Opinion ID: 2981683
Heading Depth: 3
Heading Rank: 2

Heading: Events Leading to Claims on Escrow and Lawsuit

Text: 1. Events Concerning the Finder’s Fee Provisions. At some point shortly before the close of sale, Invacare’s leadership discovered an ambiguity in McDaniel’s Consulting Agreement that could allow McDaniel to count the revenue from the Naylor acquisition toward the calculation of his revenue-dependent quarterly bonus. Disinclined to pay such a bonus, Invacare offered to pay McDaniel a flat bonus of $30,000 in lieu of his usual profit-dependent quarterly bonus—an offer which McDaniel reluctantly accepted. Invacare called this bonus a “finder’s fee” for accounting purposes (i.e., in order to capitalize the expense in the purchase price and to avoid counting the bonus as cost against the operating income of the new business). Consistent with this practice, it referred to this bonus as a “finder’s fee” in internal -4- Nos. 11-5820/11-5844/11-6044/11-6050 Naylor Med. Sales & Rentals, Inc., et al. v. Invacare Continuing Care, Inc., et al. documents. Mike Will, who served as Invacare’s Director of Rentals and point man in the Naylor acquisition, flagged a draft of the Finder’s Fee Provision with the words “Scott McDaniel” and inquired in internal discussions whether the company should consider disclosing McDaniel’s bonus to Underwood. Invacare declined to disclose this information, however. Upon discovering McDaniel’s bonus almost two years after the sale, Underwood sued Invacare for breach of the Finder’s Fee Provisions. Though McDaniel described his involvement in the asset purchase as limited, Underwood claimed that his ignorance of McDaniel’s role and incentives as finder caused him to acquiesce to a lower purchase price. He maintained that, absent this misrepresentation, he would have held out for a buyer willing to offer a purchase price over $3 million or would have continued to operate Naylor at a profit of about $550,000 per year. 2. Events Concerning the Accounts Receivable Repurchase Provision. After taking reasonable steps to collect on the accounts receivable, Invacare gave notice to the Escrow Agent for a claim invoking the buyback right under the Accounts Receivable Repurchase Provision. Underwood invoked his right to verify the existence of the unpaid balance on the accounts receivable, requesting invoice numbers, invoice dates, and more readable spreadsheets documenting the unpaid accounts receivable. Having received no further information, Underwood refused to pay the unpaid balance of the claimed accounts receivable, and Invacare refused to release the escrow funds. Plaintiffs sued Invacare for failing to honor their verification right under the Accounts Receivable Repurchase Provision and refusing to release the escrow funds despite the -5- Nos. 11-5820/11-5844/11-6044/11-6050 Naylor Med. Sales & Rentals, Inc., et al. v. Invacare Continuing Care, Inc., et al. absence of a verifiable claim. Invacare countersued for plaintiffs’ refusal to repurchase the unpaid balance of the accounts receivable, in breach of the same provision. 3. Events Concerning the Customer Loss Provision. Sometime after the close of sale, several customers acquired from the Naylor purchase either ceased or decreased their business with Invacare, including Select Medical, Regional Medical Center, Methodist Hospital, Kindred Hospital, and Briley Nursing Home. The decrease was gradual: at first, Briley even increased business, and the other customers maintained their business with Invacare for a few months. According to Underwood, the competitiveness of the medical equipment rental business causes frequent customer fluctuation. Plaintiffs thus attribute the loss of customers to fluctuations resulting from poor service, rather than to the customers’ plans predating the Naylor sale. Invacare believed, however, that plaintiffs misrepresented their customers’ willingness to continue doing business with Invacare after the Naylor acquisition, in violation of the Customer Loss Provision. Evidence at trial later revealed the possibility that Charles Nunn, the Materials Manager and Buyer for Kindred, advised Underwood as early as 2007 that Kindred would switch to a national contract. Invacare further claimed that individuals at Select Medical, Regional Medical Center, and Methodist Hospital advised Naylor or Underwood, prior to the Naylor sale, of their plans to take their business elsewhere in 2008. Alleging breach, Invacare presented a claim to the escrow agent based on the Customer Loss Provision. Plaintiffs sued under the theory that Invacare breached the -6- Nos. 11-5820/11-5844/11-6044/11-6050 Naylor Med. Sales & Rentals, Inc., et al. v. Invacare Continuing Care, Inc., et al. Escrow Agreement’s implied duty of good faith by presenting a baseless Customer Loss Provision claim and withholding the release of escrow funds without good reason.