Court holds that the buyer of the assets of a business assumed seller’s loan obligation to a creditor of a division the buyer did not purchase

The seller produced washer products. A medical device manufacturing company wanted the seller to make it an ultrasonic medical device washer product. The seller did not have the money to produce it.

So, the customer, which we will call the creditor, loaned the seller $583 K to make the medical device, pursuant to a loan agreement dated December 30, 2013. The loan agreement required the seller to repay the seller’s creditor the full amount plus interest within twelve months. The seller proceeded to develop the washer product in its medical division.

In December of 2014, the buyer entered into an $872 K asset purchase agreement to purchase the seller’s assets, other than the assets in the medical division.

The asset purchase agreement included provisions related to the buyer’s assumption of seller liabilities. Under the asset purchase agreement, the buyer assumed all of the seller’s “executory obligations of [the seller’s] continued performance arising in the ordinary course of business under any contracts and commitments that become performable or payable on or after the Closing Date[.]”

The deal closed December 19, 2014.

After the closing, the seller defaulted on its obligation to pay the creditor the principal and interest on the $583 K loan. Six months later, the creditor sued the buyer for payment, claiming that the buyer had assumed the obligation to pay off the creditor’s loan.  The buyer resisted, claiming that it did not buy any medical division assets or assume any medical division liabilities; which would include the creditor’s $583 K loan.

The court disagreed holding that the buyer assumed the loan when it agreed to the above language in quotations.

This case is referred to as Intuitive Surgical Operations, Inc. v. Midbrook, LLC,   Case No. 2:17-cv-10391, United States District Court, E.D. Michigan, Southern Division (June 25, 2018).

Comment. A buyer is stuck with the liabilities of the seller if it buys the stock of the company (if the seller is a corporation or buys all the membership interests if the seller is an LLC). The buyer can generally pick and choose which of seller’s liabilities it will be responsible for if the acquisition is structured as an asset purchase. Generally, an asset buyer only picks up seller liabilities that the buyer expressly assumes in the asset purchase agreement.

Here, the buyer had to know about the loan. It certainly was on the balance sheet. It would have been easy to expressly state in the asset purchase agreement that the buyer was not assuming the loan.  A buyer should make sure that the asset purchase agreement clearly states what liabilities the buyer is assuming as well as the liabilities the buyer is not assuming.

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

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