Chicago Business Lawsuit Filed Following Undisclosed Claims in Acquisition

Anytime two companies merge or one acquires the other, there are a multitude of legal considerations.

Chicago business lawyers know that chief among those are the disclosure of any outstanding liabilities.

These include tax liabilities and debts, but also any pending lawsuits or the potential for lawsuits - prior to the purchase. The basic reasoning is that this could affect the value of the company, and how much an entity is willing to pay for it. It's not a deal-breaker, but it's important information to which the buyer has a legal right to know.

That is what is at issue in a recent lawsuit filed in Chicago by one medical doctor who purchased the practice from another physician.

This was a deal that took place seven years ago, back in 2005. One obstetrician paid $400,000 to acquire the sizable practice of another obstetrician.

The buyer claims that at the time of purchase, he was not aware that the seller had a hefty number of medical malpractice claims pending against the practice. As part of the acquisition, the buyer legally assumed all liabilities. However, the seller had a legal obligation to notify the buyer of those pending claims.

The plaintiff is seeking $4.3 million in damages, though we don't know the exact amount of the malpractice claims or the outcome of those cases.

This was a sale that has been contentious from the beginning. The practice had branches in Bloomingdale, Elgin and Crystal Lake. The other practice had offices in Elgin, Elk Grove Village, South Barrington, Hoffman Estates and Chicago.

The agreement was that the selling doctor would receive $20,000 upfront. He would additionally receive a salary of $25,000 monthly for the first year, followed by a bonus of $80,000 at the end of that year. (He was to remain employed by the buyer.) Additionally, he claims he was to be paid a $10,000 bonus for every doctor who remained with the practice longer than one year, and he was to receive another $50,000 for a laboratory that was attached to the practice, assuming the profits exceeded $200,000.

But in 2009, the seller filed a civil suit against the buyer, alleging he was not properly compensated according to that contract. In that case, the seller was awarded a $135,000 judgment against the buyer.

Six months after that ruling, the buyer filed suit on the malpractice claims. The seller has filed a counter lawsuit, with the motive of enforcing the first judgment and claiming slander.

The lesson in all of this is that each and every acquisition and merger - even those that involve smaller companies - requires careful review by your business attorney.

This is part of a buyer's legal due diligence, which could become an issue later if it turns out the seller has withheld information. An example of some of the documents an attorney would review include:

  • Documents that assess compliance with building and zoning requirements, certificates of occupancy and completion, fire marshal inspection reports, developing permits and any recorded use restrictions.

  • Documents that detail the day-to-day operations of a business. Examples would be vendor contracts, utility bills, insurance policies, current rent, equipment leases, business or operating licenses or permits and history of insurance losses;

  • Documents that would show the physical condition of the property and the sellers ownership of it. For example, the property lease, the mortgage financing or loan documents, the property tax bills, any previous surveys and title policies, environmental assessments, reports on mold or pest inspections, etc.

  • Documents that would reveal any financial aspect of the operation. These might include any financial audits, monthly or annual operating statements, capital expenditures descriptions, reports on accounts receivable and budgets.

The primary goal of an acquisition is ultimately a profit. Liabilities are a risk that can impact that bottom line, and as such, sellers need to make the appropriate disclosures.

Jeremy A. Gibson & Associates is a law firm dedicated to business litigation in Chicago and elsewhere in Illinois. Call 877-452-4529 for a free consultation.

Additional Resources:
Sale of obstetrics practice spawns lawsuits, Nov. 8, 2012, By Claire Bushey, Crain's Chicago Business