In this engaging M&A blog post, we dive into a compelling legal case where a buyer successfully blocked a seller’s bankruptcy discharge over a $225,000 non-compete violation. Through this case study, we highlight the crucial importance of adhering to non-competition agreements in mergers and acquisitions. Business owners and legal professionals will gain insights into the severe consequences of breaching non-compete covenants and understand how bankruptcy cannot always shield violators from hefty judgments. Stay informed about M&A legalities to safeguard your business interests effectively.
M&A Stories
June 29, 2024
In mergers and acquisitions, business owners often agree to non-competition covenants to protect the goodwill of the purchased business. However, some sellers choose to compete against the sold business post-closing, leading to serious consequences that cannot always be avoided through bankruptcy.
This case involves a company that manufactured filters for septic tanks. During negotiations, one of the seller’s owners wanted a clause allowing him to make and sell competing products, but the buyer refused, and the clause was excluded from the non-compete agreement.
After the sale, the seller began producing and selling competing products, violating the non-compete and infringing on the product patent sold to the buyer. The buyer, upon discovering this, sent a cease-and-desist letter, which the seller ignored. The buyer subsequently secured a $225,000 judgment for willful patent infringement from a federal district court.
The seller then sought to discharge the judgment through bankruptcy, but the buyer objected, arguing that the seller’s actions were willful and malicious. The bankruptcy court sided with the buyer, ruling that the $225,000 judgment could not be discharged in bankruptcy.
This case highlights that M&A sellers face significant risks when disregarding non-compete agreements. Intentional competition post-closing can result in substantial monetary damages that may not be discharged in bankruptcy.
Case Reference: In Re Hornback, CASE NO. 20-10794(1)(7) A.P. NO. 21-01020, United States Bankruptcy Court, W.D. Kentucky, (Signed February 21, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.
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
Podcasts https://www.buzzsprout.com/2142689/12339043
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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