East Balt LLC v. East Balt US, LLC ( 2015 )

EFiled: May 28 2015 03:40PM EDT
Transaction ID 57304968
Case No. 10462-VCN
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
JOHN W. NOBLE 417 SOUTH STATE STREET
VICE CHANCELLOR DOVER, DELAWARE 19901
TELEPHONE: (302) 739-4397
FACSIMILE: (302) 739-6179
May 28, 2015
Peter J. Walsh, Jr., Esquire John P. DiTomo, Esquire
Jacob R. Kirkham, Esquire Morris, Nichols, Arsht & Tunnell LLP
Potter Anderson & Corroon LLP 1201 North Market Street
1313 North Market Street Wilmington, DE 19801
Wilmington, DE 19801
Re: East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
Date Submitted: February 27, 2015
Dear Counsel:
Plaintiffs seek the release, over Defendants’ objections, of funds held in
escrow, where the money was placed to indemnify Defendants against certain
risks. Defendants challenge the subject matter jurisdiction of this Court to hear
Plaintiffs’ claims. Although Plaintiffs seek money, they submit that a court of law
cannot afford them the certain, efficient, and complete relief available from this
Court through an order compelling specific performance and the payment of funds
out of escrow.
East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
Page 2
I. BACKGROUND
In November 2012, East Balt US, LLC (f/k/a OEP East Balt Holdings LLC)
and OEP East Balt B.V. (together, the “Defendants”) purchased certain assets and
assumed certain liabilities of East Balt, Inc. (the “Seller”).1 The Seller owned and
operated, directly and through subsidiaries, businesses that mixed, baked,
marketed, and distributed bakery products. Pursuant to the Asset Purchase
Agreement (the “APA”), Defendants paid over $250 million, consisting of
assumed debt and approximately $70 million in cash. Seller later converted into
East Balt LLC (“East Balt”), the limited liability company plaintiff in this action.
Under the APA, a portion of the purchase price (the “Escrow Amount”) was
placed in escrow, pursuant to an escrow agreement (the “Escrow Agreement”) with
JPMorgan Chase Bank, National Association (the “Escrow Agent”), to indemnify
Defendants against potential losses from post-closing claims subject to the APA’s
indemnity provision. Seller and K.F. Trust No. 1 (the “Trust,” and with East Balt,
1
Defendants were formed, specifically for the acquisition, by the private
investment arm of JP Morgan Chase & Co. Verified Compl. (the “Complaint” or
“Compl.”) ¶ 2. The facts set forth herein are drawn from the Complaint and the
exhibits attached thereto, and are assumed true for purposes of this motion.
East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
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“Plaintiffs”) agreed jointly and severally to indemnify Defendants for, inter alia,
breaches of representations or warranties, noncompliance with covenants,
misstatements regarding the Seller’s indebtedness, and particular third party
claims.2
The Escrow Amount was to be released eighteen months after closing (the
“Release Date”), unless Defendants had asserted indemnifiable claims. On the
Release Date, the parties to the APA were to “execute joint written instructions to
the Escrow Agent to release the then existing Escrow Amount to Seller . . . less the
amount of unresolved claims for indemnification asserted by the Purchaser
Indemnitees, which have not been paid. Such unreleased amount shall be retained
by the Escrow Agent.”3
Up until the Release Date, Defendants could make a claim for
indemnification by providing written notice (a “Claim Notice”) “promptly after . . .
receiv[ing] any written notice of any Proceeding against or involving [them] . . . or
otherwise discover[ing] the liability, obligation or facts giving rise to such claim
2
The Trust was Seller’s sole stockholder and is now the sole member of East Balt.
3
Compl. Ex. A (APA) § 9.5.2. The Escrow Agreement echoes this procedure.
Compl. Ex. B (Escrow Agmt.) § 2.01(b).
East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
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for indemnification . . . .”4 Any such Claim Notice was required to describe the
nature and estimated amount of Defendants’ loss.
On June 27, 2014, the last business day before the Release Date, Defendants
sent a Claim Notice to Plaintiffs and the Escrow Agent, asserting seven purported
claims for indemnity from the Escrow Amount, totaling more than $7.9 million.
Accordingly, the Escrow Agent made no disbursement on the Release Date. On
July 8, 2014, Plaintiffs responded to the Claim Notice through an objection letter,
which contested Defendants’ entitlement. Under these circumstances, the Escrow
Agent is required to hold the disputed funds until (i) the parties reach a written
agreement or (ii) a court of competent jurisdiction enters a final and non-
appealable order or judgment resolving the dispute, which is certified in writing by
Defendants’ counsel.5
II. NATURE AND STAGE OF THE PROCEEDINGS
Plaintiffs filed their Complaint on December 16, 2014, asserting breach of
the APA and the Escrow Agreement. They alleged that Defendants have
4
APA § 9.6.1.
5
Escrow Agmt. § 2.01(a).
East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
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(i) asserted claims and losses for which they are not entitled to indemnification,
(ii) failed to provide the requisite support for their stated claims, and
(iii) wrongfully refused to provide the Escrow Agent with joint written instructions
directing the release of the Escrow Amount. Plaintiffs also charge Defendants with
breach of the implied covenant of good faith and fair dealing.
Relevant to the current motion is Plaintiffs’ requested relief—specific
performance of the APA and the Escrow Agreement. Plaintiffs seek an order
requiring Defendants to provide joint written instructions directing the Escrow
Agent to release the remaining Escrow Amount, as well as an order compelling
Defendants to supply complete and accurate information on the claims and losses
for which they seek indemnification. Alternatively, this Court could declare that
Defendants’ indemnity claims are invalid and direct the Escrow Agent to disburse
the funds to Plaintiffs.
Defendants have moved to dismiss pursuant to Court of Chancery
Rule 12(b)(1) for lack of subject matter jurisdiction. They note that this is a
contractual indemnification case, ultimately revolving around $7.9 million held in
escrow, for which the legal remedy of money damages appears adequate.
East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
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Plaintiffs counter that they do not seek damages from Defendants, but the release
of the Escrow Amount held by the Escrow Agent. Plaintiffs assert that the
Superior Court’s powers are inadequate because it cannot compel the Escrow
Agent (a nonparty) to deliver the Escrow Amount to them, nor can it compel
Defendants to perform affirmative actions, i.e., provide written instructions to the
Escrow Agent directing release of funds or provide information in accordance with
the APA.
III. ANALYSIS
Unless provided with a statutory grant of jurisdiction, this Court may only
hear cases that involve the assertion of an equitable right or the invocation of an
equitable remedy.6 Claims involving legal rights and remedies may be heard under
the “clean-up” doctrine once a basis for equitable jurisdiction has been
established.7 Because Plaintiffs have neither brought equitable causes of action nor
claims for which the legislature has bestowed jurisdiction on this Court, the Court
may only hear this action if Plaintiffs’ request for equitable relief is proper.
6
See, e.g., Willis v. PCA Pain Ctr. of Va., Inc., 2014 WL 5396164, at *2 (Del. Ch.
Oct. 20, 2014).
7
Id.East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
Page 7
Specific performance, which Plaintiffs seek, is an equitable remedy “by
which a court of equity may compel the actual accomplishment of a contract by the
party bound to fulfill it.”8 Such relief “is designed to take care of situations where
the assessment of money damages is impracticable or somehow fails to do
justice.”9 A party is not entitled to specific performance if an award of damages
would be “as complete, practical, and efficient to the ends of justice and its prompt
administration as the equitable remedy . . . [and would be] available to the plaintiff
as a matter of right.”10
Equitable jurisdiction is “determined from the face of the complaint as of the
time of filing, with all material factual allegations viewed as true.”11 The Court
takes a realistic view of the complaint and will not hear a case where a complete
legal remedy exists despite a plaintiff’s prayers for traditional equitable relief.12
8
Donald J. Wolfe, Jr. & Michael A. Pittenger (“Wolfe & Pittenger”), Corporate
and Commercial Practice in the Delaware Court of Chancery, § 12.03[a], at 12-39
(2014).
9
Equitable Trust Co. v. Gallagher, 102 A.2d 538, 546 (Del. 1954).
10
Wolfe & Pittenger, § 12.03[b][2], at 12-42.
11
Int’l Bus. Machs. Corp. v. Comdisco, Inc., 602 A.2d 74, 78 (Del. Ch. 1991).
12
Id.East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
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“A practical analysis of the adequacy of any legal remedy, then, must be the point
of departure for each matter which comes before this Court.”13
***
Defendants argue that, here, an assessment of money damages would be
neither impracticable nor would it fail to do justice.14 Supposedly, a monetary
judgment would make Plaintiffs whole. At first blush, a “focus upon the
allegations of the complaint in light of what the [P]laintiff[s] really seek[] to gain”
favors Defendants’ argument for dismissal.15 Plaintiffs seek possession of money
currently held by the Escrow Agent. Damages of $7.9 million could compensate
Plaintiffs should they prevail on the merits. Defendants question why specific
performance or mandatory injunctive relief, as opposed to the payment of the
entire amount at issue, would be necessary to satisfy Plaintiffs.16
13
Id.14
See W. Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2007
WL 3317551, at *12 (Del. Ch. Nov. 2, 2007).
15
See Medek v. Medek, 2008 WL 4261017, at *3 (Del. Ch. Sept. 10, 2008).
16
Specific performance and mandatory injunctive relief are closely related.
Simplistically stated, both compel action, but specific performance requires a
contract to be enforced.
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May 28, 2015
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Defendants also note that the Superior Court can grant declaratory relief
regarding rights under a contract, and could thus establish entitlements to the
Escrow Amount.17 Plaintiffs respond that a declaration entitling them to the
Escrow Amount would be an insufficient remedy because those funds would not
necessarily be released unless a court were to order affirmative action, either
requiring Defendants to authorize the release, compelling their counsel to certify
the court’s order, or ordering the Escrow Agent to release the money. While the
Superior Court could declare rights, it would be unable to compel the Escrow
Agent to deliver the Escrow Amount or order Defendants to act.
Defendants reply that declaratory relief would be adequate here because the
Escrow Agent is required to release the Escrow Amount if a court of competent
jurisdiction enters a final and non-appealable judgment that is certified as such by
Defendants’ counsel.18 They argue that the Superior Court, pursuant to its
contempt powers, has the power to direct counsel. Thus, according to Defendants,
17
10 Del. C. § 6501 (“[C]ourts of record within their respective jurisdictions shall
have power to declare rights, status and other legal relations whether or not further
relief is or could be claimed.”).
18
Escrow Agmt. § 2.01(a).
East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
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a court of law can provide an adequate remedy, and this Court lacks subject matter
jurisdiction.
***
Although Defendants’ arguments for dismissal are not without merit, this
Court has held, in materially similar circumstances, that it is capable of providing a
more “certain, prompt, complete, [and] efficient” remedy than is available at law.19
In SecNet Holding, LLC v. Potash, the plaintiff sought an order compelling an
escrow agent, which was not a party to the action, to release $750,000. The Court
concluded that even if plaintiff could obtain a judgment for damages in a law court,
“defendants . . . failed to show how plaintiff could then enforce its judgment as to
the sum held in escrow.”20 “Because recourse would fall to this Court to enforce
the judgment and a legal remedy [was] not adequate or as certain, prompt,
complete or efficient as the equitable remedy . . . plaintiff lack[ed] an adequate
remedy at law . . . .”21
19
SecNet Hldg., LLC v. Potash, C.A. No. 7781-VCP, at 34 (Del. Ch. Apr. 2, 2013)
(TRANSCRIPT).
20
Id.
21
Id. at 33-34.
East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
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In SecNet, the escrow agent was required to release disputed funds upon
receipt of “a certified copy of a final, non-appealable order or judgment of a court
of competent jurisdiction as to the proper distribution of all or a portion of such
Disputed Amount.”22 The Court relied on Xlete, Inc. v. Willey23 to conclude that a
remedy at law would be inadequate.24 In Xlete, this Court explained that it “has the
power to specifically enforce escrow agreements which are by their very nature
fiduciary relationships.”25
Funds are placed in escrow to provide a convenient source of money that
may be owed. Because a damages award, or the potential enforcement of
declaratory relief through a law court’s contempt powers, would not be as “certain,
prompt, complete, or efficient” as the equitable remedies that Plaintiffs seek, this
Court has subject matter jurisdiction over the Complaint.26
22
Verified Second Am. Compl. Ex. 2, § 4(a)(vii), SecNet Hldg., C.A. No. 7781-
VCP.
23
1977 WL 5188, at *1 (Del. Ch. June 6, 1977).
24
SecNet Hldg., C.A. No. 7781-VCP, at 33-35.
25
Xlete, 1977 WL 5188, at *1.
26
Given this conclusion, it is unnecessary to address the import of the forum
selection clauses in the APA and Escrow Agreement.
East Balt LLC v. East Balt US, LLC
C.A. No. 10462-VCN
May 28, 2015
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IV. CONCLUSION
For the reasons stated above, Defendants’ Motion to Dismiss is denied.
IT IS SO ORDERED.
Very truly yours,
/s/ John W. Noble
JWN/cap
cc: Register in Chancery-K