Delaware Court denies seller’s motion to dismiss buyer’s claims that seller changed practice before closing by signing up customers with low FICO scores.
April 13, 2021
A buyer uses past performance and future projections to help price a target business. The purchase agreement usually contains representations and warranties that the seller has not changed practice since the last available financial statements. This deal illustrates why those representations and warranties help manage that risk.
This deal involved the acquisition of timeshare resort assets. The buyer purchased the timeshare business and existing contracts with the timeshare members and the seller retained the majority right to the payment stream on those existing contracts. The buyer was responsible for collecting from the timeshare members.
The seller represented and warranted in the purchase agreement that since the lasted audited financial statements it had not changed, “in any material respect, any credit policies or policies or practices relating to the collection of the Timeshare Installment Contracts and Accounts Receivable or payment of payables; … (or changed) … in any material respect, the underwriting standards or other credit criteria for the sale and/or financing of the sale of Timeshare Interests …”
After the closing the buyer sued the seller in Delaware state court. One of its claims was that the buyer discovered after the closing that the seller had in fact changed its underwriting practice after the date of the last audited financial statements by lowering its underwriting standards for new members by signing up members with much lower FICO scores than it had in the past. The buyer claimed that seller fraudulently induced the buyer to sign the purchase agreement by not telling the buyer of the changed underwriting practice.
The seller’s motion to dismiss this claim was denied and the litigation will continue. .
This case is referred to as CRE NIAGARA HOLDINGS, LLC v. RESORTS GROUP, INC., C.A. No. N20C-05-157 PRW CCLD , Superior Court of Delaware, (Submitted: February 19, 2021. Decided: April 7, 2021.).
The buyer also sued the seller for breach of the above representations and warranties. However, the breach of representations and warranties claim is subject to an agreed upon indemnification cap. Damages for fraudulent inducement should be free of the indemnification cap.
By John McCauley: I help people manage M&A legal risks.
Telephone: 714 273-6291
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