Unbound Partners Limited Partnership v. Invoy Holdings Inc. ( 2021 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
UNBOUND PARTNERS LIMITED )
PARTNERSHIP, )
Plaintiff, )
)
v. ) C.A. No. N20C-09-302
) PRW CCLD
)
INVOY HOLDINGS INC., )
Defendant. )
Submitted: February 4, 2021
Decided: March 17, 2021
Corrected: March 29, 2021
Upon Plaintiff Unbound Partners Limited Partnership’s Motion for Summary
Judgment or, in the Alternative, Motion for Default Judgment
DENIED
Upon Defendant Invoy Holdings Inc.’s Motion to Dismiss
DENIED
OPINION AND ORDER
William M. Lafferty, Esquire (Argued), Alexandra Cumings, Esquire, Michael J.
Slobom, Jr., Esquire, MORRIS, NICHOLS, ARSHT & TUNNELL LLP,
Wilmington, Delaware; Leo G. Kailas, Esquire, Paul V. LiCalsi, Esquire, REITLER
KAILAS & ROSENBLATT LLC, New York, New York, Attorneys for Plaintiff
Unbound Partners Limited Partnership.
Steven J. Fineman, Esquire, Travis S. Hunter, Esquire (Argued), Tyler E. Cragg,
Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware,
Attorneys for Defendant Invoy Holdings Inc.
WALLACE, J.
Delaware’s Rules of Civil Procedure open with a clear, but nonetheless tall,
mandate: Courts must construe them to foster “the just, speedy and inexpensive”
resolution of each case.1 When doing so, Delaware’s judicial officers enjoy wide
discretion to sculpt procedural law nimbly. To do so, this Court and its siblings’
judges have drawn on experience, intuition and commonsense. And, in doing so,
each court has developed its own “practices” that—though not spelled-out in code—
are customarily followed in the creative art of case-specific decision-making. It’s
rarely, if ever, asked that one of us second-guess another’s specific case-
management process or use another’s practice to chisel a certain rule’s and statute’s
contours to sharp and unyielding relief that a party envisions as forming fairness for
it alone. One party here, however, asks the Court to do just that.
In the main, this breach of promissory note action invites the Court to decide
whether some of the damages Unbound Partners Limited Partnership seeks are due
or are instead an unenforceable penalty. But here, at the threshold, Invoy Holdings
Inc.’s motion to dismiss just a single count of Unbound’s complaint poses a novel
procedural question. To get to the substance of Invoy’s motion, the Court must labor
with this issue raised by Unbound’s combined motion for summary and default
judgment: Does a defendant named in a complaint brought via 10 Del. C. § 390l
1
Del. Super. Ct. Civ. R. 1; Del. Ch. R. 1; Del. Fam. Ct. Civ. R. 1; Del. Ct. Com. Pl. Civ. R. 1;
Del. J.P. Ct. Civ. R. 1.
concede or default on the allegations against it by moving to dismiss under Rule 12
only one of the complaint’s counts without first answering the complaint, in whole
or in part, by affidavit? Put broadly, the Court must determine whether that motion
for partial dismissal tolls the answering period for both the challenged and
unchallenged claims.
Title 10, Section 3901 of the Delaware Civil Code, which obliges defendants
in note actions to answer by affidavit, does not speak of pre-answer motions. Rule
12(a) does so speak, but not of those motions that seek only “partial” dismissal. Yet,
Delaware courts routinely entertain motions for partial dismissal—i.e., motions
aimed at only one or more of the defective counts in a complaint. They can be
economizing tools that, in a suit’s early stages, hew meritless counts out of otherwise
adequately-pleaded complaints.
For the reasons explained more fully later, the Court holds that motions for
partial dismissal filed under Rule 12(b) toll the period for answering the entire
complaint. As a result, a defendant does not concede—or default on—a complaint,
as a matter of law, when moving against only some of that complaint before
answering any of it or the remainder. And so, when read together, § 3901’s answer-
by-affidavit requirement is inapplicable both to challenged and unchallenged claims
until a pre-answer Rule 12(b) motion is resolved. In short, the answer to Unbound’s
question is no.
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To be sure, simply because defendants are not required to simultaneously
answer allegations left untouched by their partial dismissal motions does not mean
a court is powerless to so order their answer where warranted. If a court finds
moving-and-answering to be appropriate or necessary, then it is certainly free to
shape a matter’s schedule thusly. Indeed, many cases—whether brought under
§ 3901 or not—might erode the just, the speedy and the inexpensive without such
sculpting. This, though, is not one of those cases; Invoy’s motion without answer or
affidavit is proper. Accordingly, the Court DENIES Unbound’s motion for entry of
judgment that—without real procedural reinforcement—requests relief unwarranted
and premature.
Success in that procedural skirmish doesn’t necessarily bring a win for Invoy
on the merits of its dismissal motion, however. Delaware is a pro-contractarian state,
and her law is loath to deter bilateral negotiation. Though deference to sophisticated
counterparties’ deals may not be limitless, Delaware courts will not so quickly find
a voluntary agreement unenforceable. And this Court is certainly hesitant to do so
upon a motion to dismiss. It may well be that the provision Invoy disputes is an
unenforceable penalty. But the complaint supports the reasonable inference that it is
not. Accordingly, the Court DENIES Invoy’s motion for partial dismissal as well.
-3-
I. FACTUAL BACKGROUND
A. THE LOAN.
Invoy is a startup that once had been fundraising to complete its Series B
Financing phase.2 To that end, Unbound, one of Invoy’s equity investors, offered to
supply Invoy $2 million in capital through a short-term bridge loan.3 Invoy
accepted.4 On March 9, 2020, these counterparties memorialized the debt in a
promissory note agreement (the “PNA”).5 Unbound credited Invoy one day later.6
Relevant here are the following terms. The PNA defines “Principal” as $2
million.7 “Interest” is defined as the greater of the number produced by a fixed 10%
annual rate, and a flat fee of $300,000.8 Invoy agreed to pay Principal and applicable
Interest on or before July 31, 2020—the debt’s “Maturity Date.”9 Failure to pay by
the Maturity Date despite written notice and a five-day cure period constitutes an
2
Complaint ¶¶ 2, 5, 7 (D.I. 1) (“Compl.”).
3
Id. ¶¶ 1, 6, 8-9.
4
Id. ¶ 10.
5
Id.; see generally Exhibit A, Promissory Note Agreement (D.I. 2) (hereinafter, the “PNA”).
6
Compl. ¶ 19.
7
PNA § 1(a).
8
Id. § 1(b).
9
Compl. ¶¶ 12-14, 20; PNA §§ 1(b)-(c). The original Maturity Date was June 30, 2020 before
the parties later agreed to a 31-day extension. See Exhibit B, PNA Amendment § 1 (D.I. 2).
-4-
“Event of Default.”10 If an Event of Default occurs, then Unbound may elect one of
two rights: (1) acceleration combined with a multiplier that doubles Principal in lieu
of any Interest; or (2) conversion of the outstanding balance into an equivalent
amount of senior-preferred Invoy stock.11 Central to the parties’ motions is option
(1): the “Double Principal Option.”
In its own words, the Double Principal Option declares –
Unbound may, at its discretion, by notice in writing to Invoy . . .
require that Invoy immediately pay Unbound an amount equal to
two times the outstanding Principal hereunder in lieu of accrued
Interest.12
“For the avoidance of doubt,” the Option then continues with an example illustrative
of this dispute:
If Unbound loans two million dollars ($2,000,000) to Invoy . . .
and Invoy does not repay Unbound $2,000,000 plus Interest on
or before the Maturity Date, then Invoy will owe $4,000,000 to
Unbound.13
The Maturity Date apparently came and went.14 On August 1, 2020, Unbound
sent Invoy written notice of default.15 In that notice, Unbound informed Invoy that
10
Compl. ¶¶ 15, 17; PNA §§ 3(a), (f).
11
Compl. ¶¶ 15-16; PNA §§ 3, 4(a)(i)-(ii).
12
PNA § 4(a)(i) (cleaned up).
13
Id. (cleaned up).
14
Compl. ¶ 22.
15
Id. ¶ 25; see generally Exhibit C, Notice of Breach (D.I. 2).
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it would exercise the Double Principal Option unless Invoy timely repaid.16 Invoy
allegedly didn’t repay and hasn’t remitted a cent since.17 So, Unbound sued.
B. THE LAWSUIT.
Unbound filed its complaint with an invocation of 10 Del. C. § 3901 right up
front.18 That notation states: “all allegations . . . must be answered by affidavit in
accordance with . . . 10 Del. C. § 3901.”19 The complaint then divides the allegations
into “two” breach-of-contract claims.20 Count I asserts $4 million plus pre-judgment
interest in damages.21 “In the alternative,” Count II asserts $2.3 million plus pre-
and post-judgment interest in damages.22 The bases for each count are substantively
identical. The only difference between them is that Count I seeks payment under
the Double Principal Option, while Count II computes what Invoy would owe but
for the Option.23
16
Compl. ¶ 26.
17
Id. ¶¶ 27-28.
18
See id. Caption.
19
Id.
20
Id. ¶¶ 30-45.
21
Id. ¶¶ 30-37 & Prayer for Relief § (a).
22
Id. ¶¶ 38-45 & Prayer for Relief § (b).
23
Compare PNA § 1(c) with id. §§ 3, 4(a)(i). A simple interest calculation illustrates that the
amount Unbound could recover at 10% interest per year by Maturity (i.e., roughly 4.5/12) is less
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Invoy did not file an answer to any of Unbound’s accusations. Instead, Invoy
moved to dismiss Count I under Rule 12(b)(6).24 According to Invoy, Count I’s
damages are tied to an unenforceable penalty (i.e., the Double Principal Option) and
thus cannot be recovered without violating Delaware public policy.25 Invoy noted
that it will “address” Count II after the Court thumbs Count I’s fate.26
In opposition, Unbound has moved for summary judgment, “or, in the
alternative,” for default judgment, arguing that, under 10 Del. C. § 3901, Invoy’s
choice not to answer the allegations before filing its motion works a complete
concession of liability, or at least, should be deemed a failure to defend.27 Procedure
aside, Unbound contends that the Double Principal Option requires no penalty
analysis. But, Unbound says, if it is subjected to such an examination, the Double
Principal Option is a valid expression of liquidated damages.28
The Court has heard argument on both parties’ motions and they are now ripe
for decision.
than $300,000. But since the PNA provides for the greater of the two, $2.3 million is what
Unbound would recover without the Double Principal Option.
24
Invoy Mot. (D.I. 7).
25
Id. at 4-10.
26
Id. at 10 n.4.
27
Unbound Opening Br. at 8-13, 20-24 (D.I. 9) (“Unbound Op. Br.”).
28
Id. at 13-20.
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II. STANDARDS OF REVIEW
A. MOTION TO DISMISS.
A party may move to dismiss under this Court’s Civil Rule 12(b)(6).29 In
considering a motion to dismiss, the Court (1) accepts as true all well-pleaded factual
allegations; (2) credits vague allegations if they give the opposing party notice of the
claim; (3) draws all reasonable inferences in favor of the non-movant; and (4) denies
dismissal if recovery on the claim is reasonably conceivable.30 Delaware’s pleading
standard is “minimal.”31 Dismissal is inappropriate unless “under no reasonable
interpretation of the facts alleged could the complaint state a claim for which relief
might be granted.”32 Put differently, a claim targeted for dismissal will survive if “a
possibility of recovery” can be divined from it.33
29
See Del. Super. Ct. Civ. R. 12(b)(6) (“[T]he following defense[] may at the option of the
pleader be made by motion[:] failure to state a claim upon which relief can be granted. . . .”).
30
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Holdings LLC, 27 A.3d 531, 535 (Del. 2011).
31
Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 895 (Del. 2002)).
32
inVentiv Health Clinical, LLC v. Odonate Therapeutics, Inc., 2021 WL 252823, at *4 (Del.
Super. Ct. Jan. 26, 2021) (internal quotation marks and citations omitted).
33
Firefighters’ Pension Sys. of City of Kan. City, Mo. Tr. v. Presidio, Inc., 2021 WL 298141, at
*15 (Del. Ch. Jan. 29, 2021) (internal quotation marks and citations omitted); see Cent. Mortg., 27
A.3d at 537 n.13 (“Our governing ‘conceivability’ standard is more akin to ‘possibility. . . .’”).
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That said, the Court won’t strain to pull claim-saving interpretations from the
complaint.34 Too, “the benefits of liberal construction afforded a non-movant do not
extend to ‘conclusory allegations that lack specific supporting factual
allegations.’”35 And so, the Court will dismiss “if the non-movant fails to plead
specific allegations supporting an element of its claim or where no reasonable, i.e.,
unstrained, interpretation of the facts alleged reveals a remediable injury.”36
B. SUMMARY JUDGMENT.
“Summary judgment is appropriate where the record demonstrates that ‘there
is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.’”37 But, summary judgment will not be granted if “a
material fact is in dispute” or “it seems desirable to inquire thoroughly into [the facts]
in order to clarify the application of the law to the circumstances.”38 The burden is
34
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001); see Price v. E.I. DuPont de Nemours
& Co., Inc., 26 A.3d 162, 166 (Del. 2011) (The Court need not draw “unreasonable inferences in
favor of the non-moving party.”), overruled on other grounds by Ramsey v. Ga. S. Univ. Advanced
Dev. Ctr., 189 A.3d 1255, 1277 (Del. 2018).
35
Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, 2021 WL 117036, at *6 (Del. Super. Ct.
Jan. 13, 2021) (quoting Ramunno v. Cawley, 705 A.2d 1029, 1034 (Del. 1998)).
36
Surf’s Up, 2021 WL 117036, at *6 (citations omitted).
37
Parexel Int’l (IRL) Ltd. v. Xynomic Pharms., Inc., 2020 WL 5202083, at *4 (Del. Super. Ct.
Sept. 1, 2020) (quoting Del. Super. Ct. Civ. R. 56(c)).
38
Ebersole v. Lowengrub, 180 A.2d 467, 468-69 (Del. 1962).
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on the movant to demonstrate its claim is supported by undisputed facts.39 If that
burden is met, then the non-moving party must show “there is a genuine issue for
trial.”40 And in determining whether there is, the Court views the facts in the light
most favorable to the non-moving party.41
Generally, “a matter should be disposed of by summary judgment whenever .
. . a trial is unnecessary.”42 Still, the Court has “discretion to decline to decide the
merits of the case in a summary adjudication” where it is not “reasonably certain
that there is no triable issue.”43 And again, the Court will deny summary judgment
as a prudential matter if the record has not been developed thoroughly enough to
permit correct use of the law.44 Finally, the Court may deny summary judgment—
39
Moore v. Sizemore, 405 A.2d 679, 680 (Del. 1979).
40
Del. Super. Ct. Civ. R. 56(e); Parexel, 2020 WL 5202083, at *5 (“The moving party must
establish that the undisputed facts support [its] claims or defenses, after which the burden shifts to
the non-moving party to demonstrate that there are material issues of fact to be resolved at trial.”
(internal quotation marks omitted)); see Brzoska v. Olson, 668 A.2d 1355, 1364 (Del. 1995).
41
Judah v. Del. Tr. Co., 378 A.2d 624, 632 (Del. 1977).
42
Jeffries v. Kent Cty. Vocational Tech. Sch. Dist. Bd. of Educ., 743 A.2d 675, 677 (Del. Super.
Ct. 1999).
43
Parexel, 2020 WL 5202083, at *4 (citing Cross v. Hair, 258 A.2d 277, 278 (Del. 1969)).
44
Ebersole, 180 A.2d at 270; see Cont’l Ins. Co. v. Rutledge & Co., 750 A.2d 1219, 1227-28
(Del. Ch. 2000) (“[T]he Court also maintains the discretion to deny summary judgment if it decides
that a more thorough development of the record would clarify the law or its application.” (citing
Alexander Indus., Inc. v. Hill, 211 A.2d 917, 918-19 (Del. 1965))).
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even if its requirements seem to be met—where “a trial record is necessary in the
interests of justice.”45 For, indeed, “[t]here is no ‘right’ to summary judgment.”46
III. DISCUSSION
If Invoy’s motion isn’t procedurally proper, the Court can’t reach its merits.47
The Court must, then, start with § 3901. In its combined motion, Unbound contends
two things: (1) that § 3901 renders Rule 12 pre-answer motions improper; and,
(2) even if § 3901 doesn’t make all Rule 12 pre-answer motions improper, it does
make Rule 12 pre-answer motions for only partial dismissal improper. Neither is
right.
A. INVOY’S PARTIAL MOTION TO DISMISS IS PROCEDURALLY PROPER.
1. Section 3901 Governs Answers, Not Pre-Answer Motions.
Title 10, Section 3901 of the Delaware Civil Code imposes technical
demands on defendants to promissory note lawsuits. Among those obligations is
that the defendant must answer by affidavit. The statute provides:
In all actions upon notes . . . the plaintiff may specifically require
the defendant . . . to answer any or all of the complaint by an
45
Williams Cos., Inc. v. Energy Transfer LP, 2020 WL 3581095, at *2 (Del. Ch. July 2, 2020)
(citing Telxon Corp. v. Meyerson, 802 A.2d 257, 262 (Del. 2002)).
46
Brechner v. Phoenix Network Sols. LLC, 2017 WL 5953517, at *4 (Del. Super. Ct. Dec. 4,
2017) (citing Cross, 258 A.2d at 278).
47
See, e.g., Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139, 141 (Del. 2012)
(instructing that a trial court should first decide whether statutory and procedural requirements are
satisfied before reaching the substance of a dispute).
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affidavit setting forth the specific nature of any defense . . . by
the specific notation on the face of the complaint that those
allegations must be answered by affidavits.48
The purpose of § 3901’s answer-by-affidavit requirement “is to dispose of legally
uncontested matters quickly.”49 That is so because creditors’ time-sensitive
repayment interests or rights in collateral may be further impaired by trifling
litigation invoking frivolous or invalid defenses.50 As a result, the statute empowers
the Court to deem allegations admitted, and relatedly, to enter a default judgment, if
a defendant fails to comply strictly with the statute’s terms.51
But, though “legally uncontested matters” should be disposed quickly, the
Court can’t know if a matter is “legally uncontested” until the legal contest is
actually joined—e.g., by an answer admitting, denying or defending the allegations.
So, by its own terms, the logic that animates § 3901’s answer-by-affidavit
requirement plainly does not obtain until the moment the defendant “responds to the
designated allegations by affidavit filed with [its] answer or answers[.]”52 Indeed,
48
DEL. CODE ANN., tit 10, § 3901(a) (2020) (emphasis added).
49
Wilmington Tr. Co. v. Thielemann, 2002 WL 31814946, at *2 n.2 (Del. Super. Ct. Nov. 27,
2002) (citation omitted).
50
See First Fed. Sav. & Loan Ass’n of Phila. v. Damnco Corp., 310 A.2d 880, 882 (Del. Super.
Ct. 1973) (“An object of [§ 3901] is to assure speedy disposition of claims of the type specified . .
. by permitting defenses only in those instances where a defendant states under oath that he believes
he has a valid defense[.]” (citation omitted)).
51
DEL. CODE ANN., tit 10, § 3901(d).
52
Id. (emphasis added).
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the statutory text does not contemplate judicial action, waiver or forfeiture unless
the defendant (1) fails to meet the answering deadline or (2) does meet the deadline,
but deficiently.53 That answering deadline, though, isn’t found in § 3901. And,
while § 3901 mentions complaints and answers, it says nothing of pre-answer
motions. It is Civil Rule 12 that provides guidance on these.
Under Rule 12(a), the deadline for answering a complaint ordinarily is
measured by reference to either the complaint’s service or to a Rule 12 pre-answer
motion’s outcome.54 And where, as here, a defendant has submitted a Rule 12(b)
pre-answer motion, the answering deadline is tolled until, and subsequently clocked
from, that motion’s resolution.55 This is equally so in § 3901 actions, which Rule
12(a) expressly incorporates:
If the plaintiff has made a specific notation under Rule 3(b) [i.e.,
our rule addressing § 3901 actions] requiring the defendant to
53
Id. (If “the defendant . . . fails to respond to the designated allegations by affidavit filed with
the answer or answers, the designated allegations will be deemed admitted, and default judgment
may be entered thereon, in the discretion of the court and upon motion by the plaintiff.”); see, e.g.,
Gillette v. Wilmington Sav. Fund Soc’y, FSB, 2020 WL 7861341, at *2 (Del. Dec. 31, 2020)
(deeming answer in a § 3901 action that “contained general denials” and “[n]either set forth the
specific nature or character of any defense” deficient and affirming grant of summary judgment);
Bank of Am., N.A. v. Yarborough, 2020 WL 2511430, at *2-3 (Del. Super. Ct. May 15, 2020)
(granting default judgment in a § 3901 action to mortgagee when mortgagor “did not answer the
complaint despite personal service” and the time for doing so expired).
54
Del. Super. Ct. Civ. R. 12(a).
55
See id. R. 12(a)(1) (“The service of a motion permitted under [Rule 12(b)] alters [answering]
periods as follows. . . . If the Court denies the motion . . . the responsive pleading [i.e., the answer]
shall be served within 10 days after notice of the Court’s action.”).
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answer any or all allegations . . . by affidavit . . . the defendant
shall, not later than the time for serving an answer, serve either
an affidavit of defense in conformity with [§ 3901] or a motion
that judgment be refused notwithstanding the plaintiff’s
complaint[.]56
Together, a defendant’s duty to “answer . . . the complaint by an affidavit”57 is not
triggered under § 3901 until “the time for serving an answer”58 arrives under Rule
12(a). Accordingly, Invoy has not yet shirked its answer-by-affidavit duties.
Section 3901 itself is unambiguously inapplicable until Invoy’s motion is resolved.
Each of the cases on which Unbound relies confirms that § 3901 monitors the
sufficiency of answers, not the propriety of pre-answer motions. In those cases,
summary judgment was granted or a default judgment entered because the defendant
either did not answer and did not file a pre-answer motion, or failed to answer
specifically enough to satisfy the statute.59 Unbound hasn’t identified a single case
56
Id. R. 12(a).
57
DEL. CODE ANN., tit 10, § 3901(a).
58
Id.
59
See Gillette, 2020 WL 7861341, at *2-3 (affirming summary judgment because general denial
lacked statutory specificity); Yarborough, 2020 WL 2511430, at *2, *5 (entering default judgment
because defendant did not answer or motion against the complaint at all); JPMorgan Chase Bank
v. Smith, 2014 WL 7466729, at *2-3 (Del. Super. Ct. Dec. 15, 2014) (entering default judgment
because defendant “failed to defend by failing to answer or file an appropriate motion”); Coppedge
v. U.S. Bank Nat’l Ass’n, 2014 WL 5784006, at *1 (Del. Dec. 19, 2011) (affirming summary
judgment because “unintelligible” counterclaim did not meet statutory specificity); Teeven v.
Kearns, 1993 WL 1626514, at *2, *4 (Del. Super. Ct. Dec. 3, 1993) (treating motion for judgment
on the pleadings as a summary judgment motion and granting that motion because the defendant’s
flat denial of default did not “fulfill the purpose of an affidavit of defense, which is to set forth a
legally meritorious defense to the claim” (internal quotation marks omitted)).
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in which summary judgment or a default judgment was obtained because a defendant
filed a pre-answer motion to dismiss instead of answering by affidavit.60 Perhaps
recognizing this, Unbound tries to suggest that pre-answer motions themselves are
“defenses” for § 3901 purposes and thus deficient if not sworn by an affidavit.61 Not
so. Section 3901 “defenses” are those that typically would be enumerated in Rule
12(a) answers.62 More important, if the Court accepted Unbound’s interpretation,
then a defendant never could file a pre-answer motion against a § 3901 complaint—
the defendant would always be required to answer in some way. No doubt, if the
General Assembly intended to except § 3901 complaints from early dismissal, it
would have plainly said so. It didn’t.63 And the Court will not import an irrational
60
Contrary to Unbound’s suggestion (Unbound Op. Br. at 13), Bayer-Highland Fam. P’ship,
Ltd. v. RF Cap. Holdings, LLC, 2018 WL 3129317 (Del. Ch. June 25, 2018), was not such a case.
There, the Court of Chancery merely denied a motion to stay. Id. at *1. The court admonished
the plaintiffs for citing “the pleadings-stage motions as a basis for declining to answer allegations
in the defendant’s pleadings” because the case involved an expedited corporate control dispute.
Id. at *2. In short, the case didn’t concern § 3901 at all.
61
See, e.g., Unbound Reply Br. at 10-11 n.5, Jan. 20, 2021 (D.I. 13) (citing DEL. CODE ANN.
§ 3901(b)).
62
DEL. CODE ANN. § 3901(a) (Defendant must “answer . . . by an affidavit setting forth the
specific nature and character of any defense[.]”).
63
See id. § 3901(i) (directing Delaware courts to follow their Civil Rules when taking action
under the statute).
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design into a statute where “one among possible interpretations . . . would produce
a reasonable result.”64
2. Pre-Answer Motions for Partial Dismissal Toll the Period for
Answering the Whole Complaint without Default; But, a Court
Certainly Has the Discretion to Order an Answer to Any
Unchallenged Claims.
Invoy’s dismissal motion is proper under § 3901’s plain language. So,
Unbound tries to delimit Rule 12’s interplay with that statute. In Unbound’s view,
even if Rule 12 pre-answer motions seeking complete dismissal are proper in § 3901
actions, motions seeking only partial dismissal aren’t.
According to Unbound, a motion for partial dismissal, by definition, leaves
the hanging aspects of a § 3901 complaint unchallenged. Because of that, the
defendant who moves partially against a § 3901 action simultaneously fails to
answer by affidavit the unchallenged counts. Unbound asserts this procedural
default as to the unanswered claims infects the defendant’s motion against the
challenged (but still “unanswered”) claims as well. The net effect, Unbound reasons,
is that Invoy’s partial motion to dismiss failed to toll the time for answering its entire
complaint, which, for Invoy, has now long elapsed. Thus, in Unbound’s view,
Invoy’s pre-answer motion for partial dismissal effectively has done nothing but
64
Coastal Barge Corp. v. Coastal Zone Indus. Control Bd., 492 A.2d 1242, 1247 (Del. 1985)
(citation omitted); see Moore v. Wilmington Hous. Auth., 619 A.2d 1166, 1173 (Del. 1993)
(presuming that a statute’s natural construction will not foment “mischievous or absurd results”).
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delay its suit’s prosecution—hence its request that the Court find a full admission of
liability or a default on the defense.
Unbound’s flailing assault on pre-answer motions for partial dismissal here
might lay damage to not just those brought in § 3901 actions. So the Court here
must precisely address whether Rule 12 permits a pre-answer motion for partial
dismissal to toll the period for answering an entire complaint. It does.
a. A Rule 12(b)(6) Motion for Partial Dismissal Tolls the Period for
Answering the Whole Complaint without a Consequent Default on
Those Counts or Claims Untouched By the Motion.
Rule 12 requires defendants to answer the complaint no later than 20 days
after being served with it.65 The Rule also states that filing a pre-answer motion
“alters [that] period” and defers it until the Court resolves “the motion.”66 But, Rule
12 speaks of motions—not of those that are “partial.” Delaware courts, though, do
allow 12(b)(6) motions for partial dismissal so long as they do not seek to just trim
down theories within a single claim.67 Indeed, as a matter of practice, motions for
partial dismissal are commonplace. Still, this Court’s research reveals no Delaware
65
Del. Super. Ct. Civ. R. 12(a).
66
Id. R. 12(a)(1). The Rule grants the Court discretion to modify that timeframe. Id. R. 12(a).
67
See inVentiv, 2021 WL 252823, at *6 (“Rule 12(b)(6) doesn’t permit . . . dismissals of parts
of claims;” a Rule 12(b)(6) motion must assail an entire claim to be cognizable. (emphasis in
original) (internal quotation marks omitted)); id. at *5-6 (collecting authority).
-17-
case that expressly passes on whether they too freeze a defendant’s answering duties
while pending.
Also common are Delaware courts’ references to federal precedent
interpreting analogue federal rules of civil procedure when speaking on our own.68
Though there is some divergence of opinion,69 the majority view of federal courts is
that a pre-answer motion for partial dismissal tolls the period for answering the
whole complaint and does not occasion default on claims unchallenged by such
motion.70 Proceeding thusly streamlines later filings and proceedings and spares
68
See Appriva S’holder Litig. Co, LLC v. EV3, Inc., 937 A.2d 1275, 1286 (Del. 2007) (“Where,
as here, the Superior Court’s Civil Rules of Procedure closely track the Federal Rules of Procedure,
cases interpreting the federal rules are persuasive authority[.]” (citing Hoffman v. Cohen, 528 A.2d
1096 (Del. 1988))); Plummer v. Sherman, 861 A.2d 1238, 1242 (Del. 2004) (“We note at the outset
that the Delaware Rules of Civil Procedure are patterned after the Federal Rules of Civil Procedure.
We therefore find certain federal cases appropriate for determining the proper interpretation of the
Delaware Rules of Civil Procedure.”); Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1191 n.11
(Del. 1988) (“Decisions interpreting the Federal Rules of Civil Procedure are usually of great
persuasive weight in the construction of parallel Delaware rules; however, such decisions are not
actually binding upon Delaware courts.” (citations omitted)).
69
See Gerlach v. Mich. Bell Tel. Co., 448 F. Supp. 1168, 1174 (E.D. Mich. 1978) (“Separate
counts are, by definition, independent bases for a lawsuit and the parties are responsible to proceed
with litigation on those counts which are not challenged by a motion under [Rule] 12(b).”); see
also Andrea G. Lisenbee & Michael D. Moberly, To Plead or Not to Plead?: Assessing the Effect
of a Partial Motion to Dismiss on the Duty to Answer, 13 SUFFOLK J. TRIAL & APP. ADVOC. 45,
62 (2008) (“Precisely because Rule 12(b) motions do interrupt discovery in many cases . . . a
defendant’s submission of a partial motion to dismiss occasionally accomplishes little except to
delay the real commencement of litigation.” (internal quotation marks omitted)).
70
See Jackson v. Carter, 2017 WL 2426862, at *2 (D.N.J. June 5, 2017) (denying summary
judgment motion as “premature” because defendants’ “partial motion to dismiss [had] suspended
the time to answer” (citation omitted)); In re Vaughan Co., Realtors, 477 B.R. 206, 226 (Bankr.
D.N.M. 2012) (“The large majority of courts addressing this [tolling] issue have held that when a
defendant timely files a motion to dismiss . . . [time is extended] to file an answer as to all claims,
including those not addressed by the motion to dismiss. . . . This Court agrees with that holding.”
(citations omitted)); Cir. City Stores, Inc. v. Citgo Petroleum Corp., 1994 WL 483463, at *4 (E.D.
-18-
parties the expense of “exploring the factual predicate for claims that have no legal
merit.”71 Whereas, if “[a] partial motion[] to dismiss did not suspend a party’s
obligation to reply to additional claims, the result would be a procedural thicket of
piecemeal answers that would poorly serve judicial economy.”72 Having a defendant
answer unchallenged counts and then file a second answer should her motion for
partial dismissal be denied might compel the Court to evaluate redundant
Pa. Sept. 7, 1994) (denying motion for default judgment because “a partial 12(b) motion enlarges
the time to file an answer”); accord Dotson v. DISH Network, L.L.C., 2019 WL 3483806, at *3
(S.D. Ga. July 31, 2019) (same); Iraheta v. Equifax Info. Servs., LLC, 2018 WL 3381419, at *2-3
(W.D. La. July 10, 2018) (same); Neal v. Neal, 2018 WL 1335985, at *2 (D. Ariz. Mar. 15, 2018)
(same), aff’d, 745 F. App’x 683 (9th Cir. 2018), cert. denied, 140 S. Ct. 66 (2019); Fed.
Contracting, Inc. v. United States, 128 Fed. Cl. 788, 797-98 (2016); Talbot v. Sentinel Ins. Co.,
Ltd., 2012 WL 1068763, at *4 (D. Nev. Mar. 29, 2012) (same); Thermolife Int’l LLC v. Gaspari
Nutrition Inc., 2011 WL 6296833, at *5 (D. Ariz. Dec. 16, 2011) (same); Gortat v. Capala Bros.,
Inc., 257 F.R.D. 353, 366 (E.D.N.Y. 2009) (same); Kent v. Geren, 2008 WL 150060, at *1 (D.
Colo. Jan. 11, 2008) (same); Beaulieu v. Bd. of Trs. of Univ. of W. Fla., 2007 WL 2020161, at *2
(N.D. Fla. Jul. 9, 2007) (same); Shah v. KIK Int’l LLC, 2007 WL 1876449, at *1 (N.D. Ind. June
26, 2007) (same); Ideal Instruments, Inc. v. Rivard Instruments, Inc., 434 F. Supp. 2d 598, 638-39
(N.D. Iowa 2006) (same); Bertaut v. Par. of Jefferson, 2002 WL 31528468, at *1 (E.D. La. Nov.
8, 2002) (same); Batdorf v. Trans Union, 2000 WL 635455, at *5 (N.D. Cal. May 8, 2000) (same);
Finnegan v. Univ. of Rochester Med. Ctr., 180 F.R.D. 247, 249-50 (W.D.N.Y. 1998) (same); Oil
Express Nat’l, Inc. v. D’Alessandro, 173 F.R.D. 219, 220-21 (N.D. Ill. 1997) (same); Brocksopp
Eng’g, Inc. v. Bach-Simpson Ltd., 136 F.R.D. 485, 486-87 (E.D. Wis. 1991) (same); Bus.
Incentives Co. v. Sony Corp. of Am., 397 F. Supp. 63, 64-65 (S.D.N.Y. 1975) (same); see also 5B
CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE § 1346 & n.18 (3d ed. 2020)
(characterizing these cases as the “majority” and explaining their reasoning).
71
Lisenbee & Mobley, supra note 71, at 61-62; see Fed. Contracting, 128 Fed. Cl. at 788 (For
this reason, and those others mentioned, “[n]o other court has adopted the [minority’s] reasoning
. . .; indeed, every court to consider [the minority view] on this point has disagreed with and
declined to follow it.” (internal quotation marks and citations omitted)).
72
Gortat, 257 F.R.D. at 366 (internal quotation marks omitted); accord Compton v. City of
Harrodsburg, Ky., 287 F.R.D. 401, 401-02 (E.D. Ky. 2012).
-19-
pleadings.73 It could also muddle “the proper scope of discovery during the motion’s
pendency.”74 And entering a “default” on the unchallenged count would ignore the
defendant’s otherwise active appearance and undermine Delaware’s strong
preference for trials on the merits.75 Here, imposing Unbound’s posited move-and-
also-answer rule likely would do all this.
But for the damages sought, Unbound’s breach-of-contract claims are mirror
images. Yet, the course Unbound suggests would command Invoy to deny Count I
by answer—despite its properly-filed Rule 12(b)(6) pre-answer motion against it—
or risk its default. Too, Unbound would extract an answer to Count II—discovery
on which would then advance while Count I lags behind unresolved—or risk
default.76 The Civil Rules plainly were not intended to enclose litigants in such a
73
Gortat, 257 F.R.D. at 366.; see, e.g., Ideal Instruments, 434 F. Supp. 2d at 639.
74
WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE § 1346.
75
But see, e.g., Del. Super. Ct. Civ. R. 55(b)(2) (authorizing default judgment when a party “has
failed to appear, plead or otherwise defend”); In re Asbestos Litig., 228 A.3d 676, 685 (Del. 2020)
(“A court . . . should be especially mindful of one overarching consideration—Delaware’s strong
judicial policy that courts should decide cases on their merits.” (citations omitted)); Beckett v.
Beebe Med. Ctr., Inc., 897 A.2d 753, 757-58 (Del. 2006) (“In Delaware, public policy favors
permitting a litigant a right to a day in court. Courts should apply [the Civil Rules] with a liberal
construction because of the underlying policy that favors a trial on the merits, as distinguished
from a judgment based on a default.” (internal quotation marks and citations omitted)).
76
And, Unbound says, because this is an action governed by § 3901, both answers and the
dismissal motion would have to be by or accompanied by an affidavit meeting the specifics of
§ 3901(a)—or default is again risked. Or. Arg. Tr., Feb. 4, 2021, at 28-29 (D.I. 18).
-20-
maze.77 Accordingly, this Court adopts the majority view. The answering period
was tolled until now. Invoy’s choice not to answer any part of the complaint before
moving against Count I constitutes neither an admission of its allegations’ truth, nor
a default, under § 3901 and Rule 12.
b. Delaware Courts Retain Discretion to Require an Answer.
To be clear, the Court has determined only that our rules of procedure allow,
as an initial matter, that a pre-answer motion for partial dismissal tolls the period for
answering the whole complaint and that summary or default judgment is
unwarranted where that motion’s opponent premises its judgment request on the bare
fact that the motion was filed before answering. Simply put, a defendant will not
risk default or concession when she does not simultaneously answer any allegations
left unchallenged by her partial motion to dismiss. That said, a court can—as a
matter of its own discretion and for expediency’s sake—order the filing of an answer
to the complaint’s unchallenged claims as that motion pends. And, no doubt, there
are instances (or even whole species of actions) where our courts as a matter of
practice and sound case management do precisely that. Where Unbound goes too
far is in its attempt to elevate such discretion-based practice and process to a
requirement under penalty of rule or statute.
77
See Del. Super. Ct. Civ. R. 1 (instructing this Court to construe the Rules in a manner that
secures “just, speedy and inexpensive” results).
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It is beyond debate that Delaware courts enjoy wide discretion to manage their
affairs in a manner that “promote[s] economies of time and effort for the court,
litigants, and counsel.”78 Indeed, “Delaware trial courts have inherent power to
control their dockets”79 and to “maintain orderly adjudication of claims.”80 As a
result, Delaware courts have ordered some defendants to answer claims
unchallenged by their instant motions.81 In fact, the parties have represented to the
Court that the “prevailing practice” in the Court of Chancery is to answer the
allegations at which a partial dismissal motion is not aimed.82 That practice—
78
Brenner v. Albrecht, 2012 WL 252286, at *4 (Del. Ch. Jan. 27, 2012) (internal quotation marks
omitted); accord In re Montes-Galindez, 2020 WL 2393357, at *1 (Del. May 11, 2020) (“In the
absence of a clear showing of an arbitrary refusal or failure to act, this Court . . . will not . . .
compel a trial court to perform a particular judicial function, to decide a matter in a particular way,
or to dictate the control of its docket.” (cleaned up)); In re Bordley, 545 A.2d 619, 620 (Del. 1988).
79
Solow v. Aspect Res., LLC, 46 A.3d 1074, 1075 (Del. 2012).
80
Avve, Inc. v. Upstack Techs., Inc., 2019 WL 1643752, at *8 (Del. Super. Ct. Apr. 12, 2019)
(citation omitted).
81
See, e.g., Bayer-Highland, 2018 WL 3129317, at *1-2. And even when a defendant has failed
to timely answer, Delaware courts still may exercise their discretion not to enter a default
judgment. See, e.g., Pinkett ex rel. Britt v. Nationwide Mut. Ins. Co., 832 A.2d 747, 750 (Del.
Super. Ct. 2003).
82
See Tr. Ruling at 11, 17-18, Visionaid, Inc. v. Miller, C.A. No. 7083-VCN (Del. Ch. May 22,
2012). The Court summons this bench ruling—the import of which the parties have vigorously
briefed and argued—to substantiate the parties’ representations of Chancery practice, not as
influential precedent on interpretation of Chancery Rule 12. The Court of Chancery itself strongly
cautions against such citation to and reliance on its own bench rulings. See Focus Fin. Partners,
LLC v. Holsopple, 2020 WL 6390038, at *14 (Del. Ch. Nov. 2, 2020) (“[A] bench ruling typically
reflects a case-specific determination that is intended for the parties, and by virtue of being spoken
rather than written, its language and implications may be less clear. Compared to written decisions
. . . the [bench] ruling starts at a disadvantage.” (citations omitted)); Day v. Diligence, Inc., 2020
WL 2214377, at *1 (Del. Ch. May 7, 2020) (“Transcript Rulings generally have no precedential
value in this Court and they should ordinarily not be relied on as precedent. . . . Rulings from the
-22-
whether targeted or applied broadly—isn’t wrong.83 And it certainly is not this
Court’s place to cast any doubt on it. Neither § 3901 nor Rule 12 coerces courts to
cede discretionary territory to a single course that may or may not be workable for
every factual circumstance a litigant might allege.84
So, it is clear that moving for partial dismissal before answering is not a
procedural error necessitating a default or analogous repercussions. And, as
critically, it is clear that this Court and its sisters are free under our rules to make
case-specific judgments about the timing, nature and prudence of pleadings.
B. COUNT I—WHICH SEEKS DAMAGES UNDER THE DOUBLE PRINCIPAL
OPTION—SURVIVES DISMISSAL.
Having overcome procedural barriers, the Court may now reach the merits.
In moving to dismiss, Invoy argues that the Double Principal Option is an
bench . . . [do] not advance the common law.” (emphasis in original) (citation omitted)); High
River Ltd. P’ship v. Occidental Petroleum Corp., 2019 WL 6040285, *7 n.77 (Del. Ch. Nov. 14,
2019) (same). This Court takes the very same view of its own transcript or bench rulings—they
are typically case-specific determinations intended for the parties and have little to no precedential
value thereafter.
83
But see Invoy Reply Br. at 21-22 & n.10 (D.I. 11) (suggesting that a judicial officer errs by
ordering an answer to unchallenged claims while a partial dismissal motions pends). At oral
argument, Invoy also contended that the Court of Chancery’s prevailing practice on this point is
just incorrect. Or. Arg. Tr. at 8, 11. It isn’t. Delaware courts have broad discretion to control
their dockets, limited only by arbitrariness or abdication. In re Montes-Galindez, 2020 WL
2393357, at *1.
84
See DEL. CODE ANN. tit. 10, § 3901(i) (“The Court, in its discretion, may extend time in which
the defendant or defendants has to answer or otherwise do anything authorized by its Rules of Civil
Procedure.” (emphasis added)); Del. Super. Ct. Civ. R. 12(a) (authorizing the Court to select “a
different time” than that provided in the Rule for answering a complaint and to generally dictate
responsive pleadings).
-23-
unenforceable penalty because (1) damages for breach of the PNA were certain; and
(2) the Option is not rationally related to Unbound’s actual damages. The Court
cannot agree given the very limited record before it. The complaint supports the
reasonable inference that the Double Principal Option might well express an
enforceable liquidated damages provision.
1. The Double Principal Option Implicates a Penalty Analysis.
Delaware enables sophisticated counterparties to contract as they wish and her
courts are loath to disturb bilaterally-negotiated terms.85 Pro-contractarian,
“Delaware law in general recognizes that the value of contracts is maximized by
enforcing them as written [and that] little value can come of a promise that can be
avoided upon the remorse of the maker thereof.”86 Indeed, Delaware law promotes
voluntary business arrangements “as a matter of fundamental public policy.”87
85
Sycamore Partners Mgmt., L.P. v. Endurance Am. Ins. Co., 2021 WL 761639, at *5 (Del.
Super. Ct. Feb. 26, 2021); see Change Cap. Partners Fund I, LLC v. Volt Elec. Sys., LLC, 2018
WL 1635006, at *4 (Del. Super. Ct. Apr. 3, 2018) (“Delaware ‘courts will enforce the contractual
scheme that the parties have arrived at through their own self-ordering, both in recognition of a
right to self-order and to promote certainty of obligations.’” (quoting Ascension Ins. Holdings,
LLC v. Underwood, 2015 WL 356002, at *4 (Del. Ch. Jan. 28, 2015))); NACCO Indus., Inc. v.
Applica Inc., 997 A.2d 1, 35 (Del. Ch. 2009) (“Delaware law generally elevates contract law . . .
to allow parties to order their affairs and bargain for specific results. . . .”); Abry Partners V, L.P.
v. F & W Acquisition LLC, 891 A.2d 1032, 1059-61 (Del. Ch. 2006) (same).
86
Lyons Ins. Agency, Inc. v. Wark, 2020 WL 429114, at *1 (Del. Ch. Jan. 28, 2020).
87
NACCO, 997 A.2d at 35.
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Still, Delaware’s fundamental public policy of contractual enforcement is not
absolute and will kneel to competing public policies of overriding concern.88 When
the fruits of a bargain are tainted by unsavory objectives, “our courts will decline to
enforce [them], no matter how clear or sincerely intended when entered.”89 The
inclusion of penalties disguised as liquidated damages provisions presents one such
constraint on the freedom of contract.90 This is so because “[c]ontract law allows
parties to establish only a good faith estimation of actual damages sustained as a
result of a contract’s termination.”91 That the line separating good and bad faith
recompense is often thin makes close scrutiny appropriate.92 After all, “[t]he
distinction between a penalty and liquidated damages clause is significant—if a
provision is . . . a penalty, it is void as against public policy . . .; if the provision is a
true liquidated damages provision, it will be enforced according to its own terms.”93
88
See Sycamore, 2021 WL 761639, at *9-10 (collecting and analyzing authority in which
Delaware’s pro-contractarianism was supplanted by even more fundamental values).
89
Wark, 2020 WL 429114, at *1.
90
Id. at *4.
91
Del. Bay Surgical Servs., P.C. v. Swier, 900 A.2d 646, 650 (Del. 2006) (emphasis added); see
DEL. CODE ANN., tit. 6, § 2-718(1) (2020) (“Damages for breach by either party may be liquidated
. . . but only at an amount which is reasonable[.]”).
92
See Wark, 2020 WL 429114, at *4 (“Delaware imposes limits on liquidated damages clauses .
. . and will not enforce them if they function as coercive penalties.” (citing Swier, 900 A.2d at
650)).
93
Swier, 900 A.2d at 650 (internal quotation marks omitted).
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Liquidated damages provisions embody “the parties’ best guess of the amount
of injury that would be sustained in a contractual breach” and serve to make “certain
and definite damages which would otherwise be uncertain and not susceptible of
proof.”94 In contrast, a penalty is a “punishment for default, rather than a measure
of compensation for . . . breach,” that inserts with blunt instruments “a stipulated
sum . . . irrespective of the damage sustained.”95 To ascertain the difference, the
Court conducts a two-prong analysis that probes the “intent of the parties”—“a
mixed question of law and fact.”96 First, the Court must determine whether damages
were certain, i.e., capable of “accurate calculation,” at the time of contracting.97 If
damages were calculable with a fair amount of precision, then a clause that concocts
an aggravated total is a penalty. And second, if damages were uncertain or at least
could not be forecasted reliably, then the Court must determine whether the amount
selected is reasonable.98 At this step, the Court will not strike that number merely
94
Id. (internal quotation marks omitted).
95
Id.96
Id.97
Id. at 651 (citing Lee Builders v. Wells, 103 A.2d 918, 919 (Del. Ch. 1954)) (internal quotation
marks omitted); Brazen v. Bell Atl. Corp., 695 A.2d 43, 48 (Del. 1997); cf. Kold, LLC v. Croman,
2014 WL 7008431, at *4 (Del. Super. Ct. Nov. 25, 2014) (The Court “will not construe a liquidated
damages provision to be a penalty if . . . at the time of contracting, the damages the parties might
reasonably anticipate were difficult or impossible to ascertain[.]” (citation omitted)).
98
Swier, 900 A.2d at 651; cf. Kold, 2014 WL 7008431, at *4 (A liquidated damages provision is
not a penalty if “the stipulated amount reasonably estimates the damages that would likely be
-26-
because the cost “has become financially inconvenient for [a counterparty] to
honor[.]”99 Instead, to be unreasonable, “the amount at issue must be
unconscionable or not rationally related to any measure of damages a party might
conceivably sustain.”100
Despite all this, Unbound contends that a penalty analysis is unnecessary
because the Double Principal Option “is not a liquidated damages provision[;] [it] is
a valid and enforceable agreed-upon amount that is triggered when Invoy
defaults.”101 In other words, Unbound tries here to split two hairs: that a default is
somehow distinguishable from a breach, and a provision that governs only one of
two party’s dereliction cannot be a liquidated damages clause. Not so. A liquidated
damages provision may be best described as any “contract provision that requires
payment in the event of a termination.”102 Here, the Double Principal Option cannot
caused by a breach, or is reasonably proportionate to the damages [that] have actually been caused
by the breach.” (citation omitted)).
99
Change Cap., 2018 WL 1635006, at *9 (internal quotation marks omitted).
100
Swier, 900 A.2d at 651 (emphasis in original) (internal quotation marks and citations omitted).
101
Unbound Op. Br. at 13.
102
Swier, 900 A.2d at 651; Alltrista Plastics, LLC v. Rockline Indus., Inc., 2017 WL 237625, at
*2 (Del. Super. Ct. Jan. 18, 2017) (“[T]he Supreme Court [has] affirmed that liquidated damages,
by definition, are damages paid in the event of a breach of contract.” (citing RESTATEMENT
(SECOND) OF CONTRACTS § 356 (1981)) (internal quotation marks omitted)).
-27-
be exercised unless there is an Event of Default.103 That might be enough to reveal
its role as a liquidated damages provision.
Unbound’s hair-splitting also would rend the PNA’s plain language. The
Double Principal Option too remedies “defaults” unrelated to timely repayment.
Indeed, Unbound may collect Principal twice its size if Invoy or one of its
subsidiaries (1) experiences a change in corporate control; (2) cross-defaults by
incurring inordinate indebtedness to someone else; (3) securitizes any of its assets;
(4) declares bankruptcy; or (5) reneges on a warranty.104 The parties understood that
any of these Events could terminate the PNA. And so, even if there were a difference
of commercial magnitude between a payment default on a note and a generic
contractual breach,105 the parties unambiguously agreed that it would not matter.106
In a last gasp, Unbound says that the Double Principal Option is not a
liquidated damages provision because it really is just a charge of additional
103
PNA §§ 3, 4(a).
104
Id. at §§ 3(b)-(f).
105
But see Default, BLACK’S LAW DICTIONARY (11th ed. 2019) (“The omission or failure to
perform a legal or contractual duty[.]” (emphasis added)); id. Breach (“A violation or infraction
of a law, obligation or agreement[.]” (emphasis added)).
106
See Surf’s Up, 2021 WL 117036, at *10 (“When the contract is clear and unambiguous, the
Court gives full effect to the plain-meaning of the contract’s provisions.” (cleaned up)); see also
Unbound Reply Br. at 4 (“Neither party argues that the contract language is ambiguous and it is
not.”).
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Interest.107 Unbound’s reasoning here devolves a discussion of usury in which
Unbound insists Invoy cannot bemoan a high interest rate in a state that does not cap
it.108 True, but inapt. The Double Principal Option itself can be read to remove
Interest from the equation.109 Given the reticulated terms the parties devised for
tabulating Interest, it appears that the Option was meant to disregard the normal rates
in favor of something else.110 Accordingly, at this point, the Court must say that the
Double Principal Option implicates a penalty analysis.
2. Count I’s Damages are Reasonably Conceivable.
For Count I to withstand dismissal, Unbound must have pled specific
allegations supporting its actual damages—an element of a breach-of-contract
claim.111 Where, as here, liquidated damages are resisted as penal, the burden is on
the party seeking elimination of the purported penalty to establish both penalty-
analysis prongs.112 So, on its dismissal motion, Invoy must show it is not reasonably
107
Unbound Op. Br. at 13-15.
108
See DEL. CODE ANN. tit. 6, §§ 2301(c), 2304(a), 2306.
109
PNA § 4(a)(i).
110
Compare id. § 1(b) (expressly defining Interest and providing calculation methodology) with
id. § 4(a)(i) (requiring payment “in lieu of accrued Interest”).
111
See Buck v. Viking Holding Mgmt. Co. LLC, 2021 WL 673459, at *3 (Del. Super. Ct. Feb. 22,
2021) (citing VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003)).
112
See CRS Proppants LLC v. Preferred Resin Holding Co., LLC, 2016 WL 6094167, at *3 (Del.
Super. Ct. Sept. 27, 2016) (citing S.H. Deliveries, Inc. v. TriState Courier & Carriage, Inc., 1997
WL 817883, at *2 (Del. Super. Ct. May 21, 1997)).
-29-
conceivable that Count I’s damages derive from any other source but a penalty.113
The Court, though, will presume a liquidated damages provision is valid.114 And the
Court will not dismiss Count I unless Invoy’s interpretation of the Double Principal
Option’s purpose at the time of contracting is the only reasonable one.115 This, the
Court cannot say.
a. Damages May Have Been Uncertain.
Invoy contends that damages were capable of accurate calculation because the
parties agreed to a specific Principal-Interest scheme. But, at this stage, the Court
can’t say why the parties opted to fix Interest at 10% per year or $300,000 at the
time of contracting.116 Why not 20%? Why not $500,000? Why not a floating rate?
Why not attach a security interest? Those queries are why Delaware law is reluctant
to find damages certain on a barebones record; a counterparty would be deprived of
113
See inVentiv, 2021 WL 252823, at *4 (Court cannot dismiss if “any reasonable conception [of
an element] can be formulated to allow . . . recovery.” (internal quotation marks and citations
omitted)).
114
Kold, 2014 WL 7008431, at *4 (“In Delaware, liquidated damages [provisions] are
presumptively valid and enforceable[.]” (citation omitted)).
115
See Vinton v. Grayson, 189 A.3d 695, 699-700 (Del. Super. Ct. 2018) (“In Delaware, the
interpretation of a contract is a question of law suitable for determination on a motion to dismiss.
But, on a motion to dismiss, dismissal is proper only if the defendants’ interpretation is the only
reasonable construction as a matter of law.” (cleaned up)).
116
See Swier, 900 A.2d at 650-51; S.H. Deliveries, 1997 WL 817883, at *2.
-30-
a meaningful opportunity to litigate mutual intent.117 Indeed, in the absence of a
fortuitous (but unusual) term admitting that damages are uncertain,118 courts
interpreting such provisions need considerable information surrounding the
circumstances under which the parties chose the disputed amount.119 But here, “[a]t
the moment, the Court has nothing more than the arguments of [Invoy’s] counsel to
support a finding” that the PNA conclusively settled with certainty and precision
amounts due on the note.120 That, though, is not enough to negate the reasonable
inference that the parties picked these numbers because they were unsure about what
damages otherwise might be owing and appropriate.121 Accordingly, because
117
See Olsen v. T.A. Tyre Gen. Contractor, Inc., 2006 WL 2661140, at *2 (Del. Aug. 24, 2006)
(summarily reversing grant of dismissal motion on liquidated damages because “the validity of the
liquidated damages clause was never fully litigated”).
118
See Piccotti’s Rest. v. Gracie’s, Inc., 1988 WL 15338, at *1 (Del. Super. Ct. Feb. 23, 1988)
(analyzing liquidated damages provision that stated “Sellers and Buyers agree . . . it is
exceptionally difficult to assess damages in the event that the Buyers violate all or part of this
agreement”).
119
See, e.g., CRS Proppants, 2016 WL 6094167, at *3-4 (analyzing a liquidated damages
provision on a full summary judgment record and concluding market conditions at the time of
contracting made damages uncertain); Swier, 900 A.2d at 651 (reviewing a liquidated damages
provision on a full trial record and affirming damages as uncertain).
120
DecisivEdge, LLC v. VNU Grp., LLC, 2018 WL 1448755, at *7 (Del. Super. Ct. Mar. 19,
2018); see id. (denying motion to dismiss in liquidated damages case to allow for “additional
discovery”).
121
See Swier, 900 A.2d at 650 (characterizing issue of liquidated damages provision vel non as a
“mixed question of law and fact”); Cent. Mortg., 27 A.3d at 536-37 (discussing conceivability
standard).
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liquidated damages must be “incapable of accurate estimation to be valid,”122 and
Invoy has not carried its burden on this question,123 the Court cannot conclude that
Unbound’s recovery under Count I isn’t reasonably conceivable.124
b. The Double Principal Option May Have a Rational Basis.
Assuming damages were certain, the Court still must reject Invoy’s attack on
the Double Principal Option’s rationality.125 That is because Invoy’s Principal-
Interest arguments, repeated here, suffer from the same factual defects as before.
Delaware courts are inclined to find no rational basis where the recourse
chosen is totally outside the breach’s natural dimensions, is inconsistent with the
parties’ relationship, or grants a secured lender the power to break the law.126 But
122
Wark, 2020 WL 429114, at *7 (citing Faw, Casson & Co., L.L.P. v. Halpen, 2001 WL 985104,
at *2 n.1 (Del. Super. Ct. Aug. 7, 2001)).
123
See CRS Proppants, 2016 WL 6094167, at *3 (observing that burden is on party claiming
penalty to demonstrate both penalty-analysis prongs)
124
Cent. Mortg., 27 A.3d at 535; Vinton, 189 A.3d at 700.
125
Swier, 900 A.2d at 651.
126
Wark, 2020 WL 429114, at *7-8 (finding a penalty where the provision was “unreasonable to
the extent it purport[ed] to impose fixed damages untethered from any act or behavior . . . beyond
that of choosing to work for a competitor”); Halpen, 2001 WL 985104, at *3 n.7 (finding a penalty
where the provision failed to “connect[] defendant’s conduct in some fashion with a resulting
business loss”); Tropical Nursing, Inc. v. Arbors at New Castle Subacute & Rehab. Ctr., 2005 WL
8135148, at *6 (Del. Super. Ct. Apr. 4, 2005) (finding a penalty where the provision sought to
disincentivize the defendant from “hiring away” an employee from plaintiff where there was no
evidence “hiring away” had any bearing on the parties’ business relationship); Am. Energy Sys. of
Wash., Inc. v. Galeano, Inc., 1991 WL 166117, at *3 (Del. Super. Ct. July 19, 1991) (finding a
penalty where the provision granted a lessor the right both to repossess the collateral and seek full
payment of its value from the lessee in violation of positive commercial law).
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here, the complaint supports the reasonable inference that Unbound was relatively
overexposed in extending a volatile, short-term and uncollateralized credit line to a
startup that was unable to fundraise during a pivotal equity financing period. It is
therefore reasonably conceivable that doubling Principal in lieu of Interest was
rationally related to protecting Unbound from the possibility that it never would
recoup Interest from a firm that had been struggling to attract capital in the first
place. As a result, Invoy can’t rest on the fact that Unbound’s “liquidated damages
are substantially larger than its actual damages” because it is reasonably conceivable
that the Double Principal Option was a “reasonable estimate of the damages which
could be caused.”127 Discovery—given this exceedingly thin record—would be
helpful in fleshing this out.128
Finally, Invoy objects to the suggestion that, because it is a sophisticated entity
and was represented by counsel, a penalty cannot lie. It is true that Delaware courts
have not grafted a superior-bargaining-position element onto the penalty analysis.
And, to be sure, there is no corporate exemption from the penalty analysis that frees
firms to draft agreements forbidden to individuals. But—though not dispositive—
degree of sophistication, arsenal of resources, and presence of counsel at the
127
DecisivEdge, 2018 WL 1448755, at *6 (internal quotation marks omitted); S.H. Deliveries,
1997 WL 817883, at *2 (same); see Cent. Mortg., 27 A.3d at 535 (requiring courts to draw
inferences in favor of the non-movant).
128
See DecisivEdge, 2018 WL 1448755, at *7.
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negotiation table, may be relevant factors when assessing whether a provision is
unconscionable or actually had a rational basis at the time of contracting.129 That
the PNA was executed by entities with attorneys130 may not carry the day for
Unbound. At this point, however, the PNA’s formation does further support the
reasonable inference that an investment fund and its portfolio company knew the
stakes when contemplating loss on an expensive instrument. Accordingly, the Court
is not prepared to hold—on a motion to dismiss—that any bridge loan containing a
term enlarging a matured or liquidated debt twofold is commercially unreasonable,
and thus, unenforceable at law.131
Count I’s damages are reasonably conceivable. It survives dismissal.
C. SUMMARY JUDGMENT AND RELATED RELIEF ARE UNWARRANTED.
The Court returns, briefly, to Unbound’s motion. As explained, Invoy’s
motion is procedurally proper. Accordingly, a default judgment cannot be entered.
With its procedural weapons disarmed, Unbound is left to argue that Invoy’s
129
See, e.g., Swier, 900 A.2d at 653 (observing that “both parties were sophisticated and
represented by counsel” “[a]t the time of the contract” in concluding the liquidated damages
provision was not a penalty); CRS Proppants, 2016 WL 6094167, at *2 (observing that the subject
agreement was “heavily negotiated by sophisticated parties” at the outset of the penalty analysis
and concluding the provision was not a penalty).
130
See PNA § 12 (“The Parties, each of which has been represented by counsel in connection
herewith, have had ample opportunity to review this Agreement.”).
131
See DecisivEdge, 2018 WL 1448755, at *7 (denying motion to dismiss even though the
disputed provision was “suspect” and gave the court the “impression” that it was a penalty because
the record was too underdeveloped on the parties’ mutual intent).
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unabashed and unjustified breach entitles it to summary judgment. Just as with
Invoy’s motion, though, the record simply is too undeveloped to accord Unbound
that relief or to jump to those conclusions.132 Its answering duties now triggered,
Invoy may register legitimate denials or defenses that might undercut or excuse
Unbound’s allegations. We’ll see. But a more thorough inquiry is the prudent
course.133 Summary judgment for Unbound now is premature—and denied.
IV. CONCLUSION
For the reasons explained above, Unbound’s motion for default and/or
summary judgment is DENIED; there has been no cognizable default under
Delaware’s note action statute and it is simply too early to find the facts so clear as
to warrant judgment due as a matter of law. Invoy’s motion for partial dismissal,
too, is DENIED; it would be equally premature to find the PNA’s Double Principal
Option an illegal penalty as a matter of law.
IT IS SO ORDERED.
Paul R. Wallace, Judge
132
See Rutledge, 750 A.2d at 1227-28 (observing that courts have discretion to deny summary
judgment where factual clarity is warranted); Moore, 405 A.2d at 680 (placing burden on the
movant to demonstrate its claim is supported by undisputed facts); Williams Cos., 2020 WL
3581095, at *2 (observing that a court should deny summary judgment where a record is necessary
for equitable purposes); Judah, 378 A.2d at 632 (instructing courts to view the facts in the light
most favorable to the non-movant).
133
See Ebersole, 180 A.2d at 468-69.
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