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All Metro Health Care Services, Inc. v. Edwards

July 30, 2010

ALL METRO HEALTH CARE SERVICES, INC., ALL METRO HOME CARE SERVICES, INC., ALL METRO HOME CARE SERVICES OF NEW YORK, INC., ALL METRO HOME CARE SERVICES OF NEW JERSEY, INC., ALL METRO HOME CARE SERVICES OF MISSOURI, INC., ALL METRO EMERGENCY RESPONSE SYSTEMS, INC., CAREGIVERS ON CALL, INC., ALL METRO MEDICAL STAFFING, INC., ALL METRO MANAGEMENT AND PAYROLL SERVICES CORPORATION, ALL METRO FIELD SERVICE WORKERS PAYROLL SERVICES CORPORATION, AND THE 1818 MEZZANINE FUND II, L.P., PLAINTIFFS-APPELLANTS/CROSS-RESPONDENTS, AND CIT HEALTHCARE, LLC, PLAINTIFF/INTERVENOR,
v.
GLENN EDWARDS, DEFENDANT-RESPONDENT/CROSS-APPELLANT.



On appeal from Superior Court of New Jersey, Chancery Division, Bergen County, No. C-334-07.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued May 4, 2010

Before Judges Wefing, Messano and LeWinn.

Plaintiffs appeal from a trial court order granting summary judgment to defendant. Defendant cross-appeals from a subsequent order of the trial court denying his motion for counsel fees. After reviewing the record in light of the contentions advanced on appeal, we affirm the grant of summary judgment to defendant and reverse the denial of counsel fees.

Defendant Glenn Edwards was the sole owner of All Metro Aids, Inc. ("AMA"), a home health care company. He decided to sell all the stock in AMA and thus receive the proceeds of the successful business he had developed. Scott Mixer, AMA's chief financial officer, wanted to purchase the business and incorporated defendant All Metro Health Care Services, Inc. ("All Metro") to structure the transaction. Mixer was the president, chief executive officer and chairman of All Metro, which signed a Stock Purchase Agreement setting forth the basic parameters of the transaction. That Stock Purchase Agreement was later amended by a subsequently executed Modification Agreement.

Mixer did not have the necessary funds to complete this management buy-out and turned to The 1818 Mezzanine Fund II, L.P. ("1818") and CIT Healthcare, LLC ("CIT") to advance the necessary sums. They agreed to do so, using a technique referred to as mezzanine financing, under which 1818 and CIT could elect to convert the debt owed to them into an equity interest in All Metro.

The transaction closed on December 30, 2005, for a purchase price of approximately $22,000,000, $12,000,000 of which was provided by 1818, the balance by CIT. In addition, CIT provided All Metro with a $10,000,000 revolving line of credit and a $9,000,000 loan, maturing five years after the closing. At the closing All Metro signed a loan and security agreement in favor of CIT for this debt. It also executed a senior subordinated promissory note for $9,000,000 in favor of 1818. Finally, defendant Edwards, All Metro, 1818 and CIT signed a Subordination Agreement. At the closing Edwards received $17,955,416.67 in cash, a promissory note for $4,055,000, and an acknowledgement that he would be reimbursed for the increased individual income tax liability he would incur as a result of the parties' agreement to make an election under § 338(h)(10) of the Internal Revenue Code, 26 U.S.C. § 338. One effect of the documents executed at the closing was to characterize as junior debt the balance owed to defendant Edwards as part of the purchase price while the debt All Metro owed to 1818 and CIT was characterized as senior debt. In essence, Edwards agreed that the remaining money All Metro owed to him was to be subordinated to All Metro's debts to 1818 and CIT. This Subordination Agreement contained the following provisions:

1. The payment of any and all Subordinated Debt is expressly subordinated to the Senior Debt to the extent and in the manner set forth in this Subordination Agreement. The term "Subordinated Debt" means the principal of and interest on all indebtedness, liabilities, and obligations of Borrowers, now existing or hereafter arising, to the Undersigned including but not limited to: (i) the indebtedness of Borrowers, or any of them, evidenced by that certain Junior Subordinated Promissory Note dated as of even date herewith (the "Junior Note"), payable to the order of the Undersigned in the original principal amount of $4,055,000, and (ii) any other obligations owing by Borrowers, or any of them, now or hereafter to the Undersigned . . . . The term "Senior Debt" means (i) any and all Obligations of Borrowers to Lender under, in connection with, or in any related to (including debtor-in-possession financing), the Loan and Security Agreement . . . and (ii) any and all Obligations (as defined in the Guarantee and Collateral Agreement . . .) to 1818 Fund of any kind of Borrowers under, in connection with or in any way related to . . . (emphasis added).

The parties also agreed, in Paragraph 2, that until the Senior Debt was paid, the Subordinate Debt could not be paid. The paragraph reads:

Until the Senior Debt is paid in full and all of Lenders' respective obligations to Borrower have been terminated under the Loan Agreements, Borrower shall not pay, and Undersigned shall not accept, any payments of any kind (including prepayments) associated with Subordinated Debt, provided however, that so long as (i) no Event of Default or Unmatured Event of Default under he Loan and Security Agreement and (ii) no Event of Default . . . has occurred, and if no Default Event would result from the making of any such payment(s), All Metro may pay and the Undersigned may accept scheduled principal and interest payments under the Junior Note. Notwithstanding the foregoing, upon the occurrence of a Default Event, Borrowers shall not make and the Undersigned shall not receive, any payments of interest or principal, or otherwise, on the Subordinated Debt, without prior written consent of each Lender.

The Subordination Agreement also contained an agreement to not bring a claim regarding payment of the Subordinated Debt until the Senior Debt was paid in full. The Subordination Agreement contained a choice of law provision stating that the agreement was to be governed by New Jersey law, and any action brought under the agreement was to be brought in New Jersey.

Several months after the closing, defendant's accountant notified the parties that a mathematical error in calculation at the closing resulted in Edwards receiving $455,000 less in cash than he should have. All Metro was unable at that point to pay that sum in full, and Edwards agreed upon an installment schedule of seventeen payments. All Metro made only the first two of these.

In September 2006, Edwards and All Metro filed with the Internal Revenue Service their joint election under ยง 338 of the tax code, the result of which was to increase the individual tax liability of Edwards by $1,526,576, plus interest and penalties. As with the shortfall in the purchase price, All Metro did not have the funds at that time to reimburse Edwards for this increased tax obligation. Edwards and All Metro therefore agreed between themselves that All Metro would pay $455,627 to the taxing authorities on behalf of Edwards, and ...


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