Moving the HME Industry Forward

Manufacturer/Provider

Asset Purchase – Potential Successor Liability

December 26, 2016

AMARILLO, TX – Generally, there are two ways to purchase a DME company: an asset purchase or a stock purchase. Let’s talk about a stock purchase first. Assume that John Smith owns ABC Medical Equipment, Inc. Assume that Bill Johnson wants to buy the stock, not the assets, of ABC. Smith, individually, will be the seller. Johnson, individually, will be the buyer. Smith will sell his stock certificate (exhibiting ownership of ABC) to Johnson. ABC will continue to operate as it always has: same Tax ID #, same PTAN, same Medicaid provider number, same accreditation, same employees, same third-party payor contracts, etc.

There will be no “break in billing.” The only change is that Smith is “out” as the stockholder and Johnson is “in” as the stockholder. Change of ownership (“CHOW”) notifications will need to be filed with the appropriate governmental contractors and agencies. The third-party payor contracts will need to be examined to determine if any steps must take place in order for the contracts to remain in effect, such as prior notice to the insurer or approval by the insurer of the new stockholder. The pre-closing liabilities of ABC, known or unknown, will remain with ABC. Barring something unforeseen, Johnson (individually) will not be responsible for ABC’s pre-closing liabilities.

Now, let’s switch gears and talk about an asset purchase. In an asset purchase, Johnson will form his own legal entity (XYZ Medical Equipment, Inc.). The seller will be ABC and the purchaser will be XYZ. ABC will sell its tangible and intangible assets to XYZ. Tangible assets include inventory, computers, delivery vans, etc. Intangible assets include patient files and intellectual property. XYZ will need to obtain its own PTAN, state licensure, accreditation, Medicaid provider number, third-party payor contracts, etc.

There likely will be a “break in billing.” For example, assume that on February 1, 2017, XYZ has met all of the prerequisites for XYZ to submit an application for a PTAN. That is, on February 1, 2017, XYZ will be accredited, will have state licensure, and will have a surety bond. Assume that “closing” of the asset acquisition occurs on February 1, 2017. Assume that on February 1, 2017, XYZ submits its CMS-855S to the NSC. Lastly, assume that the NSC issues the PTAN to XYZ on April 1, 2017. From February 1, 2017, to April 1, 2017, XYZ will have to hold its Medicare claims. On April 1, 2017, XYZ can submit all of the accumulated Medicare claims.

There are positives and negatives for each approach. An upside for engaging in an asset acquisition is that, as a general rule, XYZ is not liable for any of ABC’s liabilities. Over the years, the Department of Justice has taken the position that the purchaser of assets might be responsible for the seller’s pre-closing fraudulent acts if the asset purchase is a “de facto merger.” A recent federal appellate court decision illustrates how such a de facto merger might arise.

Eriem Surgical, Inc. (“ESI”) purchased the assets of Micrins Surgical, Inc. (“MSI”) shortly after it closed its doors. In so doing, ESI (i) hired MSI’s former employees, (ii) took over the MSI facilities, and (iii) took over usage of MSI’s trademark, website, phone number, and e-mail address. ESI is owned by the wife of a large stockholder of MSI. The IRS took $400,000 from ESI’s account to pay $400,000 owed by MSI to the IRS. The federal district court (trial court) upheld the IRS’s treatment of ESI as a “continuation of MSI.”

The trial court found that Carol Teitz (owner of ESI) served as the “proxy” for Bernhard Teitz (a large stockholder of MSI) to “continue to exert control over the company.” The 7th Circuit Court of Appeals upheld the trial court’s decision. In its opinion, the 7th Circuit stated: “We could imagine an argument that, because Bernhard owned only 40 percent of Micrins’ stock, Eriem should be liable for only 40 percent of its taxes. But Eriem has taken an all-or-none stance; it is unwilling to concede owing the Treasury a penny. Given a choice between all and none, the district court did not commit either a legal or a factual error in electing ‘all.’”

It is important to not read too much into this case. In almost all of the asset acquisitions, the purchaser is not liable for the seller’s obligations. However, when a “de facto” merger occurs, such liability might be imposed on the purchaser. The ESI case gives us an example of when successor liability can be imposed. Although the ESI case deals with tax liability, its reasoning equally applies to fraud liability.

Attribution: A portion of this article was taken from a December 19, 2016, Health Law360 article entitled “7th Circ. Sticks Surgical Tools Co. With Predecessor Tax Bill,” written by Chuck Stanley.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or jbaird@bf-law.com.