One of the problem assets in an acquisition can be the seller’s accounts receivable.
A buyer may want to manage the risk of bad receivables by providing for a post-closing adjustment to the purchase price.
This case involved the July 2015 purchase of the assets of a medical billing company, pursuant to an asset purchase agreement. One large seller receivable was with a customer that paid the seller a percentage of the customer collections from the medical billings handled by the seller.
After the closing, this customer refused to pay most of this receivable, claiming that the seller failed to perform its contractual responsibilities, causing the customer to lose the ability to collect on many of its medical claims. Furthermore, the customer claimed that the seller had agreed before the closing to write off the pre-2015 receivables. This was news to the buyer.
This customer then sued both the seller and the buyer, and the litigation ended up in a Pennsylvania federal district court. The buyer turned around and sued the seller. The buyer asserted that the seller warranted that the customer receivables were valid obligations, and any alleged seller agreement to write off the pre-2015 accounts receivable would breach this warranty.
The seller denied that it had agreed to the write-off. The court said that seller would be responsible to the buyer for the write-off if the evidence at trial establishes that there was a write-off.
The buyer also wanted the seller to indemnify the buyer for any loss it suffers from defending the lawsuit brought against it by the customer. The court said no. There was nothing in the asset purchase agreement requiring the seller to indemnify the buyer for any loss the buyer suffers from the customer’s lawsuit against it.
This case is referred to Moore Eye Care, PC v. ChartCare Solutions Inc., Civil Action No. 15-cv-05290, United States District Court, E.D. Pennsylvania, (March 7, 2019).
Often the purchase price is adjusted after the closing for receivables that prove uncollectible. This provision is often secured by a hold back of a deferred portion of the purchase price or by an amount put in escrow.
The buyer could have also got the right to be indemnified for lawsuits filed against it arising out of seller’s operation of the business before the closing. This protection would often be found in the indemnification clause of the purchase agreement.
By John McCauley: I help businesses minimize risk when buying or selling a company.
Telephone: 714 273-6291
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