When Selling Its Assets, Business Should Take Care Not to Transfer Unknown Claims

Where the business sold all of its assets “of whatever kind or nature,” this included unknown claims which had caused economic harm to the business. Lau v. Constable, 2022 NCBC 34 (J. Earp).  As a result, the company did not have standing to pursue any claim against its former president that existed before the asset sale.

Plaintiff Vent Tech Corporation (“Company”) is a North Carolina corporation established to design, manufacture and sell medical devices.  Defendant Martin was its president for a number of years.  Under Martin’s leadership, the Company alleged that Martin exercised so little oversight of the Company’s affairs that he enabled the Company’s former CFO to pillage the Company’s assets. The theft was so bad, the Company alleged, that the Company was ultimately forced to sell its assets at a significant discount in 2012.  Pursuant to an asset purchase agreement (“APA”), the Buyer obtained “all the assets, properties and rights of [the Company]…of whatever kind or nature” other than certain enumerated assets set forth on an attached schedule.  The relevant schedule did not include any legal claims against officers or employees. After the sale, the Company filed suit against Martin, alleging claims which the Business Court described as “economic, fraud-based claims.”  After discovery, Martin moved to dismiss those claims, contending the Company lacked standing as a result of the APA. 

The Business Court agreed. The Company argued that the claims were unassignable as a matter of law and/or public policy.  In determining whether Michigan law (which governed the APA) would apply to the “assignability” analysis, the Business Court held that unless North Carolina public policy would preclude the assignment of such claims, there was nothing to preclude the Court from following Michigan law. (Opinion, ¶35).  Analyzing the types of claims which the Company had asserted, the Business Court held that North Carolina public policy would not preclude such economic, fraud-based claims suffered by a company from being assigned. (Id., ¶39, 41).  With nothing to preclude the application of Michigan law to the analysis (Id., ¶45), the Business Court held that Michigan law would also allow such claims to be assigned (Id., ¶50).  As a result of that assignment, and by the plain terms of the APA, all of the Company’s economic, fraud-based claims that existed as of the sales date (even unknown claims) had been assigned, and the Company had no standing to assert those claims against Martin.  (Id., ¶61).            

Based upon this decision, a business that is looking to sell its assets would be well-served to retain for itself all unknown legal claims that exist as of the date of any applicable APA

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