Background
Rodney Harback owned Eddie’s Body Shop, a collision repair business, and held a paint supply agreement with PPG Industries requiring him to purchase $900,000 in paint over five years. In exchange, PPG provided $155,000 in upfront incentive payments. The contract expressly prohibited assignment without PPG’s written consent. In January 2017, Harback sold the business to Adam Clark, Brandon Moore, and their LLC for $2 million—a reduction from his initial $2.8 million asking price, largely to reflect the value of the PPG Contract. The asset purchase agreement required the buyers to assume all remaining paint-purchasing obligations under the PPG Contract and hold Harback harmless from liability.
The buyers initially continued purchasing from PPG but in July 2017 informed PPG they intended to switch to another paint supplier. PPG terminated Harback’s contract for violation of the no-assignment provision and demanded repayment of the full $140,000 in incentives. Harback ultimately borrowed against life insurance policies to pay PPG $85,000 and sued the buyers for breach of the asset purchase agreement. The buyers countered that Harback’s failure to obtain PPG’s written consent before the sale constituted a material breach that deprived them of the contract’s value.
The trial court found that while Harback technically breached the PPG Contract by selling without consent, this breach was harmless because PPG allowed continued purchasing. The court determined the buyers’ announcement in July 2017 that they would switch suppliers constituted anticipatory repudiation of their assumed obligations, which caused PPG to terminate and demand repayment.
The Court’s Holding
The Tennessee Court of Appeals affirmed the trial court’s judgment in Harback’s favor. The court held that buyers who assume a seller’s contractual obligations in an asset purchase remain bound by those obligations. Although Harback technically violated the PPG Contract by failing to obtain written consent to the sale, this breach was harmless to the buyers because PPG continued supplying paint after discovering the sale. The court found no evidence that the buyers relied on any valuation of the PPG Contract in negotiating the purchase price or terms—they simply agreed to assume the obligation.
The decisive breach, the court held, was the buyers’ anticipatory repudiation. When they expressed their intent to switch paint suppliers in July 2017, they triggered PPG’s termination decision and the demand for repayment. The buyers’ own conduct—not Harback’s technical violation—caused the loss. The court rejected the buyers’ argument that Harback’s failure to obtain consent was material to their liability, emphasizing that the buyers clearly understood they were obligated to continue purchasing PPG paint and proceeded with full awareness of this commitment.
The court affirmed the award requiring the buyers to reimburse Harback $85,000 plus interest on his life insurance loans, along with attorney’s fees. The buyers’ counterclaim was dismissed with prejudice.
Key Takeaways
- In asset sales, buyers who assume contractual obligations cannot escape liability by alleging the seller breached the underlying contract, particularly when the seller’s breach causes no actual harm and the buyers themselves later repudiate the assumed obligations.
- Anticipatory repudiation—announcing intent not to perform—constitutes actionable breach and can trigger liability even when the other party technically breached first, if that breach did not cause the complaining party’s loss.
- Courts will enforce indemnification provisions against buyers who assume obligations if those buyers later breach the very obligations they undertook, regardless of technical violations by the seller that proved harmless.
- The characterization of a contractual obligation as an “asset” in an asset purchase agreement does not relieve a buyer from the obligation if both parties clearly understood its nature as a purchase commitment.
Why It Matters
This decision provides critical guidance for acquisition practitioners negotiating asset purchases. It confirms that general indemnification language requiring buyers to hold sellers harmless from assumed obligations will be enforced strictly. Buyers cannot avoid liability by retroactively challenging the seller’s title to transfer obligations, particularly when the buyers themselves precipitate the underlying loss through their own breach. The court’s practical approach—noting that switching paint suppliers requires time and was understood by the buyers as a deliberate business decision—reinforces that parties will be held to their understanding of contractual terms, even when they fail to carefully review underlying contracts before assuming obligations.
For sellers, the decision validates that reducing sale price to account for assumed obligations (Harback reduced his price by $800,000 in part due to the PPG commitment) creates enforceable buyer liability for those very obligations. For buyers, the ruling underscores the critical importance of detailed due diligence on all assumed contracts before closing, including review of termination provisions, consent requirements, and personal guarantees. The buyers’ failure to review the PPG Contract despite having access to it, and their subsequent decision to breach the assumed obligation, proved far costlier than the effort of examining the contract would have been.