The court held that the seller creditor could garnish the receivables because the buyer’s ownership of them would not vest until the buyer had received its license from the state of Florida
M&A Stories
September 2, 2022
Introduction
When acquiring a physician practice, buyers face unique risks related to state licensing. This blog highlights a case where the buyer lost ownership of purchased medical insurance receivables due to a creditor’s actions.
The Deal
In this case, a medical practice in Florida was acquired through an asset purchase. The buyer purchased the practice’s assets, including outstanding receivables owed by medical insurance companies. However, the buyer’s ownership of these receivables was contingent upon obtaining a license from the state of Florida.
Post-Closing Challenges: After the closing, the buyer initiated the process of obtaining the necessary license, which typically takes several months. Meanwhile, the seller continued working at the office, and the payments from insurance companies were deposited into the seller’s old account, which the buyer had access to.
Creditor’s Garnishment: Unfortunately, a creditor of the seller obtained a $130K judgment against the seller and garnished the funds owed to the practice by certain health insurers. These garnished funds were the receivables that the buyer had purchased from the seller.
The Lawsuit
The buyer disputed the garnishment in a Florida state court, arguing that they owned the receivables as they had been purchased. However, the court rejected the buyer’s claim, stating that ownership could not vest with the buyer until they obtained the required state license. Consequently, the court ordered the funds to be paid to the creditor.
The buyer appealed the court’s decision but was unsuccessful in overturning it.
See Physicians Care Centers Of Florida, LLC v. PNC Bank, National Association, No. 4D21-3228, District Court of Appeal of Florida, Fourth District, (August 17, 2022).
Commentary
The buyer, experienced in acquiring medical practices, acknowledged that obtaining a license typically takes months after the closing. In hindsight, the buyer could have mitigated this risk by withholding a portion of the purchase price until the license was obtained. This would have provided more protection against such unforeseen circumstances.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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