HH Medical Inc. v. Walz et al
Filing
19
OPINION & ORDER re: 17 LETTER MOTION for Oral Argument addressed to Judge Edgardo Ramos from Howard J. Rubin dated January 18, 2024. filed by HH Medical Inc., 13 MOTION to Dismiss . filed by Anna Walz, John Walz., F or the foregoing reasons, the Walzes motion to dismiss, Doc. 13, is DENIED. HH Medical's request for oral argument, Doc. 17, is DENIED as moot. The parties are directed to appear for an initial pretrial conference on June 14, 2024, at 10:30 a .m. The parties should dial 877-411-9748 and enter access code 3029857# when prompted. The Clerk of Court is respectfully directed to terminate the motions, Docs. 13, 17. It is SO ORDERED. (Initial Conference set for 6/14/2024 at 10:30 AM before Judge Edgardo Ramos.) (Signed by Judge Edgardo Ramos on 5/9/2024) (jca)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
HH MEDICAL, INC., f/k/a
APOTHECOM SCOPEMEDICAL
INC.,
Plaintiff,
OPINION & ORDER
23-cv-08809 (ER)
– against –
ANNA WALZ and JOHN WALZ,
Defendants.
RAMOS, D.J.:
�is action arises from allegations that Anna and John Walz refused to indemnify
HH Medical, Inc., after breaching representations and warranties made in the sale of their
company to HH Medical. Before the Court is the Walzes’ motion to dismiss the
complaint. Doc. 13. For the reasons set forth below, the motion is DENIED.
I.
BACKGROUND
A. �e Parties
HH Medical is a Delaware corporation with its principal place of business located
in Yardley, Pennsylvania. Doc. 1 ¶ 3 (“Compl.”). �e Walzes are residents of New
Jersey. Id. ¶¶ 4–5.
B. HH Medical’s Purchase of MedEvoke
MedEvoke is a medical communications company. Id. ¶ 9. In 2021, HH Medical
negotiated to purchase MedEvoke from the Walzes, who collectively held 100% of the
membership interests in MedEvoke. Id. ¶ 10. On June 18, 2021, HH Medical and the
Walzes entered into a written purchase agreement for the sale of MedEvoke to HH
Medical (the “Purchase Agreement”). 1 Id. ¶ 11. Under the Purchase Agreement, HH
�e Court may consider the Purchase Agreement, Doc. 16-1, because it is incorporated by reference in the
complaint. DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010). Although HH Medical
alleges that it entered into the Purchase Agreement with the Walzes, the Purchase Agreement names
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Medical agreed to buy the Walzes’ membership interests in MedEvoke for an upfront
price of $20 million plus possible additional payments that could raise the total price to
$25 million. Id. ¶ 12. HH Medical ultimately paid the Walzes $20,670,000. Id. �e
transaction closed the same day as the Purchase Agreement was executed. Id. ¶ 21.
C. �e Purchase Agreement
Representations and Warranties
Pursuant to the Purchase Agreement, the Walzes made a series of representations
and warranties to HH Medical (the “Warranties”). Id. ¶ 14. �e Walzes represented and
warranted that Schedule 3.4 of the Purchase Agreement set forth certain MedEvoke
financial statements (the “Financial Statements”). 2 Id. ¶ 15. Under Section 3.4 of the
Purchase Agreement, the Walzes represented and warranted that “[t]he Financial
Statements have been prepared in accordance with GAAP [generally accepted accounting
principles] throughout the periods indicated except as set forth on Schedule 3.4(B)” and
that the statements of income included in the Financial Statements “fairly present the
results of income for the respective periods indicated.” Id. ¶¶ 16–17 (first alteration in
original); Doc. 16-1 at 10. Under Section 3.17, the Walzes represented and warranted
that:
�e amount of all work-in-process, accounts receivable, unbilled invoices (including unbilled invoices for services and out-of-pocket
expenses) and other debts due or recorded in the records and books
of account of [MedEvoke] as being due to [MedEvoke] represent or
will represent valid obligations arising from sales actually made or
services actually performed in the ordinary course of business.
“Apothecom ScopeMedical Inc.” as the purchaser, not HH Medical. Doc. 16-1 at 1 (capitalization
omitted). HH Medical identifies itself as “HH Medical, Inc., f/k/a Apothecom ScopeMedical Inc.” in the
caption of the complaint. Compl. at 1 (capitalization omitted). As discussed in more detail below, HH
Medical asserts that the caption makes clear that “HH Medical and Apothecom are one and the same.”
Doc. 15 at 23. �roughout this opinion, the Court refers to the purchaser in the Purchase Agreement as HH
Medical.
�e Financial Statements include MedEvoke’s balance sheets as of December 31, 2019, and December 31,
2020; statements of income for those calendar years; balance sheet as of March 31, 2021; and an income
statement for the twelve months ending March 31, 2021. Compl. ¶ 15.
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Compl. ¶ 18; Doc. 16-1 at 22. �e purpose of the Financial Statements and the
Warranties was to give HH Medical a basis for calculating MedEvoke’s value and the
purchase price HH Medical would be willing to pay. Compl. ¶ 49.
Indemnification Provision
In Section 8.2.1(a) of the Purchase Agreement, the Walzes agreed to indemnify
HH Medical for “Losses” arising out of “any misrepresentation, inaccuracy or breach of
any representation or warranty contained in Article III.B hereof.” Id. ¶ 23; Doc. 16-1 at
38. �e Purchase Agreement defines “Losses” as “all liabilities . . . , obligations, losses,
damages, demands, claims, actions, suits, judgments, settlements, penalties, interest, outof-pocket costs, expenses and disbursements (including reasonable costs of investigation,
and reasonable attorneys’, account[ants]’ and expert witnesses’ fees) of whatever kind
and nature.” Compl. ¶ 25 (omission in original); Doc. 16-1 at 47.
�e parties also agreed that the maximum aggregate indemnity payment under
Section 8.2.1(a) would be 15% of the total purchase price. Compl. ¶ 24. Because the
final purchase price was $20,670,000, the maximum indemnity payment is $3,100,500.
Id.
Financial Statements
�e Financial Statements represented that in 2020, MedEvoke had net sales of
approximately $6.7 million and EBITDA of approximately $1.5 million.3 Id. ¶ 28. For
the twelve months ending March 31, 2021, the Financial Statements represented that
MedEvoke had net sales of approximately $7 million and EBITDA of approximately $1.3
million. Id. In order to negotiate an appropriate purchase price for MedEvoke, HH
Medical estimated the company’s value by applying a commercial multiplier to its
EBITDA. Id. ¶¶ 41, 53.
EBITDA—which stands for “earnings before interest, taxes, depreciation, and amortization”—is a metric
that measures a company’s profits. Compl. ¶ 41. It is often used to value target companies during the
acquisition process, and it was the valuation metric used in this acquisition. Id.
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D. �e Walzes’ Alleged Breaches
HH Medical later discovered that MedEvoke’s revenue reflected in the Financial
Statements was significantly inflated because the Walzes had wrongly recognized revenue
in violation of GAAP. Id. ¶ 32. First, revenue was improperly recognized with respect to
projects for which clients never signed a contract or issued a purchase order, and for
which the company therefore did not perform any work or receive any revenue. Id. ¶ 34.
Second, revenue was improperly recognized with respect to projects for which clients had
signed a contract or issued a purchase order, but for which no work had been done as of
the respective dates of the applicable Financial Statements. Id. ¶ 35. �ird, the Walzes
recognized more revenue in the Financial Statements than was appropriate under GAAP
given the amount of work performed in each of the respective periods of the Financial
Statements. Id. ¶ 36.
By improperly recognizing revenue in this manner, the Financial Statements
inflated MedEvoke’s revenue for 2020 by $714,000 and inflated its revenue between
January 1 and March 31, 2021, by $72,000. Id. ¶¶ 38–40. For the calendar year 2021,
net revenue was inflated by approximately $1.2 million. Id. ¶ 40. By overstating revenue
in this way, the Financial Statements also inflated MedEvoke’s EBITDA. Id. ¶¶ 38, 41.
As a result of the Walzes’ breaches of their representations and warranties, HH
Medical alleges, it was left owning a company worth significantly less than the price that
HH Medical paid for it. Id. ¶ 48. HH Medical’s estimated loss attributable to the Walzes’
breaches is at least $7.8 million. Id. ¶ 59.
E. �e Walzes’ Refusal to Indemnify HH Medical
On December 15, 2022, HH Medical notified the Walzes of its claims for
indemnification for breaches under the Purchase Agreement. Id. ¶ 46. On January 12,
2023, the Walzes sent a notice to HH Medical rejecting HH Medical’s claims. Id. ¶ 47.
To date, they have refused to indemnify HH Medical for any of its losses. Id.
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F. Procedural History
HH Medical commenced this action on October 6, 2023. HH Medical’s sole
claim is for contractual indemnification for breach of representations and warranties. Id.
¶¶ 60–67. HH Medical seeks damages of at least $3,100,500, pre- and post-judgment
interest, costs, expenses, and attorney fees. Id. at 13. �e Walzes have moved to dismiss
the complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure
12(b)(6). Doc. 13.
II.
LEGAL STANDARD
In considering a motion to dismiss pursuant to Rule 12(b)(6), a court accepts all
factual allegations in the complaint as true and draws all reasonable inferences in the
plaintiff’s favor. Koch v. Christie’s Int’l PLC, 699 F.3d 141, 145 (2d Cir. 2012). But
“[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory
statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). �e purpose of
Rule 12(b)(6) “is to test, in a streamlined fashion, the formal sufficiency of the plaintiff’s
statement of a claim for relief without resolving a contest regarding its substantive
merits.” Halebian v. Berv, 644 F.3d 122, 130 (2d Cir. 2011) (citation omitted).
“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Iqbal,
556 U.S. at 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim
is facially plausible “when the plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.
�is standard “is not akin to a ‘probability requirement,’ but it asks for more than a sheer
possibility that a defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S. at
556). To state a plausible claim, the plaintiff must “‘raise a reasonable expectation that
discovery will reveal evidence’ of the wrongdoing alleged, ‘even if it strikes a savvy
judge that actual proof of those facts is improbable.’” Citizens United v. Schneiderman,
882 F.3d 374, 380 (2d Cir. 2018) (quoting Twombly, 550 U.S. at 556). If the plaintiff has
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not “nudged [the] claims across the line from conceivable to plausible, [the] complaint
must be dismissed.” Twombly, 550 U.S. at 570.
III.
DISCUSSION
HH Medical brings a single claim for contractual indemnification for breach of
representations and warranties. Compl. ¶¶ 60–67. “Under New York common law, upon
showing that: (1) plaintiff and defendant entered into a contract; (2) containing an
express warranty by the defendant with respect to a material fact; (3) which warranty was
part of the basis of the bargain; and (4) the express warranty was breached by defendant,
plaintiff is entitled to be indemnified for any damages incurred as a result of such
breach.” Promuto v. Waste Mgmt., Inc., 44 F. Supp. 2d 628, 642 (S.D.N.Y. 1999).
According to the Walzes, the complaint fails to allege that HH Medical relied on
any representations that the Walzes made. Doc. 13-1 at 5. �ey also maintain that the
complaint fails to request any recoverable damages as a result of the alleged breach. Id.
at 10. And they assert that HH Medical has not established that it is the proper plaintiff.
Id. at 15. �e Court addresses these arguments in turn.
A. Reliance
�e Walzes contend that HH Medical has not satisfied the reliance requirement
because the complaint fails to allege that “the warranties issued by [the Walzes] were the
‘basis of the bargain.’” Doc. 13-1 at 9. HH Medical argues that it has sufficiently alleged
that “the breached warranties were bargained-for terms of the Purchase Agreement.”
Doc. 15 at 10.
�e Court finds CBS Inc. v. Ziff-Davis Publ’g Co., 553 N.E.2d 997 (N.Y. 1990), to
be controlling on this issue. In that case, plaintiff CBS entered a purchase agreement to
buy several magazine businesses from defendant Ziff-Davis. Id. at 998. �e purchase
agreement contained warranties from Ziff-Davis that the financial statements for the
businesses were accurate and had been prepared in accordance with GAAP. Id. at 998–
99. Before the deal closed, however, CBS conducted its own due diligence and began to
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suspect that the financial statements were inaccurate. Id. at 999. CBS informed ZiffDavis of its suspicions. Id. Ziff-Davis responded that CBS’s position was meritless and
demanded that CBS proceed with the closing. Id. CBS agreed to close, but it expressly
stated that there was a dispute between the parties and that it was not waiving any rights
by closing. Id. After closing, CBS sued for breach of warranty. Id. �e trial court
dismissed the claim “because CBS alleged ‘it did not believe that the representations set
forth in [two paragraphs] of the contract of sale were true’ and thus CBS did not satisfy
‘the law in New York [which] clearly requires that this reliance be alleged in a breach of
warranty action.’” Id. (second alteration in original). �e Appellate Division affirmed.
Id.
On appeal, the New York high court reversed the dismissal of the breach of
warranty claim. Id. �e court agreed with CBS’s formulation of the reliance requirement
in actions for breach of express warranties. Id. at 1000. Specifically, the court explained:
“�e critical question is not whether the buyer believed in the truth of the warranted
information, as Ziff-Davis would have it, but whether [it] believed [it] was purchasing the
[seller’s] promise [as to its truth].” Id. at 1000–01 (alterations in original) (internal
quotation marks and citation omitted). “�is view of ‘reliance’” requires “no more than
reliance on the express warranty as being a part of the bargain between the parties.” Id. at
1001. Applying that principle, the court observed:
Unquestionably, the financial information pertaining to the income
and expenses of the consumer magazines was relied on by CBS in
forming its opinion as to the value of the businesses and in arriving
at the amount of its bid; the warranties pertaining to the validity of
this financial information were express terms of the bargain and part
of what CBS contracted to purchase. CBS was not merely buying
identified consumer magazine businesses. It was buying businesses
which it believed to be of a certain value based on information furnished by the seller which the seller warranted to be true.
Id. at 1002. �us, the court concluded that Ziff-Davis should not be relieved of its
warranty obligations. Id.
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Here, HH Medical alleges that the Walzes warranted that the Financial Statements
were prepared in accordance with GAAP and that they fairly presented MedEvoke’s
financial results. Compl. ¶ 31. And the purpose of the Warranties “was to give HH
Medical a basis for (and was, in fact, used by HH Medical for) determining MedEvoke’s
enterprise value and the associated purchase price that HH Medical was willing to pay for
the Company.” Id. ¶ 49; see also id. ¶ 53 (alleging that “the parties used a multiple of
EBITDA, based on [the Walzes’] financial disclosures, to evaluate and negotiate an
appropriate enterprise value and purchase price for the Company”). �us, just as in CBS,
HH Medical has alleged that it believed it was purchasing the Walzes’ promise as to the
truth of the Warranties. HH Medical asserts that it relied on the information in the
Financial Statements to determine MedEvoke’s value and that the Warranties were
express terms of the Purchase Agreement. �erefore, HH Medical has sufficiently alleged
that the Warranties were part of the basis of the bargain.
�e Walzes also argue that the complaint is insufficient because it is silent on the
issue of “knowledge.” Doc. 13-1 at 9. According to the Walzes, “a plaintiff is required to
demonstrate the element of ‘knowledge’ since ‘what the buyer knew and, most
importantly, whether he got that knowledge from the seller are the critical questions.’”
Doc. 18 at 2 (quoting Kriegel v. Donelli, No. 11-cv-9160 (ER), 2014 WL 2936000, at *7
(S.D.N.Y. June 30, 2014)).
�is argument fails as well. �e Walzes cite Kriegel, but that case involved a
warranty that the seller of a dental practice did not know of any material fact adversely
affecting the practice’s business prospects of which the buyer had not been made aware.
2014 WL 2936000, at *1, *4. After the sale, a valued employee left the practice, and the
buyer brought a breach of warranty claim. Id. On summary judgment, the seller argued
that the buyer had agreed to the sale knowing that the employee might leave, so the
employee’s intention to leave could not have affected the buyer’s decision to purchase the
practice. Id. at *8. But the court found that there was no evidence in the record to
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suggest that the seller had expressed any doubts to the buyer about the employee’s
intention to remain at the practice. Id. at *10. As a result, the court explained, “this is not
a case in which the seller’s disclosure of the inaccuracy of certain warranted information
forecloses the buyer from claiming that he believed that he was purchasing the seller’s
promise of truth of the warranted information.” Id. In this case, likewise, there is
nothing in the record to suggest that the Walzes disclosed the inaccuracy of the
Warranties to HH Medical.
�e Walzes also point to Galli v. Metz, 973 F.2d 145 (2d Cir. 1992), but that case
does not help them for similar reasons. �ere, the buyers purchased three companies
from the sellers and obtained extensive warranties. Id. at 147. After the deal closed,
several unexpected liabilities arose, and the buyers refused to pay the full purchase price.
Id. When the sellers sued for breach of contract, the buyers answered with a
counterclaim asserting breach of warranty and other claims. Id. �e sellers had
warranted that they were not aware of any facts that might result in claims that could
adversely affect the companies—even though they knew about hazardous waste
contamination on property formerly used by one of the companies. Id. at 150. Following
a bench trial, the court ruled in favor of the sellers because the contamination was
disclosed to the buyers prior to closing. Id. On appeal, the Second Circuit explained that
“[w]here a buyer closes on a contract in the full knowledge and acceptance of
facts disclosed by the seller which would constitute a breach of warranty under the terms
of the contract, the buyer should be foreclosed from later asserting the breach.” Id. at
151. Since the district court did not determine who had disclosed the contamination to
the buyers, the Second Circuit remanded that question for further development. Id.
Again, however, there is no indication in this case that HH Medical learned from the
Walzes before closing that the Warranties were inaccurate.
At this stage, HH Medical has satisfied the “reliance” requirement by alleging that
the Warranties were part of the basis of the parties’ bargain.
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B. Damages
Next, the Walzes argue that HH Medical seeks damages that are not recoverable
under the Purchase Agreement. Doc. 13-1 at 10. As a preliminary matter, the Walzes
contend that “[i]n reviewing the Agreement’s language for purposes of the Defendants’
indemnification of Plaintiff, the Court must narrowly construe the language contained
therein.” Id. at 11. �ey cite Hooper Associates, Ltd. v. AGS Computers, Inc., 548
N.E.2d 903 (N.Y. 1989), for the proposition that “[w]hen a party is under no legal duty to
indemnify, a contract assuming that obligation must be strictly construed to avoid reading
into it a duty which the parties did not intend to be assumed.” Id. at 905. In this case,
however, the Purchase Agreement did impose a legal duty to indemnify: under Section
8.2.1(a), the Walzes agreed to indemnify HH Medical for any “Losses” arising out of any
misrepresentation or breach of warranty. Doc. 16-1 at 38; see Major Energy Elec. Servs.,
LLC v. Horowitz, No. 19-cv-10431 (NRB), 2020 WL 4432121, at *6 n.1 (S.D.N.Y. July
31, 2020) (rejecting the sellers’ reliance on Hooper where the relevant agreement
“imposed a clear legal duty” on the sellers to indemnify the plaintiffs for the breach of
any representation or warranty).
�e Walzes further argue that HH Medical fails to allege any “Losses” as defined
in the Purchase Agreement. Doc. 13-1 at 10. �ey assert that the definition of “Losses”
does not include “lost profits,” “diminution of value,” or “consequential damages,” so
HH Medical cannot recover for any such losses. Id. at 12. HH Medical responds that the
alleged damages are the difference between MedEvoke’s value as warranted by the
Walzes and its actual value at the time of closing. Doc. 15 at 15. �ose damages,
according to HH Medical, are “the standard form of compensation for a breach of
warranty claim” and “fall squarely within the scope of indemnifiable losses under the
Purchase Agreement.” Id.
�e Court finds Powers v. Stanley Black & Decker, Inc., 137 F. Supp. 3d 358
(S.D.N.Y. 2015), instructive on this issue. In that case, the court considered whether an
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indemnification provision allowed for the recovery of diminution in value damages based
on the sellers’ breach of warranties. Id. at 384–85. As relevant here, the indemnification
provision in Powers required the sellers to indemnify the buyer “for all Losses imposed
on or incurred by [the buyer] . . . based upon, arising out of, in connection with, or
resulting from, directly or indirectly, (i) the inaccuracy or untruth of any of the
representations or warranties made by the [sellers].” Id. at 385. �e definition of
“Losses” was similar to the one at issue in this case, as it covered:
[A]ll demands, claims, actions or causes of action, assessments,
losses, damages, costs, expenses, liabilities, judgments, awards,
fines, sanctions, penalties, charges and amounts paid by a Person
in settlement, including reasonable costs, fees and expenses of
attorneys, experts, accountants, appraisers, consultants, witnesses,
investigators, and any other agents or representatives of such
Person, but specifically excluding . . . lost profits [or] consequential
damages . . . .
Id. (first alteration in original). �e sellers argued that diminution of value damages
qualified as “lost profits” or “consequential damages” and thus were unrecoverable. Id.
�e court disagreed, holding that “diminution of value instead is classified as a
form of ‘general damages.’” Id. As the court explained, “[g]eneral damages compensate
the injured party for the value of the very performance promised” and “include those
damages that are the natural and probable consequence of the breach.” Id. at 385–86
(internal quotation marks and citations omitted). “�erefore, where the seller makes
misrepresentations about the business he is selling, the natural and probable result is that
the business is actually worth less than the buyer paid, and diminution of value damages
therefore compensate the buyer for the ‘value of the promised performance.’” Id. at 386
(quoting Schonfeld v. Hilliard, 218 F.3d 164, 176 (2d Cir. 2000)). �e court concluded
that the diminution of value damages sought by the buyer were available under the
agreement “as damages that ‘directly or indirectly’ resulted from the [sellers’] inaccurate
warranties and representations.” Id. at 385.
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While HH Medical uses the term “benefit of the bargain” damages, Doc. 15 at 16,
it essentially seeks the same kind of diminution in value damages as the buyer in Powers:
“damages in an amount equal to the difference between the inflated upfront $20 million
purchase price and the actual value of the Company at the time of the Acquisition.”
Compl. ¶ 52. �e indemnification provision in the parties’ Purchase Agreement covers
“Losses” arising out of any misrepresentation or breach of warranty. Doc. 16-1 at 38.
�e definition of “Losses,” in turn, includes:
all liabilities . . . , obligations, losses, damages, demands, claims,
actions, suits, judgments, settlements, penalties, interest, out-ofpocket costs, expenses and disbursements (including reasonable
costs of investigation, and reasonable attorneys’, accountants’ and
expert witnesses’ fees) of whatever kind and nature; provided that
Losses shall not include Consequential Damages except to the extent asserted in a �ird Party Claim.
Id. at 47–48. As in Powers, the alleged losses are not consequential damages; they are
diminution in value damages that arise from the Walzes’ alleged misrepresentations and
therefore are within the scope of the indemnification provision. See Powers, 137 F. Supp.
3d at 385.
�e Walzes also assert that HH Medical has not alleged that its loss “is one which
is perpetual in nature.” Doc. 13-1 at 13. Specifically, the Walzes take issue with HH
Medical’s reliance on an EBITDA multiplier. Id. To calculate damages using a multiple
of EBITDA, the Walzes contend, HH Medical “must allege that there was a diminution of
the company’s earnings in perpetuity.” Id. at 14 (citing Zayo Grp., LLC v. Latisys
Holdings, LLC, No. 12874 (VCS), 2018 WL 6177174, at *16 (Del. Ch. Nov. 26, 2018)).
Because the complaint does not allege any permanent losses, the Walzes argue that it
must be dismissed. Id.
�e Court declines to adopt the Walzes’ proposed pleading requirement. �e
Walzes rely on language from Zayo stating that the “benefit of the bargain” method of
calculating damages is appropriate “only when the alleged breach of the representation or
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warranty has caused a permanent diminution in the value of the business (as a result of
lost revenues into perpetuity) and the business has thereby been permanently impaired.”
Zayo, 2018 WL 6177174, at *16. As another decision from the Delaware Court of
Chancery recognized, however, Zayo was “a post-trial opinion in which the Court had the
benefit of a full record and expert testimony on the subject.” Swipe Acquisition Corp. v.
Krauss, No. 2019-0509 (PAF), 2020 WL 5015863, at *7 (Del. Ch. Aug. 25, 2020). �e
Swipe court also explained:
At the pleadings stage, it is reasonably conceivable that an EBITDA
multiple could support a damages calculation. Plaintiff alleges that
the parties discussed using an EBITDA multiple to calculate the purchase price and that the Buyers, in fact, did so. Foreclosing calculating damages using an EBITDA multiple at this stage, as Defendants urge, would require the Court to make that determination
without the benefit of a record and, worse yet, to ignore Plaintiff’s
allegations and, instead, draw inferences in favor of Defendants.
Id. (footnote omitted).
Here too, based on the complaint’s allegations, it is plausible that a multiple of
EBITDA could support a damages calculation. HH Medical seeks damages “in an
amount equal to the difference between the inflated upfront $20 million purchase price
and the actual value of the Company at the time of the Acquisition based on the true,
properly accounted revenue and EBITDA figures.” Compl. ¶ 52. �e complaint alleges
that the parties “used a multiple of EBITDA . . . to evaluate and negotiate an appropriate
enterprise value and purchase price for the Company.” Id. ¶ 53; see Swipe, 2020 WL
5015863, at *7 (noting that plaintiff alleged that buyers used an EBITDA multiple to
calculate the purchase price); cf. Zayo, 2018 WL 6177174, at *17 (“[T]here is no
evidence that Zayo actually based its purchase price on a multiple of EBITDA.”). And to
estimate the actual value of MedEvoke at the time of the acquisition, HH Medical relied
on the same valuation method used to determine the original purchase price, but it
applied that method to “the actual, properly accounted financial performance of the
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Company at the time of the Acquisition.” Compl. ¶ 54. At this stage, those allegations
are sufficient.
C. Proper Party
Finally, the Walzes argue that HH Medical has failed to establish that it is a party
to the agreement at issue. Doc. 13-1 at 15. As noted above, the Purchase Agreement
names “Apothecom ScopeMedical Inc.” as the purchaser, not HH Medical. Doc. 16-1 at
1 (capitalization omitted). According to the Walzes, HH Medical has failed to adequately
allege that it has an interest in that agreement. Doc. 13-1 at 15–16.
HH Medical responds that the complaint makes clear that “HH Medical and
Apothecom are one and the same.” Doc. 15 at 23. While Apothecom signed the
Purchase Agreement, it later changed its name to HH Medical, so Apothecom “continues
to exist in its same legal form, with all the same rights, but under a new name.” Id.
�e complaint’s sole reference to Apothecom is in the caption, which lists the
plaintiff in this action as “HH Medical, Inc., f/k/a Apothecom ScopeMedical Inc.”
Compl. at 1 (capitalization omitted). �e parties do not dispute that “f/k/a” is shorthand
for “formerly known as.” Doc. 13-1 at 15; Doc. 15 at 23. But they disagree on whether
that notation is sufficient.
�e Court can reasonably infer from the caption that HH Medical is the same
legal entity as Apothecom and thus is the proper plaintiff to bring this action. In other
contexts, courts have relied on a “formerly known as” designation in the caption of the
complaint. See Taylor-Norman v. JoCo Assembly, No. 09-cv-410 (TCK) (FHM), 2010
WL 3521610, at *7 (N.D. Okla. Sept. 7, 2010) (allegation in caption that defendant JoCo
was “formerly known as” PBM was sufficient to allege that JoCo was liable for PBM’s
actions under doctrine of successor liability); W. Refin. Yorktown, Inc. v. BP Corp. N. Am.
Inc., 618 F. Supp. 2d 513, 528 (E.D. Va. 2009) (concluding that it was “not unreasonable
to infer in Plaintiff’s favor that ‘f/k/a,’ when used in the caption identifying the
plaintiff . . . , merely denotes a change in corporate name”).
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�e Walzes’ cited cases do not suggest otherwise. Doc. 13-1 at 16. In Tim-Minn,
Inc. v. Tim Hortons USA Inc., No. 20-cv-23481 (KMW) (EGT), 2021 WL 4482733 (S.D.
Fla. Aug. 2, 2021), report and recommendation adopted, 2021 WL 4480281 (S.D. Fla.
Sept. 30, 2021), the question was whether plaintiff Tim-Minn and individual franchisee
plaintiffs were in privity. Id. at *5–6. �e defendant argued that they were because the
franchisee plaintiffs were subsidiaries, but the court rejected that argument due to a lack
of allegations about the subsidiaries’ corporate structure and whether they operated
independently. Id. at *7. �e Walzes also cite Cortlandt Street Recovery Corp. v. Hellas
Telecommunications, S.à.r.l., 790 F.3d 411 (2d Cir. 2015), for the general principle that “a
non-party to the contract lacks standing to sue for breach absent a valid assignment of the
claim.” Doc. 13-1 at 16. In neither of these cases, however, did the court address the
question at issue here: whether, at the pleading stage, the use of “formerly known as” in
the caption is sufficient to allow a corporation to stand in the shoes of its predecessor and
bring a contractual claim.
IV.
CONCLUSION
For the foregoing reasons, the Walzes’ motion to dismiss, Doc. 13, is DENIED.
HH Medical’s request for oral argument, Doc. 17, is DENIED as moot. �e parties are
directed to appear for an initial pretrial conference on June 14, 2024, at 10:30 a.m. �e
parties should dial 877-411-9748 and enter access code 3029857# when prompted.
�e Clerk of Court is respectfully directed to terminate the motions, Docs. 13, 17.
It is SO ORDERED.
Dated:
May 9, 2024
New York, New York
EDGARDO RAMOS, U.S.D.J.
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