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Contracting with a judgment-proof subsidiary? Consider getting a guaranty from the parent

Consider: Northbound Group, Inc. v. Norvax, Inc., No. 14-1651 (7th Cir. July 28, 2015) (affirming summary judgment). In that case:

  • Northbound Group was a company that generated leads for life-insurance sales. Facing financial difficulties, it agreed to sell its assets to Norvax, which generated leads for health-insurance sales.
  • The actual asset-purchase agreement was not between Northbound and Norvax, but between Northbound and a newly-created subsidiary of Norvax.
  • Northbound later claimed that both Norvax and its new subsidiary breached the asset-purchase agreement in various ways. When Northbound filed suit, though, it sued only Norvax and not the subsidiary, which apparently had no assets and (presumably) was judgment-proof.

The Seventh Circuit affirmed summary judgment dismissing Northbound’s breach-of-contract claim against Norvax. The court said, “[i]t goes without saying that a contract cannot bind a nonparty. … If appellant is entitled to damages for breach of contract, [it] can not recover them in a suit against appellee because appellee was not a party to the contract.” Id., slip op. at 4 (internal quotation marks and citations omitted, ellipsis and alterations added).

Lesson: Drafters should take note of the Seventh Circuit’s remark to the effect that if Northbound had wanted Norvax to guarantee its new subsidiary’s performance under the asset-purchase agreement, then it (Northbound) could have negotiated for such a guaranty. See id. at 8.

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