The buyer purchased all business assets other than expressly excluded assets, and the construction lien was not described as an excluded asset.
M&A Stories
August 10, 2021
Introduction:
In the world of business sales, asset purchases are common, where the buyer acquires almost all of the seller’s assets, except for specific exclusions detailed in the agreement. A recent case sheds light on the importance of thorough due diligence during such transactions.
The Case:
The case involved a Vancouver-based subcontractor who faced financial difficulties and decided to sell its assets, including a receivable owed by a general contractor for work performed under a subcontract. The buyer purchased all the assets, and one of them was this receivable.
However, the general contractor refused to pay the receivable, prompting the buyer to record a construction lien on the Kirkland apartment property where the work had taken place.
The Ruling: The matter was brought before a Washington state appellate court, which ruled in favor of the buyer. The court held that the right to the construction lien had been effectively transferred to the buyer through the asset purchase agreement.
The court clarified that the assets included in the agreement were not limited to those specifically listed; instead, any assets not expressly excluded were part of the deal. Since the construction lien was not excluded, it was considered assigned to the buyer through the asset purchase agreement.
The general contractor argued that the buyer could not be assigned the construction lien because the cause of action (the right to enforce the lien) did not exist before the sale. However, the court disagreed, stating that the lien arises when labor is performed or materials are furnished. As the seller had performed the work before the sale, the cause of action existed at that time, allowing the buyer, as the assignee of the lien, to enforce it.
This case is referred to as Lennar Multifamily Builders, LLC v. Saxum Stone, LLC, No. 81879-1-I, Court of Appeals of Washington, Division One, (Filed July 19, 2021).
Conclusion:
This case highlights the importance of comprehensive due diligence for buyers in business asset purchases. In this instance, the buyer’s diligence uncovered an uncollected receivable, which could then be enforced through a construction lien, ultimately safeguarding their interests in the transaction.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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