New York federal court says dry cleaner asset buyer was not responsible for seller’s federal wage and hour liability

Seller was formed in 2007, which operated as a dry cleaning business in Manhattan that did business as Slayton Cleaners. Seller retained seven employees, including one front-desk attendant, one helper, two ironing persons, one spotter, one driver, and one tailor. Employee worked at Seller, and later Buyer, as an ironer from 2004 to about February 5, 2017.

Owner of Buyer formed Buyer in February 2016. Owner of Buyer and Owner of Seller began discussing the purchase of Seller’s dry cleaning business in the beginning of 2016. According to Owner of Buyer, Owner of Seller assured him during the negotiations to purchase Seller’s dry cleaning business that Seller had complied with all applicable laws and was free from any legal liability or debt. Owner of Buyer stated that Buyer did not review any documents or conduct any due diligence research in preparation for the sale. During their negotiations, Owner of Buyer’s investigation into the business appeared to have consisted only of asking Owner of Seller about how much gross income Seller generated.

Seller sold assets consisting of its goodwill, leasehold interest, all equipment, supplies, trade name, fixtures, furnishings and improvements to Buyer on April 5, 2016, for a purchase price of $350,000. In the Bill of Sale, Owner of Seller warranted that there were no pending lawsuits or judgments against Seller or other legal obligations which may be enforced against the transferred assets. $100,000 was paid upon closing and the remaining $250,000 was financed by a promissory note signed by Owner of Buyer, both individually and as a representative of Buyer. Pursuant to this note, Buyer was required to remit monthly payments of about $8.7K to Seller. Seller then assigned the lease of its premises to Buyer with the landlord’s consent.

Buyer, doing business under Seller’s trade name, continued to provide dry cleaning and laundry services in the same manner as Seller, using the same location and, for the most part, the same equipment. Initially, all Seller employees were retained by Buyer except for the driver, whose duties were absorbed by the driver for another cleaning business owned by Owner of Buyer. Owner of Buyer noted that Buyer paid the employees at the same rate as Seller had for the first week after the sale, but then increased their wages the next week. The front desk attendant resigned approximately one month after the sale, and the tailor left approximately one month later following an argument with the new front desk attendant.

On February 21, 2017, Employee sued Buyer and Seller, in a New York City federal court, for, among other claims, federal wage and hour violations. The court noted that Employee’s successor liability claims against Buyer depended upon several factors. But, the court said that Buyer’s responsibility for the federal and hour claims would probably require that Buyer had pre-closing notice of the wage and hour problems and that Seller was unlikely to have the ability to pay off its federal wage and hour debts.

The court had no problem with finding that Seller could handle the wage and hour debts. It then looked at whether Buyer had pre-closing notice of the wage and hour issue.

The court noted that Seller assured Buyer prior to the sale that the business was in compliance with all laws and was debt-free. Also, the acquisition documents included Seller’s warranty that there were no unsatisfied pending lawsuits, judgments, or legal obligations associated with the business.

Employee nevertheless argued that that Buyer should be held to have had constructive knowledge of the Seller’ alleged federal wage and hours law violation because Buyer failed to exercise due diligence which would have disclosed the problem and that a due diligence obligation for Buyer was favored for policy reasons so as to encourage Buyer to get the whole story and adjust Buyer’s offer accordingly (for example, to permit Buyer to pay a portion of the purchase price to satisfy Seller’s wage and hour liability).

The Court was not persuaded by Employee’s argument, saying that there is no general duty of due diligence required of the purchaser of a business, and that imputing such constructive notice is appropriate only when certain red flags, such as the suspiciously low purchase price and uncharacteristically quick closing, would lead a buyer of a business to inquire further into the circumstances of the transaction.

Therefore, the court held that Buyer was not responsible for Seller’s federal wage and hour debt.

This case is referred to as Diaz v. Slayton One Cleaner Inc., No. 17 CV 1311-LTS-KNF, United States District Court, S.D. New York (October 11, 2018).

Comment. This decision makes sense. Buyer handled this relatively small acquisition with prudence. Seller told Buyer there were no legal problems with the business and represented and warranted in the transaction documents that there were no legal problems.

In a small deal in New York the court is saying that you probably don’t have to do due diligence to look for federal wage and hour violations unless there are some red flags which would make a reasonable person dig deeper.

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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The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in due diligence, federal wage and hour violations, successor liability

Seller of pressure washer business had to go an extra mile to recover unpaid purchase price from buyer

For thirty-two years, Seller owned and operated Midwest Cleaning Systems, a northeast Iowa business that sold and serviced pressure washers and cleaning equipment. For the last thirty years, the business sold and serviced Alkota brand equipment. When Seller decided to sell the business, Buyer was one of four people interested in buying it.

On September 23, 2014, Seller and Buyer signed an asset purchase agreement. Buyer agreed to purchase the assets of Midwest Cleaning Systems. The asset purchase agreement called for Buyer to pay $40,000 at closing with the remaining $80,000 plus interest due on or before December 1, 2015. The asset purchase agreement also required Buyer to execute a security agreement that granted Seller a security interest in all of the assets sold under the asset purchase agreement; which Buyer signed the same day Buyer signed the asset purchase agreement. Seller filed a UCC financing statement with the Iowa Secretary of State.

When Buyer failed to make the $80,000 plus interest payment by December 1, 2015, Seller contacted Buyer. Buyer thought the payment was due on December 31, not December 1. Buyer then sent Seller a check dated December 2, 2015 in the amount of $40,800. Since the check was not for the full amount due, Seller again contacted Buyer. Seller gave Buyer until March 1, 2016 to pay the balance due under the asset purchase agreement. Buyer only paid an additional $144.66 before the March 1, 2016 deadline. No further payments were made.

On November 23, 2016, Seller filed a petition with an Iowa trial court to foreclose on the collateral provided in the security agreement (the pressure washer business assets). Seller sought judgment against Buyer for $40,000 plus interest, attorney fees, and costs. Seller also requested an order granting Seller the right to possession of the collateral for a sale to be held with the net proceeds from the sale to be applied toward the judgment against Buyer.

Buyer denied Seller’ claims. Buyer’s primary reason for not paying the balance of the purchase price was because Buyer claimed that Seller had assured Buyer that the business had a defined, protected territory in which Midwest Cleaning Systems was the exclusive Alkota Dealer, which it did not.

Following a trial without a jury, the court found that Seller breached the asset purchase agreement. The court denied Seller’s petition and ordered Seller to pay court costs.

Seller appealed to the state’s intermediate court of appeals. The court of appeals reversed the trial court’s decision and ruled in Seller’s favor; meaning Seller could sell the business assets and apply the net proceeds to the remaining purchase price amount, plus interest, attorney fees and court costs.

This case is referred to as Valley v. Kiel, No. 17-1666, Court of Appeals of Iowa (October 10, 2018).

Comment. The evidence provided to the trial court should have given Seller a win. The main issue was whether Seller sold Buyer an exclusive distributorship business. The purchase documents were silent on the issue and the testimony between Buyer and Seller was conflicting.

So, Seller had to do extra work to get paid by litigating in the court of appeals.

A buyer in this situation should have reviewed the distribution agreement before signing the asset purchase agreement to see if it was exclusive. A buyer should also have required the seller to represent and warrant in the asset purchase agreement that the distribution arrangement was exclusive.

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

Telephone:      714 273-6291

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The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in buying distribution business, due diligence, securing deferred purchase price, security agreement

Buyer of stock of title and escrow company can enforce noncompete and nonsolicitation provisions in target’s employment agreements

Target was a title and escrow company located in West Jordan, Utah (greater Salt Lake City area). Target’s Manager and Target’s COO/general counsel signed employment agreements with Target. Target’s Manager’s employment agreement, executed in August 2003, stated that she would not compete against Target within a 40-mile radius of any of Target’s offices, during her employment with Target and for the following year. Target’s COO/general counsel’s employment agreement, executed in August 2004, limited Target’s COO/general counsel’s right to compete with Target during and after his employment there, and contained a nonsolicitation provision barring him from trying to recruit away Target employees. In May 2006 Target’s Senior VP of escrow operations signed an employment agreement with Target which contained nonsolicitation and noncompete provisions.

Between 2003 and February 2009, Buyer, a large southern California based company that provides comprehensive title insurance protection and professional settlement services for real estate transactions, acquired all of Target’s stock.

In later 2014, Target’s COO/general counsel’s created Competitor. He quit his job in March of 2015, when Competitor opened for business. The following day, Target’s Manager resigned and started at Competitor. Within two weeks, at least 25 other employees defected as well.

Buyer promptly sued Competitor, Target’s COO/general counsel, Target’s Manager, and Target’s Senior VP of escrow operations, alleging, among other things, breach by the former Target employees of their employment agreements. The lawsuit was filed in federal district court in Salt Lake City.

After a jury trial, the jury awarded Buyer $1.7 million in damages against the former Target employees, $1 million of compensatory damages against Competitor, $500K of punitive damages against Competitor and $2.9 million in attorney fees.

On appeal, the former Target employees argued that their signed employment agreements with Target terminated when Buyer purchased Target. Therefore, they argued, the agreements’ restrictive covenants were no longer valid and enforceable at the time the three former Target employees began working for Competitor.

The court rejected the argument saying that the law is clear that a purchase of a company’s stock does not terminate the company’s employment agreements it has with its employees.

This case is referred to as First American Title Insurance Company v. Northwest Title Insurance Agency, No. 17-4086, United States Court of Appeals, Tenth Circuit (October 9, 2018).

Comment. This case illustrates the difference between buying the assets of a business and buying the company that owns the business (stock of a corporation or the membership interests of an LLC).

When you buy the stock of a company, a company employment agreement is generally not terminated unless there is a “change of ownership” clause in the employment agreement.

Not so if you buy the assets of the business. In an asset deal it is more common to find a clause in the employment agreement (often in the assignment provision), that in effect, terminates the employment agreement if the seller tries to transfer the employment agreement to a buyer without the employee’s written consent.

A buyer is more likely to face getting a target employee’s consent involving an employment agreement in an asset deal than in a stock deal.

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

Telephone:      714 273-6291

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The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in asset vs stock deal, covenant not to compete, nonsolicitation of employees and customers

Buyer of business can’t stop release of escrowed funds to seller, because buyer did not follow the escrow agreement’s notice provision

Seller held a number of consumer debt accounts in Puerto Rico. Seller first approached Buyer about a possible sale of Seller’s debt accounts sometime in 2013 and, later that year, the parties entered into discussions. The accounts consisted of auto loans, charged-off consumer receivables, and charged-off credit card accounts owned by Seller and included, among other things, the right to collect in any litigation or bankruptcy.

On May 30, 2014, Seller sold the debt accounts to Buyer pursuant to a purchase agreement, a servicing agreement (where Seller’s affiliate would service the purchased accounts), and an escrow agreement.

The purchase agreement provided that Seller would indemnify Buyer for any losses Buyer incur as a result of the inaccuracy of any of Seller’s representations and warranties contained in the purchase agreement or the breach of any of Seller’s covenants contained in the purchase agreement or the origination, servicing, maintenance or administration of the accounts prior to the closing date. The indemnification obligations of Seller survived until May 30, 2017. Buyer provided no written request to Seller for indemnification before the May 30, 2017 deadline.

The purchase agreement then provided that Seller’s total liability and Buyer’s exclusive remedy with respect to the purchase agreement and the related servicing agreement was limited to the amount held in escrow. The escrow agreement required that $6 million be held in escrow for the satisfaction of any claims related to the purchase agreement, provided the terms for reduction of the escrow funds, and required that Buyer provide Seller with notice of each claim it had against the escrow funds.

To establish a timely claim, Buyer must have provided written notice of each pending claim and each anticipated claim to the escrow agent and to Seller prior to May 31, 2017.  In the absence of a timely claim by Buyer, the escrow agent must release the escrow funds together with any fund earnings to Seller on May 31, 2017.

On May 26, 2017 (Memorial Day), Buyer drafted a letter identifying legal claims against the escrow in relation to the purchase agreement. In this letter, Buyer claimed that Seller breached the servicing agreement: (1) by not forwarding funds received by Seller with respect to the purchased accounts to Buyer; (2) by not paying a required purchase price adjustment amount for ineligible accounts to Buyer; and (3) by misrepresenting the character of the purchased accounts, engaging in mass settlement activities, adversely selecting accounts to be sold, and excluding certain information relating to Seller’s activities from Seller’s records provided to Buyer.

Buyer’s senior vice president and general counsel gave the letter to his executive assistant to send. The executive assistant then sent the letter only to the escrow agent by facsimile and Federal Express. Buyer never sent a copy of the letter or any other form of notice to Seller. On May 30, 2017, the escrow agent informed Seller of the letter containing Buyer’s claims. Buyer conceded that the sole reason for its failure to provide notice to Seller pursuant to the purchase agreement and escrow agreement was human error on Buyer’s side.

On June 7, 2017, Seller asked Buyer to release the escrow funds and disputed the claims set forth in Buyer’s letter. Buyer refused to release the escrow funds.

On June 21, 2017, Seller filed a complaint in a Delaware court, seeking the release of the escrow funds.

The court noted that the escrow agreement required the release of the escrow funds unless Buyer had given Seller notice of Buyer claims against the escrowed funds prior to May 31, 2017. To establish a timely claim, the escrow agreement required that notice be sent to a specified Seller address, or by facsimile to a specified Seller location followed by a telephone call to Seller to confirm Seller’s receipt of the fax. If Buyer failed to provide notice by these methods by the expiration date, then the terms of the transaction documents negotiated by the parties dictated that the escrow funds should be released to Seller.

Buyer acknowledged that it did not comply with these requirements. But Buyer noted that the escrow agent made Seller aware of Buyer’s escrow claims before the expiration date. Buyer argued that because Seller received actual notice, the court should ignore the terms of the notice requirements in the escrow agreement, and not release the escrowed funds to Seller.

The court refused to ignore the plain language of the transaction documents and ordered the escrowed funds to be released to Seller.

This case is referred to as PR Acquisitions, LLC v. Midland Funding LLC, C.A. No. 2017-0465-TMR, Court of Chancery of Delaware (Decided: April 30, 2018).

Comment. The escrowed funds were Buyer’s primary security for representations that Seller made about the purchased accounts.

However, even if Buyer blew the deadline for suing for breach of the transaction documents, Buyer had a right under Delaware law to sue Seller for fraudulent misrepresentations. However, to sue for fraud, Buyer had to be reasonable in relying upon Seller’s misrepresentations; and by Buyer’s own omission, it had received enough data from Seller prior to closing to assess the truthfulness of Seller’s representations about the accounts. Therefore, Buyer could not maintain a fraud claim against Seller.

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

Telephone:      714 273-6291

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The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in escrow, fraud in business sale, notice provision, reliance

Buyer of company can’t offset its obligation to pay company pre-closing tax refunds to seller against buyer’s claimed larger indemnification claim against seller

Company is a gulf coast environmental remediation company. Buyer, an affiliate of private equity firm Halifax Group LLC, became interested in Company, which was then engaged in a profitable clean-up project.

On March 31, 2014 Buyer purchased Company from Sellers under a stock purchase agreement for approximately $100 million. The stock purchase agreement provided a series of Sellers representations and warranties regarding Company’s condition and financial statements, including, among other things, that its financial condition was fairly reflected in accordance with generally accepted accounting principles; that certain liabilities and obligations were either reserved against or reflected in its financial statements; and that senior management had not received any notice that certain customers intended to terminate or reduce their relationships with Company. The stock purchase agreement further provided that Sellers would indemnify Buyer for losses arising out of certain breaches of Company’s representations and warranties.

After the closing Buyer claimed that it discovered that Sellers made a series of false and misleading statements about Company’s financial reporting, its systems, and its growth prospects. Buyer alleged that, contrary to the requirements of multiple stock purchase agreement provisions, Company’s financial records were not maintained in accordance with generally accepted accounting principles and instead materially misrepresented the company’s financial state. Additionally, Seller’s financial reporting omitted expenses and overstated revenue, resulting in a purchase price that was inflated by more than $23 million.

Buyer sued Sellers after the closing in 2015 in a New York State court, in part, for indemnification for breach of the stock purchase agreement.

A year later, while Buyer’s lawsuit was pending, Sellers brought an action against Buyer and Company in the same New York court. Sellers sued to receive from Company $2.8 million of Company’s pre-closing tax refunds. It was undisputed that Company received about $2.8 million in pre-closing tax refunds that were payable to Sellers and that Buyer was required to cause Company to release the refunds to Sellers.

Nevertheless, Buyer refused to release the refunds to Sellers because of their larger indemnification claim Buyer had against Sellers in the earlier lawsuit.

The court said that Buyer had to cause Company to release the refunds to Sellers.  There was nothing in the stock purchase agreement that permitted Buyer to setoff or offset Seller’s refunds against Buyer’s larger indemnification claim.

This case is referred to as Cricket Stockholder Rep, LLC v. Project Cricket Acquisition, Inc., Docket No. 651454/2016, Motion Seq. No. 001, Supreme Court, New York County (May 10, 2018). https://scholar.google.com/scholar_case?case=4864837335428147567&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017#r[1]

Comment. The result would have been different if Buyer had a setoff or offset right provision in the stock purchase agreement. However, a seller may resist putting the provision in the purchase agreement.

Under a setoff or offset provision, a buyer has the right to offset indemnification claims it may have against the seller under the purchase agreement, against any post-closing payment obligations that buyer owes to the seller, such as deferred purchase price, noncompetition or consulting payments, or the payment of prorated tax refunds.

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

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in offset or setoff provision

Buyer’s fraud claim failed because buyer did not allege facts that seller intentionally or recklessly omitted material facts from a stock purchase agreement disclosure schedule

Target, a 100% subsidiary of Seller, owned and operated an open—pit gold mining operation in Colorado. At some point prior to November 2014, Seller’s general counsel and another senior executive knew that a third party allegedly acquired the mineral interests on a plot of land on Target’s property adjacent to the mill, which will be referred to as the plot.

In early 2015, Seller began marketing Target for sale and sent Buyer an offer to sell the company. On June 8, 2015, Buyer and Seller entered into a stock purchase agreement in which Buyer agreed to purchase 100% of Target’s stock for approximately $820 million.

The deal closed in New York City on August 3, 2015. Seller’s general counsel attended the closing. Neither at nor prior to closing did Seller’s general counsel or others at Seller inform Buyer about any third party’s ownership of the mineral interests in the plot.

Buyer filed this action on October 19, 2017, seeking damages from Seller relating to the mill’s deficiencies, including those related to the third—party mineral interest in the plot, in part based upon Seller’s fraud. Seller asked the court to dismiss this claim, in part, because Buyer did not allege facts that Seller intentionally or recklessly failed to disclose the third-party mineral interests in the plot.

The court reviewed Buyer’s factual allegations. In the filed complaint Buyer said that it learned after the closing that Seller knew about the third-party mineral interest in the plot before the closing and failed to disclose the mineral interest to Buyer before the closing.

The court noted that Seller was required to tell Buyer, before closing, about this matter in a disclosure schedule to the stock purchase agreement that Seller delivered to Buyer. In that schedule, Seller represented and warranted that the schedule was a true and complete list of all royalties, overriding royalties, net profit interests, or payments on or out of production on all Target properties for which Target did not have 100% ownership. Seller provided the disclosure schedule; but the schedule did not include the third-party mineral interest in the plot.

The court concluded that these allegations of fact if true would not prove that Seller fraudulently omitted the third-party mineral interests in the plot from the disclosure schedule. Court said that Buyer can establish fraudulent intent either (a) by alleging facts to show that Seller had both motive and opportunity to commit fraud, or (b) by alleging facts that constituted strong circumstantial evidence of conscious misbehavior or recklessness.

There were no factual allegations of a smoking gun such as a Seller email that talked about hiding the third-party mineral interests from Buyer or an allegation of facts that Seller had a motive to commit fraud.

Therefore, the court dismissed the fraud claim but granted Buyer the chance to file an amended complaint, if it can, that contains factual allegations that the omission from the disclosure schedule was intentional or reckless.

This case is referred to as Newmont Mining Corporation v. AngloGold Ashanti Limited, No. 17-CV-8065 (RA), United States District Court, S.D. New York (September 30, 2018).

Comment. Disclosure schedules are a great way to force a seller to tell the buyer about all of the problems with the business.

In this case, Seller did not tell Buyer about third-party mineral interests.  That was a breach of a representation and warranty and the basis for a breach of contract claim. Unfortunately, Buyer could not bring a breach of contract claim because Buyer had agreed in the stock purchase agreement that it must bring a breach of contract claim by the end of 2016; and it sued Seller in 2017.

However, the end of 2016 deadline did not apply to fraud claims.

But fraud claims are much more difficult to win. In this case Seller’s omission of a crucial negative fact from a disclosure schedule is not fraud, unless the omission was intentional or reckless. In this case Buyer did not have any facts that if true could establish that the omission was intentional or reckless.

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

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in fraud in business sale, fraudulent intent, fraudulent omission

Seller of target company’s release given in stock purchase agreement bars reimbursement claim of seller’s parent against target

Shareholder’s Parent is a leading North American provider of environmental services to commercial and governmental entities. Until November 1, 2015, Shareholder’s Parent indirectly owned all of the issued and outstanding stock of Target through its wholly-owned subsidiary, Shareholder.

Shareholder provides turnkey environmental services, specializing in industrial cleaning and maintenance, waste transportation, and environmental management services. Target is an environmental services and waste management organization.

Shareholder’s Parent historically purchased certain automobile/general liability and workers’ compensation insurance policies to provide coverage for itself and its subsidiaries, including Target. The policies were occurrence-based, meaning that they provided coverage for events that took place during their policy periods regardless of when a claim ultimately is made against the insured. The underlying claims at issue in this suit all relate to events that occurred while Target was Shareholder’s Parent’s indirect subsidiary.

For its automobile/general liability insurance policies, Shareholder’s Parent had its insurers directly handled the claims and then reimbursed the insurers for the amounts that the insurers paid that fell below the policies’ deductibles or above the policies’ limits. For its workers’ compensation insurance policies, Shareholder’s Parent paid out the claims and then the insurers reimbursed Shareholder’s Parent for amounts that fall above the policies’ deductibles and below the policies’ limits. The insurance expenses borne by Shareholder’s Parent, that is, the amounts paid below the policies’ deductibles and above the policies’ limits, are referred to here as the non-covered payments. Before the transaction, Target reimbursed Shareholder’s Parent for non-covered payments when the act or incident underlying a claim involved Target.

On August 4, 2015, Buyer and Shareholder entered into a stock purchase agreement where Buyer would purchase all of stock of Target for $58 million. Shareholder’s Parent and Target were not parties to the purchase agreement.

The purchase agreement contained a release where Shareholder and Shareholder’s Parent released Buyer and Target from any liabilities owed to either Shareholder or Shareholder’s Parent to the extent related to Target or Shareholder’s ownership of Target, that accrued prior to the closing or that accrued after the closing as a result of any event that occurred prior to the closing date.

The transaction closed on November 1, 2015. After the closing, Buyer and Target refused to reimburse Shareholder’s Parent and Shareholder for the non-covered payments related to Target’s business that Shareholder’s Parent had paid its insurers. Specifically, Shareholder’s Parent alleged that it has reimbursed insurers for non-covered payments on more than fifty claims that Shareholder’s Parent would have passed along to Target pre-closing. Shareholder’s Parent claimed that these non-covered payments totaled about $800K and projected that they would increase to a total of about $1.5 million by the time the last of the claims at issue is paid in full.

On June 8, 2017, Shareholder’s Parent and Shareholder sued Target and Buyer in a Delaware court. Shareholder claimed, in part, that Buyer breached the purchase agreement by disclaiming responsibility for the non-covered payments made by Shareholder’s Parent. Shareholder’s Parent claimed that Target has been unjustly enriched by Shareholder’s Parent’s continuing payment of the non-covered payments since the closing.

Buyer and Target challenged the legality of the claims and asked the court to dismiss the claims. The court agreed with Buyer and Target.

The court looked at Shareholder’s claim that Buyer breached the purchase agreement by disclaiming responsibility for the non-covered payments. However, this claim was not valid because there is no provision in the purchase agreement that obligated Buyer to reimburse Shareholder for the non-covered payments made after the closing.

The court also rejected Shareholder’s Parent’s unjust enrichment claim against Target for the non-covered payments made by Shareholder’s Parent after the closing because Shareholder and Shareholder’s Parent unambiguously released Target and Buyer “from claims, obligations, and liabilities, including those accruing after the closing resulting from a pre-closing event.

This case is referred to as US Ecology, Inc. v. Allstate Power Vac, Inc., C.A. No. 2017-0437-AGB, Court of Chancery of Delaware (Decided: June 18, 2018).

Comment. A buyer does not want to overpay for a business. One of the ways this happens is being stuck with unknown pre-closing liabilities of the business.

In this case, Target would have had to pay $1.5 million to Shareholder’s Parent had there been an enforceable contract between Target and Shareholder’s Parent. There was no contract.

However, Shareholder’s Parent had a shot to be reimbursed by suing not under a contract it had with Target but under a legal theory that would compensate the Shareholder’s Parent because Target was unjustly enriched by Shareholder’s Parent paying Target’s uncovered insurance liabilities.

Fortunately for Target (and Buyer), this claim was barred by the release that was in the stock purchase agreement.

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

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in shareholder release, stock purchase agreement

Delaware court holds that buyer of specialty chemical business can sue seller for misrepresenting the environmental liabilities of the business

Target’s business is making specialty chemicals. Its business was originally operated as an American subsidiary of a German based company. Ultimately, Target became the owner of the business. The owners of Target will be referred to as Shareholder. The owners of the business over the years were all related companies and for convenience will all be referred to as Target.

From 1919 to 1991, Target owned and operated a dyes and chemicals plant in Linden, New Jersey. Target discovered extensive contamination at the Linden property during the 1970s-80s.

In 1989, Target and New Jersey entered into a consent order regarding environmental contamination and cleanup at the Linden property. The consent order made Target responsible for environmental remediation until New Jersey gave Target written notice it satisfied the consent order.

In 2005 and 2007, New Jersey sent letters advising Shareholder how to address the Linden property’s off-site contamination remediation efforts. The letters stated that the remedial efforts were not complete and Target did not have a fully implemented cleanup. Specifically, the 2005 New Jersey letter talked about the remediation and restoration of off-site impacts that have resulted from historic discharges by Target.  These letters were a matter of public record.

Buyer is a global specialty chemical subsidiary of a public company based out of Covington, Kentucky. In 2011, Buyer was interested in acquiring Target. As part of its due diligence Buyer asked Shareholder about the Linden property environmental issues.

Shareholder told Buyer in writing and in an April 2011 conference call that all environmental issues had been resolved; specifically, not telling Buyer about the Linden property’s off-site environmental problems.

In May 2011, Buyer agreed to acquire Target from Shareholder for $3.2 billion, through a stock purchase agreement, dated as of May 31, 2011.

Under the stock purchase agreement, Shareholder agreed to assume all environmental liabilities other than any off-site migration or disposal of hazardous materials from the Linden property prior to the closing. Shareholder made no representation and warranty in the stock purchase agreement, however, about Linden property off-site environmental problems.

Shareholder and Buyer also agreed in the stock purchase agreement that Shareholder made no representations and warranties other than those representations and warranties of Shareholder contained in the stock purchase agreement, and that other than for fraud, Shareholder disclaimed any other representations or warranties.

The deal closed August 23, 2011.

Shareholder wanted to retain the Linden property. So, immediately after the stock purchase agreement closed, Target conveyed the Linden property back to Shareholder for one dollar.

On February 7, 2014, Shareholder advised Buyer that additional remedial work, including an ecological risk assessment, remained. Buyer contended this is the first time Shareholder advised Buyer that off-site work remained. Buyer also contended that Shareholder had been aware of the off-site requirements since 2007.

On July 23, 2015, New Jersey sent Buyer and Target a demand for stipulated penalties for their failure to comply with New Jersey law related to the required Linden property off-site remediation work.

Buyer sued Shareholder, in Delaware Superior Court, in part, for fraud. Buyer alleged that Shareholder made fraudulent misrepresentations and/or omissions of fact regarding the environmental condition and remediation of the Linden property. Buyer contended that Shareholder’s misrepresentation and omission occurred, in part, prior to execution of the stock purchase agreement.

Shareholder asked the court to dismiss Buyer’s fraud claim arguing, in part, that Shareholder made no misrepresentations in the stock purchase agreement. Shareholder argued that Shareholder cannot be responsible to Buyer for failing to tell Buyer about the Linden property off-site environmental problems, because that alleged fraudulent omission was not made in the stock purchase agreement, but allegedly made during the course of Buyer’s due diligence review of Target.

The court disagreed and permitted Buyer to pursue its fraud claim against Shareholder for fraudulently describing the Linden property’s off-site environmental problems.

The court said that if Shareholder chooses to speak, then Shareholder cannot lie. Once Shareholder speaks, Shareholder also cannot do so partially or obliquely such that what Shareholder says becomes misleading.  Further, Shareholder may need to disclose information in order to prevent statements Shareholder actually made from becoming misleading.

Here, the court pointed to the April 2011 conference call, where Shareholder represented to Buyer that a barrier wall had been installed and a pump-and-treat remedy was in place. Shareholder further represented that reserves were in place for 20 years of operation and maintenance of completed remedial measures. Buyer contended that Shareholder did not mention any ongoing on-site or off-site remediation, or any on-site or off-site remediation that would be required going forward. Buyer understood Shareholder’s representations to mean that there were no significant unmet environmental liabilities associated with the Linden property.

The court also noted that Buyer asked Shareholder during due diligence, for information about the remediation efforts of the Linden property. Shareholder told Buyer to look at the data room for any information. However, there were no documents indicating that further action was needed for the Linden property. Because information was missing from the data room and statements made during the April 2011 conference call, Buyer relied upon those omissions and statements when it entered into the stock purchase agreement.

This case is referred to as Ashland LLC v. Heyman, C.A. No. N15C-10-176 CCLD EMD, Superior Court of Delaware (Decided: June 21, 2018).

Comment. The lesson here for the seller is to give all relevant due diligence information to the buyer.

The court noted that there were two letters from the state of New Jersey that were a matter of public record and which would have alerted the buyer to a potential environmental problem. With 20/20 hindsight, Buyer’s discovery of these public records, would probably have resulted in better protection for Buyer in the stock purchase agreement.

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

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in extra-contractual fraud, fraud in business sale, fraudulent omission

Buyer of trucking business held liable for unpaid compensation of former seller employees under the federal layoff notice law – the WARN Act

Seller, based in Little Rock, Arkansas, owned and operated a commercial trucking business that serviced customers throughout the United States. On December 4, 2008, Seller and Buyer (also a trucking company with headquarters in Indianapolis, Indiana) entered into a written asset purchase agreement. The asset purchase agreement described the deal as the acquisition of “certain assets” and the assumption of “certain liabilities” of Seller for a $24.1 million purchase price.

The purchased assets were all assets of Seller, including the right to use Seller’s trade name, other than Seller’s cash and cash equivalents, customer accounts receivables, real estate, and goodwill relating to Seller’s trucking business “other than the Purchased Assets.”

At the same time, Seller’s president and vice president executed a noncompetition agreement. The noncompetition agreement stated that Buyer had purchased Seller’s business and substantially all of Seller’s assets, including but not limited to the business name, customer business, customer lists, and driver lists. The noncompetition agreement further stated that Buyer intended to merge the operation of Seller’s business into Buyer.

At the time of the sale, Seller had 658 employees. As part of the asset purchase agreement, Buyer agreed to hire all of Seller’s drivers that met Buyer’s standards. After the sale, Buyer offered employment to 201 of Seller’s 658 employees. The remaining employees were terminated by Seller.

On January 16, 2009, Employees filed a class-action complaint against Buyer in an Arkansas federal district court, seeking damages under the federal layoff notice law, called the WARN Act. Under this law, employees terminated in a mass layoff can recover unpaid compensation earned during their last 60 days of employment, unless they were given 60 days’ notice of their termination. Seller had not given a 60-day termination notice.

Buyer and Seller both asked the court to rule whether Buyer is responsible under the WARN ACT for Seller’s failure to give the required 60-day notice. Buyer’s liability to Employees depended upon whether Buyer purchased Seller’s assets with the intent to run the business as a going concern. The trial court ruled that Buyer was liable to Employees because it had, in fact, purchased Seller’s assets with the intent to run the business as a going concern.

Buyer appealed to the United States Court of Appeals.

Buyer argued that it did not have a duty to give Employees WARN Act notice because it did not purchase Seller as a going concern. Buyer contended that the sale was merely a sale of assets.

Under the WARN Act, Buyer is responsible for giving Employees the 60-day notice of the mass layoff if its deal with Seller is a sale of Seller’s business. The WARN Act does not define “sale of business.”

However, this Court of Appeals previously said that when a case involves simply a sale of assets, as opposed to the sale of a business as a going concern, the seller retains the WARN Act notice requirement, not the buyer. On the other hand a buyer has to give the layoff notice and is responsible for not doing so, if the deal is a sale of a business as a going concern.

The court said that although Buyer and Seller styled the sale as a sale of assets by entering into an asset purchase agreement, in substance the court described the transaction as a sale of Seller’s business.  The court said that Congress passed the WARN Act to protect employees; and wanted to impose WARN Act liability on deals where the buyer acquired employer’s overall operations as a going concern.

Viewing the Buyer-Seller transaction in light of this common-sense approach, the court found that the transaction was more than merely a sale of assets. The court pointed to the asset purchase agreement which the court said showed that Buyer purchased Seller intending to continue Seller’s existing trucking business indefinitely. Furthermore, Buyer purchased all of the instruments that were central to Seller’s business. For example, Buyer purchased Seller’s name, customer and subscriber lists, agreements, contracts, commitments, plans, bids, and quotations.

The court also pointed to the noncompetition agreements that the asset purchase agreement required Seller’s president and vice president to execute. The agreements state that Buyer had purchased Seller’s business and substantially all of Seller’s assets, including but not limited to the business name, customer business, customer lists, and driver lists. Most tellingly for the court, was the fact that the noncompetition agreements stated that Buyer intended to merge the operation of Seller’s business into Buyer.

Furthermore, the court said that the asset purchase agreement required Seller to use reasonable efforts to assist Buyer with the transition of Seller’s business from Seller to Buyer.

This case is referred to as Day v. Celadon Trucking Services, Inc., No. 15-1711, United States Court of Appeals, Eighth Circuit (Filed: July 5, 2016).

Comment. The federal WARN Act applies to companies with at least 100 employees. Several states also have their version of the WARN Act. California, for example applies its layoff notice law to companies with at least 75 employees.

In 20/20 hindsight, could Buyer have withheld from the closing enough of the purchase price to cover any potential layoff notice law violation under the WARN Act?

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

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in layoff notice law or Warn Act, post asset purchase issues

Maryland court enforces boilerplate forum selection clause in confidentiality and noncompetition agreement against spouse and related companies of signatory

Buyer is a group of related Maryland companies founded in 1976 and has its world headquarters in Taneytown, Maryland (an hour NW drive from Baltimore). Buyer provides service and makes products in the commercial HVAC, industrial process, power, and industrial refrigeration markets. Buyer manufactures products at 19 locations throughout nine countries and supplies products via a sales network of more than 170 offices.

Seller and Seller’ spouse founded Target as a North Carolina corporation in or around 1990. Target manufactures and sells components for cooling towers and heat exchangers, including Opti-Bar. Buyer was a customer of Target, and Buyer incorporated Target’s products into the cooling towers that Buyer manufactured and sold, and into Buyer’s field-erected cooling towers.

In 2005, Buyer purchased all of Target’s stock from Seller and Seller’s spouse for roughly $3.76 million. According to Buyer, it wanted to acquire Target, in part, because Target produced a product called Opti-Bar, which had an industry reputation as the best, most efficient splash bar in the cooling tower market.

Seller was employed by Buyer as sales manager, after the closing, as part of the deal. In consideration for the purchase of Target stock, Seller and Buyer entered into the confidentiality agreement. Seller, but not Seller’s spouse, signed the confidentiality agreement. In the confidentiality agreement, Seller assigned all his work product that he created for Buyer as a Buyer employee to Buyer.

The confidentiality agreement also prohibited Seller from competing against Buyer during his employment with Buyer for 2 years from the later of the date of the confidentiality agreement or the date Seller’s employment with Buyer ends. The confidentiality agreement was governed by Maryland law and specified that all disputes relating to the confidentiality agreement shall be tried in a federal or state court in Maryland. The agreement contained Seller’s consent to resolving all disputes in Maryland.

After they sold Target to Buyer, Seller and Seller’s spouse formed Seller Company #1, a North Carolina LLC. Seller Company #1 was in the business of buying and selling cooling tower parts. Records showed that Seller was Seller Company #1’s registered agent and manager and Seller signed checks and tax forms on Seller Company #1’s behalf.

Seller Company #2 was a Georgia LLC that Seller and Seller’s spouse formed in 2007. Seller’s spouse owned 51% and Seller owned 49%. A credit application that Seller signed described Seller Company #2’s business as the resale of cooling tower parts.

Seller’s sales manager duties included managing Target’s relationships with its customers as well as procuring and bidding on outside sales. In the spring of 2014, Target discovered that, for at least 5 years, Seller was engaging in business activities that not only distracted from performing his duties at Target but were also in direct competition with the business of Buyer. Specifically, Target believed that Seller, individually and through Seller Company #2 and Seller Company #1, was selling products and cooling tower parts made by Buyer’s competitors to Buyer’s actual and prospective customers; manufacturing replica Target and Buyer products to sell to Buyer’s actual and prospective customers; and diverting a project from Buyer by submitting a bid to a general contractor through Seller Company #2.

Target terminated Seller on July 29, 2014. Five months later, Target and Buyer, sued Seller in Maryland state court to stop his behavior and recover damages for Seller’s claimed illegal gains and Buyer’s lost profits, as well as treble damages. Buyer and Target added Seller’s spouse, and Seller Company #1 and Seller Company #2 as defendants.

Seller’s spouse and Seller Company #1 and Seller Company #2 filed a joint motion to dismiss for lack of personal jurisdiction. In it, Seller’s spouse claimed that she had no connection to Maryland other than the sale of Target to Buyer in 2005. She argued that she never worked for Buyer, and never signed the confidentiality agreement.

She rejected the idea that her purported awareness or knowledge of the confidentiality agreement could possibly form the basis for jurisdiction in a Maryland court, and that, until this dispute arose, was not aware of the terms of Seller’s confidentiality agreement with Target, including its non-compete and Maryland jurisdiction provisions.

Seller Company #1 and Seller Company #2 asserted that they had no contact with Maryland, and allegations that Seller and Seller’s spouse exercised complete dominion and control over their affairs was insufficient to assert Maryland jurisdiction over these North Carolina and Georgia companies.

Buyer and Target responded that Seller, Seller’s spouse, and their two companies were all part of the same scheme, to impermissibly compete with Buyer and used Buyer’s proprietary documents and information in breach of legal obligations to Buyer.

Buyer submitted that Maryland possessed jurisdiction over Seller’s spouse because Buyer’s complaint flows from the stock purchase agreement, which Seller’s spouse signed and thereby transacted business in Maryland by selling her stock in Target to a Maryland company in Maryland through a stock purchase agreement governed by Maryland law.

In regard to Seller’s spouse and Seller’s two related companies, Buyer charged, among other things, that Seller’s spouse, Seller Company #2, and Seller Company #1 are affiliates of Seller and are bound by the confidentiality agreement Maryland forum selection clause. Buyer urged that Maryland should not permit Seller’s use of his spouse and his companies in a shell game and should enforce the confidentiality agreement against not only Seller—but also the non-signatories (Seller’s spouse and the related two companies).

The trial court, expanding Maryland law, concluded that Seller’s spouse and the related two companies are bound by the provision in the confidentiality agreement requiring disputes to be resolved in Maryland, even though they never signed the confidentiality agreement, because they were closely related to the contractual relationship between Seller and Target.

The decision of the trial court was upheld by Maryland’s intermediate court of appeals. The appellate court held that the Maryland forum-selection clause in the confidentiality agreement is enforceable against each of Seller’s spouse and the two related companies because Buyer and Target’s claims arose out of their status in relation to the confidentiality agreement, and that they were closely related to the contractual relationship between Seller and Buyer, so that it was foreseeable that they would be bound by the forum-selection cause contained in the Confidentiality Agreement.

This case is referred to as Peterson v. Evapco, Inc., No. 778, September Term, 2016, Court of Special Appeals of Maryland (Filed: July 5, 2018).

Comment. A forum selection clause in an agreement for the sale of a business seems like boring boilerplate. However, there are practical advantages to selecting a court located close to you if a dispute breaks out.  It can save time and money.

The interesting wrinkle here is that the buyer of a business could also enforce confidentiality and noncompetition agreements in its home turf not only against the seller (the guy that signed the agreement) but also against others involved in the alleged scheme to circumvent the agreement’s provisions; even when those others did not sign the agreement.

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

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in covenant not to compete, enforce against nonparty, forum selection clause, nondisclosure agreement

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