The seller did not follow purchase agreement when it (a) sent notice of termination of the deal to buyer by electronic mail and (b) failed to give buyer ten business days to cure the default.
M&A Stories
March 13, 2023
Introduction
In certain business transactions, buyers may provide a substantial cash deposit that can be forfeited to the seller under specific circumstances. However, it is crucial for sellers to adhere to the proper procedures for deposit forfeiture. This blog highlights a case where a seller lost the right to retain a $605K deposit due to non-compliance with termination procedures.
The deal
The seller in question owned a chain of nursing homes in Iowa, which ended up in bankruptcy after the founder’s passing. A buyer agreed to purchase the nursing home chain for $12.1 million and submitted a $605K cash deposit. As part of the agreement, the buyer was required to sign management agreements for each nursing home by a specified date. Unfortunately, the buyer failed to meet the deadline, prompting the seller to send a termination notice via email. Subsequently, the nursing home was sold to another buyer.
The lawsuit
The buyer demanded the return of the $605K cash deposit, but the seller refused. Consequently, the buyer sought legal intervention to recover the deposit. The court ruled in favor of the buyer, ordering the seller to return the deposit. The seller could have retained the deposit had they followed the termination procedure outlined in the purchase agreement. However, the seller made two critical errors. Firstly, they sent the termination notice via email, which was not permitted according to the agreement. The agreement stipulated that notices must be in writing and delivered by hand, overnight courier, or regular first-class U.S. mail, with prepaid postage. Secondly, the seller was obligated to provide the buyer with an opportunity to sign the management agreements within ten business days of receiving a proper termination notice. However, the buyer had already signed the agreements within the ten-day period, even though the initial notice was defective due to being sent via email.
See In Re QHC Facilities, LLC, Case No. 21-01643-als11, United States Bankruptcy Court, S.D. Iowa, (Filed January 26, 2023).
Lesson Learned
This case serves as a reminder to both buyers and sellers about the importance of adhering to notice provisions in purchase agreements. While these provisions may appear standard, disregarding them can lead to significant consequences. Buyers and sellers should ensure strict compliance with the agreed-upon procedures to avoid complications and potential financial losses.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
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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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