Herzog Contracting Corp. v. McGowen Corp.

Facts

In 1989, Plaintiff purchased the assets of a corporation called Tru-Flex from Defendant and formed a wholly owned subsidiary (also called Tru-Flex) to hold them, to which Plaintiff assigned the asset purchase agreement. The agreement called for annual payments of $500,000 from Tru-Flex to Defendant for five years. Later in 1989, Tru-Flex transferred funds to Defendant in the amount $400,000, for which Defendant signed two promissory notes to repay. Plaintiff claimed that the funds were a loan to Defendant. However, Defendant alleged that the funds did not constitute a loan and were actually a partial prepayment of the $500,000 annual installment that Tru-Flex owed under the asset purchase agreement, and that the promissory notes were never intended to be presented for payment. Defendant explained that the transaction’s purpose was to enable Defendant to postpone realization of taxable income to the following year by making the $400,000 payment look like a loan. Due to this dispute, Plaintiff refused to keep making the $500,000 annual payments under the asset purchase agreement and Defendant sued for breach of contract. Subsequently, Tru-Flex assigned the $400,000 worth of promissory notes to Plaintiff and Plaintiff sued Defendant to recover on the notes.