In August 2015, the seller, an oil and gas operator, agreed to sell oil and gas assets located in Utah to the buyer for $11.5 million. The buyer did not have the financing and so the buyer cut a deal with Don (referred to as the buyer’s assignee), who agreed to buy the seller’s assets. Under this deal, the buyer’s assignee would buy and own the oil and gas assets, and the buyer would operate the oil and gas properties for a 30% net profits interest.
The seller agreed to the buyer’s assignment of the buyer’s right to purchase the seller’s assets, as long as the buyer remained on the hook for the obligation to pay the purchase price. The buyer and seller subsequently signed the asset purchase agreement (“APA”).
By October 4, 2015 the buyer had completed its due diligence. The buyer asked the buyer’s assignee to complete its remaining due diligence and work on completion of the net profits operating agreement.
After that the deal went south. The buyer’s assignee did not get all the due diligence information it had request from the seller. And the seller terminated the APA on November 9, 2015, claiming that the buyer had not satisfied certain conditions and performed certain covenants by the deadline of November 6, 2015.
On February 12, 2016, the buyer sued the seller and the buyer’s assignee. The buyer alleged that the seller had breached the terms of the APA by refusing to cooperate with the buyer to close the APA. The buyer also sought a declaration that it was entitled to performance under the APA.
The seller argued that the buyer had no claim against it for a breach of the APA because the buyer had assigned all its rights in the APA to the buyer’s assignee. The buyer replied that its claim for breach of the APA did not fail because the assignment was partial and, thus, the buyer retained some interest in the APA. In particular, the buyer argued that the seller’s consent to the assignment was conditioned on the buyer retaining its obligations, including indemnity obligations under the APA.
The Texas appellate court agreed with the seller. It held that unless qualified, the assignment is a transfer of the buyer’s whole interest in the APA to the buyer’s assignee. Following an unqualified assignment, the buyer loses all rights to enforce the APA.
The court noted that the APA specifically stated that the buyer’s assignment of its APA rights to the buyer’s assignee did not relieve the buyer of any of its APA obligations. That the buyer retained its APA obligations did not give the buyer the right to legally enforce the APA against the seller.
This case is referred to as Pacific Energy & Mining Company v. Fidelity Exploration & Production Company, Inc, No. 01-17-00594-CV, Court of Appeals of Texas, First District, Houston, (Opinion issued July 24, 2018).
Comment. The buyer could not finance this deal on its own. It obtained a funding source but lost control of the deal. It may have been the buyer’s best shot, but the probability of closing depends upon not only the seller but the financing source.
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