Question: Successor Liability

by birdaise. Posted on Sep 12, 2020    0    7

I own a small retail business in AZ, and am in the process of selling. We have a purchase agreement polished (not signed), and are ready to turnkey. The one thing holding it up is pending litigation that my business has been involved in since 2017, of which my business is considerably smaller than the other two defendants involved. The buyer does not want to assume the risk, and is requesting that it be resolved prior to finalizing the sale.

I am looking for experience in this scenario, in which I could assure the buyer that they will not be involved, or at risk, considering they will only be purchasing my assets, FFE, customer lists, etc. There is no legal business purchase, nor a reassignment of the lease I am currently in. Any suggestions as to what actions to take, resources available to gather information, or strategic moves I could make would be much appreciated.


pixelrow 1

You need to provide the buyer an indemnification agreement assuming potential liabilities that arise from the matter. It's not uncommon and an experienced business contract attorney can put together a page or two agreement for you.

  birdaise 1

Would this be separate from an indemnification in a typical asset purchase agreement? Something specific to the litigation itself?


It should be built into the existing indemnification (& reps/warranties section) and mentioned by name


You should both speak to an attorney, one that the buyer will listen to and trust but will also understand your position. As long as there is no judgment lien at the time of the sale, the liability can’t attach to the assets and shouldn’t affect the buyer.

  birdaise 1

Our attorneys are involved, and mine is wondering too why they're not proceeding. The buyer's attorney is hesitant. No liability in the litigation whatsoever. Could you recommend resources to research, so that I can assure the buyer there are no problems with proceeding?


Just the general laws against fraudulent conveyances, but I don't think that's the buyer attorney's specific concern it sounds like. It's more a fear of the unknown. When I'm in this situation I would just write into the purchase agreement that the buyer will be entitled to indemnification / compensation if the liability somehow affects the buyer.

If you can afford it, you may want to offer the buyer that you will get an independent legal opinion from a more specialized lawyer (that you two can mutually agree upon) as to whether/how this liability will attach to the assets and how that should be addressed in the purchase agreement. You can keep the cost down for that opinion the more general you keep it, but if the buyer wants it to be very specific and offer very specific assurances it will cost more.

pixelrow 2

Its depends on the general indemnification language, does it address active or potential litigation. It would appear the general language doesn't satisfy the buyer so adding specific language is the next step. If mere language isn't sufficient you may have to set aside some of the sale proceeds in escrow until the matter is resolved. That language must be carefully drafted to limit the time period. Also, if the opposing litigant becomes aware of the reserves, it could encourage them to pursue the funds.