and went to court.
The court ultimately ordered Buyer to hand over the $450 K to Seller, and pay Seller the $150 K uninsured portion of the loss. Furthermore, Buyer was ordered to pay Seller $230 K as punitive damages as punishment for what Buyer did.
This Arkansas Court of Appeals case is referred to as DWB, LLC v. D&T PURE TRUST, 2018 Ark. App. 283, No. CV-16-1131, Court of Appeals of Arkansas, Division II (May 2, 2018).
Comment. Buyer’s first mistake was not insuring the facility for replacement value. Buyer saved premium dollars but was unlucky. The facility was totaled by a tornado. That mistake cost him over $150 K; the additional cost to replace the facility over and above the $450 K amount of insurance proceeds.
But then Buyer made it worse. Buyer offered the $450 K insurance check to Seller upon condition that Seller give up its right to demand that Buyer pay for the uninsured portion of the cost to replace the facility. That tactic cost Buyer an additional $230 K in punitive damages.
The lesson here is that a buyer or a seller that ignores the clear requirements of an acquisition document provision risks incurring damages, which can in some cases include punitive damages. Also, most acquisition documents would also stick the defaulting party with the other party’s reasonable legal fees and cost.
By John McCauley: I help people start, grow, buy and sell their businesses.
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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