THE ECONOMICS LOOK GOOD
In 2011, Primcogent Solutions purchased Santa Barbara Medical Innovations (SBMI). Primcogent was a distributor of health and wellness products, and SBMI owned the exclusive distribution rights to the Zerona Diamond 2400, a medical laser that was being advertised as a noninvasive alternative to liposuction.
In its sales pitch, SBMI claimed revenue from the Zerona, manufactured by McKinney-based Erchonia Corp., was strong and only expected to go up. Sales were being given a boost by a contract with Groupon that was helping to market the product. Primcogent liked what it heard, and the two companies quickly closed the deal.
BUT SOMETHING DOES NOT ADD UP
As it turns out, Primcogent wasn’t told the entire story. After purchasing SBMI, it learned that many customers were unhappy with the Zerona and were returning it at an alarming rate. A short time later, Groupon canceled its contract with SBMI, which only added to its troubles. The financial burden brought about by these problems proved too much for Primcogent to bear, and the company filed for Chapter 11 bankruptcy in May of 2013. Months later, it filed for Chapter 7.
GETTING TO THE BOTTOM OF IT
Chris Hamilton and Hamilton Wingo were selected by the bankruptcy court to represent the United States Bankruptcy Trustee and handle Primcogent’s claim against SBMI and Erchonia. Through his investigation, Hamilton uncovered information showing SBMI knew before being acquired by Primcogent that customers were unhappy with the Zerona and that Groupon planned to terminate its contract.
The case was scheduled to be heard before a three-judge panel in a binding arbitration hearing. Erchonia chose to settle mere minutes before the hearing took place. Santa Barbara Medical Innovations did not. Although, after the six-day hearing ended and the judges handed down their verdict, it might have wished it had.The arbitrators awarded $17.1 million in favor of his clients. Hamilton didn’t stop there. Days later, he filed a breach of contract, insurance coverage, and bad faith claims against Carolina Casualty Insurance Company, which provided SBMI with business insurance, for failing to tender their full insurance policy before trial. Carolina Casualty had denied coverage of the claim, contending the lawsuit was not covered by the insurance policy and was subject to multiple policy exclusions. Hamilton obtained a summary judgment that the $17.1 million award was covered and a final judgment against Carolina Casualty for breach of contract damages. Hamilton continues to pursue additional claims for bad faith and punitive damages against Carolina Casualty, which are still pending.
The arbitration award was affirmed by the United States Court of Appeals for the Fifth Circuit, where the panel admonished Hamilton’s opposing counsel, “I’d be embarrassed to be taking the position you are taking in this case. I would be absolutely embarrassed for you and your law firm …”
The 5th Circuit affirmed the judgment in full on the same day as oral arguments.