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Quebec Court Throws Out Buyer’s Lawsuit Against Seller…

By March 11, 2019September 23rd, 2019Selling A Practice

This is an interesting case because it deals with a lot of issues that DMC deals with on a daily basis – the NUANCES of selling or buying a dental practice.

In the case of Robert Nolet-Lévesque DMD inc. c. Michaël Laroche Dentist inc., 2018 QCCS 246, the Superior Court of Quebec had to decide whether a PURCHASE / SALE transaction between two dentists could be undone by allegations of false statements made by the seller, hidden defects or breaches of contractual obligations.

Misrepresentations by Seller? Nope

Here, Dr. Robert bought Dr. Michaël’s practice in 2014 for just over $736k. A letter of intent was submitted, stating that the deal would be conditional “on funding and a due diligence process, including equipment inspection”. As part of due diligence, Dr. Robert found that there approx. 2116 patient files. But he only did a site visit that lasted one hour, checked dental records for 3 hours, their accountant reviewed the financial statements, the dental equipment was checked on their behalf by a specialized firm and that’s it. The purchase was made on July 11, 2014.

After the sale, Dr. Robert complained that, although he had tried to maintain the patient base, he lost a lot of goodwill. He wanted a price reduction of $110k. He believed there was only 1,301 active files and not the 2,116 he thought he paid for. Dr. Michaël resisted that claim, telling the Court that he had been very transparent throughout the sale process. Dr. Michaël said that Dr. Robert had only made a claim AFTER taking over and AFTER being disappointed by the income he had generated. Importantly, no analysis had been made concerning the number of patients or active patients at the practice BEFORE the sale. The Purchaser only had a company determine the number of patients AFTER he bought the practice (at a cost to him of $3k and it took the company 1.5 days to figure it out). During due diligence and BEFORE buying, the buyer only sampled 70 files and after 3 hours spent at the dental clinic were satisfied with their due diligence.

Ultimately, the Court sided with the Seller, adding that the buyer was supposed to do their due diligence BEFORE BUYING (like a house buyer). Besides, none of the legal paperwork mentioned that the Seller had made promises about the number of active patients or the transfer of the goodwill. On the contrary, the Seller was only supposed to “guarantees the accuracy of the statement of financial results, which seemed much more concerned then the applicant than the active files!”

But wait… there’s more! And I’ve never heard of this argument before: Dr. Robert also accused Dr. Michaël of having “worked too much in the two months preceding the signing of the [purchase agreement] …and thus having exhausted the pool of dental work to be done with patients”. In other words: the Seller misrepresented the amount of dental work to be done by the Buyer the day after the sale. Thankfully, the Court threw this argument out as well on the basis that the Seller had tried to sell to him sooner (the Buyer wasn’t ready), the Seller had worked hard in previous years (but this wasn’t held against him), and nobody abused the situation.

After that, the Court a took step back. Even IF there was a breach of a representation (which the Court had NOT found), the damages being claimed are actually not there. Dr. Robert’s billings were $620k in the first year vs. Dr. Michaël’s $780k in the previous year (a decrease in 20%). The Court noted that a 20-25% drop in patient goodwill, per the Seller’s accountant, is within the norm of what to expect after a sale. And even when the buyer went to get financing and the bank wanted an appraisal on the goodwill, the appraisal company came back and valued the goodwill HIGHER (at $400k) than what was agreed to by the parties themselves in their legal paperwork ($290k)!

More generally, here’s what the Court said about buying goodwill: “Buying a goodwill is like taking the risk of disappointing the client who does not expect to meet another health professional. It is no secret that this trust may not be the same when the two professionals have two very different personalities, as is the case in this case. There is therefore a risk that the patient will not accept treatment by a dentist other than Mr. Laroche… Not only is this notion of acquisition fragile, but in addition the productivity of a professional varies from one to another, and this is true for all professions. It is not because a professional generates $ 800,000 in gross fees that the one who takes his place the following year will automatically do the same. It’s not even a certainty for the same dentist from one year to the next. Competition in this area can have an influence on the annual turnover. Years of expertise can also influence the financial results of a clinic. Is it not reasonable to believe that a less experienced dentist will be less productive than a more experienced one, which is the case here?”

For these reasons, the Court found that there was NO misrepresentations concerning the goodwill or the patients.

Equipment With Hidden Defects

The Buyer also claimed that a large number of assets were unusable within the days and weeks that followed the purchase. Dr. Robert claimed that he wouldn’t have bought the practice for such a high price if he’d known of the vices which rendered them allegedly unfit for their use.

Again, the Seller denied any fault: if there were any issues, no formal notice had been given prior to the sale (which is required under Quebec Civil Law). The Court once again sided with the Seller: “The absence of a formal notice is fatal and all claims must be rejected on this ground.” The court went on to say that the defects MUST have existed at the date of the sale and, if they were hidden defects, they MUST NOT HAVE BEEN CAPABLE of being detected. Again, since there was no evidence of any of this, the Court rejected the Buyer’s claims and added that the “the (Purchaser) was negligent at the time of the purchase.” Ouch!

Accounts Receivable Management

The Buyer claims from the Seller the sum of $ 1,200 for the management of accounts receivable for a period of 12 weeks. As there was no agreement between the parties on this issue, the Court rejected this claim.

Bottom Line

If you’re a seller, make sure to give the buyer the opportunity to do their due diligence, ask questions, and don’t give certain statements or promises in the legal agreements if the Buyer has done or waived their due diligence. If something isn’t in the agreement, then it’ll be virtually impossible for a court to enforce it! And if you are thinking of selling now or in the next 5 years, you should absolutely reach out to me or David Mayzel to help you prepare for a sale in a way that helps protect you against lawsuits like this one.