Sanctuary Wealth wants an Indiana state court judge to reverse her earlier decision that EverNest Financial Advisors was within its rights to buy back Sanctuary’s stake in the firm after a company affiliate was hit with a FINRA fine.
In its motion to reconsider filed last week with Indiana Commercial Court Judge Christina Klineman, Sanctuary’s attorneys argued EverNest should be required to show that its board “in good faith” determined that the FINRA sanction negatively impacted its business.
“Whether the FINRA sanction could have a material adverse effect on EverNet’s business or goodwill is not a matter about which the Court should have to guess or make assumptions,” Sanctuary's filing read. “No evidence connects the dots between the FINRA 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, the Indiana-based EverNest included an option to buy back Sanctuary’s stake in the firm if a “triggering event” occurred.
But in September of that year, FINRA fined Sanctuary Securities (a broker/dealer subsidiary of Sanctuary) for selling clients risky private placements offerings; the firm agreed to pay $60,000, with restitution of $48,000, according to the FINRA settlement letter.
The FINRA settlement allegedly unnerved EverNest, and more than a year later, Management Partner Frank Esposito approached Sanctuary about buying back the firm’s management interest. The parties moved forward on a call-right process, with EverNest planning to buy back Sanctuary’s share at 80% of the stake’s valuation.
But Sanctuary allegedly balked when it got a report by an appraiser, causing it to believe the buyback 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 decided without a trial, Klineman agreed Sanctuary had breached its contract. However, she ruled a trial could be necessary to determine whether Sanctuary was correct in refusing to move forward because it felt the valuation was too low.
In its response, Sanctuary said that while the agreement between the firms didn’t define the phrase “material adverse effect,” courts evaluating the meaning agreed that there is a “heavy burden” on the party claiming one happened. According to Sanctuary, EverNest’s board needed to determine whether a materially adverse event occurred, and Sanctuary claimed there’s not much to support that assertion.
“For example, EverNest has designated no evidence suggesting that its clients or potential clients were concerned about, much less even aware of, the FINRA sanction,” the motion read. “EverNest has designated no evidence suggesting that its clients or potential clients 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 ruling that the firm acted in bad faith was “inconsistent” with its ruling that the consideration of the valuation may need a trial to sort out. But if the court found the valuation presented “disputed issues of material fact,” Sanctuary argued that may mean the call option wasn’t justified.
In a statement, a Sanctuary spokesperson reiterated that the valuation question needed 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 the court will allow the claim to continue into discovery so we can finally move forward with a fair and accurate divestiture of our stake in EverNest,” the spokesperson said.
Neither officials from EverNest nor its attorneys returned a request for comment prior to publication.
