United States District Court, N.D. Ohio, Western Division
David R. Venzke, Plaintiff
Black Stone of Northwest Ohio, et al., Defendants
G. Carr, Sr. U.S. District Judge
a breach-of-contract suit.
2014, plaintiff David Venzke sold his home healthcare
company, Nursing Resources Corporation (NRC) to the
defendant, Black Stone of Northwest Ohio (Black Stone NWO).
of the sale, Venzke agreed to receive five percent of the
purchase price as a share of “phantom equity” in
NRC. Venzke's phantom equity was on its face worthless,
but it could become valuable if certain contingencies
occurred. For its part, Black Stone NWO agreed to pay Venzke
an earnout that ranged from $200, 000 to $625, 000 if
NRC's adjusted earnings before income, depreciation,
taxes, and amortization (EBITDA) for fiscal year 2015 was at
least $600, 000. Finally, Venzke warranted to Black Stone NWO
that all of NRC's accounts receivable were collectible,
that the company had no pending claims against it, and that
there were no undisclosed liabilities.
a year after the sale, multiple disputes had arisen between
initially claimed that Black Stone NWO breached the
parties' contracts by refusing to pay him for his phantom
equity interest and denying him an earnout. Black Stone NWO
counter-claimed that Venzke breached the warranties he had
made to NRC. After unsuccessfully trying to mediate their
disputes, Venzke brought this lawsuit.
is proper under 28 U.S.C. § 1332(a)(1).
is Black Stone NWO's motion for summary judgment. (Doc.
24). For the following reasons, I grant the motion in part
and deny it in part.
its sale to Black Stone NWO, NRC provided home healthcare
services in Northwest Ohio. (Doc. 28-1, PageID 628).
Stone Companies of Ohio (Black Stone) is a holding company
that “established a structure for providing home health
care through shared administration supporting
revenue-generating operating entities.” (Doc. 24-2,
PageID 178). It relies on a separate entity, Black Stone
Operations, LLC, to “provide[ ] administrative services
to multiple regional operating entities” that delivered
home healthcare services throughout Ohio. (Id.,
Black Stone structure provided advantages for attracting
investors and providing services with economies of scale
enabled by shared administrative services” from Black
Stone Operations. (Id.).
2013, Black Stone planned an expansion into Northwest Ohio.
(Doc. 24-2, PageID 179). It identified NRC as a
“potential acquisition target.” (Id.).
March, 2014, Black Stone NWO and Venzke executed a Stock
Purchase Agreement. (Doc. 24-3). Black Stone NWO agreed to
purchase NRC's shares for $3.75 million. The purchase
price represented NRC's 2012 EBITDA multiplied by five.
(Doc. 1-1, PageID 18; Doc. 24-2, PageID 179).
Phantom Equity Agreement
agreed to receive part of the purchase price in the form of a
phantom equity interest in Black Stone NWO that entitled him
to certain “economic rights” as specified in the
parties' Phantom Equity Agreement. (Doc. 1-2, PageID 56).
Venzke's phantom equity interest in Black Stone NWO,
which the parties also refer to as the “Grantee's
Percentage, ” was five percent. (Id.).
particular relevance to Venzke's claims, the Phantom
Equity Agreement provided that, in the event of a
“Change of Control” - that is, a merger of Black
Stone NWO with or into another entity (Doc. 1-2, PageID 56) -
Venzke would be “entitled to receive an amount equal to
the product of Grantee's Percentage, as of the date of
the Change of Control, multiplied by the Gross
According to the Phantom Equity Agreement, “Gross
means (as determined in good faith by Black Stone) (a) (i)
the total amount payable (and paid) in cash and the value of
securities received for the equity of Black Stone in
connection with any Change of Control, or (ii) (A) the total
amount payable (and paid) in cash and the value of securities
received for the assets of Black Stone in connection with any
Change of Control minus (B) all liabilities, obligations and
other indebtedness of Black Stone not assumed or taken
subject to by the buyer * * *; in each case, minus (b) the
sum of the transaction costs associated with the change of
control. * * * Black Stone shall have the authority to
establish reasonable reserves or make other equitable
adjustments, in good faith, to the foregoing calculation
(e.g., to take into account unforeseen factors or to satisfy
fixed or contingent liabilities or obligations of Black
(Id., PageID 57).
Stock Purchase Agreement specified that part of the purchase
price for NRC's shares would be calculated and paid as an
earnout. Under the parties' separate Earnout Agreement,
Venzke would be entitled to a graduated sum if NRC's
“Adjusted EBITDA” equalled or exceeded $800, 000
during fiscal year 2015. (Doc. 1-3, PageID 63).
Earnout Agreement further provided that, “[p]romptly
following the end of the Earnout Period [i.e.,
2015], ” Black Stone NWO was to prepare: 1) “a
consolidated income statement of the Company for the Earnout
Period”; and 2) a “Computation Notice, ”
defined as “a computation of EBITDA and Adjusted
EBITDA, showing separately each of the adjustments made to
EBIDTA to arrive at Adjusted EBITDA.” (Doc. 1-3, PageID
65). Although the contract required that Black Stone NWO
deliver both documents to Venzke “within 90 days
following the end of the Earnout Period”
(id.), the Earnout Agreement did not give Venzke a
remedy if Black Stone NWO failed to deliver the notices
within that period.
parties also executed an Escrow Agreement. (Doc. 24-2). Under
this contract, Black Stone NWO put $200, 000 of the purchase
price in escrow for the payment of claims against Black Stone
NWO arising from Venzke's breach of the warranties
of the Stock Purchase Agreement, Venzke made several
warranties to Black Stone NWO. In particular, Venzke
warranted that: 1) all of NRC's accounts receivable had
been or could be collected in full within ninety days after
becoming due; 2) NRC had no undisclosed liabilities; and 3)
there was no pending “Proceeding” against NRC
beside those set forth in the Stock Purchase Agreement. (Doc.
1-1, PageID 19, 32, 35, 36). Venzke further agreed to
indemnify and hold Black Stone NWO harmless from any breach
of these warranties. (Id., PageID 44).
the sale had closed, NRC became “a wholly-owned
subsidiary” of Black Stone NWO and continued to do
business under a different trade name. (Doc. 24-2, PageID 180
at ¶12). NRC “generated revenues as it had”
before the sale, but now “enjoyed cost-savings by using
the shared administrative services available through”
Black Stone Operations. (Id., PageID 180 at
November, 2015, Black Stone sold Black Stone Operations and
its operating entities, including Black Stone NWO, to AFAM
Acquisition, LLC for just over $40 million. (Doc. 11, PageID
98 at ¶30; Doc. 24-2, PageID 182 at ¶¶33-35;
Doc. 24-6, PageID 326). After the merger, Black Stone NWO
“remained a separate operating entity, ” and NRC
remained a “wholly-owned subsidiary” of Black
Stone NWO. (Doc. 24-2, PageID 182 at ¶35).
“Gross Proceeds” Calculation
undisputed that the AFAM merger constituted a “change
of control” for purposes of the Phantom Equity
Agreement. Accordingly, Black Stone undertook to calculate
the “Gross Proceeds” of that transaction to
determine the value, if any, of Venzke's phantom equity.
total purchase price was $40, 100.000. (Doc. 24-6, PageID
required by the Phantom Equity Agreement's definition of
“Gross Proceeds, ” Black Stone NWO first deducted
from that sum $13, 015, 838 in “liabilities,
obligations and other indebtedness of Black Stone [NWO] not
assumed by” AFAM. (Doc. 24-6, PageID 328). It then
subtracted $1, 579, 670 in “transaction costs, ”
as well as a further $8, 000, 000 for established reserves.
(Id.). Then, because Black Stone retained $70,
836.30 in cash on hand, it added that sum to the “Gross
Proceeds” calculation, yielding a figure of $17, 575,
NRC was one of multiple “[o]perating [e]ntities under a
common [p]arent” organization (i.e., Black
Stone Operations), Black Stone NWO decided that “the
proceeds from the AFAM sale needed to be allocated to each of
the [o]perating [e]ntities to determine the value that NRC
contributed to the transaction.” (Doc. 24-6, PageID
328). Management relied on NRC's EBITDA in the
twelve-month period ending August 31, 2015 to gauge NRC's
value because EBITDA was “generally the main value
driver for the AFAM transaction.” (Id.).
Stone NWO then “determined that [Black Stone
Operations'] costs should be allocated to each of the
[o]perating [e]ntities” based upon each entity's
revenue. (Doc. 24-6, PageID 328). Because revenue “is a
measurement of activity at the [o]perating [e]ntity's
level, ” Black Stone NWO's allocation method
assumed that “each [o]perating [e]ntity consumes a
proportional share of [Black Stone Operations']
centralized functions.” (Id.).
so allocating proceeds and costs among the operating
entities, Black Stone NWO determined that NRC “did not
contribute to the value upon which the NRC transaction was
based (EBITDA)[.]” (Id., PageID 329). Rather,
Black Stone NWO determined that NRC's EBITDA
“equaled negative $187, 846.00.” (Id.).
Because NRC's share of the “gross proceeds”
from the merger was less than zero, Black Stone concluded
that Venzke was not entitled to a payment for his phantom
in 2016, Black Stone NWO calculated Venzke's
“Earnout Amount” and determined that he was not
entitled to a payment under the Earnout Agreement. (Doc.
24-2, PageID 183 at ¶40). According to management's
calculations, NRC's 2015 adjusted EBITDA was less than
$800, 000, the minimum earning that would trigger a payment
under the Earnout Agreement. (Doc. 24-6, PageID 336).
Venzke's Alleged Warranty Breaches
March, 2015, Black Stone NWO sent Venzke a “Notice of
Claims for Indemnification” regarding three alleged
warranty breaches. (Doc. 24-2, PageID 199-203).
Uncollectible Accounts Receivable
Stone NWO claimed that it “found $80, 502 of
uncollectible Accounts Receivable.” (Doc. 24-2, PageID
199). The company made ordinary and reasonable efforts to
collect the accounts receivable that Venzke had transferred
to it, but it ultimately wrote off $101, 539.69 in accounts
as uncollectible. (Id., PageID 181 at ¶21).
Undisclosed Workers' Compensation Claims
Stone NWO also alleged that Venzke failed to disclose four
Workers' Compensation claims that were pending against
NRC when the sale closed.
purchasing NRC, Black Stone NWO “became self-insured
for Workers' Compensation claim[s].” (Doc. 24-1,
PageID 180 at ¶15). While this change had certain
financial advantages for Black Stone NWO, it also obligated
Black Stone NWO to pay for claims that the State of Ohio
would have paid (including the four allegedly undisclosed
claims). (Id., PageID 182 at ¶¶29 -31).
Had Venzke disclosed those claims, Black Stone NWO maintains
that it would have adjusted the purchase price downward by
$100, 226. (Id., PageID 182 at ¶31).
Black Stone NWO audited the visit records of NRC's home
healthcare aides and discovered that one aide committed fraud
by forging “client names on . . . visit notes.”
(Doc. 24-2, PageID 199). Black Stone NWO therefore concluded
that NRC's submission of these claims, which totaled
$182, 347.80, to the State of Ohio for payment was improper.
on the advice of counsel and auditors, Black Stone NWO
“consider[ed] the suspected fraud to be an undisclosed
liability” and “established an open reserve for
the potential liability[.]” (Doc. 24-2, PageID 181 at
¶¶23-24). As of the summary judgment filings, no
party has demanded reimbursement from Black Stone NWO.
filed this suit in May, 2017. He alleges that Black Stone NWO
breached the Stock Purchase Agreement, the Phantom Equity
Agreement, and the Earnout Agreement. By way of relief,
Venzke seeks: 1) a payment of $356, 890 under the Phantom
Equity Agreement; 2) a payment of $200, 000 under the Earnout
Agreement; and 3) the release of the $200, 000 held in escrow
in accordance with the Stock Purchase and Escrow Agreements.
(Doc. 1, PageID 5).
Stone NWO filed its answer and counterclaims in September,
contends that Venzke breached the Stock Purchase Agreement by
falsely warranting that NRC had no undisclosed liabilities,
no undisclosed claims pending against it, and no
uncollectible accounts receivable. (Doc. 11, PageID
judgment is appropriate under Fed.R.Civ.P. 56 where the
opposing party fails to show the existence of an essential
element for which that party bears the burden of
proof.” Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986).
movant must initially show the absence of a genuine issue of
material fact. Id. at 323. Once the movant carries
its burden, the “burden shifts to the nonmoving party
[to] set forth specific facts showing there is a genuine
issue for trial.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 250 (1986). Rule 56 “requires
the nonmoving party to go beyond the [unverified]
pleadings” and submit admissible evidence supporting
its position. Celotex, supra, 477 U.S. at
accept the nonmovant's evidence as true and construe all
evidence in its favor. Eastman Kodak Co. v. Image Tech.
Servs., Inc., 504 U.S. 451, 456 (1992).
and Black Stone NWO's claims turn on the language of four
contracts: 1) the Phantom Equity Agreement; 2) the Earnout
Agreement; 3) the Escrow Agreement; and 4) the Stock Purchase
I am “confronted with [several] issue[s] of contractual
interpretation, ” my role is “to give effect to
the intent of the parties to the agreement.”
Westfield Ins. Co. v. Galatis, 100 Ohio St.3d 216,
219 (2003). I must examine the contract “as a whole and
presume that the intent of the parties is reflected” in
the contract's language. Id. And I must
“look to the plain and ordinary meaning of the language
used in the [contract] unless another meaning is clearly
Phantom Equity Payment
alleges that Black Stone NWO breached the Phantom Equity
Agreement when it concluded that NRC's share of the gross
proceeds of the AFAM merger was $0 and, accordingly, denied
him a payment for his phantom equity interest. (Doc. 1,
PageID 4 at ¶¶13-14; Doc. 28, PageID 611-17).
claims that he is entitled to $356, 890 for his phantom
equity interest. (Doc. 28, PageID 616).
bases this calculation “on the percentage NRC's
revenues bore to the total revenues of the Black Stone
companies sold” to AFAM. (Id.). Because NRC
generated 17.8% percent of Black Stone Operations' total
revenues,  NRC's share of the gross proceeds
generated by the AFAM merger transaction ($40, 100, 000)
amounts to $7, 137, 800 ($40, 100, 000 x .178 = $7, 137,
800). And because the Phantom Equity Agreement entitles
Venzke to five ...