MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Harrison Wexford, Partner Sandra K. Liu, General Counsel, Crestline Packaging Solutions LLC Priya Mehta, Chief Financial Officer, Crestline Packaging Solutions LLC
FROM: Megan Chu, Associate, Calderwood & Harkness LLP Derek Okonkwo, Associate, Calderwood & Harkness LLP
DATE: June 4, 2025
RE: Representations & Warranties Insurance — Summary and Coverage Analysis; Crestline Packaging Solutions LLC Acquisition of Substantially All Assets of Allegheny Valley Packaging, Inc.
MATTER NO.: 1006-00006
STATUS: Draft — For Internal Discussion Purposes Only
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I. Executive Summary
The purpose of this memorandum is to summarize the key terms, coverage parameters, exclusions, and potential gaps of the buyer-side representations and warranties insurance policy (the "R&W Insurance" or the "Policy") obtained in connection with the proposed acquisition by Crestline Packaging Solutions LLC ("Crestline," "CPS," or "Buyer") of substantially all assets of Allegheny Valley Packaging, Inc. ("AVP" or "Seller") for a purchase price of $180,000,000 (the "Transaction"). This memorandum is intended for internal discussion among the deal team and client personnel identified above and is subject to the attorney-client privilege and the work product doctrine.
The Policy has been obtained through Greystone Marsh Advisory LLC, a specialty representations and warranties insurance brokerage, with Philip J. Tanaka serving as the lead broker (principal office: 399 Park Avenue, 16th Floor, New York, NY 10022). The underwriting carrier is Northbridge Specialty Insurance Company, a Connecticut-domiciled specialty insurer, which has issued the Policy under Policy Number NSW-2025-07812.
This is a buyer-side policy. Crestline is the named insured. The Policy is designed to supplement — but not replace — Seller's direct indemnification obligations under the Asset Purchase Agreement (the "APA"), which is currently being finalized for an estimated execution date of June 15, 2025. The buyer-side structure means that Crestline may make claims directly against the carrier for covered losses arising from breaches of Seller's representations and warranties in the APA, without first being required to exhaust its remedies against Seller (subject to the retention, as described herein).
The key metrics of the Policy are as follows:
• Coverage Limit: $18,000,000 (representing 10% of the $180,000,000 Purchase Price)
• Retention (Self-Insured Retention): $1,800,000 (representing 1% of the Purchase Price), with a drop-down to $900,000 twelve months after the Closing Date
• Estimated Total Premium and Fees: Approximately $620,000–$630,000, consisting of a premium of $540,000 (3.0% rate on the coverage limit), a non-refundable underwriting fee of $50,000, and estimated surplus lines taxes and fees of approximately $30,000–$40,000
• Premium Allocation: 100% borne by Buyer
Based on our review of the Policy term sheet, the non-binding indication, and the draft Policy language received to date, we recommend that the Policy provides meaningful supplemental coverage for the Transaction. However, certain exclusions and coverage gaps — particularly regarding known environmental matters at the Butler, Pennsylvania facility, pre-closing sales and use tax liabilities across Pennsylvania, Ohio, and West Virginia, and the approximately $3,100,000 pension underfunding — must be addressed through the APA's direct indemnification provisions, the environmental special indemnity, and the Excluded Liabilities framework rather than through the Policy. We detail these gaps, the corresponding APA-based mitigants, and our specific recommendations in Sections VI through VIII and XII of this memorandum.
II. Transaction Overview
The following is a summary of the material terms and structure of the Transaction, provided for context in evaluating the scope and adequacy of the R&W Insurance Policy.
Buyer. Crestline Packaging Solutions LLC is an Ohio limited liability company and a portfolio company of Ridgeway Capital Partners Fund III, LP, a Delaware limited partnership. Ridgeway Capital Partners is a middle-market private equity firm focused on industrial and specialty manufacturing businesses. Crestline was formed as a platform acquisition vehicle for this Transaction and intends to operate the acquired AVP business as a going concern following the Closing.
Seller / Target. Allegheny Valley Packaging, Inc. is a Pennsylvania corporation, taxed as an S-corporation for federal income tax purposes under Subchapter S of the Internal Revenue Code. AVP is headquartered at 250 Industrial Boulevard, Butler, Pennsylvania 16001 and is a family-owned business controlled by Gerald W. Horvath (age 68, retiring following the Transaction), Patricia A. Horvath, and Michael G. Horvath. AVP's S-corporation status is relevant to the Transaction structure and to the R&W Insurance analysis because the individual shareholders will receive the after-tax proceeds of the sale, and AVP itself will have minimal remaining assets following the closing, which heightens the importance of the R&W Policy as an alternative recovery source independent of Seller creditworthiness.
Transaction Structure. The Transaction is structured as an asset purchase, governed by the laws of the State of New York. Buyer will acquire substantially all of the assets used in or necessary to the conduct of AVP's corrugated and specialty packaging business, subject to agreed-upon Excluded Assets and Excluded Liabilities, for a cash purchase price of $180,000,000, subject to customary adjustments for net working capital, indebtedness, and transaction expenses.
Purchase Price. The aggregate purchase price is $180,000,000, subject to a post-closing net working capital adjustment based on a Target NWC of $12,400,000 with a $250,000 collar (i.e., no adjustment for deviations within $250,000 above or below the Target NWC).
Financing. The Transaction is being financed through a combination of debt and equity as follows:
• Debt: $130,000,000 incremental term loan, with Pinnacle National Bank, N.A. serving as Administrative Agent and the syndicate lenders consisting of Commonwealth Merchant Bank and Heartland Commercial Finance LLC. The incremental term loan is being incurred pursuant to Amendment No. 3 to the Existing Credit Agreement dated November 15, 2021 (Reference No. PCL-2025-04-1187).
• Equity: $50,000,000 equity contribution from Ridgeway Capital Partners Fund III, LP.
Escrow. An amount equal to $9,000,000 (representing 5% of the Purchase Price) will be deposited at closing with Atlantic Fiduciary Trust Company as escrow agent. The escrow funds are scheduled for release eighteen (18) months following the Closing Date, net of any pending or unresolved indemnification claims. The escrow provides a funded source of recovery for Buyer's indemnification claims under the APA during the general representations survival period.
Target Business. AVP is a corrugated and specialty packaging manufacturer serving industrial and consumer goods customers across the mid-Atlantic and Midwest regions. The business operates out of two manufacturing facilities — one located in Butler, Pennsylvania and one located in Meadville, Pennsylvania. Key business metrics include:
• Trailing twelve-month ("TTM") revenue of approximately $95,000,000
• TTM adjusted EBITDA of approximately $18,500,000
• Implied enterprise value / adjusted EBITDA multiple of approximately 9.7x
• Approximately 340 full-time employees across both facilities, of which approximately 185 hourly employees at the Butler facility are represented by the International Paperworkers Union Local 814 under a collective bargaining agreement expiring March 31, 2027
Estimated Closing Date. The parties currently estimate a Closing Date of July 31, 2025, subject to the satisfaction or waiver of customary closing conditions, including Hart-Scott-Rodino clearance (if applicable), third-party consents, and the bring-down of representations and warranties.
Outside Date. The APA provides for an outside date of September 30, 2025, after which either party may terminate the APA if the Closing has not occurred (subject to customary exceptions for a party whose breach caused the failure to close).
III. Insurance Placement Process
A. Broker Engagement
Crestline engaged Greystone Marsh Advisory LLC ("Greystone Marsh") as its exclusive representations and warranties insurance broker for the Transaction. Philip J. Tanaka, a Managing Director at Greystone Marsh specializing in transactional risk insurance for middle-market M&A transactions, serves as the lead broker on this placement. Greystone Marsh's principal office is located at 399 Park Avenue, 16th Floor, New York, New York 10022. The terms of the broker engagement are set forth in the engagement letter referenced as Appendix D to this memorandum.
Greystone Marsh a comprehensive market canvass, soliciting non-binding indications from multiple specialty R&W insurance carriers, including several of the leading domestic and international markets for transactional risk insurance. Following evaluation of the competing proposals on the basis of pricing (premium rate on limit), breadth of coverage (including retention levels, survival periods, and exclusion scope), claims-paying reputation and financial strength, and the carrier's willingness to tailor terms to the specific risk profile of an industrial/manufacturing asset purchase, Greystone Marsh recommended Northbridge Specialty Insurance Company as the preferred carrier. After consultation with the deal team, Crestline authorized Greystone Marsh to proceed with the Northbridge placement.
B. Underwriting Process
Northbridge Specialty Insurance Company conducted its own independent diligence review of the Transaction, which is customary for buyer-side R&W placements. The underwriting process included the following principal components:
Document Review. The carrier reviewed a comprehensive set of Transaction documents and diligence materials, including but not limited to:
• The draft Asset Purchase Agreement (circulated to the carrier on May 2, 2025, reflecting the substantially complete negotiated draft as of that date)
• Seller's disclosure schedules (draft versions, with the understanding that certain schedules remain subject to update and finalization prior to APA execution)
• The financial and accounting due diligence report prepared by Hargrove Thornton LLP (engagement partner: Steven M. Raines), covering AVP's historical financial statements, quality of earnings analysis, normalized EBITDA adjustments, and working capital analysis
• The Phase I Environmental Site Assessment for the Butler facility and the Phase I Environmental Site Assessment for the Meadville facility, both prepared by Greenvale Environmental Sciences LLC (project lead: Dr. Alicia Fernandez)
• The Phase II Environmental Site Assessment for the Butler facility (commenced May 12, 2025, also conducted by Greenvale Environmental Sciences LLC under Dr. Fernandez's direction), to the extent preliminary results were available
• Audited financial statements of AVP for fiscal years 2022, 2023, and 2024, prepared by Pendleton & Sawyer CPAs LLP (AVP's independent auditor)
• Selected other diligence materials as requested by the carrier during the underwriting process, including tax returns, material contracts, and employee benefit plan documents
Underwriting Call. An underwriting call was held with the Northbridge underwriting team, attended by members of the Calderwood & Harkness deal team, Crestline management (Sandra K. Liu and Priya Mehta), and representatives of Hargrove Thornton LLP (Steven M. Raines). During this call, the underwriting team explored key risk areas, including environmental conditions at the Butler property, the composition and reliability of AVP's customer base, the nature of union labor arrangements at the Butler facility, the quality of historical financial reporting, and AVP's tax compliance posture across multiple jurisdictions. The underwriting call was productive, and the carrier's follow-up questions were addressed through a supplemental information package prepared by the deal team.
Non-Binding Indication and Binding. Following completion of its underwriting review, Northbridge issued a non-binding indication ("NBI") setting forth the proposed coverage terms, including the coverage limit, retention, premium rate, exclusions, and key conditions. The NBI terms are summarized in the Policy Term Sheet attached as Appendix A (to be attached when available in final form). After negotiation of certain NBI terms between Greystone Marsh (on behalf of Crestline) and the Northbridge underwriting team, the carrier confirmed its willingness to issue a binding commitment upon finalization of the APA and satisfaction of customary binding conditions. The non-refundable underwriting fee of $50,000 became payable upon the carrier's issuance of the binding commitment.
C. Policy Type
The Policy is a buyer-side representations and warranties insurance policy. Under this structure:
• Crestline (as Buyer and named insured) may submit claims directly to Northbridge for covered losses arising from breaches of Seller's representations and warranties in the APA, without first being required to pursue recovery from Seller.
• The Policy provides first-party coverage to Buyer, meaning Buyer is the beneficiary and policyholder. This is distinct from a seller-side R&W policy, which would insure Seller against indemnification claims made by Buyer.
• The Policy is designed to cover losses arising from inaccuracies in, or breaches of, the representations and warranties made by Seller in the APA, measured as of the signing date and the Closing Date (through the bring-down mechanism), subject to the exclusions and conditions described herein.
The buyer-side structure is the predominant form of R&W insurance in the current market and offers several advantages to Crestline, including direct recourse to a creditworthy insurance carrier, avoidance of dependence on Seller's post-closing financial condition, facilitation of a cleaner post-closing relationship with the Horvath family (particularly given Gerald W. Horvath's intended retirement), and alignment with the expectations of Ridgeway Capital Partners as the equity sponsor.
IV. Policy Terms Summary
This Section IV sets forth a summary of the material terms of the Policy as reflected in the non-binding indication and the draft Policy form received from Northbridge. Final Policy terms will be confirmed upon binding and issuance of the Policy.
A. Named Insured
The named insured under the Policy is Crestline Packaging Solutions LLC. In addition, the following entities are included as additional insureds:
• Ridgeway Capital Partners Fund III, LP, as the equity sponsor of Crestline
• The respective affiliates, successors, and permitted assigns of both Crestline and Ridgeway Capital Partners Fund III, LP
The inclusion of Ridgeway Capital Partners Fund III, LP as an additional insured is standard for sponsor-backed transactions and ensures that the equity sponsor may make claims directly under the Policy in the event of a covered loss, including in circumstances where the sponsor has suffered losses at the fund level (e.g., diminution in the value of its equity investment in Crestline).
B. Policy Number
The Policy has been assigned Policy Number NSW-2025-07812 by Northbridge Specialty Insurance Company.
C. Carrier. The underwriting carrier is Northbridge Specialty Insurance Company, a Connecticut-domiciled insurance company licensed as a surplus lines insurer in the applicable jurisdictions. Northbridge is a recognized specialty carrier in the transactional risk insurance market with a track record of claims-paying capacity and financial stability. Greystone Marsh has confirmed that Northbridge maintains financial strength ratings consistent with the carrier's stated capacity to pay claims under the Policy limits.
D. Coverage Limit
The aggregate limit of liability under the Policy is $18,000,000. This amount was calculated as 10% of the $180,000,000 Purchase Price, which is within the customary range for buyer-side R&W policies in middle-market transactions.
The coverage limit applies to all claims under the Policy in the aggregate. There is no per-claim sublimit, except as may be noted for specific exclusion carve-backs or sub-limited coverage areas discussed in Section VI below. Once the aggregate limit of $18,000,000 has been exhausted through the payment of covered claims, the Policy is fully discharged, and no further recovery is available from the carrier.
E. Retention (Self-Insured Retention / "SIR")
The Policy includes a self-insured retention, which functions as a deductible that must be exhausted before the Policy responds to covered losses. The retention is structured as follows:
Initial Retention. The initial retention is $1,800,000, representing 1% of the $180,000,000 Purchase Price. Buyer must absorb the first $1,800,000 of covered losses before the Policy begins to pay claims.
Drop-Down Provision. The retention drops to $900,000 (50% of the initial retention) twelve (12) months after the Closing Date. This drop-down mechanism is a favorable feature negotiated by Greystone Marsh during the placement process and provides enhanced coverage in the later portion of the general representations survival period, when Seller's willingness and ability to satisfy indemnification claims may have diminished.
Satisfaction of the Retention. The retention is intended to be satisfied first by Seller's direct indemnification obligations under the APA. That is, Buyer may seek recovery from Seller for losses within the retention or basket amount before the Policy attaches. The Policy does not require Buyer to have actually collected any amounts from Seller to satisfy the retention; rather, the retention is satisfied by the aggregate amount of covered losses incurred, regardless of whether Buyer has recovered such amounts from Seller. This is an important distinction, as it means that Buyer is not required to pursue litigation or other collection efforts against Seller as a precondition to making a claim under the Policy.
Relationship to APA Basket. The interplay between the Policy retention and the APA basket merits careful attention. The APA provides for a deductible basket of $1,350,000, which is structured as a tipping basket — meaning that once aggregate qualifying indemnification claims exceed $1,350,000, Buyer is entitled to first-dollar recovery from Seller for all qualifying losses, not merely the excess above the basket. The APA basket of $1,350,000 is lower than the initial Policy retention of $1,800,000. The practical implications are as follows:
During the First 12 Months Post-Closing: Losses between $1,350,000 and $1,800,000 would be recoverable from Seller under the APA (because the APA tipping basket has been exceeded), but would not yet trigger Policy coverage (because the $1,800,000 Policy retention has not been reached). This creates a $450,000 "APA-only zone" in which Buyer's sole recourse is Seller indemnification.
After 12 Months Post-Closing: The drop-down retention of $900,000 falls below the APA basket of $1,350,000. This means the Policy could respond to aggregate covered losses exceeding $900,000, even if the APA tipping basket of $1,350,000 has not been fully satisfied. As a practical matter, during this period, the Policy provides a more favorable attachment point than the APA for certain categories of losses.
We discuss the layering of coverage in greater detail in Section VII.B below.
F. Premium. The estimated cost of the Policy is summarized as follows:
• Base Premium: $540,000, calculated at a rate of 3.0% applied to the $18,000,000 coverage limit
• Underwriting Fee: $50,000, a flat fee payable to Northbridge upon binding, non-refundable regardless of whether the Transaction closes
• Surplus Lines Taxes and Fees: Estimated at approximately $30,000–$40,000, depending on the applicable state(s) of filing and applicable surplus lines tax rates; the exact amount will be determined at binding
• Total Estimated Cost: Approximately $620,000–$630,000
All premium, fees, taxes, and associated costs are borne 100% by Buyer (Crestline Packaging Solutions LLC). This allocation is consistent with market practice for buyer-side R&W policies and was agreed upon between the parties during APA negotiations. The premium is payable at the Closing, with the underwriting fee payable at binding (expected concurrent with APA execution on or about June 15, 2025).
The premium rate of 3.0% on the coverage limit is within the prevailing market range for transactions of this size and risk profile in the industrial and manufacturing sector. Based on Greystone Marsh's market data and our experience with comparable placements, rates for buyer-side R&W policies in middle-market industrial acquisitions currently range from approximately 2.5% to 4.0% of the coverage limit, depending on deal-specific risk factors, retention levels, and survival periods. The 3.0% rate reflects Northbridge's assessment of the overall risk profile, including the favorable diligence findings at the Meadville facility, offset by the complexities associated with the Butler environmental condition, the unionized workforce, and the S-corporation tax structure of the Seller.
The total estimated cost of $620,000–$630,000 represents approximately 0.35% of the $180,000,000 purchase price, which we consider reasonable in light of the $18,000,000 in coverage obtained and the Seller credit risk that the Policy is designed to mitigate.
G. Policy Period
The Policy period is as follows:
• Inception Date: The Closing Date (estimated July 31, 2025). The Policy becomes effective upon closing of the Transaction. If the Transaction does not close, the Policy will not incept and no premium will be payable (the non-refundable underwriting fee of $50,000, if already paid, will not be refunded).
• General Representations: Coverage is coterminous with the APA survival period for general representations, which is eighteen (18) months from the Closing Date. Claims for breaches of general representations must be submitted within this period.
• Fundamental Representations: Coverage extends for sixty (60) months from the Closing Date, covering the fundamental representations including organization and good standing, authority and enforceability, title to acquired assets, capitalization, brokers and finders, and tax matters.
• Tax Representations: Coverage extends until sixty (60) days after the expiration of the applicable statute of limitations (including any extensions, waivers, or tolling agreements), which is coterminous with the survival period for tax representations under the APA.
• Environmental Representations: Coverage extends for thirty-six (36) months from the Closing Date, which is coterminous with the APA survival period for environmental representations and the environmental special indemnity.
The alignment between the Policy coverage periods and the APA survival periods is intentional and ensures that there is no temporal gap between the expiration of Seller's contractual indemnification obligations and the termination of Policy coverage. This coterminous structure is a best practice in R&W insurance placements and was specifically negotiated by Greystone Marsh during the placement process. Any changes to the APA survival periods prior to execution should be promptly communicated to the carrier to confirm corresponding adjustments to the Policy periods.
H. Governing Law
The Policy is governed by the laws of the State of New York, consistent with the governing law provision of the APA. The selection of New York law ensures uniformity in the interpretation and enforcement of both the contractual indemnification provisions and the insurance coverage terms, reducing the risk of conflicts or inconsistencies arising from the application of different state laws.
V. Covered Representations and Warranties
The Policy provides coverage for losses arising from breaches of all representations and warranties made by Seller in the APA, subject to the exclusions, conditions, and limitations described in Sections VI and XI of this memorandum. The following is a summary of the covered representations, organized by category:
• Organization and Good Standing — Representations that AVP is duly organized, validly existing, and in good standing under the laws of the Commonwealth of Pennsylvania and is qualified to do business in each jurisdiction where the nature of its business or properties requires such qualification.
• Authority and Enforceability — Representations that AVP has the corporate power and authority to execute, deliver, and perform the APA and to consummate the transactions contemplated thereby, and that the APA constitutes a valid and binding obligation of Seller enforceable in accordance with its terms.
• Title to Acquired Assets — Representations that Seller has good and valid title to, or a valid leasehold interest in, the Acquired Assets, free and clear of all liens and encumbrances other than Permitted Liens.
• Financial Statements — Representations regarding the accuracy and completeness of AVP's historical financial statements, including that they have been prepared in accordance with GAAP consistently applied and fairly present the financial condition and results of operations of AVP as of the dates and for the periods indicated.
• Absence of Undisclosed Liabilities — Representations that AVP does not have any liabilities or obligations of a nature required to be reflected in financial statements prepared in accordance with GAAP, except as disclosed in the APA, the disclosure schedules, or the financial statements, or incurred in the ordinary course of business after the most recent balance sheet date.
• Absence of Certain Changes (Interim Operating Covenants) — Representations that, since the most recent balance sheet date, AVP has conducted its business in the ordinary course consistent with past practice and has not experienced any Material Adverse Effect.
• Tax Matters — Representations regarding AVP's tax compliance, the filing of tax returns, payment of taxes, and the absence of pending or threatened tax audits, assessments, or deficiencies, subject to the specific known matter regarding the sales/use tax exposure discussed in Section VI.A.
• Compliance with Laws — Representations that AVP is in material compliance with all applicable federal, state, and local laws, regulations, and governmental orders.
• Environmental Matters — Representations regarding environmental compliance, the absence of environmental liabilities, compliance with environmental permits, and the absence of releases of hazardous substances, subject to the known-matters exclusion for the Butler TCE contamination discussed in Section VI.A.
• Material Contracts — Representations regarding the validity, enforceability, and status of AVP's material contracts, including customer and supplier agreements, equipment leases, and other commercial arrangements.
• Real Property — Representations regarding the owned and leased real property used in AVP's business, including the Butler facility (owned) and the Meadville facility (leased), and the condition of such properties.
• intellectual Property — Representations regarding AVP's ownership of or right to use intellectual property, the absence of infringement claims, and the adequacy of intellectual property protections for the business.
• Employee and Labor Matters — Representations regarding employment practices, compliance with labor laws, the status of the collective bargaining agreement with International Paperworkers Union Local 814, and the absence of pending or threatened labor disputes or unfair labor practice charges.
• Employee Benefits — Representations regarding AVP's employee benefit plans, ERISA compliance, and the funded status of pension and other benefit plan obligations.
• Product Liability and Warranty — Representations regarding the quality and safety of AVP's products, compliance with product safety standards, and the absence of material product liability claims or warranty obligations.
• Insurance — Representations regarding the maintenance and adequacy of AVP's insurance coverage.
• Customers and Suppliers — Representations regarding the status of material customer and supplier relationships, the absence of any notice of intent to terminate or materially reduce the volume of business, and customer concentration risks.
• Brokers and Finders — Representations that no broker, finder, or investment banker is entitled to any fee or commission in connection with the Transaction.
Important Note Regarding Buyer's Representations. The Policy covers only Seller's representations and warranties. Buyer's own representations and warranties in the APA (including representations regarding Buyer's organization, authority, financing capacity, and litigation status) are not covered by the Policy. This is standard for a buyer-side R&W policy structure.
VI. Key Exclusions and Carve-Outs
The Policy contains a number of exclusions and carve-outs that limit the scope of coverage. Understanding these exclusions is critical to evaluating the overall risk allocation framework for the Transaction. The following is a summary of the material exclusions.
A. Known Matters / Disclosed Matters
The Policy excludes coverage for matters that were actually known to the deal team or disclosed in the APA disclosure schedules as of the date of the Policy. This is the most significant category of exclusion and reflects the fundamental principle that R&W insurance is designed to cover unknown risks — that is, risks that were not identified during the diligence process and are therefore not reflected in the negotiated allocation of risk in the APA.
The following specific known matters have been identified by the carrier and are expected to be expressly excluded from Policy coverage:
1. Butler Environmental Condition. The Recognized Environmental Condition ("REC") identified at the Butler property — specifically, the historical solvent use and disposal area located at the northeast corner of the property — is a known matter excluded from Policy coverage. The Phase I Environmental Site Assessment prepared by Greenvale Environmental Sciences LLC (project lead: Dr. Alicia Fernandez) identified this REC, and the Phase II Environmental Site Assessment (commenced May 12, 2025) confirmed the presence of trichloroethylene ("TCE") in shallow groundwater at concentrations of approximately 12 parts per billion ("ppb"), which exceeds the Pennsylvania Act 2 Medium-Specific Concentration ("MSC") standard of 5 ppb. Based on preliminary Phase II results and the scope of the impacted area, estimated remediation costs range from $1,200,000 to $2,800,000, depending on the selected remediation approach, the extent of the contamination plume (which is still being delineated), and applicable regulatory requirements.
Because this condition was identified during the diligence process and is reflected in the APA disclosure schedules, it constitutes a "known matter" and is excluded from the Policy. The risk of remediation costs is instead addressed through the Seller's environmental special indemnity of up to $8,000,000 under the APA, which survives for 36 months following the Closing Date. We discuss the interaction between the environmental special indemnity and the Policy in greater detail in Sections VII.D and VIII.A below.
2. Sales/Use Tax Exposure. The approximately $420,000 in potential sales and use tax exposure identified across Pennsylvania, Ohio, and West Virginia for tax periods 2021 through 2024 is a known matter. This exposure was identified during the tax diligence process conducted by Hargrove Thornton LLP and relates to potential nexus and taxability issues arising from AVP's sales activities and use tax obligations in these jurisdictions. To the extent this exposure is disclosed in the APA disclosure schedules — as it is expected to be — it will be excluded from Policy coverage. Seller has agreed to indemnify Buyer for this pre-closing tax exposure under the APA's tax indemnification provisions.
3. Pension Underfunding. The approximately $3,100,000 underfunded pension obligation under AVP's defined benefit pension plan constitutes a known matter. Under the APA, the pension underfunding is classified as an Excluded Liability, meaning Seller retains responsibility for this obligation, and it will not be assumed by Buyer as part of the Acquired Assets transaction. Accordingly, the pension underfunding is excluded from Policy coverage under both the known-matters exclusion and the specific employee benefit plan exclusion discussed in Section VI.G below.
4. AVP Existing Indebtedness. The approximately $14,200,000 outstanding under AVP's revolving credit facility with Merchants & Traders Bank, which is to be repaid in full at or prior to the Closing, is an Excluded Liability under the APA and is excluded from Policy coverage. This is standard, as existing seller indebtedness is a pre-closing obligation that is addressed through the closing mechanics of the APA (payoff at closing) rather than through indemnification or insurance.
B. Purchase Price Adjustments
The Policy excludes losses arising from or relating to the net working capital adjustment mechanism under the APA. The Target NWC has been agreed at $12,400,000, with a customary collar of plus or minus $250,000 (meaning no purchase price adjustment will be made for variations within the collar). Post-closing purchase price true-ups, disputes regarding the calculation of closing net working capital, and any resulting adjustments to the purchase price are not insurable losses under the Policy. This exclusion is universal in R&W policies, as purchase price adjustment mechanisms are commercial terms of the APA that do not involve breaches of representations and warranties.
C. Forward-Looking Covenants
The Policy generally excludes losses arising from breaches of post-signing, pre-closing covenants — that is, affirmative and negative operating covenants that govern Seller's conduct of the business during the interim period between APA execution and Closing. These covenants are forward-looking obligations (e.g., operating in the ordinary course, refraining from material capital expenditures without Buyer's consent, maintaining insurance coverage) rather than backward-looking representations of fact, and as such are outside the scope of R&W insurance coverage.
However, the Policy does cover "bring-down" representations at Closing. That is, to the extent Seller's representations and warranties are required to be true and correct as of the Closing Date (in addition to the signing date) as a condition to closing, the Policy will cover breaches of those representations as of the Closing Date, subject to applicable materiality qualifiers. This is an important distinction, as it means that a deterioration in the accuracy of Seller's representations between signing and closing (for example, the emergence of a material undisclosed liability during the interim period) would be a covered loss under the Policy if the bring-down condition is satisfied and the Transaction nevertheless closes.
D. Fraud. The Policy does not cover losses caused by the fraud of the insured — i.e., fraud committed by Crestline, Ridgeway Capital Partners, or their respective officers, directors, or employees. This is a standard carve-out designed to prevent moral hazard.
Critically, however, the Policy does cover losses arising from fraud committed by Seller. This is one of the most valuable features of buyer-side R&W insurance. If Seller's representations and warranties were fraudulently made — for example, if Seller knowingly concealed a material liability or made a representation it knew to be false — Buyer may still recover from the carrier under the Policy. In such circumstances, the carrier is subrogated to Buyer's rights and may pursue its own recovery action against Seller and its shareholders. This coverage for Seller fraud provides Buyer with a meaningful backstop in the event that Seller's indemnification obligations prove to be illusory or uncollectable (for example, if the Horvath family shareholders have dissipated the sale proceeds).
E. Consequential, Punitive, and Multiplied Damages
The Policy contains a standard exclusion for consequential, punitive, exemplary, and multiplied damages. This means that if Buyer suffers indirect or consequential losses (such as lost profits or business interruption losses) arising from a breach of Seller's representations, such losses are generally not covered under the Policy.
There is, however, an important exception: if consequential, punitive, or multiplied damages are awarded to a third party in a third-party claim brought against Buyer (the insured), such damages are covered under the Policy. For example, if a customer or governmental authority obtains a judgment against Buyer that includes a component of punitive damages based on pre-closing conduct by AVP, that portion of the judgment would be covered. This exception is critical for claims involving product liability, environmental enforcement, and regulatory penalties.
F. Transfer Taxes and Transaction Costs
The Policy excludes losses relating to transfer taxes, including the Pennsylvania Realty Transfer Tax (estimated at approximately $360,000 in connection with the transfer of the Butler facility real property), as well as Transaction Expenses incurred by either party in connection with the negotiation, execution, and consummation of the APA. Transfer taxes and transaction costs are allocable under the APA and are not appropriate subjects for R&W insurance coverage.
G. Underfunded Employee Benefit Plans
The Policy specifically excludes losses relating to underfunded pension or employee benefit plan obligations. As noted in Section VI.A.3 above, the approximately $3,100,000 pension underfunding under AVP's defined benefit plan is an Excluded Liability under the APA and is separately excluded from Policy coverage under this provision. This exclusion is common in R&W policies and reflects the carrier's view that pension underfunding is a quantifiable, known obligation rather than an insurable contingency.
H. ERISA and Benefit Plan Matters
Certain ERISA-related matters may be subject to sub-limits or specific exclusions under the Policy. The scope of ERISA coverage can be a negotiation point in R&W placements, particularly where the target company sponsors qualified retirement plans or welfare benefit plans with post-retirement obligations.
In this Transaction, the ERISA risk profile is mitigated by the fact that AVP's 401(k) plan — the Allegheny Valley Packaging 401(k) Profit Sharing Plan, administered by Patriot Plan Administrators LLC — is not being assumed by Buyer. The 401(k) plan will remain with Seller as an Excluded Liability, and Buyer intends to establish a new 401(k) plan for transitioned employees following the Closing. This structure significantly reduces Buyer's ERISA exposure and should narrow the scope of any ERISA-related exclusions in the final Policy.
I. Asbestos and PFAS
The Policy contains a standard exclusion for liabilities arising from or relating to asbestos-containing materials and per- and polyfluoroalkyl substances ("PFAS"). This exclusion is essentially universal in current R&W insurance placements and reflects the difficulty carriers face in underwriting and pricing these long-tail environmental and toxic tort risks. Neither the Phase I nor Phase II Environmental Site Assessments identified asbestos or PFAS contamination at the Butler or Meadville facilities; however, given the industrial nature of AVP's operations and the age of the Butler facility, the possibility of latent asbestos exposure cannot be entirely eliminated. This exclusion should be noted as a residual risk that is not mitigable through the Policy.
J. Collectability of Receivables
The Policy excludes losses arising from the uncollectability of accounts receivable. This exclusion means that if accounts receivable included in the Acquired Assets prove to be uncollectable or overstated, Buyer cannot recover such losses under the Policy, even if the uncollectability results from inaccuracies in Seller's financial statement representations. The risk of receivables collectability is addressed through the net working capital adjustment mechanism (which captures the value of receivables as of the Closing Date) and through Buyer's own post-closing collection efforts.
VII. Interaction with APA Indemnification Framework
The R&W Policy is designed to work in concert with the APA's indemnification provisions, providing complementary coverage that enhances Buyer's overall risk protection. This Section describes the APA indemnification framework and explains how the Policy interacts with each component.
A. APA Indemnification Summary
The APA provides for customary post-closing indemnification by Seller in favor of Buyer for losses arising from breaches of Seller's representations and warranties, breaches of Seller's covenants, Excluded Liabilities, and certain specific indemnities. The principal parameters of the APA indemnification framework are as follows:
• Indemnification Cap: 25% of Purchase Price, equal to $45,000,000. This cap applies to Seller's aggregate liability for breaches of general representations and warranties. The cap does not apply to breaches of fundamental representations, fraud, or specific indemnities (including the environmental special indemnity).
• Basket (Deductible): 0.75% of Purchase Price, equal to $1,350,000. The basket is structured as a tipping basket, meaning that once aggregate qualifying indemnification claims exceed $1,350,000, Buyer is entitled to first-dollar recovery for all qualifying losses (i.e., recovery from dollar one, not merely the excess above the basket).
• Mini-Basket (De Minimis Threshold): $50,000 per individual claim. Individual claims with losses below $50,000 do not qualify as indemnifiable losses and do not count toward satisfaction of the $1,350,000 basket. This provision prevents Buyer from aggregating numerous small claims to reach the basket threshold.
• Escrow: $9,000,000 (5% of Purchase Price), deposited at closing with Atlantic Fiduciary Trust Company (contact: Robert D. Whitaker) as escrow agent. The escrow fund serves as a dedicated, funded source of recovery for Buyer's indemnification claims and is scheduled for release eighteen (18) months following the Closing Date, net of any pending or unresolved claims as of the release date.
• Environmental Special Indemnity: Up to $8,000,000 for pre-closing environmental conditions at the Butler and Meadville facilities, surviving for thirty-six (36) months following the Closing Date. The environmental special indemnity is separate from and in addition to the general indemnification cap of $45,000,000 and is designed specifically to address the known TCE contamination at the Butler facility and any other pre-closing environmental conditions that may be identified.
• Survival Periods:
• General representations: 18 months from the Closing Date
• Fundamental representations (title, authority, capitalization, brokers, taxes): 60 months from the Closing Date
• Environmental representations: 36 months from the Closing Date
• Tax representations: 60 days after the expiration of the applicable statute of limitations (including any extensions, waivers, or tolling agreements)
B. Layering of Coverage
The APA indemnification framework and the R&W Policy create a multi-layered coverage structure. Understanding the layering is essential for assessing Buyer's recovery prospects for losses of varying magnitudes. The coverage layers operate as follows:
Layer 1 — Mini-Basket ($0 to $50,000 per claim). Individual claims with losses below $50,000 are not recoverable under the APA indemnification framework and do not count toward the basket. The Policy incorporates the APA's de minimis threshold, meaning individual claims below $50,000 are also excluded from the Policy. Accordingly, losses below $50,000 per claim are entirely unrecoverable and represent pure self-insurance for Buyer.
Layer 2 — Basket ($0 to $1,350,000 aggregate). Qualifying indemnification claims (i.e., individual claims exceeding $50,000) accumulate toward the $1,350,000 basket. Until aggregate qualifying claims exceed $1,350,000, no recovery is available under the APA or the Policy. Once the basket is exceeded, the tipping basket mechanism provides first-dollar recovery from Seller under the APA. During this layer, the Policy has not yet been triggered because the Policy retention has not been satisfied.
Layer 3 — APA-Only Zone ($1,350,000 to $1,800,000) (First 12 Months Only). During the first twelve months following the Closing Date, the Policy retention is $1,800,000, while the APA tipping basket is $1,350,000. This creates a $450,000 zone in which losses are recoverable from Seller under the APA (because the tipping basket has been exceeded) but are not yet covered by the Policy (because the $1,800,000 retention has not been reached). During this period, Buyer's recovery for losses in this $450,000 band depends entirely on Seller's willingness and ability to pay.
After twelve months, the drop-down provision reduces the Policy retention to $900,000, which is below the APA basket of $1,350,000. The drop-down effectively eliminates the APA-only zone and means that, for the remainder of the general representations survival period (months 13–18), the Policy attaches at a lower threshold ($900,000) than the APA basket ($1,350,000).
Layer 4 — Policy Coverage. The Policy responds to aggregate covered losses exceeding the applicable retention, up to the $18,000,000 aggregate coverage limit. In Year 1 (months 1–12), this layer covers losses from $1,800,000 to $19,800,000 (retention plus limit). After the 12-month drop-down, this layer covers losses from $900,000 to $18,900,000. The Policy is the primary recovery source in this layer, and claims may be submitted directly to Northbridge without first exhausting remedies against Seller.
Layer 5 — APA Indemnification Above Policy Limit. Losses exceeding the $18,000,000 Policy limit remain subject to Seller's direct indemnification obligations under the APA, up to the $45,000,000 indemnification cap. However, as a practical matter, the collectability of Seller indemnification claims in excess of the Policy limit is subject to significant risk. AVP is a family-owned S-corporation, and following the Closing, the sale proceeds will have been distributed to the Horvath family shareholders (after repayment of AVP's existing indebtedness and satisfaction of transaction costs). AVP itself will have minimal remaining assets. The escrow of $9,000,000 represents the primary funded backstop for direct Seller indemnification, and it is released 18 months post-closing. Accordingly, for losses exceeding the Policy limit and the escrow, Buyer would need to pursue recovery directly from the Horvath family shareholders, which may involve litigation risk and collection uncertainty.
C. Subrogation. The Policy contains a waiver of the carrier's right of subrogation against Seller and its shareholders, except in cases of fraud committed by Seller or any of its shareholders. This subrogation waiver is standard in buyer-side R&W policies and was specifically requested by Seller's counsel, Broadmoor Strauss & Kline LLP (Nathan R. Feldstein), during APA negotiations as a condition to Seller's acceptance of the overall indemnification framework.
The practical effect of the subrogation waiver is as follows:
• If the carrier pays a claim to Buyer under the Policy, the carrier may not turn around and seek reimbursement from Seller or the Horvath family shareholders (except in fraud cases). This effectively limits Seller's post-closing financial exposure to (a) amounts within the Policy retention that are recoverable under the APA, (b) the $9,000,000 escrow, and (c) direct APA indemnification claims that exceed the Policy limit.
• In cases of Seller fraud, the carrier preserves its full subrogation rights and may pursue recovery from Seller, the Horvath family shareholders, and any other responsible parties. This is appropriate because fraud represents an intentional breach that should not benefit from the protections of the subrogation waiver.
• The carrier preserves its subrogation rights against third parties (i.e., parties other than Seller and its shareholders), such as advisors, auditors, or other service providers who may have contributed to a loss.
D. Coordination with Environmental Special Indemnity
The interplay between the $8,000,000 environmental special indemnity under the APA and the R&W Policy is an important element of the overall risk allocation for environmental matters:
• Known Environmental Conditions. As discussed in Section VI.A.1, the known Butler TCE contamination is excluded from Policy coverage as a known matter. This contamination, including all remediation costs, regulatory compliance obligations, and related liabilities, is addressed exclusively through the Seller's environmental special indemnity. The $8,000,000 environmental special indemnity limit provides significant headroom above the current upper-bound remediation estimate of $2,800,000, but it should be noted that remediation costs are inherently uncertain and may increase as the Phase II ESA delineation progresses and as regulatory requirements are finalized.
• Unknown Environmental Conditions. Environmental conditions that were not identified in the Phase I or Phase II Environmental Site Assessments and are not otherwise disclosed in the APA schedules would be covered by the Policy under the environmental representations, subject to the 36-month survival period and the standard Policy retention. This is because unknown environmental conditions do not fall within the known-matters exclusion. For example, if post-closing investigation reveals a previously unidentified area of soil or groundwater contamination at either the Butler or Meadville facility, Buyer could seek recovery under the Policy for losses arising from the breach of Seller's environmental representations.
• Meadville Facility. The Phase I Environmental Site Assessment for the Meadville facility was completed on May 5, 2025 by Greenvale Environmental Sciences LLC, and no Recognized Environmental Conditions were identified. The Meadville facility accordingly presents a lower environmental risk profile than the Butler facility. To the extent any unknown environmental conditions are subsequently identified at Meadville, they would be covered by the Policy.
• Complementary Structure. The overall structure is complementary: the environmental special indemnity addresses known environmental risks (where the Policy does not respond), and the Policy addresses unknown environmental risks (where the special indemnity may or may not be applicable, depending on whether the condition constitutes a "pre-closing environmental condition" under the APA).
VIII. Coverage Gap Analysis
Based on our review of the Policy terms, the APA indemnification framework, and the Transaction risk profile, we have identified the following coverage gaps and residual risks. For each gap, we describe the nature of the risk, the Policy's treatment, available mitigants, and our recommendations.
A. Gap 1: Known Environmental Matters (Butler TCE)
Risk. Estimated remediation costs of $1,200,000 to $2,800,000 for TCE contamination in shallow groundwater at the Butler property, with concentrations at approximately 12 ppb (exceeding the Pennsylvania Act 2 MSC standard of 5 ppb). The contamination is located in the northeast corner of the property in the vicinity of a historical solvent use and disposal area. Phase II ESA delineation is ongoing, and the final remediation scope, approach, and cost may differ from current estimates.
Policy Status. Excluded from coverage as a known matter identified during the diligence process.
Mitigation. Seller's environmental special indemnity under the APA provides up to $8,000,000 for pre-closing environmental conditions at the Butler and Meadville facilities, surviving for 36 months following the Closing Date. The $8,000,000 indemnity cap provides substantial headroom above the current upper-bound remediation estimate of $2,800,000. Additionally, the Seller escrow of $9,000,000 provides a funded source of recovery for claims under the environmental special indemnity during the first 18 months.
Recommendation. The deal team should continue to closely monitor the Phase II ESA results being conducted by Greenvale Environmental Sciences LLC under Dr. Fernandez's direction. Final remediation scope and cost may change materially as additional data becomes available. The final APA language for the environmental special indemnity should be drafted broadly to capture all "pre-closing environmental conditions" — including both known and subsequently discovered conditions — to ensure that remediation costs exceeding the current estimates remain within the scope of the indemnity. If Phase II results indicate a materially larger contamination plume or higher remediation costs, the adequacy of the $8,000,000 indemnity cap should be reassessed prior to APA execution.
B. Gap 2: Sales/Use Tax Exposure
Risk. Approximately $420,000 in potential sales and use tax exposure across Pennsylvania, Ohio, and West Virginia for tax periods 2021 through 2024.
Policy Status. Likely excluded from Policy coverage as a known matter, to the extent disclosed in the APA disclosure schedules.
Mitigation. Seller has agreed to provide specific indemnification for pre-closing tax liabilities under the APA's tax representations, with a survival period extending until 60 days after the expiration of the applicable statute of limitations (including extensions). The sales/use tax exposure constitutes a pre-closing tax liability that is an Excluded Liability under the APA.
Recommendation. The deal team should confirm that the $420,000 sales/use tax exposure is specifically identified in the APA disclosure schedules and is covered by Seller's tax indemnity obligation. Given the relatively modest quantum of this exposure, the APA indemnification provides adequate protection. However, the team should verify with Leonard Cross (Tax) that the tax indemnity is drafted broadly enough to cover potential interest, penalties, and professional fees associated with resolving this exposure, as the $420,000 estimate may reflect only the base tax liability.
C. Gap 3: Pension Underfunding
Risk. Approximately $3,100,000 in underfunded pension obligations under AVP's defined benefit pension plan.
Policy Status. Excluded from Policy coverage on multiple grounds: (i) the pension underfunding is a known matter, (ii) it is classified as an Excluded Liability under the APA, and (iii) the Policy contains a specific exclusion for underfunded employee benefit plan obligations.
Mitigation. The pension underfunding is classified as an Excluded Liability under the APA, meaning Seller retains full responsibility for this obligation. Buyer is not assuming the pension plan or any liability associated with its underfunded status.
Recommendation. The deal team should confirm that the pension underfunding is clearly and unambiguously excluded from the Assumed Liabilities in the final APA. Any ambiguity in the definition of Assumed Liabilities or the characterization of the pension obligation could create a risk that Buyer is deemed to have assumed responsibility for the underfunding, which would not be covered by the Policy.