ARC Welding v. American Welding — Appellate Court Finds Taking Monies from Reserve Would Constitute a Windfall — Chicago Business Litigation Lawyers near Oak Brook and Naperville

Where an asset purchase agreement between two companies did not contemplate the forfeiture of an entire reserve payment as a result of an audit of assets taking one month longer than originally contemplated, and such a forfeiture would result in a windfall for one of the parties.

ARC Welding Supply Co. was a distributor of compressed gases and welding supplies in Vincennes, Indiana. As part of an asset purchase agreement American Welding & Gas, Inc. paid ARC $1,534,796.06 for ARC’s assets, of which the primary assets where its asset cylinders. Some cylinders were already rented to ARC’s clients, so determining the number of asset cylinders that could be transferred from ARC to American was difficult. As a result, American withheld $150,000 for 180 days to protect against a shortage of up to 1,200 out of a potential 6,500 cylinders.

American conducted an audit of the number of cylinders, beginning with those at ARC’s facility, and then those that were rented to existing clients. American did not visit every client, only those for whom rental records could not clearly indicate the number of cylinders in the client’s possession. The agreement originally specified that settlement would occur on or before April 15, 2015. Ron Adkins, American’s President, and CEO, informed ARC’s owner, Charles McCormick, that the audit was taking longer than expected and the overall count was shorter than expected. As a result, American wanted to extend the time for the audit as a means of locating every possible cylinder. At the conclusion of the audit in May 2015, the final number of cylinders was 4,663, 1,837 short of the estimated total of 6,500. As a result, American did not pay the $150,000 that was held back, and ARC filed suit.

ARC argued in the district court that American breached the contract when it did not complete the cylinder audit within 180 days. As a result, ARC claimed that American owed it the full $150,000 that was deferred prior to the audit. The district court rejected this argument, finding that American did not miss the deadline, as the deadline was extended by McCormick through the end of May 2015, and that because ARC failed to deliver at least 5,300 cylinders, it was not entitled to any portion of the $150,000. ARC then appealed.

The appellate panel began by finding that ARC did little to contest the district court’s finding that it was not entitled to any of the $150,000 deferrals as a result of it failing to deliver at least 5,300 cylinders. The panel found that the agreement did not contemplate forfeiture of the entire deferral payment as a result of the audit exceeding the original 180-day timeline. The panel then found that, because ARC’s cylinder total fell far below the required minimum of 5,300, it could not possibly have been damaged by the extended audit timeframe.

ARC argued that, under the panel’s interpretation, American could have elected to delay the completion of the audit indefinitely and reaped a windfall of the entire deferral payment. The panel rejected this argument. The panel stated that the issues of appropriate damages for a failure to complete the audit was entirely separate from the issue of damages that would be appropriate for a delay in completing the audit. The panel, therefore, affirmed the decision of the district court.

You can view the full appellate decision here.

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