LVI Group Investments, LLC v. NCM Group Holdings, LLC ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LVI GROUP INVESTMENTS, LLC, )
)
Plaintiff, )
)
v. ) C.A. No. 12067-VCG
)
NCM GROUP HOLDINGS, LLC, )
SUBHAS KHARA, EVERGREEN )
PACIFIC PARTNERS, L.P., )
EVERGREEN PACIFIC PARTNERS )
GP, LLC, EVERGREEN PACIFIC )
PARTNERS II, L.P., EVERGREEN )
PACIFIC PARTNERS II GP, L.P., )
EVERGREEN PACIFIC PARTNERS II )
GP, LLC, EVERGREEN PACIFIC )
PARTNERS MANAGEMENT )
COMPANY, INC., TIMOTHY )
BRILLON, MICHAEL NIBARGER, and )
TIMOTHY BERNARDEZ, )
)
Defendants. )
)
)
NCM GROUP HOLDINGS, LLC, )
Counter-Plaintiff, )
)
v. )
LVI GROUP INVESTMENTS, LLC, )
SCOTT STATE, PAUL CUTRONE, )
NORTHSTAR GROUP HOLDINGS, )
LLC, LVI PARENT CORP., BRIAN )
SIMMONS, ROBERT HOGAN, and )
CHS PRIVATE EQUITY V, L.P. )
)
)
Counter-Defendants. )
MEMORANDUM OPINION
Date Submitted: September 4, 2019
Date Decided: December 31, 2019
Rudolf Koch, Matthew W. Murphy, and Matthew D. Perri, of RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Steven C.
Florsheim, Greg Shinall, Daniel A. Shmikler, Michael G. Dickler, and Trevor K.
Scheetz, of SPERLING & SLATER, P.C., Chicago, Illinois, Attorneys for
Plaintiff/Counter-Defendant LVI Group Investments, LLC.
Richard D. Heins, and Philip Trainer, Jr., of ASHBY & GEDDES, Wilmington,
Delaware; OF COUNSEL: Stephen Novack, Donald A. Tarkington, Andrew D.
Campbell, Elizabeth C. Wolicki, and Yvette V. Mishev, of NOVACK AND MACEY
LLP, Chicago, Illinois, Attorneys for Defendant/Counter-Plaintiff NCM Group
Holdings, LLC, and Defendants Evergreen Pacific Partners, L.P., Evergreen Pacific
Partners II, L.P., Evergreen Pacific Partners GP, LLC, Evergreen Pacific Partners
II GP, L.P., Evergreen Pacific Partners II GP, LLC, Evergreen Pacific Partners
Management Company, Inc., Timothy Brillon, Michael Nibarger, and Timothy
Bernardez.
Peter B. Ladig, of BAYARD P.A., Wilmington, Delaware, Attorneys for
Defendant/Counter-Plaintiff NCM Group Holdings, LLC as to Claims Against Brian
Simmons, Robert Hogan, and CHS Private Equity V, L.P.
John A. Sensing, of POTTER ANDERSON & CORROON LLP, Wilmington,
Delaware; OF COUNSEL: John J. Quinn, THE LAW OFFICES OF JOHN J.
QUINN; Dylan P. Kletter and Kelsey D. Bond, of BROWN RUDNICK LLP,
Hartford, Connecticut, Attorneys for Defendant Subhas Khara.
Thomas A. Uebler and Kerry M. Porter, of MCCOLLUM D’EMILIO SMITH
UEBLER LLC, Wilmington, Delware; OF COUNSEL: Jeffrey H. Bergman of
MANDELL MENKES LLC, Chicago, Illinois, Attorneys for Brian Simmons, Robert
Hogan, and CHS Private Equity V LP.
GLASSCOCK, Vice Chancellor
2
This is the latest chapter in the complicated legal saga resulting from the
creation of a demolition company, NorthStar. The parties and related entities are
described in detail below. Sufficient to this introductory exposition is that NorthStar
was formed by a combination of two large demolition contractors, which can be
identified generally as LVI and NCM. After the merger, the resulting demolition
company was known as NorthStar, and the LVI and NCM entities remained as
holding companies, containing their respective interests in NorthStar.
These ownership interests in NorthStar were determined in part by the
respective EBITDAs of the component companies. The business of these demolition
companies involved long-term—often multi-year—projects. Moreover, payment by
the owner of the property being demolished, or the contractor with which LVI and
NCM subcontracted, was only partly in cash. The business model, in fact, was for
the demolition company to monetize each contract by removing and selling valuable
scrap, the value of which was estimated at the beginning of each job. Because of the
nature of these businesses, then, accounting was somewhat complex. As described
in some detail below, the value of any job in a given accounting period was the result
of allocation of costs and revenues incurred and estimated, and gave room for both
good-faith error and (as alleged by both parties) fraud in connection with the
computing of the interests of LVI and NCM in NorthStar.
Despite its name, NorthStar, starting soon after formation, had, in fact, a
trajectory: downward. 1 LVI and NCM have sued each other and related individuals
and entities, alleging the fraud referenced above. Much motion practice has
resulted. 2 This Memorandum Opinion addresses four motions for Summary
Judgment. The results are below.
Equity enthusiasts, 3 and students of Anglo-American legal history generally,
should they persevere in digesting this Decision, will note that what follows involves
tort claims in the context of a contract, and parties pursuing legal issues in way of
damages; those readers may wonder why such a clearly legal matter has been
imposed on this court of equity. At this action’s long-ago conception, the Plaintiff
and Counter-Plaintiff contemplated reallocation of their interests in NorthStar, an
equitable remedy. Thus, equitable jurisdiction was present, and litigant’s efficiency
requires that the matter remain in Chancery.
1
NorthStar’s performance was, in fact, dis-asterous.
2
See LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2018 WL 1559936 (Del. Ch. Mar. 28,
2018); LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2017 WL 3912632 (Del. Ch. Sept. 7,
2017); LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2017 WL 1174438 (Del. Ch. Mar. 29,
2017).
3
Some exist.
2
I. BACKGROUND 4
A. Parties and Relevant Non-Parties
Plaintiff and Counter-Defendant LVI Group Investments, LLC (“LVI” or
“LVI LLC”) is a Delaware limited liability company. 5 Counter-Defendant LVI
Parent Corp. (“LVI Parent”) is a Delaware corporation. 6 LVI Parent operated
through its subsidiaries and sat at the head of the LVI family of entities until shortly
before the Merger, when it created LVI LLC. 7 Where pertinent, I strive to
distinguish the LVI entities by referring specifically to “LVI LLC” and “LVI
Parent.” Otherwise, when referring generally to the pre-merger operations of the
LVI family of companies, or to allegations by and against the Plaintiff, I refer simply
to “LVI.”
Defendant and Counter-Plaintiff NCM Group Holdings, LLC (“NCM”) is a
Delaware limited liability company. 8
4
I base the facts for this summary judgment ruling on the evidence submitted under affidavit with
the parties’ papers.
5
Transmittal Aff. of Hayley M. Lenahan in Support of the Defs.’ Br. In Support of Their Mot. for
Summ. J., Docket Items (“D.I.”) 654–58, 686–90, 715 (“Lenahan Aff.”), Ex. 1, Ans. & Affirmative
Defenses to LVI Grp. Invs., LLC’s Verified Am. Compl. (“EPP Ans.”), ¶ 6.
6
Transmittal Aff. of Matthew D. Perri, Esq. in Support of LVI Grp. Invs., LLC’s Opening Br. In
Support of Its Mot. for Summ. J., D.I. 667–69, 719 (“Perri Aff.”), Ex. 15, Contribution Agreement
by and among NCM Grp. Holdings, LLC, LVI Grp. Invs. LLC, NorthStar Grp. Holdings, LLC, &
LVI Parent Corp. (“Contribution Agreement”), Preamble.
7
See id. Recitals.
8
Id. Preamble.
3
 Defendant Subhas Khara was NCM’s former President and CEO. 9
Defendants Evergreen Pacific Partners, L.P. and Evergreen Pacific Partners
II, L.P. (the “EPP Funds”) are Delaware limited partnerships. 10 Evergreen Pacific
Partners GP, LLC and Evergreen Pacific Partners II GP, LLC (the “EPP GPs”) are
general partners to the EPP Funds and are Delaware limited liability companies. 11
Evergreen Pacific Partners II GP, L.P. is a Delaware limited partnership. 12
Evergreen Pacific Partners Management Company, Inc. (“EPP Management”) is a
Delaware corporation. 13 It provides administrative support to the EPP Funds and
the EPP GPs. 14 The EPP Funds are significant equity owners in NCM. 15
Defendants Timothy Brillon, Michael Nibarger, and Timothy Bernardez are
individuals who work with the EPP entities. 16 Brillon is the CFO and CCO of EPP
9
EPP Ans., ¶ 8.
10
Id. ¶ 9.
11
Id.
12
Id.
13
Id.
14
Lenahan Aff., Ex. 5, Dep. of Michael A. Nibarger (“Nibarger Dep.”), at 45:22–46:5. Because
the parties sometimes include different portions of depositions in different exhibits, where
relevant, I include a reference to the exhibit where the cited portion of the deposition may be found,
even where the deposition as a whole has previously been cited.
15
See EPP Ans., ¶ 9 (detailing ownership stake of EPP Funds in NCM at the time of the
transaction); see also Transmittal Aff. of John A. Sensing, D.I. 659–63 (“Sensing Aff.”), Ex. 9,
Confidential Information Mem. prepared by Houlihan Lokey, at 12 (providing graphic of
NorthStar corporate structure showing ownership interest of EPP).
16
EPP Ans., ¶¶ 10–12.
4
Management and also a member of the EPP GPs. 17 Nibarger is a Vice President and
Secretary of EPP Management, co-founder of the EPP Funds, and member of the
EPP GPs. 18 Bernardez is a co-President of EPP Management, co-founder of the EPP
Funds, and a member of each of the EPP GPs. 19 I refer to the EPP Funds, the EPP
GPs, EPP Management, and Brillon, Nibarger, and Bernardez collectively as “EPP.”
CHS Private Equity V L.P. (“CHS”) is a Delaware limited partnership. 20
Brian Simmons and Robert Hogan are partners of CHS. 21 I refer to Simmons,
Hogan, and CHS collectively as the “CHS Defendants.” CHS is one of several
private equity owners of LVI. 22
Nominal Defendant NorthStar Group Holdings, LLC (“NorthStar”) is a
Delaware limited liability company. 23 It was the creation of NorthStar by LVI and
NCM that was the impetus for this legal action.
17
Id. ¶ 12; Lenahan Aff., Ex. 7, Dep. of Tim Brillon (“Brillon Dep.”), at 13:20–14:10.
18
EPP Ans., ¶ 10; Nibarger Dep., at 7:21–8:4.
19
EPP Ans., ¶ 11; Lenahan Aff., Ex. 6, Dep. of Timothy D. Bernardez (“Bernardez Dep.”), at
75:10–76:13.
20
Def. NCM Grp. Holdings, LLC’s Ans., Affirmative Defenses and Third Am. Verified Countercl.
to LVI Grp. Invs., LLC’s Verified Am. Compl., D.I. 789 (“NCM Countercl.”), ¶ 12.
21
Id. ¶¶ 13–14.
22
See Sensing Aff., Ex. 9, Confidential Information Mem. prepared by Houlihan Lokey, at 12
(providing graphic of NorthStar corporate structure showing CHS’ ownership interest in LVI).
23
Lenahan Aff., Ex. 8, Counter-Def. LVI Parent Corp.’s Ans. & Affirmative Defenses to NCM
Grp. Holdings, LLC’s Sec. Am. Verified Countercl. (“LVI Parent Ans.”), ¶ 11; EPP Ans. ¶ 18.
5
B. Factual Background
1. LVI and NCM Merge to Form NorthStar
Prior to their merger, LVI and NCM were two of the United States’ largest
demolition and remediation companies, operating nationwide. 24 Their business
models were similar. Both companies made money through two primary channels:
site owners paid to have properties demolished, and the companies then retained and
resold salvage materials such as steel, copper, alloys, and equipment from the
building sites. 25 Both companies operated through a network of branch offices, each
overseen by a branch manager. 26 The branch managers, in turn, received reports
from project managers who supervised demolitions at particular sites. 27
In 2013, LVI and NCM entered into negotiations regarding a potential
business combination. 28 Both parties undertook extensive due diligence. 29 This
process culminated on April 23, 2014, when NCM, LVI LLC, LVI Parent, and
24
Lenahan Aff. Ex. 3, Expert Report of Louis G. Dudney, CPA/CFF, dated March 26, 2018
(“Dudney Report”), at 5; see also EPP Ans., ¶ 1.
25
See Dudney Report, at 18–20.
26
Id. at 15 (“NCM manage[d] its operations using a regional model with branch offices and
satellite offices to provide broad geographic coverage and local market expertise”); Lenahan Aff.,
Ex. 11, Dep. of John Leonard (“Leonard Dep.”), at 18:14–21 (describing LVI branch manager
responsibilities as “reviewing estimates, overseeing the execution of projects, and direct oversight
of the [profits and losses] for the . . . office.”).
27
Lenahan Aff., Ex. 12, Dep. of Bryn DiLoreto (“DiLoreto Dep.”), at 29:15–30:6 (describing
project manager duties).
28
EPP Ans., ¶ 18.
29
See, e.g., Perri Aff., Ex. 1, Dep. of Scott State (“State Dep.”), at 89:21–24, 96:1-20; Perri Aff.,
Ex. 2, Brillon Dep., at 209:6–12, 266:2–277:22.
6
NorthStar entered an agreement (the “Contribution Agreement”), under which LVI
and NCM contributed their assets to form a new company, NorthStar (the
“Merger”). 30
The structure of the Merger was unusual, and that structure is pertinent, at
least in part, to this decision. Since 2002, the LVI family of companies operated
under LVI Parent. 31 Thus, it was LVI Parent that began negotiating the Merger with
NCM, conducted due diligence, and worked with NCM to combine the businesses. 32
Shortly before the Merger, LVI Parent undertook a transformation from parent
corporation to contributed asset. On April 7, 2014—16 days before the Merger’s
consummation—LVI Parent created LVI LLC. 33 LVI Parent then merged with a
subsidiary of LVI LLC. 34 As a part of the Contribution Agreement, LVI LLC
contributed its subsidiaries (including LVI Parent, now a subsidiary), along with
NCM subsidiaries, to form NorthStar. 35 LVI Parent still exists as a subsidiary of
30
Contribution Agreement, Recitals.
31
See Lenahan Aff., Ex. 126, NCM Grp. Holdings, LLC’s Ans., Affirmative Defenses & Sec. Am.
Countercl. to LVI Grp. Invs., LLC’s Verified Am. Compl. (“NCM Sec. Am. Countercl.”), Ex. B,
at 9. LVI Parent was incorporated in 2002 and acquired LVI Services, Inc., through which it
operated. Id.
32
LVI Parent Ans., ¶ 17 (noting LVI Parent engaged in the Merger negotiations). LVI Parent, for
instance, made the required filing to obtain clearance from the FTC. Id.; Lenahan Aff., Ex. 127,
NorthStar Grp. Holdings, LLC’s Opp’n To NCM Grp. Holdings, LLC’s Am. Mot. for Leave to
File Sec. Am. Countercl., at Ex. H.
33
See Contribution Agreement.
34
Id. Recitals.
35
Id. § 1.2.
7
NorthStar, and it holds the stock of LVI Services, Inc., which in turn holds all the
stock of the other contributed LVI subsidiaries. 36 The parties chose this structure to
create a tax-free transaction. 37
Although no longer conducting operations following the Merger, LVI and
NCM remained in existence as holding companies that owned NorthStar equity. 38
LVI and NCM split NorthStar’s equity based largely on their respective pre-merger
Earnings Before Interest Taxation Depreciation and Amortization (“EBITDA”). 39
Using this measuring stick, LVI obtained 62.5% of the equity, and NCM 37.5% of
the equity, in NorthStar. 40
2. Terms of the Contribution Agreement
In the Contribution Agreement, both LVI and NCM warranted certain
financial statements regarding their companies (the “Warranted Financial
Statements”). 41 The Warranted Financial Statements formed the basis for the
companies’ EBITDA and thereby the divide of the equity ownership in NorthStar. 42
Under §§ 2.4(a) and 3.4(a) of the Contribution Agreement, the Warranted Financial
36
Id.
37
Id. Recitals.
38
See id. § 1.2.
39
See id.
40
Id. § 1.2(b).
41
Id. §§ 2.4(b), 3.4(b).
42
See id. Schedules 2.4(b) and 3.4(b).
8
Statements included the audited year-end financial statements for the period ending
December 31, 2012, the unaudited year-end financial statements for the period
ending December 31, 2013, and the unaudited year-end financial statements for the
two months ending February 28, 2014. 43 NCM and LVI represented that the
Warranted Financial Statements fairly presented, in all material respects, the
financial position of the businesses in accordance with Generally Accepted
Accounting Principles (“GAAP”). 44 The companies did not make representations or
warranties regarding any other financial statements. 45
The Contribution Agreement includes a merger clause in § 6.6, providing that
it would “constitute the entire Agreement between the Parties pertaining to the
subject matter herein and supersede any prior representation, warranty, covenant, or
agreement of any Party regarding such subject matter.” 46 The Contribution
Agreement also includes a non-reliance provision. Under § 5.4(f), the parties agreed
they had not “relied on any statements, representations or warranties whatsoever”
outside of the Agreement.” 47 Therefore, the Warranted Financial Statements
43
Id. §§ 2.4(a), 3.4(a).
44
Id. §§ 2.4(b), 3.4(b).
45
Id. § 5.4(f).
46
Id. § 6.6.
47
Id. § 5.4(f).
9
attached to the Contribution Agreement formed the only representations on which
the parties could successfully sue for contractual remedies, following the Merger.
The Contribution Agreement provides for specific remedies in case of breach
or misrepresentation. Section 5.4(e) limits available remedies to indemnification
claims, requests for injunctive relief, and fraud claims against the “Person who
committed such fraud.” 48 Section 5.1 limits these remedies by imposing time
restrictions on the Warranted Financial Statements. Under § 5.1(a)(iii)–(iv), the
parties’ representations regarding the Warranted Financial Statements would expire
on April 23, 2015—one year after the Merger’s execution. 49 However, the
Contribution Agreement contains a survival clause, allowing the parties to postpone
the expiration of the representations and warranties by filing a notice of claim under
§ 5.1(c):
Notwithstanding the foregoing in this Section 5.1, any representation
or warranty in respect of which indemnity may be sought under
Section 5.2 below, and the indemnity with respect thereto, will
survive the time at which it would otherwise terminate pursuant to this
Section 5.1 if notice of the inaccuracy or breach or potential
inaccuracy or breach thereof giving rise to such right or potential right
of indemnity will have been given to the party against whom such
indemnity may be sought prior to such time. . . .50
48
Id. § 5.4(e) (“The sole and exclusive remedies of the Parties arising out of, relating to or resulting
from this Agreement . . . will be strictly limited to (i) the indemnification provisions contained in
this Article 5, (ii) the provisions of Section 5.6 [specific performance] and (iii) claims for fraud
against the Person who committed such fraud.”).
49
Id. § 5.1(a)(iii)–(iv).
50
Id. § 5.1(c) (emphasis added).
10
Finally, in § 5.2(a)–(b), the Contribution Agreement provides for
indemnification for NorthStar and the contributed assets in case of a breach or
misrepresentation by LVI or NCM:
(a) Indemnification by NCM Holdings. Subject to the other terms of
this Article 5, NCM Holdings will indemnify and hold harmless
[NorthStar] and each of its Subsidiaries from and against all Losses
arising out of, relating to or resulting from (i) any failure of any
Surviving NCM Representation to be true or (ii) any breach of any
covenant or agreement of NCM Holdings herein. 51
(b) Indemnification by LVI Holdings. Subject to the other terms of this
Article 5, LVI Holdings will indemnify and hold harmless [NorthStar]
and each of its Subsidiaries from and against all Losses arising out of,
relating to or resulting from (i) any failure of any Surviving LVI
Representation to be true or (ii) any breach of any covenant or
agreement of LVI Holdings herein. 52
3. Post-Merger Litigation
Just shy of a year after the merger, NCM notified LVI of an indemnification
claim based on alleged false representations in its Warranted Financial Statements. 53
The next day, LVI notified NCM of its own indemnification claim. 54 The parties
underwent mediation as required by the Contribution Agreement, and when that
failed, commenced litigation. 55 Both parties ultimately dropped their
51
Id. § 5.2(a).
52
Id. § 5.2(b).
53
LVI Parent Ans., ¶ 28.
54
EPP Ans., ¶ 98.
55
LVI Parent Ans., ¶ 35.
11
indemnification claims and proceed solely on claims for fraud (as well as conspiracy
or aiding and abetting, and unjust enrichment claims against EPP). 56 This litigation
centers on the alleged fraud by both parties in creating their respective Warranted
Financial Statements.
After extensive discovery, each party narrowed their fraud allegations to a
limited number of pre-Merger projects of the other company. 57 LVI’s allegations
focus on four NCM projects. 58 The parties refer to these as the Apple, Pepco,
Sunoco, and DuPont Hickory projects. 59 LVI’s expert asserts that based on a review
of these projects, NCM misstated its pre-merger EBITDA by approximately $3.4
million for the trailing twelve month period ending December 31, 2013 and
approximately $5.2 million for the trailing twelve month period ending February 28,
2014. 60 NCM’s allegations, in turn, focus on six LVI projects. The parties refer to
these as the Holly Street, Alcoa, HECO, Foothill, Newark, and Lafayette projects. 61
56
See D.I. 653 (stipulating dismissal of indemnity claims and counterclaims). Section 5.4(b) of
the Contribution Agreement allowed the parties to recover a maximum of $15 million for
indemnity; fraud, by contrast, has no recovery cap. Contribution Agreement § 5.4(b).
57
The parties’ claims and counterclaims contemplate a wider collection of fraudulent projects, but
through discovery each party has effectively reduced those allegations to the projects identified in
their respective expert reports. See Dudney Report; Lenahan Aff., Ex. 51, Expert Report of Erin
P. Roberts, CPA, dated March 26, 2018 (“Roberts Report”).
58
See Dudney Report, at 83–110.
59
See id. at 12.
60
Id. at 128.
61
See Roberts Report, at 5–6.
12
NCM’s expert opines that LVI fraudulently misstated its pre-Merger EBITDA by at
least $10.9 million. 62
For the reader to understand the cross-claims for fraud arising from these
unique projects, it is necessary to address the projects in detail, which this
Memorandum Opinion does, I am afraid, in wearisome fashion, below.
Also, because the parties represented that their Warranted Financial
Statements complied with GAAP, the allegations involve some basic principles of
GAAP, reviewed briefly here. First, GAAP permits the use of the percentage of
completion (“POC”) method of accounting for contracts. 63 POC allows a business
to recognize income during a long project based on the percentage of the project
completed, estimated costs of completion, and expected profit margin. 64 Both
parties used POC to create financial statements for their various demolition
projects. 65 This allowed them to record income for large projects that often took
62
Id. at 8 (“In my professional opinion, the LVI financial statements were not presented in
accordance with GAAP and were materially misstated by at least $10.9 million for the six projects
analyzed in this report.”). Roberts goes on to note that “after the financial statements for the two
months ended February 2014 were reported, LVI (after April 2014 NorthStar) recorded
incremental losses of $10.7 million through December 31, 2016 for a total loss of $21.6 million.”
Id. at 7.
63
Dudney Report, at 58.
64
Id. at 58–59.
65
Id. at 58; Lenahan Aff., Ex. 4, Dep. of Louis G. Dudney, CPA/CFF (“Dudney Dep.”), at 31:5–
6.
13
more than a year to complete. 66 NCM and LVI both tracked the progress of their
projects through work-in-process (“WIP”) schedules. 67
Accounting in this fashion requires estimations, which sometimes prove
inconsistent with results actually achieved over time. “Fade” is a colloquial term
related to POC accounting. Because earnings are recognized as a project progresses,
the business does not yet know the project’s final results. If the cost of completion
is underestimated during the project, then the final earnings will be less than reported
on the financial statements, and the project will experience “fade” as the business
revises those numbers to reflect the final results. Fade can result from innocent
estimation errors, or from intentional overstatement. As both parties note, fade
necessarily occurs when a business fraudulently inflates its earnings to report better
numbers, then “reverses” those earnings once the project reaches completion and
experiences fade.
Second, GAAP permits recording some legal claims as revenue. Under
GAAP, to recognize a claim as revenue, it must be probable that it will be collected. 68
66
See Dudney Report, at 58.
67
Id. at 11 (“NCM maintained its POC accounting in work-in-process schedules . . . by-branch,
by-month, and by-project. . .”); Roberts Report, at 14–34 (summarizing LVI’s WIP schedules used
to maintain POC accounting on six projects).
68
Roberts Report, at 9; Lenahan Aff., Ex. 13, at ASC 605-35-25-31.
14
To be “probable of collection,” the following conditions must be met at the time the
revenue is recognized:
(a) The contract or other evidence provides a legal basis for the claim;
or a legal opinion has been obtained, stating that under the
circumstances there is a reasonable basis to support the claim.
(b) Additional costs are caused by circumstances that were unforeseen
at the contract date and are not the result of deficiencies in contractor’s
performance.
(c) Costs associated with the claim are identifiable or otherwise
determinable and are reasonable in view of the work performed.
(d) The evidence supporting the claim is objective and verifiable, not
based on management’s feel for the situation or on unsupported
representations. 69
If the above factors are not met, then under GAAP, the contractor should not
record the claim as revenue. 70
Third, and finally, under GAAP, a loss must be recognized when it occurs. 71
Delaying the report of a loss on financial statements is a violation of GAAP. 72
69
Lenahan Aff., Ex. 13, at ASC 605-35-25-31.
70
See id. at ASC 605-35-25-87(c) (“If it is probable that the contract price will be adjusted by an
amount that exceeds the costs attributable to the change order and the amount of the excess can be
reliably estimated, the original contract price shall also be adjusted for that amount when the costs
are recognized as costs of contract performance if its realization is probable.”).
71
Roberts Report, at 10 (“For a contract on which a loss is anticipated GAAP requires recognition
of the entire anticipated loss as soon as the loss becomes evident” (quoting Lenahan Aff., Ex. 13,
at ASC 605-35-25-45 through 46)).
72
See id. (“[A] loss must be recognized when it is known and not delayed until a later date that
may be more beneficial to a company.”).
15
4. LVI’s Claims against NCM, Khara, and EPP
In its original complaint, LVI sued NCM and its CEO, Subhas Khara. 73 Later,
it added NCM’s major private equity owner, EPP, as a defendant, including three
individuals associated with EPP—Brillon, Nibarger, and Bernardez. 74 NCM has not
moved for summary judgment of the underlying fraud allegations. The facts that
follow, therefore, focus on the involvement of EPP and Khara, both of whom have
moved for summary judgment, arguing—among other things—that the evidence
does not support a claim that they knew of or participated in NCM’s alleged fraud.
a. EPP’s and Khara’s Roles in NCM’s Accounting Practices
EPP and Khara were both involved in accounting practices at NCM from 2011
through the Merger. 75 EPP provided high-level guidance as well as specific
instructions. NCM would, on occasion, look to EPP for direction related to creating
financial statements. 76 Khara also looked to EPP for instructions regarding financial
73
Verified Compl., D.I. 1.
74
Pl. LVI Grp. Invs., LLC’s Verified Am. Compl. Against Defs., D.I. 262.
75
EPP and Khara both argue that most of the evidence LVI proffers is irrelevant because it
concerns interim financial statements (i.e. monthly or project-specific financial statements not
directly connected with the Warranted Financial Statements) that do not concern the alleged
fraudulent projects. They argue that only evidence specifically connecting them to NCM’s four
alleged fraudulent projects are relevant to the litigation. I decline, for purposes of these motions,
to disregard evidence demonstrating the relationship between EPP, Khara, and NCM’s accounting
practices, as it is relevant to determining what inferences I must make for the non-moving party.
76
Affidavit of Brian Morris, Esq. in Support of LVI Grp. Invs., LLC’s Ans. Br. in Opp’n to EPP
Defs.’ Mot. for Summ. J., D.I. 692–98 (“Morris Aff.”), Ex. 18, at NORTHSTAR18608976 (NCM
CG employee writing to Brillon, “we need guidance from you and EPP of how to position the cost
to complete and the imputed fade for the Oct individual WIPs. . . .”); Morris Aff., Ex. 19, at
NORTHSTAR16684036 (attaching monthly financials and WIP schedules to an email to Khara,
16
statements. 77 In addition, EPP actively provided instructions to NCM’s CFO, Duane
Kerr, and others regarding adjustments to financial statements. For example, on
May 12, 2012, Brillon, on behalf of EPP, told Kerr to book inventory adjustments
and asked if there was “anywhere else we have room to improve April.” 78 On July
4, 2012, Brillon sent Khara a spreadsheet of jobs in which both Brillon and the
auditors selected jobs where “the fade that we have recognized in 2012 should be
pushed back to 2011.” 79 Kerr also discussed with Brillon specific approaches to
creating NCM’s financial statements and WIP schedules. On July 26, 2013, Kerr
wrote to Brillon:
Per our discussions, we have asked our Branch managers to take an
aggressive approach to their WIP schedules. This is a departure from
the relatively conservative approach that we preach to our managers.
Based on this aggressive approach we may have some level of WIP
fade as those jobs come to completion. However, we feel that new
noting the documents were “compiled after getting guidance from EPP (Brillon related Nibarger’s
instructions).”). NCM does not dispute these emails, but it notes that the employee sending them,
David Whitley, was an acquired company’s COO, and Brillon reviewed his work while NCM
CG’s accounting group was experiencing high turnover. See Brillon Dep., at 20:1–21:2; DiLoreto
Dep., at 34:8–12, 38:21–39:12, 142:24–143:20 (“[Brillon] operated as the CFO of NCM CG for a
period of time.”). Hereinafter, when exhibit page numbers begin with party designations (e.g.
NORTHSTAR, EPP), I include only the relevant numerals.
77
E.g. Morris Aff., Ex. 22, at -83279 (“Tim w/o any reserve for Byron Claim Recovery we are at
2013 EBITDA of $20.9M with add backs. Our projected target was $21.5M[.] Dec EBITDA was
$1.8M. Please advise as to how much should we reserve for Byron.”).
78
Morris Aff., Ex. 20, at -16666218 (“After booking the CG inventory is there anywhere else we
have room to improve April at either DR or CG?”).
79
Morris Aff., Ex. 21, at -16662837 (“The auditors want to . . . book this reversal back into 2011
. . . the jobs in orange were selected by the auditors and I added the jobs in green. I think the jobs
in green should be included in this analysis and the fade that we have recognized in 2012 should
be pushed back to 2011 on these jobs as well.”).
17
bookings of several large high margin jobs may help us overcome any
margin fade that may occur. 80
In addition to consulting on approaches to financial statements, Brillon often asked
if the numbers reflected in the financial statements could be improved. 81
Beyond general oversight, EPP and Khara were involved in specific
accounting decisions as early as 2012. This included providing target numbers for
financial statements. On November 29, 2012, after Brillon asked if there were room
for improvement in the previous month’s financial statements, Khara replied, “We
will look at it one more time and finalize it tomorrow – is there a target number?” 82
Brillon responded, “$1.8M if it is doable without being overly optimistic.” 83 Khara
answered that NCM would “get aggressive on the WIP and should be able to find it
in the WIP. However November may be soft due to the squeeze.” 84 In December
2012, NCM sent its 2012 year-end and December numbers to EPP, and Brillon noted
to Bernardez and Nibarger, “2012 EBITDA is $17.6M vs. last bank forecast of
80
Morris Aff., Ex. 27, at -16706401.
81
E.g. Morris Aff., Ex. 20, at -16666218 (“is there anywhere else we have room to improve
April”); Morris Aff., Ex. 32, at -16644801 (“Is there any room for improvement on October?”);
Morris Aff., Ex. 37, at -16639356 (“Any room to improve the Dec numbers or is this what you are
comfortable with?”).
82
Morris Aff., Ex. 32, at -16644801.
83
Id.
84
Id.
18
$17.8M.” 85 Nibarger responded, “Do we have any room?” 86 Brillon relayed this
question to Khara, writing “Any room to improve the Dec numbers or is this what
you are comfortable with?” 87 Later that night, NCM sent revised numbers, with the
2012 EBITDA increased by $1.2 million to $18.8 million. 88
EPP’s and Khara’s involvement in 2013 continued to affect the results shown
in NCM’s financial statements. When NCM reported January 2013 EBITDA at
$800,000, Brillon wrote to Khara, “[Nibarger] would like to see if you could get this
closer to $1M.” 89 After further adjustments, NCM reported $1.032 million in
EBITDA for January. 90 When the next month’s EBITDA initially appeared lower
than expected, Kerr described to Khara his methods for adjusting the numbers:
When I finished the [February] WIPs last night I was at EBITDA
<850>. I literally went through each branch WIP schedule and
squeezed out earnings wherever I could (jobs that had substantial costs
left to incur that could take reductions in cost estimate, and that weren’t
100% complete or <30% complete. I was literally squeezing out $3k
here and $5k there. I added another $250 to Mojave revenue. All this
to get to the $398 number that I’m at right now (I scrimped and
scratched to pick up $1,250 – I mean, smoke was billowing out of my
office!). As you can see by the revenue number (14MM), there just
85
Morris Aff., Ex. 36, at -0277715.
86
Id.
87
Morris Aff., Ex. 37, at -16639356.
88
See Morris Aff., Ex. 38, at -0204571 (sending revised financial statements); Morris Aff., Ex. 39,
at -0101394 (financer emailing questions, including inquiry about “the $18.8MM [EBITDA]
actuals for FY 2012.”).
89
Morris Aff., Ex. 44, at -16633711.
90
Morris Aff., Ex. 45, at -0110115 (reporting $1,032,313 EBITDA for January 2013).
19
isn’t enough work to generate earnings. I just don’t have the jobs left
with backlog to squeeze earnings out. 91
On March 11, 2013, Brillon notified others at EPP about half a million dollars
of fade resulting from 2012 financial statements, and Nibarger responded, “That
cannot happen.” 92 Brillon noted the fade “is in relation to the $1.5M of found
EBITDA . . . at the end of December [2012].” 93 Correspondence around this time
also shows that Khara instructed branch managers to increase revenue and delay
reporting losses to strengthen the financial statements. 94 When NCM reported its
March EBITDA, Brillon asked, “Any chance to get this higher?” and Kerr
responded, “No. This is after squeezing every last drop out of everything (and then
some).” 95
On June 27, 2013, Khara emailed Kerr and told him, “At a minimum we have
to get at $1.5M [EBITDA] for May.” 96 The next day, Kerr emailed Brillon to offer
draft financial statements for May, which included “$1.2MM EBITDA.” 97 Brillon,
91
Morris Aff., Ex. 50, at -16631632.
92
Morris Aff., Ex. 41, at -0101338.
93
Id.
94
See Morris Aff., Ex. 52, at -16690113 (“we need $100K of Ebitda – any room on any of your
projects”); Morris Aff., Ex. 53, at -15056898 (“We are going to have some fade on AK Steel as I
believe the revenue is going to be less than what is stated but due to [Khara’s] instructions of
wanting to finish the quarter strong we did not take the hit this month.”).
95
Morris Aff., Ex. 55, at -0203437.
96
Aff. of Brian F. Morris, Esq. in Support of LVI Grp. Invs., LLC’s Ans. Br. In Opp’n to Def.
Subhas Khara’s Mot. for Summ. J., D.I. 699–703 (“Morris Aff. II”), Ex. 32, at -16701438.
97
Morris Aff., Ex. 59, at -16701751.
20
copying Nibarger on his response, noted that the forecast for May had been
“EBITDA of $2.1M.” 98 Nibarger responded, “This cannot stand.” 99 Bernardez then
instructed Brillon, “Go through the WIP today job by job with [Kerr] and [Khara] to
see where we can go up. Let’s discuss the revised results on our Monday call.” 100
Later that day, Kerr sent revised financial statements, which showed May EBITDA
as $2,004,773.101
In September 2013, Kerr sent July WIP schedule results to Khara and Brillon,
attaching “a list of jobs that had substantial fade on the July WIP. Most of these
were due to aggressive WIP cost estimates in Q1 . . . There just simply isn’t any
room on these jobs to be any more optimistic on the cost estimates in July.” 102 In
October, responding to August financial results, Brillon wrote to Khara, “is [this]
the best we show for Aug, this is lower than what we were guiding the lenders to on
the last lender call.” 103 Khara forwarded this email to Kerr, who sent revised
numbers to Brillon less than two hours later with EBITDA increased by $275,000. 104
98
Id.
99
Id.
100
Id.
101
Morris Aff., Ex. 62, at -16701877 (reporting that “[a]fter receiving feedback relative to the
initial estimate of where numbers were coming in, we had managers re-evaluate some of their key
jobs and made revised estimates to the same.”).
102
Morris Aff., Ex. 28, at -80041.
103
Morris Aff., Ex. 78, at -60439 through 440.
104
Compare Morris Aff., Ex. 77, at -14692929-003 (showing August EBITDA at $1.401,557) with
Morris Aff., Ex. 78, at -60439 (showing August EBITDA increased to “$1.675MM”). This
21
Kerr warned that “if the final results on those jobs prove not to be as positive as what
we are expecting there will be fade experienced at the tail end of those jobs.”105
Brillon forwarded this correspondence to Nibarger and Bernardez. 106 Two months
later, reporting on October’s results, Kerr wrote that although the “initial numbers
were much lower,” NCM “went back to the branch managers to have them go over
their WIPs with a fine tooth comb for revenues and cost savings that they may not
have considered.” 107
Khara continued his involvement in NCM’s accounting practices into 2014 to
the close of the Merger. According to the WIP schedules submitted by branch
managers for February 2014, NCM showed a total loss of around $325,000. 108 Prior
to submitting the financial statements, Kerr informed Khara, “February EBITDA of
$1.3M is the best I could do. My first cut was only $100k.” 109 Khara responded,
“Please try to get it up to $1.5-$1.6M with Pepco, Teco, Duke Cape Fear, Apple,
Las Vegas Courthouse. Try to pick up $50k from 5-6 large projects – this will help
increase included $50,000 of income on the DuPont Hickory project, discussed further below. Id.
(“I was able to increase the August EBITDA to $1.675MM by . . . [b]ooking . . . an additional
$50k of income on the Dupont Hickory Job.”).
105
Morris Aff., Ex. 78, at -60439.
106
Id.
107
Morris Aff., Ex. 81, at -83875.
108
Dudney Report, at 55.
109
Morris Aff., Ex. 92, at -16760591.
22
at closing.” 110 Kerr responded, “Won’t b[e] easy. Will get as close as possible.”111
The next day, Kerr wrote to Khara, “Ok. Got it to . . . EBITDA $1.5M.” 112
Finally, LVI offers evidence regarding “Blue Cell Manipulations,” by which
Kerr allegedly tracked the adjustments he made to excel spreadsheets submitted by
branch managers by highlighting numbers that he changed. 113 The evidence does
not show that Khara or EPP were involved in this practice. 114 LVI suggests,
nonetheless, that the pressure—including pressure from EPP personnel and Khara—
110
Id. In his deposition, Khara denied that in this email he was referencing the merger’s closing.
Morris Aff., Ex. 94, Dep. of Subhas Khara (“Khara Dep.”), at 349:1–350:4 (“When I say ‘closing,’
it means closing of the month to budget.”).
111
Morris Aff., Ex. 95, at -16760542.
112
Morris Aff., Ex. 93, at -16760538.
113
See Dudney Report, at 116–17; see also Morris Aff., Ex. 107, at -11397615 (“the highlighted
blue cells on the excel spreadsheet is where Brea [i.e. management] has made adjustments”). NCM
employees, including Kerr, testified they had no knowledge of the practice. See Morris Aff., Ex.
17, Dep of Duane Kerr (“Kerr Dep.”), at 54:8–55:17. LVI’s expert, Dudney, estimated that the
Blue Cell Manipulations showed an overstatement of EBITDA of $2.2 million for 2013 and $0.3
million for 2014. Dudney Report, at 14. While most of the alleged Blue Cell Manipulations
related to the four projects at issue, Dudney also concluded that these Blue Cell Manipulations
resulted in an overstatement of EBITDA related to other projects of $850,000 in 2013 and an
understatement of EBITDA in 2014 of approximately $800,000. See id. at 128, table 24.
114
LVI concedes this in its briefing. See LVI Grp. Invs., LLC’s Ans. Br. In Opp’n to EPP Defs.’
Mot. for Summ. J., D.I. 691 (“LVI Ans. Br. to EPP”), at 49 (“EPP argues that the Blue Cells were
not modified by EPP. But the Blue Cells are the evidence of, and one of the mechanisms employed
to effectuate, the fraud EPP participated in and directed. EPP did not need to be bookkeepers to
be responsible.”); LVI Grp. Invs., LLC’s Ans. Br. In Opp’n to Def. Subhas Khara’s Mot. for
Summ. J., D.I. 698 (“LVI Ans. Br. to Khara”), at 40 n.18 (“Khara’s knowledge of Kerr’s method
for tracking such changes [i.e. the Blue Cell Manipulations] is irrelevant. What is relevant is that
Blue Cell changes were made in response to Khara’s direction to ‘find’ more EBITDA in specified
projects.”).
23
to overstate NCM EBITDA inspired the adjustments represented by the Blue Cell
Manipulations.
b. EPP’s and Khara’s Roles in NCM’s Financials Regarding the
Alleged Fraudulent Projects
In contrast to the evidence showing involvement in NCM’s general
accounting practices, evidence showing EPP’s and Khara’s involvement in NCM’s
allegedly fraudulent projects—the Apple, Pepco, Sunoco, and DuPont Hickory
projects—is limited. 115
LVI alleges the Apple project experienced losses post-Merger because of an
unreasonably low bid, unreported project delays, and aggressively underreported
costs on the WIP schedules. 116 The evidence does not show that EPP or Khara
directed or adjusted any financial statements related to the Apple project. Khara was
involved in the project at a high level. He instructed that bidding on the project be
“aggressive,” but he also instructed that it should be “diligent,” and “accurate.” 117
He was aware of delays in the project’s completion, but LVI was made aware of
115
I note that NCM employees testified they had no involvement with EPP in preparing financial
statements. E.g. Lenahan Aff., Ex. 15, Deposition of Manish Patel (“Patel Dep.”), at 171:19–
172:25 (denying EPP asked him to submit inaccurate financial data); Kerr Dep., at 47:9–23 (same);
Lenahan Aff., Ex. 17, Deposition of Mark Canonica (“Canonica Dep.”), at 116:23–117:12 (same);
Ex. 18, Deposition of Scott Williams (“Williams Dep.”), at 49:1–22 (same).
116
Dudney Report, at 85–86.
117
Morris Aff. II, Ex. 71, at -14827550 (“[W]e plan to bid this very aggressively . . . We all are
very excited so let us put a strong, diligent and sincere effort to win this.”).
24
these delays prior to the Merger. 118 Finally, NCM’s Regional Manager, Mike
Canonica, knew that delays in reporting cost increases for the project on the WIP
schedules would result in fade, and he made Khara aware of this issue. 119
LVI alleges that NCM’s Warranted Financial Statements report inaccurate
numbers regarding the Pepco project. No evidence suggests EPP was involved in
financial statements related to the project. LVI offers one email sent by Khara that
ties him to the project. In that email, Khara ordered the submission of a change order
on the project with a “substantial margin on the claim to overcome shortfall in other
areas,” explaining in a subsequent email that it was “a good time to cover any
shortfall in demolition/scrap etc.” 120 After the Merger, NCM’s project manager for
118
See Morris Aff. II, Ex. 78, at -17652966 (Apple’s notification of delay); Morris Aff. II, Ex. 77,
at -16760368 (Khara commenting that NCM was “blindsided” by Apple’s notification of delay);
Transmittal Aff. of John A. Sensing to Def. Subhas Khara’s Reply Br. in Support of His Mot. for
Summ. J., D.I. 717 (“Sensing Aff. II”), Ex. G (LVI COO John Leonard emailing Khara, “heard
that there are issues at Apple and Sunday was last day. Need any help?”); Sensing Aff. II, Ex. F,
Deposition of Shrenik Vora (“Vora Dep.”), at 93:10–94:5 (“[I]n March of ‘14 we had a notice of
delay from Apple that came due . . . [LVI Employee] Mike told John Leonard about the notice of
delay, and John inquired like if everything is okay. And so we set up a meeting . . . I met Mike on
site, we discussed the project . . . we gave him a brief tour, he looked at everything and spoke with
John Leonard on the phone, and he was pretty satisfied with everything, what he saw.”).
119
See Morris Aff. II, Ex. 73, at -15614872 (Canonica noting in January 2014 that “Apple has a
huge increase in [costs of completion] . . . Want to update this YE WIP with projected costs so we
don’t take a big fade hit in Q1 2014”); Morris Aff. II, Ex. 75, at NORTHSTAR17688571 (“OUCH!
Another hit coming in May . . . All WIP fade from Apple.”); Morris Aff. II, Ex. 76, at -17688569
(“[Khara] is fully aware of the WIP fade.”).
120
Morris Aff. II, Ex. 51, at -17384195.
25
Pepco testified that the project’s numbers on the WIP schedules were inaccurate but
he did not know who had adjusted them. 121
Regarding the Sunoco project, LVI’s allegations center on the anticipated sale
of a low sulfur gas furnace (the “LSG Unit”), a multi-million-dollar piece of
machinery salvaged from the project site. LVI alleges that NCM fraudulently listed
the sale of the LSG Unit as revenue to NCM when in fact the LSG Unit had not yet
sold. Correspondence between LVI and NCM personnel shows that they discussed,
prior to the Merger, treating the LSG Unit’s potential sale as revenue on NCM’s
financial statements, despite the fact that it had not sold. 122 NCM, however,
represented to LVI that it had a letter of intent covering the sale, thus justifying
reporting the sale as revenue—in fact, the purported existence of an LOI was based
on a statement by Khara, apparently unsupported by documentation. 123
Khara was involved in the Sunoco project and to some extent in the sale of
the LSG Unit. While an early email between NCM personnel suggested the sale of
121
See Morris Aff. II, Ex. 79, Deposition of Jason Haller (“Haller Dep.”), at 54:4–55:16 (testifying
there would be no reason for changing the cost of completion as demolition had not yet commenced
on the project).
122
The evidence suggests miscommunications on LVI’s part. See Morris Aff. II, Ex. 84, at -
01981047 (CEO Scott State emailing CFO Paul Cutrone, “Still don’t see how they took up revenue
w/o a valid sale last year. Did we challenge that in [due diligence]?” and Cutrone replying, “We
definitely covered it and ultimately accepted it,” and State responding, “You should probably pull
together documentation on this as it could become an issue when CHS realizes there was margin
booked on $4.5MM of asset sales that weren’t sold.”).
123
Id. (email from Cutrone stating, “[Khara] claimed to have an ‘LOI to sell $5.5 mil’ but I did
not ask for copy of LOI at the time.”).
26
the LSG Unit was “dead,” Khara was not included on this email. 124 However, Khara
was at least aware of the possibility that the LSG Unit would not be sold: he received
two draft financial statements, one contemplating a sale of the LSG Unit, one
without the sale included. 125 He also requested that the project manager for Sunoco
confirm the WIP schedule numbers if the LSG Unit were not sold, and he then
withheld part of the project manager’s bonus based on the uncertainty of the sale. 126
As noted above, Khara ultimately told LVI that NCM had a letter of intent to cover
the sale, but may have done so without supporting documentation. 127
In contrast to Khara’s involvement, a single email connects EPP to the Sunoco
project. On April 2, 2014, Manish Patel—a member of NCM’s accounting group—
emailed Brillon NCM’s financial statements and reported projected and actual
revenue and EBITDA for the month of February 2014. 128 The financial statements
124
See Dudney Report, at 102 (internal LVI email, not including Khara, noting “the [LSG Unit]
deal is dead for Sunoco so we’ll be lucky to get $16M in revenue. . .”); Sensing Aff., Ex. 62, at -
15087110 (same).
125
Sensing Aff., Ex. 63, at -16736088 (copying Khara on email stating, “Looking at $1MM fade
over the next couple months assuming we DO NOT sell [LSG Unit] as we’ve already recognized
$5MM in profit. If we can’t sell, we may do better on the sale of parts and pieces so the contract
value may go up from my estimate which would offset the fade.”).
126
Morris Aff. II, Ex. 82, at -16734285 (Khara asking “Duane / John what is the worst case for the
Sunoco WIP if we do not sell the LSG unit?” and LVI employee Jenkins responding, “Worst case
is a $1-1.25MM fade if we don’t sell LSG.”); Morris Aff. II, Ex. 83, at -849863 (Kerr noting in
email to project manager that Khara withheld bonus “due to the uncertainty of the LSG sale.”).
127
Id. (email from LVI CFO Cutrone stating, “[Khara] claimed to have an ‘LOI to sell $5.5 mil’
but I did not ask for copy of LOI at the time.”).
128
Lenahan Aff., Ex. 22, at -16739174; see also Dudney Report, at 102–03.
27
attached to this email included numbers related to the Sunoco project, but the email
did not discuss the project. 129 In other words, nothing shows that issues regarding
the sale of the LSG Unit ever reached EPP.
LVI also alleges NCM fraudulently inflated earnings on the DuPont Hickory
project. Some evidence shows that EPP and Khara were involved in financial
statements related to DuPont Hickory. On November 26, 2012, Khara wrote to
Bernardez, “Tim – we received the call for the award from DuPont estimated (with
scrap) $15MM! Thanks.” 130 Next, on October 1, 2013, Brillon wrote to Khara
regarding NCM’s August’s financial results and asked, “Sage, is [this] the best we
show for Aug, this is lower than what we were guiding the lenders to on the last
lender call.” 131 Khara forwarded this email to Kerr, and Kerr responded that he was
able to increase EBITDA by, among other things, “Booking . . . an additional $50k
of income on the Dupont Hickory job.” 132
129
See id.
130
Dudney Report, at 108 n.532; Lenahan Aff., Ex. 25, at -0102225.
131
Morris Aff., Ex. 78, at -60439 through 440.
132
Id. The parties dispute whether the alleged improper inflation was corrected (or “reversed”)
before the Merger. EPP points to the testimony of LVI’s expert, Dudney, that the improper
adjustment to the DuPont Hickory project—$282,000—was reversed out in January 2014.
Lenahan Aff., Ex. 4, Dudney Dep., at 225:14–227:3. LVI contends that Kerr’s $50,000 inflation
described in the email above was reversed prior to the Merger, but that the remainder of the
inflation, around $225,000, remained misstated at the time of the Merger and had to be reversed
afterward. See Morris, Ex. 96, at -292329-018 (listing NorthStar “Look Back Adjustment” for
2014 financials for DuPont Hickory as “(224,040)”).
28
5. NCM’s Allegations Regarding LVI
Through discovery, NCM has narrowed its allegations regarding LVI’s
allegedly fraudulent practices to six projects, referred to as the Holly Street, Alcoa,
HECO, Foothill, Newark, and Lafayette projects. 133 Of these projects, Holly Street,
Alcoa, and HECO account for around 90% of the dollar value of the alleged fraud. 134
LVI has moved for summary judgement that it is not liable for this alleged fraud.
Each project presents a unique set of facts, and so I examine the evidence regarding
each of the six projects individually below.
133
Perri Aff., Ex. 16, Expert Rebuttal Report of Louis G. Dudney, CPA/CFF dated May 15, 2018
(“Dudney Rebuttal Report”), at 4.
134
Dudney Rebuttal Report, at 4 (“[NCM expert] Mr. Roberts opined that approximately 89% of
the total alleged accounting misstatements relate to [Holly Street, Alcoa, and HECO projects].”).
LVI LLC notes that in the Contribution Agreement, the parties listed certain projects under
Schedule 1C that were subject to Change Orders or disputes with the clients, and NorthStar would
be allowed to take losses resulting from settlements, up to an aggregate of $10 million, without the
losses counting against EBITDA for loan covenant compliance purposes. State Dep., at 174:17-
178:3 (“[Schedule 1C allowed NorthStar prospectively going forward to settle projects on this list
or otherwise dispense of them, and if there were EBITDA impacts, those would not flow through
as amounts that would be compared to our covenants.”); Perri Aff., Ex. 3, Deposition of Paul
Cutrone (“Cutrone Dep.”), at 77:21–79:23 (“if, in fact, we make a business decision down the road
that results in us taking an EBITDA hit or a book hit on those [Schedule 1(c)] projects, we would
have the appropriate mechanism to add it back for covenant purposes.”), 82:15–84:3 (“These
claims [on Schedule 1C projects] were good claims. We didn’t want to write them off, but if it
made good business sense to settle them out in the future, we didn’t want it to affect bottom line
earnings.”). The Holly Street and Alcoa projects were listed on Schedule 1C. Nibarger Dep., at
322:20–324:9. NCM understood prior to the Merger that a $15.6 million cash loss was possible
on the Holly Street and Alcoa projects. Perri Aff., Ex. 20, at -2621641 (Brian Simmons noting that
Bernardez “defines the problem as $15.6 mm of cash exposure.”). LVI suggests that the evidence,
combined with the presence of Holly Street and Alcoa on the Schedule 1C, suggest that NCM had
notice that the Change Orders and claims associated with these projects might settle for less than
what LVI sought. As NCM notes, however, the fact that the Contribution Agreement contemplated
potential losses does not exculpate LVI in the case that it fraudulently misstated financials
regarding the Holly Street and Alcoa projects.
29
One demolition term is important before proceeding: when a party demands
additional compensation—for example, for performing work outside the original
project scope, accruing unexpected costs, or when there is less scrap onsite than
represented—the party seeking the additional compensation files a “contract claim.”
In the industry, these are referred to simply as “claims.” To distinguish these claims
from the legal claims that may subsequently arise out of them, I refer to these
contract claims as “Change Orders.”
a. The Holly Street Project
NCM alleges LVI committed fraud regarding the Holly Street project because
it entered a subcontract knowing it would be unprofitable and then inflated earnings
for the project based on a lawsuit it knew was not probable of collection, as required
by GAAP. Holly Street involved the abatement, decommissioning, and demolition
of a power plant for the City of Austin, Texas.135 LVI served as subcontractor to the
project’s general contractor, TRC. 136 Under its September 2011 subcontract, LVI
would receive $11.7 million, a figure that included $3 million in cash and $8.7
million in estimated scrap value recovered from the site. 137
135
Roberts Report, at 14.
136
Id. at 15.
137
Perri Aff., Ex. 25, Subcontract with LVI Facility Services Inc. for the Holly Street Power Plant
Project (“TRC Subcontract”), at -54549.
30
As the execution of the subcontract approached, LVI expressed doubts that
there would be sufficient levels of copper scrap on the demolition site to realize the
estimated scrap value. On March 11, 2011—six months prior to executing the
subcontract—LVI wrote to TRC that it was “unlikely that there is 950,000 lbs. of
copper remaining at the site.” 138 The City of Austin offered to allow LVI to inspect
the site for copper, but on June 22, LVI employee Michael Marcheschi warned CEO
Scott State and COO John Leonard that if LVI inspected the site, it would be
“conceding that [it] could verify [the scrap quantities]; we are going to get one day
to find an additional 2.5 in scrap we didn’t find in many days there.” 139 On June 26,
Marcheschi estimated that if LVI based its bid on the presence of $7.4 million of
scrap value, then the Holly Street project could see as large as a $2.6 million shortfall
in scrap. 140 Around this time, Marcheschi told State, “it was a bad idea to go forward
with the contract with TRC.” 141 Leonard was initially opposed to the contract as
well until he conducted a site visit. 142
138
Lenahan Aff., Ex. 62, at -23891.
139
Lenahan Aff., Ex. 70 at -2028581.
140
Lenahan Aff., Ex. 106, at -8279 through 280. Marcheschi noted in this same email, however,
that he had a “high degree of confidence in reducing the ‘shortage’ from $2.6 to $2.1” based on a
site visit, and possibly reducing it further to $719,212.38 based on representations on the site
owner’s website. Id.
141
Lenahan Aff., Ex. 71, Deposition of Michael Marcheschi (“Marcheschi Dep.”), at 119:19–24.
142
See Marcheschi Dep. 120:12–121:25 (testifying that Leonard was “opposed to signing the
contract,” but that after he visited the site and made calculations, he “thought the numbers
worked.”).
31
The next month, July 2011, TRC informed LVI that the City of Austin had
indeed overstated the amount of copper at the site by 600,000 pounds, and TRC
interpreted its agreement with LVI as assigning LVI the risk of a scrap shortfall. 143
LVI disagreed and warned TRC that if it signed the general contract with the City of
Austin, it was “absent any contract discussions on key provisions with [LVI].” 144
During the negotiations of the subcontract that followed, LVI and TRC
adjusted the copper estimate in the subcontract downward from the City of Austin’s
initial representation of 950,000 pounds to 320,000 pounds. 145 LVI and TRC entered
the subcontract on September 9, 2011. 146 The subcontract included a provision that
143
Lenahan Aff., Ex. 59, at -4363 (TRC representative noting her “understanding of our
agreement” was that “LVI has inspected the Holly Street site and is satisfied that the known scrap
and salvage value at the site is at least $8,700,000. LVI will take the risk of scrap quantities and
value if scrap and salvage value is less than $8,700,000.”).
144
Lenahan Aff., Ex. 59, at -4361.
145
Compare Perri Aff., Ex. 26, at -23891 (March 2011 proposal suggesting 950,000 pounds of
Copper) with TRC Subcontract, at -84549 (executed subcontract showing 320,000 pounds of
Copper on Exhibit E, Scrap and Salvage schedule). I note that Schedule E on the subcontract also
lists 970,000 pounds of “Copper, Motor Breakage,” that LVI does not include in its calculation of
an adjustment to 320,000 pounds of copper, which it appears to calculate from the sum of “Copper,
Transformers, Turbines, etc.” “Copper, Buss Bar, Unit #3,” and “Copper Wire, Net Recovery.”
NCM does not seem to rebut or oppose LVI’s contention that the Subcontract only estimates
320,000 pounds of Copper. See NCM Grp. Holdings, LLC’s Response in Opp’n. to LVI Grp.
Invs. LLC’s Mot. for Summ. J., D.I. 686 (“NCM Ans. Br.”), at 26–27 (“LVI argues . . . that the
final contract between LVI and TRC reflected a lesser amount of copper, which was a result of
LVI’s due diligence. Yet, this argument is a red herring as the amount of copper in the contract is
not at issue.”). Moreover, if LVI earlier stated it was unlikely there was 950,000 pounds of copper
on-site, it seems equally unlikely that it would then increase its estimation of on-site copper to
1,290,000 pounds. Based on the foregoing, I do not consider the amount of copper estimated in
the TRC Subcontract—320,000 pounds—to be a disputed fact between the parties.
146
TRC Subcontract, at -84504.
32
contemplated the pursuit of “a Change Order based on actual scrap quantities being
less than as stated in the Project Bid Documents. . . .”147 In other words, LVI
expected that the subcontract would protect its interests by giving rise to a request
for a Change Order. 148 The parties dispute whether the subcontract between TRC
and LVI guaranteed a minimum total scrap value. 149
Based on scrap shortfall that in fact occurred, as well as other issues that arose,
LVI began discussing potential Change Orders with TRC more than a year before
Merger discussions began. 150 On October 25, 2012, a project manager at LVI
147
See TRC Subcontract, at -84507 (“In addition, to the extent the parties are successful in
obtaining a Change Order based on actual scrap quantities being less than as stated in the Project
Bid Documents, the parties shall share equally in the net proceeds of such Change Order.”).
148
State Dep. 361:7–367:24 (“We were relying on our contract with TRC and their obligations
under our contract to affect certain recoveries or conditions with the City. And if in fact they
breached those negotiations in our contract with TRC, that could impact the overall project, but it
would not impact our ability to seek recovery either directly or through litigation.”).
149
Compare Perri Aff., Ex. 61, Marcheschi Dep. 71:10–24 (noting that the subcontract between
LVI and TRC includes “a guaranteed minimum as far as the value of the total scrap”) and State
Dep., at 362:8–363:14 (“[The TRC Subcontract] protected our rights by giving us certainty that
there were minimum thresholds [of scrap] that had to be met, and that work conditions would have
to be honored for us to proceed at the price that we offered to proceed at.”) with Lanahan Ex. 69
at -19223413 (Auditor Grant Thornton’s email to LVI General Counsel noting it “had a look at the
attached TRC contract and cannot see an obligation from the [general contractor] or the property
owner on the minimum scrap value”) (emphasis in original).
150
See Perri Aff., Ex. 27 (March 14, 2012 notice in shortfall of Copper scrap from representation
of 950,000 pounds); Perri Aff., Ex. 50 (July 9, 2012 notice of additional costs resulting from an
emergency boiler abatement); Perri Aff., Ex. 51 (August 9, 2012 response from TRC confirming
presence of asbestos resulting in increased costs for emergency abatement). NCM offers several
emails as evidence that LVI improperly reported earnings on the project because it understood
there would be a scrap shortfall. In November, David Pearson, LVI’s regional manager, asked
Marcheschi why cupronickel was being carried on the books. Lenahan Aff., Ex. 65, at -1631934
(“Can you refresh my memory on why we carried CuNi and how much – what do we have to
support our position?”). Marcheschi told Pearson that during contract negotiations, he was told to
“go back out to the site and search for more copper,” despite the fact that, as noted above, LVI
33
emailed Leonard, informing him that Holly Street was operating at a loss of $1.9
million. 151 This figure, according to the email, excluded “the claim for copper and
CuNi” shortfall. 152 With damages from potential claims and Change Orders
included, the job showed a profit of $200,000. 153 Ultimately, LVI sued TRC for
$9.6 million for its failure to pursue a Change Order with the site owner (the “TRC
Claim”). 154 LVI then discounted the claim, booking $4.9 million in revenue in 2013
based on the lawsuit. 155 LVI’s auditor, Grant Thornton, concluded in its financial
audit that LVI had a basis for its claim sufficient to recognize the revenue. 156
In 2017, the court hearing the TRC Claim denied TRC’s motion for summary
judgment, which TRC based on the argument that LVI had accepted the risk of
shortfall because it had inspected the site. 157 In 2018, NorthStar—who by that point
understood there was not 950,000 pounds, and in part to make up for this, it listed CuNi [i.e.
cupronickel] the site owners claimed was present in on-site boilers. Id. at -1631933.
151
Lenahan Aff., Ex. 66 at -25135.
152
Id.
153
Id.
154
Perri Aff., Ex. 8, Dep. of Greg DiCarlo (“DiCarlo Dep.”), at 84:18–85:25.
155
See Perri Aff., Ex. 23, at -16733384 (presentation noting that the claim was expected to be $8
million to $10 million and recognizing revenue based upon the claim); Roberts Report, at 16.
156
See Perri Aff, Ex. 29, at -303 (stating GAAP standard for recognizing revenue based on a claim
and discussing the Holly Street project: “Included as an exhibit to the [TRC subcontract] is a listing
of expected scrap quantities and dollar value of $8.7M which was relied on by the Company when
[it] calculated the contract price, as such, the Company is entitled to be made whole for reductions
in the expected scrap quantities.”).
157
See Perri Aff., Ex. 53, Order Denying Mot. for Partial Summ. J., and Denying Mot. to Strike,
at 24–25 (“While the Contract Documents do include language whereby LVI agreed that it
carefully examined the Plant conditions under which the Project was to be performed, and that it
entered into the Project on the basis of its own examination, investigation, and evaluation, . . . these
34
owned the litigation asset—settled the claims with TRC and received a payment of
approximately $2.3 million. 158
b. The Alcoa Project
NCM alleges LVI committed fraud regarding the Alcoa project because LVI’s
internal analysis, developed based on settlement offers with the site owner, showed
lower gross profits and contract value than it represented in its Warranted Financial
Statements. The Alcoa project was a demolition, remediation, and restoration
project in Frederick, Maryland. 159 LVI and Alcoa signed the contract for the project
on March 2, 2011. 160 Difficulties accrued with the project, including disputes over
the scope of the work, additional costs allegedly caused by Alcoa, and interference
with scrap recovery. 161
In February 2013, LVI informed Alcoa of Change Orders based on these
disputes. 162 Beginning in July, LVI and Alcoa negotiated to reduce the scope of the
provisions are not followed by any risk-allocation language . . . Accordingly, TRC’s motion for
summary judgment is denied as to its contention that LVI allocated any risk of . . . salvage
shortfalls to itself pursuant to the Contract Documents.”).
158
Perri Aff., Ex. 13, Aff. of Gregory G. DiCarlo (“TRC paid LVI Facility Services, Inc.
approximately $2.3 million and released its approximately $3 million in claims against that
subsidiary.”).
159
Perri Aff., Ex. 4, Leonard Dep., at 166:13–18.
160
Perri Aff., Ex. 32, Compl. in the Cir. Ct. for Frederick Cnty. MD (“Alco Compl.”), ¶ 24.
161
DiCarlo Dep., at 47:10–48:15.
162
Perri Aff., Ex. 33 (notifying ALCOA of Change Order requests).
35
project and the contract value through Change Orders. 163 LVI and Alcoa sent
settlement offers based on the de-scope, and LVI developed internal analyses of the
project’s value and estimated gross profit based on the settlement offers. 164 Both the
settlement offers that LVI sent to Alcoa as well as the internal analyses based on
these offers indicate that LVI excluded the value of its claims against Alcoa from
the settlement negotiations and its internal analyses. 165 In a “Counter offer and
scope resolution” sent to Alcoa on October 28, 2013, LVI included an attachment
labeled “LVI Counter Offer to Alcoa 8/28 Descope Settlement Offer.” 166 In this
attachment, it proposed that Alcoa owed a contract value to LVI of $777,959.40, and
it noted, “This number excludes LVI claims.” 167 In contrast to this number, LVI
163
Roberts Report, at 19; Lenahan Aff., Ex. 110 (letter to Alcoa negotiating descope); Lenahan
Aff., Ex. 111 (letter to Alcoa “Re.: Counter offer and scope resolution”).
164
See Roberts Report, at 19 (“LVI developed several internal analyses that evaluated LVI’s
estimated gross profit position based on offers proposed by both LVI and Alcoa relating to contract
de-scope.”); Perri Aff., Ex. 36 (containing internal analysis developed based on the proposed offers
of each party).
165
Though shown by documents explained below, LVI personnel also corroborated this in
testimony. Leonard Dep., at 195:22–196:14 (“Alcoa 8/29 Settlement Offer . . . doesn’t include the
claim that [LVI] had against them already”), 197:5–23 (“[The settlement offer] had nothing to do
with the total settlement . . . we still had, obviously, a discussion regarding our entitlement on the
claim”); Cutrone Dep., at 125:18–126:23 (Alcoa’s settlement offer “does not contemplate
additional claims that LVI was putting forth”).
166
Perri Aff., Ex. 35, at -222020-005.
167
Id. (“Contract Value Owed to LVI . . . excludes LVI claims”). Notably, some of the exhibits
offered by the parties differ on this issue. NCM’s exhibit leaves out the attachment (included in
LVI’s exhibit) sent to Alcoa advising that the settlement negotiation “excludes LVI claims.”
Compare id. (executed version including attachment at page -222020-005 noting contract value
“excludes LVI claims”) with Lenahan Aff., Ex. 111 (unexecuted version not including
attachment).
36
developed an internal analysis that incorporated both the de-scoped project value as
well as “Potential Claims,” which resulted in a calculation that Alcoa owed LVI a
contract value of $10,055,520.00.” 168
Ultimately, on October 4, 2013, LVI sued Alcoa, seeking $10.1 million in
damages (the “Alcoa Action”). 169 In November, reacting to the lawsuit, Alcoa
modified the project’s scope.170 LVI’s internal analyses based on the settlement
offers—discussed above—showed a negative gross profit; by contrast, LVI reported
a positive gross profit on its November WIP schedule and year-end 2013 WIP
schedule. 171 LVI also calculated the contract value at $22.9 million on its internal
analyses, but it reported a contract value of $27.4 million to its financial accountant,
Grant Thornton, and on its year-end financial statements. 172
168
Perri Aff., Ex. 36, at -2002647-007.
169
See Alcoa Compl., at -548354.
170
Roberts Report, at 19; Lenahan Aff., Ex. 112 (“This letter is to inform you of Alcoa’s decision
to modify the existing scope of work at the Eastalcoa facility.”).
171
Roberts Report, at 19. The discrepancy between these numbers as of November 2013 was $4.3
million. Id. LVI updated their internal analyses in February 2014, and the discrepancy reduced to
$3.8 million. Id.
172
Id. at 19–20.; see also Lenahan Aff., Ex. 93, at -304.
37
LVI personnel testified they were confident in the claim’s strength. 173
Ultimately, NorthStar settled the claim with Alcoa post-Merger for a small sum. 174
c. The HECO Project
NCM alleges that LVI knew profits were fading in the HECO project but
fraudulently delayed recognizing those losses until after the Merger. The HECO
project involved asbestos abatement, demolition, and equipment removal for
Hawaiian Electric Company, Inc. 175 LVI entered the contract on December 15, 2011
and began work in 2012, but it left the job in June 2012 due to difficulties with the
site owner. 176 LVI then negotiated a Change Order, executed in December 2013,
and returned to work on the site. 177 New problems developed soon after LVI’s
return, and it began to contemplate the need for another Change Order to address
new costs. 178
173
See DiCarlo Dep., at 56:15–57:12 (“we had a very strong basis for recovery on our claims”);
Leonard Dep., at 205:7–17 (“we believed all of the CIE was recoverable”).
174
The parties dispute whether the size of the settlement indicated that the claim was originally
weak or if NorthStar settled for a low value to create further business opportunities with Alcoa.
See Leonard Dep., at 201:16–202:3; DiCarlo Dep., at 59:10–60:16.
175
Lenahan Aff., Ex. 79, at -1543903.
176
Lenahan Aff., Ex. 79, at -1543907; Perri Aff., Ex. 11, Dep. of Joe Catania (“Catania Dep.”), at
128:7–18.
177
Perri Aff., Ex. 37, Am. No. 4 to Major Construction Serv. Contract Between Hawaiian Elec.
Co., Inc. & LVI Environmental Serv., Inc.
178
See Leonard Dep., at 604:9–610:6 (describing renewed troubles on the HECO project).
38
LVI personnel sent several emails regarding the HECO project that NCM
offers as evidence of fraud. On March 7, 2014, CEO Scott State forwarded an email
to COO John Leonard about scrap prices to which he added, “Scrap starting to
fade.” 179 Leonard wrote back, “I know. Issue at Poletti.” 180 Leonard then responded
to State’s email a second time, adding, “And HECO.” 181 On March 11, CFO Paul
Cutrone emailed personnel on the HECO project and requested that they “thin down”
costs associated with accounts payable and bill payments and “push some to April”
in order to “start managing quarter end balances.” 182
On the date of the Merger, Cutrone emailed Leonard and State, noting, “We
have deferred margin erosion on HECO.” 183 Cutrone later testified he deferred
margin erosion because of the opportunity to recover based on LVI’s Change Orders
with the site owner. 184 Finally, in May 2014, after the Merger, Joe Catania, the
179
Perri Aff., Ex. 39, at -2122048.
180
Id.
181
Perri Aff., Ex. 38, at -2122045.
182
Lenahan Aff., Ex. 80, at -2121458 (requesting to “thin down” payments associated with “LVI
AP Payment Audit List”); see also Perri Aff., Ex. 67, Catania Dep. 98:5–100:17 (noting that
request to “thin this down” relates to postponing payments to vendors on the LVI accounts payable
list).
183
Lenahan Aff., Ex. 81 at -355683.
184
See Perri Aff., Ex. 68, Cutrone Dep., at 140:5–141:25 (“the deferral is because HECO was
starting to have cost overruns, and it was my understanding that we’d have margin erosion if we
did not recover either operationally or through advancement of change order and/or claim with the
client to recover. And until I had better clarity around that, I deferred . . . I’m expecting recovery
of [the erosion] and the monetizing of that overrun either through production gains or . . . favorable
change orders with the client.”).
39
regional manager for the HECO project, asked Leonard if he could begin recording
around $1 million total loss for the project, or “post the hit.” 185 Leonard emailed
back, “What?” 186 He testified his puzzlement stemmed from the fact that he
expected the anticipated Change Order to give rise to claims that would keep the
project profitable. 187
After the Merger, NorthStar’s CFO, Jeff Adix, opined that HECO was
overstated as of December 31, 2014 because the Change Orders did not properly
give rise to revenue recognition under GAAP. 188 Adix also stated, however, that he
would not consider HECO overstated as of the date of the Merger due to the project’s
history of successfully negotiating Change Orders. 189
d. The Foothill Project
NCM alleges that LVI made baseless adjustments to the financial statements
on the Foothill project, fraudulently inflating profits. The Foothill project was an
185
Lenahan Aff., Ex. 83, at -1899392 (“Post the hit? [Cutrone] told Lenny this would be a good
month for it[.] Post half? About 1mil total.”).
186
Perri Aff., Ex. 69, at -1899361.
187
Perri Aff., Ex. 62, Leonard Dep., at 136:13–22 (“I believed, based on discussions, that we were
going to put together a claim that was going to recoup all costs, plus overhead and profit from
HECO.”).
188
Lenahan Aff., Ex. 84, at -2910 (“In my opinion, based on the work performed, there is
substantial evidence that the 12/31/14 reported results for the HECO project were significantly
overstated relative to the value of that project . . . In my opinion, the cause of the misstated HECO
results was an over-reliance by the Company’s former CFO on the outcome of an assumed future
claim, without taking the necessary steps to fully validate a claim of this size. . .”).
189
Id. at -2914 through -2915.
40
abatement, demolition, and site clearing at the Foothill De Anza Educational
Center. 190 LVI entered the contract on August 8, 2013. 191 It estimated the total
contract value at $5 million, with $2.7 million in scrap value. 192
On February 20, 2014, a regional controller emailed LVI’s Northern
California Branch President, Michael Kinelski, to confirm that the estimated gross
profit of $461,000 reflected in the January 2014 WIP schedule was accurate. 193
Kinelski confirmed the accuracy the following day. 194 The regional controller then
provided COO Leonard with the draft January WIP for Foothill on February 24,
noting that “[Kinelski] forecasts the job to make 451k GP. As of Dec 2013 we
reflected job to date [gross profits] of $819k. I’m in the process of finding additional
[gross profits] from other Branches so we can adjust the job as of Dec.” 195 LVI made
upward adjustments to the WIP, and three days later the regional controller sent an
email to Kinelski, noting, “We would like to adjust Foothill for Jan as follows,” and
showing a gross profit for the project of $878,762. 196 Kinelski responded, “Ok with
190
Lenahan Aff., Ex. 88, Foothill De Anza Educational Center Demolition Work Order dated
8/8/2013.
191
Id. at -436904.
192
Lenahan Aff., Ex. 89, at -1976866; Lenahan Aff., Ex. 90 at -1912010.
193
Lenahan Aff., Ex. 91, at -2219557 (“I see the Job by Job is reflecting Foothill with a revenue
of 6.5 mil and a GP of 461k. Is this accurate? I hope not.”).
194
Id. at -2219556 (“Unfortunately the $460k is where it looks like we’ll end up right now.”).
195
Lenahan Aff., Ex. 92, at -192009.
196
Lenahan Aff., Ex. 95, at -2221011.
41
me.” 197 The final January WIP recorded gross profits of $879,000. 198 The
adjustment carried over to February, resulting in a total increase of estimated gross
profits from the draft WIP schedule of approximately $418,000. 199
At his deposition, Kinelski testified that he expected the gross profit to be
$460,000, and that he could not identify a basis for the upward adjustment. 200 LVI
claims the basis for the adjustment was a potential Change Order on the project. 201
e. The Newark Project
The Newark project involved a partial demolition at the airport in Newark,
New Jersey. 202 NCM alleges that LVI fraudulently included revenue for the Newark
project based on a claim it knew it could not collect. LVI entered a subcontract in
April 2012 with Jervis B. Webb Company for a fixed price of approximately $8.2
million. 203 LVI began to experience operational setbacks soon after the start of the
197
Id. at -2221010.
198
Roberts Report, at 33.
199
Roberts Report, at 32–33.
200
Lenahan Aff., Ex. 94, Dep. of Michael Kinelski (“Kinelski Dep.”), at 95:1–24 (“Q: [A]s of
February 21 you expected the gross profit to be $460,000, correct? A: That is correct. Q: Did
anything change between February 21 to March 14 which would have increased the gross profit
on the job? A: Not that I can remember. Q: Had you discussed a change with anyone other than in
this E-mail? A: No, I don’t think so.”).
201
See Perri Aff., Ex. 12, Kinelski Dep., at 79:16–80:1 (“at this time we were well underway with
claim at a project called the Blue Cube at Foothill . . . we were well underway and we had claims
with our owner, our customer, as well as a subcontractor. . .”).
202
Leonard Dep., at 229:9–230:25.
203
Roberts Report, at 22; Lenahan Aff., Ex. 113, at -368583 (“Contract Price $8,207,265.00”).
42
project—prior to the Merger—and it had difficulty estimating its cost of
completion. 204
LVI increased the Newark project’s revenue based on a Change Order it
internally viewed as likely unsuccessful. 205 In November 2013, LVI assembled
plans to file a Change Order and increased the contract value by $500,000 based on
these plans. 206 The next month, LVI prepared to submit its Change Order for
$640,000. 207 Along with the draft, an LVI employee wrote, “Most of this is going
to be disputed and shaky at best.” 208 LVI employee Bowman then sent the draft
claim to COO Leonard, noting, “As discussed, not a lot of confidence in this should
we actually submit but this will get you to the number.” 209 Bowman then sent the
204
Leonard Dep., at 231:14–233:11, 237:10–238:11; Perri Aff., Ex. 41, at -2109372 (“How the
hell do we not have a clue [about cost to complete Newark project] at this point?”); Perri Aff., Ex.
56, at -2029355 (“Don’t kill the messenger, I have asked every question imaginable for the last 6
months trying to get [cost to complete the Newark project] right. I don’t have an answer. . .”).
205
Lenahan Aff., Ex. 96, at -2029356 (LVI President Bowman stating, “Given the contract
language that I am familiar with I do not feel very confident that we will be able to have substantial
success claim wise.”); Lenahan Aff., Ex. 97, at -2797139 (Bowman stating “you can see by the
emails attached that there isn’t much confidence in any of this sticking.”); Lenahan Aff., Ex. 77,
Dep. of Gary Bowman (“Bowman Dep.”), at 273:24–274:9 (“the contract basically allowed the
customer to do whatever they wanted. . .”).
206
Roberts Report, at 22–24; see also Lenahan Aff., Ex. 114, at -4396600.
207
Perri Aff., Ex. 43, at -2797142 (“Total: $640,000”).
208
Id. at -2797140.
209
Id. at -2797139.
43
proposed Change Order to LVI Senior Vice President Frank Aiello, noting, “you can
see by the emails attached that there isn’t much confidence in any of this sticking.” 210
Bowman continued to express serious doubts about the Change Order’s
strength. 211 The $500,000 revenue remained on the financials through the Merger.
In July 2014, Bowman told another employee that Newark was overstated by
$500,000 due to the inclusion of the claim. 212 In addition, LVI personnel had been
told to refrain from adding monthly costs to the Newark project as they became
known, thus “freezing” the margin until after the Merger. 213 In August 2014,
following the Merger, LVI circulated a forecast of Newark’s results and suggested
that it needed to reverse out $500,000 for the Change Order revenue by decreasing
the total contract value. 214 Ultimately, LVI obtained $100,000 on the Change Order,
and after the Merger it revised the contract value down by $400,000. 215
210
Id.
211
Bowman Dep., at 274:3–9 (“I didn’t feel as though we had the proper documentation to
demonstrate that we were being held up in a way so significant that it would be worth pursuing.”).
212
Lenahan Aff., Ex. 98, at -83372 (“We have over 300,000 in WA work revenue to which the
cost has hit the job but the revenue cannot be recognized since we over stated the revenue by
500,000 for the potential claim value and are now simply trying to backfill the gap.”).
213
Lenahan Aff., Ex. 98, at -83372 (Bowman noting, “We never completed adding the add’l costs
we knew about many months ago, we were told to discontinue adding them each month—we
would need to dig back to get specific amounts but we definitely never added the total cost that we
realized we were short from months ago.”).
214
See Bowman Dep., at 306:2–307:7.
215
Roberts Report, at 23; see also Lenahan Aff., Ex. 119 at -2288123 (reversing project value as
part of Schedule 1C); Lenahan Aff., Ex. 48 (same).
44
f. The Lafayette Project
NCM alleges that LVI improperly delayed reporting known costs on the
Lafayette project. Lafayette was an interior demolition and hazardous waste
removal for historical buildings in the Washington D.C. area. 216 The branch
manager for the project, David Rymers, emailed LVI’s regional controller, Frank
Rapuzzi, in March 2013 to identify issues concerning cost-overruns, estimation
difficulties, and timing for recording losses. 217 The same month, Rapuzzi emailed
CFO Paul Cutrone to inform him that the project had estimated additional costs of
$300,000 that had not been recorded. 218 In September 2013, Paul Cattan, another
LVI regional controller, explained that for August 2013’s project results, he utilized
Rymers’ percent-complete numbers, except in cases where using these numbers
created a decrease in revenue for the month, in which case he changed to the prior
month’s percentage complete, to avoid recording losses.219 Additionally, the
January 2014 job cost report contained edits adding approximately $325,283 in costs
to the Lafayette project and noting the costs were “provided last month but not
216
Lenahan Aff., Ex. 121, Subcontract Agreement.
217
Lenahan Aff., Ex. 100 at -117472.
218
Lenahan Aff., Ex. 101, at -2747540-541 (“Despite the addition of $200K in CO’s as just
discussed, we had to keep the job flat for the month . . . he is trying to phase it in but we have
$300k issue on this job.”).
219
Lenahan Aff., Ex. 122, at -4201289 (“[Rymers] – we used your % completes except in cases
that created a decrease in revenue for the month in which case I changed to the prior months %
complete”).
45
entered in Dec.” 220 Finally, in November 2014—after the Merger—Rymers stated
in an email to fellow LVI employees Paul Cattan and Richard Hubbs, “Recall I had
a $560k loss for [Lafayette] estimated that I wanted to project at end of 2013 and
was told to reverse in dec 2013 and recognize sometime in 2014. [] But to date we
have not.” 221
6. Post-Merger Events
NorthStar, starting soon after the Merger, performed poorly. Following the
formation of the new company, four LVI directors served on NorthStar’s seven-
member board of managers. 222 LVI’s CEO, Scott State, continued on as CEO of
NorthStar, while NCM’s CEO, Khara, became President and a member of the
NorthStar Board of managers. 223 NorthStar experienced a personnel shakeup as it
220
Lenahan Aff., Ex. 124, at -2422145.
221
Lenahan Aff., Ex. 102, at -2526817. LVI disputes that this loss was ever reversed. See Perri
Aff., Ex. 22 (Job-by-job WIP schedule containing financial information for the Lafayette project);
Perri Aff., Ex. 71, Dep. of Paul Cattan (“Cattan Dep.”), at 18:7–25 (testifying that a “job-by-job”
WIP schedule shows the loss was not reversed, and that this WIP schedule would ultimately be
reflected in the Warranted Financial Statements).
222
See Sensing Aff., Ex. 1, at -16723256.
223
Id. (“It is agreed that Scott State will serve as the CEO of [NorthStar], and Sage Khara will
serve as President of [NorthStar].”).
46
executed planned rearrangements following the Merger. 224 In addition, it closed
several NCM branch offices as well as NCM’s National Business Center. 225
Problems also arose with projects post-close. Losses and write-offs emerged
from LVI and NCM legacy projects. 226 In addition, NorthStar entered many new
projects that saw costs in excess of expected revenue. 227 A trough in the market
price of scrap metal led to additional declines in revenue due to lower-value resales
of scrap from demolition projects. 228 As an added trouble, the ongoing litigation
between LVI and NCM delayed company audits, which in turn made NorthStar
224
See Sensing Aff., Ex. 4, at -497763 (“Management is forecasting $9.3 million in potential
headcount synergies from the elimination of 123 positions in the combined companies . . . Overall,
the reductions assumed represent an 18.4% reduction in overall headcount levels . . . including a
40% reduction in estimators, a 35% reduction in branch managers, and a 31% reduction in sales
personnel.”).
225
Id. (“Management is forecasting $1.5 million in annual facility savings . . . for 15 facilities to
be consolidated (6 LVI and 9 NCM)”); Sensing Aff, Ex. 10, Deposition of John Kling (“Kling
Dep.”), at 8:15–9:5, 130:11–24 (describing the operation and closure of the NCM National
Business Center); Sensing Aff., Ex. 11, Deposition of Jim Hall (“Hall Dep.”), at 238:10–239:7,
241:22–242:18 (describing how post-Merger synergies shook up operations).
226
E.g. Roberts Report, at 7–8.
227
Sensing Aff, Ex. 14, at -30536 (listing “Top 20 Problem Projects – Q4-2015”); Sensing Aff,
Ex. 15, at -2965 (Listing “Jobs with Contract Values > 2M In Progress as of 01/31/2015,” showing
many with cost in excess of revenue); Sensing Aff, Ex. 16, at -28775 (same for jobs “In Progress
as of 09/30/2016”), Sensing Aff., Ex. 17, at -330721 (same for jobs “In Progress as of 3/31/16”),
Sensing Aff., Ex. 18, at -29346 (same for jobs “In Progress as of 6/30/16”); Sensing Aff., Ex. 19,
at 11 (same for jobs “In Progress as of 12/31/16”); Sensing Aff., Ex. 20, at 11 (same for jobs “In
Progress as of 03/31/17”).
228
See Sensing Aff, Ex 21 (providing “Large Scrap Status Summary” indicating declining prices);
Sensing Aff., Ex. 22, Deposition of Karan “Sam” Shah (“Shah Dep.”), at 181:15–183:4 (testifying
that drop in scrap value led to reduced profitability on NorthStar jobs); Sensing Aff., Ex. 23
(NorthStar requesting Change Order on Pepco project due to reduction in scrap value).
47
noncompliant with certain lending covenants and damaged its ability to secure
bonds. 229 This, in turn, negatively impacted its ability to bid on new jobs. 230
LVI and NCM put NorthStar up for sale in October 2016. 231 During the sale
process, based on its business performance, NorthStar reduced its financial forecasts
several times. 232 As a result, many bidders dropped out, and in June 2017, LVI and
NCM sold their equity stakes in NorthStar to JF Lehman for a “zero cash equity
return” for either company. 233
229
See Sensing Aff., Ex. 24, Deposition of Jose Carlos (“Carlos Dep.”), at 48:11–50:5 (noting
litigation caused delays in the audit process), 150:14–152:7 (testifying that litigation required a
“lookback” audit); Sensing Aff., Ex. 25, Deposition of Robert Hogan (“Hogan Dep.”), at 228:9–
11 (noting lack of an audit caused LVI to fall out of compliance with loan covenants), Sensing
Aff., Ex. 28, State Dep., at 467:16–468:6 (describing difficulties obtaining bonds as a result of the
lack of audit); Sensing Aff., Ex. 29, Deposition of Michael Roberts (“Roberts Dep.”), at 30:5–16
(explaining that absence or delay of an audit would lead to difficulty obtaining surety credit), 42:9–
14 (explaining that finance company declined to provide “payment performance bonding to
NorthStar” due to the audit problems).
230
Sensing Aff., Ex. 30, at 11–12 (“[T]he delayed issuance of financial statements caused by the
Investor Dispute had a negative impact on the Company’s ability to bid on certain job
opportunities, which led to the Company underperforming financially during the year ended
December 31, 2016 and beyond. . .”).
231
See Sensing Aff., Ex. 9, Confidential Information Mem., prepared by Houlihan Lokey Capital.
232
E.g. Sensing Aff., Ex. 34, Fund III LPAC Memo. NorthStar dated April 5, 2017, at 4 (“in late
March the Company put out a revised 2017 forecast, which shows year-end EBITDA of $38.9
million, compared with original budget of $54 million.”).
233
In other words, JF Lehman purchased NorthStar for an amount less than its total debt, and LVI
and NCM received nothing from the sale. See Sensing Aff., Ex. 36, Agreement and Plan of Merger
among JFL-NGS Partners, LLC, Polaris Merger Sub, LLC, & NorthStar Grp. Holdings, LLC dated
as of June 12, 2017.
48
C. Procedural History
This case has a long and somewhat tortuous procedural history. I focus only
on procedure pertinent to the four motions addressed in this Memorandum Opinion.
LVI filed its original complaint on March 3, 2016, against NCM and Khara. 234
NCM responded on April 4, 2016 with a counterclaim against LVI and a third-party
complaint against Scott State, Paul Cutrone, and NorthStar. 235 NCM amended its
counterclaim and third-party complaint, and on August 23, 2016, LVI, State,
Cutrone, and NorthStar all moved to dismiss.236 On March 29, 2017, I granted the
motions to dismiss with regard to the derivative claims but denied the motions to
dismiss regarding fraud claims. 237
On May 3, 2017, LVI filed an amended complaint, adding the EPP entities as
a defendants. 238 On May 23, EPP moved to dismiss LVI’s amended complaint. 239 I
largely denied EPP’s motion to dismiss on March 28, 2018. 240 On April 10, 2018,
NCM filed a second amended counterclaim, adding LVI Parent as a counter-
234
D.I. 1.
235
D.I. 28.
236
D.I. 118–22.
237
D.I. 236.
238
D.I. 262.
239
D.I. 294.
240
LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2018 WL 1559936 (Del. Ch. Mar. 28, 2018)
(granting dismissal of the negligent misrepresentation claims and denying dismissal of other
claims).
49
defendant. 241 Several months later, on June 29, 2018, NCM and LVI each
voluntarily dismissed their indemnity claims against the other. 242 NCM, EPP,
Khara, LVI, LVI Parent, and Scott State all moved for summary judgment in June
and July 2018. 243 I held oral argument on the motions for summary judgment on
November 28, 2018. 244
Shortly after that argument, on December 6, 2018, NCM filed a third amended
counterclaim, adding Brian Simmons, Robert Hogan, and CHS Private Equity V LP
as counter-defendants. 245 The CHS counter-defendants moved to dismiss on
December 20, 2018.246 The CHS counter-defendants then moved for summary
judgment on May 31, 2019. 247 After briefing completed on these latest motions, I
heard oral argument on September 4, 2019 on the CHS counter-defendants motions
to dismiss and for summary judgment. 248 What follows is my decision resolving the
241
D.I. 627.
242
D.I. 653. LVI explained that “LVI LLC and NCM have stipulated to dismiss their parallel
claims for indemnification, because the exclusive contractual remedy relating to such claims is no
longer available.” LVI Grp. Invs., LLC’s Mot. for Summ. J., D.I. 665, at 3 n.2.
243
D.I. 654, 659, 664–65, 674.
244
D.I. 781.
245
D.I. 789.
246
D.I. 794.
247
D.I. 854.
248
D.I. 888.
50
four motions for summary judgment filed on June 29 and 30, 2018 by NCM, EPP,
Khara, LVI, and LVI Parent. 249 My reasoning follows.
II. ANALYSIS
Summary judgment may be granted if there is “no genuine issue as to any
material fact” and the moving party is “entitled to a judgment as a matter of law.” 250
The Court “must view the evidence in the light most favorable to the non-moving
party.” 251 The Court must not weigh evidence and instead must “determine whether
or not there is any evidence supporting a favorable conclusion to the nonmoving
party.” 252 This requires the non-moving party to “set[] forth specific facts
demonstrating that there is a genuine issue for trial.” 253 Of special importance in the
context of claims for fraud, “[w]hen an ultimate fact to be determined is one of
motive, intention or other subjective matter, summary judgment is ordinarily
249
As addressed below, Defendants NCM and EPP filed their motion for summary judgment
jointly, with NCM joining only in part.
250
Ct. Ch. R. 56(c).
251
Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2017 WL 3168966, at
*2 (Del. Ch. July 26, 2017) (quoting Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 1998
WL 731660, at *2 (Del. Ch. Oct. 9, 1998)).
252
Id. (quoting In re El Paso Pipeline Partners, L.P. Derivative Litig., 2014 WL 2768782, at *8
(Del. Ch. June 12, 2014)).
253
Klig v. Deloitte LLP, 36 A.3d 785, 793 (Del. Ch. 2011).
51
inappropriate.” 254 Nonetheless, when evidence of scienter is absent from the record,
summary judgment may be appropriate. 255
Regarding contracts, summary judgment is unavailable if evidence is required
to resolve ambiguities; that is, if the contractual language is “fairly susceptible [to]
different interpretation[s].” 256 This does not negate the fact that “the intent of the
parties as to its scope and effect are controlling, and the court will attempt to
ascertain their intent from the overall language of the document.” 257
A. LVI’s Motion for Summary Judgment
LVI has moved for summary judgment on NCM’s allegations of fraud and
fraudulent inducement. The elements of the two claims are the same:
(1) the defendant made a false representation; (2) the defendant knew
the representation was untrue or made the statement with reckless
indifference to the truth; (3) the defendant intended for the plaintiff to
rely on the representation; (4) the plaintiff justifiably relied on the
254
Great Hill Equity, 2017 WL 3168966, at *2 (quoting Cont’l Oil Co. v. Pauley Petroleum, Inc.,
251 A.2d 824, 826 (Del. 1969)); see also Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 2009 WL
3756700, at *4 (Del. Ch. Nov. 9, 2009) (“Where intent or state of mind is material to the claim at
issue . . . summary judgment is not appropriate. In such cases, the court should evaluate the
demeanor of the witnesses whose states of mind are at issue during examination at trial.”) (internal
quotation marks omitted).
255
E.g. Krahmer v. Christie’s Inc., 2006 WL 4782304, at *4 (Del. Ch. Oct. 17, 2006) (granting
summary judgment on fraud claim because of lack of evidence contradicting good faith belief in
truth of statement); Wolf v. Magness Constr. Co., 1994 WL 728831, at *5 (Del. Ch. Dec. 20, 1994)
(granting summary judgment because of lack of evidence suggesting a knowing or reckless
misrepresentation).
256
ITW Glob. Invs. Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2017 WL 1040711, at *6
(Del. Super. Ct. Mar. 6, 2017) (quoting GMG Capital Invs., LLC v. Athenian Venture Partners I,
L.P., 36 A.3d 776, 780 (Del. 2012)).
257
Id. (quoting Riverbend Cmty., LLC v. Green Stone Eng'g, LLC, 55 A.3d 330, 336 (Del. 2012)).
52
representation; and (5) the plaintiff suffered causally related
damages. 258
In the Contribution Agreement, LVI represented that the Warranted Financial
Statements disclosed the financial position of its businesses in accordance with
GAAP. 259 NCM’s allegations of fraud regarding six LVI projects center largely on
two GAAP violations: (1) reporting claims or Change Orders as revenue when they
were not probable of collection, and (2) delaying reporting losses when the losses
were known. 260 To survive this motion for summary judgment, therefore, NCM
must offer some evidence from which I may conclude that (1) the Warranted
Financial Statements were not GAAP compliant, (2) LVI knew they were not GAAP
compliant, and (3) LVI nonetheless intentionally offered them to induce NCM’s
reliance (in this case, to enter the Merger).
258
Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 807 (Del. Ch. 2014) (citing Stephenson
v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del.1983); In re Wayport, Inc. Litig., 76 A.3d 296,
323 (Del. Ch. 2013); Paron Capital Mgmt., LLC v. Crombie, 2012 WL 2045857, at *5 (Del. Ch.
May 22, 2012)).
259
Contribution Agreement, § 3.4(b).
260
The GAAP standards for these two rules are stated in the facts and reiterated here. To be
“probable of collection,” the following conditions must be met at the time of revenue recognition:
(1) the contract or other evidence provides that a legal basis for the claim or a legal opinion has
been obtained; (2) additional costs are unforeseen and not the result of deficiencies in contractor
performance; (3) costs associated with the claim are identifiable and reasonable; and (4) the
evidence supporting the claim is objective and verifiable, not based on management’s feel.
Roberts Report, at 9; Lenahan Aff., Ex. 13, at ASC 605-35-25-31. Under GAAP, a loss must be
recognized when it occurs. Roberts Report, at 10.
53
Each of the six LVI projects presents a unique set of facts and operates as a
motion-in-miniature. As noted above, for the purposes of deciding the motion, I
view the facts in the light most favorable to NCM, not weighing the evidence but
drawing all reasonable inferences in its favor. In discussing the projects and the
related allegations of fraud below, I will not repeat a full description of each project,
which is provided in the Background section of this Memorandum Opinion in
dolorous detail. Based on a review of the projects, I find summary judgment is
warranted on the Alcoa project, and it is not warranted for the Holly Street, HECO,
Foothill, Newark, and Lafayette projects. My reasoning follows.
1. The Holly Street Project
In the Holly Street project, LVI subcontracted the demolition of a power plant
in Texas. When a scrap shortfall occurred, LVI sued the general contractor for $9.6
million and—relying on the value of this lawsuit—booked revenue of $4.9 million.
LVI’s fraud, according to NCM, is that it knew this claim was not probable of
collection because it anticipated the scrap shortfall beforehand.
The parties agree on most of the facts. LVI anticipated a shortfall early on
and remained skeptical about the amount of scrap. By July 2011, the site owner
admitted scrap was overstated, but the general contractor nonetheless entered a
contract with the site owner. LVI negotiated its subcontract to reflect a reduced—
and more realistic—amount of scrap on the site and to contemplate a Change Order
54
in the event of what by that point was an anticipated scrap shortfall. 261 When the
shortfall occurred, the general contractor refused to pursue a Change Order with the
site owner, and LVI sued the general contractor under the subcontract for this failure.
At the end of 2013, LVI’s financial auditor concluded that LVI had a basis sufficient
under GAAP to recognize revenue from the claim. 262
The parties disagree on several facts, however, and drawing conclusions in
NCM’s favor, as I must, I find three disputed facts material, precluding summary
judgment here. The parties’ disagreements center on the strength of LVI’s claim
and the contractual protections afforded by the subcontract. First, the parties
disagree over whether the subcontract provided LVI with a guaranteed minimum
value of scrap. NCM points out that LVI’s auditor told it shortly before the Merger
that it reviewed the subcontract and did not see “an obligation” of minimum scrap
value from the general contractor or the site owner; by contrast, LVI personnel all
testified that the subcontract did provide a guarantee minimum scrap. 263 Second, the
261
Compare Perri Aff., Ex. 26, at -23891 (March 2011 proposal suggesting 950,000 pounds of
Copper) with TRC Subcontract, at -84549 (executed subcontract showing 320,000 pounds of
Copper on Exhibit E, Scrap and Salvage schedule).
262
See Perri Aff, Ex. 29, at -303 (“Included as an exhibit to the [TRC Subcontract] is a listing of
expected scrap quantities and dollar value of $8.7M which was relied on by the Company when
[it] calculated the contract price, as such, the Company is entitled to be made whole for reductions
in the expected scrap quantities.”).
263
Compare Perri Aff., Ex. 61, Marcheschi Dep. 71:10–24 (noting that the subcontract between
LVI and TRC includes “a guaranteed minimum as far as the value of the total scrap”) and State
Dep., at 362:8–363:14 (“[The TRC Subcontract] protected our rights by giving us certainty that
there were minimum thresholds [of scrap] that had to be met, and that work conditions would have
to be honored for us to proceed at the price that we offered to proceed at.”) with Lenahan Aff., Ex.
55
parties disagree over whether the subcontract gave LVI a firm basis to pursue a
Change Order, when the general contractor’s agreement with the site owner did not
guarantee a Change Order in case of a shortfall. In other words, did LVI enter its
subcontract knowing that when the shortfall occurred, the general contractor would
be obliged to pursue a Change Order with the site owner without a contractual basis
with the site owner on which to rely? Third, the parties dispute whether LVI
assumed the risk of a shortfall in the subcontract. While post-merger litigation
shows the subcontract did not clearly allocate the risk, this only reinforces the
conclusion that at the time it entered the subcontract, LVI did so without a clear
contractual right to avoid such a risk.
These three disputes raise factual issues of whether LVI booked the revenue
in good faith or whether it booked the revenue despite a belief that it did not have
the contractual or legal protections to vindicate its claim, in order to induce a
favorable merger. These disputed facts ultimately go to whether LVI had knowledge
of an improper financial statement and nonetheless represented otherwise to NCM.
While the evidence suggests—and LVI’s testimony and the opinion of its
auditor corroborates—that there may have been ample basis to support its
representations, I cannot as a matter of law disregard the facts tending to prove
69 at -19223413 (Auditor Grant Thornton’s email to LVI General Counsel noting it “had a look at
the attached TRC contract and cannot see an obligation from the [general contractor] or the
property owner on the minimum scrap value”) (emphasis in original).
56
otherwise. In other words, the inferences from which I conclude that NCM may
prove this claim are weak, but sufficient.
2. The Alcoa Project
In the Alcoa project, LVI contracted for demolition work at Alcoa’s site in
Frederick, Maryland. This project was contentious, leading to LVI’s claim that
Alcoa had violated its contract with LVI in a variety of ways and that Change Orders
were due. After LVI sued Alcoa, it showed the project as profitable on its financial
statements. By contrast, internal analyses based on settlement offers with Alcoa
stated a number that showed the project at a loss. NCM argues this discrepancy
shows an intentional inflation of earnings that amounts to fraud. Nonetheless, the
undisputed facts show that LVI is entitled to a judgment.
Following the commencement of its lawsuit against Alcoa seeking $10.1
million, LVI recorded a total contract value on its 2013 year-end financial statements
of $27.4 million with $3 million in gross profit. 264 LVI’s internal analyses showed
a contract value of $22.9 million, with a negative gross profit. The settlement offers
sent to Alcoa reflect this lower value, but when stating the “Contract Value Owed to
LVI,” one of the offers specified that this amount “excludes LVI claims.” 265 This
suggests that the internal analyses based on these settlement offers also excludes the
264
Roberts Report, at 19–20.; see also Lenahan Aff., Ex. 93, at -304.
265
Perri Aff., Ex. 35, at -222020-005 (“Contract Value Owed to LVI . . . excludes LVI claims”).
57
value of the claims. This conclusion is corroborated by a further internal analysis
that adds the reduced project value together with LVI’s potential claims and shows
a contract balance due from Alcoa of $10,055,520. 266 NCM contends this internal
analysis cannot support summary judgment because “[t]here is no evidence that the
numbers in that document had any basis in fact or any verifiable support.” 267
Countering the veracity of the numbers, however, does not create a material dispute
that anything other than the exclusion of LVI’s claims against Alcoa caused the
discrepancy between the year-end financial statements on the one hand, and the
settlement offers and the internal analyses based on those offers on the other hand.
Even viewing the evidence in the light most favorable to NCM, I find this to be the
reasonable conclusion.
NCM contends that even if the discrepancy is explained by LVI’s claim, there
remains a question of fact about whether the accounting for the claim was proper.
But this does not raise a material fact about whether LVI committed fraud. NCM
does not offer any evidence that anyone at LVI doubted the strength of its claim or
any evidence that they should have doubted it; in fact, the evidence suggests that
LVI personnel, including its General Counsel, believed in the claim’s strength. 268 In
266
Perri Aff., Ex. 36, at -2002647-007.
267
NCM Ans. Br., at 34.
268
See DiCarlo Dep., at 56:15–57:12 (“we had a very strong basis for recovery on our claims”);
Leonard Dep., at 205:7–17 (“we believed all of the CIE was recoverable”).
58
sum, even viewing the facts in the light most favorable to NCM, there is no evidence
presented that suggests an improper inflation of gross profits or contract value. Nor
is there evidence presented that suggests reporting the lawsuit as revenue on the year-
end financial statements not only violated GAAP, but from which I may infer that
LVI knew it violated GAAP and offered it to NCM nonetheless.
3. The HECO Project
The HECO project required LVI to demolish a power plant in Hawaii, and the
contract price included scrap value estimates that were not fulfilled. NCM offers
four email exchanges as evidence of fraud on the HECO project, arguing that LVI
understood the project to be a loss but nonetheless deferred the loss until after the
Merger. While the evidence is scant, it nonetheless creates an issue of material fact.
Resolving that factual issue in favor of NCM, I cannot say, as a matter of law, that
fraud is precluded.
In the first exchange, CEO Scott State wrote to COO John Leonard, “scrap
starting to fade”; Leonard wrote back, “I know. Issue at Poletti”; then Leonard
responded again, adding, “And HECO.” 269 This is not, as NCM argues, an
ambiguous exchange. Leonard’s first response notes that fading scrap prices are an
issue at Poletti. His second email notes that fading scrap prices are also an issue at
HECO. NCM’s interpretation—that Leonard was signaling not only that HECO
269
Perri Aff., Ex. 39, at -2122048.
59
financials were fading but also that he understood LVI would be operating at a loss
with respect to HECO—unreasonably stretches the evidence. I do not find that this
evidence implies fraud on the part of LVI. Likewise, in the second email exchange,
LVI’s CFO, Paul Cutrone, requested that costs be “thinned down” and pushed to
April, but this fails to imply fraud. 270 This email related to accounts payable and
cash flow, and there is no indication that it affected revenue reporting.
The final two email exchanges, however, viewing the evidence in the light
most favorable to NCM, create issues of material fact, if narrowly, that preclude
summary judgment. Cutrone wrote to Leonard and State on the date of the Merger,
“We have deferred margin erosion on HECO.” 271 Following the Merger, LVI
employee Joe Catania asked Leonard if he could “post the hit,” meaning record
around $1 million total loss for the HECO project that had been deferred. 272 LVI
argues that Leonard’s one-word response—“What?”—is exculpatory, but I find it
insufficient to establish that Leonard expected in good faith that anticipated claims
would keep the project profitable. 273 Similarly, Cutrone’s later deposition testimony
270
Lenahan Aff., Ex. 80, at -2121458 (requesting to “thin down” payments associated with “LVI
AP Payment Audit List”).
271
Lenahan Aff., Ex. 81, at -355683. LVI points out that this email concerns financials for the
first quarter of 2014, including March 2014, but deferred margin erosion arguably concerns margin
erosion that went unreported at an earlier date, potentially during the period covered by the
Warranted Financial Statements.
272
Lenahan Aff., Ex. 83, at -1899392.
273
Perri Aff., Ex. 69, at -1899361.
60
that he deferred margin erosion because of the opportunity to recover based on LVI’s
claim, on a cold record, is insufficient to resolve a factual dispute over whether LVI
knew it had losses on the HECO project and intentionally delayed stating them on
the financials until after the Merger.
These latter two exchanges, again narrowly, create an issue of material fact
about whether LVI knew about a loss prior to the merger but intentionally delayed
reporting it in violation of GAAP. Thus, as a matter of law, I cannot grant summary
judgment.
4. The Foothill Project 274
The Foothill project required LVI to demolish a school. NCM argues that
LVI intentionally and artificially inflated gross profits for the Foothill project on the
January 2014 WIP, which then improperly carried over into the Warranted Financial
Statements ending in February 2014. The parties cite to different parts of the record
and construe email exchanges in different ways, but the evidence shows a dispute of
material fact that precludes summary judgment on the Foothill project.
274
LVI argues that summary judgment is warranted for these last three projects—Foothill, Newark,
and Lafayette—because any fraudulent misstatements could not have been large enough to be
material to NCM’s decision to enter the merger. This is, at the very least, disputed for two reasons
NCM outlines. First, NCM’s expert testified to the materiality of these projects. See Lenahan
Aff., Ex. 74, Roberts Dep., at 231:9–16. Second, although the amounts may be smaller compared
with the other projects, they form a portion of NCM’s total claim for a misstatement of $10.9
million, a material figure.
61
The record shows that LVI employee Michael Kinelski received the first draft
for the January WIP schedule from a regional controller, and he approved numbers
reflecting a gross profit of $460,000. 275 These numbers were passed on to COO
Leonard. 276 Someone at LVI—the record is unclear who—made a significant
upward revision to the gross profit in the WIP schedule. 277 The regional controller
sent a second draft to Kineslki, writing, “We would like to adjust Foothill for Jan as
follows,” and this draft stated gross profits of $878,762. 278 Kinselski approved the
numbers, writing back, “Ok with me.” 279
The disputed material fact is whether there was any basis for the adjustment.
LVI states the basis for the adjustment was a Change Order, and it cites to Kinelski’s
deposition. In the passage LVI cites, Kinelski is discussing emails between himself
and the regional controller dated July 16, 2014: “at this time we were well underway
with claim at a project called the Blue Cube at Foothill . . . we were well underway
and we had claims with our owner, our customer, as well as a subcontractor. . .”280
LVI does not offer evidence, however, showing that the Foothill Change Orders
275
Lenahan Aff., Ex. 91, at -2219557.
276
Lenahan Aff., Ex. 92, at -192009.
277
Lenahan Aff., Ex. 95, at -2221011.
278
Id.
279
Id. at -2221010.
280
Perri Aff., Ex. 12, Kinelski Dep., at 79:16-80:1.
62
discussed in Kinelski’s deposition regarding emails sent in July 2014 served as the
basis for the adjustment to gross profit in the January and February WIP schedules.
It is unclear whether these later emails explain or relate to the adjustments. NCM,
in turn, cites to another passage in Kinelski’s deposition in which he states he did
not know who adjusted the profits from $460,000 to $878,000, that he had not
expected such a change, and that he was unaware of any changes on the Foothill
project that would have given rise to the adjustment. 281
In sum, while a factfinder might agree with LVI that the adjustment was part
of a healthy give-and-take over numbers, the parties have a dispute of material fact
as to whether the adjustment to gross profits for Foothill had any basis to justify it.
Resolving this issue in favor of NCM, it is reasonable to infer that LVI knew it was
an artificial inflation that could not be achieved, and nonetheless fraudulently stated
the inflated figure in its Warranted Financial Statements.
5. The Newark Project
The Newark project involved an LVI contract to demolish airport baggage-
handling equipment. The undisputed evidence shows that LVI recorded revenue of
$500,000 based on a planned Change Order. 282 LVI personnel on the project saw
281
Lenahan Aff., Ex. 94, Kinelski Dep., at 94:16–95:24.
282
Roberts Report, at 22–24; see also Lenahan Aff., Ex. 114, at -4396600.
63
the claim as shaky, unfounded, and unlikely to stick. 283 They communicated this
message, but the revenue nonetheless remained on the financial statements until after
the Merger, at which time LVI reversed its value by $400,000. 284 LVI essentially
argues that because the Newark job team “was failing spectacularly,” their judgment
on the claim’s worth was suspect and reasonably omitted from the financial
reporting. That is one inference, but the instant motion requires me to consider
another; the inference that LVI maintained the revenue despite a clear message from
its employees closest to the project that the claim was not as valuable as reported.
An issue of material fact remains as to whether LVI intentionally maintained
artificially inflated revenue until after the Merger, and thus knew its Warranted
Financial Statements violated GAAP.
6. The Lafayette Project
LVI undertook the Lafayette project in connection with renovation of historic
properties in the District of Columbia. The parties dispute four material facts about
whether LVI intentionally misstated its financial statements, thus precluding
summary judgment for the Lafayette project. First, LVI employee Rappuzi emailed
CFO Paul Cutrone in March 2013 and told him that the project had incurred
283
Lenahan Aff., Ex. 96, at -2029356; Lenahan Aff., Ex. 97, at -2797139; Lenahan Aff., Ex. 77,
Bowman Dep., at 273:24–274:9.
284
Roberts Report, at 23; see also Lenahan Aff., Ex. 119 at -2288123 (reversing project value as
part of Schedule 1C; Lenahan Aff., Ex. 48 (same).
64
$300,000 in unreported costs. 285 The parties dispute whether the Warranted
Financial Statements properly reflect these known costs. Second, in August 2013,
another LVI employee, Cattan, stated that he was switching accounting methods
with the intent to show more revenue. 286 The parties dispute whether this caused the
improper reporting of revenue on the financial statements. Third, $325,000 in costs
for December 2013 were not reported until January 2014 without explanation, which
affected the 2013 Warranted Financial Statements. 287 Fourth and finally, yet another
LVI employee, Rymers, testified that he was instructed to reverse a known loss at
the end of 2013 and delay reporting it until 2014. The parties dispute whether
Rymers followed these instructions, and thus whether this known loss was
intentionally delayed until after the Merger. 288
Thus, the parties disagree about whether known costs went unreported,
whether LVI personnel intentionally manipulated accounting methods to artificially
inflate profits, whether an unexplained delay in reporting over $325,000 in costs had
any basis, and whether LVI improperly and intentionally delayed reporting an
285
Lenahan Aff., Ex. 101, at -2747540-541.
286
Lenahan Aff., Ex. 122, at -4201289.
287
Lenahan Aff., Ex. 124, at -2422145.
288
As noted in the factual recitation, LVI attempts to show the loss was not improperly reversed
by pointing to “job-by-job” reports showing the loss was reported. See Perri Aff., Ex. 22; Perri
Aff., Ex. 71, Cattan Dep., at 18:7–25. The parties, however, also dispute whether these “job-by-
job” reports are reflected in the Warranted Financial Statements. See NCM Ans. Br., at 53.
65
additional $560,000 in costs. LVI’s argument that these “minor alleged
discrepancies” may not even have been reviewed by LVI senior management does
not warrant summary judgment when NCM has offered evidence that could create,
at this stage, an inference of intentional improper misstatement of financials.
B. NCM and EPP’s Motion for Summary Judgment
EPP has moved for summary judgment on LVI’s claims for fraud, fraudulent
inducement, conspiracy to commit or aiding and abetting fraud, and unjust
enrichment. 289 NCM joins EPP’s motion as it relates to the timeliness of LVI’s fraud
claims. NCM has not moved for summary judgment on the underlying allegations
of fraud against it.
1. LVI’s Fraud Claims are not Time-Barred
NCM joins with EPP in arguing that LVI’s fraud claims are not timely under
a plain reading of the Contribution Agreement. At the summary judgment stage,
“the intent of the parties as to [a contract’s] scope and effect are controlling, and the
court will attempt to ascertain their intent from the overall language of the
document.” 290 Summary judgment is only denied if the contractual language is
289
I dismissed LVI’s claim against EPP for negligent misrepresentation in my decision of March
29, 2018. See LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2017 WL 1174438 (Del. Ch.
Mar. 29, 2017).
290
ITW Glob. Invs. Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2017 WL 1040711, at *6
(Del. Super Ct. Mar. 6, 2017) (quoting Riverbend Cmty., LLC v. Green Stone Eng’g, LLC, 55 A.3d
330, 336 (Del. 2012)).
66
“fairly susceptible [to] different interpretation[s],” requiring evidence to resolve
ambiguities. 291 Moreover, “Contract terms are not ambiguous merely because the
parties to the contract disagree.” 292
NCM and EPP base their argument on § 5.1(c), “Timing of Claim,” a
provision that relates to the survival of the representations and warranties for the
Warranted Financial Statements. That section provides:
Notwithstanding the foregoing in this Section 5.1, any representation
or warranty in respect of which indemnity may be sought under Section
5.2 below, and the indemnity with respect thereto, will survive the time
at which it would otherwise terminate pursuant to this Section 5.1 if
notice of the inaccuracy or breach or potential inaccuracy or breach
thereof giving rise to such right or potential right of indemnity will have
been given to the party against whom such indemnity may be sought
prior to such time (regardless of when the Losses in respect thereof may
actually be incurred). 293
According to the Defendants, this provision permits the survival of indemnity claims
only. Under the Defendants’ argument, the provision’s express references to
indemnity—particularly, “and the indemnity with respect thereto”—mean that the
provision only allows the survival of indemnity claims. For all other causes of
action, the representations and warranties expire. If the parties wanted other causes
of action to survive, the Defendants argue, they would have said so by including a
291
Id. (quoting GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780
(Del. 2012)).
292
Seidensticker v. Gasparilla Inn, Inc., 2007 WL 4054473, at *2 (Del. Ch. Nov. 8, 2007).
293
Contribution Agreement, § 5.1(c).
67
phrase such as “and all other remedies with respect thereto” rather than “and the
indemnity with respect thereto.”
LVI, by contrast, argues that this misses the point of § 5.1(c). The provision,
it argues, is cumulative: if notice of inaccuracy or breach is timely filed, then the
representations and warranties survive, and the related indemnity also survives. If
the parties meant for other remedies to expire, they would have said so.
I do not find the contract ambiguous. Section 5.1(c) concerns the survival of
representations and warranties. It defines the scope of the representations and
warranties as those “in respect of which indemnity may be sought.” 294 It also
provides that the indemnity itself will survive with the representations and
warranties. 295 I read the provision as doing exactly what it purports to do, and
nothing more. The fact that the parties did not mention fraud cannot be read as an
intent to cause potential fraud claims to expire. In other words, the warranties have
not expired, and if those warranties were fraudulent, a fraud action remains
contractually viable.
The language in the Contribution Agreement’s remedies clause treats fraud
separately from indemnification. That provision limits remedies to “(i) the
indemnification provisions contained in this Article 5, (ii) the provisions of Section
294
Contribution Agreement, § 5.1(c).
295
Id. (“. . . and the indemnity with respect thereto. . .”).
68
5.6 [specific performance] and (iii) claims for fraud against the Person who
committed such fraud.” 296 In other words, fraud is not contained by the Contribution
Agreement in the same way indemnification and specific performance are, nor does
the contract limit fraud claims to the parties to the Agreement. Given this treatment,
the explicit extension of the right to indemnification upon notice of a claim is
necessary to preserve that right. As such, it does not imply an intent to extinguish
fraud claims based on the warranties. Section 5.1(c) does not imply a positive intent
to extinguish the otherwise-broad remedy for fraud and preserves fraud actions
based on the representations and warranties thereby preserved.
In sum, § 5.1(c) operates to preserve the representations and warranties if
notice is timely given, and it also preserves the indemnity related to those
representations and warranties. I find that the parties did not express the intent, in
light of the contract as a whole, to extinguish the fraud cause of action by leaving it
out of the survival clause in § 5.1(c). Therefore, summary judgment on this
argument is denied.
296
Id. § 5.4(e).
69
2. EPP is Entitled to Summary Judgment for Fraud and Fraudulent
Inducement
“The elements of fraudulent inducement are the same [as] those of common
law fraud.” 297 As I have described, to demonstrate fraud, a plaintiff must show:
(i) a false representation, (ii) the defendant’s knowledge of or belief in
its falsity or the defendant’s reckless indifference to its truth, (iii) the
defendant’s intention to induce action based on the representation, (iv)
reasonable reliance by the plaintiff on the representation, and (v)
causally related damages. 298
EPP’s motion does not seek summary judgment on the underlying fraud allegations
against NCM; rather, EPP argues that summary judgment is warranted because the
evidence does not show that it made or caused NCM to make the false
representations, and thus LVI cannot show that EPP committed fraud with regard to
the Merger.
LVI’s evidence regarding EPP falls generally into two buckets. The first
bucket is evidence purporting to show that EPP played a high-level role in NCM’s
accounting practices and participated in or directed earnings mismanagement. The
second bucket is evidence purporting to show that EPP played a role in the
Warranted Financial Statements or in the financials associated with the four alleged
fraudulent projects. To put it plainly, the first bucket is heavy, and the second bucket
297
Smith v. Mattia, 2010 WL 412030, at *5 n.37 (Del. Ch. Feb. 1, 2010).
298
Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 49 (Del. Ch. 2015) (citing
Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983)).
70
is light. EPP argues that I should entirely disregard any evidence that does not
specifically tie EPP to those four projects or the Warranted Financial Statements. I
disagree: the evidence regarding EPP’s general role in NCM’s accounting practices
is circumstantial evidence that is relevant, particularly with respect to the inferences
that I must draw at this stage of the proceedings.
I find that LVI does not meet its burden to put forward evidence on the first
prong of fraud, in other words, to show that EPP made a false representation. After
I denied EPP’s earlier Motion to Dismiss this claim, the parties engaged in extensive
discovery, but even after discovery, the record does not contain any evidence
showing that EPP—a separate entity from NCM—made or directly caused NCM to
make the false representations at issue in this litigation. Therefore, as a matter of
law, the evidence does not support a claim for fraud against EPP. 299
299
As the parties note, I denied EPP’s Motion to Dismiss on March 28, 2018, finding that LVI
adequately alleged a claim of fraud, and that the fact that “the representations and warranties in
the agreement were made by NCM, not [EPP] . . . is not fatal to LVI’s fraud claims.” LVI Grp.
Invs., LLC v. NCM Grp. Holdings, LLC, 2018 WL 1559936 (Del. Ch. Mar. 28, 2018). I based that
finding on the public policy against allowing parties to limit their exposure for fraudulent activity.
See Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A2d 1032, 1064 (Del. Ch. 2006); Prairie
Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 61 (Del. Ch. Nov. 24, 2015). Having
reviewed the evidence after substantial completion of discovery, I find LVI’s fraud claim lacking.
However, because I deny summary judgment of the conspiracy claim against EPP below, EPP
faces potential liability for their association with NCM’s allegedly fraudulent activities, but as
conspirators, not fraudsters.
71
3. EPP is not Entitled to Summary Judgment for Conspiracy to
Commit or Aiding and Abetting Fraud and Fraudulent
Inducement 300
In contrast to fraud, conspiracy does not require showing a false
representation by the defendant. 301 Instead, it requires showing “(1) the existence of
a confederation or combination of two or more persons; (2) that an unlawful act was
done in furtherance of the conspiracy; and (3) that the conspirators caused actual
damage to the plaintiff.” 302 Conspiracy is an intentional tort, and therefore it requires
some evidence regarding scienter by EPP. 303 EPP argues for summary judgment on
the conspiracy claim because it contends there is no evidence of an intentional
agreement between it and NCM. A conspiracy claim, however, does not require
LVI, even at trial, “to prove the existence of an explicit agreement.” 304 Rather, a
claim for conspiracy can rely on circumstantial evidence from which a reasonable
300
LVI pled aiding and abetting fraud as an alternative to conspiracy to commit fraud. See Pl. LVI
Grp. Invs., LLC’s Verified Am. Compl. Against Defs., D.I. 262, ¶¶ 122–36. The parties have not
briefed the alternative aiding and abetting claim, and because I find summary judgment is not
warranted on the conspiracy, I do not reach the alternative claim.
301
In my Decision of March 29, 2018, I rejected the argument from EPP that the exclusive
remedies clause in § 5.4(e) of the Contribution Agreement prohibited a conspiracy claim based on
the principle that “where a conspiracy exists, the acts of each co-conspirator with respect to the
aim of the conspiracy are attributable to the acts of the other co-conspirators under a theory of
agency,” and thus “all members of a conspiracy to commit fraud have committed such fraud.” LVI
Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2018 WL 1559936, at *14 (Del. Ch. Mar. 28, 2018).
302
Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1036 (Del. Ch. 2006).
303
Binks v. DSL.net, Inc., 2010 WL 1713629, at *11 (Del. Ch. Apr. 29, 2010).
304
In re Am. Int’l Grp., Inc., 965 A.2d 763, 806 (Del. Ch. 2009).
72
factfinder can conclude there was an agreement. 305 Similarly, intent can be inferred
from circumstantial evidence. 306
LVI offers significant circumstantial evidence of EPP’s involvement with
NCM’s accounting, and I find that, taken as a whole, this evidence is sufficient to
support its claims for a conspiracy to commit fraud. I will not recount the evidence
in detail, which is set out in full in the Background section of this Memorandum
Opinion. Viewing the evidence in the light most favorable to LVI, as I must for this
motion, the proffered evidence leads to a reasonable conclusion that EPP was
involved in earnings mismanagement related to NCM’s accounting practices.
Moreover, EPP exerted influence over those practices. It guided NCM on how to
approach WIP schedules. 307 On more than one occasion, it requested additional
EBITDA or provided targets and watched NCM’s numbers morph to comply with
its requests, sometimes over the course of just a few hours. 308 It instructed when
revenues and fade should be recognized. 309 When EPP expressed displeasure over
305
See id.
306
ITW Glob. Invs. Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2017 WL 1040711, at *8
(Del. Super. Ct. Mar. 6, 2017) (quoting Goldsborough v. 397 Props., LLC, 2000 WL 33110878,
at *2 (Del. Super. Sept. 29, 2000)). While ITW Glob. involved fraud claims, I find the principle
regarding circumstantial evidence equally applicable to a conspiracy to commit fraud.
307
Morris Aff., Ex. 27, at -16706401 (email from Kerr to Brillon, noting, “Per our discussions, we
have asked our Branch managers to take an aggressive approach to their WIP schedules.”).
308
See Morris Aff., Ex. 20, at -16666218; Morris Aff., Ex. 32, at -16644801; Morris Aff., Ex. 59,
at -16701751; Morris Aff., Ex. 62, at -16701877.
309
Morris Aff., Ex. 21, at -166662837.
73
the numbers, results were nearly instantaneous. 310 I conclude that evidence is
sufficient to draw the inference that EPP knew of the allegedly-fraudulent financial
representations related to the Merger, and that it assisted or agreed with NCM to
induce LVI’s reliance thereon.
To the extent EPP denies the evidence shows that it engaged in any earnings
mismanagement, this in itself creates a dispute of material fact about EPP’s
relationship to NCM’s accounting practices.311 Importantly, EPP engaged in the
creation of NCM accounting practices of the very kind alleged with relation to the
projects at issue in this litigation. In addition, while EPP argues that there is no
indication that any of its involvement in NCM’s accounting affected the Warranted
Financial Statements, this is also a disputed material fact. LVI’s expert, Dudney,
did not expressly point to misstatements in the Warranted Financial Statements
traceable to EPP’s involvement. LVI argues, however, that logically any improper
310
See Morris Aff., Ex. 59, at -16701751 (“This cannot stand”); Morris Aff., Ex. 41, at -101338
(“That cannot happen.”).
311
EPP also points to the across-the-board denials by NCM employees that they ever received
instructions from EPP to manipulate financial statements. Lenahan Aff., Ex. 15, Patel Dep., at
171:19–172:25 (denying EPP asked him to submit inaccurate financial data); Lenahan Aff., Ex.
17, Canonica Dep., at 116:23–117:12 (same); Lenahan Aff., Ex. 18, Williams Dep., at 49:1–22
(same). The evidence offered, however, shows that EPP contained its involvement to interactions
with executives like CEO Khara and CFO Duane Kerr, and so the testimony by NCM employees
serves only to further establish a material dispute.
74
delay of fade until a project’s completion would translate into a misstatement of the
Warranted Financial Statements if the project spanned multiple years. 312
In any case, at this stage, the lack of “smoking gun” evidence showing an
explicit agreement by EPP to participate in the alleged fraudulent accounting related
to the four projects or the Warranted Financial Statements does not support summary
judgment. I find there is sufficient circumstantial evidence that creates a genuine
issue of material fact over whether EPP intentionally agreed with NCM to create
fraudulent statements and induce LVI based on those statements. Because EPP held
most of NCM’s equity, had the opportunity to direct the accounting at a high level
and in a suspect manner, and had the motive to inflate financials to increase NCM’s
stake in the Merger, I find the evidence, reviewed above, sufficient at this stage to
reasonably infer an agreement between EPP and NCM regarding the alleged fraud.
Therefore, I deny EPP’s Motion for Summary Judgment on LVI’s claim of
conspiracy to commit fraud.
4. EPP is Entitled to Summary Judgment for Unjust Enrichment
Finally, EPP has moved for summary judgment of LVI’s claim for unjust
enrichment. “The elements of unjust enrichment are: (1) an enrichment, (2) an
impoverishment, (3) a relation between the enrichment and impoverishment, (4) the
312
LVI also lists projects associated with the alleged earnings mismanagement that experienced
profit reversals post-Merger. See LVI Ans. Br. To EPP, at 16–18. EPP disputes whether this
evidence shows that the alleged earning mismanagement caused these later profit reversals.
75
absence of justification, and (5) the absence of a remedy provided by law.” 313 EPP
asserts that the evidence of enrichment is insufficient to withstand summary
judgment. To avoid summary judgment, there must be facts from which I may infer
each element. The enrichment, further, must not be speculative, attenuated, or too
indirect to support a relationship to the loss.314 The remedy—disgorgement of the
unjust enrichment—is equitable; it falls away if there is a tort remedy available. LVI
is actively pursuing such a tort remedy, of course, and the unjust enrichment claim
therefore necessarily provides only an alternative remedy. Thus, I must examine the
record to see whether, even if (and only if) EPP proves not to have committed the
torts LVI has alleged, it nonetheless must disgorge gains from the Merger.
LVI offers three pieces of evidence regarding EPP’s unjust enrichment. First,
it states that “the EPP Defendants were unjustly enriched when they received 37.5%
of LVI in exchange for their worthless interest in NCM.” 315 But EPP did not receive
37.5% of LVI; NCM received 37.5% of NorthStar. In other words, the Merger,
according to LVI, benefitted EPP because the enterprise value of its stake in
NorthStar was more valuable than its larger stake, pre-Merger, in NCM.
Presumably, this benefit was unjustified, because it resulted, per LVI, from NCM’s
313
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (quoting Fleer Corp. v. Topps Chewing
Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988)).
314
Id. at 60–61.
315
LVI Ans. Br. to EPP, at 53.
76
fraud. But if EPP is itself an innocent investor, what value has been transferred to it
from LVI? The evidence is that the combined entity has been sold, with NCM—and
indirectly EPP—retaining no equity value. There is nothing in the record to show
that EPP ever realized any value from the Merger. If it had, any such value would
have had an attenuated relationship to the loss suffered by LVI, which only indirectly
benefitted EPP by “enriching” a company largely—but not entirely—owned by EPP.
This sort of relationship has been considered too attenuated to the impoverishment
to support an unjust enrichment claim. 316 In any event, there is simply no evidence
that EPP realized a gain related to the impoverishment.
LVI next points to management fees paid to EPP Management (one of the
EPP entities) under the Contribution Agreement. 317 The provision in the
Contribution Agreement simply states that NCM paid fees it owed to EPP
Management, and that it would pay all outstanding fees. This does not suggest the
fees were incurred because of or as a result of the Merger. NCM already owed the
fees, and the Contribution Agreement clarified that NCM would pay them. There is
316
See Vichi v. Koninklijke Philips Elecs. N.V., 62 A.3d 26, 61 (Del. Ch. 2012) (“[Defendant] only
benefitted to the extent that the reduction of risks of [subsidiary’s] failure improved [defendant’s]
balance sheet and increased the ‘potential dividends’ [defendant] might have collected from
[subsidiary]. In any event, the direct benefit of [the] loan ran to [subsidiary], not to [defendant].”).
317
Contribution Agreement, § 1.3(d) (“The parties acknowledge that $1,345,207.85 was paid prior
to the Funding Date to Evergreen Pacific Partners Management Company, Inc. . . NCM Holdings
shall and hereby does assume all other accrued and unpaid management and letter of credit fees
and expenses due and owing by the NCM Subsidiaries to Evergreen Pacific Partners Management
Company, Inc. . .”).
77
nothing indicating the payment of the fees was unjustified, or worked an enrichment
on any EPP entity.
Similarly, LVI points to $5.4 million in preexisting loans made by EPP to
NCM, more than $15 million in indemnity related to NCM’s surety program, and
$1.5 million in promissory notes, and it alleges that only the Merger’s consummation
allowed NCM to either pay EPP back or keep the surety from being triggered. 318 An
allegation that EPP received benefits because the bargain struck between LVI LLC
and NCM put NCM in a better position to fulfill preexisting obligations to EPP is
the sort of indirect relationship between harm and benefit that falls short of the
showing required for equity to act. Again, to support a claim for unjust enrichment,
the enrichment must be unjustified. Simply alleging that NorthStar/NCM were able
to satisfy pre-existing obligations to EPP, post-Merger, does not state a claim for
unjust enrichment. 319
For the reasons explained above, summary judgment is warranted in favor of
EPP on LVI’s unjust enrichment claim. EPP also argues that it is immune from an
unjust enrichment claim under the exclusive-remedies provision of the Contribution
318
LVI Ans. Br. to EPP, at 54; Morris Aff., Exs. 113–16.
319
I emphasize again that if EPP conspired to defraud LVI, or aided and abetted NCM’s fraud,
there is a legal recovery available, obviating application of the equitable unjust enrichment claim.
78
Agreement. LVI counters that the contractual limitations are inapplicable to EPP, a
non-party. Because of my decision above, I need not reach the issue.
C. Khara’s Motion for Summary Judgment
Khara has moved for summary judgment on LVI’s claims for fraud and
fraudulent inducement. As noted above, common law fraud and fraudulent
inducement require showing the same elements:320
(i) a false representation, (ii) the defendant’s knowledge of or belief in
its falsity or the defendant’s reckless indifference to its truth, (iii) the
defendant’s intention to induce action based on the representation, (iv)
reasonable reliance by the plaintiff on the representation, and (v)
causally related damages. 321
Unlike EPP, Khara is not a separate entity from NCM for the purpose of LVI’s fraud
claim because, as an employee and executive, he acted as NCM’s agent. Therefore,
Khara cannot—and does not—argue that even if he facilitated fraud, that fraud was
in fact perpetrated by NCM, and not by him. Instead, Khara bases his motion on
two arguments attacking the evidence regarding other prongs of LVI’s fraud claim:
first, that LVI has not properly shown that the alleged fraud proximately caused its
damages; second, that even if NCM committed fraud, LVI has not shown that Khara
facilitated it. For the reasons explained below, I do not consider either argument
persuasive.
320
Smith v. Mattia, 2010 WL 412030, at *5 n.37 (Del. Ch. Feb. 1, 2010).
321
Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 49 (Del. Ch. 2015) (citing
Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983)).
79
1. Khara’s Argument Regarding Causation does not Warrant
Summary Judgment
Khara’s first argument centers on the last element of fraud: causation. Even
if fraud occurred, Khara argues, LVI has not offered any evidence showing that the
fraud caused the damages LVI seeks, which are substantial. Instead, Khara contends
that the parade of business horribles following the Merger—personnel shakeup,
branch closings, underperforming projects, damaging litigation, historic troughs for
scrap markets—more than adequately account for NorthStar’s southbound
trajectory. In the face of this alternate causation, Khara argues it is improper for LVI
to turn to him as a source of recovery for its bad business investment. At this stage
of the litigation, I disagree.
To succeed—as Khara points out—LVI needs to offer evidence showing
damages causally related to Khara’s fraud. 322 At the summary judgment stage, this
requires evidence that the fraud directly caused some damages; in other words,
enough evidence to show that LVI deserves the opportunity to prove the amount at
trial. Khara’s argument improperly conflates the summary judgment showing with
a post-trial damages analysis, demanding that LVI offer evidence showing it was
NCM’s fraud in the Merger that proximately led to the zero cash equity sale in 2017.
But LVI is not required to show this. Assuming that fraud occurred, LVI need only
322
Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 815 (Del. Ch. 2014) (“To be actionable,
a fraudulent misrepresentation or omission must cause the plaintiff to suffer damages.”).
80
offer evidence that the fraud produced some damages to survive summary judgment
regarding causation. 323 To my mind, LVI has done so in two ways.
First, having offered some evidence of fraud related to the Merger, to create
an inference that the fraud caused NorthStar’s decline, it is enough at this point to
show that some allegedly fraudulent NCM projects underperformed expectations
following the Merger. Viewing the evidence in the light most favorable to LVI, as
I must at this stage, I can reasonably conclude that misrepresented financial
statements caused, to some degree, NorthStar’s losses.
Second, LVI offers an argument for damages that does not depend on any
post-Merger decline in NorthStar’s value. LVI split NorthStar’s equity with NCM
based largely on the companies’ respective EBITDAs. Therefore, if NCM
fraudulently inflated its EBITDA in its Warranted Financial Statements, then to the
extent of NCM’s misstatement, LVI surrendered a portion of equity it should have
received, and it did so in direct proportion to the fraudulent misstatement. Thus, if
there were underlying misstatements on NCM’s part, then LVI has offered evidence
of causally related damages because LVI entered the Contribution Agreement and
unreasonably split NorthStar’s equity with NCM to the extent that NCM’s EBITDA
was fraudulently misstated in the Warranted Financial Statements.
323
The issue of Khara’s intent is dealt with separately below.
81
2. Khara’s Argument Regarding Knowledge of Fraud does not
Warrant Summary Judgment
Khara next argues that summary judgment is warranted because LVI’s
evidence does not show his involvement in the alleged fraud. For the purpose of this
motion, Khara argues that if fraud in fact occurred, LVI’s evidence fails to show that
he knew about it or participated in it. 324 This requires LVI to offer evidence from
which I may infer Khara’s “contemporaneous knowledge or reckless disregard” of
his involvement in fraudulent practices. 325 Because fraud requires scienter, evidence
of mere negligence on Khara’s part is insufficient to support a reasonable conclusion
of fraud. 326
At the summary judgment stage, “intent can be inferred from circumstantial
evidence.” 327 It is uncommon for a motion for summary judgment to be granted,
324
Khara’s briefing on his Motion for Summary Judgment includes arguments that could be read
as seeking judgment on portions of the underlying allegations of fraud, despite the fact that NCM
itself has not moved for summary judgment. For instance, on pages 34–35 of his opening brief,
Khara argues that LVI has failed to offer any evidence that the 2012 Warranted Financial
Statements were materially misstated. See Def. Subhas Khara’s Opening Br. in Support of his
Mot. for Summ. J., D.I. 659 (“Khara Opening Br.”), at 34–35. In addition to arguing he lacked
knowledge of the fraud, Khara also attacks the strength of LVI’s evidence of the underlying fraud
regarding the four allegedly fraudulent projects and the so-called Blue Cell Manipulations. See id.
at 37–47. Considering Khara’s briefing as a whole, however, it appears he concedes that the
underlying fraud is a disputed material fact and focuses his argument on his own knowledge of
and involvement with that fraud, and this is how I treat his argument for the sake of determining
his motion.
325
See Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 810 (Del. Ch. 2014) (quoting Metro
Commc’n Corp. BVI v. Advanced Mobilecomm Techs., Inc., 854 A.2d 121, 154 (Del. Ch. 2004)).
326
See DRR, L.L.C. v. Sears, Roebuck & Co., 949 F. Supp. 1132, 1141 (D. Del. 1996).
327
ITW Glob. Invs. Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2017 WL 1040711, at *8
(Del. Super. Ct. Mar. 6, 2017).
82
therefore, solely on failure of proof of intent. In ITW Glob. Invs. Inc., the Superior
Court concluded that based on “a wealth of circumstantial evidence relating to
knowledge” summary judgment was improper because “[t]his evidence could
prompt a factfinder to conclude that [the defendant] was involved in a ‘pattern of
deception.’” 328 In EPP’s similar motion, I found the evidence offered that EPP
directed and manipulated NCM’s project WIP schedules and interim financial
statements to be the sort of circumstantial evidence on which a reasonable factfinder
could rely in connection with the conspiracy claim, thus precluding summary
judgment on that claim. A similar analysis applies to the fraud claim against Khara.
The evidence shows that he directed the adjustments of NCM financial statements
in response to EPP’s requests or target numbers. 329 Khara often played the “go-
between,” receiving instructions from EPP and overseeing their implementation. 330
In addition, Khara himself made requests of CFO Kerr to reach target numbers on
financial statements. 331
In addition to this oversight, LVI’s evidence shows that Khara was involved
in various capacities with the four alleged fraudulent projects. He oversaw the
328
Id. at *9.
329
E.g. Morris Aff., Ex. 22, at -83279; Morris Aff., Ex. 21, at -166662837; Morris Aff., Ex. 32, at
-16644801.
330
E.g. Morris Aff., Ex. 44, at -16633711; Morris Aff., Ex. 78, at -60439.
331
Morris Aff., Ex. 92, at -16760591.
83
bidding for the Apple project, and the regional manager informed him that delays in
reporting costs would lead to fade. 332 Khara was directly involved in the financials
for the Pepco project, instructing subordinates to submit Change Orders and noting
how the Change Order should relate to other items in the financials. 333 On the
Sunoco project, Khara understood that there were issues with the unsold LSG Unit,
and he represented to LVI that NCM had a letter of intent for a sale, which LVI
relied on to accept the reported revenue in the Merger. 334 When Khara instructed
Kerr to increase EBITDA to a target number to “help at closing,” Kerr responded
that he did so, in part, by “[b]ooking . . . an additional $50k of income on the Dupont
Hickory job.” 335
In sum, beyond Khara’s role in implementing EPP’s instructions regarding
interim financials and WIP schedules, the evidence shows that he was involved with
the financials for each of the four allegedly fraudulent projects in some capacity.
The burden will be on LVI to show at trial that all the elements of fraud on Khara’s
part are met. I find, however, sufficient circumstantial evidence to create a dispute
332
See Morris Aff. II, Ex. 73, at -15614872; Morris Aff. II, Ex. 75, at -17688571; Morris Aff. II,
Ex. 76, at -17688569.
333
Morris Aff. II, Ex. 51, at -17384195.
334
See Morris Aff. II, Ex. 84, at -1981047 (“[Khara] claimed to have an ‘LOI to sell $5.5 mil’ but
I did not ask for copy of LOI at the time.”).
335
Dudney Report, at 35–36; Morris Aff., Ex. 78, at -60439 through 440.
84
of material fact regarding Khara’s knowing involvement in the underlying fraud and
his fraudulent intent. 336
Dall. LVI Parent’s Motion for Summary Judgment
LVI Parent has moved for summary judgment on NCM’s claims of fraud and
fraudulent inducement. The elements of fraud have been repeated sufficiently
above. The parties agree on the relevant substantive facts, namely that (1) LVI
Parent negotiated the merger with NCM, (2) LVI Parent created LVI LLC shortly
before the Merger, (3) LVI Parent became a subsidiary of LVI LLC, and (4) LVI
LLC then contributed LVI Parent to NorthStar as part of the Contribution
Agreement. Further, the parties do not dispute that LVI Parent created the financials
that became the Warranted Financial Statements attached to the Contribution
Agreement. Nor do the parties disagree that LVI Parent made no representations
about the Warranted Financial Statements in the Agreement.
Rather than a factual dispute, the parties disagree about a unique question of
law created by the unique merger structure: when two companies contribute
subsidiaries as assets to form a third company, and they maintain an equity stake in
that new company, can they sue the contributed entities for fraud? To state the issue
stripped of nuance, NCM argues that liability in tort inhered in LVI Parent, that none
336
Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 810 (Del. Ch. 2014) (quoting Metro
Commc’n Corp. BVI v. Advanced Mobilecomm Techs., Inc., 854 A.2d 121, 154 (Del. Ch. 2004)).
85
of the transactions at issue transferred this liability to any other entity, and therefore
the liability still resides in LVI Parent. LVI parent, on the other hand, argues with
equal conviction that in light of the structure of this transaction, a holding that an
asset contributed to NorthStar is itself liable for fraud in the creation of NorthStar
would be nonsensical. It appears that this question, in light of the structure of the
Merger, is one of first impression.
I hesitate to decide this issue without a record at trial. The trial will go forward
in any event, and an opinion granting summary judgment here would be, in practice,
advisory if the LVI interests in general prove not fraudsters. Summary judgment is
inappropriate where, as here, “upon an examination of all the facts, it seems desirable
to inquire thoroughly into them in order to clarify the application of the law to the
circumstances.” 337 Therefore, LVI Parent’s motion for Summary Judgment is
denied without prejudice to the legal issues inherent therein.
III. CONCLUSION
For the foregoing reasons, I grant in part and deny in part LVI’s Motion for
Summary Judgment. Specifically, that motion is granted as it relates to the Alcoa
project and denied as it relates to the remainder of the allegedly fraudulent projects.
I grant in part and deny in part EPP and NCM’s Motion for Summary Judgment.
Specifically, that motion is granted on the claims against EPP for fraud and unjust
337
Ebersole v. Lowengrub, 180 A.2d 467, 470 (Del. 1962).
86
enrichment and denied as to the remainder. I deny Khara’s Motion for Summary
Judgment. I deny LVI Parent’s Motion for Summary Judgment without prejudice
to the legal issues raised therein. The relevant parties should submit a form of order
consistent with this Memorandum Opinion, and should submit memoranda
regarding how my decision here affects the pending Motion to Dismiss and Motion
for Summary Judgment filed by the CHS Defendants, and the pending Motion for
Summary Judgment filed by Scott State, if at all.
87