Sanctuary Wealth is asking an Indiana state court judge to reverse her earlier ruling that EverNest Financial Advisors was within its rights to buy Sanctuary's shares in the firm after an affiliate of the company was hit with a FINRA fine.
In its motion for reconsideration filed last week with Indiana Commercial Court Judge Christina Klineman, lawyers for Sanctuary argued that EverNest should be required to show that its board “in good faith” determined that the FINRA sanction adversely affected in her business.
“Whether FINRA's sanction could have a material adverse effect on EverNet's business or goodwill is not a matter for the Court to speculate or make assumptions about,” Sanctuary's filing said. “No evidence connects the dots between FINRA's sanction and any adverse economic effect on EverNest's business or goodwill, much less a material adverse effect.”
In 2022, Sanctuary Wealth purchased a 20% membership interest in EverNest. However, Indiana-based EverNest included an option to buy Sanctuary's shares in the firm if a “trigger event” occurred.
But in September of that year, FINRA fined Sanctuary Securities (a broker/dealer subsidiary of Sanctuary) for selling clients risky private placement offers; the firm agreed to pay $60,000, with a return of $48,000, according to the FINRA settlement letter.
The FINRA settlement reportedly troubled EverNest, and more than a year later, Managing Partner Frank Esposito approached Sanctuary to buy the firm's management interests. The parties moved forward in a fair call process, with EverNest planning to buy Sanctuary's stock at 80% of the stock's valuation.
But Sanctuary allegedly stumbled when it received a report from an appraiser, leading it to believe the purchase price was too low, according to court documents. EverNest responded by filing a lawsuit against Sanctuary earlier this year.
In a motion to see if the case could be settled out of court, Klineman admitted that Sanctuary breached its contract. However, she ruled that a trial may be necessary to determine whether Sanctuary was correct in refusing to go ahead because it thought the valuation was too low.
In its response, Sanctuary said that while the agreement between the firms did not define the phrase “material adverse effect,” courts assessing the meaning agreed that there was a “heavy burden” on the party alleging that such occurred. According to Sanctuary, EverNest's board had to determine whether a material adverse event had occurred, and Sanctuary contended that there was little to support that assertion.
“For example, EverNest has not identified any evidence suggesting that its customers or potential customers were concerned about, much less aware of, FINRA's sanction,” the motion said. “EverNest has not established any evidence suggesting that its customers or potential customers knew that there was a contractual relationship between EverNest and Sanctuary, much less the nature of the business relationship between EverNest and Sanctuary.”
According to Sanctuary, the court's decision that the firm acted in bad faith was “inconsistent” with its decision that the valuation review may need a trial to resolve. But if the court found that the appraisal presented “disputable issues of material fact,” Sanctuary argued, that could mean the purchase option was not warranted.
In a statement, a Sanctuary spokesperson reiterated that the valuation issue needs to be resolved.
“Fundamentally, establishing a fair valuation of the shares at the heart of this dispute has always been what this case is about, and we are confident that the court will allow the claim to proceed pending discovery, so that finally we can move forward with a fair and accurate issue. the sale of our shares in EverNest,” the spokesperson said.
Neither officials from EverNest nor its attorneys returned a request for comment before publication.