Can a purchase agreement transfer counterclaim liability without express language? Fisher v. Davidhizar Explained

In Fisher v. Davidhizar, the Utah Court of Appeals addressed whether a purchase agreement that transferred a bankruptcy estate’s interest in pending litigation also transferred liability for counterclaims. The court’s analysis provides important guidance on contract interpretation and assignment of litigation interests.

Background and Facts

David Fisher sued Dr. Lavern Davidhizar for breach of a settlement agreement, while Davidhizar counterclaimed for fraudulent inducement. After the court granted summary judgment to David on the breach claim but before trial on remaining issues, David filed bankruptcy. David’s parents and the bankruptcy estate entered into a Purchase Agreement transferring “any and all interest of the Bankruptcy Estate in and to the Davidhizar Action and to the causes of action and claims asserted by [David] therein.” The Fishers substituted as plaintiffs but never moved to substitute as counter-defendants. After a jury found David liable for fraudulent inducement and awarded damages to Davidhizar, the district court held the Fishers liable under the Purchase Agreement.

Key Legal Issues

The primary issue was whether the Purchase Agreement’s plain language transferred only David’s claims and potential proceeds or also included his liability for Davidhizar’s counterclaim. The court applied general contract interpretation principles, reviewing the district court’s interpretation for correctness.

Court’s Analysis and Holding

The Court of Appeals found the Purchase Agreement unambiguous and reversed the district court. The court emphasized that the agreement’s recitals repeatedly referenced “proceeds” from the lawsuit but made no mention of liabilities. Under 11 U.S.C. § 541(a), bankruptcy estates include only a debtor’s assets that can be liquidated, not potential liabilities on counterclaims. The court rejected Davidhizar’s argument that accepting the entire “Davidhizar Action” meant assuming all rights and liabilities, finding this interpretation inconsistent with the agreement’s focus on proceeds and the bankruptcy estate’s limited interest in assets.

Practice Implications

This decision underscores the importance of precise drafting in assignment agreements involving pending litigation. When parties intend to transfer both benefits and burdens of litigation, the agreement must explicitly address liability assumption. The court also remanded the attorney fees issue, noting that the prevailing party determination required reconsideration in light of the Fishers’ successful appeal on the counterclaim liability issue.