Buyer Beware: Ohio Court Imputes Successor Liability Based on General Contract Terms Thumbnail

Buyer Beware: Ohio Court Imputes Successor Liability Based on General Contract Terms

In Cintas Corp. v. Great Lakes Best One Tire & Serv., LLC the Ohio 11th District Court of Appeals recently upheld a trial court’s ruling that a successor buyer company was liable for a contract entered into by a seller corporation. Relying on the theory of successor liability, the court held that the buyer agreed to assume the seller corporation’s prior liability through the plain language of the purchase agreement.

In September 2012, Terry’s Tire Town, Inc. (“Terry’s”) entered into a five-year “Standard Rental Service Agreement” (the “Service Agreement”) with Cintas Corporation (“Cintas”), for uniforms and other facility products/services. James Brott, Terry’s Commercial Division Manager, executed the agreement on behalf of Terry’s. Terry’s terminated the Service Agreement early, and as a result, incurred an early cancellation fee of $5,450.44.

In March 2014, American Tire Distributors purchased Terry’s, but the following month, approached Mr. Brott and proposed a sale of the commercial tire division. Mr. Brott formed Great Lakes Best One Tire & Service, LLC (“Great Lakes”) to purchase the commercial tire division.

In July 2014, Terry’s Town Holdings, Inc., Terry’s and Great Lakes entered into a Purchase Agreement (the “Purchase Agreement”) whereby Great Lakes would purchase Terry’s commercial tire division. Post-sale, Great Lakes continued to use the services of Cintas, but later notified Cintas that it was transferring to a more cost-effective option.  Cintas filed suit, alleging breach of contract, and seeking damages in the amount of $5,450.44, plus interest.

At trial, Mr. Brott testified that he informed Cintas of the sale and that Terry’s was in fact a new entity, Great Lakes. However, Mr. Brott also acknowledged that he never changed the logo on the company shirts and never removed a sign bearing the Terry’s name at one of the stores. A representative of Cintas affirmed its knowledge of the sale, but testified Cintas was never formally informed of the change of ownership and thus continued to provide rental services to Great Lakes, including services to the Great Lakes location that contained the Terry’s sign.

The general terms of the Purchase Agreement included the following provisions: general purchase and sale; excluded assets; assumed liabilities; and excluded liabilities. The Service Agreement was not specifically included in the excluded assets section nor was it specifically excluded from the assumed liabilities section. The trial court found that Great Lakes had purchased the assets and liabilities of Terry’s, including the Service Agreement, and granted judgment in favor of Cintas in the amount of $5,450.44. On appeal, Great Lakes asserted that Cintas failed to establish any of the four recognized exceptions to the general rule for successor liability. The general rule for successor liability provides that an asset purchaser will not be liable for the debts and obligations of the seller company. Ohio courts recognize four exceptions to the rule, one of them being the buyer’s express or implied agreement to assume such liability. 

The appeals court held that Great Lakes expressly or impliedly agreed to assume Terry’s prior liability through the plain language of the Purchase Agreement. The appeals court reasoned that the plain language of the Purchase Agreement did not exclude the Service Agreement as an assumed liability and therefore the Purchase Agreement was treated as such. In other words, Great Lakes did not merely purchase only the assets of Terry’s but also assumed a number of liabilities through the Purchase Agreement, including the Service Agreement. Accordingly, the appeals court upheld the trial court’s finding of Great Lakes’ liability for the assumed debts and obligations of Terry’s, specifically the sum of $5,450.44. Cintas Corp. illustrates the need to properly schedule a definitive agreement; specifically, in this instance, the excluded assets and the assumed/excluded liabilities. Failure to do so may result in the imputation of successor liability with respect to certain assets and liabilities based on the general asset agreement language. As such, in buy-side transactions, one should always consult an attorney to draft the definitive agreement to avoid unwanted liabilities from the seller.

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