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Huntingford v. Pharmacy Corp. of America

United States District Court, D. New Mexico

June 14, 2019




         This case requires the Court to determine whether a corporate buyer's management (or mismanagement) of the pharmacy business it purchased from an individual seller amounted to a breach of the parties' contract and implied duty of good faith and fair dealing. Plaintiff Ross Huntingford maintains that he is entitled to a $1, 250, 000 deferred payment because Defendant PharMerica's various breaches of contract and implied contractual duties deprived him of a fair opportunity to earn that payment. PharMerica maintains there is no evidence of bad faith or breach, and Plaintiff may not rewrite the contract after the fact simply because he is unhappy with the outcome. The Court conducted a bench trial from April 29, 2019, through May 1, 2019. Being fully advised of the record, the parties' arguments at trial, and the relevant law, the Court makes the following findings of fact and conclusions of law and enters judgment in favor of Defendant.


         The Asset Purchase Agreement

         1. On September 30, 2013, Plaintiff Ross Huntingford, his company Integrated Concepts, Inc. d/b/a PharmaCare Health Services (PharmaCare), and Defendant Pharmacy Corporation of America d/b/a PharMerica (PharMerica) entered into an Asset Purchase Agreement (APA). (Pl.'s Ex. A at 6).[1]

         2. Through the APA, Mr. Huntingford agreed to sell PharMerica his pharmacy business, PharmaCare. (Id.)

         3. PharmaCare provided services to various customer accounts including “nursing homes, assisted living facilities, group homes and other long-term care or institutional care facilities, and to residents of such homes or facilities . . . .” (Id.; see also Vol. I of Tr. of Bench Trial Proceedings (Tr. I) at 50:12-21.)

         4. PharmaCare serviced customer accounts by providing pharmaceutical products and related services and supplies, clinical and consultant pharmacist services, nutritional products, and medical records. (Pl.'s Ex. A at 6.)

         5. Long-term care facilities are facilities that have a “custodial drug permit” through the State of New Mexico, meaning the pharmacy fills prescriptions for the facility and the facility subsequently distributes prescriptions to individuals, rather than individuals receiving their medications directly from the pharmacy. (Tr. I at 49:21-23.)

         6. PharMerica is a national corporation that provides pharmacy services for skilled nursing facilities, long-term care facilities, assisted living facilities, hospitals, and other institutional care settings. (Vol. II of Tr. of Bench Trial Proceedings (Tr. II) at 167:21-25.)

         7. In 2013, Mr. Huntingford began actively seeking potential buyers to whom he could sell his pharmacy business. (Tr. I at 51:10-15.)

         8. Mr. Huntingford worked with a professional consulting firm, Harbor Consulting Group, to contact potential buyers. (Id. at 51:14-15.)

         9. Mr. Huntingford negotiated the sale to PharMerica with PharMerica's then Vice President of Mergers and Acquisitions, Tim Jolly. (Id. at 54:6-18; Tr. II at 172:13-19.)

         10. Mr. Jolly also conducted PharMerica's due diligence prior to the sale and had access to all PharmaCare's data during this due diligence period. (Tr. I at 55:11-24.)

         11. Mr. Huntingford believed that the value of his pharmacy business at the time he began seeking a buyer was $3.1 million. (Id. at 52:2-4.)

         12. Mr. Huntingford and PharMerica agreed that the purchase price of the pharmacy business would be up to $3 million plus an additional payment for inventory. (Pl.'s Ex. A at 7-8.)

         13. The $3 million figure consisted of a $1, 750, 000 Closing Date Payment and a potential Deferred Payment of up to $1, 250, 000 based on the business's profits following the sale. (Id.)

         14. The APA's deferred payment clause provided that if the Actual Gross Profit of the business met a certain target amount at the two-year anniversary of the closing date, PharMerica would make an additional payment to Mr. Huntingford. (Id. at 8.)

         15. The APA defined Actual Gross Profit as the gross profit earned between the one-year and two-year anniversaries of the closing date “from each of the Qualified Customer Accounts that Buyer actively services as of the Two Year Anniversary.” (Id. at 9.)

         16. The Actual Gross Profit calculation would not include profits from any customer accounts terminated before the two-year anniversary by either PharMerica or the customer. (Id.)

         17. Gross Profit was defined as “the gross revenues of the Pharmacy Business from each Qualified Customer Account less the cost of Inventory less the aggregate amount of uncollected accounts receivable of any Qualified Customer Accounts.” (Id. at 43.)

         18. The APA also specified that, when calculating the Gross Profit, “no corporate overhead . . . shall be deducted” and “all expenses, including the purchase of pharmaceuticals, shall be at [PharMerica's] actual invoiced cost” and not include any rebates. (Id.)

         19. The deferred payment was to be calculated as follows:

a. If, at the two-year anniversary, the Actual Gross Profit was greater than or equal to $2, 200, 000, PharMerica would pay Mr. Huntingford $1, 250, 000. (Id. at 8.)
b. If the Actual Gross Profit was less than $1, 870, 000 (the Target Gross Threshold), Mr. Huntingford would receive no deferred payment. (Id.)
c. If the Actual Gross Profit at the two-year anniversary fell between $2, 200, 000 and $1, 870, 000, Mr. Huntingford would receive a lesser deferred payment calculated using a reduction multiplier. (Id. at 8-9.)

         20. If PharMerica terminated an account prior to the two-year anniversary for any reason (besides being required to do so by law or because the customer account was not complying with the terms of its contract), then the minimum thresholds for the two deferred payment options ($1, 870, 000 and $2, 200, 000) would be reduced by the gross profit earned on that account prior to its termination. (Id. at 10.)

         21. If a customer terminated its account prior to the two-year anniversary, the minimum threshold required to earn a deferred payment would not change.

         22. At the two-year anniversary of the closing date, PharMerica was required to “calculate the Actual Gross Profit and deliver to [Mr. Huntingford] a statement (the ‘Deferred Payment Statement') setting forth such calculation with reasonable supporting documentation.” (Id. at 9.)

         23. At closing, PharMerica acquired all of the purchased assets listed in the APA, including “all right, title and interest” in the pharmacy business's inventory, personal property, assumed contracts, customer accounts receivable, and all express or implied guarantees, warranties, and similar claims relating to any assumed liabilities or purchased assets. (Id. at 6-7.)

         24. The parties also entered into an “Assignment and Assumption Agreement, ” under which PharMerica “assume[d] and agree[d] to perform all of the obligations of Assignor arising or accruing under the Assumed Contracts . . . .” (Pl.'s Ex. A-D at 1.)

         25. PharMerica assumed 66 contracts from PharmaCare. (Pl.'s Ex. B; Def.'s Ex. 3 at 2-5.)

         26. The APA also listed 13 “Marketed Customer Accounts, ” which were accounts that Mr. Huntingford had been actively soliciting business from but did not have contracts with PharmaCare at the time of closing. (Def.'s Ex. 3 at 8; Tr. II at 182:19-25.)

         27. Together the “Assumed Contracts” and the “Marketed Customer Accounts” made up the “Qualified Customer Accounts”-those accounts whose profits counted toward the Actual Gross Profit calculation if they were still being “actively serviced” by PharMerica at the two-year anniversary of the closing. (Pl.'s Ex. A at 9, 46.)

         28. Negotiations over the sale took approximately seven months (Tr. I at 142:20-23), during which Mr. Huntingford was represented by counsel. (Id. at 143:3-17.)

         29. Mr. Huntingford reviewed eight to ten drafts of the contract with his counsel and his broker, Harbor Consulting Group. (Id. at 142:24-144:1.)

         30. Mr. Huntingford believes the closing date of the sale was on or about November 4, 2013 (id. at 82:1), while PharMerica asserts it was October 31, 2013 (Tr. II at 173:11-14).

         31. PharMerica thus considered the relevant earn-out period to be from November 1, 2014, to October 31, 2015. This was based on its understanding that the APA closing date was October 31, 2013. (Id. at 183:9-13.)

         PharMerica's Management of the Assumed Contracts

         32. PharMerica terminated the Vista Care/Gentiva account before the two-year anniversary. (Tr. I at 82:22-83:5.)

         33. As a result, Vista Care/Gentiva's prior gross profits of $37, 584 were subtracted from the target threshold Mr. Huntingford would have to reach to earn a deferred payment, a number PharMerica calculated using PharmaCare's accounting data. (Tr. I at 176:7-23; Def.'s Ex. 7 at 4.)

         34. The new Target Gross Threshold was thus $1, 832, 416. (Def.'s Ex. 7 at 4.)

         35. On February 1, 2014, PharMerica began transferring account data from the PharmaCare system to its own accounting system. (Vol. III of Tr. of Bench Trial Proceedings (Tr. III) at 16:17- 19.)

         36. PharMerica's Senior Vice President of Corporate Development, Christopher Schaefer, testified that for several months during the transition period-from the closing date until February 1, 2014-PharmaCare continued to run independently before PharMerica “really made any changes at all or moved any business, ” even though PharMerica had acquired the business. (Tr. II at 214:3-11.)

         37. PharMerica reported that 21[2] of the Assumed Contracts terminated their accounts sometime during this transition period-between October 31, 2013 and February 1, 2014. (See Def.'s Ex. 7 at 1-2; Tr. III at 16:7-17:19.)

         38. Mr. Schaefer testified that PharMerica's position that those 21 accounts terminated their contracts soon after the acquisition was based on “an assumption that if it never showed up in our system at all that it left prior to then.” (Tr. III at 16:19-21.) In other words, PharMerica assumed these accounts terminated prior to February 1, 2014 because no data associated with them was ever transferred from PharmaCare's system to its own.

         39. PharMerica produced no documentation proving the 21 accounts had indeed terminated their contracts between the closing date and February 2014. (Id. at 16:7-13.)

         40. Mr. Huntingford asserts that PharMerica failed to perform its contractual obligations under these 21 Assumed Contracts, forcing them to terminate because they were not receiving services. (Tr. I at 90:25-91:2.)

         41. Lori Carabajal worked as a consultant pharmacist for PharmaCare for 13 years prior to the sale of the business, then worked as a consultant pharmacist for PharMerica for 11 months following the acquisition. (Tr. II at 5:24-6:13.)

         42. As a consultant pharmacist, Ms. Carabajal was the interface between the pharmacy and the customer facilities-resolving problems and overseeing processes. (Tr. I at 5:9-16.)

         43. Ms. Carabajal testified that she left her position at PharMerica because she believed that she could not “perform [the] full duties that [she] wanted to as a consultant pharmacist.” (Id. at 6:17-18.) She felt that she “had no ability to resolve issues or help the clients like [she] was able to with PharmaCare.” (Id. at 6:18-20.)

         44. Ms. Carabajal believed that PharMerica “dropped” all accounts it acquired in the transition that provided only consulting services and did not generate revenue from prescriptions. (Id. at 47:13-21.) Ms. Carabajal testified that she believes this to be the case because:

a. Her supervisor during the transition period, a PharMerica employee, told her at some point that “they were trying to figure out what to do with the non-revenue generating places or contracts . . . .” (Tr. II at 45:17-46:1); and
b. In March 2014 she “had to start [her] own business to service consulting needs because they were dropped in the ...

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