The equipment was secured by a seller debt. As part of the deal the seller leased the encumbered equipment to the buyer. After seller repossession, the buyer unsuccessfully claimed that it owned the equipment.
M&A Stories
February 28, 2023
Introduction
This business acquisition involved valuable farm equipment, that was secured by a seller debt.
Details of the Deal
The seller operated a business involved in the growth, processing, and export of hay and alfalfa to Asian markets. The buyer agreed to purchase the business assets for $3 million in cash.
Secured Equipment: The assets included two valuable pieces of equipment that served as collateral for seller debt. The first was an alfalfa baling press, securing a debt of $1.2 million. The second was a set of 13 liquefied natural gas (LNG) trucks, securing a debt of $478,000.
Lease Agreement: Instead of seeking permission from the secured lender for the equipment transfer, the seller decided to lease the equipment to the buyer. The buyer’s rental payments were meant to service the seller’s debt.
Buyer’s Default and Equipment Repossession: Two years after the deal’s completion, the buyer ceased business operations and started selling off its assets without making any further payments to the seller. Consequently, the seller repossessed the equipment, selling the press for $1.5 million while retaining ownership of the trucks.
The Lawsuit
The buyer sued the seller, claiming ownership of the equipment. However, the trial court ruled in favor of the seller, stating that the buyer had only leased the equipment. The buyer appealed the decision, but the appellate court upheld the trial court’s ruling, emphasizing that the lease agreements clearly stated the equipment remained the seller’s property.
Legal Fees: Additionally, the appellate court upheld the trial court’s order for the buyer to pay the seller’s legal fees. This decision was based on an agreement between the parties, outlined in the deal documents, stating that the losing party would be responsible for the winner’s legal fees.
See HayDX, Inc. v. Ichida, No. E076124, Court of Appeals of California, Fourth District, Division Two, (Filed January 10, 2023).
Conclusion
The lack of clarity in the contract terms regarding the rights and obligations of the buyer and seller in the event of non-payment might have been a factor leading to the litigation. The appellate court acknowledged that the written contracts between the parties were not particularly clear or well-defined.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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