ITW Global Investments Inc. v. American Industrial Partners Capital Fund IV, L.P. ( 2015 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
ITW GLOBAL INVESTMENTS INC., )
)
Plaintiff, )
)
v. ) C.A. No.: N14C-10-236 JRJ CCLD
)
AMERICAN INDUSTRIAL PARTNERS )
CAPITAL FUND IV, L.P.; AMERICAN )
INDUSTRIAL PARTNERS CAPITAL )
FUND IV (PARALLEL), L.P.; AIPCJ IV, )
LLC; KIM MARVIN; PAUL )
BAMATTER; and ERIC BAROYAN, )
)
Defendants. )
OPINION
Date Submitted: March 24, 2015
Date Decided: June 24, 2015
Upon Defendants’ Motion to Dismiss Count I Against AIP:
GRANTED.
Upon Defendants’ Motion to Dismiss Count II Against AIP:
GRANTED, in part, and DENIED, in part.
Upon Defendants’ Motion to Dismiss Counts I through V Against the Individual
Defendants:
GRANTED.
Steven B. Feirson, Esquire (pro hac vice) (argued), Dechert LLP, Cira Center,
2929 Arch Street, Philadelphia, PA 19104, Michael H. Park, Esquire (pro hac
vice), and Rebecca Kahan Waldman, Esquire (pro hac vice), Dechert LLP, 1095
Avenue of the Americas, New York, NY 10036, Ann Mary Olson, Esquire (pro
hac vice), Dechert LLP, One Bush Street, Suite 1600, San Francisco, CA 94014, P.
Clarkson Collins, Jr., Esquire, and Meghan A. Adams, Esquire, Morris James LLP,
500 Delaware Avenue, Suite 1500, P.O. Box 2306, Wilmington, DE 19899,
Attorneys for Plaintiff.
Peter D. Doyle, Esquire (pro hac vice) (argued), and Seth Fier, Esquire (pro hace
vice), Proskauer Rose LLP, Eleven Times Square, New York, NY 10036, John E.
Roberts, Esquire (pro hac vice), Proskauer Rose LLP One International Place,
Boston, MA 02110, William D. Johnston, Esquire, and Mary F. Dugan, Esquire,
Young Conaway Stargatt & Taylor, LLP, Rodney Square, 1000 North King Street,
Wilmington, DE 19801, Lawrence Portnoy, Esquire (pro hac vice), and Jillian
Rennie Stillman, Esquire (pro hac vice), Davis Polk & Wardwell LLP, 450
Lexington Avenue, New York, NY 10017, Attorneys for Defendants.
JURDEN, P.J.
2
I. INTRODUCTION
Before the Court is Defendants American Industrial Partners Capital Fund
IV, L.P., American Industrial Partners Capital Fund IV (Parallel), L.P., and AIPCF
IV, LLC’s (“AIP”) Motion to Dismiss Counts I and II of the Complaint; and
Defendants Kim Marvin, Paul Bamatter, and Eric Baroyan’s (“Individual
Defendants”) Motion to Dismiss Counts I through V (“Defendants” includes AIP
and the Individual Defendants).
Plaintiff ITW Global Investments Inc. (“ITW”) alleges that Defendants
committed fraud, fraud in the inducement, and breach of contract in connection
with ITW’s acquisition of Brooks Instrument (“Brooks”) from AIP
(“Transaction”). According to ITW, Defendants committed fraud and breached the
Securities Purchase and Sale Agreement (“SPSA”) by misrepresenting the
financial statements and other provisions in the SPSA, and orchestrated a series of
“sham sales” designed to fraudulently induce ITW to enter into an agreement it
otherwise would not have entered into by artificially inflating Brooks’ November
2011 sales.
In opposition, AIP argues that Count I (fraud) of the Complaint should be
dismissed because it impermissibly “rehashes” the damages allegedly caused by
ITW’s breach of contract claim. AIP contends that Count II (fraud in the
inducement) of the Complaint should be dismissed because: (1) any alleged fraud
3
based on misrepresentations in the SPSA constitutes an “impermissible bootstrap”
to ITW’s breach of contract claim; and (2) any alleged fraud based on extra-
contractual statements was disclaimed in the SPSA.
The Individual Defendants contend that all counts in the Complaint should
be dismissed because: (1) the Complaint fails to plead sufficient facts showing they
had knowledge of the alleged misrepresentations; and (2) alternatively, this Court
does not have personal jurisdiction over them.
For the following reasons, AIP’s Motion to Dismiss Count I (fraud) is
GRANTED; AIP’s Motion to Dismiss Count II (fraud in the inducement) is
GRANTED, in part, and DENIED, in part; and the Individual Defendants’
Motion to Dismiss all counts against them is GRANTED.
II. BACKGROUND
ITW, a Delaware corporation with its principal place of business in Illinois,
is a public company specializing in the manufacture, sales, and service of industrial
components and equipment. 1
AIP is a middle-market private equity firm that invests primarily in
industrial manufacturing businesses.2 Kim Marvin is a Partner in AIP and resident
1
Compl. ¶ 9.
2
Id. ¶ 10. AIP includes American Industrial Partners Capital Fund IV, L.P., American Industrial
Partners Capital Fund IV (Parallel), L.P., which are Delaware limited partnerships that are
managed by AIPCF IV, LLC, a Delaware limited liability company. Id.
4
of Maryland. 3 Paul Bamatter is a Partner in AIP, AIP’s Chief Financial Officer,
and a resident of Connecticut. 4 Eric Baroyan is a Partner in AIP and a resident of
New York. 5
On December 31, 2007, AIP purchased Brooks from Emerson Electric
Company. 6 Brooks is a Pennsylvania-based manufacturing company that
manufactures advanced flow, pressure, and vacuum measurement and control
solutions. 7
In September 2011, ITW and AIP began to negotiate the Transaction. 8 On
September 22, 2011, at AIP’s direction, Brooks’ management provided ITW with
historical financial information and future financial projections that it intended
ITW to use as the basis for valuing Brooks. 9 AIP projected that Brooks’ revenue
would be approximately $210 million in fiscal year 2011, $247 million in fiscal
year 2012, and $322 million in fiscal year 2013. 10
On October 28, 2011, ITW delivered a Letter of Intent to purchase Brooks
for $500 million.11 On November 3, 2011, AIP accepted the Letter of Intent,
promising to operate Brooks in “a normal and customary manner” and “not to
3
Id. ¶ 12.
4
Id. ¶ 13.
5
Id. ¶ 14.
6
Id. ¶ 11.
7
Compl. ¶ 11.
8
Id. ¶ 23.
9
Id. ¶ 24.
10
Id.
11
Id. ¶ 25.
5
engage in any transaction which may adversely and materially affect the decision
of ITW to pursue” the purchase of Brooks. 12
On November 10, 2011, Brooks’ management informed AIP (specifically,
the Individual Defendants) that Brooks’ sales had fallen from $15.2 million in
September 2011 to $10.8 million in October 2011––Brooks’ worst sales month in
2011. 13 Brooks also informed AIP that its sales projections for November would
reach only approximately $13 million. 14 When Bamatter learned of the financial
results and projections, he asked Clark Hale, Brooks’ Chief Executive Officer, and
Waqar Nasim, Brooks’ Chief Financial Officer, “is there a story that is not
scary?”15 Thereafter, according to ITW, Baroyan pushed Brooks’ sales team to
“book the hell out of everything we possibly can over the next 10–15 days to ease
any concern ITW is going to have once they see October data.” 16
On November 18, 2011, ITW learned of the October financial results.17 AIP
explained to ITW that the October sales drop was an anomaly caused by three days
of lost production due to a year-end physical inventory and a one-time unusual
supplier delay. 18 AIP then provided projections that Brooks’ November 2011 sales
12
Id. ¶ 25.
13
Compl. ¶¶ 26, 41.
14
Id. ¶ 41.
15
Id. ¶ 42.
16
Id. ¶ 43.
17
Id. ¶ 26.
18
Id.
6
would be $17 million and December 2011 sales would be $21.5 million.19 After
the October sales drop, ITW decided to hold off on the purchase of Brooks until
after the November 2011 sales met AIP’s projections. 20
Throughout the month of November, Baroyan was in daily contact with Hale
and Nasim, monitoring Brooks’ progress toward AIP’s $17 million sales forecast.21
Through Baroyan and others at AIP, AIP directed Brooks to maximize its
November sales. 22
ITW alleges that AIP directed Brooks to enter into a series of “sham sales”
with AIP affiliates, Ichor Systems (“Ichor”) and Precision Flow Technologies
(“PFT”), throughout the fall of 2011 in an effort to inflate Brooks’ sales figures to
meet AIP’s revenue projection.23 ITW alleges that in order for AIP to “effectuate
this scheme,” in the fall of 2011, Brooks’ management, including Hale (CEO) and
Bhushan Somani (Vice President Global Account Management) attempted to sell a
large amount of soon-to-be-discontinued products to Applied Materials, Inc.
(“AMAT”). 24 When the parties were unable to reach an agreement, AIP and
Brooks arranged to “sell” the products to Ichor (“Last Time Buy Agreement”). 25
19
Compl. ¶ 27.
20
Id. ¶ 28.
21
Id. ¶ 44.
22
Id.
23
Id. ¶¶ 44–55.
24
Id. ¶¶ 45–46.
25
Compl. ¶ 45.
7
After those negotiations deteriorated, a second version of the Last Time Buy
Agreement was prepared on November 21, 2011 by Geoffrey Chriswisser on
behalf of Ichor, which required Brooks to repurchase up to 20 percent of the
original quantity of product acquired by Ichor as part of the Last Time Buy
Agreement (“partial right of return”).26 According to ITW, Brooks agreed to
repurchase certain legacy products in Ichor’s excess inventory at a later date in
order to induce Ichor to enter into the transaction. 27 The Brooks accounting team,
however, strongly objected to recording the shipments as revenue because doing so
(given the partial right of return) would violate Generally Accepted Accounting
Principles (“GAAP”). 28
On December 1, 2011, Chriswisser drafted a final Last Time Buy Agreement
that removed the partial right of return and Brooks’ obligation to repurchase Ichor-
owned legacy products, but Hale simultaneously affirmed by email to Ichor’s
Chief Executive Officer that Brooks would buy back certain products later––
completely inconsistent with the final Last Time Buy Agreement. 29 ITW alleges
that this partial right of return inflated Brooks’ revenue, making Brooks more
attractive to ITW. 30 Accordingly, ITW alleges that AIP granted the partial right of
26
Id. ¶ 48.
27
Id. ¶ 47.
28
Id.
29
Id. ¶ 49.
30
Id. ¶ 45.
8
return with the hope that the products would not be returned until after ITW had
taken control of Brooks.31
ITW further alleges that AIP and Brooks effectuated a similar scheme of
“sham sales” with PFT––another AIP affiliate. From September to November
2011, Brooks recorded $867,029 in sales to PFT.32 The agreement between PFT
and Brooks included an obligation for Brooks to buy back any product that had no
usage for 120 days. 33 Nevertheless, even though the terms of the agreement
violated GAAP, Brooks recorded the sales as revenue. 34
On November 29, 2011, ITW and AIP entered into a second Letter of Intent
whereby ITW would purchase Brooks for $425 million with a potential earn-out
payment of up to $75 million.35 Marvin signed the second Letter of Intent on
behalf of AIP.36 Because the second Letter of Intent made clear that ITW would
not acquire Brooks unless ITW approved of Brooks’ unaudited financial
statements ending November 30, 2011, ITW alleges that AIP knew or should have
known that the November 2011 sales were essential to ITW’s decision whether to
purchase Brooks.37
31
Compl. ¶ 45.
32
Id. ¶ 54.
33
Id.
34
Id.
35
Id. ¶ 31.
36
Id. ¶ 31.
37
Compl. ¶ 28.
9
On December 8, 2011, AIP provided ITW with Brooks’ consolidated
balance sheets, statements of income, and statements of cash flow for each
September 30 fiscal year from 2009–2011, as well as for October and November
2011 (“Financial Statements”). 38 The Financial Statements showed that November
2011 sales were $17.8 million. 39 This prompted ITW to request a face-to-face
meeting, but Marvin refused to allow ITW to meet with Brooks’ management in
person.40 Instead, Marvin agreed to provide written answers to ITW’s questions
about the November results and allowed ITW to speak with Brooks’ management
by phone.41 In its written answers, AIP assured ITW that the November financial
results reflected the ordinary course of business and that the December financial
projections of $21.5 million in sales would be met. 42 Actual sales, however, turned
out to be only $9.8 million. 43
On December 13, 2011, ITW and AIP entered into the SPSA whereby ITW
agreed to purchase Brooks for $425 million with a potential earn-out payment of
up to an additional $75 million.44
After the SPSA was executed in early 2012, products from Ichor and PFT
started to be returned. 45 Out of the approximately $5 million in products sold to
38
Id. ¶ 34. See also Defs.’ Op. Br., Ex. 1 SPSA § 2.8.
39
Compl. ¶ 34.
40
Id.
41
Id.
42
Id. ¶¶ 35, 37.
43
Id. ¶ 38.
44
Id. ¶ 40.
10
Ichor during the fall of 2011, approximately $1.2 million in products were
returned.46 Additionally, Brooks accepted purchase orders from Ichor for certain
legacy products, which ITW alleges were booked during November 2011 to induce
Ichor to enter into the sham sales. 47
III. PARTIES’ CONTENTIONS
AIP argues that Count I (fraud) of the Complaint should be dismissed
because it impermissibly “rehashes” the damages allegedly caused by ITW’s
breach of contract claim. 48 AIP argues that Count II (fraud in the inducement) of
the Complaint must be dismissed for two separate reasons. First, the fraud in the
inducement claim based on the SPSA is barred as an “impermissible bootstrap” to
ITW’s breach of contract claim. 49 Specifically, AIP argues that both the fraud in
the inducement claim and the breach of contract claim are premised on the same
conduct––the alleged sham sales to Ichor and PFT. 50 Second, AIP argues that any
fraud in the inducement claim based on extra-contractual statements was
disclaimed under the SPSA in an anti-reliance clause.51
45
Compl. ¶ 50.
46
Id. ¶¶ 46, 59.
47
Id. ¶ 53.
48
Defendants’ Opening Brief in Support of Their Motion to Dismiss at 21 (Trans. ID. 56390395)
(“Defs.’ Op. Br.”).
49
Id. at 15–17.
50
Id. at 16–17.
51
Id. at 18–19.
11
The Individual Defendants argue the Complaint fails to plead with the
requisite particularity that the Individual Defendants knew the Financial
Statements were false when made. 52 Alternatively, the Individual Defendants
contend that this Court does not have personal jurisdiction over them because the
Individual Defendants do not transact business in Delaware and do not have any
contacts with Delaware. 53
In opposition, ITW contends that its fraud in the inducement claim is not an
impermissible bootstrap to its breach of contract claim because Delaware case law
permits simultaneous breach of contract and fraud claims when the fraud claims
relate to misrepresentations in the contract. 54 ITW further contends that the anti-
reliance clause in the SPSA should not be enforced based on public policy
grounds.55
ITW asserts it has properly alleged independent claims for fraud and fraud in
the inducement against the Individual Defendants because Marvin, Bamatter, and
Baroyan played a role in the negotiations of the SPSA, and the harm caused to
52
Defendants’ Reply Brief in Support of Their Motion to Dismiss at 12–16 (Trans. ID.
56746794) (“Defs.’ Reply Br.”).
53
Defs.’ Op. Br. at 26–28.
54
Plaintiff’s Brief in Opposition to Defendants’ Motion to Dismiss at 15, 17–18 (Trans. ID.
56590866) (“Pl.’s Ans. Br.”).
55
Id. at 19–20. ITW does not dispute that the language of the SPSA created a valid,
unambiguous anti-reliance clause. Id. at 21.
12
ITW, based on their awareness of the alleged misrepresentations and the
affirmative steps they took to mislead and prevent ITW from learning the truth. 56
Finally, ITW contends that the Court has personal jurisdiction over the
Individual Defendants because each of the Individual Defendants is a partner in a
Delaware limited partnership, and because they entered into the SPSA—which is
governed by Delaware law. 57
IV. STANDARD OF REVIEW
The Court assumes that all well-pleaded facts in a complaint are true when
considering a Motion to Dismiss under Superior Court Civil Rule 12(b)(6).58
Allegations are well-pleaded if they place the defendant on notice of the claim. 59
Although the pleading threshold in Delaware is low, “[a]llegations that are merely
conclusory and lacking factual basis, however, will not survive a motion to
dismiss.”60
In considering a motion to dismiss under Rule 12(b)(6), the court generally
may not consider matters outside the complaint. 61 However, documents that are
integral to or incorporated by reference in the complaint may be considered.62
56
Id. at 26, 29–30.
57
Pl.’s Ans. Br at 34.
58
Brevet Capital Special Opportunities Fund, LP v. Fourth Third, LLC, 2011 WL 3452821, at
*6 (Del. Super. 2011).
59
Precision Air, Inc. v. Standard Chlorine of Del., Inc., 654 A.2d 403, 406 (Del. 1995).
60
Brevet Capital, 2011 WL 3452821, at *6.
61
Super. Ct. Civ. R. 12(b).
62
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 70 (Del. 1995).
13
“Where an agreement plays a significant role in the litigation and is integral to a
plaintiff’s claims, it may be incorporated by reference without converting the
motion to a summary judgment.”63
Because the Court finds that the SPSA is integral to and incorporated by
reference in the Complaint, it will consider the terms of the SPSA without
converting this motion into one for summary judgment.
V. DISCUSSION
In order to survive a motion to dismiss a fraud claim, a plaintiff must allege
that: (1) defendant falsely represented a material fact or omitted facts that the
defendant had a duty to disclose; (2) defendant knew that the representation was
false or made with a reckless indifference to the truth; (3) defendant intended to
induce plaintiff to act or refrain from action; (4) plaintiff acted in justifiable
reliance on the representation; and (5) plaintiff was injured by its reliance on
defendant’s representation. 64
Superior Court Civil Rule 9(b) requires that “[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall be stated with
particularity.” The particularity pleading standard requires a plaintiff to plead “the
63
Furnari v. Wallpang, Inc., 2014 WL 1678419, at *4 (Del. Super. 2014).
64
See, e.g., ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch.
2006).
14
time, place and contents of the false representations.” 65 However, “[m]alice,
intent, knowledge, and other condition of mind of a person may be averred
generally.” 66
ITW has alleged two counts of fraud against AIP: one for fraud, and one for
fraud in the inducement.67 Both counts as pleaded are materially identical, other
than the damages sought. 68
A. Count I: Fraud
“Delaware courts have consistently held that to successfully plead a fraud
claim, the allegedly defrauded plaintiff must have sustained damages as a result of
a defendant’s action.” 69 “[T]he damages allegations may not simply ‘rehash’ the
damages allegedly caused by the breach of contract.” 70
Here, Count I of the Complaint pleads, “[a]s a direct and proximate result of
AIP’s fraudulent representations and omissions, ITW sustained damages in an
amount exceeding $85 million.” 71 Count III for Breach of Contract pleads: “[a]s a
65
See, e.g., Browne v. Robb, 583 A.2d 949, 955 (Del. 1990) (internal quotations omitted).
66
Super. Ct. Civ. R. 9(b).
67
Compl. ¶¶ 111–124.
68
Compare id. ¶¶ 111–117, with id. ¶¶ 118–124.
69
Cornell Glasgow, LLC v. La Grange Properties, LLC, 2012 WL 2106945, at *8 (Del. Super.
2012) (quoting Dalton v. Ford Motor Co., 2002 WL 338081, at *6 (Del. Super. 2002)).
70
Cornell Glasgow, 2012 WL 2106945, at *8–9 (dismissing a fraud claim because the plaintiffs’
damages allegation was nothing more than a “rehash” of the allegations in its breach of contract
claims). See also AFH Holding Advisory, LLC v. Emmaus Life Sciences, Inc., 2013 WL
2149993, at *13 (Del. Super. 2013) (dismissing a fraud claim because the plaintiff’s damages
allegation for fraud was not separate and distinct from its damages allegation for breach of
contract).
71
Compl. ¶ 117.
15
direct and proximate result of AIP’s breaches, ITW has sustained damages in an
amount exceeding $85 million, plus its attorney fees and costs.” 72 Because ITW
has pleaded materially identical damages for $85 million, they fail to separate the
damages incurred by any alleged fraudulent misrepresentation and any alleged
breach of contract under the SPSA. Accordingly, Count I for fraud must be
dismissed because it pleads damages that are simply a “rehash” of the breach of
contract damages. Because Count II for fraud in the inducement pleads damages
for rescission or rescissory damages, the Court will now address Count II.
B. Count II: Fraud in the Inducement
ITW has alleged that AIP fraudulently induced it in two ways: (1) by
statements made in the SPSA; and (2) by statements made outside the SPSA with
the intent to induce ITW to enter into the SPSA.
1. Fraud in the Inducement Based on the SPSA
A fraud claim can be based on representations found in a contract, 73
however, “where an action is based entirely on a breach of the terms of a contract
between the parties, and not on a violation of an independent duty imposed by law,
a plaintiff must sue in contract and not in tort.” 74 Under Delaware law, a plaintiff
“cannot ‘bootstrap’ a claim of breach of contract into a claim of fraud merely by
72
Id. ¶ 130.
73
Ameristar Casinos, Inc. v. Resorts Int’l Holdings, LLC, 2010 WL 1875631, at *11 (Del. Ch.
2010).
74
Midland Red Oak Realty, Inc. v. Friedman, Billings & Ramsey & Co., 2005 WL 445710, at *3
(Del. Super. 2005).
16
alleging that a contracting party never intended to perform its obligations.”75
Stated differently, “a plaintiff cannot state a claim for fraud simply by adding the
term ‘fraudulently induced’ to a complaint.” 76 “Essentially, a fraud claim alleged
contemporaneously with a breach of contract claim may survive, so long as the
claim is based on conduct that is separate and distinct from the conduct
constituting breach.”77 Allegations that are focused on inducement to contract are
“separate and distinct” conduct. 78
AIP relies on MicroStrategy Inc. v. Acacia Research Corp., Cornell
Glasgow, LLC v. La Grange Properties, LLC, and Furnari v. Wallpang, Inc. to
argue that ITW’s claim for fraudulent inducement based on the SPSA is an
impermissible bootstrap to its claim for breach of contract. 79 However, AIP’s
reliance on those cases is misplaced. In all three cases the plaintiffs alleged fraud
based on the performance of a contract, rather than the inducement to contract
because of alleged fraudulent conduct occurring prior to entering the contract.
In MicroStrategy, the defendant had warranted in a settlement agreement
that it had no present intention of bringing a patent infringement suit against the
75
Furnari, 2014 WL 1678419, at *8 (quoting Narrowstep Inc. v. Onstream Media Corp., 2010
WL 5422405, at *15 (Del. Ch. 2010)) (emphasis added).
76
MicroStrategy Inc. v. Acacia Research Corp., 2010 WL 5550455, at *17 (Del. Ch. 2010).
77
Furnari, 2014 WL 1678419, at *8 (internal quotations omitted).
78
See Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *16–17 (Del. Ch.
2013); Brasby v. Morris, 2007 WL 949485, at *6–7 (Del. Super. 2007).
79
Defs.’ Op. Br. at 15–18.
17
plaintiff.80 After the execution of the agreement, the defendant notified the
plaintiff that the defendant planned to sue for patent infringement. 81 The plaintiff
then sued for both breach of the settlement agreement and fraud. 82 The Court of
Chancery dismissed the fraud claim as an impermissible bootstrap to the extent
that the fraud claim alleged that the representation and warranty in the settlement
agreement was false when defendant made it. 83
Similarly, in Cornell Glasgow, the plaintiff sued for breach of contract and
fraudulent inducement because the defendants delayed payment of invoices and
then induced the plaintiff’s “continued performance by promising payment upon
receipt of additional information.” 84 The Court dismissed the fraud claim because
the alleged misrepresentations all related to the defendants failed performance after
the execution of the agreement.85
Finally, in Furnari, the plaintiff sued for breach of contract and fraudulent
inducement because the defendant failed to pay amounts allegedly owed under the
contract.86 The Court dismissed the plaintiff’s fraud claim as an impermissible
bootstrap to the breach of contract claim because the plaintiff failed to allege any
80
2010 WL 5550455, at *2.
81
Id. at *3.
82
Id. at *17.
83
Id. The Court of Chancery did not dismiss the fraud claim to the extent that the allegations fell
outside the agreement based on oral assurances to fraudulently induce the plaintiff to enter into
the agreement. Id. The agreement did not contain an anti-reliance clause. Id.
84
2012 WL 2106945, at *8.
85
Id.86
2014 WL 1678419, at *1–2.
18
fraud that occurred prior to entering into the contract that induced the plaintiff into
signing it.87
The instant case is distinguishable from the foregoing cases because Count II
of ITW’s Complaint relates to misrepresentations about the Financial Statements
occurring before the closing of the SPSA. The Delaware Court of Chancery
confronted a similar situation to the present case, and concluded that simultaneous
fraud and breach of contract claims were viable because the claims were based on
the manipulation of financial statements before entering into a stock purchase
agreement.88 In Osram Sylvania Inc. v. Townsend Ventures, LLC, the plaintiff–
buyer entered into a Stock Purchase Agreement (“SPA”) with the defendants–
sellers.89 After the closing, the plaintiff–buyer discovered that the defendants–
sellers allegedly manipulated the acquired companies’ financial statements to
induce the plaintiff–buyer to enter into the SPA.90 The SPA represented and
warranted that the financial statements were “correct and complete in all material
respects . . . and fairly present[ed] the financial condition . . . of the Acquired
Companies.”91 The plaintiff–buyer alleged that the information in the financial
statements did not fairly present the financial condition of the acquired companies
87
Id. at *8.
88
2013 WL 6199554, at *16–17.
89
Id. at *1.
90
Id. at *2.
91
Id. at *3.
19
and violated GAAP. 92 The Court of Chancery refused to dismiss the fraud claim as
impermissible bootstrapping because the plaintiff–buyer “pointed to specific
misrepresentations by [the defendants–sellers] including misrepresentations about
the sales results and financial condition of the [acquired companies] made before
the [e]xecution of the SPA.” 93
In ABRY Partners V, L.P. v. F & W Acquisition LLC, the parties entered into
a Stock Purchase Agreement (“SPA”) for the buyer’s purchase of a portfolio
company. 94 The SPA contained several representations and warranties about the
company’s financial statements.95 After the parties entered into the agreement, the
buyer discovered that the financial statements prior to the agreement were
fraudulently manipulated by the buyer. 96 The Court of Chancery refused to
dismiss the fraudulent inducement claim, finding that the “financial statements
were represented and warranted in the Agreement and were therefore intended to
induce the Buyer to sign the Agreement and close the sale to purchase the
Company.” 97
Similar to the allegations Osram and ABRY Partners, ITW alleges that AIP
manipulated the Financial Statements by engaging in the alleged sham sales with
92
Id. at *2.
93
Id. at *16–17.
94
ABRY Partners, 891 A.2d at 1034.
95
Id. at 1034–35.
96
Id. at 1038–40.
97
Id. at 1051.
20
Ichor and PFT. 98 Importantly, ITW alleges the sham sales occurred before
entering into the SPSA and were designed to induce ITW to enter into the SPSA. 99
AIP warranted in Section 2.8(c) of the SPSA that all of the Financial Statements
conformed to GAAP and were presented fairly, in all material respects, and that
AIP had sufficient controls to ensure that the statements were accurate. 100 If any of
AIP’s representations and warranties were false, AIP and the other sellers agreed to
indemnify ITW for any resulting “losses.” 101 ITW alleges AIP knew that the
November 2011 sales were essential to ITW’s desire to purchase Brooks.102
ITW has alleged sufficient facts from which it can be reasonably inferred
that AIP fraudulently induced ITW to enter into the SPSA by directing Brooks to
artificially inflate its November 2011 sales through a series of “sham sales” before
the SPSA was entered into. 103 Count II for fraud in the inducement is not
impermissibly bootstrapped to Count III for breach of contract. Therefore, the
Court will not dismiss Count II to the extent it alleges that AIP manipulated the
November 2011 financial statements before ITW entered into the SPSA and is
based on misrepresentations in the SPSA.
98
Compl. ¶¶ 44–55.
99
Id. ¶ 46.
100
Defs.’ Op. Br., Ex. 1 SPSA § 2.8.
101
Id. § 8.2.
102
Compl. ¶ 28.
103
Additionally, because Count II alleges damages for rescission or rescissory damages, it is not
barred as a “rehash” of the Complaint’s breach of contract damages.
21
2. Fraud in the Inducement Based on Extra-Contractual Statements
AIP also argues that ITW’s fraud claims are barred because the SPSA
explicitly disclaims any reliance on extra-contractual representations. According
to AIP, the anti-reliance clause prevents ITW from alleging a prima facie case of
fraud because ITW cannot justifiably rely on statements that it warranted it would
not rely on.
To establish a claim for fraud, a plaintiff must have acted in justifiable
reliance on the representation.104 Reliance is commonly disclaimed in agreements
between sophisticated parties. 105 An anti-reliance clause must contain clear
language “by which the plaintiff has contractually promised that it did not rely
upon statements outside the contract’s four corners in deciding to sign the
contract.”106 The policy behind enforcing anti-reliance clauses “is that a party
cannot promise . . . that it will not rely on promises and representations outside of
the agreement and then shirk its own bargain in favor of a ‘but we did rely on those
other representations’ fraudulent inducement claim.” 107
104
See, e.g., ABRY Partners, 891 A.2d at 1050.
105
See id. at 1057–59 (explaining that anti-reliance clauses are enforceable in Delaware).
106
See id. at 1059 (quoting Kronenburg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004)).
107
See ABRY Partners, 891 A.2d at 1057.
22
The parties here do not dispute that the SPSA specifically warrants that ITW
will not rely on extra-contractual statements.108 Section 4.8(ii) of the SPSA,
entitled “No Reliance,” provides:
[ITW] is not relying (for purposes of entering into this Agreement or
otherwise) upon any advice, counsel or representations (whether
written or oral) of the Sellers’ Representative, Parent, any Subsidiary
of Parent or any Seller other than those representations expressly
made hereunder . . . .
Section 10.12, entitled “Entire Agreement,” provides in pertinent part:
Each party hereto agrees that, except for the representations and
warranties contained in this Agreement, none of Buyer, Parent, Parent
[sic], any of Parent’s Subsidiaries, the Sellers, nor any Seller makes
any other representations or warranties, and each hereby disclaims any
other representations or warranties made by itself or employees,
agents, financial and legal advisors, or other representatives with
respect to the execution and delivery of the Agreement.
The parties dispute whether the anti-reliance clause applies to effectively bar ITW
from asserting a fraud claim based on statements made by Defendants to ITW
outside the four corners of the SPSA.
At the outset, the Court notes that “Delaware upholds the freedom of
contract and enforces as a matter of fundamental public policy the voluntary
agreement of sophisticated parties.” 109 In doing so, Delaware courts have upheld
108
Pl.’s Ans. Br. at 21.
109
Cornell Glasgow, 2012 WL 2106945, at *8 (quoting Nacco Indus., Inc. v. Applica Inc., 997
A.2d 1, 35–36 (Del. Ch. 2009)).
23
the enforceability of anti-reliance clauses.110 In RAA Management, LLC v. Savage
Sports Holdings, Inc., the plaintiff based its fraud claim on alleged
misrepresentations made during the due diligence process outside of the final
written agreement.111 In response to the defendant’s motion to dismiss, the
plaintiff argued that the court should decline to enforce the anti-reliance clause on
public policy grounds. 112 The Delaware Supreme Court rejected the plaintiff’s
public policy argument, and held that such a fraud claim was barred by the non-
reliance disclaimer in the agreement. 113 Further, RAA Management explicitly
reaffirmed ABRY Partners for the proposition that public policy favors the
enforcement of contractually binding written disclaimers of reliance on
representations outside of a final agreement of sale. 114 In RAA Management, the
Delaware Supreme Court explained that:
[s]ophisticated parties may not reasonably rely upon representations
outside of the contract, where the contract—like the [nondisclosure
agreement] in this case—contains a provision explicitly disclaiming
reliance upon such outside representations. The Abry Partners court
distinguished fraud claims based on representations made outside of a
merger agreement––which can be disclaimed through non-reliance
110
See, e.g., ABRY Partners, 891 A.2d at 1057–58.
111
RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 A.3d 107, 117 (Del. 2012). Although
RAA Management was decided under New York law, the Delaware Supreme Court conducted a
thorough analysis of the dispute under Delaware law and specifically stated, “the results would
be the same under Delaware law.” Id. at 118.
112
Id. at 116.
113
Id. at 117.
114
Id. at 118–19.
24
language––with fraud claims based on “false representation[s] of fact
made within the contract itself”––which cannot be disclaimed. 115
RAA Management controls the instant dispute. In addition to allegations of
fraud in the inducement based on the SPSA, ITW bases the other half of its fraud
claim on misrepresentations during the course of negotiations before entering into
the SPSA, i.e., outside the four corners of the SPSA. Although ITW alleges
Defendants made misrepresentations before the parties signed the final written
SPSA, by signing the SPSA, ITW warranted that it was not relying on any such
representations made outside the SPSA. Moreover, ITW warranted in the anti-
reliance clause that it is “a sophisticated entity familiar with transactions similar to
those contemplated by [the SPSA].” 116 RAA Management makes clear that the
SPSA’s anti-reliance clause is enforceable to bar ITW’s claim for fraud based on
extra-contractual statements. 117
115
Id. at 117.
116
Defs.’ Op. Br., Ex. 1 SPSA § 4.8(iv).
117
Moreover, in ABRY Partners the Court of Chancery stated that when confronted with such an
argument (as that asserted by ITW), public policy favors enforcement of the anti-reliance clause.
ABRY Partners, 891 A.2d at 1058. As then-Vice Chancellor Strine noted:
To fail to enforce non-reliance clauses is not to promote a public policy against
lying. Rather, it is to excuse a lie made by one contracting party in writing––the
lie that it was relying only on contractual representations and that no other
representations had been made––to enable it to prove that another party lied orally
or in a writing outside the contract’s four corners. For the plaintiff in such a
situation to prove its fraudulent inducement claim, it proves itself not only a liar,
but a liar in the most inexcusable of commercial circumstances: in a freely
negotiated written contract. Put colloquially, this is necessarily a ‘Double Liar’
scenario.
25
Therefore, Count II for fraud in the inducement must be dismissed to the
extent that ITW alleges a claim of fraud based on any extra-contractual statements
made by AIP because the anti-reliance clause bars ITW from relying on such
statements. 118
Id. Similarly, as then-Vice Chancellor Jacobs noted in Great Lakes Chemical Corp. v.
Pharmacia Corp., “[w]ere this Court to allow [the buyer] to disregard the clear terms of its
disclaimers and to assert its claims of fraud, the carefully negotiated and crafted . . . Agreement
between the parties would . . . not be worth the paper it is written on.” RAA Mgmt., 45 A.3d at
113 (quoting Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 556 (Del. Ch. 2001)).
118
After briefing was completed, ITW submitted a letter to the Court discussing TransDigm, Inc.
v. Alcoa Global Fasteners, Inc. in support of its argument that the anti-reliance clause does not
apply because the anti-reliance clause in the SPSA did not disclaim fraud based on concealment
of information. See Pl.’s Mar. 23, 2015 Letter to the Court (Trans. ID. 56954364). In
TransDigm, the Delaware Court of Chancery declined to dismiss a claim for “fraudulent
concealment” despite an anti-reliance clause disclaiming reliance on “fraudulent
misrepresentations.” TransDigm, Inc. v. Alcoa Global Fasteners, Inc., 2013 WL 2326881, at *8
(Del. Ch. 2013). In reaching this decision, the Court of Chancery distinguished between fraud
claims based on false representations and those based on concealment. Id. at *8–10. Here,
ITW’s claims are focused on AIP allegedly misrepresenting––not concealing––the financial
condition of Brooks with respect to the November 2011 sales. See, e.g., Compl. ¶ 28. Because
the Court of Chancery’s analysis in TransDigm focused on fraudulent concealment, the Court
does not find it persuasive on the dispute at issue here. Moreover, the Delaware Supreme Court
made clear in RAA Management that an anti-reliance clause bars a plaintiff from later claiming
fraud based on statements made outside the agreement. See RAA Mgmt., 45 A.3d at 117–19.
Additionally, the U.S. District Court for the District of Delaware has cautioned that the
TransDigm “exception” is limited:
[the plaintiff] cannot circumvent Abry’s holding by arguing the Defendants
neglected to inform [the plaintiff] that its representations were false. Every
misrepresentation, to some extent, involves an omission of the truth, and [the
plaintiff] cannot re-characterize every misrepresentation as an omission.
Therefore, simply characterizing something as an “omission” does not render the
anti-reliance provision a nullity.
Universal Am. Corp. v. Partners Healthcare Solutions Holdings, L.P., 61 F. Supp. 3d. 391, 400
(D. Del. 2014).
26
B. The Individual Defendants
ITW alleges claims for fraud and fraudulent inducement against the
Individual Defendants.119 Not only does the Complaint fail to mention the
Individual Defendants in Counts I and II, the Complaint fails to plead any fraud
committed by Marvin, Bamatter, or Baroyan. The requirement that fraud be
pleaded with particularity “serves to discourage the initiation of suits brought
solely for their nuisance value, and safeguards potential defendants from frivolous
accusations of moral turpitude.”120
ITW warranted in the SPSA that it had been given access to Brooks’ books
and records, facilities, officers, employees, and any other property or documents
that ITW had requested to review.121 ITW further warranted that its decision to
purchase Brooks was not based on any forecast or any “assurance, guarantee, or
representation whatsoever as to the expected or projected success” of Brooks. 122
119
ITW does not oppose Defendants’ Motion to Dismiss Counts III through V against the
Individual Defendants. Pl.’s Ans. Br. at 26 n.20. Therefore, the Court finds that Counts III
through V are dismissed against the Individual Defendants. The fraud claims against the
Individual Defendants cannot be dismissed based on the bootstrapping doctrine because ITW is
no longer seeking simultaneous claims for breach of contract or indemnification against the
Individual Defendants. However, the anti-reliance clause applies with equal force to the
Individual Defendants because, as discussed, ITW could not rely on statements made by the
Individual Defendants outside the SPSA. Thus, ITW could not have justifiably relied on any
statements made by the Individual Defendants that were outside of the SPSA.
120
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,
1208 (Del. 1993).
121
Defs.’ Op. Br., Ex. 1 SPSA § 4.8.
122
Id.
27
The crux of ITW’s argument is that the Complaint adequately alleges claims
for fraud against the Individual Defendants because the Individual Defendants
allegedly knew that Section 2.8 of the SPSA regarding Brooks’ November 2011
balance sheet was false or that the representations were made with reckless
indifference to the truth. While Superior Court Civil Rule 9(b) provides that
“knowledge . . . may be averred generally,” “where pleading a claim of fraud . . .
that has at its core the charge that the defendant knew something, there must, at
least, be sufficient well-pleaded facts from which it can reasonably be inferred that
this ‘something’ was knowable and that the defendant was in a position to know
it.”123
Here, the “something” that all the Individual Defendants allegedly knew was
that the November 30, 2011 financial statement was false. The Complaint alleges
the following facts to support this alleged knowledge:
(1) the Individual Defendants were aware on November 10, 2011, that
Brooks’ November sales would reach only $13 million; 124
(2) Marvin knew ITW was worried about the November financial
results;125
(3) Marvin refused to allow ITW representatives to have a face-to-
face meeting with Brooks’ management on December 8, 2011, after
ITW received the November financial statements. 126 Instead, Marvin
123
Metro Commc’n Corp. BVI v. Advanced MobileComm Techs., Inc., 854 A.2d 121, 147 (Del.
Ch. 2004) (quoting IOTEX Commc’ns, Inc. v. Defries, 1998 WL 914265, at *4 (Del. Ch. 1998)).
124
Compl. ¶ 41.
125
Id. ¶ 31.
126
Id. ¶ 34.
28
would only permit Brooks’ management to discuss the November
results by telephone and Brooks’ management would provide written
answers to any questions submitted by ITW; 127
(4) Baroyan pushed the Brooks’ sales teams to “book the hell out of
everything we possibly can over the next 10–15 days to ease any
concern ITW is going to have once they see October data;” 128
(5) Baroyan had daily contact with Brooks’ CEO and CFO to monitor
Brooks’ progress toward the November $17 million sales goal and he
directed Brooks to maximize November sales;129 and
(6) on or about November, 11, 2011, Bamatter asked Brooks’ CEO
and CFO, in regards to the low October sales, “is there a story that is
not scary?”130
None of the aforementioned facts give rise to a reasonable inference that the
Individual Defendants knew about, or were recklessly indifferent to, any alleged
misrepresentations or sham sales contained in the November 2011 financial
statements. Where a plaintiff fails to allege facts that support an inference that
individuals had knowledge of a fraudulent statement, its fraud claim against those
individuals must be dismissed.131
127
Id.
128
Id. ¶ 43.
129
Id. ¶ 44.
130
Compl. ¶ 42.
131
Metro Commc’n, 854 A.2d at 146–47 (dismissing fraud claims against individuals where
pleadings did not support a reasonable inference that they had “actual knowledge” of facts that
made report misleading); Anvil Holding Corp. v. Iron Acquisition Co., 2013 WL 2249655, at *7
(Del. Ch. 2013) (denying a motion to dismiss fraud claims where it was “reasonably
conceivable” that the individual defendants had knowledge of false statements made by the
company).
29
Additionally, the Complaint does not sufficiently allege that the Individual
Defendants participated in the fraud.132 Paragraph 15 of the Complaint
conclusorily states, “Defendants Marvin, Bamatter, and Baroyan were actively
involved in the fraud and were aware of the relevant facts.” Nowhere does ITW
plead any additional facts to support this conclusory statement. To the contrary,
ITW alleges any fraud was committed by Brooks’ employees––not AIP.133
Without more, such a conclusory statement is insufficient to support a reasonable
inference that the Individual Defendants participated in the alleged fraud. 134
ITW has failed to allege sufficient facts from which it can reasonably be
inferred that the Individual Defendants participated in the alleged fraud or knew
about, or were recklessly indifferent to, any alleged misrepresentations or sham
132
Corporate executives can be individually liable for the torts they personally commit even if
they were acting in their official capacity. Duffield Assocs., Inc. v. Meridian Architects &
Eng’rs, LLC, 2010 WL 2802409, at *4 n.5 (Del. Super. 2010) (“[A] corporate officer is
individually liable for the torts he personally commits and cannot shield himself behind a
corporation when he [is] an actual participant in the tort.” (quoting Donsco, Inc. v. Casper
Corp., 587 F.2d 602, 606 (3d Cir. 1978) (emphasis added))). “This rule applies to claims of
fraud.” Duffield, 2010 WL 2802409, at *4.
133
The Complaint identifies Brooks’ management, Hale (CEO) and Somani (Vice President
Global Account Management) as the employees who orchestrated the alleged sham sales to
Ichor. Compl. ¶¶ 46–56.
134
Browne, 583 A.2d at 953, 955 (explaining that Rule 9(b) requires the circumstances
surrounding the fraud to be pleaded with particularity); Metro Commc’n, 854 A.2d at 147
(explaining that merely holding a managerial position in a company is not sufficient to show a
manager had knowledge of any alleged fraud committed by the company).
30
sales contained in the November 2011 financial statements. 135 Consequently, the
claims against the Individual Defendants must be dismissed.
VI. CONCLUSION
For the foregoing reasons, AIP’s Motion to Dismiss Count I (fraud) is
GRANTED; AIP’s Motion to Dismiss Count II (fraud in the inducement) is
GRANTED, in part, and DENIED, in part; and the Individual Defendants’
Motion to Dismiss all counts against them in the Complaint is GRANTED.
IT IS SO ORDERED.
_____________________________
Jan R. Jurden, President Judge
135
Because the Court finds that ITW has failed to plead fraud with the requisite particularity
against the Individual Defendants, the Court will not address the issue of personal jurisdiction.
31