Claim for Indemnification Under Stock Purchase Contract Was Timely

A company that provided administrative and payroll services was acquired by a bank under a stock purchase agreement. The agreement provided for the escrow of $2 million dollars, that was to be released to the sellers after a period of time had passed after the sale. Several months after the sale, a former employee came forward to reveal potentially fraudulent practices on the part of the administrative company. After an investigation by an outside law firm, the bank demanded indemnification from the sellers, but the sellers refused. The bank then sued in an attempt to recover money it had paid out to settle claims with the company’s clients. The district court determined that the indemnification claim was made too long after the bank first learned about the potential issues, but the appellate court found that undisputed facts did not show this to be the case and determined that the district court erred in granting summary judgment.

The Damian Services Corporation provides various administrative and payroll services to independent temporary staffing companies. The baseline level of service that Damian provides is short-term payroll funding to pay the temp agencies’ employees. Damian also offers other services to clients who pay more. Although Damian contracted with its temp agency clients, it invoiced the end-user companies that hired the temporary workers. The end-user employers would then pay Damian, which would, in turn, send the payments to the temp agencies after taking its cut as a fee for its services.

Damian encouraged its client staffing agencies to obtain prompt payment by providing discounts or levying fees depending on how long it took for the end-user employers to pay. These discounts and fees were negotiated independently with each staffing firm. In 2009, Damian changed its invoicing practices in such a way that made it much more difficult for staffing firms to receive discounts for prompt payment and more likely to be levied with fines.

In February 2015, the Sellers sold Damian to Sterling National Bank for $25 million. Under the Stock Purchase Agreement, Sterling deposited two million dollars of the purchase price in an escrow account. If no disputes arose by December 2015, one million dollars would be released to the Sellers and the rest would be released in August 2016. Soon after the closing, a former Damian employee began contacting Damian clients to expose the 2009 change. Sterling quickly initiated an investigation.

By 2015, the law firm hired by Sterling had prepared a preliminary memorandum on potentially fraudulent billing practices. The next day, the firm discussed its initial findings in a telephone call with the U.S. Attorney’s Office in the Northern District of Illinois as a potential case of corporate fraud. Sterling also hired a forensic accounting firm, which calculated that if the 2009 change had not occurred, Damian’s clients would have saved $1,289,916 in discounts and avoided late fees. Sterling demanded indemnification from the Sellers, but the Sellers rejected the demand. Sterling then filed suit in September 2016, seeking indemnification under the agreement. On cross-motions for summary judgment, the district court granted summary judgment for the Sellers, and both sides appealed.

The appellate panel began by noting that the district court had found that Sterling’s indemnification notice was too late and that the delay prejudiced the Sellers. The panel stated that it was not persuaded that Sterling’s demand was actually late, or at least that the undisputed facts showed it to be late. The panel noted that the agreement required notice within ten days, but only after a party became “aware of” the claim, and it required a demand with “reasonable detail.” Sterling argued that it did not become “aware of” the claim until the law firm that it hired completed its investigation. The Sellers argued that Sterling became aware of the claim no later than the day that the law firm presented basic facts surrounding the 2009 change to the U.S. Attorney’s Office. The panel determined that whether Sterling’s demand came more than ten days after it became aware of its claim could not be decided in favor of the Sellers as a matter of law.

Finally, the panel determined that the Sellers did not irrevocably forfeit any rights or defenses by reason of the timing of Sterling’s demand. The panel noted that the Sellers never had the right to settle the claims, as nothing in the language of the agreement required Sterling to involve the Sellers in any settlement negotiations or to allow the Sellers to settle the claims themselves. The panel also determined that the Sellers had not forfeited the right to litigate the underlying contract claims, as they were litigating the merits of those claims in the instant case. The panel reversed the judgment in favor of the Sellers and remanded the case for further proceedings.

To read the entire opinion click here.

Act now to Reach Experienced Shareholder Oppression and Shareholder Rights Attorney in the Chicago Area 

With offices in Chicago, Elmhurst, and Wilmette, we’re proud to offer more than thirty years of experience in a vast range of business law disputes and especially in the area of shareholder oppression and freeze out disputes.  Lubin Austermuehle’s track record includes the fact that the firm obtained a $40 million settlement in the Erikson v. Ameritech class action suit listed by Crain’s Chicago Busines as the second-largest settlement in Illinois for the yearWith offices in Chicago, Elmhurst, and Wilmette, near Oakbrook and Waucanda and Barrinton, we’re close to you. Take advantage of our FREE consultation to tell us your legal needs and we can discuss whether our firm is a good fit for you. Call us at 630-333-0333 or via our website by clicking here. We look forward to speaking with you.

Contact Information