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Herman Law LLC » Recent MA SJC Noteworthy Decision, so to speak
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Recent MA SJC Noteworthy Decision, so to speak

Posted on Apr 19th, 2013

A recent decision by the Massachusetts Supreme Judicial Court is noteworthy for transactional practitioners:

In T. Butera Auburn vs. Williams, the Court held that a purchaser of a veterinary business was not entitled to withhold payment on a promissory note issued in connection with the purchase of defendant’s business.  The case involved the purchase of a veterinary clinic business from the defendant via an asset purchase agreement, where $800,000 was paid at the closing, the another $400,000 was payable via a promissory note over 15 years.  According to the decision, when plaintiffs discovered that the defendant was in violation of her covenant not to compete and other post-closing obligations, they brought suit and sought to hold back payment on the note to set off their damages.  Plaintiffs argued that they were excused from performance under the Note based on language on the APA that a default under a related transaction document (such as the Note) would be a default under the APA.  The Court rejected this argument, noting that this case involved the opposite scenario.  Here the breach occurred under the APA provisions, not the Note, and the Note did not contain a cross-default provision that would have potentially allowed the Plaintiffs to stop payment.  The Court did comment however, that if the plaintiffs could have shown that “the damaged business itself was supposed to generate the income from which the debt … was to be repaid, [the defendant] might well be estopped from obtaining judicially compelled acceleration on the basis that the Note was breached when payments were not subsequently made on time by the borrower.”

This case is a useful reminder that:

  • cross-default provisions and rights for setoff in the event of an indemnification or other claim should be included in Notes and other transactional documents
  • Language such as that quoted below may be helpful to add as an acknowledgment to a remedies section in the transaction documents to prevent a similar result