Vague APA Note Payment Adjustment Provision Results in Lawsuit

Introduction

This post closing asset deal dispute could not be resolved by summary judgment because the purchase money note adjustment provision was held to be an unenforceable agreement to agree.

The deal

The Utah based seller manufactured a garden planter product that it sold to garden stores and other consumers. After manufacturing and selling the product for some time, the seller decided to sell the manufacturing molds to the buyer, a local garden seed and supply company.

The buyer paid $100K at the August 2011 closing and delivered a $400K note payable in 8 annual installments of principal and interest beginning August 15, 2012; with the balance of principal and interest payable on August 15, 2019. The amount of the annual payment was not specified.

The note provided for reduced note payments in the in the event the planter product “failed to generate expected sales numbers in any given year” in which case “the terms of this Note shall be modified in proportion to the reduced sales numbers.”

“Expected sales numbers” was not defined. However, the seller represented the amount of its net sales for 2009 and 2010 as well as interim pre-closing numbers for 2011 in the asset purchase agreement. Also, the amount of each annual note payment was not specified.

The buyer made 4 annual note payments after the closing. In each case in disclosed how the buyer calculated the payments. The buyer used $50K as the base amount of the payment (presumable taking the $400K principal amount of the note divided by 8 annual payments). The buyer then used the last full year of pre-closing product sales (2010) as the “expected sales numbers”. The product sales for each of the first 4 years after the closing were significantly less than the 2010 product sales amount so buyer’s first 4 year note payments were significantly less than $50K.

The lawsuit

After four years of accepting the buyer’s payments, the seller sent the buyer a written notice of default claiming the buyer had failed to pay the “total amount due each year” and demanding the full balance of the loan under the note’s acceleration provision. The buyer refused saying that the amounts were in accordance with the “expected sales numbers” payment adjustment provision of the note.

The seller sued the buyer in a Utah state court. The trial court agreed with the buyer and dismissed the seller’s lawsuit and the seller appealed. The intermediate appellate court held that while the buyer and seller agreed to modify the note amounts in the event sales expectations were not met, their failure to agree on the tools to achieve that modification renders the note payment amount adjustment provision indefinite and unenforceable.

This case is referred to Bloom Master Inc. v. Bloom Master LLC.No. 20170226-CA, Court of Appeals of Utah, (Filed April 25, 2019)

Comment

The seller and buyer would have saved themselves a lot of time, money and stress by simply cleaning up the note terms. Several recommendations:

  1. State the annual interest rate;
  2. State the total amount of each annual note payment due before adjustment;
  3. State the expected sales numbers to use for the adjustment;
  4. State the formula; and
  5. Give an example.

By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).

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 agreement to agree is unenforceable, note payment amount adjustment, promissory note, purchase price, purchase price adjustment Tagged with: , , ,

Recent Comments

Categories