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All Metro Health Care Services, Inc. v. Edwards

2010 WL 4054182 (N.J. Super App. Div. 2010) (Unpublished)

CONTRACTS; ATTORNEYS FEES — Where there are multiple contracts between parties, a court must be careful when awarding attorneys fees to make sure that the claims for which the attorneys fees are awarded arise out of the contract under which the attorneys fees are permitted because if they arise out of a contract that does not provide attorneys fees, no such award can be made.

The sole owner of a home health care company decided to sell all of his stock in the company. The chief financial officer of the company wanted to purchase the business and created a corporation to structure the transaction. Each signed a stock purchase agreement setting forth the parameters of the transaction. The purchase was to be secured with debt financed by two lenders, the latter also receiving an equity interest in the new company in return for granting a revolving line of credit and making a loan to be repaid five years after the closing. At closing, the seller received cash, a promissory note, and an acknowledgment that he would be reimbursed for the increased individual income tax liability he would incur as a result of the parties’ tax elections.

All parties also executed a subordination agreement in which the seller agreed that the remaining money owed him was to be subordinated to the new company’s debts to the two lenders. The parties agreed that until the senior debt was paid, the subordinate debt could not be paid. The agreement also contained an agreement wherein the seller would not bring a claim regarding payment of the subordinated debt until the senior debt was paid in full.

Several months after closing, the seller’s accountant notified the parties that an error at closing resulted in the seller receiving $455,000 less in cash than he should have received. Further, the new company only made two of seventeen installment payments. Subsequently, the seller’s tax liability increased by $1,526,576. Because of a liquidity crisis, the new company failed to fully make good on this liability. The second lender declared the new company in default and refused to advance any more funds on the revolving line of credit.

Pursuant to the stock purchase agreement, the seller filed a demand for binding arbitration seeking the balance of the money due him. The new company filed a declaratory judgment action, seeking a ruling that the amounts due the seller were subordinated debt and could not be paid until the senior debt was satisfied in full. The lower court entered a judgment for the seller, finding that neither obligation was a subordinated debt. The seller then moved for counsel fees under the agreement. The lower court denied this relief.

The Appellate Division affirmed the grant of summary judgment, and reversed the denial of counsel fees. The Court agreed that the subordination agreement had to be read in conjunction with the stock purchase agreement, which intended that the payment of the $455,000 and the increased tax liability were meant to be part of the original purchase price. Given that the seller was seeking to vindicate rights chiefly held under the stock purchase agreement, the Court found the lower court erred in denying counsel fees because of a belief that the seller was seeking to vindicate rights under the subordination agreement which did not contain a fee-shifting provision. The stock purchase agreement contained such a provision, and the Court remanded the matter to address what reasonable counsel fees were incurred in support of the seller’s action.

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