The HC Companies, Inc. v. Myers Industries, Inc. ( 2017 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
417 S. State Street
JOSEPH R. SLIGHTS III Dover, Delaware 19901
VICE CHANCELLOR Telephone: (302) 739-4397
Facsimile: (302) 739-6179
Date Submitted: September 8, 2017
Date Decided: December 5, 2017
R. Judson Scaggs, Jr., Esquire Michael J. Barrie, Esquire
Ryan D. Stottmann, Esquire Stephen M. Ferguson, Esquire
Morris, Nichols, Arsht & Tunnell LLP Benesch, Friedlander, Coplan
1201 North Market Street & Aronoff, LLP
Wilmington, DE 19899 222 Delaware Avenue, Suite 801
Wilmington, DE 19801
Re: The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
Dear Counsel:
This letter opinion addresses The HC Companies, Inc.’s (“HC”) motion for
partial summary judgment. For the reasons that follow, the motion is granted.
HC purchased a lawn and garden business from Myers Industries, Inc. and
MYE Canada Operations Inc. (together, “Myers”) in February 2015. Among the
assets acquired were equipment and machinery to manufacture plastic pots, flats,
trays and other items used to grow and sell plants.1 The condition of that equipment
1
HC also acquired other assets and rights from Myers, including leasehold interests in
manufacturing facilities. Def. Myers Indus. Inc.’s Answer to HC’s Compl. ¶ 8; Aff. of
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 2
was material to the transaction. Meyers represented and warranted in the Amended
and Restated Asset Purchase Agreement (the “Purchase Agreement”) that the
equipment was in “good condition.”2 This representation and warranty, in turn, was
captured within Meyers’ indemnification obligation as set forth in the Purchase
Agreement. It was also captured, by extension, within the Escrow Agreement3 that
memorialized the $8.6 million in funds the parties set aside in escrow to address
post-closing indemnification claims (the “Escrow Property”).4
The operative agreements set forth a detailed process by which
indemnification claims were to be asserted and processed. Relevant here, HC was
required to submit its indemnification claims to Myers by written notice. Myers, in
turn, retained the right to object to indemnification claims raised by HC so long as
it provided a written objection to HC within 10 days of receiving HC’s claim notice.
Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 1 (“Purchase Agreement”)
§ 2.
2
Purchase Agreement § 4.08(c).
3
Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 2 (“Escrow
Agreement”) § 1.3(c)(i).
4
Purchase Agreement § 4.08(c). The precise amount of the Escrow Property is $8,625,000.
Id. at Art. I (definition of “Escrow Amount”); Escrow Agreement at Recitals (same).
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 3
If Myers failed to provide a timely objection, Myers would be deemed to have
“irrevocably waived” the right to contest HC’s claim notice.5
The transaction closed on February 17, 2015. Shortly thereafter, HC sent an
indemnification claim notice to Myers asserting that Myers had breached the
Purchase Agreement’s representations and warranties because some of the tangible
assets it acquired, primarily equipment and machinery, were not in good repair.
HC’s claim notice demanded almost $8 million of the Escrow Property. Myers
timely objected on the ground that HC’s claim lacked sufficient detail.
HC sent a second indemnification claim notice in July 2016, this time seeking
more than $10 million. Once again, HC claimed that specified pieces of equipment
and machinery were not in good condition. Myers did not respond to this notice
until several weeks later, outside the 10-day objection period imposed by the
agreements. When HC demanded payment because the response was untimely,
Myers disagreed and refused to authorize the release of the Escrow Property. This
litigation followed.
In its motion for partial summary judgment, HC contends that it is entitled to
the Escrow Property based on the clear terms of the parties’ contracts because
5
Escrow Agreement § 1.3(c)(i).
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 4
Myers’ objection to HC’s second claim notice was not timely. Myers counters that
the first and second claim notices contain the same claim, and thus its objection to
HC’s first claim notice suffices under the agreements to preserve its rights to contest
the claim. Myers also raises other defenses based on the terms of the agreements
and equitable estoppel.
The core issue is whether Myers timely objected to HC’s second
indemnification claim notice. In resolving this issue, the Court need only consider
the Purchase Agreement, the Escrow Agreement and the parties’ written
correspondence. Because I find that Myers did not timely object to HC’s second
claim notice, I must conclude that it has waived its right to contest HC’s claim to the
Escrow Property. Accordingly, HC’s motion for partial summary judgment must be
GRANTED.
I. Factual Background
I have drawn the facts from the admissions in the pleadings, uncontested facts
presented in the parties’ submissions and those matters of which the Court may take
judicial notice. Unless otherwise indicated, I have determined that the following
facts are undisputed.
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 5
A. The Purchase Agreement
The relevant representations and warranties provision within the Purchase
Agreement is Section 4.08(c).6 There, Myers represented and warranted that “[a]ll
Tangible Personal Property that has a replacement value in excess of $50,000 is in
good condition and in [a] state of good maintenance and repair in all material
respects.”7 Section 8.02(a) of the Purchase Agreement provides that Myers will
indemnify HC for “any inaccuracy in or breach of any of the representations or
warranties of [Myers] contained in this Agreement . . . .”8
Section 8.05 governs “Indemnification Procedures,” and subsection (c) sets
forth the process for making “Direct Claims” against an “Indemnifying Party.” 9 A
“Direct Claim” is any claim by an “Indemnified Party” (i.e., HC) against an
“Indemnifying Party” (i.e., Myers) “on account of a Loss which does not result from
a Third Party Claim.”10 Section 8.05(c) requires HC to give written notice to Myers
6
Purchase Agreement § 4.08(c).
7
Id.
8
Id. § 8.02(a).
9
Id. § 8.05. Either party, HC or Myers, could make indemnification claims under the
Purchase Agreement and Escrow Agreement for reasons specified in those agreements.
Because this decision concerns solely HC’s indemnification rights, however, I do not
discuss Myers’ indemnification rights.
10
Id. § 8.05(c). “‘Losses’ means any Liabilities, losses, damages, fines, interest,
judgments, awards, settlements, fees, claims, suits, actions, causes of actions, assessments,
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 6
within 10 days after HC receives a Direct Claim, but provides that failure to give
prompt notice will not relieve Myers of its indemnification obligations:
Direct Claims. Any claim by an Indemnified Party on account
of a Loss which does not result from a Third Party Claim (a “Direct
Claim”) shall be asserted by the Indemnified Party giving the
Indemnifying Party prompt written notice thereof (but in any event, no
later than ten (10) business days after the receipt by such Indemnified
Party of such Direct Claim). The failure to give such prompt written
notice shall not, however, relieve the Indemnifying Party of its
indemnification obligations, except and only to the extent that the
Indemnifying Party forfeits rights or defenses by reason of such failure.
Such notice by the Indemnified Party shall describe the Direct Claim in
reasonable detail, shall include copies of all material written evidence
thereof and shall indicate the estimated amount, if reasonably
practicable, of the Loss that has been or may be sustained by the
Indemnified Party.11
B. The Escrow Agreement
According to Section 1.3(c)(i) of the Escrow Agreement, once Myers receives
an indemnification claim notice from HC, it has 10 business days to send a written
objection:
If any Buyer Indemnitee desires to make a claim for indemnification
pursuant to the Purchase Agreement that is not addressed by a Joint
Written Instruction pursuant to Section 1.3(a)(i) (an “Indemnification
Claim”), such Buyer Indemnitee [HC] shall provide written notice of
penalties, costs or expenses, including reasonable attorneys’ or other professional fees and
expenses, but excluding any exemplary or punitive damages except in the case of a third-
party claim.” Id. at Art. I (Definitions).
11
Id. § 8.05(c).
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 7
such Indemnification Claim to Sellers [Myers] and the Escrow Agent
(“Claim Notice”), specifying in reasonable detail (to the extent known)
the nature and dollar amount (estimated, as necessary and to the extent
feasible) of the Indemnification Claim. Upon receipt of an
Indemnification Claim, any Seller may contest the Indemnification
Claim(s) specified in the Claim Notice (or any portion thereof) by
giving the Escrow Agent, the applicable Buyer Indemnitee (to the
extent necessary contact information for such Buyer Indemnitee is
provided in the Claim Notice) and Buyer written notice of such
contest (the “Objection Notice”) on or before 5:00 p.m., Dallas,
Texas time, on the tenth (10th) Business Day after receipt by the
Sellers of such Claim Notice (such period, the “Dispute Period”),
which Objection Notice shall include a statement of the reason or basis
of such contest and shall state the amount, if any, of any such Claim
that is not in dispute (any disputed Claim shall hereinafter be referred
to as a “Disputed Claim”).12
Section 1.3(c)(i) goes on to state that if Myers does not object within 10 days, then
Myers is deemed to have “irrevocably waived the right to contest” HC’s claim:
If the Escrow Agent has not received an Objection Notice prior to
the expiration of the applicable Dispute Period, the Sellers shall
have irrevocably waived the right to contest the distribution of that
portion of the Escrow Property specified by the corresponding
Claim Notice and the Escrow Agent shall pay to the Buyer Indemnitee
specified in the corresponding Claim Notice the amount set forth in the
Claim Notice on or before the fifth (5th) Business Day after the
expiration of the Dispute Period.13
12
Escrow Agreement § 1.3(c)(i) (emphasis supplied).
13
Id. (emphasis supplied).
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 8
C. The Indemnification Claims
On April 13, 2015, just two months after the transaction closed, HC sent a
Claim Notice to Myers (the “First Claim Notice”) asserting that Myers had breached
Section 4.08(c) of the Purchase Agreement because the equipment and other assets
listed in the notice were not in “good condition.”14 The First Claim Notice identified
almost $8 million of losses and expressly invoked the procedures set forth in Section
8.05(c) of the Purchase Agreement.15 Myers sent out its objection on April 24, 2015,
in which it stated its position that HC’s First Claim Notice lacked sufficient detail.16
HC responded by notifying the escrow agent of the dispute on May 28, 2015, and
instructing the agent not to release the Escrow Property to either party until they
resolved their dispute and submitted either a “Joint Written Instruction or Final
Decree.”17
14
Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 3 (“First Claim
Notice”).
15
Id. at 2 (“In total, Buyer has identified $7,916,539 in Losses for which Sellers have
agreed to indemnify Buyer pursuant to Section 8.02(a) of the Purchase Agreement.”).
16
Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 4 at 2 (“For each
and every purported ‘deficiency’ and ‘additional deficiency’ referred to in your Letter, you
failed to describe it in any detail, let alone ‘reasonable detail.’”) (emphasis in original).
17
Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 5 at 1 (“Until [HC]
and [Myers] are able to resolve the Direct Claims referenced in the Notice, [HC] hereby
expressly requests that the Escrow Agent retain the full amount of the Escrow Property . . .
until receipt of a Joint Written Instruction or a Final Decree . . . , in each case, directing
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 9
After Myers objected, the parties utilized the indemnification procedure as a
dispute resolution mechanism of sorts. HC hired experts to inspect the equipment
with an eye toward addressing Myers’ objections regarding the lack of specificity in
the First Claim Notice.18 HC then sent Myers a letter in December 2015, in which
it included a settlement demand along with a detailed breakdown of each alleged
defective asset and the experts’ opinions regarding why the asset was not in “good
condition” as warranted.19 The parties were unable to reach an agreement.
HC sent a second claim notice on July 15, 2016, and Myers received it on
July 18, 2016 (the “Second Claim Notice”).20 In the Second Claim Notice, HC
identified a number of assets it alleged were not in “good condition” as warranted in
Section 4.08 of the Purchase Agreement, and provided detailed charts that listed for
each asset the amount of the alleged loss and an explanation of the deficiency.21 This
any disposition thereof. [HC] reserves all of its rights and remedies against [Myers].
Nothing contained in this notice shall preclude [HC] from providing a subsequent notice
of any indemnification claim . . . .”).
18
See Def. Myers Indus. Inc.’s Answering Br. in Opp’n to Pl.’s Mot. for Partial Summ. J.
(“Myers’ Answering Br.”), Ex. 7.
19
Id.
20
Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 6 (“Second Claim
Notice”); Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 8 (stating
that Myers’ received the Second Claim Notice via FedEx on July 18, 2016).
21
Second Claim Notice, Ex. A–B.
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 10
notice also included the experts’ opinions on defects and damages.22 In total, HC
claimed over $10 million in losses, well in excess of the $8.6 million in escrow. 23
Myers did not deliver its written objection until August 12, 2016.24 On August 17,
2016, HC advised the escrow agent that HC had not received a timely objection from
Myers and stated its position that Myers, therefore, had “irrevocably waived the right
to contest the distribution of the full amount of the Escrow Property . . . .” 25
D. Procedural History
On August 17, 2016, HC filed its Verified Complaint in this Court for breach
of contract seeking, inter alia, the full amount of Escrow Property based on the
claims raised in its Second Claim Notice. On May 25, 2017, HC filed a motion for
partial summary judgment in which it argues that Myers has waived its right to
contest the Second Claim Notice, and the release of the Escrow Property, because
22
Id.
23
Id. at 2 (“[HC] has identified $10,144,445 in Losses related to the Deficiencies for which
[Myers] ha[s] agreed to indemnify [HC] pursuant to Section 8.02(a) of the Purchase
Agreement.”).
24
Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 7. Myers 10-day
objection period expired no later than August 1, 2016. Aff. of Jason Reed in Support of
HC’s Mot. for Partial Summ. J., Ex. 8.
25
Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 8.
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 11
its objection to the Second Claim Notice was not timely. Myers opposes the motion.
This is the Court’s decision.
II. Analysis
As noted, the core issue raised by the motion is whether Myers timely objected
to HC’s Second Claim Notice. In order to decide that issue, the Court must first
determine whether the claim contained in the Second Claim Notice is the same as
the claim contained in the First Claim Notice. If the claims are different, then the
Escrow Agreement required Myers to send a written objection within 10 days of
receiving the Second Claim Notice, which Myers did not do. If the claims are the
same, then Myers’ original objection to the First Claim Notice, timely provided,
would perfect its objection and require HC to prove its breach of warranty claim on
the merits. For reasons discussed below, I find that the two claim notices clearly and
unambiguously contain different claims. Thus, Myers’ objection to the Second
Claim Notice was untimely, it has waived its objections and HC is entitled to the
Escrow Property.
A. Standard Of Review
Under Court of Chancery Rule 56(c), summary judgment is appropriate where
“there is no issue as to any material fact and . . . the moving party is entitled to
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 12
judgment as a matter of law.”26 This Court has often observed that “[w]hen the issue
before the Court involves the interpretation of a contract, summary judgment is
appropriate only if the contract in question is unambiguous.”27
Delaware “is more contractarian than . . . many other states.”28 With this in
mind, our courts have recognized that “[p]arties have a right to enter into good and
bad contracts, the law enforces both.”29 “The presumption that the parties are bound
by the language of the agreement they negotiated applies with even greater force
when the parties are sophisticated entities that have engaged in arms-length
negotiations.”30
After carefully reviewing the operative provisions of the contracts at issue
here, I am satisfied they are clear and unambiguous.31 Thus, the Court’s task is to
construe and enforce the contracts as written.
26
Ct. Ch. R. 56(c).
27
United Rentals, Inc. v. RAM Hldgs., 937 A.2d 810, 830 (Del. Ch. 2007).
28
GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898, at *12 (Del. Ch. July 11,
2011).
29
Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010).
30
W. Willow-Bay Ct., LLC v. Robino-Bay Ct. Plaza, LLC, 2007 WL 3317551, at *9 (Del.
Ch. Nov. 2, 2007).
31
Myers did not argue in its brief on the motion that the contracts are ambiguous. At oral
argument, however, Myers’ counsel made an off-handed comment that the contracts might
be subject to two reasonable interpretations. Tr. of Oral Argument 43:3–8. It is unclear
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 13
B. Myers Failed To Object On Time
As noted, Myers argues that the First Claim Notice and the Second Claim
Notice cover the same claim, and thus its objection to the First Claim Notice is
sufficient for the Second Claim Notice. I disagree. Although many of the assets
listed in the two notices overlap, the Second Claim Notice identified seventy new
Losses as subjects of the claim.32 It also provided substantially more detail regarding
the deficiencies of all the listed assets, along with supporting expert opinions, as the
bases of HC’s claim that the assets were not in “good condition” as warranted.33 In
many instances, the stated Losses for the individual assets that are listed in both of
HC’s two Claim Notices differ in amount. For example, the Loss claimed for
machine G9 is $27,000 in the First Claim Notice, but is revised to $27,542 for a
from this comment whether Myers intended to argue that the agreements are ambiguous.
Assuming Myers does seek to press a belated ambiguity argument, I reject it both as
untimely and unsustainable. As explained below, the operative provisions are subject to
only one reasonable construction. See Rhone-Poulenc Basic Chem. Co. v. Am. Motorists
Ins. Co., 616 A.2d 1192, 1196 (Del. 1992) (“A contract is not rendered ambiguous simply
because the parties do not agree upon its proper construction. Rather, a contract is
ambiguous only when the provisions in controversy are reasonably or fairly susceptible of
different interpretations or may have two or more different meanings.”); Comet Sys., Inc.
S’holders’ Agent v. MIVA, Inc., 980 A.2d 1024, 1030 (Del. Ch. Oct. 22, 2008) (“The
determination of whether a contract is ambiguous is a question for the court to resolve as a
matter of law.”) (citations omitted) (internal quotation marks omitted).
32
Second Claim Notice, Ex. A.
33
Compare First Claim Notice at Ex. A–B, with Second Claim Notice at Ex. A–B.
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 14
“software” defect and $17,100 for “clamp end seals/screw” in the Second Claim
Notice.34 The Loss for machine 103 is $8,000 in the First Claim Notice, but is
revised to $10,611 for a “color head” repair.35
No analytical or perceptual paradigm exists where one could read the First
Claim Notice and the Second Claim Notice and then credibly declare that they are
the “same notices.” Myers’ attempt to do just that—to argue that the notices are the
same and, therefore, that its objection to the First Claim Notice carried over to the
Second Claim Notice—is simply not credible. The differences are manifest on the
face of the notices and they are substantive. I am satisfied, therefore, that HC’s
delivery of the Second Claims Notice triggered Myers’ obligation timely to object
to that notice under Section 1.3(c)(i) of the Escrow Agreement.36 It did not do so.
Myers’ construction of the agreements as allowing its first and only timely
objection to HC’s indemnification claim to freeze the Escrow Property as to all
future claims finds no support in the language of the contracts and, indeed, runs
34
Compare First Claim Notice, Ex. A, with Second Claim Notice, Ex. A–B.
35
Compare First Claim Notice, Ex. A, with Second Claim Notice, Ex. A–B. As noted,
there are upwards of 70 such examples where the Losses stated in the Second Claim Notice
differ from those set forth in the First Claim Notice.
36
While “Direct Claims” are tied to “Losses,” Myers’ response obligation is tied to its
receipt of an “Indemnification Claim” from HC. Purchase Agreement § 8.05(c); Escrow
Agreement § 1.3(c)(i).
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 15
directly contrary to the clear terms of the Escrow Agreement. Section 1.3(c)(i)
provides that Myers was obligated timely to “contest [the] Indemnification
Claim(s)” and further provides that if it did not do so, it lost the right to “contest the
distribution of that portion of the Escrow Property specified in the corresponding
Claim Notice.”37 This language unambiguously requires that Myers object to claims
as made and makes clear that objections raised will be tied to “the corresponding
Claim Notice.” The language also reveals that the parties anticipated HC might
make more than one claim. Thus, Myers’ first objection (the only timely objection)
was tied to the “corresponding” First Claim Notice and did not carry over to the
Second Claim Notice.38
37
Escrow Agreement § 1.3(c)(i) (emphasis supplied).
38
Myers argues that under HC’s construction of the Agreements, HC could serially send
the same claim notice and pounce on the Escrow Property the moment Myers failed to
respond in time to any one of the repeated notices. But that is not what occurred here. As
demonstrated above, the two Indemnification Claims stated in their respective notices are
clearly different. According to Myers, HC’s First Claim Notice lacked detail. HC provided
that detail and then asserted substantially more Losses in its Second Claim Notice. Myers’
argument, under these circumstances, that it may simply stand on its original objection
(that the claim lacked detail) flies in the face of the bargained-for give and take required
by the parties’ agreements. Moreover, the extreme scenario that Myers envisions would
be addressed (and prevented) either by the express terms of the contract (e.g., the
“corresponding” language in Section 1.3(c)(i) of the Escrow Agreement) or the implied
covenant of good faith and fair dealing. See, e.g., Nemec v. Shrader, 991 A.2d 1120, 1126
(Del. 2010) (“[The courts] will [] imply contract terms when the party asserting the implied
covenant proves that the other party has acted arbitrarily or unreasonably, thereby
frustrating the fruits of the bargain that the asserting party reasonably expected.”).
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 16
Section 1.3(c)(i) of the Escrow Agreement requires Myers to object to HC’s
claim notices in writing within 10 days after it receives the notice.39 Myers received
HC’s Second Claim Notice no later than July 18, 2016, but Myers did not object
until August 12, 2016—several days outside of the 10-day window. Thus, the
objection was untimely and, absent some other viable legal defense to HC’s
indemnification claim, Myers has “irrevocably waived the right to contest the
distribution of that portion of the Escrow Property specified by the [Second] Claim
Notice.”40
C. HC’s Claim Is Not Barred By Estoppel
Myers sees that other viable legal defense in the law of estoppel. Specifically,
Myers argues that HC is estopped from arguing that Myers waived any objection to
the Second Claim Notice because HC instructed the escrow agent on two occasions
not to release any of the Escrow Property until the parties’ dispute was resolved by
“Joint Written Instruction or Final Decree.”41 Specifically, HC’s instruction to the
escrow agent appeared in a letter dated May 28, 2015, following Myers’ objection
39
Escrow Agreement § 1.3(c)(i).
40
Id.
41
E.g., Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 5 at 1.
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 17
to the First Claim Notice, and again in the Second Claim Notice.42 According to
Myers, by affirmatively stating to the escrow agent that the indemnification dispute
was “subject to final resolution only through Joint Written Instruction or Final
Decree,” HC acknowledged that the Escrow Property was subject to a “Disputed
Claim” and thereby relieved Myers of its obligation to object.43
Myers bears the burden of proving equitable estoppel by demonstrating that
it: “(i) lacked knowledge or the means of obtaining knowledge of the truth of the
facts in question; (ii) reasonably relied on the conduct of the party against whom
estoppel is claimed; and (iii) suffered a prejudicial change of position as a result of
[its] reliance.”44 Myers estoppel defense fails as a matter of law because the
undisputed evidence in the summary judgment record reveals that Myers cannot
demonstrate reasonable, detrimental reliance.
42
Second Claim Notice at 2.
43
Myers’ Answering Br. at 21. According to the Escrow Agreement, an “Indemnification
Claim” is treated as a “Disputed Claim” only when Myers sends a “written notice of []
contest” (i.e., an objection notice) to HC and the escrow agent within the 10-day window
following HC’s claim. Escrow Agreement § 1.3(c)(i).
44
Nevins v. Bryan, 885 A.2d 233, 249 (Del. Ch. 2005) (citing Wilson v. Am. Ins. Co., 209
A.2d 902, 904 (Del. 1965); Waggoner v. Laster, 581 A.2d 1127, 1136 (Del. 1990)); see
also VonFeldt v. Stifel Fin. Corp., 714 A.2d 79, 87 (Del. 1998) (“To make out a claim of
equitable estoppel, plaintiff must show that he was induced to rely detrimentally on
defendant’s conduct.”).
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 18
The analysis must begin with a complete picture of precisely what HC said in
its directions to the escrow agent. Myers has cherry picked what it likes in the
correspondence but there is more. Following the language Myers relies upon, HC
stated in both the May 28 letter and the Second Claim Notice that it “reserves all of
its rights and remedies against [Myers]. Nothing contained in this notice shall
preclude [HC] from providing a subsequent notice of any additional indemnification
claim under any section of the Purchase Agreement . . . .”45 The Second Claim
Notice does not contain the words “Disputed Claim,” but does state clearly that HC
was seeking in that notice “payment of the full value of the Escrow Property.”46
Myers could not have reasonably relied on HC’s correspondence to the escrow
agent in deciding not to send an objection to the Second Claim Notice because HC
made it clear that it “reserve[d] its right” to raise “additional indemnification
claim[s]” against the Escrow Property in “subsequent notice[s].” When HC
delivered its Second Claim Notice, it did just that. Moreover, Myers’ conduct
reveals that it did not rely on HC’s letters in deciding not to send a written objection;
45
Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 5 at 1; Second
Claim Notice at 2.
46
Second Claim Notice at 2.
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 19
it sent a written objection to the Second Claim Notice on August 12, 2016—after the
10-day window closed.47 In the absence of reasonable reliance, Myers’ estoppel
argument fails.48
D. Myers’ Untimeliness Argument Is Itself Untimely
Myers disputes that HC’s Second Claim Notice was valid in the first place
because HC sent the notice more than 10 days after it received notice of the alleged
equipment defects that gave rise to its claim. According to Myers, this means the
47
Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J., Ex. 7. Myers also
points to HC’s December 2015 settlement overture as yet another statement by HC upon
which Myers relied to justify its failure to object to the Second Claim Notice. While HC
did provide additional detail in its settlement letter, it said nothing that would lead Myers
reasonably to believe that a second indemnification claim would not be forthcoming or that
an objection to that claim would not be necessary. See Myers’ Answering Br. at 21, 23;
Myers’ Answering Br., Ex. 7.
48
See Nevins, 885 A.2d at 249. Myers’ estoppel argument likely fails on the first prong as
well. Myers cannot say that it “lack[ed] knowledge or the means to obtain knowledge of
the truth of the facts in question”—the fact in question being that HC may bring a second
claim—after it received HC’s May 28 letter and the Second Claim Notice in which (in both
instances) HC reserved the right to bring additional claims. Id. Myers was also aware of
its obligation to object to HC’s claim notice under the Escrow Agreement, as it was a party
to the contract, had timely objected to the First Claim Notice and had belatedly objected to
the Second Claim Notice. Aff. of Jason Reed in Support of HC’s Mot. for Partial Summ. J.,
Ex. 5.
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 20
Second Claim Notice was untimely under Section 8.05(c) of the Purchase
Agreement.49
Myers’ timing defense to the Second Claim Notice may have carried the day
if only Myers had timely raised it.50 Unfortunately for Myers, any delay by HC
under Section 8.05(c) of the Purchase Agreement (assuming there was a delay) did
not relieve Myers of its obligation to send a written objection. Section 8.05(c)
provides that “the failure to give such prompt written notice shall not, however,
relieve the Indemnifying Party [Myers] of its indemnification obligations,
except and only to the extent that the Indemnifying Party forfeits rights or defenses
by reason of such failure.”51 Myers has not shown that it forfeited any rights or
defenses as a result of HC’s delay in submitting the Second Claim Notice, and I can
think of no right or defense that Myers would have lost if it had made a timely
49
Purchase Agreement § 8.05(c) (providing that Direct Claims “shall be asserted by [HC]
giving [Myers] prompt written notice thereof (but in no event, no later than (10) business
days after the receipt of [HC] of such Direct Claim)”).
50
If HC failed to provide timely notice of an indemnification claim, then Myers could
have included that failure as a “reason or basis” for contesting HC’s claim, as envisioned
by the Escrow Agreement. Escrow Agreement § 1.3(c)(i) (providing that Myers’ objection
notice “shall include a statement of the reason or basis” for Myers objection).
51
Id. (emphasis supplied).
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 21
objection. In fact, a timely objection would have preserved Myers’ rights and
defenses, including its defense that HC’s Second Claim Notice was untimely.
Myers does claim that it was prejudiced by HC’s delay because it could not
make a prompt inspection of the allegedly defective assets listed in the Second Claim
Notice.52 Assuming that is true, that does not amount to a “forfeit[ure]” of rights
and defenses captured by the exception in Section 8.05(c).53 The only reasonable
construction of Section 8.05(c) is that HC’s delay in sending a claim notice must be
the cause of Myers forfeiting rights and defenses.54 But Myers forfeited its defenses
only as a result of its delay in objecting to HC’s claim. As stated, Myers could have
used HC’s delay as part of its defense in arguing that HC was not entitled to
indemnification, along with any other arguments it might muster in defense of the
claim on the merits. According to the plain language of the Purchase Agreement
52
As an aside, I note that Myers’ argument that the Second Claims Notice did not provide
it with adequate, timely notice of the claimed loss is inconsistent with its argument that the
First and Second Claim Notices are the same notices. See Myers’ Answering Br. at 19–20
(defending on the basis that HC was “resubmitting notice of the same claim”); id. at 26–27
(“HC’s delay between alleged discovery and notice to Myers has prevented Myers from
defending against HC’s substantive deficiency claims.”).
53
Purchase Agreement § 8.05(c).
54
Id. (“[T]he failure to give such prompt written notice shall not, however, relieve the
Indemnifying Party [Myers] of its indemnification obligations, except and only to the
extent that the Indemnifying Party forfeits rights or defenses by reason of such failure.”)
(emphasis supplied).
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 22
and the Escrow Agreement, however, Myers is not entitled to raise its defenses
unless it objects on time.55 Myers did not object on time, and thus it cannot challenge
HC’s Second Claim Notice.56
III. Conclusion
For the reasons discussed above, HC is entitled to the Escrow Property. This
may seem like a harsh result, but it is the result dictated by what these two
sophisticated parties bargained for.57 To reiterate, Delaware courts enforce bad deals
the same as good deals.58 The Court cannot rewrite the contracts, and it cannot
ignore the plain terms of the contracts. HC’s motion for partial summary judgment
55
It appears that the parties structured the indemnification claim procedure in a way that
resembles a short statute of limitations period. See id.; Escrow Agreement § 1.3(c)(i). The
limitations period is the 10-day window following HC’s claim notice. If Myers objects
within that window, it can then raise any and all defenses it possesses. But if Myers’ fails
to object within the window, it is time-barred from raising any defenses. This scheme
reflects an intent to have post-closing indemnification claims addressed promptly and
efficiently so that the Escrow Property, a percentage of the funds Myers paid to HC as
consideration, will either be paid out to the seller as contemplated to round out the purchase
price, or to the buyer, if needed, to cover indemnifiable losses, all within the 18 months
post-closing allowed for indemnification claims. See Purchase Agreement § 8.01
(providing that indemnification claims survive for only 18 months after closing).
56
Specifically, the Court’s ruling pertains to HC’s claim for the Escrow Property. The
Court expresses no opinion as to whether Myers’ failure to object on time affects its rights
to defend HC claims for amounts in excess of the Escrow Property.
57
See W. Willow-Bay Ct., 2007 WL 3317551, at *9.
58
Nemec, 991 A.2d at 1125.
The HC Companies, Inc. v. Myers Industries, Inc.
C.A. No. 12671-VCS
December 5, 2017
Page 23
is GRANTED. HC shall submit an implementing order on notice to Myers within
ten (10) days.
IT IS SO ORDERED.
Very truly yours,
/s/ Joseph R. Slights III