ANALYSIS OF DECEMBER 2, 2021 SUPREME COURT OPINION
(Posted December 2, 2021) The Supreme Court issues its first published opinion in five weeks today. Ehrhardt v. SustainedMED, LLC involves an indemnity provision buried in a stock-purchase agreement.
Our tale begins 12 years ago, when six individuals contracted to sell their shares in a company called Cyfluent. The sellers told the buyer, SustainedMED, that Cyfluent had contracts with 165,000 doctors and that monthly revenues exceeded $800,000 per month. The buyer was happy to acquire an asset like that for $4.9 million, comprising $2.1 million in cash and notes for the remainder.
The stock-purchase agreement contained indemnity language that obligated the sellers to make the buyer whole in the event of inaccuracies in any pre-sale representations. The provision limited total indemnity to $4.9 million, the amount of the purchase price, subject to a $25,000 deductible.
Alas, Cyfluent was nowhere near as affluent as the sellers had promised. Instead of 165,000 doctors, it had contracts with only about 100. That’s one hundred; not one hundred thousand. The buyer soon figured out that revenues were only a trickle, and the company’s worth was tiny in comparison with what the sellers had indicated.
The buyer then invoked the indemnity provision, indicating that it was using the promissory notes to set off part of its losses and demanding payment for the rest. The sellers refused, so the buyer went to court.
After a bench trial, the court ruled in favor of the buyer, awarding judgment for $2.775 million and declaring that the promissory notes were extinguished. The buyer then filed a claim for its attorney fees and costs. The sellers claimed that their maximum liability for fees was $25,000, because of the $4.9 million cap. The buyer replied that the note extinguishment didn’t count against that cap, so there was plenty of room left for a fee award.
The circuit court took the matter under advisement for what turned out to be a very long time – three years. It then issued an order that granted fees of $972,000 and a smaller costs award. The order didn’t contain any explanation for the ruling.
That brings us to Ninth and Franklin, where the justices consider only one issue: whether the fee award should be capped at $25,000. In a unanimous ruling, the Supreme Court agrees with the sellers that attorney fees are within the indemnity cap, and that the cancellation of the notes counts as compensation, too. The court accordingly reverses the million-dollar award and enters final judgment of $25,000 in fees to the buyer.
As I see it, the court’s ruling here makes perfect sense. I’ve long known that, for example, cancellation of indebtedness is a taxable event to the debtor, and it follows that that should be counted as part of the buyer’s recovery.
The only thing that surprises me about this is that the opinion is published. I have no insider knowledge as to how the court chooses which rulings to publish and which ones come down by unpubs. I’ve assumed that the court almost always publishes those holdings that have broader precedential value, and the ones that contain, say, narrow and unusual facts are decided without publication.
The language in this contract may not be unique, but I doubt that this precise setup is widespread in stock purchases and other contracts containing indemnity provisions. My best guess on this one is that the court publishes the holding that cancellation of indebtedness is indeed part of a plaintiff’s recovery; but that’s not entirely satisfying.