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FACTUAL ALLEGATIONS

The Purchase Agreement

31. LBH is the parent company of Liberation Way, LLC ("Liberation

Way"). Liberation Way provides much needed addiction treatment and

rehabilitation services to persons suffering from the life-threatening weight of

substance abuse and addiction. Liberation Way operates treatment and/or

rehabilitation facilities in Yardley, Pennsylvania; BaJa Cynwyd, Pennsylvania; Fort

Washington, Pennsylvania; and Collingswood, New Jersey.

32. Effective December 11, 2017, Plaintiffs and the Members entered into

the Purchase Agreement. Under the Purchase Agreement, the Members sold to LBH

Holdco most of their membership units in LBH, and they contributed a smaller

number of membership units to LBH Holdings (the "Contributed Units") in

exchange for common units in LBH Holdings. LBH Holdings contributed the

Contributed Units to LBH Holdco such that LBH is now a wholly-owned subsidiary

of LBH Holdco.

33. The sale under the Purchase Agreement closed on December 11, 2017

(the "Closing Date"), the san1e date on which parties signed the Purchase

Agreement. On that date, LBH Holdco became the sole owner ofLBH.

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34. As is common in such acquisition agreements, Article II of the Purchase

Agreement contains express representations and warranties to LBH Holdings and

LBH Holdco as to various aspects of LBH's operations and financial condition.

These representations were made "to induce [LBH] Holdings and [LBH Holdco] to

enter into this Agreement and consummate the transactions contemplated hereby."

(Ex. A at 10.)

35. Specifically, Article II provides, inter alia:

(a) In Section 2.17, that "[e]ach Group Company is, and has been

since its respective date of formation, in compliance in all

material respects with all applicable statutes, . . . rules and

regulations promulgated by any Governmental Authority"

("Group Company" means each ofLBH and its subsidiaries);

(b) In Section 2.25(c), that "[n]o Group Company nor, to the

Knowledge of the Company, any of its owners, officers,

managers or members, agents, employees or independent

contractors . . . has engaged in any activity that, is in material

violation of ... Chapter 709 of the Pennsylvania Code, all laws

governing or regulating the p!'ovision of drug and alcohol

rehabilitation services or other medicine, patient records and

document[s], referrals ... [and] certification or registration of

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drug and alcohol facilities" ("Knowledge of the Company"

means the "actual knowledge of Coluccio or Gerner after a

reasonable inquiry of officers of [LBH] or its subsidiaries who

are or reasonably should be knowledgeable about the subject

matter or issue at question");

(c) In Section 2.25(k), that "[e]ach Group Company has in all

material respects maintained all records required to be

maintained by Health Care Program Laws and any Governmental

Authority, including all records required to be maintained by

other third party payors"; and

(d) In Section 2.26, that "[t]he representations and warranties made

Ol' contained in this Agreement, the Disclosure Schedule, and

exhibits hereto and the certificates and statements executed or

delivered pursuant to this Agreement do not and shall not contain

any untrue statement of a material fact and do not omit to state a

material fact required to be stated herein or therein or necessary

in order to make such representations, warranties or other

material not misleading in the light of the circumstances in which

they were made or delivered."

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36. Thus, the Company provided extensive representations and warranties

to induce LBH Holdings and LBH Holdco to enter into the Purchase Agreement and

to close on the acquisition of the units in LBH.

The Indemnification Provisions

37. Under Article VII of the Purchase Agreement, the Members expressly

agreed to indemnifY Plaintiffs with respect to any breach of any representation in the

Purchase Agreement.

38. Section 7.1 states that "all representations, warranties, covenants, and

agreements of the Parties ... shall be deemed to have been t•elied upon ... and shall

survive the execution and delivery ofthis Agreement and the Closing." This survival

continues for eighteen months after the Closing Date as to all such representations,

warranties, and covenants, and four years after the Closing Date as to certain

representations, including those contained in Section 2.25 (the "Healthcare

Representations").

39. Moreover, under Section 7.2, the Members agreed to indemnifY and

hold harmless LBH, LBH Holdings, and LBH Holdco for any and all Losses

("Losses" includes any and all damages, liabilities, losses, claims, obligations, liens,

assessments, judgments, Taxes, fines, penalties, reasonable costs and expenses

(including reasonable attorneys' fees), as the same are incurred, of any kind or nature

whatsoever (whether or not arising out of third party claims and including all

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amounts paid in investigation, defense or settlement of the foregoing and

consequential damages) (Ex. A § 8.1)), including for:

(a) any "breach of any representation .or warranty made by the

Company in Section 2"; "any breach of any covenant made by

the Company or any Member under" the Purchase Agreement;

(b) "fraud on the part of any Group Company"; and

(c) "the matters set forth on Schedule 7.2(a)(vi)," which includes

"any items disclosed under any schedule to Section 2.25

(Healthcare Matters) of the" Purchase Agreement (true and

correct copies of Schedules 7.2(a)(vi) and 2.25 are attached as

Exhibit B).

40. Schedule 2.25 contained limited (and misleading) descriptions of pre-

Closing inspections conducted by the Pennsylvania Department of Drug and Alcohol

Programs (the "DDAP").

41. To make a claim for indemnification against the Members, Plaintiffs

were to provide wdtten notice to Coluccio (the "Members' Representative"), as the

designated representative of the Members. (Ex. A § 7.4(a); see also id. § 9.12.)

Notices must include the amount, nature, and source of the claim in reasonable

detail, but only to the extent actually known to the claimant. (Id.) Further, failure

to give the notice does not limit the right of any indemnified party to !'ecover
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indemnity or reimbursement except in the unlikely event that it caused the Members

suffer material prejudice or harm as a result. (/d.)

42. Under the Purchase Agreement, payment to Plaintiffs by the Members

for any indemnification claim is to be made: first, from the $4,659,813 of the

purchase price placed in escrow (the "Escrow Deposit") with SunTrust Bank (the

"Escrow Agent"), and second, after the Escrow Deposit is exhausted, from the

Members individually. (Ex. A§ 7.5.) To obtain payment from the Escrow Deposit,

LBH Holdco and the Members' Representative must deliver joint written

instructions to the Escrow Agent for the release of funds. (/d.) If the Members'

Representative disputes a claim, he is required to sign joint written instructions with

LBH Holdco and deliver such instructions to the Escrow Agent within two business

days of the final resolution of any such claim. (ld.) Without signature of the

Members' Representative on the joint written instructions, the Escrow Agent will

not release the Escrow Deposit to Plaintiffs. (See id.) The Members must then pay

any deficit that the Escrow Deposit does not cover by wire transfer. (/d.)

The Members' Actions And Omissions Caused Serious Breaches

Of The Representations And Warranties In The Purchase Agreement

43. Since the Closing Date, Plaintiffs have encountered numerous and

unexpected complications in the operations of LBH. These problems arose solely

from events taking place prior to the Closing Date that are the direct result of

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Gerner's and other Members' acts and omissions. Plaintiffs have incurred

substantial Losses in responding to and addressing these complications.

44. First, LBH received a notice from the DDAP dated March 22, 2018
(the "DDAP Notice," Ex. C). The DDAP Notice states that DDAP inspections were

conducted at LBH's Yardley facility on November 2, 2017, and at the Fort

Washington facility on November 16, December 12, and December 13, 2017, and

that the DDAP identified areas of alleged non-compliance under Pennsylvania

Code-specifically, Chapters 709 and 715-arising out of the inspections that

occurred prior to the Closing Date. Moreover, the DDAP Notice contains

accusations of violations related to controlled narcotic prescriptions observed during

DDAP's pre-Closing November 2, 2017 visit and the "lack of distinction between

the treatment facility and housing."

45. The DDAP Notice required LBH to immediately cease patient intake at

both the Yardley and Fort Washington facilities due to these alleged pre-Closing

code violations. As a result of the pre-existing (and undisclosed) violations, LBH

was required to undertake expensive remedial steps and lost the lion's share of its

revenue for several months while it corrected, to the DDAP's satisfaction, the

problems identified in the DDAP Notice. LBH was required to retain legal counsel

to assist in its response to the DDAP Notice. Ultimately, LBH incurred millions of

dollars in Losses because of this business interruption.

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46. Second, Plaintiffs have learned that Gerner is under investigation by the

Attorney General of the Conunonwealth ofPellllsylvania with respect to various pre-

Closing activities

(the "AG Investigation"). ,

47. Upon information and belief, the AG Investigation concerns events

taking place prior to the Closing Date, and is manifestly the result of alleged acts or

omissions by or controlled by Gerner. Plaintiffs have incurred, and will likely

continue to incur, substantial attorneys' fees and other costs in responding to the AG

Investigation on behalf of LBH and its employees.

48. As a result of these issues, Plaintiffs have incurred substantial and

ongoing Losses under the Purchase Agreement, for which Plaintiffs seek recovery.

Each of the problems identified above breached the representations and warranties

set forth in the Purchase Agreement, including, inter alia, Sections 2.17, 2.25(c),

2.25(k), and 2.26.

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The Members Refuse To Honor Their Indemnification Obligations

49. Under Section 7.2 of the Purchase Agreement, the Members are

required to defend, indemnif.y, and hold harmless each of the Plaintiffs for their

Losses as a result of any breaches of the representations and warranties in the

Purchase Agreement and with respect to the specific items set forth on Schedule

7.2(a)(vi) of the Purchase Agreement.

50. On May 22,2018, pursuant to Section 7.4 of the Purchase Agreement,

Plaintiffs sent a ''Notice of Claim for Indemnification" with respect to these matters

to Coluccio, as the Members' Representative (the "May 22 Notice"). (Ex. C.) The

May 22 Notice provided the factual basis for the indemnification claims and further

notified the Members that Plaintiffs were incurring significant Losses for which the

Members are required to indemnify Plaintiffs.

51. However, the Members did not honor their contractual obligations. Otl

June 18, 2018, in the face of the clear and unambiguous representations in the

Purchase Agreement, including the Healthcare Representations in Section 2.25, the

Members' Representative responded with an absolute denial of any responsibility

(Ex. E). After outright denying Plaintiffs' demand for indemnification, the response

of the Members' Representative cagily claimed to lack enough information to assess

the claim. This was even though the Members' Representative was well aware of

the criminal investigation described above.

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52. Despite that the May 22 Notice was sufficient in the first instance, on

July 10, 2018, Plaintiffs delivered a supplemental Notice of Continued Claim for

Indemnification to the Members' Representative (the "July 10 Notice," Ex. F), in

which Plaintiffs identified specific representations at issue and gave further detail

regarding the factual background for the Losses incurred in response to breaches of

representations.

53. On August 7, 2018, the Members' Representative responded to

Plaintiffs' July 10 Notice. (Ex. G.) In his response, the Members' Representative

again simply denied that any representations or warranties under the Purchase

Agreement had been breached and aggressively stated that "your claim must be

resolved by litigation in Delaware." Accordingly, the Members have expressed a

clear intent not to honor their clear indemnification obligations under Section 7.2 of

the Purchase Agreement and, as it pertains in particular to conduct required of the

Members' Representative, the obligation under Section 7.5 to sign joint written

instructions to the Escrow Agent for the release of the Escrow Deposit to LBH

Holdco.

54. Due to the extensive Losses already incurred, the Plaintiffs now bring

this action for breach of the Purchase Agreement to recover the millions of dollars

in Losses that they have wrongfully suffered.

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COUNT 1- BREACH OF CONTRACT/ANTICIPATORY REPUDIATION

55. Plaintiffs incorporate and restate the allegations in each of paragraphs

above as iffully set forth herein.

56. Plaintiffs and Members have a valid, enforceable contract in the form

of the Purchase Agreement.

57. The Purchase Agreement contains extensive contractual

indemnification provisions in Article VII requiring the Members to indemnifY,

defend, and hold harmless each of Plaintiffs for both (i) any breach of any

representation or warranty contained in the Purchase Agreement and (ii) for any

matter specifically identified on Schedule 7.2(a)(iv) to the Purchase Agreement.

Schedule 7.2(a)(iv) incorporates any matter on Schedule 2.25 of the Purchase

Agreement by reference. Schedule 2.25 identifies, inter alia, certain pre-Closing

DDAP inspections.

58. The Members' failure to disclose the violations identified in the DDAP

Notice and the actions, errors, and/or omissions giving rise to the AG Investigation,

breached the representations and warranties il1 Sections 2.17, 2.25(c), 2.25(k), and

2.26 of the Purchase Agreement. Further, certain of the items set forth in the DDAP

Notice arose out ofDDAP inspections identified on Schedule 2.25 of the Purchase

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59. Plaintiffs have fully performed their obligations under Article VII of

the Purchase Agreement by providing appropriate written notice of the

indemnification claims to the Members' Representative.

60. The Members' Representative has stated that the Members do not

intend to honor their indemnification obligations with respect to the indemnification

claims at issue. This constituted a breach or, at the very least, an anticipatory

repudiation of the Members' indenmification obligations under Article VII of the

Purchase Agreement. Further, the Members have breached or, at the very least, have

anticipatorily repudiated their obligation to permit Plaintiffs to recover their Losses

from the Escrow Deposit.

61. The Members' breach oftheir indemnification obligations has damaged

Plaintiffs because they have incurred Losses in the form of business intenuption,

remediation, and response costs due to the DDAP Notice and the AG Investigation.

62. Plaintiffs now sue the Members to recover the amounts for which the

Members are contractually required to indemnify Plaintiffs under the Purchase

Agt·eement, such payment to be made: first, from the amount of the Escrow Deposit,

and second, from the Members individually.

63. All conditions precedent to the bringing of this suit have occurred or

have been excused,

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COUNT II- SPECIFIC PERFORMANCE

64. Plaintiffs incorporate and restate the allegations in each of paragraphs

above as if fully set forth herein.

65. The Court should enter an order requiring the Members and/or the

Members' Representative to specifically perform their obligations under the

Purchase Agreement by executing joint instructions to the Escrow Agent for the

release of an amount from the Escrow Deposit equal to the amow1t of Plaintiffs'
'
Losses (or, if Plaintiffs' Losses are greater than the Escrow Deposit, for the release

of the entire Escrow Deposit to Plaintiffs).

66. Plaintiffs are ready, willing, and able to perform under the Purchase

Agreement by, among other things, executing joint written instructions to the

Escrow Agent for the release of the Escrow Deposit to Plaintiffs in the appropriate

amount. However, the Members and/or the Members' Representative have stated

that they will not agree to release the applicable amount of the Escrow Deposit at

the appropriate time.

67. The balance of equities tips in favor of Plaintiffs and in favor of

ordel"ing the Members and/or the Members' Representative to perform under the

Purchase Agreement. Their refusal to do so p1·events Plaintiffs from receiving the

benefit of their bargain; indeed, the reason the Escrow Deposit exists is to ensure the

Members' performance of their obligations to indemnify Plaintiffs for any Losses

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due to the breach of any representation or warranty in the Purchase Agreement.

Fulfilling that purpose is an equity that conclusively tips in favor of Plaintiffs.

68. For these reasons, the Court should order specific performance and

require the Members and/or the Members' Representative to execute the appropriate

joint instructions for the release ofthe appropriate amount of the Escrow Deposit to

Plaintiffs.

COUNT III- DECLARATORY RELIEF

69. In the alternative to Count II, pursuant to 10 Del. C. §§ 6501 and 6502,

Plaintiffs request a declaration from the Court that they are entitled to recover their

Losses from the Escrow Deposit until it is exhausted and that they are entitled to

receive payment of such amounts within two business days after the entry of the

Court's judgment. As described above in the paragraphs above, which are restated

and incorporated by reference, a dispute has arisen between the pal'ties as to these

two issues, for which the Court has jurisdiction to issue a determination of the

parties' rights.

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PRAYER FOR RELIEF

WHEREFORE, Plaintiffs respectfully request that this Court enter judgment

in favor of Plaintiffs as follows:

(a) Awarding Plaintiffs all Losses incurred as a result of any and all
breaches of representations and warranties in the Purchase Agreement
and/or as a result of the specific items listed on Schedule 7.2(a)(vi) to
the Purchase Agreement, including actual damages and attorneys' fees
and costs incurred in prosecuting the claims at issue in this case;

(b) Ordering the Members and/or the Members' Representative to

specifically perform their obligations under the Purchase Agreement by
executing the appropriate joint instructions for the release of the
appropriate amount of the Escrow Deposit (up to and including the
whole such Escrow Deposit) to Plaintiffs;

(c) Alternatively, ordering that Plaintiffs are entitled to recover their

Losses from the Escrow Deposit until it is exhausted and that Plaintiffs
are entitled to receive payment from the Escrow Deposit within two
business days after the entry of the Court's judgment;

(d) Awarding Plaintiffs their recoverable costs of Court;

(e) Awarding Plaintiffs pre-judgment and post-judgment interest; and

(f) Granting Plaintiffs such other and further relief as the Court deems just
and proper.

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DATED: August 10, 2018 DLA PIPER LLP (US)

Is/ John L. Reed

John L. Reed (l.D. No. 3023)
OF COUNSEL: Harrison S. Carpenter (I.D. No. 6018)
1201 North Market Street, Suite 2100
Robert M. Hoffman Wilmington, Delaware 19801
James C. Bookhout (302) 468-5700
DLA PIPER LLP (US) (302) 394·2341 (Fax)
1717 Main Street, Suite 4600 john.reed@dlapiper.com
Dallas, TX 75201 harrison.carpenter@dlapiper.com
(214) 743-4500
(214) 743-4545 (Fax)
rob.hoffman@dlapiper.com
james. bookhout@dlapiper .com Attorneys for Plaintiffs

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