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Vaughan v. American Homecare Supply

April 11, 2007

THOMAS C. VAUGHAN AND BRUCE H. CALLAHAN, IN THEIR CAPACITIES AS SHAREHOLDER REPRESENTATIVES, PLAINTIFFS,
v.
AMERICAN HOMECARE SUPPLY, LLC, DEFENDANT.



The opinion of the court was delivered by: Matthew F. Kennelly, District Judge

MEMORANDUM OPINION AND ORDER

In October 2004, American Homecare Supply, LLC (AHS) purchased Ultra Care, Inc. Ultra Care sells and rents home medical equipment and provides home infusion therapy as well as other specialty pharmacy services. Thomas C. Vaughan and Bruce H. Callahan, the representatives of Ultra Care's selling shareholders, have sued AHS for breach of contract. The two claims that Vaughan and Callahan have made involve payment of consideration due on Ultra Care's revenues that were uncollected at the time of the sale. Plaintiffs have moved for summary judgment on Count 1 of their complaint. For the following reasons, the Court denies plaintiffs' motion.

Facts

For the purpose of plaintiffs' summary judgment motion, the Court views the evidence in the light most favorable to AHS, drawing reasonable inferences in its favor. Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002).

In October 2004, AHS purchased Ultra Care pursuant to a merger agreement. The merger agreement required AHS to cause Ultra Care and its subsidiaries to endeavor diligently and in good faith to collect certain uncollected revenues of Ultra Care. See Def. Ex. A, § 3.2(a). The merger agreement set a collection target of $6.9 million for a fifteen-month period, from October 2004 through December 2005. In the event that AHS collected more than $6.9 million, AHS would pay the selling shareholders, through representatives Vaughan and Callahan, the amount that exceeded the target. If collections did not reach the $6.9 million target, then the selling shareholders would pay AHS the shortfall out of an escrow account established at the closing. The merger agreement required AHS to deliver interim collection reports to the shareholder representatives at the end of each quarter detailing the amount of uncollected revenues that were collected during that three-month period. The shareholder representatives did not dispute the figures in any of the interim reports.

The merger agreement required AHS to deliver to the shareholder representatives, within forty-five days after the fifteen-month collection period, a statement setting forth the amount of uncollected revenues that Ultra Care or its subsidiaries received over the entire collection period. See Def. Ex. A, § 3.2(c). If the shareholder representatives disputed the contents of the collection statement, they had thirty days to specify in reasonable detail the nature and extent of their disagreement. See § 3.2(d). Within that thirty-day review period, AHS was to provide the shareholder representatives with reasonable access to company records and employees. Id. If AHS and the shareholder representatives could not reach an agreement within ten days of notice of a dispute, the merger agreement provided for the engagement of a nationally recognized firm of independent accountants to review and resolve the dispute. Id. The merger agreement detailed no similar procedure for AHS to remedy a computational error that it discovered. Under another provision of the agreement, if Ultra Care or its subsidiaries collected an amount in excess of the collection target, AHS would deposit the excess amount with the shareholder representatives' paying agent. Id. § 3.2(f).

On February 14, 2006, the forty-fifth day after the end of the collection period, Carmen Davies, the regional director of reimbursement for AHS, e-mailed to Vaughan the last quarterly collection report and the final statement for the fifteen-month collection period. Davies wrote that she was sending the collection statement in accordance with section 3.2 of the merger agreement. The February 14, 2006 statement computed the total collection amount to $9,385,857.47, which is $2,485,857.47 over the $6.9 million collection target. On February 23, 2006, Vaughan wrote to Stephen Ferrara, counsel for AHS, stating that the shareholder representatives agreed to the figures on the February collection statement and asked how the $2,485,857.47 would be distributed.

On March 3, 2006, Roger Miller, a Vice President for AHS's subsidiary DependiCare, sent Vaughan a corrected final collection statement, explaining that the February 14, 2006 final statement was incorrect. The March 3, 2006 collection report detailed the actual amount that Ultra Care collected, which was $7,801,205.12. As a result, AHS explained that the excess receivables were only $901,205.12, over $1.5 million less than the original final report had stated. The shareholder representatives responded to Miller's letter on March 13, 2006, informing AHS that the merger agreement did not allow AHS to revise or amend a collection statement and demanding that AHS promptly deposit $2,485,857.47 with the paying agent pursuant to section 3.2(f) of the merger agreement.

During the fifteen-month collection period, Andrew Miller, Ultra Care's former Chief Operating Officer, regularly sent plaintiffs and the former members of the Ultra Care Executive Team collection statements to keep them and their fellow shareholders apprised of the actual amounts collected by AHS.*fn1 See Def. Exs. C-J. Andrew Miller also attests that he had discussions with plaintiff Callahan in June 2005 in which he explained that he believed the collection figures in the May 2005 interim report were wrong. He advised Callahan that he had prepared his own internal reports, which he had forwarded to plaintiffs, and believed they were correct. After Andrew Miller re-ran the reports through May 2005 several times and confirmed that his own internal reports were correct, he told Callahan and/or Brian Chung, the Ultra Care's former Chief Financial Officer, that he thought the difference between the amount reported in the May 2005 interim report and his own internal reports resulted from AHS running the collection report with an incorrect date range. Andrew Miller believed that the computational error in the May 2005 interim report carried over to subsequent reports prepared by AHS, including the incorrect final collection statement sent on February 14, 2006. He explained this to Callahan and Chung sometime after the final collection report was sent.

AHS contends that due to Andrew Miller's regular updates, the shareholder representatives were aware of the error in the collection reports when they received the February 14, 2006 final collection statement. Despite being aware of the computational errors, AHS argues, the shareholder representatives tried to seize on the error and demanded payment of the erroneous figure, which AHS says includes a windfall of over $1.5 million. AHS has offered to pay the excess receivables amount of $901,205.12 listed in the corrected March 3, 2006 collection statement and has offered to have the corrected statement audited for accuracy. The shareholder representatives have declined these offers.

The shareholder representatives contend that summary judgment is appropriate because no issue of fact exists as to whether AHS breached section 3.2(f) of the merger agreement. AHS argues that contractual ambiguities in the merger agreement create genuine issues of material fact and therefore preclude summary judgment.

Discussion

When a district court rules on a motion for summary judgment, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in [its] favor." Anderson v. Liberty Lobby, Inc.,477 U.S. 242, 255 (1986). The Court may grant summary judgment only if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c).

The shareholder representatives contend that because section 3.2(d) of the merger agreement provides that the final collection statement is "deemed final and binding" on AHS, AHS is stuck with the amount set forth in that statement and was not entitled to change or correct it. They argue that section 3.2(d) allows only the shareholder representatives, and not AHS, to dispute the computations in the collection statement. As a result, they argue, AHS's failure to deposit the excess receivables ...


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