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. Continue reading ›