The asset purchase agreement did not say that the unused portion of the deposit was to be returned to the seller. The court said the unused portion of the deposit was refundable and a refund two years after the closing was reasonable.
M&A Stories
March 15, 2023
Introduction
In a recent case, a buyer who acquired the assets of a homebuilding company was obligated to return the unused portion of a $250,000 warranty deposit to the seller. The court determined that the deposit was refundable, and it was reasonable for the refund to take place two years after the closing.
Background
The seller, a homebuilder, sold its assets to the buyer. As part of the agreement, the buyer was responsible for providing warranty services for homes sold prior to the closing. To ensure funding for these services, the buyer retained $250,000 of the purchase price as a deposit.
The lawsuit
Subsequently, a lawsuit ensued in a Georgia federal district court. The seller filed a claim seeking to recover the unused portion of the deposit, while the buyer argued that the purchase agreement did not require them to return any portion of the deposit.
Court Ruling: The court denied the buyer’s motion to dismiss the claim. It concluded that the use of the term “deposit” implied that it was refundable. Additionally, the court deemed the second anniversary of the closing as a reasonable timeframe for the return of the unused deposit.
See American Southern Homes Holdings, LLC v. Erickson, Case No. 4:21-CV-95 (CDL), United States District Court, M.D. Georgia, Columbus Division, (August 19, 2022).
Comment
This situation could have been avoided if the agreement explicitly stated that the unused portion of the deposit would be returned to the seller on a specific date. Clearly defining such terms in agreements can prevent unnecessary complications and disputes.
Overall, the court’s decision reinforces the importance of including key terms in agreements to avoid potential risks and uncertainties.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
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