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Chancery Finds Asset Purchase Agreement Required Buyer to Indemnify Seller for Liability Under State Tobacco Settlement

ITG Brands LLC v. Reynolds Am., Inc., C.A. No. 2017-0129-LWW (Del. Ch. Sept. 30, 2022)
Plaintiff acquired four cigarette brands from the defendant under an asset purchase agreement. Prior to entering into the APA, the seller had been making annual payments to the State of Florida based on the annual volume of tobacco product sales under a preexisting settlement agreement. The purchaser did not join the settlement, and the seller stopped making payments to Florida. Florida sued both parties in a Florida court over the lack of payments and obtained a judgment that the seller must continue to make settlement payments based on the purchaser’s own sales of the acquired brands. The seller and purchaser brought claims against each other in the Court of Chancery to determine which party bore responsibility for the Florida judgment.

The Court initially found that collateral estoppel did not bind the Court’s decision to the prior holding of the Florida court regarding liability that the purchaser had assumed under the APA because the parties in Florida were not identically situated to the parties in Delaware.  In Florida, the purchaser and seller were co-defendants adverse to the State of Florida, but not adverse as to each other.

The Court held that the APA’s unambiguous terms required the purchaser to assume the liability imposed by the Florida judgment and to indemnify the seller for losses due to that assumed liability.  The APA’s carve-out language did not include the ongoing liability to Florida resulting from future sales of tobacco products.  While the APA required the purchaser to undertake reasonable best efforts to join the Florida settlement, the Court explained the obligation to seek to join the Florida settlement as a party was a separate issue from the purchaser’s assumption of the seller’s liability as a party already subject to the settlement.  Accordingly, the Court concluded that the seller was entitled to indemnification from the purchaser for amounts the seller had paid or would pay to satisfy the Florida judgment.  The Court thus granted summary judgment in the seller’s favor. 

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