Pilot Corporation v. Greg Abel ( 2023 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
December 13, 2023
Kevin R. Shannon, Esquire William M. Lafferty, Esquire
Potter, Anderson & Corroon LLP Morris, Nichols, Arsht & Tunnell LLP
1313 North Market St. 1201 N. Market St.
Hercules Plaza, 6th Floor Wilmington, DE 19801
Wilmington, DE 19801
RE: Pilot Corp. v. Greg Abel et al.,
C.A. No. 2023-0813-MTZ
Dear Counsel:
Today I heard argument on plaintiff Pilot Corporation’s Motion to Strike
Defenses and certain defendants’ Motion for Leave to File Amended Answer and
Affirmative Defenses.1 The plaintiff’s motion is granted. The defendants’ is
denied.
I. Background
Plaintiff Pilot Corporation filed this action against defendants Greg Abel,
Kevin Clayton, Marc Hamburg, Mark Hewett, Scott Thon, Berkshire Hathaway
Inc., and National Indemnity Company (“NICO,” and collectively the “Berkshire
1
The transcript of today’s hearing has not been finalized. Citations in the form Rough
Tr. – refer to a rough copy of the transcript. I also heard argument on the plaintiff’s
Motion for a Protective order filed on December 11, 2023. Docket item (“D.I.”) 116.
For the reasons below, that motion is now moot.
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December 13, 2023
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Defendants”), as well as Pilot Travel Centers LLC (“PTC”).2 Berkshire acquired a
38.6% interest in PTC from Pilot and other entities in 2017. In connection with
that transaction, Berkshire, NICO, Pilot, and others entered into an investor rights
agreement (the “Investor Rights Agreement”).3 The Investor Rights Agreement
required Berkshire, through NICO, to purchase an additional 41.4% stake in PTC
in January 2023. It also granted Pilot the right to sell its remaining 20% interest to
Berkshire within sixty days of December 31, the end of PTC’s fiscal year (the “Put
Right”).4 The Put Right purchase price is equal to ten times PTC’s earnings before
interest and taxes, or EBIT, as captured in the year-end financials for that fiscal
year. The parties also entered into an LLC agreement governing PTC (the “LLC
Agreement”).5 The LLC Agreement granted Pilot a consent right over changes to
PTC’s “accounting policies,” “except as required by Applicable Law or GAAP”
(the “Consent Right”).6
Pilot alleges Berkshire caused PTC to use pushdown accounting starting in
March of 2023; Pilot fears Berkshire will cause PTC to use pushdown accounting
2
D.I. 1.
3
D.I. 1, Ex. B.
4
Id. § 2.4.
5
D.I. 1, Ex. A.
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for its 2023 year-end financials. Doing so would reduce PTC’s 2023 EBIT and
therefore the value of Pilot’s Put Right if Pilot exercises it in 2024. Pilot contends
the adoption of pushdown accounting is a change in PTC’s accounting policies that
triggers the Consent Right. It seeks expedited declaratory and injunctive relief to
that effect. I expedited those claims on November 3. 7 Pilot also brought a claim
for breach of fiduciary duty. I denied expedition of that claim, and stayed it
pending resolution of Pilot’s claims sounding in contract.8
In answering the complaint, the Berkshire Defendants asserted eleven
affirmative defenses, including unclean hands and in pari delicto.9 Both defenses
are based on allegations that James Haslam III, as Pilot’s “authorized agent,”
promised “illicit side payments to numerous PTC senior executives in order to
unjustly increase the value of its Put Right.”10
II. The Motion To Strike
I begin with Pilot’s motion to strike the affirmative defenses of unclean
hands and in pari delicto as originally pled and repeated in the Berkshire
6
Id. § 8.08(i).
7
D.I. 64 at 63–67.
8
Id. at 67–68.
9
D.I. 62 at 36–40.
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Defendants’ proposed amended answer.11 Pilot moves to strike these defenses on
the basis that they lack a sufficient nexus with Pilot’s contractual claims. Pilot has
moved only to strike the defenses as articulated in Defendants’ original answer,
and does not challenge the new allegations in the proposed amended answer on
that basis. It also has not moved to strike the defenses as to the stayed breach of
fiduciary duty claims, and so I address these defenses only as applied to Pilot’s
claims for breach of the Consent Right.12
Under Court of Chancery Rule 12(f), “the Court may order stricken from
any pleading any insufficient defense.”13 When addressing a motion to strike an
affirmative defense, the Court assumes the truth of the facts alleged in the answer
and asks whether “the challenged defense is legally sufficient.”14 Such motions are
“are granted sparingly and only when clearly warranted with all doubt being
resolved in the nonmoving party’s favor.”15
10
Id. at 38–39.
11
D.I. 109 at Mot.
12
For the avoidance of doubt, my ruling does not implicate the defense of unclean hands
as applied to Pilot’s stayed claims for breach of fiduciary duty.
13
Ct. Ch. R. 12(f).
14
Holtzman v. Gruen Hldg. Corp., 1994 WL 444756, at *3 (Del. Ch. Aug. 5, 1994).
15
Salem Church (Del.) Assocs. v. New Castle Cnty., 2004 WL 1087341, at *2 (Del. Ch.
May 6, 2004).
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A. The Unclean Hands Defense
Pilot contends its expedited claims advance the narrow question of whether
PTC’s adoption of pushdown accounting for 2023 would violate Pilot’s Consent
Right, and that the unclean hands defense is unrelated to that contractual issue.
The Berkshire Defendants view Pilot’s claims more broadly, contending Pilot
accuses Berkshire of improperly manipulating PTC’s 2023 EBIT to alter the
valuation of the 2024 Put Right, and that their defense accuses Haslam and Pilot of
doing the same.
The unclean hands defense “applies the maxim of equity that ‘[h]e who
comes into equity must come with clean hands.’”16 “Under the doctrine, the Court
will refuse equitable relief ‘in circumstances where the litigant’s own acts offend
the very sense of equity to which he appeals.’”17 “The question raised by a plea of
unclean hands is whether the plaintiff’s conduct is so offensive to the integrity of
the court that his claims should be denied, regardless of their merit.”18 For unclean
16
Am. Healthcare Admin. Servs., Inc. v. Aizen, 285 A.3d 461, 484 (Del. Ch. 2022)
(alteration in original) (quoting 1 John Norton Pomeroy, Pomeroy’s Equity Jurisprudence
§ 397, at 737 (4th ed. 1918)).
17
Wagamon v. Dolan, 2013 WL 1023884, at *2 n.19 (Del. Ch. Mar. 15, 2013) (quoting
Nakahara v. NS 1991 Am. Tr., 718 A.2d 518, 522 (Del. Ch. 1998)).
18
Gallagher v. Holcomb & Salter, 1991 WL 158969, at *4 (Del. Ch. Aug. 16, 1991).
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hands to apply, “the improper conduct must relate directly to the underlying
litigation” and “the inequitable conduct must have an ‘immediate and necessary’
relation to the claims under which relief is sought.”19
This Court has found a plaintiff’s wrongdoing lacked a sufficient nexus to a
breach of contract claim where the wrongdoing did not relate to the plaintiff’s
rights or the defendant’s obligations under the relevant agreement. In Bouchard v.
Braidy Industries, a former company director and CEO sought specific
performance of a voting agreement.20 The company defendant raised an unclean
hands defense relating to the plaintiff’s “alleged misuse of company funds,
self-dealing, or other wrongful acts” while he was a director and officer.21 The
Court reasoned the allegations of wrongdoing did “not bear an immediate and
necessary relation to [the plaintiff’s] rights under the Voting Agreement or [the
19
Nakahara v. NS 1991 Am. Tr., 718 A.2d 518, 523 (Del. Ch. 1998); Claros Diagnostics,
Inc. S’holders Representative Comm. v. OPKO Health, Inc., 2020 WL 829361, at *13
(Del. Ch. Feb. 19, 2020) (“The doctrine, therefore, only applies where there exists a close
nexus between the wrongdoing of the plaintiff and the relief he seeks.”); 2 John Norton
Pomeroy, Pomeroy’s Equity Jurisprudence § 399, at 97 (5th ed. 1941) [hereinafter
“Pomeroy’s”] (“The dirt on [the complainant’s] hands must be his bad conduct in the
transaction complained of.”).
20
Bouchard v. Braidy Indus., Inc., 2020 WL 2036601 (Del. Ch. Apr. 28, 2020).
21
Id. at *13.
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company’s] obligations under the Voting Agreement.”22 It also noted that the
company did “not assert that [the plaintiff’s] alleged ‘self-dealing and other
wrongful conduct’ somehow affected the formation of the Voting Agreement or
otherwise relates to [the plaintiff’s] claims for breach of the Voting Agreement.”23
For those reasons, the Court found the requisite nexus lacking.24
So too here. The Berkshire Defendants allege Haslam offered to pay PTC
employees as part of a scheme to increase the value of Pilot’s Put Right. To be
sure, Pilot is pursuing its claims to inform whether it will exercise its Put Right in
2024, and presents them nestled in allegations that Berkshire caused PTC to adopt
pushdown accounting to decrease EBIT and the value of the 2024 Put Right.
Those allegations add context to the tug-of-war over PTC’s 2023 EBIT that
motivates this lawsuit. But neither Pilot’s goal for this suit, nor the broader context
offered in its complaint, informs the merits of Pilot’s contractual claim. And
neither Pilot’s goal nor its context can provide an anchor for an unclean hands
22
Id.
23
Id. at *14.
24
Id.
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defense: that anchor must catch on Pilot’s claims.25 Pilot’s claims are narrow:
they ask whether PTC’s adoption of pushdown accounting for 2023 would be a
change in “accounting policy” that triggers the Consent Right in the LLC
Agreement. Haslam’s actions do not inform Pilot’s rights or Berkshire’s
obligations under the LLC Agreement. They lack an “immediate and necessary
relation” to the relief sought.26 The Court “is not an avenger of wrongs comment
at large by those who resort to it for relief.”27
This Court has also found that an unclean hands defense lacks a sufficient
nexus where the plaintiff’s claim and alleged wrongdoing related to separate
agreements.28 As pled, the Berkshire Defendants’ allegations concern the Investor
Rights Agreement: the Berkshire Defendants contend those same allegations
warrant reformation or rescission of the 2024 Put Right granted by that
25
See Kousi v. Sugahara, 1991 WL 248408, at *3 (Del. Ch. Nov. 21, 1991) (rejecting the
argument that background facts in the complaint could be used to establish a causal nexus
for purposes of unclean hands); see also Bouchard, 2020 WL 2036601, at *13–14; In re
Farm Indus., Inc., 196 A.2d 582, 589–90 (Del. Ch. 1963).
26
E. States Petroleum Co. v. Universal Oil Prod. Co., 8 A.2d 80, 82 (Del. 1939).
27
2 John Norton Pomeroy, Pomeroy’s Equity Jurisprudence, § 399, at 95–96 (5th ed.
1941).
28
Aizen, 285 A.3d at 494.
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agreement.29 But Pilot’s pending claims seek to enforce the Consent Right granted
by the LLC Agreement. Pilot may enforce its Consent Right without invoking its
Put Right, and vice versa. The relationship between the two offers context and
motivation, but is not immediate or necessary.30
I recognize that striking such defenses is relatively uncommon and indeed
disfavored. But no further factual development is needed for me to evaluate the
defense; I have taken the Berkshire Defendants’ allegations as true and made all
inferences in their favor, yet still conclude their defense could not prevail as a
matter of law. Further, the unclean hands defense is “at bottom . . . a ‘rule of
public policy.’”31 Of course, the defense “protects the integrity of a court of
equity, which, as a court of conscience, will decline to aid those who are
undeserving of help due to their own unconscionable conduct.”32 The requirement
that the defense be immediate and necessary to the claim also protects this court:
29
D.I. 62 at Countercl. ¶¶ 52, 54.
30
See Bouchard, 2020 WL 2036601, at *13–14.
31
Morente v. Morente, 2000 WL 264329, at *3 (Del. Ch. Feb. 29, 2000) (quoting
Skoglund v. Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976)).
32
2 Donald J. Wolfe Jr. & Michael A. Pittenger, Corporate and Commercial Practice in
the Delaware Court of Chancery § 15.08[a], at 15-98 (2023); see also Skoglund v.
Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976) (“[T]he purpose of the clean
hands maxim is to protect the public and the court against misuse by one who, because of
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Litigants regularly cast stones, and it is all too easy for a litigant to
invoke the doctrine of unclean hands. Its ready availability increases
litigation costs, injects an additional issue for resolution into the case,
and creates the risk that close calls on difficult facts will subvert the
doctrine. Even if a litigant is ultimately unsuccessful in proving the
defense, she may enjoy the residual benefits of painting her opponent
as an unsavory character.33
Striking a tangential unclean hands defense from consideration of Pilot’s expedited
claims serves those policy interests. And the Berkshire Defendants will still be
able to present their allegations in a more relevant context: NICO has filed
counterclaims concerning Pilot’s Put Right that it has assured the Court are
coextensive with these defenses.34 Once Pilot’s expedited Consent Right claims
are resolved, this action will turn to those counterclaims.35 The motion is granted
as to the unclean hands defense.
his conduct, has forfeited his right to have the court consider his claims, regardless of
their merit.”).
33
Aizen, 285 A.3d at 493.
34
The transcript of the November 30 hearing has not been finalized. I have a rough copy
in which this comment appears on page 19.
35
D.I. 97 at 4–5 (explaining NICO’s counterclaims would be stayed pending resolution
of the expedited claims if NICO chose not to accept the conditions for expedition); D.I.
98 (declining expedition).
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B. In Pari Delicto
Pilot also moved to strike the eighth affirmative defense of in peri delicto.
“In general, ‘under the in pari delicto doctrine, a party is barred from recovering
damages if his losses are substantially caused by activities the law forbade him to
engage in.’”36 The Berkshire Defendants argue “Pilot cannot shield its claims from
the illicit conduct of its CEO that, beyond improperly inflating PTC’s 2023 EBIT,
has also changed the factual record of PTC’s implementation of pushdown
accounting—the very subject of Pilot’s claims.”37
Like their unclean hands defense, the Berkshire Defendants’ in pari delicto
defense rests on the false premise that Pilot is seeking to enforce the Put Right
through this action. Not so. As explained, it is enforcing a different right under a
different agreement. Wrongfully inflating the 2024 Put Right’s value did not
substantially cause Pilot’s injuries relating to the Consent Right. The motion is
granted as to the in pari delicto defense.
36
In re Am. Int’l Grp., Inc., Consol. Deriv. Litig., 976 A.2d 872, 883 (Del. Ch. 2009),
(quoting In re LJM2 Co–Inv., L.P., 866 A.2d 762, 775 (Del. Ch. 2004)), aff’d sub nom.
Teachers’ Ret. Sys. of La. v. Gen. Re Corp., 11 A.3d 228 (Del. 2010).
37
D.I. 148 at Opp. 2.
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II. Motion To Amend
I next address the Berkshire Defendants’ motion to amend. On December
11, less than five hours after Pilot filed its opening brief in support of its motion to
strike, the Berkshire Defendants moved to amend their answer by adding
additional grounds for their unclean hands and in pari delicto defenses.38 They
seek to add allegations that Pilot’s “improper promises were intended not only to
improperly inflate the value of [Pilot’s] Put Right, but also to improperly influence
the behavior of PTC’s employees in connection with the dispute between Pilot and
Berkshire . . . and in the implementation of pushdown accounting within PTC.”39
In particular, the Berkshire Defendants allege that after this suit was filed and got
underway, PTC’s controller modified an internal memorandum and PTC’s
financial statements to reflect that PTC did not advocate pushdown accounting to
Berkshire before Berkshire gained control, and that PTC had not committed to
using pushdown accounting in 2023. The Berkshire Defendants believe the
controller did so because he received a side payment from Haslam, but expect the
controller to deny this.
38
D.I. 123 at Mot.
39
D.I. 123, Ex. A at 39–40.
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After a responsive pleading has been filed, a party may amend under Rule
15(a) “only by leave of Court or by written consent of the adverse party; and leave
shall be freely given when justice so requires.”40 “This court interprets Rule 15(a)
to ‘allow for liberal amendment in the interest of resolving cases on the merits.’”41
“A party should be granted leave freely to amend its complaint, unless there is
evidence of bad faith, undue delay, dilatory motive, undue prejudice or futility of
amendment.”42 “The most important factor in this context is consideration of
undue prejudice.”43 Pilot opposes leave to amend on the grounds of undue
prejudice and futility, and addressed the Berkshire Defendants’ delay in bringing
the motion as part of the prejudice analysis.
I begin with delay. After much prodding, the Berkshire Defendants offered
a timeline by which they learned on or around November 9 or 10 that the controller
40
Ct. Ch. R. 15(a).
41
Twitter, Inc. v. Musk, 2022 WL 4087797, at *1 (Del. Ch. Sept. 7, 2022) (quoting Gould
v. Gould, 2011 WL 141168, at *7 (Del. Ch. Jan. 7, 2011)).
42
U.S. Bank Nat. Ass’n v. U.S. Timberlands Klamath Falls, L.L.C., 2005 WL 2093694, at
*1 (Del. Ch. Mar. 30, 2005) (internal quotation marks omitted) (quoting Fox v. Christina
Square Assoc., 1995 WL 405744 (Del. Ch. June 19, 1995)).
43
Shulman v. Kolomoisky, 2023 WL 1453658, at *2 (Del. Ch. Feb. 1, 2023).
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had edited the financial statements;44 their original answer with allegations of side
payments followed on November 17. 45 Even with those two inputs, the Berkshire
Defendants contend they did not have what they needed to fashion another basis
for unclean hands until they received the controller’s emails about the edited
internal memorandum (the “Memo Emails”) “shortly before” December 8.46 They
filed their motion for leave on December 11, after Pilot filed its opening brief on
the motion to strike. 47 I am skeptical that the Memo Emails added meaningful
substance to the Berkshire Defendants’ theory. Their counsel was less than
forthright at argument about when they were on notice of their theory, and having
reviewed the Memo Emails, I think they are consistent with the edits to the
financial statements. But taking the Berkshire Defendants at their word, I cannot
conclude they unduly delayed.
Taking the Berkshire Defendants at their word also compels a finding of
undue prejudice. At today’s argument, I asked their counsel what discovery they
44
Rough Tr. 59 (stating that the Berkshire Defendants learned of the financial statement
edits around the time of the internal interviews); id. at 65–66 (stating that the controller
informed PTC of the financial statement edits in a November 9 or November 10
interview).
45
D.I. 62.
46
Rough Tr. 55–58; D.I. 135 at Opp. ¶ 12.
47
D.I. 123.
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intended to pursue solely in connection with their new allegations if the motion to
strike were granted: I twice suggested that a party seeking leave to amend would
benefit from minimizing prejudice from that amendment. 48 Counsel offered a
self-described “long-winded[]” plan to explore whether the controller, as well as
others, received side payments.49 Counsel sought between five and fourteen
additional depositions to explore whether Haslam promised side payments to
twenty-eight other employees, those employees’ roles within the company, what
Haslam said when he made each of those promises, and whether each deponent
passed along the promise.50 The Berkshire Defendants also anticipated filing a
motion to compel document discovery and interrogatory responses,51 including to
obtain “text messages between Mr. Haslam and any of the employees who the
company understands to have received a side payment promise,” described as
twenty-eight different individuals.52 When pressed, counsel bemoaned the
difficulty of “line drawing” and that he would “have to think it through” as to what
48
Rough Tr. 70–71, 76.
49
Id. at 71–76.
50
Id. at 72–75.
51
Id. at 75.
52
Id. at 77, 93.
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could be cut.53 The Berkshire Defendants made one-sided proposals to limit this
discovery, such as relying on declarations or limiting each deposition to one hour.
These are understandably unacceptable to Pilot, especially considering that PTC
has been interviewing its employees and sharing information with the Berkshire
Defendants.
The Berkshire Defendants’ plan is unduly prejudicial. Depositions start
tomorrow: counsel rattled off nine that are planned.54 Fact discovery ends on
December 19. 55 Trial starts January 8.56 I could curtail this plan by granting
Pilot’s motion for a protective order. But the fact that the Berkshire Defendants
insisted on facially broad discovery despite my warning that prejudice might cost
the amendment suggests they may care more about prejudicing Pilot than winning
leave to amend. Having overplayed their hand, the Berkshire Defendants have lost
this one.
53
Id. at 78–79.
54
Id. at 71.
55
D.I. 42 ¶ 1(i).
56
Id. ¶ 1(p).
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Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms
cc: All Counsel of Record, via File & ServeXpress