Buyer can sue seller of urgent care centers for lost profits from Target’s alleged material breach of 3rd party payor contracts

Buyer is based in the greater Baltimore area and operates urgent care centers and clinics throughout central Maryland, Delaware, Pennsylvania, and Virginia. In January 2015, Buyer purchased Target from Seller, a physician. Target operated urgent care facilities in Pennsylvania.

According to Buyer, Target’s third-party payor agreements, including an agreement with Independence Blue Cross, required that a board-certified physician always be on site at Target facilities. After the closing Buyer discovered that Seller’s policy was that a physician be on site unless there was an illness, family emergency, or no show by a physician. As a result, Buyer discovered that there were hundreds of times where no physicians were on site, before closing.

Buyer sued Seller in a Philadelphia federal district court. Buyer claimed that Seller’s representations and warranties that no Target condition existed that in and of itself would result in the suspension of any such third-party payor program, and that Target complied in all material respects with the requirements of all such third-party payors, including Blue Cross, were false. Specifically, Target’s urgent care centers lacked onsite physicians hundreds of times before the closing, in violation of third-party payor contracts.

As a result, Buyer claimed it would not have not paid Sellers as much for Target as Buyer did had it known about the physician onsite absentee problem.

Seller argued that Buyer has no legal claim against Seller even if the alleged facts were true. Seller claimed that the physician absentee problem was not a Target material breach of its third-party payor agreements. The court was not persuaded, concluding that even Seller conceded that board certified physicians were not always present at the urgent care facilities.  Whether this pattern was a material breach of the third-party payor contracts was a question for a later stage of the litigation.

Seller had one other line of attack why Buyer’s breach of contract claim was flawed. In noted that Buyer claimed that because Seller’ representations and warranties on this issue were false, Buyer ultimately overpaid for Target and suffered lost profits. Seller argued that Buyer can’t make a lost profit claim. The court disagreed holding that lost profits may be recovered under applicable Pennsylvania law because (1) evidence can establish the amount that Buyer overpaid for Target with reasonable certainty (2) Buyer’s alleged overpayment for Target was the proximate consequence of the breach of the physician presence requirement in the third party payor contracts, and (3) the amount that Buyer overpaid for Target was reasonably foreseeable from Seller’s alleged misrepresentations.

This case is referred to Gusdorff v. MNR Industries, LLC, Civil Action No. 18-652, Supreme Court, New York County, (July 6, 2018).

Comment. With 20/20 hindsight, Buyer would have preferred to have discovered this problem through due diligence. Then Buyer could have either walked or negotiated a reduced purchase price.

Although Buyer has a breach of contract claim against Seller there might be a cap to Buyer’s damages in the purchase price as low as 10% or less of the purchase price. Buyer’s tried in this case to override the cap by alleging fraud but the court threw out the fraud claim. It is difficult to sue a seller in a purchase agreement for fraud.

By John McCauley: I help people start, grow, buy and sell their businesses.



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Posted in Buyer beware, due diligence, economic loss doctrine, material contracts, representations and warranties

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