Clawbacks — When a Former Partner Has to Give Money Back

The buyout closed in March. The final installment is scheduled for four years out, the departing partner has moved, and the practice has settled into life without her. In November, a letter arrives. A federal relief program the practice received funds under during the pandemic has reviewed the practice’s eligibility, and a portion of the money is repayable. The dollars in question were received in a year when the departing partner was an owner, and they flowed through the distributions she took. The practice now owes them back. She does not, because nothing in the partnership agreement says she does.

That is the clawback problem in one paragraph, and government relief is only one of its faces. A payer audit lands 18 months after a departure, keyed to codes a former partner submitted. A regulatory repayment obligation surfaces for a period she practiced through. A liability crystallizes from conduct that occurred while she was an owner and was discovered after she was paid. In each case the money leaves the practice, and in each case the remaining partners bear all of it, including the share that funded somebody else’s buyout check.

The provision that fixes this is not exotic. It is a clawback right, drafted in advance, and the reason so few agreements carry one is that the scenario is hard to imagine until it happens. It became easy to imagine in 2020, when practices took relief funds under programs whose reporting, eligibility, and audit requirements continued to develop for years afterward. Whether a specific repayment obligation exists in a specific case is a determination for the practice’s accountant and counsel, made against the program’s own terms. What the agreement can do is settle in advance who bears it.

Draft the general right first, then the specific ones. The general right: where the practice is required to repay funds, or incurs a liability, arising from a period during which a former partner held an ownership interest, that partner bears her proportionate share, measured by her ownership percentage during the relevant period, and the practice may collect it by offsetting against any remaining payout installments and, past that, by direct demand. Say explicitly that the obligation survives the closing of the buyout, because a payout that has already been made cannot be recovered under a provision that expired at closing.

Then the specific ones, because generality invites argument. Government program repayment is the first: relief and assistance funds received during a partner’s tenure, repaid on a prorated basis if the practice must return them. Post-departure audit liability is the second, and it follows a different and better rule than pro rata. Payer takebacks traceable to an individual physician’s own documentation and coding belong to that physician rather than to the ownership group, which means the split follows who coded and who billed. That principle only works if the practice has already assigned individual coding responsibility in both documents—the partnership agreement and every physician employment agreement—so that the attribution is a term rather than an inference. Third, mutual indemnification allocates the liabilities that follow individual conduct to the individual: each partner holds the practice and her partners harmless for liability arising from her own misconduct, her own regulatory violations, and her own outside activities. Write it mutually. A one-way indemnity drafted by whoever held the pen is the clause that gets renegotiated at the worst possible moment.

Insurance stands in front of all of it wherever it reaches, and the agreement should say so, because indemnification between individual physicians is a last resort rather than a first one. The malpractice program and its tail, the employee-dishonesty and funds-transfer coverage that the practice’s financial controls install, and the cyber lines all pay before any partner’s personal assets are in the conversation. Confirming that sequence—coverage first, indemnity second—is part of what the annual insurance review is for.

Three drafting disciplines make a clawback provision usable rather than merely present. Bound it: state a survival period tied to the audit and lookback windows that actually apply, which vary by payer and by program, rather than leaving the obligation open forever. Cap it where the partners can agree on a cap, commonly at the amount of the buyout received, so a former partner’s exposure is knowable at the moment she signs. And structure the payout so that offsets are possible in the first place. This is the quiet argument for the five-year note that governs most large buyouts: a payment stream is a security interest that costs nothing to create. Where an agreement pays a departing partner in full at closing, add a holdback or escrow of a stated portion for a stated period, and say what releases it.

Procedure matters as much as substance, and the fairness runs in the direction people forget. A former partner asked to return money is entitled to know what she is repaying and to test it. Require prompt written notice of any audit, demand, or repayment obligation that could trigger the provision. Give her the right to participate in the defense or appeal at her own cost, and require her cooperation and reasonable access to records in return—an obligation that has to survive the departure, because the documentation she needs and the documentation the practice needs are the same documentation. Route disagreements into the dispute-resolution ladder the agreement already carries rather than into a new fight about forum. A clawback provision that lets the remaining partners determine liability, quantify it, and collect it without any of that will be resisted at exactly the moment it is invoked, and its enforceability will be tested on precisely that ground.

Which is the last point, and it is not a small one. Whether a clawback survives, how far it reaches, and whether it can be enforced against a former owner after closing depend on state law, on how the buyout was documented, and on the terms of the underlying program or payer contract. Those are counsel’s determinations. What the partnership can do is decide the allocation while it is hypothetical, in a year when the money has not yet been demanded and nobody at the table knows whose exit the provision will eventually price.

Red flags. No clawback provision, so current partners absorb the full cost of a repayment triggered by a period a former partner owned and profited from. Post-departure audit liability undefined, which turns an individual’s coding into a group liability. Individual coding responsibility absent from both documents, leaving nothing to attribute a takeback to. Indemnification drafted one way, or omitted, so individual misconduct becomes a shared expense. A payout structured entirely at closing, leaving no installment to offset against. And a provision with no notice, no participation right, and no survival period—which is a clause that will be litigated rather than applied.

A buyout paid in good faith can still be subject to clawback. Plan for it while it still describes nobody.