Explore the intricacies of buyer liability in an asset purchase involving a tar lugger business, as clarified by a recent New Mexico court decision. Understand the legal dispute, court’s ruling, key points, and implications for buyers in asset purchase transactions.
M&A Stories
August 22, 2018
In a recent legal case (August 2018), the New Mexico federal district court examined buyer liability intricacies in an asset purchase involving a tar lugger business, specifically a manufacturer of hot tar holding tanks commonly used in roofing.
Background: In 2013, the buyer acquired the assets of the tar lugger business from the seller. About a year later, an incident during a roofing job at the White Sands Missile Range involving the tar lugger, originally sold by the seller, resulted in injury to a roofer.
Legal Dispute: The injured roofer sued the buyer, claiming responsibility for the tar lugger created and sold by the seller. The argument presented was that the buyer had successor liability under the de facto merger doctrine.
Court’s Ruling: The court highlighted the general rule in New Mexico, stating that the buyer does not inherit the seller’s liabilities in an asset purchase unless explicitly assumed. The de facto merger doctrine might apply in certain circumstances if the business continues post-closing, but only if the seller or its owner received buyer equity. The court rejected attempts to characterize the seller’s earnout as buyer equity.
Key Points: The court emphasized that the transaction was a straightforward asset sale for cash, lacking the transfer of buyer equity to the seller or its owner—essential for a de facto merger.
Legal Implications: Buyers are often potential sources of recovery for creditors in asset purchase transactions. The de facto merger doctrine, while not universally applicable, emerged as a critical factor. In this case, the absence of a stock transfer but entitlement to an earnout raised questions about the doctrine’s applicability.
Conclusion: The court’s decision reinforces that a typical earnout does not equate to the seller receiving an ownership interest in the buyer. This distinction is crucial for buyers concerned about being sued for unassumed seller liabilities under the de facto merger doctrine.
Case Reference:
Ramos v. Foam America, Inc., No. CV No. 15-980 CG/KRS, United States District Court, D. New Mexico, (August 13, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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