The seller’s unpaid creditors contend that other potential strategic partners were willing to pay between $42 million and $51 million for the seller.

M&A Stories

September 26, 2022


Selling a distressed business involves unique risks for the seller’s owner and the potential buyers.

The deal

The Pittsburgh based seller, with 2019 revenues in excess of $88 million, and 650 employees, became financially distressed. The owner agreed to a deal put together by his secured lenders to sell the assets of the business to a private equity company for $36M cash. He did this deal without replacing his recently lost CFO and COO.

This deal paid off the secured lenders but left $30 million in unsecured debt. The seller slid into bankruptcy after the sale.

The lawsuit

The unsecured creditors challenged the sale by suing the seller’s owner and the buyer acquisition company, and the buyer’s private equity owner in the bankruptcy court, claiming that the company could have been sold for more money, pointing to two offers that had been rejected by the seller’s owner for between $42 million and $51 million.

The seller’s owner and buyer group moved to dismiss the claims. The court refused to do.

The seller’s owner was the CEO of the seller. The court found these allegations about the owner if true could support a claim that he as an officer of the seller breached his fiduciary duty of care and loyalty to his company: (1) he failed to adequately explore, consider, and deliberate other potential suitors; (2) he failed to take the prudent step of marketing the business to third parties, failed to hire a broker or investment banker to market the business before consummating the transaction with the buyer, and otherwise failed to open the business up for auction at the pre-bankruptcy foreclosure sale; (3) he “was intentionally or grossly uninformed regarding the value maximizing options available” to the seller because he “failed to have a functioning and disinterested board of directors, failed to follow corporate formalities (e.g., failed to have formal board meetings, failed to have proper board resolutions, and failed to have corporate minutes), failed to hire the requisite professionals to assist … (the seller) … in valuing the seller and finding strategic partners, and failed to cause … (the seller) … to form a committee of independent and un-conflicted fiduciaries to analyze any proposals for the purchase of … (the seller) … or for the purchase of equity in … (the seller) …

The court also found that the unsecured creditors’ allegations if true could make the buyer and its owner responsible for the seller’s debt owed to the unsecured creditors. The buyer could be held responsible under Pennsylvania’s de facto merger successor liability theory. Under this theory a continuation of the seller’s operations with the same people and same place can make the buyer responsible for the seller’s debts if the seller’s owner had also received equity in the buyer.

The court found that the unsecured creditors had met this pleading requirement. The court found an allegations that the seller’s CEO “actually acquired equity in … (the buyer) … as part of his employment package” and received a “performance based bonus” which gives him “a share in profits of” …(the buyer) …”

The private equity buyer’s owner could then be held responsible for the buyer under a “piercing the corporate veil” theory. That is because of allegations that “the buyer is a special purpose vehicle, created and dominated by the buyer’s owner for the sole purpose of completing the complained of transactions …”

See In Re Pa Co-Man, Inc., Bankruptcy No. 20-20422-JAD, Adversary No. 21-02061-JAD., 21-02075-JAD, 21-02076-JAD, United States Bankruptcy Court, W.D. Pennsylvania., (September 19, 2022).


The seller’s owner and the buyer group could have probably avoided this very expensive, and time consuming litigation by conducting a bankruptcy code section 363 sale under the supervision of the bankruptcy court. The cost for going through a bankruptcy sale could be losing the deal or paying more.

By John McCauley: I write about recent legal problems of buyer 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

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

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