November 18, 2020
A buyer of a manufacturer often prefers an acquisition of assets as opposed to equity of the seller in order to minimize the risk of post-closing product liability claims.
This deal involved the acquisition of the assets of a treadmill manufacturer. In the asset purchase agreement the buyer assumed only the seller’s written repair or replace warranty and expressly stated that the buyer was not assuming any other seller product liability.
Before the closing the seller had sold a treadmill to a gym. One day while using the treadmill, a woman fell, striking her head. She later died due to her injuries from the fall.
The family sued the buyer in a Texas state court, claiming that the buyer had assumed the Texas version of the Uniform Commercial Code’s implied warranty of merchantability. The trial court ruled in favor the buyer and the family appealed to a Texas intermediate appellate court. The appellate court reversed finding that the buyer assumed seller’s implied warranty of merchantability under a rationale not clear to this writer.
The buyer appealed to the Texas Supreme Court which reversed, ruling in the buyer’s favor. The Texas high court held that the buyer, as an asset buyer, only had assumed seller’s duty to the deceased woman’s estate under an implied warranty of merchantability if the buyer expressly assumed the seller’s implied warranty of merchantability in the asset purchase agreement.
And the buyer did not, only promising to assume the written repair and replace warranty: “Based on the asset-purchase agreement’s plain and unambiguous language, the Buyer’s express assumption of the written warranty for repair or replacement of defective treadmill parts was not an assumption of a warranty of merchantability implied by law. Accordingly, the Buyer was entitled to summary judgment. We reverse the court of appeals’ judgment to the contrary and render judgment that the Koubas take nothing on their implied warranty of merchantability claim.”
This case is referred to as Northland Industries, Inc. v. Kouba, No. 19-0835, Supreme Court of Texas, (Argued October 7, 2020, Opinion Delivered: October 23, 2020)
This was the right decision. The buyer had clearly only assumed the repair or replace warranty. The ruling for the deceased woman’s estate in the Texas intermediate appellate level included a strong dissent from the chief justice of this Court of Appeals of Texas, First District, Houston.
By John McCauley: I help people manage M&A risks involving privately held companies.
Telephone: 714 273-6291
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