A company that acquired another business agreed to pay the sellers $5.1 million in delayed and contingent payments three years after closing. When those payments came due, the buyer claimed it could not pay because doing so would violate a subordination agreement with its senior lender, which prohibited payments that would cause default. The buyer moved to dismiss the sellers’ counterclaim for the unpaid amounts.
The Superior Court denied the motion. Although the subordination agreement’s plain language appeared to bar payment, the sellers alleged facts suggesting the buyer had conspired with its lender to commit accounting fraud, deliberately misrepresenting its financial condition to avoid payment obligations. The sellers also claimed the buyer made false statements about its ability to pay and materially breached the purchase agreement and implied covenant of good faith and fair dealing. These factual allegations required discovery and trial rather than dismissal on the motion practice. The court further noted that the sellers asserted their counterclaim as a compulsory response to the buyer’s lawsuit and that the subordination agreement itself permitted enforcement actions to prevent statutes of limitations from running.
The full text of the opinion follows below. Slip opinions are subject to formal revision; the official version is published in the official reports.
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
Civ. No. 2016-1546-BLS2
JOHN J. MEUNIER, CHRISTY M. WHITE, and
JOHN J. MEUNIER 2012 IRREVOCABLE TRUST
Plaintiffs
vs.
MARKET STRATEGIES, INC.,
Defendant
Consolidated with:
Civ. No. 2016-3592-BLS2
MARKET STRATEGIES INC.,
Plaintiff,
COGENT RESEARCH HOLDINGS, LLC
Defendant
MEMORANDUM OF DECISION AND ORDER ON
MARKET STRATEGIES, INC.’S MOTION TO DISMISS
These consolidated cases arise from the sale of Cogent Research, LLC (Cogent) to Market Strategies, Inc., (MSI). To facilitate the sale, the individual owners of Cogent – John Meunier, Christy White and the John Meunier 2012 Irrevocable Trust – transferred their equity interest in Cogent to a holding company, Cogent Research Holdings, LLC (CRH) which then transferred its equity interest in Cogent to MSI. In return, MSI agreed to make an initial payment of $ 8 million, and additional payments (described as Delayed and Contingent Payments) three years later totaling $ 5.1 million. The terms of the sale were memorialized in an Equity Unit Purchase Agreement (EUPA), a Subordination Agreement, and a Senior Credit Agreement, all dated May 2, 2013. MSI made the initial payment but has failed to pay any portion of the Delayed or Contingent Payments (together, the Remaining Payments), which became due on April 30, 2016. The case is now before the Court on MSI’s Motion to Dismiss the Counterclaim asserted against it by CRH in one of the two consolidated actions, Civ. No. 16-03592. This Court concludes that the Motion must be DENIED.
In support of the Motion, MSI relies on certain terms of the Subordination Agreement which subordinate the Remaining Payments to a more senior debt that MSI has with a separate lender, the Private Bank (the Bank). Section 2.3 of that Agreement states that MSI will not make and CRH will not accept any of the Remaining Payments if doing so would cause MSI to default on its debt to the Bank. Section 2.4 prevents CRH from taking any “Enforcement Action” (a defined term in the Agreement) in an effort to collect payment from MSI until MSI’s debt to the Bank is paid in full. MSI argues that because the Bank has not been paid in full and because any payment to CRH would place it in default with the Bank, the unambiguous terms of the Subordination Agreement prevent CRH from seeking to collect the Remaining Payments, thus requiring dismissal of its Counterclaim.
A fair reading of the Counterclaim, however, reveals that more is involved here than the straightforward application of certain contractual provisions. The Counterclaim alleges among other things that MSI has conspired with the Bank to commit accounting fraud so as to avoid paying CRH. This unlawful scheme (it is alleged) has allowed it to funnel unwarranted payments to the Bank and at the same time, take the position that any payment to CRH would cause a default; in fact, had it followed Generally Accepted Accounting Principles, MSI would be able to make the payments to CRH, notwithstanding the superior rights of the Bank. The Counterclaim also alleges that MSI made knowingly false representations to CRH about its ability to make the Contingent Payment in 2016, inducing CRH to a reduction. Finally, the Counterclaim alleges that MSI has by its wrongful conduct materially breached the Subordination Agreement and the EUPA as well as the covenant of good faith and fair dealing implied in both of them, thus preventing it from relying on Sections 2.3 and 2.4 described above. These allegations are necessarily fact specific and as a consequence cannot be decided on a Motion to Dismiss pursuant to Rule 12(b)(6).
MSI argues that permitting the Counterclaim (whatever the allegations may be) is still in direct violation of Section 2.4 which prevents any “Enforcement Action.” CRH responds that it asserts its Counterclaim only because MSI has decided to sue it and that because it arises from the same set of events dealt with in MSI’s Complaint, it is a compulsory counterclaim which must be asserted pursuant to Rule 13, Mass.R.Civ. P. The Subordination Agreement permits CRH to initiate an Enforcement Action “to the extent necessary to prevent the running of any applicable statute of limitations or similar restriction on claims.” Rule 13(b) would appear to constitute such a restriction since it would make this Counterclaim mandatory. Moreover, if the allegations on the Counterclaim are true, MSI is using the covenant not to sue not just as a shield but also as a sword in an effort avoid its contractual payment obligations to CRH entirely. That is, if it is in fact conspiring with the Bank so as to put off payment of the more senior debt indefinitely, that could have the effect of depriving CRH of the benefit of the bargain.
For all the foregoing reasons and for other reasons articulated in CRH’s Opposition, MSI’s Motion to Dismiss is DENIED.
______________________________________
Janet L. Sanders
Justice of the Superior Court
Dated: December 22, 2017