Learn about the legal risks associated with acquiring assets that are used as collateral for a seller’s loan in M&A deals. This blog post discusses a real case and offers insights on conducting UCC searches to avoid costly mistakes.
October 13, 2019
Introduction:
When buying a business, there’s a legal risk associated with acquiring assets that are used as collateral for a seller’s loan.
The Deal:
This follows a situation where a buyer purchased assets from a seller who manufactured video lottery machines. You can find more details here.
The problem arose because the buyer didn’t conduct a UCC search in Nevada, where the seller was incorporated. If they had, they would have discovered that all of the seller’s property, including the machines and location contracts, were used as collateral for a $1.5 million loan from a secured lender.
The Lawsuit:
After the purchase, the buyer placed some of the video lottery machines in Maryland restaurants according to location contracts. The buyer had paid the seller $1.2 million for these machines.
However, the seller defaulted on its $1.5 million loan. The lender then sued the buyer in a Maryland federal district court and received a preliminary injunction. This injunction required the revenue from the Maryland machines in the restaurants to be held in trust while the lawsuit proceeded.
Eventually, the court ruled in favor of the secured lender, ordering the buyer to pay $1.2 million for the Maryland machines, plus $150,000 in pre-judgment interest.
Comment:
This serves as a strong reminder to buyers to conduct thorough UCC searches. In this case, the buyer’s failure to do so led to them paying the seller double the original $1.2 million purchase price. It’s essential to check the financing statements filed in the state where the seller’s business is incorporated or, if it’s not a business entity, in the state where the seller resides.
Case Reference:
Potts v. Maryland Games, LLC, Civil Action No. CBD-18-3250, United States District Court, D. Maryland, Southern Division (September 27, 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
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