North Carolina Business Court Sifts Through Warranty Claims Based on Asset Purchase Agreement

North Carolina Business Court Sifts Through Warranty Claims Based on Asset Purchase Agreement

The Business Court yesterday sifted through cross motions for summary judgment brought by the seller and buyer of a business selling "power protection devices used primarily to control power surges and to provide power filtration in high volume office equipment."  The case turned on the application of New York law, which the APA had specified as the governing law, and the Order left a number of claims for trial.

The principal breach of warranty claimed by the buyer in KLATMW, Inc. v. Electronic Systems Protection, Inc., concerned the stability of the seller's customer base.  Section 3.18 contained the following language:

none of the customers . . . required to be listed on Schedule 3.18 has cancelled, terminated or otherwise materially altered (including any material reduction in the rate or amount of sales or purchases or material increase in the prices charged or paid, as the case may be) or notified the Business of any intention to do any of the foregoing.

The seller had a significant customer,Global, that was in the process of being acquired by Xerox at the time the APA was signed.  There was some evidence that the seller should have expected a decline in the sales to Global as a result of Xerox's historical lack of interest in the seller's product, and Global was in fact listed on Schedule 3.18 as a customer whose sales volume "appears to be diminishing" as a result of Xerox' acquisition of Global.  As things developed, the Global business declined by more than $2 million in the year following the purchase.

The buyer made claims following the closing for breach of warranty, and for fraud.  Its claims included breaches of warranty other than of section 3.18.  The claims were to be resolved per New York law, as the Court ruled in a 2010 Order.  As Judge Gale explained in yesterday's opinion, New York law made a difference in the resolution of the case, both as to the buyer's obligation to prove reliance on the warranty, and the circumstances under which the buyer might be found to have waived the warranty.

In New York, reliance is an element of a breach of contract claim, but reliance is established "so long as a buyer demonstrates that the warranty is a part of the basis of the parties' bargain." And waiver is proved only based on information provided by the seller to the point of knowledge on the part of the buyer of a breach of the warranty at the time of the closing.  Knowledge obtained from sources other than the seller, such as information commonly known, is irrelevant to waiver. 

Judgre Gale did an admirable summary of ten years of  New York law'on the questions of breach of warranty, reliance, and waiver. Op. pars. 59-64  After this analysis, he found that there were questions of fact as to the buyer's level of knowledge regarding the impending decline of the Global business.

Judge Gale dismissed the tort claims on the ground that the buyer could not show reasonable reliance on the misrepresentations it claimed with respect to Global's status as a customer.  That finding stemmed in part from the buyer's independent and extensive due diligence through a business broker which directly  contacted Global representatives about Xerox' intentions.  He also dismissed a Chapter 75 claim because "the contract claims are adequate to provide the remedies [the buyer] seeks if those claims can be proven."  There's a whole lot more to the facts of this case and to the claims made by the parties than are mentioned in this post.  Those especially interested in New York law should read the opinion.

Read this article in its entirety on North Carolina Business Litigation Report, a blog for lawyers focusing on issues of North Carolina business law and the day-to-day practice of business litigation in North Carolina courts.

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