Defendants Get Lit Up by the Court on the Fifth Day of Hanukkah
December 10, 2021
It’s not often that a lawsuit in the Commercial Division between sophisticated parties to an arm’s-length business transaction warrants a blistering rebuke of the parties by the Court. But on December 3, 2021, New York County Commercial Division Justice Andrew Borrok issued a scathing decision in a case entitled Extended CHAA Acquisition, LLC v Mahoney, in which the Court granted the plaintiff-buyer (“Buyer”) summary judgment and specific performance directing the defendants to proceed with the sale of their interests in defendant Extended Nursing Personnel CHHA, LLC (“Seller”) to Buyer for tens of millions of dollars and censured Seller’s principals (“Sellers”), who, “motivated by dissatisfaction with the business deal that the Seller . . . cut and fueled by unabashed insidious antisemitism, actively prevented the Buyer from closing and breached the Purchase Agreement.”
Judge Borrok prefaced the facts of the case and his legal analysis of the merits of the parties’ motions by citing numerous excerpts from communications among Sellers and Seller’s agent-representative who
“actively took glee in frustrating the Buyer’s ability to close and in being gratuitously abusive and disrespectful of the Buyer’s principals and their religious observance. The degree to which [Sellers] taunted the Buyer’s principals to their face and mocked them behind their back because they are Jewish is horrifying and cannot be overstated. Their bigotry is disgusting and shameful, representing the worst and most depraved behavior that has no place in civilized society.”
[Oral argument on the motions held four days earlier is just as compelling of a read.]
In September 2019, Buyer and Seller entered into a membership interest purchase agreement (“the Purchase Agreement”) whereby Sellers agreed to sell and convey all of their membership interests in Seller to Buyer in exchange for Buyer’s payment of an “Estimated Purchase Price” of $49,000,000 plus estimated cash on hand and minus indebtedness, transaction expenses, and certain liabilities. As part of the closing deliverables, Seller was required to provide the server and IT infrastructure necessary to operate Seller’s business before the closing date of the transaction.
Under the Purchase Agreement, the parties also expressly agreed that specific performance was an appropriate remedy because no adequate remedy of law would compensate Buyer in the event of a Seller breach, and that such provision survived termination of the Purchase Agreement.
For over a year and a half, the parties worked to consummate the sale, and on March 25, 2021, the parties executed a Third Amendment to the Purchase Agreement and agreed to extend the closing date to March 29, 2021. Over the course of the next four days, Seller’s principals actively worked in bad faith to prevent the closing by intentionally ignoring Buyer’s repeated attempts to consummate the sale, trying to run out the clock on the closing deadline set by the Third Amendment, after which time Sellers believed they would no longer be obligated to comply with the Purchase Agreement so that the company could be sold to a third-party at a higher price.
Specifically, the record reflected, among other things, the following bad-faith conduct/ breaches by Seller:
- On March 26, 2021, three days prior to the closing, Buyer called to ask to close on Tuesday, March 30, rather than March 29, due to the Passover holiday. Sellers refused to extend the closing date by just one day for no apparent reason other than religious intolerance.
- Also on March 26, Sellers provided a proposed Fourth Amendment to the Purchase Agreement — which Buyer had no obligation to agree to — and demanded that Buyer return the signed Fourth Amendment by 5:00 pm that day. Although Buyer returned comments on March 27 (the very next day and two days prior to the closing) in an effort to bring this transaction to a close, Sellers refused to negotiate with Buyer as to Seller’s demanded Fourth Amendment.
- Seller failed to fulfill certain pre-closing obligations including delivering the Seller’s computer server and IT infrastructure necessary to operate the business which was scheduled to occur on March 28, 2021.
- On the March 29 closing date, Sellers tried to shake down Buyer, expressly representing that they would not close unless Buyer paid $58 million (an $18 million increase in the agreed-upon purchase price), and without the server. Absent the $18 million premium, Sellers were not interested in engaging in any further discussions, negotiations, or extensions regarding the transaction.
In the December 3 Decision, the Court denied Sellers’ motion pursuant to CPLR 3211 to dismiss Counts I through III of Plaintiff’s Complaint sounding in specific performance, injunctive relief, and breach of the implied covenant of good faith and fair dealing as “frivolous” and granted Buyer leave to bring an order to show cause seeking appropriate sanctions for having to defend the motion.
Stating that Buyer’s entitlement to summary judgment and specific performance was “not a close call,” the Court granted Buyer’s motion directing that the transaction close by December 10, 2021, and granted Buyer leave to move by order to show cause for summary judgment that Seller breached the covenant of good faith and fair dealing since the record reflected “evidence of the insidious antisemitism fueling the breach by the Sellers.”
The Court expressly held that there were “no material issues of fact that the Purchase Agreement was a valid contract which the Seller breached, that the Buyer was ready, willing, and able to perform under the Purchase Agreement, and that the balance of the equities weighs in the Buyer’s favor.” Although Seller argued that Buyer anticipatorily repudiated the Purchase Agreement on March 26, the Court found that argument to be entirely “disingenuous” as it was undisputed that Seller voluntarily agreed to extend the closing date until March 29 and that “the Seller actively avoided the Buyer in an effort to frustrate the Buyer’s ability to close and celebrated when the Buyer could not wire because of the Seller’s multiple breaches by 5 pm on March 29, 2021 and then treated the contract as having expired at that point.”
What’s More . . .
On December 3, Sellers filed a Notice of Appeal of the Court’s decision and additionally filed in the Appellate Division, First Department, an Emergency Motion for a Stay Pending Appeal in light of the Court’s Order to proceed with a closing of the transaction at issue by December 8 (transfer of server and “closing deliverables”) and December 10 (final closing, including payment of purchase price).
On December 7, the First Department granted Sellers’ application for interim relief and set forth a briefing schedule for the expedited motion with a decision date of December 24, 2021.
Stay tuned . . .