Sunday, March 10, 2013
Badly Written Buy-Sell Agreement Did Not Provide for Recovery of Overpayments to Departing Shareholder
The Lord Giveth and the Lord Taketh Away,
but a Badly Written Buy-Sell Agreement Might Not Take Away
In a recent decision of the Sixth Circuit Court of Appeals, it examined a Buy-Sell Agreement of a professional practice that did not, by its terms, require a departing physician to pay funds into the practice to account for excessive withdrawals therefrom. There having been imposed no obligation by contract, the court would not create one. Neuro-Spine Solutions, PC v. Freund, 2012 WL 5382902 (6th Cir. Nov. 5, 2012).
Neuro-Spine Solutions, PC, a Tennessee professional corporation, had as its shareholders Freund, he holding 35% of the shares, and Lorio, he holding 65% of the corporation’s shares. There was a falling out between Freund and Lorio, and Freund withdrew from the corporation. A variety of claims having been dismissed or resolved by the trial court, the primary issue on appeal was whether Freund was required to pay funds over to Neuro-Spine consequent to the fact that it was balance sheet insolvent (i.e., debt exceeded assets) or because he had been over-compensated through the time of his withdrawal.
Under the terms of the Buy-Sell Agreement, upon Freund’s withdrawal, Lorio had the option of effecting the corporation’s dissolution or buying Freund’s shares pursuant to the agreement’s terms; he elected to purchase the shares. The agreement defined value in terms of a trio of figures, namely collected fees, cash on hand and tangible assets. Telling for this dispute, the value of the tangible assets was to be calculated without including any company liabilities.
With respect to the determination of the stock’s value, the Court of Appeals affirmed the determination made by the trial court. In that the definition did not account for company liabilities, and further did not provide for any payment by the withdrawing shareholder to the corporation, that value stands.
As to a claim that Freund had been over-compensated vis-à-vis the shareholder agreement and rejecting an assertion that there could be a claim for repayment in excess of salary, the court noted that the shareholders agreement:
Rather than requiring a repayment by the terminating shareholder, the Shareholders Agreement provides that such terminating shareholder “receive no monies” in exchange for a sale of the stock. The agreement contains no provision for a repayment of overdrawn compensation, in the event Dr. Freund was not in line with the pre-arranged payouts.
With respect to a loan made by Neuro-Spine to a separate corporation owned by Freund, Neuro-Spine sought to enforce that obligation against Freund. At trial, the court found that Freund had not agreed to be personally liable on that obligation, and that determination was affirmed by the Court of Appeals.
There was also a somewhat unclear claim with respect to a line-of-credit owed by Neuro-Spine on which Freund, along with Lorio, was a personal guarantor. Regardless, the court upheld a grant of summary judgment in favor of Freund with respect thereto.
Aside from the details of this ruling, at least a pair of points of guidance come forth. First, shareholder buy-sell agreements and similar documents will likely be carefully scrutinized by the courts. To the extent a remedy is not provided for a particular fact situation, the courts will not provide relief that has not been negotiated and agreed to. Second, when entering into multiple agreements as to the same operative facts, it is absolutely crucial that the agreements be consistent both internally and with respect to one another.