Buyer May Pay $1.2 Million Twice for Seller Assets Subject to Financing Statement

Introduction

One of the legal risks when purchasing a business is purchasing assets that are collateral for a loan.

The deal

This is a follow up to a deal where the buyer purchased the assets of a seller that made video lottery machines. See http://www.mk-law.com/wpblog/business-buyer-risks-loss-of-assets-to-secured-creditor/

The buyer apparently did not do a UCC search in Nevada, the state where the seller was incorporated, or it would have discovered that all of the seller’s personal property, which would include the machines and associated location contracts were secured as collateral under a $1.5 million loan made to the seller by a secured lender.

The lawsuit

After the closing, the buyer placed some of the video lottery machines in restaurants in Maryland, pursuant to location contracts. The buyer had paid the seller $1.2 million for the Maryland video lottery machines.

The seller defaulted its $1.5 million loan. The buyer sued the buyer in a Maryland federal district court and obtained a preliminary injunction from the court ordering that the revenue the restaurants paid the buyer from the Maryland machines be placed in trust pending the outcome of the lawsuit.

Later, the court granted the secured lender summary judgment and ordered the buyer to pay the secured lender the value of the Maryland machines in the amount of $1.2 million plus pre-judgment interest of $150K.

This case is referred to as Potts v. Maryland Games, LLC, Civil Action No. CBD-18-3250, United States District Court, D. Maryland, Southern Division (September 27, 2019)  

Comment

This is a strong reminder to buyers. Do a proper UCC search or you may pay twice for the assets of the target business. There is more than one place to search for UCC financing statements. But at a minimum you need to check the financing statements filed with the state where a seller entity is incorporated or if not an entity, with the state where the individual seller resides.

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