Explore the legal implications of fraud in M&A deals and how it can impact bankruptcy proceedings. Learn from the case of In Re Morabito and discover why fraud liability may not be discharged in bankruptcy.
M&A Stories
February 23, 2019
In a recent case (In Re Morabito), a seller of convenience stores faced legal trouble in an M&A deal. Here’s the story:
1. Seller and buyer in a stock acquisition disagreed on a working capital estimate.
2. Seller filed a lawsuit to get the disputed money; buyer claimed fraud.
3. Court found seller committed fraud, awarding the buyer $150 million, $85 million for fraud.
4. They settled, seller agreed to pay $85 million but defaulted.
5. Buyer filed a confession of judgment in court.
6. The court upheld the confession, and the buyer initiated an involuntary bankruptcy against the seller.
7. The bankruptcy court ruled the $85 million debt as nondischargeable due to fraud.
8. The seller appealed but lost.
Moral of the Story:
Fraud in M&A can lead to hefty damages beyond indemnification caps, and fraud liability may not be discharged in bankruptcy.
Case Reference:
In Re Morabito, Case No. 3:18-cv-00221-MMD, United States District Court, D. Nevada, (January 22, 2019).
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
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