Generally, a cash buyer of the assets of a business is not responsible for the defective products made by the seller, unless the buyer assumed those liabilities in the asset purchase agreement.
However, California started imposing the seller’s product liabilities upon certain asset buyers in 1977, and several states have followed.
This case is about a 1984 acquisition of a company that made valves. There the buyer expressly disclaimed in the asset purchase agreement any responsible for any seller liabilities.
A plumber and his wife sued the buyer in a New York state court in 2014. They alleged that the plumber installed and removed seller valves, and that he may have been exposed to asbestos containing dust from gaskets, internal packing, and external insulation. The plumber alleged that due to his work asbestos-containing dust settled on his work clothing, and his wife was then exposed to this asbestos dust from washing his work clothing
The buyer and seller’s asset purchase agreement had an Indiana choice of law provision and Indiana had adopted the products line exception. Therefore, the plumber and his spouse argued that the buyer was responsible for the seller’s asbestos product liability.
The court disagreed: “This language only specifies that contractual disputes (i.e., breach of contract claims) amongst the parties to the “agreement” will be governed by Indiana law. The above language does not, however, go so far as to state that tort claims not arising directly out of the contract and the parties thereto are also governed by Indiana law.”
Instead the court applied New York law, which did not recognize the product line exception. The buyer was dismissed from the lawsuit.
This case is referred to In Re New York City Asbestos Litigation., Docket No. 190364/2014, Motion Seq. No. 005, Supreme Court, New York County, (May 20, 2019)
A typical choice of law provision in a purchase agreement is designed to pick the applicable law for interpreting the contract; not to pick state law for resolving other disputes.
In buying the assets of a business, most states only make the buyer responsible for the liabilities of the seller that the buyer expressly assumes in the asset purchase agreement. Beyond that, the buyer needs to look at the applicable state’s successor liability law exceptions for any buyer responsibility for unassumed seller liabilities.
In many states, the successor liability law may impose seller unassumed liability on an asset buyer that pays for the business with buyer equity, in whole or part. And in a few states, including California, the successor liability law may impose seller unassumed liability on an asset buyer in an all cash deal, for seller’s product liabilities.
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Telephone: 714 273-6291
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