Explore a real-life M&A case involving unpaid receivables and the legal implications for both buyers and sellers. Understand the risks and strategies to manage bad receivables in your M&A transactions.
M&A Stories
March 20, 2019
Introduction:
In the world of mergers and acquisitions, the status of a seller’s accounts receivable can become a critical issue. This article delves into a case that highlights the importance of managing the risk associated with bad receivables and the potential impact on the purchase price.
The Case:
In July 2015, an acquisition took place involving the assets of a medical billing company, following an asset purchase agreement. A significant concern arose due to a large outstanding receivable from a customer who paid the seller based on collections from medical billings. After the acquisition, this customer refused to pay a substantial portion of this receivable, citing the seller’s failure to fulfill contractual obligations. The customer also claimed that the seller had previously agreed to write off pre-2015 receivables, a surprise revelation for the buyer.
The Lawsuit:
Subsequently, the customer initiated a lawsuit against both the seller and the buyer, which landed in a Pennsylvania federal district court. In response, the buyer sued the seller, alleging that the seller had warranted the validity of the customer receivables. Any alleged agreement by the seller to write off the pre-2015 accounts receivable would constitute a breach of this warranty, according to the buyer’s claim. The seller, however, denied any such agreement. The court determined that the seller would be held responsible for the write-off if trial evidence confirmed its existence.
Additionally, the buyer sought indemnification from the seller for any losses incurred in defending against the customer’s lawsuit. However, the court ruled against this request, as the asset purchase agreement did not include a provision obligating the seller to indemnify the buyer for losses stemming from the customer’s legal action.
Comment:
In M&A transactions, it’s common to adjust the purchase price post-closing for uncollectible receivables. Typically, this adjustment is secured through methods such as withholding a portion of the purchase price or placing funds in escrow. Buyers may also consider seeking indemnification for legal disputes arising from the seller’s pre-closing business operations.
Case Reference:
Moore Eye Care, PC v. ChartCare Solutions Inc., Civil Action No. 15-cv-05290, United States District Court, E.D. Pennsylvania, (March 7, 2019).
By John McCauley: I help businesses minimize risk when buying or selling a company.
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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