Am. Healthcare Admin. Servs., Inc. v. Aizen

• Decision Date: 18 November 2022
• Docket Number: C.A. No. 2019-0793-JTL
• Citation: 285 A.3d 461
• Parties: AMERICAN HEALTHCARE ADMINISTRATIVE SERVICES, INC., AHAS Holdings, Inc., Christine Schaffer, Christine Schaffer Revocable Living Trust, Grover Lee, Grover Lee Revocable Living Trust, Charles E. Lee, Charles E. Lee Living Trust, Jacqueline C. Lee, Jacqueline C. Lee Living Trust, Charles E. Lee 2012 Trust No. 1, Charles E. Lee 2012 Trust No. 2, Jacqueline Lee 2012 Trust No. 1, and Jacqueline Lee 2012 Trust No. 2, Plaintiffs/Counterclaim-Defendants, v. Lance AIZEN, Defendant/Counterclaim-Plaintiff.
• Court: Court of Chancery of Delaware

285 A.3d 461

AMERICAN HEALTHCARE ADMINISTRATIVE SERVICES, INC., AHAS Holdings, Inc., Christine Schaffer, Christine Schaffer Revocable Living Trust, Grover Lee, Grover Lee Revocable Living Trust, Charles E. Lee, Charles E. Lee Living Trust, Jacqueline C. Lee, Jacqueline C. Lee Living Trust, Charles E. Lee 2012 Trust No. 1, Charles E. Lee 2012 Trust No. 2, Jacqueline Lee 2012 Trust No. 1, and Jacqueline Lee 2012 Trust No. 2, Plaintiffs/Counterclaim-Defendants,

v.Lance AIZEN, Defendant/Counterclaim-Plaintiff.

C.A. No. 2019-0793-JTL

Court of Chancery of Delaware.

Date Submitted: September 16, 2022

Date Decided: November 18, 2022

Thomas W. Briggs, Jr., Sabrina M. Hendershot, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Christopher R. Rodriguez, Andrew D. Bluth, SINGLETON SCHREIBER, LLP, Sacramento, California; Attorneys for Plaintiffs/Counterclaim-Defendants.

Paul D. Brown, Joseph B. Cicero, Gregory E. Stuhlman, Aidan T. Hamilton, CHIPMAN BROWN CICERO & COLE, LLP, Wilmington, Delaware; Attorneys for Defendant/Counterclaim-Plaintiff.

LASTER, V.C.

A corporation sold assets to a buyer. The buyer placed a portion of the consideration in escrow to fund any purchase price adjustment and to secure indemnification obligations. The asset purchase agreement appointed the corporation's former CEO as the sellers’ representative for purposes of making decisions about the escrowed funds.

The period for holding the escrowed funds has expired, and no claims against the escrowed funds remain outstanding. The buyer agrees it has no claim to the funds. The sellers’ stockholders, other than the former CEO, want the funds released from escrow and paid over to the corporation. They filed this action against the former CEO and asserted a series of claims, all of which are designed to compel the release of the escrowed funds.

The former CEO answered, raised affirmative defenses, and filed counterclaims, all of which are designed to obtain a determination that he has authority to keep the funds in escrow. The former CEO is embroiled in litigation with the selling corporation over his termination, and he believes that if the escrowed funds are released to the corporation, then the corporation will distribute them to its stockholders and render itself judgment-proof. The former CEO wants to keep the funds in escrow so that they can serve as a source of recovery if he prevails in his litigation. He contends that he has discretion as the sellers’ representative to decline to release the funds from escrow. He argues in the alternative that the court should order the funds to remain in escrow as a matter of equity.

This decision grants the selling stockholders’ motion for partial judgment on the pleadings. There is no contractual basis for maintaining the funds in escrow. All of the conditions for releasing the escrowed funds have been satisfied. The former CEO has discretionary authority over the release of the escrowed funds, but he must exercise that authority consistent with the implied covenant of good faith and fair dealing, which means consistent with the purpose of the contract and the range of possibilities that the parties would have agreed upon if they had anticipated the issue and bargained over it when negotiating their agreement. Keeping the funds in escrow to serve as a source of recovery for a personal dispute is not a purpose that the parties would have agreed upon if they had anticipated the issue and addressed it during the original bargaining phase.

To the extent the former CEO seeks a remedy that would prevent the selling company from distributing the funds to its stockholders, he should seek that remedy from the court presiding over his lawsuit against the selling company. To ensure that the former CEO has the opportunity to seek that relief, and to avoid burdening a sister court with an emergency application, the order implementing this ruling will provide for the release of funds from escrow on a date not earlier than sixty days after the judgment in this case becomes final.

I. FACTUAL BACKGROUND

The facts are drawn from the operative pleadings and the documents they incorporate by reference. When evaluating a motion for judgment on the pleadings, the facts must be viewed in the light most favorable to the non-movant. In this case, that means the facts are viewed in the light most favorable to the former CEO.

A. The Company And Its Affiliates Before The Asset Sale

American Healthcare Administrative Services, Inc. (the "Company") is a California corporation with its principal place of business in Rocklin, California. Grover Lee and Christine Schaffer founded the Company in 1986 to provide pharmacy benefits services to self-insured employers, health plans, hospitals, school districts, labor unions, and health and welfare funds. Dkt. 50 ¶ 18. Today, the Company is a wholly owned subsidiary of AHAS Holdings, Inc. ("Parent"). Surprisingly, the parties dispute whether Parent is an entity that exists under Delaware law or California law. The dispute is immaterial to the contractual issues addressed by this decision, but given the procedural posture, the court assumes that Parent is a California entity. Lee and Schaffer comprised the original members of the board of directors of the Company (the "Company Board") and the original members of the board of directors of Parent (the "Parent Board").

B. Lee Aizen Joins The Company.

In 2010, the Company hired Lee Aizen as Vice President of Sales. Dkt. 58 at 8. Aizen asserts that he "added professionalism and non-family oversight" to an operation that was "losing money consistently" due to "mismanagement" and "personal expenses of the Lee family." See Dkt. 58 at 8. This assertion does not matter to the outcome of the case, but given the procedural standard, I assume it to be true.

In 2012, Aizen became President of the Company. He later took on the title of CEO. Dkt. 58 at 8.

Aizen subsequently entered into an employment agreement dated November 21, 2014 (the "Employment Agreement"). See Dkt. 58 at 11. Surprisingly, it is not clear what entity served as the counterparty. The parties have not provided the court with a copy of the Employment Agreement, and two other documents point in different directions, with one document implying that the Company is the counterparty and the other implying that Parent is the counterparty. Compare Compl. Ex. D (Company) with Dkt. 53 Ex. A (Parent). Aizen contends that his Employment Agreement was with the Company. That is the version of the facts most favorable to his position, so I assume it to be true.

Under the terms of the Employment Agreement, Aizen received base compensation of $550,000, up from his pre-agreement compensation of $354,750. He also received an option to purchase 1,000 shares of Company stock. Aizen borrowed $2.4 million from Parent to pay for the shares, documented by a promissory note. See Dkt. 53 ¶ 22; id. Ex. A at 1–2. The Employment Agreement provided that if the Company ever terminated Aizen's employment as a result of a "Change of Control Transaction," then the Company would (i) forgive any amounts payable under the promissory note and (ii) make additional payments to Aizen. Dkt. 58 at 10, 12, 15; accord Dkt. 56 at 6. Aizen also joined the Company Board and the Parent Board. Cf. Dkt. 50 ¶ 40; Dkt. 53 at 19.

In March 2017, the Parent Board approved an addendum to the Employment Agreement (the "Addendum"). The Addendum extended the term of Aizen's employment through December 31, 2020 and increased his base salary to $750,000. Dkt. 53 Resp. No. 24.

C. The Asset Purchase Agreement And The Termination Agreement

Soon after the execution of the Addendum, Maxor Acquisition, Inc. (the "Buyer") expressed interest in acquiring two of the Company's lines of business. See Dkt. 50 Ex. B at A-1. The parties disagree about whether the two segments made up a majority of the Company's business. That fact does not have any bearing on the outcome of the case, but Aizen denies that they did, so given the procedural standard, I accept his assertion.

On August 10, 2017, the Company reorganized its corporate structure in anticipation of selling the two lines of business. As part of the reorganization, Aizen exchanged his shares in the Company for shares in Parent. After the reorganization, Aizen, Lee, Schaffer, and their affiliates owned all of the stock in Parent.¹ Aizen owned ten percent of Parent's equity, and Lee, Schaffer, and their affiliates owned the remaining ninety percent. See Dkt. 53 ¶ 37; accord Dkt. 54 Resp. No. 37.

On June 26, 2018, the Parent Board passed a resolution approving and authorizing the Company to proceed with the asset sale, which it defined as the "Transaction." See Dkt. 53 Ex. A. The agreement governing the Transaction is an asset purchase agreement dated June 27, 2018. Dkt. 50 Ex. B (the "APA" or "Purchase Agreement"). The parties to the Purchase Agreement were the Buyer and a group defined as the "Seller Parties," which consisted of the Company, Parent, and all of the Parent's stockholders (including Aizen). See APA at 1. Aizen also became a party to the Purchase Agreement, but only in his capacity as the "Sellers’ Representative." See id. In that capacity, Aizen acted as the agent of the Seller Parties for purposes of taking various actions under the Purchase Agreement. The use of a sellers’ representative is a common feature in transaction agreements, particularly where there are many selling stockholders, and it avoids the need to have multiple parties sign off on the acts necessary to complete a deal. 1 ABA Mergers & Acqs. Comm., Model Stock Purchase Agreement with Commentary § 12.5 at 358 (2d ed. 2010) (explaining that appointment of sellers’ representative is for buyer's convenience, particularly when buyer "would prefer to deal with one person"; stating that sellers "will want to assure that Sellers’ Representative acts only within prescribed bounds.").

The Parent Board also approved an agreement terminating Aizen's...