Exploring a legal case where a business owner’s personal behavior led to personal liability in an M&A transaction. Learn how a seller’s owner can be held accountable for their actions even when not directly named in the agreement.
February 28, 2020
Introduction:
In the world of business, when the owner of a corporation or LLC decides to sell the company’s assets, they usually aren’t personally on the hook for the buyer’s obligations in the agreement. This changes if they personally sign the agreement or guarantee the company’s commitments. However, there’s an exception when the owner’s behavior is questionable.
The Situation:
In this case, three trampoline parks located in California, New Jersey, and New York were sold to a single buyer through separate asset purchase agreements. The person behind these parks was the primary owner of each park’s operating LLC. Their ownership in these selling LLCs was through holding companies, which were also LLCs.
The Sale:
The founder sold all three parks to the buyer at the same time, each park having its own asset purchase agreement. The sale price depended on a multiple of the combined earnings of the parks (EBITDA), with historical and projected earnings influencing the price for each park.
The Legal Dispute:
After the sale, it was revealed that two competing trampoline parks were opening very close to the New Jersey park that was sold. The founder knew about these competitors but didn’t disclose this to the buyer before the sale. This was significant because the New Jersey park’s earnings influenced the sale price for all the parks.
The buyer took legal action, claiming that the founder breached the seller’s representations and warranties in the asset purchase agreement for the California park. The founder argued that even if there was a breach, it was by the selling California LLC, not by them personally.
The buyer acknowledged that the founder wasn’t a party to the California agreement and wasn’t a guarantor of the LLC’s obligations. However, the buyer argued that the founder’s LLC, which held a controlling interest in the selling LLC, was part of the agreement, and the founder signed on behalf of this LLC as its manager.
The buyer also cited a law stating that a member or manager of an LLC could be personally liable under certain circumstances, similar to a corporation shareholder’s liability. The court agreed with the buyer, rejecting the founder’s attempt to dismiss the claim.
Conclusion:
This case serves as a reminder that a business owner’s personal actions can lead to personal liability, even when dealing with the sale of a business through a corporation or LLC. The court’s decision shows that under certain circumstances, a seller’s owner can be held personally accountable for their actions, even if they’re not directly named in the agreement.
Case Reference:
This case is referred to as Rush Air Sports, LLC v. RDJ Group Holdings, LLC, No. 1:19-cv-00385-NONE-JLT, United States District Court, D. Colorado (February 14, 2020).
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
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