Explore a case study where a buyer sued the seller over lost profits in an urgent care center acquisition. Learn about the legal aspects and due diligence considerations.
M&A Stories
December 21, 2018
In this case, a buyer in the Baltimore area, operating urgent care centers in several states, acquired a healthcare firm in 2015. The purchased firm owned and operated urgent care centers in Pennsylvania. The seller’s firm had third-party payor agreements, like one with Independence Blue Cross, which required an on-site board-certified physician. However, after the acquisition, it was discovered that the physician requirement wasn’t strictly enforced, leading to numerous instances where no physicians were on-site.
The buyer sued the seller, alleging that the representations made in the acquisition regarding third-party payor agreements were false. They claimed they wouldn’t have paid as much for the acquisition if they had known about the physician absence issue.
The seller argued that this wasn’t a material breach, but the court disagreed, as even the seller admitted that board-certified physicians weren’t always present. The court also allowed the buyer’s claim for lost profits, stating that Pennsylvania law permitted it, given the evidence of overpayment due to the breach.
A note on due diligence: Could the buyer’s due diligence have discovered this issue?
However, it’s important to mention that the damages might be capped in the purchase agreement, which is common practice (usually around 10% or less of the purchase price). The buyer tried to bypass this cap by alleging fraud, but the court rejected this approach. It can be challenging to claim fraud in a purchase agreement when the fraudulent behavior is also a breach of the seller’s representations and warranties.
Case Reference:
Gusdorff v. MNR Industries, LLC, Civil Action No. 18-652, Supreme Court, New York County, (July 6, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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