Explore a case study on M&A legal issues as a supplier sues a seller for alleged fraud. Learn about the legal challenges and key takeaways.
M&A Stories
October 30, 2023
Introduction:
Selling your company’s assets can pose a significant risk to the owner, particularly when there’s an attempt to commit fraud to evade payment to creditors.
Case Background:
A business relationship commenced in July 2012 between a supplier and the company, involving the supply of corrugated paper pizza boxes with printed logos. By October 2016, discussions led to a Master Supply and Purchase Agreement. Under this agreement, the supplier offered discounts, rebates, and a one-time payment in exchange for the company’s commitment to buy products and grow the business.
However, issues arose within a few months, with the supplier alleging breaches, including the company signing a letter of intent to sell assets to a competitor of the supplier. The alleged fraudulent activities continued, with false statements by the company’s owner.
On March 13, 2017, the asset sale to the competitor was completed, and the supplier claimed that the sale proceeds were transferred to the company’s owner. The supplier also argued that rebate payments were assigned to the competitor without the corresponding obligations, leading to the cessation of business operations and non-notification of the asset sale.
Legal Challenge:
The supplier seeks damages, asserting that the sale of assets to the owner was to defraud them under the Ohio Uniform Fraudulent Transfer Act, resulting in a federal court case in Tampa.
Outcome:
The court denied a motion to dismiss, highlighting the supplier’s grounds to claim creditor status and the fraud committed by the company. This underscores the legal risks that sellers and their owners face when attempting to avoid payments to creditors through fraudulent means.
Key Takeaway:
When considering selling a business, it is crucial to conduct negotiations with suppliers, vendors, employees, and customers in good faith. Failing to do so can result in severe legal consequences, particularly when fraudulent actions are involved.
Case Reference:
Pratt Corrugated Holdings, Inc. V. Porter Pizza Box of Ohio, LLC, Case No. 8:23-cv-1825-WFJ-AEP United States District Court, M.D. Florida, Tampa Division (September 12, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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