Bradley E. Julius v. Accurus Aerospace Corporation ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BRADLEY E. JULIUS, in his )
capacity as Seller Representative, )
)
Plaintiff, )
)
v.
)
ACCURUS AEROSPACE )
C.A. No. 2017-0632-MTZ
CORPORATION and ACCURUS )
AEROSPACE WICHITA LLC (f/k/a )
ZTM Acquisitions, LLC, f/k/a ZTM )
Aerospace, LLC), )
)
Defendants. )
_________________________________ )
)
ACCURUS AEROSPACE )
CORPORATION and ACCURUS )
AEROSPACE WICHITA LLC (f/k/a )
ZTM Acquisitions, LLC, f/k/a ZTM )
Aerospace, LLC), )
)
Counterclaim-Plaintiffs,
)
v. )
)
ZTM, INC. (n/k/a BKJ Holdings, Inc.), )
THE KELLEY JULIUS )
REVOCABLE TRUST, THE )
BRADLEY JULIUS REVOCABLE )
TRUST, and BRADLEY E. JULIUS, )
in his capacity as Seller Representative, )
)
Counterclaim-Defendants. )
MEMORANDUM OPINION
Date Submitted: July 11, 2019
Date Decided: October 31, 2019
Lisa Zwally Brown, GREENBERG TRAURIG, LLP, Wilmington, Delaware; Paul
D. Brown and Stephanie S. Habelow, CHIPMAN BROWN CICERO & COLE,
LLP, Wilmington, Delaware; Lynn D. Preheim and Christina J. Hansen, STINSON
LEONARD STREET LLP, Wichita, Kansas, Attorneys for Plaintiff Bradley E.
Julius and Counterclaim-Defendants, ZTM, Inc., The Kelly Julius Revocable Trust,
The Bradley Julius Revocable Trust, and Bradley E. Julius.
Raymond J. DiCamillo, Kevin M. Gallagher, Sara C. Hunter, and Ryan D.
Konstanzer, RICHARDS, LAYTON & FINGER P.A., Wilmington, Delaware; Thad
J. Bracegirdle and Andrea Schoch Brooks, WILKS, LUKOFF & BRACEGIRDLE,
LLC, Wilmington, Delaware; Adam H. Offenhartz, Peter M. Wade, David F. Crowley-
Buck, and Lauren M. Kobrick, GIBSON, DUNN & CRUTCHER LLP, New York, New
York, Attorneys for Defendants and Counterclaim-Plaintiffs Accurus Aerospace
Corporation and Accurus Aerospace Wichita LLC.
ZURN, Vice Chancellor.
2
This case, concerning an acquisition in the aviation parts industry, teaches an
important lesson about the benefits of allocating risk among contracting parties and
detriments of imprecise drafting. The buyers considered this acquisition in a niche
industry to be very lucrative. The sellers produced parts for a particularly important
customer: the world’s largest aerospace company, The Boeing Company.
Boeing parts generated significant revenue for the company. At the time of
contracting, all parties knew the sellers’ contracts for dozens of high-revenue Boeing
parts expired at the end of 2016. This was a common occurrence in the industry,
and it was typical for parts to be added to and removed from the sellers’ master
contract with Boeing. On most occasions, Boeing would request a quote for expiring
parts and afford the sellers the opportunity to re-bid on those parts.
Throughout the due diligence process and at the time of closing, both the
buyers and sellers believed in good faith that Boeing would give the company the
opportunity to re-bid on all parts expiring at the end of 2016, as Boeing had done for
other expiring parts in the past. Aware of the value derived from producing these
parts, the buyers elected to pursue the acquisition. The deal closed, and the parties
placed a portion of the purchase price in an escrow fund, anticipating the possibility
of litigation.
Though there was no guarantee the company would win the Boeing contracts,
the buyers walked into a situation that was worse than they expected. Months after
3
the acquisition, the buyers learned Boeing never requested quotes for dozens of parts
under the expiring contracts. Much to the buyers’ dismay, Boeing awarded those
contracts to other suppliers in 2013 and 2014 and, therefore, the company had “lost”
the opportunity to bid on those parts at that time. The buyers do not allege that, at
the time of contracting, the sellers knew these parts would be unavailable for re-bid.
Seeking redress for the lost bid opportunity, the buyer refused to consent to
release the escrow funds. The sellers filed suit to obtain those funds. The buyers
counterclaimed, alleging breaches of representations and warranties in the governing
asset purchase agreement. The parties filed cross-motions for partial summary
judgment on the issue of liability on all counts brought by all parties. For the reasons
explained below, I find that the sellers are entitled to summary judgment on the
buyers’ counterclaim and that the buyers are entitled to summary judgment on the
sellers’ affirmative claims.
I. BACKGROUND
Plaintiff Bradley E. Julius brings five affirmative claims for relief, in his
capacity as Seller Representative, on behalf of BKJ Holdings, Inc. (f/k/a ZTM, Inc.)
(“ZTM” or the “Company”), the Bradley E. Julius Revocable Trust, the Kelly Julius
Revocable Trust, Kelly E. Julius, and himself (collectively, “Sellers”). In response,
Defendants Accurus Aerospace Corporation and Accurus Aerospace Wichita LLC
(f/k/a ZTM Acquisitions, LLC, f/k/a ZTM Aerospace, LLC) (collectively,
4
“Accurus” or “Buyers”) assert a counterclaim against Sellers. The parties have filed
cross-motions for summary judgment on all claims, so I draw the facts from the
evidentiary record developed by the parties. 1
A. ZTM Succeeds In The Aviation Parts Industry, And Boeing
Becomes ZTM’s Most Valuable Customer.
Julius founded ZTM, which he owned and controlled as Trustee of the Bradley
E. Julius Revocable Trust, together with Kelly Julius as Trustee of the Kelly Julius
Revocable Trust. 2 ZTM operated out of Wichita, Kansas, one of the key aerospace
supply regions in the United States. 3 ZTM manufactured large, complex precision
aerospace parts and assemblies for major commercial aviation and military
customers. 4 By 2015, ZTM had grown to a business of 126 employees with over
$35 million in anticipated revenue.5 ZTM’s primary customer was The Boeing
Company (“Boeing”), which accounted for more than half of its sales.6 In 2014,
revenue from Boeing-related entities comprised 66.3% of ZTM’s sales.7 ZTM
1
See Ct. Ch. R. 56(c).
2
See Docket Item (“D.I.”) 14 ¶¶ 2, 23.
3
Id. ¶ 2. Since the acquisition at issue, the Company no longer operates as ZTM. Id.
4
D.I. 12, Defs.’ Answer ¶ 3; D.I. 14 ¶¶ 2, 23.
5
D.I. 14 ¶ 23.
6
D.I. 67, Ex. B at KSHD_0003821; D.I. 67, Ex. E (Hoopes Dep.) 39:15–17. The parties
attached deposition excerpts as exhibits to various briefs. For clarity, I identify the
deposition using the docket item, exhibit reference, and deposition name.
7
D.I. 67, Ex. B at KSHD_0003820.
5
projected that by 2016, Boeing-related entities would account for 70.3% of ZTM’s
sales.8
The relationship between ZTM and its customers, such as Boeing, followed
an industry-standard pattern. Airplane parts manufacturers typically enter into a
Long Term Agreement (“LTA”), or “master contract,” with customers like Boeing.9
That LTA establishes the terms on which the supplier will manufacture parts for the
customer. 10 The LTA often contains separate sub-contracts for specifically
identified parts, which may expire before the LTA does. 11 ZTM and Boeing entered
into a master contract that included sub-contracts for certain Boeing parts. 12 Some
of those contracts were set to expire at the end of 2016, before the master contract’s
expiration date.13
Suppliers can bid on sub-contracts to manufacture parts. 14 When Boeing bids
out parts, it typically sends a Request for Proposal (“RFP”) or Request for Quotation
(“RFQ”) to the supplier. 15 After receiving the RFQ or RFP from manufacturers like
8
Id. at KSHD_0003821.
9
See D.I. 67, Ex. D (Gibson Dep.) 39:11–16; D.I. 14 ¶ 5.
10
See D.I. 67, Ex. E (Hoopes Dep.) 39:18–40:25.
11
See id.
12
D.I. 67, Ex. E (Hoopes Dep.) 39:18–40:25; D.I. 14 ¶ 5.
13
See D.I. 14 ¶ 36; see also D.I. 67, Ex. F (Capperauld Dep.) 18:17–19:6.
14
See, e.g., D.I. 79, Ex. D-1 (Gibson Dep.) 210:14–211:17.
15
See D.I. 67, Ex. F (Capperauld Dep.) 51:8–18; D.I. 66 at 8.
6
ZTM, Boeing determines which manufacturer wins the contract, and sends that
manufacturer an award letter. 16
The award letter identifies the specific parts Boeing has awarded to the
manufacturer.17 Via amendment, those parts “roll on” or are added to the master
contract.18 But if the manufacturer bid for parts under an expiring contract and
Boeing decided to award those expiring parts to another company, then the expiring
parts would “roll off” of the master contract at their expiration date. 19 ZTM
maintained master electronic files on its internal system that contained all RFQs,
RFPs, award letters, and related documents. 20
Manufacturing parts for Boeing through this process was the “bread and
butter” of ZTM’s business. 21 Although winning a contract renewal bid with Boeing
was not guaranteed, the opportunity to re-bid on existing contracts was “critical to
16
See, e.g., D.I. 67, Ex. F (Capperauld Dep.) 54:13–21.
17
See id. 52:13–53:2, 54:13–21.
18
See id. 52:13–53:7; D.I. 77, Ex. 3 (Capperauld Dep.) 94:5–18, 243:15–24.
19
See, e.g., D.I. 96 at 8, 20, 50 [hereinafter “Hearing Tr.”].
20
See D.I. 67, Ex. G (Woodson Dep.) 38:6–24.
21
D.I. 67, Ex. C (Julius Dep.) 128:4–12; see also id. 69:14–70:14, 102:5–18.
7
the success of [ZTM]” 22 and was the “lifeblood” of the Company. 23 ZTM vigorously
pursued the opportunity to re-bid on expiring contracts.24
For example, the Company proactively reached out to Boeing to secure such
opportunities in 2015. 25 In the summer and fall of 2015, ZTM received four RFQs
offering the opportunity to bid to renew parts that were expiring at the end of 2015.26
ZTM received an award letter in December 2015 for those RFQs. 27 Upon receiving
that award letter, Jamie Woodson, ZTM’s business manager, identified parts for
which ZTM was not provided the opportunity to re-bid, and contacted Boeing for an
explanation. 28 The value of those parts was approximately $2 million in sales in
2015. 29 Similarly, upon learning in 2015 that Boeing was offering the opportunity
to re-bid on certain parts expiring in 2016 and 2017, Julius and Woodson contacted
Boeing and took immediate steps to secure ZTM’s ability to re-bid on those parts.30
22
Id. 104:1–3.
23
Id. 102:5–18.
24
See, e.g., id. 69:20–70:23, 104:1–14.
25
See D.I. 87 at 4–5.
26
D.I. 88, Exs. II (RFQ-46985-101), JJ (RFQ-46985-201), KK (RFQ-46985-301), LL
(RFQ-46985-401), MM.
27
D.I. 88, Ex. PP (Award Letter dated December 17, 2015 referencing RFQ-46985-101, -
201, -301, and -401).
28
D.I. 88, Ex. OO; D.I. 88, Ex. G-1 (Woodson Dep.) 341:2–13.
29
D.I. 88, Ex. MM at ACC_000058015.
30
Id.; D.I. 88, Ex. C-1 (Julius Dep.) 106:7–16.
8
B. Julius Decides To Sell ZTM.
Rowan Taylor founded Liberty Hall Capital Partners, L.P (“Liberty”) in 2011.
Liberty is a private equity firm focused exclusively on investments in the aerospace
industry. 31 Liberty formed Accurus in November 2013, 32 and continues to control
Accurus through an affiliate.33 Accurus is a buyer of aerospace manufacturing
companies. Liberty, either independently or through Accurus, acquired six
aerospace companies prior to acquiring ZTM. 34
In 2015, Julius decided to sell ZTM. He hired Koch Siedhoff Hand & Dunn,
LLP (“Koch”) to assist with the sale. 35 During the sale process, ZTM marketed itself
as the “second largest interior shop for Boeing Commercial.” 36 In August 2015,
ZTM’s broker, Ed Dunn, approached Accurus about a potential sale of ZTM’s
assets, property, and rights.37 Dunn sent an executive summary of the opportunity
to Liberty. 38
31
D.I. 67, Ex. H (Taylor Dep.) 73:23–74:14.
32
Id. 111:1–7.
33
D.I. 64, Ex. 5 at 9.
34
D.I. 67, Ex. H (Taylor Dep.) 110:2–111:23.
35
D.I. 67, Ex. C (Julius Dep.) 42:2–4.
36
D.I. 67, Ex. B at KSHD_0003823.
37
See D.I. 67, Ex. I; D.I. 67, Ex. H (Taylor Dep.) 190:21–191:2.
38
D.I. 14 ¶ 33.
9
On behalf of Liberty, Taylor signed a confidentiality agreement with ZTM
dated August 13, 2015 (the “Confidentiality Agreement”). 39 Under the
Confidentiality Agreement, Liberty received “Evaluation Materials” in order to
evaluate a possible transaction with ZTM. 40 The Confidentiality Agreement defines
“Evaluation Materials,” in part, as
all information, in whatever form or format and however it may be
embodied, concerning the Disclosing Party that are furnished, made
available, or otherwise disclosed to a Receiving Party by or on behalf
of the Disclosing Party, orally or in writing, and whether or not such
Evaluation Materials in whole or in part are protectable trade secrets
independent from this Agreement; and includes the business plans,
historic financials, projected financials, PowerPoint presentations,
software, contracts, agreements, understandings, notes, analyses,
compilations, studies or other documents or materials whether prepared
by any Party or others, which contain or reflect all or any portion of
such materials.41
In the Confidentiality Agreement, Liberty and ZTM agreed, “[T]he other Party does
not make any representation or warranty as to the accuracy or completeness of such
other Party’s Evaluation Materials.” 42
After signing the Confidentiality Agreement, Accurus determined that the
timing was not right for Accurus to make an acquisition.43 ZTM then struck a deal
39
D.I. 64, Ex. 6 (Taylor Dep.) 205:7–14; D.I. 64, Ex. 7 at ACC_000032300–04.
40
D.I. 64, Ex. 7 at ACC_000032300.
41
Id.
42
Id. at ACC_000032302.
43
D.I. 67, Ex. D (Gibson Dep.) 220:11–221:24.
10
with another buyer, but that deal fell through. 44 Thereafter, Dunn contacted Liberty
and Accurus again in early 2016.45 Liberty and ZTM re-engaged the sale process
and signed a new confidentiality agreement that was substantially similar to the
previous agreement.46
Sometime before March 2, ZTM began producing documents for Liberty to
review to evaluate the ZTM acquisition.47 As part of Buyers’ due diligence, ZTM
prepared spreadsheets of projections for Buyers to review, which included
information on the airplane part numbers under contract, part quantities, the contract
expiration dates, pricing, gross margins, sales, projected sales, and other financial
information.48 Woodson prepared the projections under the direction of Dunn and
Arthur Hoopes of Koch. 49
In an email dated March 2, Liberty requested ZTM’s revised forecasts for
2016 through 2019. 50 On March 4, on behalf of Sellers, Dunn sent several
44
D.I. 14 ¶ 34.
45
Id. ¶¶ 34–25; see also D.I. 67, Ex. D (Gibson Dep.) 227:9–20; D.I. 67, Ex. H (Taylor
Dep.) 215:17–216:4.
46
D.I. 14 ¶ 35; see also D.I. 64, Ex. 6 (Taylor Dep.) 226:24–227:5; D.I. 64, Ex. 8 at
KSHD_0024859–0024863.
47
D.I. 64, Ex. 9 (Dunn Dep.) 134:5–11; D.I. 64, Ex. 10 (Hoopes Dep.) 90:7–22.
48
See D.I. 67, Exs. L-1, L-2, M-1, M-2.
49
See D.I. 67, Ex. G (Woodson Dep.) 150:1–151:23.
50
D.I. 67, Ex. L at ACC_000015109; see also D.I. 64 at 7; D.I. 64, Ex. 10 (Hoopes Dep.)
90:7–22.
11
documents to Taylor and Jim Gibson, Accurus’s Chief Executive Officer, including
revised sales projections for 2016 through 2019. 51 Gibson “heavily relied” on these
projections during due diligence. 52 In a letter dated March 11, Liberty, on behalf of
Accurus, offered to purchase ZTM for $80 million. 53
On March 16, Dunn notified Liberty that ZTM discovered a formula error that
affected the sales projections, which caused a swing of approximately $1.9 million
in revenue.54 Sellers corrected the error and circulated revised projections on March
16.55 The parties did not circulate any additional revised forecasts. 56 Liberty did not
revise its offer to purchase ZTM. 57
The projection spreadsheets included tabs specific to Boeing airplane models
that listed each part number that ZTM was manufacturing. 58 Within each tab, ZTM
identified parts for which it would not have the opportunity to re-bid when their
contracts expired.59 If a part was no longer available for re-bid, it was marked with
51
D.I. 14 ¶ 36; D.I. 67, Ex. L at ACC_000015108.
52
D.I. 67, Ex. D (Gibson Dep.) 359:21–24.
53
D.I. 67, Ex. N at ACC_000017857–60; D.I. 64, Ex. 10 (Hoopes Dep.) 99:21–101:23.
54
D.I. 67, Ex. M at ACC_000015130.
55
Id.; D.I. 64, Ex. 9 (Dunn Dep.) 174:12–175:23.
56
D.I. 67, Ex. E (Hoopes Dep.) 187:5–10; D.I. 67, Ex. G (Woodson Dep.) 328:21–329:2.
57
D.I. 64, Ex. 6 (Taylor Dep.) 298:1–18.
58
D.I. 67, Exs. M-1, M-2.
59
Id.
12
a red triangle to alert Buyers of the expiring contract without the opportunity to re-
bid. 60 Projections for parts marked with the red triangle indicated no future sales.61
All parts without the red triangle were presented as available for re-bid, with sales
projected through 2019.62 The forecasts also included the gross margins for each
part number. 63 Sellers “believed at the time the forecast spreadsheets were created
that the prospective buyer would have the opportunity to bid on [certain parts
expiring at the end of 2016].” 64
After due diligence began but before the parties executed the APA on June 3,
ZTM communicated with Boeing about parts expiring at the end of 2016 and new
parts, and provided Buyers with information regarding those communications. 65 For
example, on March 2, Woodson emailed Boeing with a list of expiring parts, stating:
“Below is the list of parts we were discussing yesterday that were on the RFQs that
extended 2015 but are expiring in 2016 that we were told we lost. If there is an
opportunity to re-bid these we would be very interested in fighting to keep this work
60
Id.
61
Id.
62
Id.
63
Id.
64
D.I. 77 at 11; see also D.I. 67, Ex. C (Julius Dep.) 66:10–23; D.I. 67, Ex. D (Gibson
Dep.) 200:3–23.
65
D.I. 68, Exs. S, T, U, V, W.
13
at ZTM.” 66 The parts referred to in the March 2 email were marked with a red
triangle in the projections because ZTM did not secure contracts for those parts and
understood they would not result in future revenue.67 Boeing continued to award
parts to ZTM during this period.68 ZTM alerted Buyers of the newly awarded parts,
and Buyers analyzed how these awards affected the projections. 69
During this period, Buyers and their consultants also sought part information
from ZTM 70 and specifically requested that ZTM clarify the status of parts identified
in the projections.71 For example, on February 19, Hoopes emailed Dunn regarding
a “write up of 2015 Follow on and 2016 expiring parts,” and stated that “ZTM has a
large number of Boeing parts that are due to expire at the end of 2016 [and] ZTM
66
D.I. 68, Ex. T at ACC_000056129; D.I. 66 at 15.
67
See D.I. 67, Ex. L at ACC_000015113; D.I. 67, Ex. M at ACC_000015138. ZTM’s
pattern of communicating with Boeing about potentially lost opportunities to bid continued
between signing and closing. On June 22, ZTM coordinated with Buyers about contacting
Boeing about new bids for parts expiring in 2016, stating “[w]e have received some quotes
from [Boeing] for our existing parts that are scheduled to come off our contract at the end
of 2016.” D.I. 68, Ex. CC at ZTM_0016272.
68
See D.I. 68, Exs. W (Award Letter dated May 10, 2016), Ex. Z (Award Letter dated May
13, 2016), Ex. AA (Award Letter dated May 18, 2016).
69
See D.I. 68, Ex. BB at ACC_000095692.
70
See D.I. 68, Ex. U.
71
See D.I. 68, Ex. V at ACC_000023148; D.I. 68, Ex. X at ACC_000028722.
14
has already quoted on 212 of the 608 parts.” 72 The revenue for the expiring parts in
that email as expiring was not included in the March projections. 73
As Liberty’s primary negotiator with responsibility for reviewing the APA,
Taylor knew prior to executing the APA that certain Boeing parts were expiring at
the end of 2016, and that there was no guarantee that Accurus would win a bid to
continue manufacturing expiring parts. 74 ZTM informed Accurus that they believed
the Company would have the opportunity to bid on the expiring parts. 75 As Julius
testified: “At the time of the sale . . . everybody thought the opportunity to quote
[the expiring parts] would come.” 76 However, ZTM “never promised those parts to
Accurus or Liberty.” 77
C. Accurus Purchases ZTM Pursuant To The APA.
Accurus purchased ZTM’s assets pursuant to an Asset Purchase Agreement
executed on June 3, 2016 (the “APA”). 78 The deal closed on July 29 (the “Closing”).
The APA contains an integration clause that states: “The Transaction Documents
constitute the entire agreement and understanding of the Parties and supersede all
72
D.I. 68, Ex. S at KSHD_0024727.
73
D.I. 68, Ex. O (Dunn Dep.) 201:6–24.
74
D.I. 64, Ex. 6 (Taylor Dep.) 217:4–25, 223:19–224:9, 325:11–326:6, 328:7–10.
75
See, e.g., D.I. 67, Ex. C (Julius Dep.) 66:10–23; D.I. 67, Ex. D (Gibson Dep.) 200:3–23.
76
D.I. 67, Ex. C (Julius Dep.) 65:13–17.
77
Id.
78
D.I. 7, Ex. A [hereinafter “APA”].
15
prior agreements, undertakings, negotiations, and communications, both written and
oral, among the Parties, or any of them, with respect to the subject matter hereof.”79
The APA defines “Transaction Documents” as “this Agreement, the Escrow
Agreement, the Bill of Sale, the Assignment and Assumption Agreement, the
Consulting Agreement, the Employment Agreements and the certificates, affidavits,
and releases required to be delivered under this Agreement.” 80
The APA also contains a number of representations and warranties. Section
3.25(d) states: “Seller has disclosed to Buyer any material disputes, complaints, or
issues with respect to any customers or suppliers and the manner in which Seller
proposes to resolve such disputes, complaints or issues.” 81 Section 3.25(a) states:
Since the Balance Sheet Date, no customer, distributor, or supplier of
the Business has terminated or materially reduced or altered its business
relationship with Seller or Seller Subsidiary or materially changed the
terms on which it does business with either, or threatened that it intends
to cancel, terminate, or otherwise materially reduce or alter its business
relationship with either. 82
79
Id. § 12.5.
80
Id. at 78.
81
Id. § 3.25(d).
82
Id. § 3.25(a).
16
Likewise, Section 3.7(a) states:
Since the Balance Sheet Date, the Seller Group has conducted its
operations in the ordinary and usual course of business consistent with
past practice, and there has not been any: (a) event, occurrence, or
development that has had, or reasonably could be expected to have,
individually or in the aggregate, a Material Adverse Effect. 83
The APA defines the Balance Sheet Date as December 31, 2015. Finally, Section
3.28 states:
No representation or warranty made by Seller in this Agreement and no
statement contained in the Disclosure Schedule to this Agreement or
any certificate or other document furnished or to be furnished to Buyer
pursuant to this Agreement, including the other Transaction
Documents, contains any untrue statement of a material fact, or omits
to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they are made, not
misleading.84
The APA does not include an explicit representation or warranty as to the
accuracy of the projections Sellers shared with Defendants prior to entering into the
APA. The parties did not attach ZTM’s sales projections to the APA. The APA
does not reference the sales projections, nor does it incorporate them by reference.
Nor does the APA guarantee that Buyers would be able to renew expiring parts, or
even that Boeing would allow Buyers to bid on such parts.
83
Id. § 3.7(a).
84
Id. § 3.28.
17
The APA also establishes procedures the parties can follow in the event
Buyers breached the APA’s representations and warranties. Section 8.3(a)(i) of the
APA states that ZTM must indemnify Accurus against any losses arising out of,
relating to, or resulting from the breach of any ZTM representation or warranty,
“without giving effect to any materiality, Material Adverse Effect or similar
qualifications.”85 The APA includes procedures and standards the parties must
follow to bring a “Direct Claim” for indemnification under the APA for breach of
contract or otherwise.86
Under the terms of the APA, Buyers deposited funds with an escrow agent for
the exclusive purpose of satisfying Accurus in the event Accurus suffered
indemnifiable losses (the “Indemnity Escrow Amount”).87 Pursuant to the APA, the
parties entered into a separate Escrow Agreement on July 28, 2016. 88 Bank of
America, National Association Global Custody and Agency Services, as escrow
agent, agreed to hold the $3 million escrow amount in an escrow fund.89 The Escrow
Agreement echoes the APA’s procedures and standards.90
85
Id. § 8.3(a)(i).
86
Id. § 8.5(g).
87
Id. §§ 1.2(b), 2.8(a); see also D.I. 6, Ex. B Art. I (a)–(b) [hereinafter “Escrow
Agreement”].
88
APA § 1.2; see also Escrow Agreement at 1.
89
Escrow Agreement Art. I (a)–(b).
90
Id. §§ 3.1–3.3.
18
D. The Buyers Discover The Lost Parts.
After the Closing, Boeing sent the Company an award letter, completing a
bidding cycle that began with an RFQ Boeing issued before the acquisition.91
Buyers compared the parts in the award letter with ZTM’s projections provided
during due diligence. 92 Buyers discovered 53 parts included on ZTM’s projections
under contracts expiring at the end of 2016, and identified as available for rebid,
were not on the award letter (the “Lost Parts”). 93 The revenue from the Lost Parts
represented approximately 10% of ZTM’s total projected sales from 2017 through
2019: $3.96 million in 2017, and $4.62 million in 2018 and 2019. 94
Boeing had awarded the Lost Parts to other suppliers before December 15,
2015, and as early as 2013 and 2014.95 Sellers were not aware that Boeing had
awarded the Lost Parts to other suppliers prior to the acquisition; Buyers do not
91
D.I. 64, Ex. 16 (Gibson Dep.) 327:8–328:16.
92
Id. 311:21–312:21, 328:6–13.
93
Id. The projections identified the Lost Parts as parts that would be available for re-bid
upon expiration of their contracts. They were not marked with a red triangle. See D.I. 68,
Ex. P ¶ 63; D.I. 67, Ex. E (Hoopes Dep.) 141:19–142:19.
94
D.I. 67, Ex. Q at KSHD_0030750.
95
Hearing Tr. at 50, 52, 65 (“Mr. Offenhartz: . . . Boeing’s decision, we learned well into
discovery, long after the pleadings were drafted, long after documents were exchanged and
long after—well, in the midst of depositions, we did learn that Boeing had transferred the
lost parts to someone, I think in 2013 and 2014. Absolutely before the balance sheet closing
date.”); see also D.I. 64, Ex. 18 (Capperauld Dep.) 69:13–70:23, 163:14–206:17; D.I. 64,
Ex. 19.
19
contend otherwise. 96 Accordingly, Sellers did not inform Buyers that the Company
would not have the opportunity to bid on those parts.97 Rather, Sellers had
communicated to Buyers that they believed the Company would have the
opportunity to bid on the Lost Parts.98 Had Buyers known that the Company lost
that opportunity, “if [Buyers] would have chosen to continue at all, [Buyers] would
have reduced [their] price.”99
E. Litigation Ensues.
Dissatisfied with the Company’s inability to re-bid on the Lost Parts, Buyers
decided to take action. On April 5, 2017, Accurus asserted a Direct Claim against
Sellers.100 In the Direct Claim, Accurus claimed losses from Sellers’ alleged
breaches of the APA that exceeded the amount of funds remaining in the Indemnity
96
D.I. 67, Ex. C (Julius Dep.) 66:10–15; D.I. 64, Ex. 17 (Woodson Dep.) 287:7–19; D.I.
64, Ex. 6 (Taylor Dep.) 330:8–23.
97
D.I. 68, Ex. P ¶ 117; D.I. 67, Ex. C (Julius Dep.) 66:10–15.
98
See, e.g., D.I. 67, Ex. C (Julius Dep.) 66:10–15; D.I. 67, Ex. D (Gibson Dep.) 200:3–23.
99
D.I. 67, Ex. H (Taylor Dep.) 412:5–8.
100
D.I. 7, Ex. C.
20
Escrow Fund, and demanded that the Indemnity Escrow Fund remain with the
Escrow Agent pending resolution of the Direct Claim. 101
Julius then sought relief in this Court. Julius filed his initial Complaint on
September 1, 102 and an Amended Complaint on September 26. 103 In Counts I
through IV of the Amended Complaint, Sellers seek a declaratory judgment that
Accurus breached the Escrow Agreement and the APA, as well as specific
performance of the Escrow Agreement or, in the alternative, a mandatory injunction
for breach of the APA. 104 In Count V, Sellers allege Buyers breached the implied
covenant of good faith and fair dealing by withholding the escrowed funds and
asserting invalid indemnification claims. 105 On October 11, Buyers filed a
counterclaim against Sellers, alleging they overpaid for ZTM’s assets.106 Buyers’
counterclaim alleges a single count of breach of the APA, and is specifically limited
to “the breach of express representations in the APA.” 107
101
Id.
102
D.I. 1.
103
D.I. 6.
104
Id. at 17–20.
105
Id. at 21–22.
106
D.I. 12.
107
Id. at 51 n.4, 61.
21
The litigation proceeded. The parties filed their cross-motions for summary
judgment on April 15, 2019 and completed briefing on June 18.108 I heard oral
argument on July 11,109 and render my decision today. For the following reasons, I
grant in part and deny in part both Sellers’ and Buyers’ motions.
II. ANALYSIS
On their cross-motions for partial summary judgment, the parties ask me to
determine the issue of liability on all counts asserted by Sellers and Buyers.110
Summary judgment is appropriate where there is no genuine dispute of material fact
and the moving party is entitled to judgment as a matter of law. 111
Where the parties have filed cross motions for summary judgment and
have not presented argument to the Court that there is an issue of fact
material to the disposition of either motion, the Court shall deem the
motions to be the equivalent of a stipulation for decision on the merits
based on the record submitted with the motions.112
In cases involving questions of contract interpretation, like this one, courts will grant
summary judgment in two scenarios: (1) when the contract is unambiguous, or (2)
when the extrinsic evidence fails to create a triable issue of material fact. 113 In fact,
108
D.I. 64–70, 77–79, 86–88.
109
D.I. 96.
110
The parties have agreed that damages and relief will be determined later.
111
Ct. Ch. R. 56(c).
112
Ct. Ch. R. 56(h).
113
GRT, Inc. v. Marathon GTF Tech., Ltd., 2012 WL 2356489, at *4 (Del. Ch.
June 21, 2012).
22
“[s]ummary judgment is the proper framework for enforcing unambiguous contracts
because there is no need to resolve material disputes of fact.” 114
This matter is suited for resolution on the record presented at the summary
judgment stage. The parties agree that there are no genuine disputes of material fact
and that the APA and Escrow Agreement are clear and unambiguous.115
Consequently, I resolve this issue on narrow grounds, looking only to the language
of the agreements between the parties.
The parties have struggled over whether the projections are part of the APA
and whether Buyers disclaimed reliance on the projections by way of the APA’s
integration clause.116 Sellers have consistently argued that the projections have no
bearing on the outcome of this matter. Buyers’ position has been more nuanced and
has evolved throughout the duration of the dispute.117 Buyers eventually conceded
that the allegedly inaccurate sales projections are not part of the APA, asserting they
114
HIFN v. Intel Corp., 2007 WL 1309376, at *9 (Del. Ch. May 2, 2007).
115
See D.I. 78 at 6–77; D.I. 77 at 16.
116
See, e.g., Hearing Tr. at 11–13, 26, 28–30, 32–36, 43–44, 47–48, 51, 69–71.
117
Initially, Buyers insinuated that they relied on the projections to their detriment when
entering into the APA, and argued the projections are part of the APA because the
integration clause did not sufficiently disclaim reliance on the projections. See, e.g., D.I.
78 at 19; D.I. 66 at 37–39 (citing Anvil Hldg. Corp. v. Iron Acq. Co., 2013 WL 2249655,
at *7–9 (Del. Ch. May 17, 2013); Abry P’rs V, L.P. v. F&W Acq. LLC, 891 A.2d 1032,
1058 (Del. Ch. 2006); Kronenberg v. Katz, 872 A.2d 568, 575 (Del. Ch. 2004)); Hearing
Tr. at 70. Buyers then implied that, even if the projections are not part of the contract, the
Court should still consider them when determining whether Sellers breached the APA.
See, e.g., D.I. 87 at 2–3; Hearing Tr. at 32, 43.
23
are evidence of Sellers’ breach. 118 In keeping with Buyers’ framing of the issue, I
do not consider the projections beyond their significant role in the factual
background. I need only determine whether Sellers represented that Buyers would
undoubtedly have the opportunity to bid on the Lost Parts under the APA’s plain and
unambiguous terms.
I conclude that Sellers did not breach the terms of the APA and therefore are
entitled to partial summary judgment on Buyers’ Counterclaim. I also conclude that
Buyers did not breach the Escrow Agreement or implied covenant of good faith and
fair dealing and are entitled to partial summary judgment on Counts I through V of
Sellers’ Amended Complaint.
118
Buyers reject any claim of reliance on the projections and concede that they are not part
of the contract—and therefore cannot be used to interpret the APA—but believe I should
turn to the projections as “evidence” of Sellers’ alleged breach. See, e.g., D.I. 87 at 9–10,
10 n.5; D.I. 78 at 3, 14, 15 n.4, 19, 20, 21 n.5; Hearing Tr. at 34, 35. According to Buyers,
Buyers are not alleging that Sellers breached the APA because the forecasts
provided by Sellers during due diligence turned out to be inaccurate. Buyers
are not alleging that Sellers breached the APA because Buyers relied on these
forecasts to value the Company. Buyers contend that Sellers breached the
APA because the representations and warranties Sellers made in the APA
concerning ZTM’s relationship with Boeing and the financial condition of
ZTM were false. Although the forecasts are relevant to identifying,
explaining, and valuing the breaches, and can be viewed as a symptom or
expression of the underlying facts giving rise to the breaches, they are not
the source of the breaches.
D.I. 78 at 21 (citations omitted).
24
A. Sellers Are Entitled To Partial Summary Judgment On
Buyers’ Counterclaim.
According to Buyers, Sellers breached Sections 3.25(a), 3.25(d), 3.28, and
3.7(a) of the APA by failing to notify Buyers that (1) Boeing had awarded the Lost
Parts to other suppliers in 2013 and 2014 and (2) therefore, Accurus did not have the
opportunity to bid on the Lost Parts. Buyers contend that, pursuant to the APA, they
“were purchasing, among other assets, [] the opportunity to bid to renew the Lost
Parts”119 and that “the opportunity to re-bid on [the Lost Parts] was addressed within
the representations and warranties” in the APA. 120
Because this case involves questions of contract interpretation, I look to the
language of the APA to determine whether summary judgment is appropriate.
The principles governing contract interpretation are well settled.
Contracts must be construed as a whole, to give effect to the intentions
of the parties. Where the contract language is clear and unambiguous,
the parties’ intent is ascertained by giving the language its ordinary and
usual meaning. Courts consider extrinsic evidence to interpret the
agreement only if there is an ambiguity in the contract.121
“When interpreting a contract, a court must give effect to all of the terms of the
instrument and read it in a way that, if possible, reconciles all of its provisions.”122
“[A] court will prefer an interpretation that harmonizes the provisions in a contract
119
D.I. 87 at 3.
120
D.I. 78 at 11.
121
Nw. Nat’l Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del. 1996) (citations omitted).
122
GRT, Inc., 2012 WL 2356489, at *4.
25
as opposed to one that creates an inconsistency or surplusage.”123 “Contract terms
themselves will be controlling when they establish the parties’ common meaning so
that a reasonable person in the position of either party would have no expectations
inconsistent with the contract language.”124
Contracting parties allocate risk through representations and warranties.125
Delaware courts “respect the ability of sophisticated businesses . . . to make their
own judgments about the risk they should bear and the due diligence they undertake,
recognizing that such parties are able to price factors such as limits on liability.”126
Consistent with Delaware’s pro-contractarian policy, “a party may not come to court
to enforce a contractual right that it did not obtain for itself at the negotiating
table.”127 Delaware law presumes parties are bound by the language of the
agreement they negotiated, especially when the parties are sophisticated entities that
have engaged in arms-length negotiations.128
123
Id.
124
Eagle Indus., Inc. v. Devilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997).
125
See Cobalt Operating, LLC v. James Crystal Enters., LLC, 2007 WL 2142926, at *28
(Del. Ch. July 20, 2007), judgment entered, (Del. Ch. Aug. 15, 2007), and aff’d, 945 A.2d
594 (Del. 2008).
126
Abry P’rs, 891 A.2d at 1061.
127
GRT, Inc., 2012 WL 2356489, at *7.
128
See HC Cos., Inc. v. Myers Indus., Inc., 2017 WL 6016573, at *5 (Del. Ch.
Dec. 5, 2017).
26
With these principles in mind, I look only to the plain language of the APA’s
representations or warranties to determine whether the parties accounted for the risk
of unknown and undisclosed lost parts. Here, Buyers’ bargained-for representations
and warranties did not protect them against the risk that they would be unable to bid
on the Lost Parts. Nor did the APA impose on Sellers an obligation to notify Buyers
about Boeing’s decision to award the Lost Parts to other suppliers in 2013 and 2014.
Buyers cannot demonstrate Sellers breached the APA, and Sellers are entitled to
summary judgment on Buyers’ Counterclaim. 129
1. Sellers Did Not Breach Section 3.25(d) of the APA
Because There Were No “Disputes,” “Complaints,” or
“Issues” With Respect To Boeing And The Lost Parts.
Buyers argue that the fact that “ZTM no longer had the opportunity to bid to
renew the Lost Parts” was a “material issue” that Sellers were obligated to disclose
under Section 3.25(d). 130 Section 3.25(d) states: “Seller has disclosed to Buyer any
material disputes, complaints, or issues with respect to any customers or suppliers
and the manner in which Seller proposes to resolve such disputes, complaints or
issues.”131 The parties disagree as to whether the lost opportunity to bid is a material
“issue” with Boeing. Because the APA is unambiguous, I discern the parties’
129
See GRT, Inc., 2012 WL 2356489, at *7 (“[A] party may not come to court to enforce
a contractual right that it did not obtain for itself at the negotiating table.”).
130
D.I. 78 at 3–4, 22.
131
APA § 3.25(d).
27
intended meaning by giving the term “its ordinary and usual meaning” and reading
the APA as a whole.132
Dictionary definitions assist in discerning the usual and ordinary meaning of
“issue.”133 Black’s Law Dictionary defines “issue” as “a point in dispute between
two or more parties.”134 Merriam-Webster defines “issue” as: “a vital or unsettled
matter;” a “concern” or “problem;” “a matter that is in dispute between two or more
parties;” and “the point at which an unsettled matter is ready for a decision.”135
132
Nw. Nat’l Ins. Co., 672 A.2d at 43 (citations omitted).
133
See Horton v. Organogenesis Inc., 2019 WL 3284737, at *4 (Del. Ch. July 22, 2019)
(“Delaware courts look to dictionaries for assistance in determining the plain meaning of
terms which are not defined in a contract.” (quoting Lorillard Tobacco Co. v. Am. Legacy
Found., 903 A.2d 728, 738 (Del. 2006))).
Buyers contend the term I must construe is not simply “issue,” but “material issue.”
D.I. 87 at 14, 16–17. Buyers assert that this phrase carries its own, special meaning, and
cite Black’s Law Dictionary. Id. at 16–17. Buyers are correct that “material issue” is its
own term of art, but incorrectly assume that its specialized definition informs the
contractual interpretation issue before me. Black’s Law Dictionary defines “material
issue” as “an issue that must be decided in order to resolve a controversy” and offers an
example: “the existence of a material issue of disputed fact precludes summary judgment.”
Material Issue, Black’s Law Dictionary (11th ed. 2019). As contrast, Black’s Law
Dictionary defines “immaterial issue” as “an issue not necessary to decide the point of law”
and refers readers to the definition of “material issue” for further context. Immaterial Issue,
Black’s Law Dictionary (11th ed. 2019). Buyers invoke a meaning of “material issue” that
is a term of art in the litigation context. Buyers make no argument and offer no evidence
that the parties intended import that specific term of art into the APA. Therefore, I focus
on the meaning of “issue” alone, recognizing that it is modified by the term “material,”
which has its own importance.
134
Issue, Black’s Law Dictionary (11th ed. 2019).
135
Issue, Merriam-Webster Online Dictionary, https://www.merriam-
webster.com/dictionary/issue (last visited Oct. 30, 2019).
28
From these definitions, I conclude that the parties intended to adopt the
ordinary meaning of “issue,” which requires there to have been an actual dispute or
question raised by ZTM or Boeing that ZTM or Boeing intended to resolve. This
necessarily implies that ZTM or Boeing needed to be aware of a problem—namely
Boeing’s decision to award the Lost Parts to other suppliers and ZTM’s
dissatisfaction with that decision—and bring that problem to the attention of the
other party for inquiry and resolution, thereby creating an “issue” between Boeing
and ZTM. 136
Reading the APA as a whole bolsters my interpretation of “issues.” The other
terms in Section 3.25(d), namely “disputes” and “complaints,” reinforce the
conclusion that the parties intended to adopt the plain and ordinary meaning of
“issues.” 137 Black’s Law Dictionary defines “dispute” as a “conflict or
136
The parties sparred extensively over Section 3.25(d)’s lack of a knowledge qualifier.
Buyers contend that because there is no language conditioning the duty to disclose on
Sellers’ knowledge of the fact that Boeing awarded the parts to other suppliers, Sellers are
liable under 3.25(d) notwithstanding the fact ZTM was unaware that Buyers would not
have the opportunity to bid on the Lost Parts at the time of contracting. I agree that Section
3.25(d) does not have a knowledge qualifier that would have clearly allocated the risk of
loss to Buyers. However, the need for Sellers to have been aware of Boeing’s decision to
award the parts to other suppliers, thus eliminating the opportunity to bid on the parts, is
implicit in the definition of “issue.” Logically, ZTM could not have an “issue” with Boeing
over the “unsettled question” of whether it would be able to bid on the Lost Parts if ZTM
was unaware of Boeing’s decision. Having an “issue” necessarily implies that one is aware
of the underlying problem.
137
Sellers contend I should apply the canon of interpretation of noscitur a sociis, which
requires that words “be interpreted in the context of words surrounding them.” Agar v.
Judy, 151 A.3d 456, 473 (Del. Ch. 2017) (internal quotation marks omitted) (quoting
Zimmerman v. Crothall, 2012 WL 707238, at *7 (Del. Ch. Mar. 27, 2012)). Buyers,
29
controversy.” 138 Merriam-Webster defines the noun “dispute” as “verbal
controversy,” “debate,” or “quarrel,” and defines the verb as “to call into question
or cast doubt upon,” “struggle against,” “oppose,” or “contend over.”139 Further,
Merriam-Webster defines “complaint” as an “expression of grief, pain, or
dissatisfaction” or “something that is the cause or subject of protest or outcry.” 140
Similar to the definitions of “issue,” the definitions of “dispute” and “complaint”
require there be an active controversy of which both parties are or become aware.
Buyers eschew the plain meaning of “issues” and argue for a broader reading.
Buyers contend I should not interpret “issues” in a way that harmonizes it with
“disputes” and “complaints,” arguing that “defining an agreed-upon contractual term
as a redundancy violates the established canon of contract interpretation that a
contract should not be read to render terms superfluous.” 141 “While redundancy is
correctly point out that “the doctrine of noscitur a sociis only applies where a contractual
term is ambiguous.” Zimmerman, 2012 WL 707238, at *7. Here, the parties agree that the
APA is unambiguous and that I can resolve the pending motions by interpreting the terms
according to their plain and ordinary meaning. I do so here, and I do not need to use the
definitions of “disputes” or “complaints” to interpret the meaning of “issues.” Rather,
reading the APA as a whole, I note those consistent definitions to confirm that the parties
intended “issues” to be interpreted in accord with its plain meaning: a problem, concern,
or matter in dispute between two parties.
138
Dispute, Black’s Law Dictionary (11th ed. 2019).
139
Dispute, Merriam-Webster Online Dictionary, https://www.merriam-
webster.com/dictionary/dispute (last visited October 30, 2019).
140
Complaint, Merriam-Webster Online Dictionary, https://www.merriam-
webster.com/dictionary/complaint (last visited October 30, 2019).
141
D.I. 87 at 14–15.
30
sought to be avoided in interpreting contracts, this principle of construction does not
go so far as to counsel the creation of contract meaning for which there is little or no
support in order to avoid redundancy.” 142 My interpretation reflects conservative
verbosity, not improper redundancy. “Issue” itself is defined in terms of a “dispute
between two or more parties.” 143 Both “issue” and “complaint” imply a “concern”
or “problem” existing “between two or more parties” 144 that has risen to a “conflict
or controversy.” 145 Although the Court prefers to avoid surplusage when
interpreting a contract, I decline to dismiss the plain and ordinary meaning of
“issues” to achieve that goal.
Prior to the sale of the Company, Sellers identified and actively responded to
a lost opportunity to bid on 44 parts valued at approximately $2 million in sales,
which is less than the $3.3 million in sales in 2015 for the Lost Parts. 146 The 2015
lost opportunity became an “issue” between Boeing and ZTM. ZTM actively sought
the opportunity to bid on parts, and Boeing responded with RFQs indicating that
ZTM lost the opportunity to bid on certain parts. Shortly thereafter, ZTM took
142
U.S. W., Inc. v. Time Warner Inc., 1996 WL 307445, at *15 (Del. Ch. June 6, 1996).
143
Issue, Black’s Law Dictionary (11th ed. 2019).
144
Issue, Merriam-Webster Online Dictionary, https://www.merriam-
webster.com/dictionary/issue (last visited October 30, 2019).
145
Dispute, Black’s Law Dictionary (11th ed. 2019).
D.I. 88, Ex. MM at ACC_000058015; D.I. 88, Ex. OO; D.I. 88, Ex. G-1 (Woodson
146
Dep.) 341:2–13.
31
immediate steps to secure the opportunity to re-bid. In that scenario, ZTM became
aware of a loss that created a “vital or unsettled matter” with Boeing. 147 This nuance
does not compel a finding that every lost opportunity is an “issue.”
The facts surrounding the Lost Parts are distinct. No “issue” arose when
Boeing awarded the Lost Parts to other suppliers and ZTM lost the opportunity to
bid on those parts. Neither Boeing nor ZTM raised any problem or made any inquiry
about the Lost Parts when Boeing awarded those parts to other suppliers in 2013 and
2014. Buyers offer no evidence that Boeing alerted ZTM that the Lost Parts were
awarded to other suppliers in 2013 or 2014, or that such an alert became a “matter []
in dispute”148 between the parties. ZTM was not aware of a loss that became a “vital
or unsettled matter”149 in ZTM’s relationship with Boeing. In 2013 and 2014, ZTM
had no occasion to respond to Boeing’s decision to award the Lost Parts to other
suppliers, raise for Boeing’s consideration the question of whether ZTM would be
able to re-bid on the Lost Parts, or actively pursue the opportunity to re-bid on the
Lost Parts. ZTM did not know that it had lost that opportunity.
The fact that Boeing awarded the Lost Parts to other suppliers is not, by itself,
evidence of a dispute, complaint, or issue between ZTM and Boeing. ZTM and
147
Issue, Merriam-Webster Online Dictionary, https://www.merriam-
webster.com/dictionary/issue (last visited October 30, 2019).
148
Id.
149
Id.
32
Boeing had an LTA, and it was typical for parts to be added to or removed from that
LTA. Buyers have not demonstrated that awarding parts to other suppliers was the
result of, or resulted in, any disagreement between Boeing and ZTM.
Rather, after Boeing awarded the Lost Parts to other suppliers, ZTM and
Boeing continued their business relationship without any dispute until Accurus
voiced its concerns after Closing. In a June 2016 letter to Boeing, Jim Gibson, then-
President of Accurus, recognized ZTM’s “good standing with The Boeing
Company.” 150 One month before the parties signed the APA, Boeing sent ZTM three
award letters awarding ZTM additional parts to manufacture. 151 After the Closing,
Boeing renewed its contracts for “most of the parts set to expire in 2016 for which
[Accurus] had the opportunity to bid.”152
When the parties signed the APA, Boeing and ZTM had a good working
relationship and had no disputes, issues, or complaints between each other, under
the plain meaning of these terms. Thus, Sellers did not breach Section 3.25(d) by
failing to disclose Boeing’s decisions to move the Lost Parts to another supplier.
150
D.I. 86, Ex. 2 (Gibson Dep.) 299:17–300:1; D.I. 64, Ex. 3 at ACC_000000733 (letter
dated June 14, 2016).
151
D.I. 67, Exs. W (letter dated May 10, 2016), Ex. Z (letter dated May 13, 2016); D.I. 68,
Ex. AA (letter dated May 18, 2016).
152
D.I. 66 at 14; see also D.I. 67, Ex. H (Taylor Dep.) 323:14–18.
33
2. Sellers Did Not Breach Sections 3.25(a) And 3.7(a) Of
The APA Because Those Sections Only Apply To
Events That Occurred After December 31, 2015, And
Boeing Awarded The Lost Parts To Other Suppliers In
2013 and 2014.
Buyers also allege that Sellers breached Sections 3.25(a) and 3.7(a) of the
APA. In particular, Buyers argue that by awarding the Lost Parts to other suppliers,
Boeing materially changed or reduced its business relationship with ZTM under
Section 3.25(a), and that Boeing’s choice to award the Lost Parts to other suppliers
and the Company’s consequent inability to bid on those parts constituted a Material
Adverse Effect under Section 3.7(a). Buyers have failed to demonstrate that Sellers
breached the APA under the plain meaning of both Sections.
Both Sections contain dispositive temporal cutoffs. Section 3.25(a) states:
Since [December 31, 2015], no customer, distributor, or supplier of the
Business has terminated or materially reduced or altered its business
relationship with Seller or Seller Subsidiary or materially changed the
terms on which it does business with either, or threatened that it intends
to cancel, terminate, or otherwise materially reduce or alter its business
relationship with either. 153
Section 3.7(a) states:
Since [December 31, 2015], the Seller Group has conducted its
operations in the ordinary and usual course of business consistent with
past practice, and there has not been any: (a) event, occurrence, or
development that has had, or reasonably could be expected to have,
individually or in the aggregate, a Material Adverse Effect.154
153
APA § 3.25(a).
154
Id. § 3.7(a).
34
Sections 3.25(a) and 3.7(a) are both representations about events or occurrences
occurring after the Balance Sheet Date of December 31, 2015. Anything that
occurred before the Balance Sheet Date cannot form the basis of Buyers’ claims
under either Section 3.25(a) or 3.7(a). ZTM lost the opportunity to bid on the Lost
Parts before that time. Boeing awarded the Lost Parts to other suppliers in 2013 and
2014. Losing the opportunity to bid on the Lost Parts did not amount to a breach of
either Section 3.25(a) or 3.7(a).
Buyers contend the Balance Sheet Date has no bearing on my analysis.
Buyers contend the lost opportunity to bid is tethered to the dates Boeing could have
sent ZTM RFQs for the Lost Parts, December 31, 2015 through June 3, 2016, rather
than the earlier date on which Boeing decided not to give ZTM the opportunity to
bid.155 With respect to Section 3.25(a), Buyers argue “the relevant period is the time
of contracting in June 3, 2016, the date of signing the APA.”156 Buyers rely on
Taylor’s testimony that “the fundamental asset[] purchased was the right to be able
to renew and compete to renew parts when they expired;” 157 on the fact that “[a]fter
155
D.I. 87 at 21.
156
Id. (citing Ivize of Milwaukee, LLC v. Compex Litig. Support, LLC, 2009 WL 1111179,
at *9 (Del. Ch. Apr. 27, 2009) (“As a default, a representation must be true at the time it is
made to avoid a breach, regardless of who knew whether the representation was true or
not.”)).
157
D.I. 79, Ex. H-1 (Taylor Dep.) 326:3–6.
35
the manufacturing right for a specific part ‘expired,’ it could either be renewed or
awarded to another supplier;” 158 and on the reality that “the RFQ for a part could be
sent close in time to the expiration date.”159 Buyers conclude that as of the date of
contracting, and after the Balance Sheet Date, Boeing had materially reduced or
altered its relationship with ZTM by failing to issue RFQs for the Lost Parts. 160
Similarly, under Section 3.7(a), Buyers argue that “the loss of the opportunity
to bid to renew the Lost Parts constituted a Material Adverse Effect after the Balance
Sheet Date” 161 “because after December 31, 2015, they should have received RFQs
for the Lost Parts, or understood that the lack of an RFQ signaled that the parts were
awarded to other manufacturers.” 162 According to Buyers, ZTM’s failure to receive
RFQs for the Lost Parts or follow up with Boeing to determine their status (as ZTM
did in 2015 for other lost parts) rendered the lost opportunity to bid a “live issue after
158
D.I. 87 at 21 (alteration in original) (quoting D.I. 77 at 2).
159
Id. (citing D.I. 77 at 13).
160
See id. (“Sellers failed to disclose that Boeing had materially reduced or altered its
business relationship from December 31, 2015 through June 3, 2016—the time during
which, by its own admission, RFQs for the Lost Parts could be sent. In so doing, Sellers
breached their representation.”). Similar to my comment in note 136, supra, the parties
disputed what effect knowledge qualifiers had on my analysis under Sections 3.25(a) and
3.7(a). As with Section 3.25(d), Sections 3.25(a) and 3.7(a) do not include knowledge
qualifiers that would have clearly allocated the risk of an unknown loss to Buyers. Because
the clear temporal qualifier shifted the risk of this particular loss to Buyers, I need not reach
the effect of the absence of a knowledge qualifier.
161
D.I. 78 at 24.
162
D.I. 87 at 23.
36
December 31, 2015”163 that “could reasonably be expected” to have a Material
Adverse Effect.164
I assume for purposes of this analysis that losing the opportunity to bid on the
Lost Parts amounted to a material reduction in ZTM’s relationship with Boeing, or
a Material Adverse Effect.165 Even so, I conclude ZTM did not breach Sections
3.25(a) and 3.7(a) because the triggering event occurred before the Balance Sheet
Date. Boeing conclusively eliminated ZTM’s opportunity to bid on the Lost Parts
when it awarded the Lost Parts to other suppliers in 2013 and 2014. Boeing could
not have sent ZTM an RFQ for the Lost Parts before December 31, 2015, because
Boeing had already awarded those parts to other suppliers. Buyers have not
demonstrated that Boeing took any adverse action related to the Lost Parts after
December 31, 2015, and before either the execution of the APA on June 3, 2016 or
the Closing on July 28, 2016.
Under Section 3.25(a), there was no material reduction in the Company’s
business since December 31, 2015 because Boeing awarded the Lost Parts to other
163
Id.
164
Id. (quoting APA § 11.1).
165
The APA defines “Material Adverse Effect” as “any event, occurrence, fact, condition,
or change that is, or could reasonably be expected to become, individually or in the
aggregate, materially adverse to (a) the business, results of operations, prospects, condition
(financial or otherwise), or assets of the Seller Group or the Business; or (b) the ability of
Seller or the Stockholders to consummate the Transactions on a timely basis.” APA § 11.1.
37
distributors prior to that date. Under Section 3.7(a), there was no event, occurrence,
or development since December 31, 2015 that could be considered a Material
Adverse Effect because the Lost Parts were allocated to another supplier before that
date. 166 Buyers cannot establish Sellers breached Sections 3.25(a) and 3.7(a) of the
APA.
3. Sellers Did Not Breach Section 3.28 Of The APA
Because Sellers’ Representations And Warranties
Did Not Contain Any Untrue Or Misleading Statement
Of Material Fact With Respect To The Lost Parts.
Buyers argue that the alleged breaches of Section 3.25(a), 3.25(d), and 3.7(a)
are also breaches of Section 3.28. Section 3.28 is a catch-all provision that states:
No representation or warranty made by Seller in this Agreement and no
statement contained in the Disclosure Schedule to this Agreement or
any certificate or other document furnished or to be furnished to Buyer
pursuant to this Agreement, including the other Transaction
Documents, contains any untrue statement of a material fact, or omits
to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they are made, not
misleading.167
166
Buyers rely on H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 143 (Del. Ch. 2003).
In that case, the Court upheld “a breach of representations and warranties claim” that
concerned a representation similarly limited to changes and events occurring after a
balance sheet date. The plaintiff alleged there had been an adverse change in Encorp’s
financial condition and that Encorp had lost a major customer. Id. at 143. Importantly,
both occurred after the balance sheet date and before the purchase agreement was executed.
Id. Buyers’ reliance on H-M Wexford is misplaced. Buyers claim Sellers breached
Sections 3.25(a) and 3.7(a) by failing to notify Buyers a loss that occurred years before the
Balance Sheet Date. Despite Buyers’ allegations that the alleged material reduction or
Material Adverse Effect occurred after December 31, 2015, Buyers cannot identify any
actionable events or occurrences after that date.
167
APA § 3.28.
38
Under the plain terms of the APA, Sellers explicitly represented and warranted that
they disclosed all material issues with Boeing to Buyers; that Boeing had not
materially altered or reduced its business relationship with ZTM since the Balance
Sheet Date; that no Material Adverse Effect occurred after the Balance Sheet Date;
and that none of the representations and warranties contain untrue statements of
material fact.
Sellers made these representations and warranties truthfully at the time of
contracting. As discussed at length above, the lost opportunity to bid on the Lost
Parts was not an “issue” that required disclosure under Section 3.25. Likewise, that
loss was not a material reduction in ZTM’s business or Material Adverse Effect that
occurred since the Balance Sheet Date. Because Sellers did not breach Sections
3.25(a), 3.25(d), or 3.7(a), Buyers cannot prevail under Section 3.28.
Those predicate sections failed to shift to Sellers any risk that Accurus would
not have the opportunity to bid on the Lost Parts. Sections 3.25(a), 3.25(d), 3.28,
and 3.7(a) do not contain any representations or warranties that required Sellers to
notify Buyers that Boeing had awarded the Lost Parts to other suppliers in 2013 or
2014, or that guaranteed Buyers would have the opportunity to bid on the Lost Parts
39
at the time of sale. Buyers cannot now rely on the APA’s catchall provision “to
enforce a contractual right that it did not obtain for itself at the negotiating table.”168
Buyers recognize that representations and warranties “serve an important risk
allocation function.”169 Sellers informed Buyers that the Lost Parts were expiring in
2016. Sellers also informed Buyers of Sellers’ sincere, yet unsubstantiated, belief
that “the opportunity to quote [the Lost Parts] would come” 170 and that “those parts
[the Lost Parts] were available to be bid on.” 171 Yet, Buyers failed to protect the
uncertain future of the Lost Parts in the APA. If preserving opportunities to bid on
potentially lost parts was so valuable to Buyers, they could have bargained for
explicit protections against lost opportunities. They failed to do so. Taylor, who led
the APA negotiations for Buyers, confirmed he never requested that the APA include
any protection against the possibility that the Lost Parts would not be renewed after
calendar year 2016. 172 By failing to negotiate for contractual protections related to
the Lost Parts, Buyers bore the full risk of loss.
168
GRT, Inc., 2012 WL 2356489, at *7.
169
D.I. 66 at 3 (quoting Cobalt Operating, 2007 WL 2142926, at *28).
170
D.I. 67, Ex. C (Julius Dep.) 65:13–19.
171
Id. 66:20–22.
172
D.I. 86, Ex. 1 (Taylor Dep.) 388:16–25.
40
4. Buyers Are Not Entitled To Indemnification Under
Section 8.3(a) Of The APA Because Sellers Did Not
Breach Sections 3.25(a), 3.25(d), 3.28, And 3.7(a).
Buyers contend they are entitled to indemnification under Section 8.3(a) of
the APA. Buyers are correct that Sellers are required to indemnify Buyers for
breaches representations and warranties under the plain language of Section
8.3(a). 173 Because Sellers did not breach the APA’s representations and warranties,
Buyers are not entitled to indemnification under Section 8.3(a).
B. Buyers Are Entitled To Partial Summary Judgment On
Counts I Through V Of Sellers’ Amended Complaint.
Buyers are entitled to partial summary judgment on Sellers’ affirmative
claims for relief. Under the APA and the Escrow Agreement, escrowed funds not
subject to a pending or unresolved claim for indemnification were required to be
disbursed to Sellers on the first business day following May 31, 2017. 174 Sellers
contend that Buyers have improperly retained the escrowed funds for
indemnification from Sellers’ alleged breaches of the APA. 175
Sellers contend Buyers proceeded on a meritless breach theory, and assert a
trio of claims for relief. First, Sellers contend Buyers breached both the APA and
Escrow Agreement by wrongfully refusing to release the escrow funds. Second,
173
APA § 8.3(a).
174
Id. § 2.8(a); Escrow Agreement § 3.3.
175
D.I. 7, Ex. C.
41
Sellers contend Buyers breached the implied covenant of good faith and fair dealing
inherent in the APA and Escrow Agreement by asserting a baseless claim. And
finally, Sellers seek attorneys’ fees on the basis that Buyers’ allegedly frivolous
claim resulted in unnecessary litigation.
As explained above, Sellers indeed prevailed over Buyers’ breach theory.
Accordingly, pursuant to the Escrow Agreement and the APA, Buyers must release
the escrowed funds. But Buyers’ refusal to do so while their breach of contract claim
was pending was not itself a breach of those agreements. Sellers have also failed to
identify any contractual gap to invoke the implied covenant, and have failed to
demonstrate that Buyers acted in bad faith. Because Buyers’ claims were made in
good faith and were not frivolous, Sellers are not entitled to attorney’s fees.
1. Buyers Are Entitled To Summary Judgment On
Counts I Through IV Of Sellers’ Amended Complaint
Because Buyers Did Not Breach The APA Or Escrow
Agreement.
In Counts I through IV, Sellers allege Buyers breached the APA and Escrow
Agreement by seeking indemnification in accordance with those agreements’ terms,
and seek a mandatory injunction to remedy that breach or specific performance of
the Escrow Agreement. Sellers do not dispute that Buyers followed the agreed-upon
procedures.176 Rather, Sellers allege Buyers breached the APA by following those
176
See D.I. 77 at 31; D.I. 66 at 41; D.I. 64 at 24–25.
42
procedures to press an unsuccessful indemnification claim, thereby withholding a
portion of the purchase price and refusing to authorize the release of the escrow
funds.
Following negotiated and agreed-upon indemnification procedures is not
evidence of a breach of contract. 177 The agreements permitted Buyers to withhold
escrow amounts after asserting a Direct Claim. Even though Buyers’ that claim was
ultimately unsuccessful, Buyers did not breach the APA and Escrow Agreement by
pursuing that claim in accordance with bargained-for terms. Buyers did not breach
the APA or the Escrow Agreement.
177
See, e.g., GRT, Inc., 2012 WL 2356489, at *5 (“If a contract specifically contemplates
that a party may take action, addresses the specific obligations the other party is owed when
that happens, and then the party takes that action in full accordance with its attendant
obligations, there is no proper basis to conclude that the party has breached the contract by
doing what the objective terms of the contract authorize.”).
43
2. Buyers Are Entitled To Summary Judgment On Count V Of
Sellers’ Amended Complaint Because Buyers Did Not
Breach The Implied Covenant Of Good Faith And Fair
Dealing.
Sellers contend Buyers breached the implied covenant of good faith and fair
dealing because Buyers’ Counterclaim is baseless, because Buyers breached the
Escrow Agreement, and because Buyers do not have an indemnification claim.178
Specifically, Sellers assert Buyers “demonstrated a lack of good faith and fair
dealing by intentionally delaying the release of the Indemnity Escrow Fund and
asserting improper and invalid indemnification claims against the Indemnity Escrow
Fund.”179 The implied covenant does not reach Sellers’ theory. Further, Sellers have
failed to demonstrate that Buyers acted in bad faith by following agreed-upon
procedures in the APA and Escrow Agreement.
“The implied covenant of good faith and fair dealing inheres in every
contract.”180 The implied covenant “involves a cautious enterprise, inferring
contractual terms to handle developments or contractual gaps that the asserting party
pleads neither party anticipated.” 181
178
See, e.g., D.I. 86 at 18–19; D.I. 64 at 24–25.
179
D.I. 6 ¶ 88.
180
Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009).
181
Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010) (internal quotation marks omitted)
(quoting Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 445 (Del. 2005)); see also
Allen v. El Paso Pipeline GP, Co., L.L.C., 113 A.3d 167, 182 (Del. Ch. 2014) (referring to
44
We will only 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. When conducting this analysis,
we must assess the parties’ reasonable expectations at the time of
contracting and not rewrite the contract to appease a party who later
wishes to rewrite a contract he now believes to have been a bad deal.
Parties have a right to enter into good and bad contracts, the law
enforces both.182
A claim for breach of the implied covenant cannot be based “on conduct authorized
by the terms of the agreement.”183 Determining whether the implied covenant
applies turns on the language of the contract itself. 184
Here, no “gap” exists in either the APA or Escrow Agreement that requires
the cautious enterprise of inferring terms beyond those agreements’ clear language.
The parties designed the APA and Escrow Agreement for just this situation. Those
contracts contemplated that Buyers would potentially bring a breach of contract
claim against Sellers, and that Buyers would subsequently seek indemnification for
bringing those claims. The APA expressly permitted Buyers to bring a Direct Claim
against Sellers, and the Escrow Agreement provided bargained-for procedures for
the implied covenant as “the doctrine by which Delaware law cautiously supplies terms to
fill gaps in the express provisions of a specific agreement”).
182
Nemec, 991 A.2d at 1126 (footnotes omitted).
183
Dunlap, 878 A.2d at 441; Allen, 113 A.3d at 183 (stating the covenant cannot be used
to “contradict[] a clear exercise of an express contractual right” (quoting Nemec, 991 A.2d
at 1127)).
184
Allen, 113 A.3d at 183.
45
handling the escrowed funds in the event of a dispute. At the time of contracting,
Sellers must have reasonably expected Buyers might exercise their contractual
rights.
Buyers did not act arbitrarily or unreasonably in exercising those rights. Both
Taylor, the founder and Managing Partner of Liberty, and Gibson, the former CEO
of Accurus, testified that they believed ZTM breached their contractual
representations. 185 This testimony and other portions of the record indicate that
Buyers asserted their claim against Sellers in good faith. 186 And Sellers do not
dispute that Buyers followed the contracts’ agreed-upon procedures. Sellers have
failed to establish that Buyers acted with the bad faith required to demonstrate a
breach of the implied covenant, where Buyers adhered to applicable contractual
terms. Sellers cannot now obtain judicial relief from the terms of those agreements,
even if they now believe they have gotten a “bad deal.” 187 Buyers are entitled to
summary judgment on Sellers’ implied covenant claim.
185
See, e.g., D.I. 67, Ex. D (Gibson Dep.) 309:3–18; D.I. 67, Ex. H (Taylor Dep.) 318:9–
12.
186
See, e.g., D.I. 7, Ex. C (detailing the basis for Buyers’ claims).
187
Allen, 113 A.3d at 184 (quotation omitted); see also Kuroda, 971 A.2d at 888 (“General
allegations of bad faith conduct are not sufficient. Rather, the plaintiff must allege a
specific implied contractual obligation and allege how the violation of that obligation
denied the plaintiff the fruits of the contract. Consistent with its narrow purpose, the
implied covenant is only rarely invoked successfully.”).
46
3. Sellers Are Not Entitled To Attorney’s Fees.
Sellers are not entitled to attorney’s fees. “Under the American Rule and
Delaware law, litigants are normally responsible for paying their own litigation
costs.” 188 The Court recognizes an exception to this rule where a party has acted in
bad faith.
The party invoking the bad faith exception bears the stringent
evidentiary burden of producing clear evidence of bad-faith conduct by
the opposing party. The standard is arduous: situations in which a party
acted vexatiously, wantonly, or for oppressive reasons.189
“There is no single standard of bad faith that justifies an award of attorneys’ fees—
whether a party’s conduct warrants fee shifting under the bad faith exception is a
fact-intensive inquiry.” 190 “Delaware courts have previously awarded attorneys’
fees where (for example) parties have unnecessarily prolonged or delayed litigation,
falsified records or knowingly asserted frivolous claims.” 191 “Ultimately, the bad
faith exception is applied in extraordinary circumstances primarily to deter abusive
litigation and protect the integrity of the judicial process.” 192
188
Mahani v. Edix Media Gp., Inc., 935 A.2d 242, 245 (Del. 2007).
189
Marra v. Brandywine Sch. Dist., 2012 WL 4847083, at *4 (Del. Ch. Sept. 28, 2012)
(quotations omitted).
190
Auriga Capital Corp. v. Gatz Props., LLC, 40 A.3d 839, 880–81 (Del. Ch. 2012).
191
Montgomery Cellular Hldg. Co. v. Dobler, 880 A.2d 206, 227 (Del. 2005) (internal
quotation marks omitted) (quoting Johnston v. Arbitrium (Cayman Is.) Handels AG, 720
A.2d 542, 546 (Del. 1998)).
192
Nichols v. Chrysler Gp., LLC, 2010 WL 5549048, at * 3 (Del. Ch. Dec. 29, 2010).
47
Sellers argue Buyers “unnecessarily required the institution of this litigation
by improperly and without justification refusing to release the escrowed funds.”193
Sellers have failed to meet their stringent burden of producing clear evidence of
Buyers’ bad faith conduct. Buyers did not “knowingly assert[] frivolous claims”194
or engage in “obstinate, deceptive or inherently unreasonable” conduct. 195 After the
Closing, Buyers became aware that Sellers’ representations and warranties were
potentially false.196 Buyers investigated internally and contacted both Sellers and
Boeing in an effort to understand the problem with the Lost Parts. 197 Thereafter,
earnestly believing the representations in the APA were false, Buyers sent a claim
notice in accordance with the APA’s indemnification procedures and within the
Escrow Agreement’s deadline. 198
Buyers believed Sellers breached the APA and disagreed with Sellers’
interpretation of the applicable sections. Sellers have offered no evidence that
Buyers relied on their preferred interpretations of the APA in bad faith. Indeed,
Buyers’ claims required the Court to interpret the APA. While I have concluded that
193
D.I. 64 at 26.
194
Johnston, 720 A.2d at 546.
195
Marra, 2012 WL 4847083, at *4.
196
See D.I. 78 at 31–32.
197
See id.
198
See id.; see also APA Art. §§ 8.3, 8.5(g); Escrow Agreement §§ 3.2–3.3.
48
Sellers did not breach the APA, that fact is insufficient, without more, to warrant a
finding that Buyers brought their claims with bad faith. With no special
circumstances warranting shifting fees, each party bears its own.
III. CONCLUSION
For the forgoing reasons, Sellers’ partial motion for summary judgment on
the issue of liability is DENIED as to Counts I through V of Sellers’ Verified First
Amended Complaint, and GRANTED as to Buyers’ Counterclaim. Buyers’ partial
motion for summary judgment is GRANTED as to Counts I through V of Sellers’
Verified First Amended Complaint, and DENIED as to Buyers’ Counterclaim. The
parties shall confer and submit an implementing order consistent with this opinion,
and a scheduling order to address any remaining issues.
49