Sale of Child Care Facility Spawns Non-Compete Litigation

Posted by Neal F. Weinrich on

Primary Investments, LLC v. Wee Tender Care, III, Inc., 2013 WL 3665318 (Ga. App. July 16, 2013), involves a dispute arising out of the sale of Primary Prep Academy, a child care facility.  In 2008, Primary, LLC sold N& N Holdings, LLC the assets of a child care business.  Marguerite O’Brien, who is a member of Primary, LLC, executed the asset purchase agreement on behalf of the seller.  The asset purchase agreement contained a non-competition provision which provided that from three years after the closing date, neither the seller nor its agents would engage in certain competitive activities.  In January 2010, Ms. O’Brien, as well as two of her relatives who were the other two members and managers of Primary LLC, formed East Cobb Children’s Academy, LLC and opened a new child care facility.  This facility was located within the restricted territory under the non-compete in the asset purchase agreement.

The buyers filed suit, alleging a breach of the non-compete.  The trial court granted summary judgment with respect to the Defendants’ liability, finding that the non-compete had been violated.

The Georgia Court of Appeals reversed, relying on the fact that the asset purchase agreement was between only Primary, LLC and the buyers.  The Court of Appeals found that there was no evidence that Primary, LLC (who was the Seller) was involved in opening the new child care facility.  The Court of Appeals also found that there was no evidence indicating that when the O’Briens opened the new child care facility, they were acting as agents of Primary, LLC, or were acting for any purpose related to the business and r affairs of Primary, LLC.  Thus, the Court of Appeals concluded that Primary, LLC did not violate the non-compete.

The Court of Appeals also considered whether the language in the non-compete – “neither Seller nor its agents” (emphasis added) — had the effect of barring the O’Briens from opening the new child care facility in their individual capacities.  The buyers relied on the fact that Ms. O’Brien had executed the Agreement on behalf of Primary, LLC.  However, the Court of Appeals concluded that Ms. O’Brien had executed the asset purchase agreement in a representative capacity, not an individual capacity.  The Court of Appeals thus found Mrs. O’Brien’s execution of the asset purchase agreement was insufficient to make Primary, LLC’s obligations, including its obligations under the non-compete, binding on the individuals personally.  According to the Court of Appeals, “if N & N Holdings and the Nixons wished to bind the O’Briens to the terms of the noncompetition clause, they were required to make them parties to the APA and to obtain their signatures in their individual capacities.”

The Court of Appeals thus reversed the trial court’s grant of partial summary judgment against the Defendants on the issue of their liability for breaching the non-compete.

On a separate issue, the Court of Appeals affirmed the trial court’s grant of summary judgment as to the Defendants’ claim for rescission of the asset purchase agreement based on fraud or mistake.  The Defendants’ claimed that there had been a mutual mistake with respect to the size of the restricted territory in the non-compete in the asset purchase agreement.  They contended that in the execution copy of the asset purchase agreement the radius had been increased from five miles to ten miles based on the buyers’ fraud.  However, the Court of Appeals found that the trial court had appropriately granted summary judgment on this claim.