Omega Capital Management Partn v. Leonard Schrage

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 21-2924
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OMEGA CAPITAL MANAGEMENT PARTNERS, LLC,
Appellant
v.
LEONARD SCHRAGE
______________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
(D.C. No. 1-20-cv-01735)
District Judge: Honorable Maryellen Noreika
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Submitted Under Third Circuit L.A.R. 34.1(a)
September 22, 2022
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Before: AMBRO, RESTREPO, and FUENTES, Circuit Judges.
(Filed: December 22, 2022)
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OPINION *
______________
*
This disposition is not an opinion of the full Court and, pursuant to I.O.P. 5.7,
does not constitute binding precedent.
RESTREPO, Circuit Judge.
Appellant, Omega Capital Management Partners, LLC (“Omega”), appeals the
District Court’s order dismissing its Complaint against Appellee, Leonard Schrage
(“Schrage”). For the reasons that follow, we respectfully vacate the District Court’s
judgment and remand for further proceedings.
I.
Omega seeks to enforce an alleged agreement granting it the option to obtain the
exclusive right to fund between $1-2 million for Schrage’s litigation matters (the
“Agreement”). The signed Agreement laid out the general outline of the proposed
funding structure but contemplated “a final comprehensive integrated funding document
which will replace this Agreement in its entirety.” App. 36.
Omega later paid a $10,000 deposit in consideration for an addendum to the
Agreement (the “Addendum”), which allowed its original 30-day option to instead
remain open until “10 business days after all conditions set forth in paragraph 6, below,
are met.” App. 41. Paragraph 6 allowed Omega to conduct additional due diligence and
required Schrage’s assistance in that effort. The Addendum stated that if Omega believed
that Schrage’s cooperation with due diligence was not “forthcoming,” Omega could
terminate the Addendum and its deposit would be returned. App. 42.
Omega argues that Schrage failed to adequately cooperate with its due diligence
obligations, and subsequently sued under the Agreement and Addendum for (1)
injunctive and declaratory relief, (2) breach of contract, and (3) specific performance,
2
requiring Schrage to cooperate with the anticipated due diligence. Schrage sought to
dismiss the Complaint for failure to state a claim under Federal Rule of Civil Procedure
12(b)(6), alleging that the Agreement and Addendum were unenforceable “agreements to
agree,” and alternatively, that even if enforceable, the agreements violate public policy by
providing for the illegal sale of a litigation. App. 5–6. The District Court agreed with
Schrage that the agreements were void for indefiniteness and dismissed the suit with
prejudice. Omega sought reconsideration, which the District Court denied. Omega
timely appealed.
II.
The District Court had jurisdiction pursuant to 28 U.S.C. § 1332(a)(1). We have
jurisdiction pursuant to 28 U.S.C. § 1291. We exercise plenary review over an order
dismissing claims under Federal Rule of Civil Procedure 12(b)(6). Monroe v. Beard, 536
F.3d 198, 205 (3d Cir. 2008).
III.
To state a claim for breach of contract under Delaware law, 1 a plaintiff must
demonstrate: “first, the existence of the contract, whether express or implied; second, the
breach of an obligation imposed by that contract; and third, the resultant damage to the
plaintiff.” VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003).
1
The parties agree as to the application of Delaware law to this dispute; pursuant to the
Addendum, all disputes under the Agreement shall be governed and construed in
accordance with the laws of the State of Delaware.
3
The District Court interpreted the Agreement and Addendum together 2 and found
that Omega failed to show the existence of a contract: the agreements were unenforceable
“agreements to agree” because they left certain material and essential provisions subject
to future negotiations. App. 7. Specifically, the District Court found that under
Pharmathene, Inc. v. SIGA Techs., Inc., Civ. Act. No. 2627-VCP, 2010 WL 4813553, at
*7–*8 (Del. Ch. Nov. 23, 2010), a “reasonable negotiator in the position of one asserting
the existence of a contract” would not have concluded “that the agreement reached
constituted agreement on all of the terms that the parties themselves regarded as essential
and thus that the agreement concluded the negotiations.” App. 8.
In support of its finding that the agreements were void for indefiniteness, the
District Court cited, for example, that the contracts do not specify the amount of funding
or the return to be owed thereupon, and the Agreement’s acknowledgement that “[t]he
Parties are interested in further exploring a funding structure outlined herein” that would
“be set out in a final comprehensive integrated funding document which will replace this
Agreement in its entirety.” App. 8–9.
It is true that, under Delaware’s traditional rule, the absence or indefiniteness of
material terms rendered an agreement unenforceable. Cox Commc'ns, Inc. v. T-Mobile
US, Inc., 273 A.3d 752, 761 (Del. 2022). However, the District Court’s decision does
not discuss that in 2013 the Delaware Supreme Court recognized for the first time two
forms of enforceable preliminary agreements, “Type I” and “Type II” agreements. SIGA
2
This was proper and we will proceed in kind. Comerica Bank v. Glob. Payments
Direct, 2014 WL 3567610, at *7 (Del. Ch. July 21, 2014).
4
Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 349 (Del. 2013) (SIGA I). Type I
agreements reflect mutual assent to “all the points that require negotiation” but
contemplate memorializing the pact in a more formal document. Id. at 349 & n.82.
Meanwhile, with Type II agreements, the parties “agree on certain major terms, but leave
other terms open for future negotiation.” Id. Type I agreements are fully binding, while
Type II agreements give rise to a binding obligation to negotiate open issues in good
faith. Id.We disagree with the District Court that the parties’ failure to agree on the
essential provisions of the ultimate litigation funding agreement renders these preliminary
contracts void for purposes of stating a claim for relief. Rather, we note that, under SIGA
I and its progeny, the absence of a definitive contract price and contemplation of future
negotiations over a more formalized agreement generally evidence a Type II agreement
and an enforceable duty to negotiate that agreement in good faith. 3 See, e.g., id. at 351(finding that memorializing basic terms of transaction and agreement to negotiate in
accordance with those terms supports finding of Type II agreement); Cox, 273 A.3d at
761 (upholding as enforceable Type II agreement contract stating open terms like price
3
We further note that Delaware law does not require that a Type II agreement include an
express contractual promise to negotiate in good faith. See Cox, 273 A.3d at 761
(upholding contract lacking express provision requiring good faith negotiation of a future
agreement as enforceable Type II agreement). Nor is pleading breach of the duty to
negotiate in good faith a condition precedent to upholding a claim for breach of a Type II
agreement. See, e.g., Greentech Consultancy Co., WLL v. Hilco IP Servs., LLC, No.
N20C-07-052, 2022 WL 1499828, at *6, *12 (Del. Super. Ct. May 11, 2022) (finding
existence of Type II agreement despite that claimant originally pled breach of
contemplated funding agreement, not breach of duty to negotiate in good faith).
5
will “be mutually agreed upon between the parties” in a future “definitive” agreement
that must identify Sprint as “Preferred Partner” and run for 36 months); Greentech
Consultancy Co., WLL v. Hilco IP Servs., LLC, No. N20C-07-052, 2022 WL 1499828, at
*12 (Del. Super. Ct. May 11, 2022) (holding that agreement elaborating general terms of
future agreement and conditions to closing, but recognizing need for “further
documentation” to define terms in more detail, is Type II agreement). 4
IV.
We will accordingly vacate the District Court’s Order dismissing Omega’s
Complaint with prejudice and remand for analysis of the Agreement and Addendum in
comportment with SIGA I, particularly whether the Agreement and Addendum together
constitute an enforceable Type II preliminary agreement. SIGA I, 67 A.3d at 349.
4
Schrage’s alternative argument that the Agreement and Addendum are void in violation
of Delaware public policy does not alter our conclusion. A finding on remand that these
contracts constitute an enforceable Type II agreement would not be tantamount to
enforcing an agreement that violates public policy. Litigation funding agreements are not
per se champertous under Delaware law. See Charge Injection Techs., Inc. v. E.I.
Dupont De Nemours & Co., No. CV N07C-12-134-JRJ, 2016 WL 937400, at *4–*5 (Del.
Super. Ct. Mar. 9, 2016). Here, it does not follow that any final agreement borne of the
parties’ negotiations would have necessarily violated Delaware public policy.
6