Recovering Under the Basket After a Clinic Network Acquisition

The situation

Eitan and Rivka are both specialist physicians who, over a decade of practice, had built up enough capital to look for something outside medicine to invest in. Through a holding company they formed together, they agreed to acquire a network of diagnostic imaging centres operating across several communities in southwestern Ontario, from a seller whose principal was a businessman named Wilson. The deal closed for a purchase price in the neighbourhood of $65 million, funded through a mix of their own capital, a rollover of some of Wilson's equity, and acquisition financing.

Our firm was not involved in the original acquisition, which had been handled by counsel Eitan and Rivka worked with in Toronto. They came to us about four months after closing, when a routine review by their new finance team turned up something troubling in the accounts receivable they had bought as part of the deal.

The share purchase agreement, like most agreements of this size, contained a set of representations and warranties — formal promises the seller made about the state of the business, including a specific promise that the accounts receivable shown on the closing balance sheet were collectible in the ordinary course, net of a stated allowance for doubtful accounts. It also contained an indemnification structure: if a representation turned out to be false and caused the buyer a loss, the buyer could claim against the seller, subject to a survival period during which claims had to be made, a cap on total recovery, and a basket — a threshold of aggregate losses that had to be crossed before any claim could be paid at all.

What the review found

The finance team's review showed that roughly $2.3 million of the receivables reflected on the closing balance sheet were not realistically collectible. A meaningful portion related to a small number of insurer and third-party payer accounts that had been in dispute for months before closing, without an allowance being taken against them. Another portion reflected invoices for services that, on closer inspection, had already been written off internally before closing but had not been removed from the balance sheet sent to the buyers' accountants.

This mattered because the purchase price had been calculated, in part, off that balance sheet. A dollar of receivables that was not really collectible was a dollar the buyers had effectively overpaid for. If the seller's representation about the receivables was false, and it looked like it was, the buyers had a claim.

But having a valid claim and being able to collect on it are two different questions in an indemnity dispute, and this is where the mechanics of the agreement mattered as much as the underlying facts. The share purchase agreement set a basket of $500,000: losses below that amount, in total, were the buyer's problem, not the seller's. Once aggregate losses crossed the basket, the agreement was structured as a tipping basket rather than a deductible, meaning the buyer could recover the full amount from the first dollar, not merely the amount above the threshold. That distinction alone was worth roughly $500,000 to Eitan and Rivka, and it meant getting the basket mechanics right was not a technicality — it went directly to how much money changed hands.

The agreement also required that a notice of claim, describing the basis for the claim in reasonable detail, be delivered to the seller within a defined survival period after closing for representations of this kind, and it capped recovery for this category of representation at a percentage of the purchase price. Part of the purchase price, about $6.5 million, had been held back in an escrow account for eighteen months precisely to fund indemnity claims like this one, so recovery would not depend on Wilson's personal solvency or willingness to write a cheque after the fact.

What we did

1. Confirmed the notice deadline before anything else. The first task was calendaring: reading the survival period in the agreement against the closing date to establish exactly how much time remained to deliver a valid notice of claim. Missing that deadline, even by a few days, can extinguish an otherwise strong claim regardless of its merits, so this was treated as the controlling fact of the entire matter from day one.
2. Built a claim file the receivables could support. A notice of claim that simply asserts a dollar figure invites a seller to dispute everything. We worked with the buyers' finance team to trace each disputed receivable back to its origin — which invoices were already impaired before closing, which reflected payer disputes that predated the deal, and which allowance the seller's own books should have carried. This turned a general complaint about receivables into a line-by-line schedule the seller's counsel could not easily wave away.
3. Delivered a formal notice of claim within the survival period. The notice set out the representation relied on, the facts supporting the breach, and a calculated loss of approximately $2.3 million, with the supporting schedule attached. It also flagged that the claim exceeded the $500,000 basket and, because the basket was structured as a tipping basket, the full amount was recoverable rather than only the excess.
4. Anticipated the seller's basket arguments. Sellers facing an indemnity claim routinely argue that individual items fall below any per-claim minimum set in the agreement, or that losses were already reflected in a separate working capital adjustment made at closing, which would mean recovering them twice. We reviewed the working capital mechanism in the agreement closely to confirm none of the disputed receivables had already been captured there, closing off that argument before it was raised.
5. Negotiated against the escrow rather than Wilson personally. Because the funds were sitting in escrow under a separate escrow agreement, the practical negotiation was about instructing the escrow agent, not chasing a former owner for payment. This gave the buyers real leverage: the money was already set aside, and the seller's only route to keeping more of it was to negotiate the amount down, not to avoid payment altogether.
6. Reached a negotiated resolution rather than pursuing arbitration. The agreement required indemnity disputes that could not be resolved by negotiation to go to arbitration rather than the courts. Both sides had an incentive to avoid that cost and delay. After several rounds of exchanges, the seller's position moved from disputing most of the claim to accepting a middle figure, and a settlement was reached without needing to invoke the arbitration clause.

The outcome

The claim settled at roughly $1.6 million, paid out of the escrow account, against an initial claim of about $2.3 million. The seller's side maintained that some of the disputed accounts were collectible with more time and that a portion of the allowance dispute reflected a legitimate accounting judgment call rather than a misrepresentation, and rather than spend the better part of a year and a meaningful legal budget arbitrating that difference, both sides settled on a figure in between. Eitan and Rivka recovered a large majority of what they had claimed, well above the $500,000 basket that stood between them and recovering nothing, and the payment came promptly from the escrow account rather than depending on Wilson's cooperation months or years later.

It was not a full win. Roughly $700,000 of the claimed shortfall went unrecovered, and Eitan and Rivka were candid that they would have preferred the accounts receivable representation to have been drafted with a tighter definition of collectibility, closing off the room the seller's side used to argue some accounts were merely slow rather than uncollectible. That is a lesson for the next deal, not this one. For this deal, the escrow structure and the basket mechanics did exactly what they were meant to do: they gave the buyers a real, enforceable path to recovery that did not depend on litigation or on Wilson's personal finances, and it resolved within a few months of the notice being delivered rather than dragging on for years.

The imaging network has continued operating under Eitan and Rivka's ownership since the settlement, and the episode became part of how they now review acquisition targets — with more attention paid to how a target's receivables are aged and allowed for before a deal closes, not just after.

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