How Unemployment Insurance Can Impact M&A Deals

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Explore the legal implications of unemployment insurance on M&A transactions. Learn from a recent case involving a buyer and seller’s dispute over elevated insurance costs.

M&A Stories

October 23, 2023

Introduction:

In the world of Mergers and Acquisitions, understanding the implications of unemployment insurance ratings can be crucial. This factor can significantly affect the sale of a business. Let’s delve into a recent case that highlights this issue.

Background:

In this case, the seller was a business involved in computer system sales, service, and hardware, with two store locations in Connecticut. The buyer, formed in 2007, specialized in supporting information technology systems for law firms and Connecticut businesses.

In 2015, as the seller’s owner was planning for retirement, an asset purchase agreement was initiated. The buyer acquired the seller’s client list, goodwill, and physical store locations. The agreement stipulated that for five years, ending in November 2020, the buyer would make monthly payments to the seller’s owner, calculated at 65% of the monthly account profits from the seller’s former clients.

However, the seller’s business didn’t perform as expected. Furthermore, the state imposed the seller’s high unemployment insurance rating on the buyer, leading to increased insurance costs.

Legal Proceedings:

This situation led to a legal dispute in a Connecticut state court. The trial court ruled that the buyer couldn’t seek damages from the seller for its elevated unemployment insurance costs. The buyer appealed this decision.

Outcome:

The appellate court also did not hold the seller responsible for the buyer’s increased unemployment insurance expenses.

Conclusion:

This case illustrates the potential impact of a seller’s unemployment insurance rating on an M&A deal. Buyers should be vigilant about such factors when projecting a target’s post-closing performance, especially when determining the acquisition price based on earnings multiples.

Case Reference:

CCI Computerworks, LLC v. Evernet Consulting, LLC, No. AC 44975 Appellate Court of Connecticut (Argued February 2, 2023. Officially Released September 5, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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.

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M&A Asset Buyer’s Liability for Unpaid Invoices: A Legal Case Analysis

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Explore the complexities of asset buyer liability in M&A transactions through a legal case analysis. Delve into successor liability and its application in a recent court decision.

M&A Stories

October 19, 2023

Introduction:

In the world of mergers and acquisitions (M&A), asset buyers typically take on the seller’s liabilities as specified in the purchase agreement. However, exceptions do exist.

Background:

In this case, the seller was a Delaware limited liability company with its primary operations in Texas or Missouri. They specialized in manufacturing highly engineered oil country tubular goods for the natural gas and crude oil drilling markets in the United States and Canada. The majority owner of the seller was a Connecticut-based financial firm with $9 billion in assets under management, focusing on distressed businesses.

Between June and November 2020, the seller purchased goods worth over $7 million from a vendor. Unfortunately, due to economic challenges during the COVID-19 pandemic, the seller couldn’t pay unsecured creditors, including this vendor.

On December 24, 2020, an affiliate of the seller’s owner, acting as the administrative agent for the seller’s secured creditors, initiated a foreclosure sale under New York’s Uniform Commercial Code (UCC) Article 9. The notice stated that the seller’s assets would be auctioned on January 4. It was also mentioned that the seller owed approximately $110 million to the owner and an unnamed group of lenders. The vendor was not informed of the sale.

The winning bidder at the auction was a company owned by the seller’s owner. However, this buyer did not assume the $7 million debt owed to the vendor.

Post-acquisition, the buyer took over the seller’s manufacturing facilities, maintained the same officers, produced and sold the same products to the same creditors, used the same equipment, and employed the same staff as the seller. Both the seller’s former website and the buyer’s current website provided nearly identical company descriptions. Additionally, the buyer remained under the ownership and control of the seller’s owner and its affiliates.

Legal Proceedings:

The vendor filed a lawsuit against the buyer to collect the unpaid invoice, citing several legal theories, including Delaware’s doctrine of successor liability. The buyer challenged this claim by filing a motion to dismiss.

Outcome:

The court determined that, if the vendor’s allegations were true, the buyer could be held liable under the theory of “mere continuation” successor liability for the $7 million claim. The court clarified that this exception required the buyer to be not just a continuation of the same business but a continuation of the same legal entity as the seller. This continuity typically involves common officers, directors, or stockholders between the seller and the buyer, resulting in a single corporation after the transfer.

Although Delaware courts apply this theory narrowly, the vendor’s claims align with its application in this case. The vendor asserted that the buyer, much like the seller, remained under the ownership and control of the seller’s owner and its affiliates. The buyer effectively replaced the seller, continuing the same business, employing the same facilities, personnel, and equipment, maintaining a similar website, and selling to the same creditors. Furthermore, the vendor identified key officers and employees shared between the buyer and the seller, reinforcing the idea that the buyer was a continuation of the seller.

Comment:

Vice Chancellor Will of the Delaware Court of Chancery expressed disapproval of the “shady circumstances” surrounding this asset sale.

Case Reference:

Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube, LLC, C.A. No. 2022-0378-LWW Court of Chancery of Delaware (Date Submitted: May 2, 2023. Date Decided: September 5, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 

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.

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M&A Negotiations: David vs. Goliath in Earnout Deals

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Explore the legal battle in the Value Health Sols., Inc. v. Pharm. Rsch. Assocs., Inc. case and the implications of earnout agreements in M&A deals.

M&A Stories

October 16, 2019

Introduction:

In the world of mergers and acquisitions, the acquisition of clinical development software can be a tricky endeavor. The software’s success is often uncertain, making buyers hesitant to pay a hefty upfront price. To mitigate this risk, earnout agreements with milestones come into play.

Background:

In this particular case, we have a large, global contract research organization with 15,000 employees worldwide as the buyer. They provide clinical trial services to pharmaceutical and biotech companies. On the other side, we have a small clinical development software company. These companies create software tools that simplify the management and analysis of data from medical studies. They make the process of developing new medical treatments more efficient and organized.

The software developed by the seller was compatible with Salesforce, a widely used platform in clinical trials. This caught the buyer’s interest.

Both parties agreed to an Asset Purchase Agreement (APA). It included a $2.5 million cash payment at closing, with additional earnouts of $1 million in buyer stock upon reaching specific development milestones and substantial cash earnouts based on software licensing sales.

The buyer argued that none of the earnout milestones were met.

Legal Proceedings:

In response, the seller sued the buyer in North Carolina Business Court, a specialized court for complex business disputes. Unfortunately, the seller lost the earnout claim when the trial court ruled in favor of the buyer. The seller then appealed to the North Carolina Supreme Court.

Outcome:

The North Carolina Supreme Court sent the case back to the trial court. It ordered the trial court to evaluate the seller’s claims that the buyer breached the APA by refusing to pay the earnout. The court also rejected the buyer’s argument that achieving later milestones hinged on achieving earlier ones. Furthermore, it held that the seller could make a claim that $500 million in revenue from a software-as-a-service contract counted as a license sale of the seller’s software.

In Conclusion:

This high-stakes legal battle could potentially result in multimillion-dollar earnout recovery.

Case Reference:

Value Health Sols., Inc. v. Pharm. Rsch. Assocs., Inc., No. 100A22, Supreme Court of North Carolina (Filed September 1, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 

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.

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Avoiding M&A Pitfalls: Buyer Beware in Bankruptcy

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Explore the legal intricacies of M&A transactions and learn from a real case – In Re Sanders. Discover how due diligence and reliance on seller representations can impact the dischargeability of seller debts in bankruptcy.

M&A Stories

October 5, 2023

Introduction:

Selling your company carries risks, including potential legal troubles if the business falters post-sale. This could lead to lawsuits from the buyer and even bankruptcy filings by the seller, raising questions about the dischargeability of seller debts in bankruptcy.

Background:

In this case, the seller operated an auto recovery and repossession business since 2004. The buyer, an experienced entrepreneur with a degree from the Wharton School of Business, purchased the company in 2015. Post-acquisition, the buyer uncovered the seller’s deceptive claims about profitability and encountered significant issues with critical bonds, lot leases, and customer contracts.

Legal Proceedings:

The buyer sought to return the business to the seller and reclaim the $1.3 million purchase price. The seller resisted and filed for bankruptcy, aiming to discharge the buyer’s $1.3 million claim. The buyer objected, arguing that the debt shouldn’t be dischargeable due to the seller’s fraud.

Initially, the bankruptcy court ruled in favor of the seller, stating that the buyer could have discovered the business’s problems with due diligence and thus couldn’t reasonably rely on the seller’s fraudulent representations. The buyer appealed and won at the federal district court level, leading to a retrial.

Outcome:

In the retrial, a different bankruptcy court concluded that the buyer had justifiably relied on the seller’s fraud. Consequently, the court ruled in favor of the buyer, declaring the seller’s debt nondischargeable in bankruptcy.

Comment:

Notably, the seller withheld access to the company’s records, and the buyer failed to examine key documents such as bond agreements, leases, and customer contracts, which would have revealed the seller’s inability to transfer them without consent.

Despite these oversights, the court determined that the buyer hadn’t seen warning signs necessitating further due diligence. In hindsight, conducting more thorough due diligence would have saved the buyer time, money, and stress, as all these issues would have surfaced during a comprehensive review of leases, bond documents, customer contracts, and financial records.

Case Reference:

In Re Sanders, Case No. 19-03665-5-JNC, Adv. Pro. No. 20-00018-5-JNC, United States Bankruptcy Court, E.D. North Carolina, Raleigh Division (August 31, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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.

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Mitigating Successor Liability Risks in Asset Acquisitions Involving Equity

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Explore the key considerations and risks associated with acquiring assets in M&A deals involving buyer equity. Learn how successor liability risks can be effectively mitigated, with insights from the Credit Card Services, Inc v. Joe Teh Chuang case.

M&A Stories

October 2, 2023

Introduction:

When purchasing a business’s assets with cash, a buyer’s exposure to unassumed seller liabilities is typically limited. However, the landscape changes when the purchase price includes buyer equity. In this blog post, we explore the key considerations and risks associated with acquiring assets in such scenarios.

The Background:

In this case, a national company (referred to as “the competitor”) specialized in providing credit card processing services. Concurrently, a California-based company (referred to as “the seller”) was established by former employees of the competitor, who admittedly operated with stolen confidential information.

The competitor had a long-standing history as a registered ISO, enabling it to offer credit card services for major brands like VISA and Mastercard. Over time, it expanded its reach from Korean-speaking to Vietnamese- and Chinese-speaking merchants, with branch offices across the United States.

To protect its interests, the competitor had employed sales representatives who signed contracts prohibiting the use or disclosure of proprietary information, solicitation of competitor customers, or poaching of competitor employees. This proprietary information included merchant lists, customer data, pricing details, and more, all considered as highly confidential trade secrets.

In 2011, the El Monte sales reps and a San Francisco sales rep left the competitor and founded the seller, directly competing with their former employer. The seller, being an unregistered sub-ISO, had to collaborate with a registered ISO to operate.

In 2015, the buyer’s parent company, a registered ISO and competitor of the competitor, acquired the seller’s assets through a subsidiary (referred to as “the buyer”). The purchase price comprised buyer equity and the assumption of certain debts owed by the seller to the buyer’s parent. Importantly, the buyer group was aware of a 2012 lawsuit filed by the competitor against the seller group, which they did not assume as a liability.

Legal Proceedings:

In June 2012, the competitor initiated a lawsuit against its former El Monte sales reps and the seller in a California state trial court. The competitor alleged that the former sales reps had used its protected trade secrets, including confidential customer lists and merchant files, to develop the seller. Furthermore, it was claimed that one of the former reps recruited the San Francisco sales rep using the competitor’s confidential information.

The competitor’s legal action included claims of breach of contract, misappropriation of trade secrets, and other related charges stemming from this conduct. The seller and its owners acknowledged liability, and the buyer was brought into the lawsuit under the theory of successor liability, specifically through the doctrines of de facto merger and mere continuation.

Outcome:

Ultimately, the trial court ruled that the buyer had no liability to the competitor under the concept of successor liability. This decision was upheld on appeal to the intermediate appellate court. The court noted that the purchase price paid for the assets was more than sufficient, minimizing any potential liability.

Comment:

This case underscores a crucial point for M&A asset deals involving buyer equity. Successor liability risks can be effectively mitigated if the purchase price for the assets is deemed adequate, as demonstrated in this case.

Case Reference:

See Credit Card Services, Inc v. Joe Teh Chuang, No. B306223, Court of Appeals of California, Second District, Division Three (Filed August 31, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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.

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Lessons in Due Diligence for Directors and Officers: Avoiding Pitfalls in M&A

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Explore a case study involving a furniture company’s M&A journey and learn valuable lessons in due diligence for directors and officers. Discover the importance of thorough research and risk mitigation in the world of mergers and acquisitions.

M&A Stories 

September 21, 2023

Introduction:

In the world of mergers and acquisitions (M&A), making informed decisions is paramount. Directors and officers of Delaware limited liability companies, much like their counterparts in corporations, are obligated to exercise due care when considering an acquisition. While they are not guaranteeing the success of the deal, they must act with prudence to minimize risks. Failure to do so can result in personal liability, in cases of gross negligence.

The Background:

Let’s dive into a case from 2016 involving a furniture company established in 1984. This company, primarily operating furniture factory outlet stores in the South and Midwest, was known for its high-quality furniture brands. In 2016, a private equity firm acquired this company at an enterprise value of $34 million.

In 2018, the company made a strategic move by purchasing a bedding and home furniture retailer in Kentucky for over $7 million, aiming to expand its presence in that region. Unfortunately, this acquisition did not yield the desired results, and the subsequent pandemic pushed the company into bankruptcy. It was eventually sold out of bankruptcy for approximately $14 million, with certain liabilities assumed.

At its peak, the company boasted annual revenues of around $143 million, ran 68 locations, and employed about 675 people. However, by the time of the 2020 bankruptcy filing, it had downsized to 31 retail locations, a bedding manufacturing facility, a distribution facility, and roughly 270 employees.

Legal Proceedings:

In the aftermath of the bankruptcy, the company’s trustee filed a lawsuit against the officers and directors, alleging breach of their duty of care because of gross negligence in the Kentucky acquisition. The trustee argued that the due diligence process had failed to explore significant cultural and operational differences between the acquiring company and the Kentucky target.

According to the trustee, the decision-makers focused too narrowly on historical data from the Kentucky target and made flawed assumptions about future performance. They neglected key market trends, such as the shift to e-commerce and declining in-store foot traffic. Moreover, they failed to consider the economic challenges in the industry, including a softening mattress market that led to aggressive pricing strategies and bankruptcies among major mattress firms. Lastly, the trustee emphasized the failure to address substantial cultural differences, which hindered the integration of the acquired business.

In response, the directors and officers attempted to have the trustee’s complaint dismissed.

Outcome:

The bankruptcy judge determined that if the allegations were true, they could constitute gross negligence. Consequently, the motion to dismiss was denied.

Comment:

It’s worth noting that courts are generally hesitant to find breaches of the duty of. Additionally, Delaware corporations and LLCs have mechanisms, such as exculpatory clauses in their governing documents, that can shield directors, officers, and LLC managers from personal liability for breaches of their duty of care.

Case Reference:

See In Re Furniture Factory Ultimate Holding, LP, Case No. 20-12816 (JKS), Adv. Pro. No. 22-50390 (JKS), United States Bankruptcy Court, D. Delaware (August 31, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 

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.

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Asset Buyer Dilemma: Are You Missing Valuable Assets in M&A?

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Explore the complexities of asset acquisitions in the world of mergers and acquisitions (M&A). Learn from a real-life case in the Kansas City area and understand how the legal nuances of third party beneficiaries can impact your M&A deals.

September 14, 2023

M&A Insights 

Introduction:

In the world of mergers and acquisitions, asset deals come with their unique set of challenges. Unlike equity deals, where buyers inherit a company along with its known and unknown liabilities, asset buyers face a different conundrum: potentially missing out on valuable assets they weren’t aware of.

The Kansas City Dealership Deal

Our story unfolds in the context of a car dealership acquisition located in the greater Kansas City area. The intricacies of Kansas law and dealer contracts with the car manufacturer dictate where and how dealerships can establish and relocate their businesses. Each dealer is assigned a specific geographic sales area, granting them exclusive rights to sell vehicles and provide warranty services within that territory.

While dealers have the freedom to open, relocate, or consolidate dealerships within their sales area, these moves are subject to Kansas law. To move a dealership, a dealer must file a formal petition with the state, giving notice of the intended move. Importantly, any dealer within ten miles of the proposed new location can file a protest to block the move.

In 2007, our seller protested against a competitor’s move under Kansas law, leading to a settlement agreement. In this agreement, the seller allowed the competitor’s move in exchange for a promise not to protest any future relocations by the seller, a promise documented in the settlement agreement.

Several years later, the seller sold its dealership assets to our buyer. Surprisingly, the settlement agreement was never mentioned in the purchase documents, and it seems the buyer was entirely unaware of its existence.

The buyer’s plan was to relocate the dealership after the current lease expired. They located a suitable property within the ten-mile radius of the competitor’s dealership and petitioned the state for the move. Predictably, the competitor filed a protest. Oblivious to the settlement agreement, the buyer engaged in an expensive legal battle until July 2019. It was then that the former owner of the seller brought the settlement agreement to the buyer’s attention and assigned it to them. The buyer promptly informed the competitor of this assignment, leading to the withdrawal of the protest.

Legal Proceedings:

With the settlement agreement now in their possession, the buyer took legal action against the competitor in a Kansas City federal district court. Among other claims, the buyer argued that the competitor had breached the settlement agreement by protesting the relocation. Their argument rested on the assertion that, as a third party beneficiary to the settlement agreement, the competitor owed them a duty not to protest.

Outcome:

However, the competitor sought the dismissal of the lawsuit through a motion for summary judgment, contending that Michigan law, which governed the settlement agreement, did not explicitly designate a buyer of the seller’s dealership as a third-party beneficiary. The district court sided with the competitor, and the buyer’s subsequent appeal to the Court of Appeals for the 10th circuit ended in defeat.

Closing Remarks:

It’s worth noting that there was a dissenting opinion during the appeal process, suggesting that the trial judge should have allowed a jury to decide whether the buyer was indeed an intended third-party beneficiary of the settlement agreement.

Case Reference:

See Reed Auto Of Overland Park, LLC v. LANDERS Mclarty OLATHE KS, LLC, Nos. 21-3225, 22-3043, United States Court of Appeals, Tenth Circuit (Filed August 24, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 

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.

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Casino and Hotel Sale During Pandemic: Legal Clarification

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Explore the legal intricacies of a deferred closing in the world of business acquisitions, as we analyze a case involving a Las Vegas casino and hotel sale during the COVID-19 pandemic. Discover how legal proceedings unfolded and the outcome in this M&A story.

M&A Stories 

September 10, 2023

Introduction:

In the world of business acquisitions, delays can be inevitable. This story highlights a case where a seller, amid a global pandemic, found themselves in a deferred closing situation. Let’s delve into the details.

Background:

Our story revolves around a Las Vegas casino and hotel seller who had entered into an asset purchase agreement with a buyer back in April 2019. This agreement involved a deferred closing, contingent on the approval of the Nevada Gaming Commission. To seal the deal, the buyer had submitted a $350K earnest money deposit as security.

In March 2020, the COVID-19 pandemic prompted the Nevada Governor to issue a mandate for the temporary closure of nonessential businesses, including our seller’s casino and hotel. Responding to this, the buyer terminated the purchase agreement on April 14, 2020, demanding the return of the earnest money deposit. The seller, however, declined.

Legal Proceedings:

The dispute escalated to a state trial court. Here, a critical issue arose: had the seller’s pandemic-induced closure materially breached their promise to operate the business as usual, a condition of the purchase agreement?

Outcome:

The state trial court initially ruled in favor of the buyer, ordering the return of the $350K earnest money deposit. However, the seller appealed to the Nevada Supreme Court, which subsequently overturned the decision. The Supreme Court held that the seller’s compliance with state law was aimed at preserving the casino’s gaming license, and therefore, it did not constitute a material breach of the purchase agreement. Consequently, the seller retained the earnest money deposit.

Comment:

A noteworthy aspect of this case is that the earnest money deposit was intended as compensation for the seller’s commitment to keep the casino/hotel business off the market during the transaction with the buyer.

Case Reference:

See Lucky Lucy D LLC v. LGS Casino LLC, Nos. 83833, 84257, Supreme Court of Nevada (Filed August 24, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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.

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How Carnival Cruise Protected Its Digital Treasure: The DXP Software Saga

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Dive into the legal battle between Carnival Cruise and a bankrupt software developer over the OceanMedallion™ guest engagement system. Discover how Carnival fought to protect its proprietary innovation and the outcome of this high-stakes showdown.

M&A Stories 

September 8, 2023

Introduction:

Carnival, the cruise company known for unforgettable voyages, has a secret weapon called the OceanMedallion™ guest engagement system. It’s like the magic wand that makes your cruise experience extra special.

Carnival had hired a software developer to create some digital wizardry for this system. They shared their secrets, their ideas, and their know-how, making this software unique and exclusive to Carnival.

But the software developer hit some rough waters and ended up in a Delaware bankruptcy. And guess what they’re trying to do? They want to sell their DXP software, the one with Carnival’s secret sauce inside, to the highest bidder!

Carnival is not having it. So, what’s happening now is a legal showdown. Carnival is on a mission to protect its innovation, its secret ingredients, and its way of making your cruise experience truly magical.

It’s a battle of who gets to keep and control this unique software.

Background:

So, here’s the backstory: The software seller found themselves in financial hot water and filed for bankruptcy.

They made a deal with what we’ll call a “stalking horse bidder” for an auction sale. Think of them as the first person in a bidding race, kind of like the leader at the starting line in a race.

Now, what’s interesting is that this stalking horse bidder was connected to the lender who had given the seller money both before and after they hit these financial bumps.

The Delaware bankruptcy judge approved this plan, which included selling the seller’s DXP software assets free of any intellectual property infringement claims.

Legal Proceedings:

Carnival challenged the proposed sale. They asked the judge to rule that the seller’s DXP software contained Carnival’s proprietary information. Carnival also asked the court to order the seller to stop using, disclosing, or trying to sell its DXP software.

Outcome:

The court ruled that in Carnival’s favor.

Comment:

The seller’s lender and stalking horse bidder, before the Carnival litigation, probably had no idea about the infringement mess that was brewing.

Why’s that? Well, the seller had an impressive track record between 2009 and 2014. They were a seasoned pro in the cruise and hospitality world, working on more than 90 projects, including Disney Cruise Line, Walt Disney Parks & Resorts, Royal Caribbean Cruise Lines, and Bags, Inc.

And here’s the kicker: Since at least 2011, the seller had been diving deep into software architecture for cruise ships. They were like the behind-the-scenes maestro making sure everything ran smoothly on those luxury liners, thanks to their work with Disney and other big players.

Case Reference:

See IN RE DeCURTIS HOLDINGS LLC, Case No. 23-10548 (JKS) (Jointly Administered), Adv. Pro. No. 23-50413 (JKS), United States Bankruptcy Court, D. Delaware (August 9, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 

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 Problems with intellectual property, Uncategorized Tagged with: , , , , , , , , , , ,

Buyer’s Defamation Claim in Failed Bankruptcy M&A Deal

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M&A Stories 

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 

Introduction:

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.

Background:

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.

Legal 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).

Outcome:

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.

Comment:

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.

Case Reference:

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.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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.

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