Explore a recent M&A case where a buyer’s decision to back out of an asset purchase agreement led to a defamation claim by the seller. Learn about the legal proceedings and the court’s ruling in this bankruptcy-related merger case.
August 31, 2023
In a recent bankruptcy-related merger and acquisition (M&A) case, a buyer’s decision to back out of an asset purchase agreement has led to a defamation claim by the seller.
This case revolves around the sale of assets from a pellet mill situated in a small town in South Carolina. The seller, a manufacturer of biomass wood pellets, had entered bankruptcy proceedings in a South Carolina court.
The buyer was the sole bidder for the business and entered into an agreement to purchase the assets, accompanied by a $250,000 deposit. However, during the due diligence process, the buyer was informed by the town administrator about significant issues with the business.
According to the town administrator, the pellet mill had not renewed its business license and had been non-operational for a considerable period, effectively shutting down. Consequently, the business would need to restart the permitting process, with no assurance of obtaining the necessary permits due to problems with the town’s noise ordinance.
Based on this newly acquired information, the buyer chose to terminate the purchase agreement as part of the bankruptcy proceedings.
In response, the buyer initiated legal action in the bankruptcy court, seeking damages. The allegations included breach of the purchase agreement, fraud, and unfair trade practices. In return, the seller filed a counterclaim, asserting defamation. The buyer then sought the court’s dismissal of the defamation claim, requesting a final decision (dismissal with prejudice).
The court ultimately dismissed the seller’s defamation counterclaim with prejudice. The court’s reasoning was grounded in the concept that the buyer had a legal safeguard against defamation claims for any statements made within the context of the bankruptcy proceedings. Moreover, the seller was unable to establish any instances of defamatory statements made outside the realm of the bankruptcy proceedings, despite two attempts.
It is uncommon for a buyer to face a defamation lawsuit due to withdrawing from a deal following thorough due diligence. However, this case underscores the importance of buyer discretion when discussing the seller or its business with individuals unrelated to the transaction.
See In Re Jasper Pellets, LLC, C/A No. 22-01409-EG, Adv. Pro. No. 22-80045-EG, Consolidated with Adv. Pro. No. 23-80033-eg, United States Bankruptcy Court, D. South Carolina (July 6, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Telephone: 714 273-6291
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