Explore the legal intricacies of M&A in our latest blog post as we dissect a riveting case, “Liberty Mutual Fire Insurance Company v. BRG Sports, Inc.” Uncover the aftermath of an undisclosed design flaw in an asset purchase agreement that led to a product liability battle. Delve into the court’s ruling, emphasizing the buyer’s insurance carrier’s right to sue for indemnification. Learn valuable lessons on due diligence and disclosure to safeguard M&A transactions. Stay informed on the latest legal developments in the M&A landscape.
M&A Stories
July 6, 2018
In this M&A story, we delve into a legal battle arising from an April 9, 2012 asset purchase agreement between a buyer and a seller. The buyer acquired assets, including the design of the seller’s exercise equipment, and subsequently launched its own product line based on this design.
Two years later, the buyer faced a lawsuit from a customer who alleged that the product malfunctioned, causing injury. Shockingly, the seller’s product had been recalled in 2011 due to the same defect, information not disclosed to the buyer during the asset purchase.
The buyer’s insurance carrier defended the lawsuit, settling for $650,000 and incurring $155,000 in defense costs. Seeking recourse, the carrier filed a lawsuit against the seller to recover these expenses, alleging a breach of the asset purchase agreement.
The court ruled in favor of the carrier, stating that it inherited the buyer’s right to sue the seller for breaching the agreement. The seller’s failure to disclose the design flaw and recall constituted a breach of representations and warranties, specifically regarding compliance with laws and regulations.
The product recall was tied to a design defect, rendering the product illegal to sell, thereby violating products liability tort law. The court affirmed the carrier’s entitlement to indemnification, emphasizing the seller’s obligation to indemnify the buyer for liabilities not assumed, including damages from legal proceedings related to pre-closing design deficiencies.
In a recent case, Liberty Mutual Fire Insurance Company v. BRG Sports, Inc., the United States District Court, E.D. New York (June 21, 2018), denied the seller’s motion to dismiss the carrier’s lawsuit.
This case underscores the importance of thorough due diligence in M&A transactions, highlighting the need for sellers to disclose all material information to mitigate the risk of post-closing legal complications.
Case Reference:
This case is referred to as Liberty Mutual Fire Insurance Company v. BRG Sports, Inc., No. 1:17-cv-2290(FB)(LB), United States District Court, E.D. New York (June 21, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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