Explore a complex M&A case where a buyer’s fraud claim challenges a promissory note, leading to a legal battle and an important court decision. Gain insights into the interconnection of purchase agreements, note obligations, and fraud allegations.
July 8, 2019
M&A Stories
Introduction:
Obtaining a judgment against a debtor who defaults on a promissory note might seem straightforward—just present the signed note and prove nonpayment. However, not all cases are that simple.
The Case:
In this case, the transaction revolved around the sale of a fitness center. During due diligence, the seller provided the buyer with the fitness center’s historical revenue performance.
The asset purchase agreement stated that the buyer’s purchase relied on the seller’s representations. It also included warranties from the seller that no provided information contained untrue statements of material fact or omitted material facts. The obligation regarding the accuracy of these statements extended for one year after closing.
The Twist:
The buyer, after closing, discovered that the fitness center’s historical revenue provided by the seller was overstated. Additionally, the seller did not disclose the sharp decline in the facility’s revenue.
The Legal Battle:
The seller took the buyer to a New York state court, seeking summary judgment on the note under New York law. The buyer countered by alleging fraud and requesting that the court rescind or unwind the transaction, thereby relieving them of liability under the note.
The Court’s Decision:
Under normal circumstances, a creditor can obtain summary judgment on a promissory note in New York when the debtor admits note default. However, there are exceptions. This case fell into one of these exceptions.
The court ruled that when the note is “inextricably intertwined with the obligations contained in the purchase agreement,” and a breach of that agreement is alleged, summary judgment on the note should not be granted. In this situation, the Asset Purchase Agreement pertained to the fitness facility’s purchase, the note covered the purchase funds, and the agreement contained warranties by the seller regarding the truth and accuracy of provided information. The court found the note and the asset purchase agreement to be interconnected. Furthermore, the buyer’s claim of being fraudulently induced into entering the agreement raised enough factual questions to thwart the seller’s motion.
Conclusion:
Ultimately, this case highlights that the buyer has the right to challenge the note by alleging fraud and asking the court to rescind or unwind the deal.
Case Reference:
Viveros Fitness, LLC v. JB2 Fitness, LLC, Docket No. 2018-2465, Supreme Court, Chemung County, (June 18, 2019)
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
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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