Explore a significant M&A legal case involving the acquisition of a treadmill manufacturing company, where the buyer’s responsibility for warranties was at the heart of the lawsuit. Learn how the Texas Supreme Court’s decision impacted the outcome.
M&A Stories
November 18, 2020
Introduction:
When a buyer acquires a manufacturing company, they often prefer purchasing its assets over equity to reduce the risk of post-closure product liability claims.
The Acquisition:
In this case, an asset purchase agreement was made for the acquisition of a treadmill manufacturing company. The buyer explicitly took responsibility for the seller’s written repair or replacement warranty but explicitly rejected assuming any other form of seller’s product liability.
The Lawsuit:
Prior to the transaction’s completion, the seller had sold a treadmill to a gym. Unfortunately, a woman using the treadmill suffered a fall resulting in her demise. The woman’s family filed a lawsuit against the buyer in a Texas state court, arguing that the buyer had automatically taken on the implied warranty of merchantability under the Texas version of the Uniform Commercial Code.
Legal Proceedings:
The initial trial court ruled in favor of the buyer. The family, however, appealed to a Texas intermediate appellate court, which surprisingly overturned the decision. The buyer then escalated the case to the Texas Supreme Court, which ultimately ruled in favor of the buyer. The court held that as an asset purchaser, the buyer would only be bound by the seller’s implied warranty of merchantability if the asset purchase agreement explicitly mentioned it.
The Decision:
The buyer had not included an explicit assumption of the implied warranty of merchantability in the agreement, which focused solely on the written warranty for repairing or replacing defective treadmill parts. The Texas high court emphasized that the buyer’s clear commitment to the repair or replacement warranty did not equate to assuming the implied warranty of merchantability imposed by law. Thus, the court granted summary judgment in favor of the buyer and rejected the family’s claim for an implied warranty of merchantability.
This case is referred to as Northland Industries, Inc. v. Kouba, No. 19-0835, Supreme Court of Texas, (Argued October 7, 2020, Opinion Delivered: October 23, 2020)
Comment:
The Texas Supreme Court’s decision aligned with the facts of the case. The buyer’s agreement explicitly covered only the repair or replacement warranty. Interestingly, the dissenting opinion from the chief justice at the intermediate appellate level strongly disagreed with the majority opinion of that court.
By John McCauley: I help people manage M&A risks involving privately held companies.
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
Legal Disclaimer
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.
Recent Comments