CryoLife accuses On-X Life Technologies of fraud in counterclaim over $10m escrow account

CryoLife Inc. (NYSE:CRY) answered accusations from acquisition On-X Life Technologies that it’s trying to hold on to a $10 million escrow account from their merger last year with fraud charges of its own.

CryoLife paid $130 million for On-X in January 2016, including the escrow account, which was meant to cover “On-X’s indemnification obligations relating to its representations and warranties in the merger agreement,” according to a lawsuit filed in the Delaware Chancery Court by Fortis Advisors, the firm representing the On-X shareholders.

The escrowed cash was slated to be turned over to On-X a year after the deal closed, but on Jan. 18 CryoLife sent a claim notice saying it would hold on to the money to cover $17 million in losses it said it incurred “as a result of On-X committing multiple acts of financial fraud, violating European labeling regulations, failing to properly terminate and transition supply contracts, failing to maintain proper quality controls, and failing to disclose millions of dollars in other liabilities from litigation over employment and personal injury matters,” according to the complaint.

“CryoLife did not provide a single document in support of the vague allegations in its claim notice, and, to make matters worse, CryoLife thwarted any attempt by Fortis to investigate those allegations. Indeed, after serving the claim notice, CryoLife threatened the On-X shareholders with legal action if they provided Fortis, or its counsel, with any information regarding the allegations in the claim notice,” the lawsuit alleged. “Instead, in an email to Fortis, CryoLife demanded that any requests for information be directed solely to CryoLife. Yet, when Fortis directed its information requests to CryoLife, as it had been instructed to do, CryoLife refused to produce a single document supporting the allegations in the claim notice.”

The June 1 suit asked the Chancery Court to order the release of the $10 million held in escrow, judgments and awards for breach of contract, pre- and post-judgment interest and legal costs.

In its counter-claim, CryoLife said it turned up “several misrepresentations, omissions, actions, or failures by On-X prior to and in connection with the closing that have been detrimental to CryoLife,” including allegedly coercing its Italian distributor into purchasing more than $300,000 worth of products by threatening to revoke its distributorship.

“This extraordinary act resulted in an increased payment to the [shareholders] and a decreased value to CryoLife. Unfortunately, this example is only one of many instances of On-X’s wrongful conduct, and CryoLife continues to learn of additional issues and injury. While CryoLife’s resulting indemnifiable losses are still growing, they already are in excess of $10 million,” the company claimed in the counter-suit.

“Fortis, on behalf of the [shareholders], responded to these indemnification requests with a blanket denial of any obligation to CryoLife and assertion that such claims were brought in bad faith. Fortis asserted this conclusion without first having any interaction with CryoLife to discuss the basis for its claims. Despite the requirement in the merger agreement that Fortis ‘attempt to resolve’ its objections to CryoLife’s claims, Fortis has flatly refused to do so and has instead filed this complaint aimed at enabling the [shareholders] to shirk and renege on their indemnity obligations,” CryoLife alleged, according to court documents.

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