Explore a compelling M&A legal battle case study where a Houston-based franchise faced challenges post-sale. Dive into the complexities of personal guarantees, nondischargeable debt in bankruptcy, and the crucial role of due diligence for both buyers and sellers.
M&A Stories
September 10, 2018
In a recent M&A legal battle, a Houston-based franchise business providing in-home care services faced challenges after its sale. The buyer, a husband-and-wife team, aimed to acquire the business for $750,000. The deal involved a $562,000 promissory note personally guaranteed by the buyers.
As the maturity date approached, financial difficulties arose, prompting an extension of the business note’s maturity. Eventually, the buyer filed for Chapter 7 bankruptcy to evade liability, leading to a complex legal scenario. During bankruptcy proceedings, it was revealed that the buyers had omitted an $84,000 liability to the U.S. Department of Labor from their financial statements. Additionally, the collateral securing the personal guarantee was compromised, impacting the seller’s claim.
The seller argued that the buyer’s owner couldn’t discharge their personal guarantee in bankruptcy due to the omitted Department of Labor obligation. Despite challenges, the bankruptcy court allowed the seller to proceed, preventing the discharge of the personal guaranteed liability.
Key Takeaways:
Due diligence is crucial for both buyers and sellers, especially when part of the purchase price is deferred. Sellers should secure buyer notes with guarantees, necessitating due diligence on the buyer and its owner. Public records searches for liens and judgments against the buyer and owner are essential. Transparent communication about liabilities can prevent deal failure and potential bankruptcy.
Case Reference:
In Re Lubojacky, Case No 17-30599, Adversary No. 17-03236, United States Bankruptcy Court, S.D. Texas, Houston Division (August 31, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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