Explore the legal consequences of a buyer neglecting to secure a patent license during the acquisition of a company in chapter 7 bankruptcy. Learn from the Provider Meds, LLC case.
M&A Stories
November 9, 2018
In this M&A story, we examine the implications of a buyer failing to secure a patent license agreement during the acquisition of a company in chapter 7 bankruptcy.
Before the seller filed for bankruptcy, a patent dispute arose over remote pharmaceutical dispensing technology. The parties settled, with the seller obtaining a non-exclusive perpetual license for a one-time $4,000 fee paid for each machine sold by the seller and quarterly reporting obligations.
The seller later filed for chapter 11 bankruptcy, which shifted to chapter 7 liquidation. Importantly, the license agreement wasn’t listed in the bankruptcy schedule. The buyer, holding a security interest in the seller’s collateral, purchased assets outlined in an agreement approved by the bankruptcy court.
However, the asset purchase agreement didn’t explicitly mention the license. Legal battles ensued when the licensor claimed the seller hadn’t fulfilled obligations under the license agreement. The buyer intervened claiming ownership of the license.
The courts ruled against the buyer, stating that the license agreement was an “executory contract.” The ongoing obligations of both parties, combined with the trustee’s 60-day window to accept or reject the agreement, played a crucial role. The trustee, unaware of the agreement due to the seller’s oversight, didn’t accept it within the timeframe, leading to the rejection of the license as an asset.
In essence, the buyer’s failure to discover the license during due diligence within the critical 60-day period limited their options. The court emphasized the trustee’s fiduciary duty to identify unscheduled assets, placing the responsibility on the buyer to uncover such crucial details in the acquisition process.
Very import that buyers have a good bankruptcy lawyer to protect its interests when buying a business out of bankruptcy.
In The Matter Of Provider Meds, LLC, No. 17-11113, United States Court of Appeals, Fifth Circuit (October 29, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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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