Valley Joist BD Holdings, LLC v. Ebsco Industries, Inc. ( 2021 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
VALLEY JOIST BD HOLDINGS, LLC, a §
Delaware limited liability company, §
§ No. 105, 2021
Plaintiff Below, §
Appellant, § Court Below – Superior Court
§ of the State of Delaware
v. §
§ C.A. No. N20C-07-072
EBSCO INDUSTRIES, INC., §
§
Defendant Below, §
Appellee.
Submitted: October 13, 2021
Decided: December 20, 2021
Before VAUGHN, TRAYNOR and MONTGOMERY-REEVES, Justices.
Upon appeal from the Superior Court. REVERSED and REMANDED.
Joseph B. Cicero, Esquire, Aidan T. Hamilton, Esquire, CHIPMAN BROWN CICERO &
COLE, LLP, Wilmington, Delaware; Jeffrey H. Zaiger, Esquire, Judd Lindenfeld, Esquire,
ZAIGER LLC, Stamford, Connecticut; for Appellant Valley Joist BD Holdings, LLC.
John P. DiTomo, Esquire, Sara Toscano, Esquire, MORRIS, NICHOLS, ARSHT, &
TUNNELL LLP, Wilmington, Delaware; for Appellee EBSCO Industries, Inc.
1
MONTGOMERY-REEVES, Justice:
This appeal arises from a dispute over a Stock Purchase Agreement (“SPA”) formed
between Valley Joist BD Holdings, LLC (“VJ Holdings”) and EBSCO, Industries Inc.
(“EBSCO”). In December 2017, EBSCO sold all of its stock in Valley Joist, Inc. to VJ
Holdings. After closing, VJ Holdings discovered structural defects in one of the buildings
acquired as part of the transaction. In July 2018, VJ Holdings sought indemnification from
EBSCO through the procedure outlined in the SPA. Two years after receiving no response
to the notice, VJ Holdings filed suit in the Superior Court for breach of contract and fraud in
the inducement.
The Superior Court granted EBSCO’s motion to dismiss the fraud claim for failure to
plead sufficient facts to satisfy Superior Court Civil Rule 9(b). The court also dismissed the
breach of contract claim as barred under the SPA’s one-year contractual statute of limitations.
VJ Holdings filed a timely appeal raising two issues, both relating to the dismissed fraud
claim: first, whether VJ Holdings pled sufficient facts to show pre-closing knowledge of
fraud; and second, whether the Superior Court properly relied on a bootstrapping doctrine to
dismiss the fraud claim.
For the reasons provided below, the Superior Court’s March 10, 2021 order granting
a motion to dismiss is REVERSED and REMANDED for proceedings consistent with this
opinion. The allegations in the complaint, when viewed in the light most favorable to the
non-moving party, lead to a reasonable inference that EBSCO knew of the structural defects
2
in the building at the time of closing the SPA, contrary to its representation in the SPA that
the building was in good operating condition and repair. As for the bootstrapping argument,
a review of the Superior Court’s opinion reveals that the court did not rely on a bootstrapping
doctrine to dismiss the fraud claim.
I. BACKGROUND
A. The Parties
Appellant VJ Holdings is a Delaware limited liability company that served as an
acquisition vehicle for the private equity firm, Black Diamond Capital Management, LLC.1
Appellee EBSCO is a Delaware corporation with its principal place of business located in
Birmingham, Alabama.2
Valley Joist, Inc. is the entity VJ Holdings acquired through the SPA. After the
purchase, Valley Joist Inc., was converted to a Delaware limited liability company and re-
named Valley Joist, L.L.C. (“Valley Joist”).3 Valley Joist custom builds steel joist and deck
product systems that are critical components of roofing and flooring systems.4 Valley Joist
owns and operates two facilities for the design and manufacture of its joist and deck products
known as Valley Joist West, located in Fernley, Nevada, and Valley Joist East, located in Fort
Payne, Alabama.5 At the center of the dispute is Building #14 at the Valley Joist East facility,
1
Answering Br. 7.
2
App. to Opening Br. A000011 (hereinafter “A_”).
3
A000011-12.
4
A000012.
5
Id.
3
which serves as a large manufacturing building. Building #14 has three crane bays, and each
crane bay has one overhead crane.6
B. Execution of the Stock Purchase Agreement
On December 29, 2017, VJ Holdings and EBSCO entered into the SPA. VJ Holdings
purchased Valley Joist, Inc. from EBSCO for $20 million.7 Section 3.4(a) of the SPA states
that EBSCO represents and warrants that “the Assets of [Valley Joist] (including the Real
Property and buildings, fixtures, mechanical and other systems and improvements thereon)
are in good operating condition and repair, ordinary wear and tear excluded, and except for
any ordinary, routine maintenance and repair required that in sum are consistent with past
practices.”8 VJ Holdings represented and warranted that it was “provided adequate access
to the personnel, premises, and properties, Assets, books and records, and other documents
and data of the Company” and that it did not conduct any formal inspections of the structural
integrity of any Valley Joist buildings.9
C. Problems with the Cranes at Building #14
In early 2018, Valley Joist began experiencing problems with the overhead cranes in
Building #14 at Valley Joist East. The cranes would become misaligned and frequently
needed to be shut down for repair. This caused production to decline and resulted in
6
A000013.
7
Id.; A000068 at §2.2(a).
8
A000076.
9
A000014; A000091 at §4.7; Opening Br. Ex. A at 3.
4
incidental costs of $500,000.10 Valley Joist hired a structural engineer to inspect the building.
In a report dated July 20, 2018, the engineer concluded that “Building #14 was not built with
the appropriate structural support for the overhead cranes and that the weight of such cranes
could not be supported by the structure.”11 After the structural engineer determined that the
building was beyond repair to support the weight of the cranes, Valley Joist constructed a
new building, which cost approximately $7.5 million.12
On July 3, 2018, VJ Holdings sent a notice of direct claim for indemnification to
EBSCO through the procedure outlined in Section 6.7 of the SPA.13 EBSCO did not respond
and thus rejected the claim.14 Two years later, on July 8, 2020, VJ Holdings filed suit in the
Superior Court, asserting claims for breach of contract and fraud in the inducement.15 VJ
Holdings sought over $11 million in damages.16
E. The Superior Court Proceedings and Decision
EBSCO filed a motion to dismiss on October 21, 2020, arguing, among other things,
that VJ Holdings failed to adequately plead that EBSCO possessed the requisite knowledge
to state a fraud claim.17 EBSCO acknowledged that the complaint included four allegations
10
A000016.
11
A000017.
12
A000019.
13
Id.
14
A000020; see also Opening Br. Ex. A at 5.
15
Id.; A000021-25.
16
A000024; see also Opening Br. Ex. A at 17.
17
Opening Br. Ex. A at 5,17.
5
of pre-closing knowledge: (1) a May 2017 capital expenses spreadsheet detailing $550,000
allocated for roof repairs ($450,000) and crane beams ($100,000);18 (2) a September 20,
2017 email from a Valley Joist employee to an EBSCO employee stating that one crane will
not move in a southern direction;19 (3) a November 8, 2018 email of a Valley Joist employee
sending EBSCO employees a list of scheduled capital expenditures that EBSCO had
disclosed to Valley Joist;20 and (4) a transition employee’s (Josh Brasher)21 statements to a
senior Valley Joist employee (Keith Juedemann) that EBSCO knew of structural problems
with Building #14’s cranes months prior to the sale.22 The complaint also alleges that in
April or May 2018, Brasher showed Juedemann repair quotes EBSCO received before
closing, which indicated “it would cost $3 to $4 million to repair the defective condition of
Building #14.”23
EBSCO argued that the first three allegations were vague and unrelated to the actual
structural issue. EBSCO argued that the statements from the transition employee were
insufficient because the quote mentioned in the complaint referred to a quote that Valley Joist
received after closing. EBSCO attached to their motion to dismiss a repair quote dated
18
A000018.
19
Id.
20
Id.
21
The employee was identified in the SPA and these proceedings as Josh Brasher. A000128;
A000219 at 9:21-22.
22
A000017.
23
A000017-18.
6
March 16, 2018 (almost three months after closing) from Garrison Steel Erectors, Inc.
addressed to Jonathan Dooley of Valley Joist.24
The court concluded that the complaint did not meet the heightened pleading
requirements of Superior Court Civil Rule 9(b) and dismissed the fraud claim for failing to
plead “EBSCO’s pre-closing knowledge with particularity.”25 The court dismissed the
contract claim because it was filed beyond the one-year statute of limitations negotiated in
the SPA.26 The court observed that VJ Holdings appeared to attempt to circumvent the
shortened statute of limitations period by rebranding its contract claim as a fraud claim, but
the court did not rely on the bootstrapping doctrine to dismiss the fraud claim.27 VJ Holdings
filed a timely appeal challenging the Superior Court’s decision to dismiss the fraud claim.
II. STANDARD OF REVIEW
This Court reviews questions of law and contractual interpretation de novo.28 The
decision to grant a motion to dismiss under Superior Court Rule 12(b)(6) is reviewed de
novo.29 The complaint is viewed “in the light most favorable to the non-moving party,” and
24
A000138-41.
25
Opening Br. Ex. A at 17.
26
Id. Appellants do not appeal the dismissal of the contract claim.
27
A000221 at 11: 2-13; Opening Br. Ex. A at 16.
28
CompoSecure, L.L.C. v. CardUX, LLC, 206 A.3d 807, 816 (Del. 2018) (quoting Gatz Props., LLC
v. Auriga Capital Corp., 59 A.3d 1206, 1212 (Del. 2012)).
29
See Clinton v. Enterprise Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009).
7
all well-pled allegations and the reasonable inferences flowing from those allegations are
accepted as true.30
III. ANALYSIS
On appeal, VJ Holdings contends that the Superior Court erred in granting EBSCO’s
motion to dismiss the fraud in the inducement claim.31 VJ Holdings raises two arguments:
(1) the Superior Court erred by holding that the complaint failed to plead EBSCO’s pre-
closing knowledge sufficient to satisfy Superior Court Civil Rule 9(b);32 and (2) the trial
court erred by relying on the “bootstrapping doctrine” to dismiss the fraud claim.33
A. The Fraud Claim Satisfies Rule 9(b)
To state a claim for fraud, a plaintiff must allege: (1) a false representation made by
the defendant; (2) the defendant knew or believed the representation was false or was
recklessly indifferent to its truth; (3) the defendant intended to induce the plaintiff to act or
refrain from acting; (4) the plaintiff acted or refrained from acting in justifiable reliance on
the representation; and (5) damage resulted from such reliance.34 The pleading standards for
fraud claims are heightened. Superior Court Civil Rule 9(b) provides that “[i]n all averments
of fraud . . . , the circumstances constituting fraud . . . shall be stated with particularity.” The
factual circumstances that must be stated with particularity refer to the time, place, and
30
Id. at 895.
31
Reply Br. at 1-2.
32
Id. at 3.
33
Id. at 17.
34
Prairie Capital III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 49 (Del. Ch. 2015).
8
contents of the false representations; the facts misrepresented; the identity of the person(s)
making the misrepresentation; and what that person(s) gained from making the
misrepresentation.35 Rule 9(b) provides that “knowledge and other condition of mind of a
person may be averred generally.”36 “Although Rule 9(b) provides that ‘knowledge ... may
be averred generally,’ where pleading a claim of fraud has at its core the charge that the
defendant knew something, there must, at least, be sufficient well-pled facts from which it
can reasonably be inferred that this ‘something’ was knowable and that the defendant was in
a position to know it.”37
The Superior Court held that VJ Holdings satisfied several pleading requirements.
“VJ Holdings has pleaded that EBSCO made a fraudulent misrepresentation by stating that
Valley Joist ‘Assets’ were in ‘good operating condition and repair.’”38 This alleged
misrepresentation “was made in Section 3.4(a) of the SPA,” and it “was made on December
29, 2017—the date the SPA closed.”39 Further, “VJ Holdings has alleged that EBSCO made
the misrepresentation ‘with the specific intent to induce VJ Holdings to act on the purchase
of Valley Joist and to refrain from inspecting the condition of the buildings and fixtures at
Valley Joist East, including Building #14 and its cranes.”40 However, the court held that VJ
35
Browne v. Robb, 583 A.2d 949, 955 (Del. 1990); Metro Commc’n Corp. BVI v. Advanced
Mobilecomm Techs. Inc., 854 A.2d 121, 144 (Del. Ch. 2004).
36
Super. Ct. Civ. R. 9(b).
37
Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 208 (Del. Ch. 2006).
38
Opening Br. Ex. A at 12.
39
Id.40
Id. at 13.
9
Holdings failed to demonstrate facts sufficient to support a reasonable inference that EBSCO
knew the representations were false at the time they were made, thus failing to plead
“EBSCO’s pre-closing knowledge with particularity.”41
With respect to knowledge, the court reasoned that it could not consider a March 2018
invoice as evidence of pre-closing knowledge of the defects with Building #14 because the
invoice was dated after the closing of the SPA and provided no insight into what EBSCO
knew at the time of closing.42 The court held that the remaining assertions were not specific
enough to the structural problems.43 We disagree with the Superior Court’s analysis
regarding the allegations of pre-closing knowledge.
To plead knowledge for a fraud claim, a plaintiff must allege facts from which the
court can reasonably infer that the misrepresentation was “knowable and the defendants were
in a position to know it.”44 The complaint alleges that before “the expiration of the term of
the Transition Employee’s service under the TSA, Valley Joist’s new management team was
told by the Transition Employee that the problems with the Building #14 cranes were known
to EBSCO months prior to its sale of the business.” 45 Paragraph 39 of the complaint adds:
41
Id. at 16.
42
Id.
43
Id. at 15-16.
44
Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006); see also
Metro Commc’n Corp. BVI, 854 A.2d at 144 (Del. Ch. 2004) (“While knowledge may be averred
generally, where pleading a claim of fraud that has at its core the charge that the defendant knew
something, there must, at least, be sufficient well-pleaded facts from which it can reasonably be
inferred that this ‘something’ was knowable and that the defendant was in a position to know it.”).
45
A000017.
10
In or around April or May 2018, the Transition Employee
informed Keith Juedemann (a senior Valley Joist employee) that
EBSCO knew about the inadequate structural support for the
overhead cranes prior to the sale. The Transition Employee also
showed Mr. Juedemann the quotes EBSCO received indicating
that it would cost $3 to $4 million to repair the defective
condition of Building #14.46
Thus, the complaint alleges that before closing EBSCO knew of the structural issues with
Building #14, in particular, and EBSCO knew that it would cost millions of dollars to repair
Building #14.47 Valley Joist learned all this information from EBSCO’s own transition
employee.
The misrepresentation the Superior Court identified in the SPA is that “the Assets
(including the Real Property and buildings, fixtures, mechanical and other systems and
improvements thereon) were in good operating condition and repair, ordinary wear and tear
excluded.”48 Statements from the EBSCO employee designated to lead the transition
admitting EBSCO’s pre-closing knowledge of the structural issues, coupled with EBSCO’s
pre-closing receipt of quotes to repair structural damage at Building #14 for $3-4 million,
allege knowledge sufficient to survive a motion to dismiss.
In determining that these allegations were insufficient, the court appears to have
assumed that Paragraph 39 referred to one repair quote and that repair quote was the same
46
A000017-18.
47
Id.
48
Opening Br. Ex. A at 8; A000076 (emphasis added).
11
repair quote that Appellee attached to its motion to dismiss.49 That repair quote was dated
three months after the closing and addressed to a Valley Joist employee.
The court erred by relying on this repair quote. First, this repair quote was not
attached to the complaint, and the court did not determine that it was incorporated by
reference. Further, VJ Holdings argued that this quote was not one of the quotes referred to
in Paragraph 39 of the complaint.50 As such, the court should not have considered the quote
to resolve a motion to dismiss.51 Second, the complaint refers to multiple quotes, not just
one; the complaint states that the quotes were provided to EBSCO, not Valley Joist; and the
quotes provided a range of $3 to 4 million in repair costs, not just $3 million. Thus, the
complaint appears to refer to different quotes, and it is unclear why this quote would undercut
the allegations in the complaint.
When the averments are taken as a whole, they satisfy the particularity requirement,
allowing the complaint to survive dismissal and the action to proceed to
discovery. Specifically, allegations that the EBSCO transition employee, Brasher, told
Juedemann that EBSCO knew of the structural damage at Building #14 before closing and
49
See Opening Br. Ex. A at 15.
50
A000246.
51
“If, on a motion . . . to dismiss for failure of the pleadings to state a claim upon which relief can
be granted, matters outside the pleading are presented to and not excluded by the Court, the motion
shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties
shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule
56.” Super. Ct. Civ. R. 12(b).
12
received quotes before closing estimating that repairs would cost $3 to 4 million were
sufficient to allege knowledge and defeat a motion to dismiss.
B. The Trial Court Did Not Dismiss the Fraud Claim Under the
Bootstrapping Doctrine.
VJ Holdings argues that the Superior Court erred by relying on the bootstrapping
doctrine to dismiss its fraud claim. VJ Holdings leans heavily on the one sentence in the
Superior Court’s opinion: “It appears VJ Holdings is attempting to circumvent the negotiated
shortened statute of limitations period by re-casting its breach of contract claim as a fraud
claim.”52 However, this observation was not the reason the court dismissed the fraud claim.
As the court states in the very next sentence, “the [c]ourt finds that VJ Holdings . . . failed to
plead EBSCO’s pre-closing knowledge with particularity. . . . Therefore, the fraud claim
must be dismissed.”53 Thus, the bootstrapping doctrine had no bearing on the court’s
determination about the vitality of the fraud claim.
IV. CONCLUSION
For the reasons provided above, the judgment of the Superior Court is REVERSED
and REMANDED for proceedings consistent with this ruling.
52
Opening Br. Ex. A at 16.
53
Id.
13