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Beware Who Gets to Collect A/R Post-Sale; He Might Not Be A Fiduciary

An owner’s post-sale contractual obligation to collect and deposit his company’s outstanding accounts receivable into the buyer’s designated bank account did not mean the owner was acting in a fiduciary capacity, according to the Business Court.  Dunn Holdings I, Inc. v. Confluent Health, LLC, 2018 NCBH 126 (J. McGuire).  As a result, the buyer could not assert a claim for breach of fiduciary duty when the owner diverted A/R funds otherwise belonging to the buyer into the owner’s private account.

In 2014, owner Christopher Dunn (“Christopher”) sold the accounts receivable and all other assets of Dunn Holdings (“Dunn”) to Confluent Health, a Delaware LLC which operates numerous physical therapy practices throughout the country.  As part of the sale process, two new companies—Breakthrough Cary (“Cary”) and Breakthrough PT(“PT”)—were created.  Dunn was a 20% shareholder in each company, with Confluent holding the remaining amount.  Christopher worked for both companies pursuant to employment agreements.  In conjunction with the sale, Dunn entered into a separate agreement with Cary to collect and deposit all of Dunn’s then-outstanding A/R into a Cary-designated bank account, a task Dunn delegated to Christopher.  Christopher instead diverted the A/R into his own personal accounts.

Over the course of the next three years, the relationship between Christopher and Confluent deteriorated. In 2017, Christopher resigned from both companies.  His resignation triggered Dunn’s automatic obligation to negotiate and sell its membership interests in both Cary and PT to Confluent.  Both Dunn and Christopher refused to participate in any negotiations and instead filed suit against Confluent, Cary, PT, and others. In doing so, Plaintiffs included confidential financial information from the APA. Defendant countersued and asserted numerous claims, including claims for breach of fiduciary duty against Christopher and breach of the APA against both plaintiffs.  Plaintiffs moved to dismiss.

Although the Business Court refused to dismiss many of the Defendants’ counterclaims, it did dismiss Cary’s breach of fiduciary duty claim against Christopher related to his diversion of A/R.  Recognizing a simple employer/employee relationship will not create a fiduciary relationship absent “extraordinary   circumstances” that show the employee holds “all of the [financial or technology-related] cards…” (Opinion, ¶¶46,48), the Business Court found the allegations against Christopher “come nowhere close to the level necessary” to maintain such a claim.  (Opinion, ¶48).  Even though Christopher alone collected and was obligated to turn over the A/R to Cary, the Court nonetheless found the complaint failed to evidence a fiduciary relationship and thus precluded such a claim even when he diverted the A/R into his own personal accounts.

The Court refused to dismiss Defendants’ breach of the APA claim, finding that Plaintiffs’ inclusion of agreed-upon confidential information from the APA  in their public court filings could constitute the basis of a breach of contract claim.  (Opinion, ¶32).

As part of an APA, a buyer often purchases the seller’s accounts receivable but may task the seller to collect the A/R and turn it over.  The Dunn case makes clear that a buyer would be well-served to seek acknowledgment from the seller, in the APA or some other agreement,  that the seller is acting in a fiduciary capacity by collecting and deposit these accounts with the buyer.  Additionally, if the buyer must ultimately sue to recover such diverted A/R, it should be cautious not to include otherwise confidential information from the APA.

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