While the sale of a business is a common occurrence, courts are often looked upon to interpret the terms of the relevant sale documents associated with the transaction when either the buyer or seller is alleged to have breached certain obligations post-closing.

This was the case in a recent decision in the Suffolk County Commercial Division in Huntington Village Dental, P.C. v. Rathbauer, et a. (J. Whelan).

In Rathbauer, plaintiff Huntington Village Dental, P.C. (“HVDPC”) purchased a dental practice from John F. Rathbauer, DMD, LLC (“Rathbauer LLC”), evidenced by an Agreement of Sale, Promissory Note, and Bill of Sale, all dated June 14, 2010.  HVDPC also executed a lease for the first floor of a building owned by another defendant, John F. Rathbauer, DMD, P.C. (“Rathbauer P.C.”).  Of particular significance, the Promissory Note provided that, in the event of a default in payment by HVDPC under the Note, Rathbauer LLC could send a notice of default requiring payment of the balance within 90 days.  Additionally, if the default was not cured within the 90 days, ownership of the dental practice and assets would revert to Rathbauer LLC.

As part of the sale documents, Rathbauer himself remained employed by the dental practice for one year following the sale.  However, shortly after the closing, HVDPC claimed that the defendants breached their obligations under the terms of the sale documents due to “failure to turn over full and complete patient lists, clinical quality copies of x-rays and practice management documents as data which plaintiff purchased from Rathbauer LLC.”  Despite these claims, HVDPC apparently continued performing under the Promissory Note until July 2012, approximately two years after the closing and one year after Rathbauer completed his employment.  Beginning in July 2012, HVDPC refused to pay it obligations under the Promissory Note going forward, essentially based upon the same alleged breaches it claimed back in 2010.

In the Complaint, HVDPC sought rescission of the Promissory Note and the other sale documents on the grounds that the defendants materially breached their obligations and fraudulently induced plaintiff to enter the sale.  HVDPC also sought money damages for alleged tortious interference due to the defendants’ alleged interference between HVDPC and HVDPC’s patients.  Plaintiff further sought a declaratory judgment finding that HVDPC was free from any further obligations under the sale documents and that the provision in the Promissory Note permitting Rathbauer LLC to “take back” ownership of the dental practice and its assets to be deemed null and void.

Defendants then asserted two of their own counterclaims – the first seeking declaratory relief that the “take back” provision in the Promissory Note is valid and enforceable, and the second for money damages due to HVDPC’s failure to pay amounts due under the Promissory Note.

Both parties ultimately moved for summary judgment.  With respect to HVDPC’s claim for rescission of the sale documents due to the alleged “material breaches” by the defendants, the Court noted that rescission of a contract is permitted when a breach “substantially defeats [the] purpose of the contract” when such breach is “material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract.”  Wiljeff, LLC v. United Realty Management Corp., 82 A.D.3d 1616 (4^th Dep’t 2011)(quoting Lenel Sys. Intl., Inc. v. Smith, 34 A.D.3d 1284 (4^th Dep’t 2006)).

Based upon the record before it, the Court denied summary judgment and dismissed HVDPC’s claim for rescission, holding that HVDPC failed to satisfy its burden of proof.  Particularly, the Court noted that the breaches alleged by HVDPC were slight, casual and/or technical breaches, with nothing in the record pointing to a material, substantial breach by the defendants.  Furthermore, the parties operated under the agreement for two years after the closing; thus, rescission was not a remedy available to HVDPC at that point.   Given that the Court found no evidence of material breaches by the defendants, the Court also denied summary judgment and dismissed HVDPC’s declaratory judgment claim.

With respect to HVDPC’s fraudulent inducement claim, the Court held that the alleged representations by defendants were not actionable because the representations were promissory and futuristic in nature and HVDPC could not prove justifiable reliance.  The Court also noted that HVDPC essentially waived its rights for rescission under a fraudulent inducement theory by continuing to operate under the agreement for two years despite allegedly having knowledge of the alleged misrepresentations.

In considering the defendants’ separate summary judgment motion on their counterclaims, the Court granted summary judgment to the defendants for money damages as a result of HVDPC’s failure to pay amounts due under the Promissory Note because HVDPC had no bona fide defense to not paying the amounts due thereunder, given the Court’s finding that the defendants’ alleged breaches were non-material in nature.  However, with respect to the “take back” provision that was available to the defendants in the event HVDPC defaulted under the Promissory Note, the Court refused to enforce the provision, noting that no proof had been shown demonstrating the enforceability of the provision, which was actually handwritten into the Promissory Note at the closing.

This case provides an important illustration of how parties’ actions after the sale of a business is completed will affect how a Court interprets certain provisions of the parties’ agreements when the parties later seek to enforce them.  Particularly for HVDPC, while it thought it had a valid basis to rescind the sale agreements and to stop paying under the Promissory Note due to what it claimed were material breaches by the defendants, the Court ultimately found those breaches to be non-material and that HVDPC’s continued performance under the sale documents for two years post-closing resulted in a waiver of its right to rescission and, as a result, it was plaintiff HVDPC that was in default of the Promissory Note, owing money damages to the defendants.

By: Bernadette Starzee, Long Island Business News

POSTPONED, New DATE TBD

November 17, 2015

Tax Update
Presented by Thomas Terry, CPA

Join us as Thomas Terry, of Markowitz, Fenelon & Bank discussing the  latest developments on federal and New York taxation, including techniques and tax planning ideas – perfect for business owners getting ready to wrap up the year.

Topics include:

• Net Investment Income Tax
• Affordable Care Act – what it means to the employer and employee
• Proposed legislation, including new equipment regulations
• Same sex couple developments

EVENT DETAILS:

8:30am – 9:00am
Arrival and Breakfast

9:00am – 9:45am
Presenting Speaker

9:45am – 10:00am
Q&A and Discussion

REGISTRATION: All events are FREE but registration is required. Complimentary breakfast will be served.

LOCATION: CMM’s Bridgehampton office, 2495 Montauk Highway, Bridgehampton

By Christine Malafi

With all of the recent news coverage regarding the Ebola outbreak and its entry into the United States, employers need to be prepared to answer related questions and handle related issues. The CDC has stated that the 2014 Ebola epidemic is the largest in history, affecting multiple countries in West Africa, and advises of the specific symptoms and dangers of Ebola.1

1. Employers should be aware of the OSHA and CDC guidance available, and should communicate with employees and customers to reaffirm that health and safety concerns are taken very seriously and that all legal actions will be taken to protect them. OSHA has specific guidelines, based on the CDC recommendations, for healthcare workers, airline and travel industry personnel, mortuary workers, lab workers, border and custom workers, emergency responders, and critical sector employees (transportation, pharmacists, etc.) which should be reviewed by employers of those workers.
2. The following are some steps which may and may not be taken to protect employees, customer, and the public, depending upon the circumstances: 1. Consider work-related travel destinations and require only absolutely necessary business travel to affected geographical areas. 2. Ask employees about travel plans. If an employee intends to travel to a place where they may potentially be exposed to Ebola, then an employer may ask whether the employee had contact with any infected persons, and whether the employee is experiencing any symptoms.
3. The questions should be limited to avoid inquiry which would require revelation of a disability and violate the Americans with Disabilities Act (ADA).
4. If an employee has been exposed to Ebola, an employer cannot impose quarantine.
5. Remind all employees of basic practices which are important during the winter flu season (i.e., washing hands often, getting a flu shot, etc.).
6. Notify employees of potential hazards of Ebola.
7. Provide employees with reasonable means to abate the hazards of Ebola. If there is a real fear of contracting Ebola in the workplace, fearful employees may be protected if they refuse to work, and legal counsel should be obtained to help to deal with such a refusal.

If you have any further questions or concerns about the information contained in this Advisory you should not hesitate to contact us.

1 United States Centers for Disease Control and Prevention, www.cdc.gov/vhf/ebola. 2 United States Department of Labor, Occupational Safety & Health Administration, Ebola Control and Prevention, www.osha.gov/SLTC/ebola/control_prevention.html.

By Christine Malafi

Last month, the Equal Employment Opportunity Commission (EEOC) issued its written Enforcement Guidance on Pregnancy Discrimination and related issues. The Guidance, provided in the context of the Pregnancy Discrimination Act (PDA) and the Americans with Disability Act (ADA), supersedes the EEOC’s prior writings from 1983 and 1991, and applies to all employers with more than fifteen employees.

During the last 16 years, pregnancy discrimination charges filed with the EEOC have substantially increased—3,900 such charges were filed in 1997 and 5,342 such charges were filed in 2013. Discrimination is usually based on unfounded beliefs that pregnant women are not physically capable of working or that working may harm a fetus. The EEOC has clearly stated that employees cannot be discriminated against because they are, may be, intend to be, or were pregnant. Promotions cannot be denied to an employee because she may become pregnant in the future. Pregnant employees cannot be excluded from performing job duties (i.e., handling certain chemicals) out of an employer’s fear that the fetus may be harmed. Further, the same parental leave policies must be available to both male and female employees.

Pregnancy-related conditions may be disabilities under the ADA, and will require the granting of reasonable accommodation, such as granting more frequent breaks, keeping a bottle of water nearby, using a stool, modifying work schedules to accommodate morning sickness, and/or altering how job functions are performed. While a “normal” pregnancy does not constitute a disability under the ADA, it is a serious health condition under the Family Medical Leave Act (FMLA), entitling a pregnant employee to FMLA leave. The EEOC Guidelines address the “middle” ground, and state that employers must reasonably accommodate a pregnant employee with light duty or modified assignments, even when there is no pregnancy-related condition which can be considered a disability. This is a controversial issue, one that is pending before the United States Supreme Court, in the case of Young v. United Parcel Service, a case where a pregnant worker was denied light duty assignment because her doctor told her not to lift heavy packages. She claims that UPS told her that light duty was only available to employees with job-related injuries or to those disabilities recognized under the ADA.

Additionally, the new Guidelines find both breast-feeding and lactation are pregnancy-related medical conditions for which employees must be permitted to address in the same way as other limiting medical conditions. Therefore, an employer whose policies permit schedule changes or use of sick leave to attend doctor appointments or to address medical conditions must permit employees to utilize those policies for breast-feeding and lactation issues.

As before issuance of the Guidelines, an employee’s pregnancy, childbirth, or related medical condition cannot be a motivating factor in an adverse employment action. Employment policies should not include any policy that treats pregnant workers less favorably or demonstrates pregnancy bias. Policies should not more favorably treat employees (of either sex) who are not affected by pregnancy, but who have similar ability or inability to work. The Guidelines still permit neutral employment policies or practices which do not have disparate or disproportionate impact on pregnant employees, where it may be shown that they are job related and consistent with business necessity.

While school’s out for summer, employers often hire teenagers to fill seasonal employment needs. Hiring minors comes at a price, since the law imposes numerous restrictions in their employment. As such, it is a good idea to identify and review some child labor laws applicable to employees under the age of 18.

Age Requirements & Hour Restrictions

The law restricts hours that employees under the age of 18 may work. The hours that minors can work depend on age, the type of work, and whether the minor is enrolled in school. New York State is one of the stricter states in the country when it comes to child labor laws. Below are some of the rules regarding employment of minors:

• Minors under age 14. Employers are prohibited from hiring minors under the age of 14.
• Minors aged 14 and 15. When school is not in session, minors aged 14 or 15 are allowed to work no more than 8 hours per day, 40 hours per week. From June 21 through Labor Day, minors aged 14 or 15 are allowed to work only between the hours of 7:00 a.m. and 9:00 p.m. (7:00 a.m. and 7:00 p.m. the remainder of the year). When school is in session, minors aged 14 or 15 are allowed to work no more than 3 hours per school day, 8 hours on non-school days, and no more than 28 hours per week.
• Minors aged 16 and 17. When school is not in session, minors aged 16 or 17 may work up to 48 hours per week, 8 hours a day, 6 days a week, and the permitted hours are from 6 a.m. to midnight. When school is in session, they may work no more than 28 hours per week, 4 hours per day on days preceding school days and 8 hours on Fridays, Saturdays, Sundays and holidays, 6 days per week. To work between 10 p.m. and midnight on a day before a school day, 16 and 17 year olds need written permission from a parent or guardian and a certificate of satisfactory academic standing from their school.
• All minors under age 18. Minors of any age may not work during school hours, unless they have graduated or are withdrawn from school. Home-schooled children may not work during the hours of the local public school.

There are some common exceptions to these age and hour restrictions, which include: Newspaper sales and delivery; babysitters; farm laborers; performers; and models.

Other Important Reminders

• Federal and state laws require that employers obtain age certificates from workers who are known to be under age 18 (or appear to be under age), commonly known as “working papers.”
• Employers must make a work schedule for all minors and post it where workers can see it. The schedule should show minors’ start and end hours, as well as time allotted for meals.
• Employers can change a minor’s hours of work, as long as all changes are posted on the schedule. Minors may work only on the days and at the times posted on the schedule. If minors are present at other times or if there is no posted schedule, it is a violation of child labor laws.
• Employers are required to return age certificates to their employees upon their termination so that minors are able to provide the same age certificate to future employers rather than filing a new application with the issuing agency.
• Civil penalties for violations of child labor laws are: maximum $1,000 for first violation, $2,000 for second violation, and maximum $3,000 for third and each subsequent violation. The following are some of the common jobs that are prohibited to be done by minors:
• Construction work, including wrecking, demolition, roofing, or excavating operations, and the painting or exterior cleaning of a building structure from an elevated surface.
• Any act involving the operation of power-driven woodworking, metal-forming, metal-punching, metal-shearing, bakery, and paper products machines.
• Any act involving the manufacture of brick, tile, and like products.
• As a helper on a motor vehicle.
• Any act in the care or operation of a freight or passenger elevator, except that minors over age 16 may operate automatic, push-button control elevators.

Recent media coverage has heightened employer awareness of workplace bullying. This awareness, however, has created some confusion about what, if anything, should be done to address workplace bullying, and whether harassment policies are sufficient to protect the employer. While many times the characteristics of bullying and harassment can overlap, the law relating to each of these areas is different. It important for employers to understand the differences between the two and have policies in place to identify, assess, minimize, and control the risks associated with such behavior.

Workplace bullying is often defined as repeated, unreasonable, and unwelcome behavior directed toward an employee or group of employees that creates a risk to health and safety that takes one or more of the following forms: verbal abuse, offensive conduct/behaviors (including nonverbal) which are threatening, humiliating or intimidating, or work interference which prevents work from getting done. Bullying is distinct in that it contains a health and safety component. Unlike discrimination and harassment, bullying can be directed at anyone and does not have to be related to race, color, religion, or any other protected class.

Workplace harassment, on the other hand, exists where 1) enduring the offensive conduct becomes a condition of continued employment, or 2) the conduct is severe or pervasive enough to create a work environment that a reasonable person would consider intimidating, hostile, or abusive, and 3) the unwelcome conduct is based on race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information.

Workplace bullying creates a significant threat to the health, safety, and welfare of people in the workplace. It can also have wider implications for employers, including reduced profitability, low morale, and increased absenteeism and staff turnover. Bullying can also expose the employer to legal claims. While employers often treat bullying and harassment as similar issues, the two concepts are different and should be separately addressed in any policy an employer may have for handling these issues. It is important for employers to identify workplace bullying as a concern and minimize effect on employees.

Federal employment law does not currently address bullying in the workplace though it still poses a health and safety issue, making it an employer’s responsibility to prevent workplace bullying and to provide a safe workplace for employees. Several states have proposed laws seeking to address workplace bullying. New York’s “Healthy Workplace” bill is currently pending with New York State’s legislature. If this law is passed it would create a framework for employer responsibility as well as provide guidance on how these matters would be handled in the legal system.

While the legal framework for bullying claims is uncertain at this time, employers should use caution to minimize exposure from workplace bullying. Failure to do so can expose the employer to claims for a breach of health and safety if bullying is not properly handled. Moreover, workplace bullying can cause reduced profitability, low morale, and increased absenteeism and turnover.

Employers who seek to prevent workplace bullying should address the problem as they address complaints of legally actionable harassment. There should be separately established bullying and harassment policies in place. Make sure that employees know that the complaint process is available and that the complaints will be handled promptly and judiciously. Workplace bullying is a separate issue and should be recognizable to all involved and addressed properly. Employees should be aware that the process for handling these issues exists and that if they have complaints or have witnessed mistreatment, the employer wants to know about it and immediately correct it. Effective policies should ban bullying, providing easily understood examples of inappropriate behavior and a clear procedure to investigate and handle complaints.

If you have any further questions or concerns about the information contained in this Advisory you should not hesitate to contact us.