what liability and exposure does buyer of alarm accounts assume and accept
August 29, 2018
what liability and exposure does buyer of alarm accounts assume and accept
               I tried to find this in your archives on your website [https://www.kirschenbaumesq.com/page/alarm-articles] without success. While reading one of your recent articles regarding liability, the thought occurred to me, when accounts are sold, does the new owner assume all liability per the contracts? 
               Is this something that is or should be part of the sales agreement between the two parties? 
               Can limits of liability that are outlined in the original contracts be transferred to the buyer in such a sale, along with the responsibility for E & O issues? Seems that could be quite risky for the buyer but, a sale is a sale for everything, isn't it? 
               If not, then how long after accounts are sold does the original company have to keep their E&O and liability insurance in effect?  For the length of the longest contract? (In some cases that could be 10 years.) 
               What if, upon the sale of the accounts the selling company becomes "un-incorporated" ie dissolved? 
In short, when does liability/responsibility end for the seller, both for the corporation and for the officers/owners? 
Reliable Alarm
               Both buyer and seller need to understand liability and exposure when a sale of the accounts occurs.  I see confusion often when parties to the contract and attorneys insist on general liability insurance to be carried by seller or buyer or both.  Obviously they don't understand the exposure.
               Almost all deals are Asset Purchase Agreements as opposed to Stock Purchase Agreements.  The APA will normally provide that the buyer is not assuming the seller's liabilities except for certain limited exposure.  The exception to no assumption of liability will include debt on vehicles or equipment that still have to be paid for and are included in the sale; it might include a specific debt which will then be deducted from the purchase price, such as debt to the central station or some other vendor, and it will always include the seller's obligations under the subscriber contracts.
               The buyer is buying the subscriber contracts and at the closing the seller assigns and sells the contracts to the buyer.  At that moment the buyer is responsible for the performance of the contract.  Additionally, at that moment the buyer is going to be responsible for any liability that may arise, or arises, under the contract.  The buyer steps into the shoes of the seller.  Therefore, if there was a subscriber loss, or a breach of contract, while the seller still had the contract [before the closing when the assignment and sale takes place] it's the buyer who is going to be sued and will be responsible.  Yes, the seller and buyer will address this in the APA and the seller will be indemnifying the buyer, but that indemnity will not affect the subscriber or other claimant who will be looking to the buyer for damages.
               The APA must be worded sufficiently to make clear that the buyer is not assuming the seller's debts and obligations.  When the APA is not clear, and believe it or not, skilled attorneys mess this up, the buyer is exposed.
               So let's address the above questions.  Upon the sale the new owner assumes all obligations under the subscriber contracts.  All obligations.
               Buyer and seller deal with this with indemnity provisions, backed up with insurance.
               The buyer's exposure and liability under the subscriber contract is the same as the seller had, no more and no less.  All of the protective provisions in the contract are available to the buyer.  That's why it's so important to have proper contracts with protective provisions, and the Standard Form Agreements are, to borrow from Tina Turner, "simply the best, better than all the rest".  The buyer will need to rely on those contracts and wants to be sure the contracts have the best protection.  Keep in mind that a buyer of the accounts really doesn't know what exposure there might be.  These are not subscriber accounts that the buyer sold, installed, serviced and has a relationship with.  Some of these subscribers can be most disagreeable and litigious.  A smart buyer will have certain provisions in the APA for protection, such as an indemnity clause, but that may turn out to be worthless or insufficient.  Most sellers carry insurance and some buyers and their attorneys demand that the seller continue to carry the insurance thinking that will provide protection. Well, that's wrong.  The seller's insurance is an occurrence based policy, which means that it covers the loss as of the date of loss, when the incident occurred.  The closing date is the cut off.  If a loss occurs pre-closing, it's the seller's problem, and carrier that is responsible; Post-closing, it's the buyer and its insurance carrier's problem.  It won't matter that the loss occurred post-closing but there are claims that the breach or negligence occurred pre-closing, at time of installation, for example.  The carrier in place at time of loss will cover the claim.  A buyer should ascertain if the seller has insurance, but it's not necessary that the seller continue to carry the insurance as long as the policy doesn't get canceled for non-payment.  A seller, on the other hand, should insist that the buyer have insurance and that the seller be named as additional insured.  A seller need not and should not name a buyer as an additional insured, even if the seller decides to continue its E&O coverage post-closing for a period of time.
               A seller need only continue the E&O policy until the term runs out. If it's an occurrence policy, which it likely is, the carry will be responsible for any claim that arose within the policy period, no matter when the claim is made.
               A seller should not be liable for post-closing debts or claims.  An officer and shareholder should not be liable for corporate debt unless there is a guarantee.  Shareholders are liable for employee wages in some states.  A corporation can dissolve after the closing. If there is a distribution to shareholders then the shareholders would be liable to creditors of the corporation because creditors have to be paid before shareholder distribution.  If a corporation has no creditors and distributes the sale proceeds to its shareholder or shareholders, and then a claim arises for a subscriber loss, and the corporation is sued, it's not likely that the shareholders would need to defend on behalf of the corporation because they should have no exposure for the corporation's debt on that claim.
               It's a good idea to know what's involved in a sale of accounts.  It's a better idea to engage me and my office to represent you in either capacity, seller or buyer.  Contact our Merger and Acquisition team by contacting me or Jennifer Kirschenbaum,Esq at 516 747 6700 x 302 or Jennifer@KirschenbaumEsq.com. If you've worked with our Contract Administrator Eileen Wagda you can also contact her and she will get you started. You reach her at 516 747 6700 x 312 or EWagda@KirschenbaumEsq.com
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
516 747 6700