CLP Toxicology, Inc. v. Casla Bio Holdings LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CLP TOXICOLOGY, INC., )
Plaintiff, )
)
v. )
)
CASLA BIO HOLDINGS LLC, et al., )
Defendants. )
______________________________________ )
CASLA BIO HOLDINGS LLC and )
CASLA BIO GP, LLC, )
Counterclaim-Plaintiffs, )
) C.A. Nos. 2018-0783-PRW,
v. ) 2019-0401-PRW,
) and
CLP TOXICOLOGY, INC., and ) C.A. No. N18C-10-332 PRW
ALTERNATIVE BIOMEDICAL ) CCLD
SOLUTIONS LLC, )
Counterclaim-Defendants. )
______________________________________ )
CASLA BIO HOLDINGS LLC, )
Plaintiff, )
)
v. )
)
CLP TOXICOLOGY, INC., and )
ALTERNATIVE BIOMEDICAL )
SOLUTIONS, LLC, )
Defendants. )
______________________________________ )
Submitted: March 18, 2021
Decided: June 14, 2021
Issued: June 24, 2021*
MEMORANDUM OPINION AND ORDER
Upon Counterclaim-Defendant CLP Toxicology, Inc.’s Motion to Dismiss
GRANTED IN PART, DENIED IN PART.
Christopher Viceconte, Esquire, GIBBONS P.C., Wilmington, Delaware; Anthony J.
Rospert, Esquire, Thomas M. Ritzert, Esquire, THOMPSON HINE LLP, Cleveland,
Ohio; Heather M. Hawkins, Esquire, THOMPSON HINE LLP, Cincinnati, Ohio.
Attorneys for Plaintiff/Counterclaim-Defendant CLP Toxicology, Inc.
Peter B. Ladig, Esquire, Elizabeth A. Powers, Esquire, BAYARD, P.A., Wilmington,
Delaware; Jordan D. Weiss, Esquire, Allison R. Klein, Esquire, GOODWIN PROCTER
LLP, New York, New York. Attorneys for Defendant/Counterclaim-Plaintiffs Casla
Bio Holdings, LLC and Casla Bio GP, LLC.
WALLACE, J.
This is a dispute between the parties to a Securities Purchase Agreement (the
“SPA”). Counterclaim-Plaintiffs Casla Bio Holdings LLC (“Casla” or “Company
Seller”) and Casla Bio GP, LLC (“Blocker Seller” and together with Casla, the
“Seller Defendants”) sold all the securities of Alternative Biomedical Solutions
(“ABS”) to CLP Toxicology, Inc. (“CLP”). ABS provides management and
administrative services to laboratories, including (1) leasing and sale of toxicology
and chemistry measurement systems and software used for controlled substance
monitoring and drug testing, and (2) furnishing related supplies, drug analytical
standards, internal standards, chemicals and solvents, and services. CLP is a private
investment firm focused on making equity and debt investments in North American
middle market companies in a variety of industries.
Each party alleges, among other counts, that the other breached the SPA. CLP
alleges that Seller Defendants defrauded it of millions of dollars through various
avenues, including concealing the loss of important customers and manipulating the
EBITDA for the sale of ABS.1 Seller Defendants allege CLP breached the SPA by
diverting funds to avoid making earnout payments, failing to grant access to books
and records, and failing to transfer $ in accounts receivable notes in
* This decision is issued after consideration of the parties’ requests for redaction of certain of
their or other non-parties’ confidential information and with the Court’s own necessary
corrections.
1
Am. Compl. ¶¶ 8-10, Jan. 17, 2019 (D.I. 22).
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exchange for lowering the total purchase price.2 Before the Court now is CLP’s
motion to dismiss Seller Defendant’s counterclaims.
CLP’s Motion is GRANTED as to Counterclaim Counts I (breach of SPA
Section 3.3) and IV (civil conversion); and is DENIED as to Counterclaim Counts
II (breach of SPA Section 3.2(i)), III (breach of the ALS Notes Agreement), and
V (unjust enrichment).
I. FACTUAL BACKGROUND
A. THE SECURITIES PURCHASE AGREEMENT
In December 2017, CLP purchased all the securities of ABS from Seller
Defendants pursuant to the SPA; that is, through the agreement CLP received 100%
equity interest in ABS.3
Section 3.3 of the SPA specifically provides that a portion of the purchase
price may be potentially reduced by a Contingent Payment to Seller Defendant based
on ABS’s Gross Profit for calendar year 2018.4 The Contingent Payments Provision
lays out such payments to Seller Defendants as follows:
(i) If in calendar year 2018 (the “Earnout Period”), the Group
Companies have at least $ but less than
$ of Gross Profit as reflected on their audited
consolidated financial statements for the fiscal year ending
2
Am. Countercl. ¶¶ 5-8, Nov. 12, 2020 (D.I. 97).
3
Id. ¶ 1.
4
Id. ¶ 38.
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December 31, 2018 (the “2018 Audited Financials”), Buyer will
pay to the Sellers (in proportion to the allocation percentages set
forth on the Closing Allocation Schedule) $ ;
(ii) If during the Earnout Period the Group Companies have at
least $ but less than $ of Gross
Profit as reflected on the 2018 Audited Financials, Buyer will
pay to the Sellers (in proportion to the allocation percentages set
forth on the Closing Allocation Schedule) $ ; and
(iii) If during the Earnout Period the Group companies have
$ or more of Gross Profit as reflected on the 2018
Audited Financials, Buyer will pay to the Sellers (in proportion
to the allocation percentages set forth on the Closing Allocation
Schedule) $ (the payments described in this
Section 3.3(a), the “Contingent Payment”).5
In order to determine whether Seller Defendants were entitled to any
Contingent Payments, the parties were required to agree on the calculation of Gross
Profit of ABS during the Earnout Period.6 Per SPA Sections 3.3(c)–(f):
(c) No later than ten (10) days following Buyer’s receipt of the
2018 Audited Financials, Buyer shall deliver to the Company
Seller a copy of the 2018 Audited Financials, together with a
certificate of Buyer confirming the Amount of Gross Profit as set
forth on the 2018 Audited Financials and aggregate Contingent
Payment and aggregate Contingent Payment payable to sellers in
connection therewith (if any). From and after the delivery of the
2018 Audited Financials, Buyer and the Company shall provide
the Company Seller and any Representatives, accountants or
advisors retained by the Company Seller with reasonable access
to the books and records of the Group Companies for the purpose
of enabling the Company Seller and its accountants and advisors
to calculate, and to review Buyer’s calculation and preparation
5
Id. ¶ 39.
6
Id. ¶ 41.
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of Gross Profit as set forth on the 2018 Audited Financials and
the aggregate Contingent Payment payable to Sellers in
connection therewith (if any).
(d) If Company Seller disputes the calculation of Gross Profit as
set forth on the 2018 Audited Financials and the aggregate
Contingent Payment payable to Sellers in connection therewith
(if any), then Company Seller shall deliver a written notice (a
“Contingent Payment Dispute Notice”) to Buyer at any time
during the forty-five (45) day period commencing upon receipt
by the Company of the 2018 Audited Financials. The Contingent
Payment Dispute Notice shall set forth the basis for the dispute
of any such calculation in reasonable detail. Any dispute set
forth in any Contingent Payment Notice Dispute delivered in
accordance with this Section 3.3 shall be subject to, and settled
in accordance with, the Dispute Resolution Procedures mutatis
mutandis. If Company Seller does not dispute Buyer’s
calculation of the Contingent Payment within such forty-five
(45) day period, such calculation shall be final and binding on all
parties hereto.
(f) [F]rom and after the Closing through the Earnout Period,
Buyer will and will cause its Affiliates and the Group Companies
to act in good faith and not engage in any conduct for the primary
purpose of circumventing the achievement of the Contingent
Payment.7
Section 3.2 of the SPA prescribes the process by which the parties are to
determine the Closing Net Working Capital Amount. Section 3.2(b) specifically
reads:
No later than ninety (90) days following the Closing Date (the
“Closing Statement Date”), [CLP] shall, at its expense, (i) cause
to be prepared an unaudited consolidated balance sheet of [ABS],
. . . (the “Closing Balance Sheet”), together with a statement (the
“Closing Date Schedule”) setting forth in reasonable detail
7
Id. ¶¶ 41-42.
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[CLP’s] calculation of the Closing Net Working Capital Amount,
Closing Cash, Closing Indebtedness, and Seller Transaction
expenses and (ii) deliver to the [Seller Defendants] the Closing
Balance Sheet and the Closing Date Schedule, together with a
certificate of [CLP] confirming that the Closing Balance Sheet
and the Closing Date Schedule were properly prepared in good
faith and in accordance with this Section 3.2(b). The accounts
included in the Closing Balance Sheet and the Closing Date
Schedule, including the Closing Net Working Capital Amount,
Closing Cash, Closing Indebtedness and Seller Transaction
Expenses, shall be prepared in accordance with the Accounting
Principles[.]8
Section 3.2(c)(i) sets forth the materials CLP had to provide to Seller
Defendants to determine the Closing Net Working Capital Amount:
[CLP] and [ABS] shall provide [Seller Defendants] and any
Representatives, accountants or advisors retained by [Seller
Defendants] with reasonable access to the books and records of
[ABS] for the purpose of enabling [Seller Defendants] and their
respective accountants and advisors to calculate, and to review
[CLP’s] calculation and preparation of, the Closing Net Working
Capital Amount[.]9
Section 3.2(c) sets forth the process for resolving disputes between the parties
regarding the Closing Net Working Capital Amount:
If [Seller Defendants] dispute the calculation of any of the
Closing Net Working Capital Amount . . . set forth in the Closing
Date Schedule, then [Seller Defendants] shall deliver a written
notice (a “Dispute Notice”) to [Seller Defendants] at any time
during the thirty (30) day period commencing upon receipt by
[Seller Defendants] of the Closing Balance Sheet, the Closing
Date Schedule and the related certificate of [CLP] (the “Review
8
Am. Countercl. ¶ 54.
9
Id. ¶ 55.
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Period”). The Dispute Notice shall set forth the basis for the
dispute of any such calculation in reasonable detail.10
If the parties are unable to resolve any dispute following the issuance of the
Dispute Notice, the SPA provides that “either party shall have the right to refer such
dispute to the Designated Accounting Firm.”11
B. ADVANCED LABORATORY SERVICES PROMISSORY NOTES
Prior to Closing, Advanced Laboratory Services (“ALS”), an ABS customer,
purchased equipment from ABS.12 The money owed by ALS (“The ALS Balance”)
was recorded on ABS’s Accounts Receivable.13 At some point after the purchase,
ALS communicated to ABS that it was struggling to pay the amounts owed.14 To
resolve this, ABS and ALS agreed to convert the amount owed to ABS into
structured promissory notes (“ALS Notes”) in the amounts of $ and
$ , totaling $ .15
On December 14, 2017, three days prior to closing, CLP objected to the
recordation of the ALS Balance as accounts receivable and refused to reserve ALS’s
10
Id. ¶ 56.
11
Id.
12
Id. ¶ 21.
13
Id.
14
Am. Countercl. ¶ 22.
15
Id. ¶ 23; see id. at Exs. A, B, and C (ALS Promissory Notes).
-6-
equipment purchase on ABS’s Most Recent Balance Sheet for purposes of
determining the Closing Net Working Capital Amount. To resolve this, Seller
Defendants proposed that ABS “[r]emove 100% of the notes from working capital
and Casla receives 100% of the collections from the note.”16 Through its
representative at Lazard—who acted as CLP’s liaison for SPA negotiations—CLP
agreed via e-mail to removal of the ALS Notes from Working Capital in exchange
for Seller Defendants receiving 100% of the collections from the note, excluding
legal fees.17
Later the same night CLP agreed to Seller Defendants’ proposal, Seller
Defendants’ counsel e-mailed CLP’s counsel stating they agreed “that Company
Seller (as lender) will enter into notes directly with [ALS] for $ and
$ (which represents A/R owed by ALS to ABS currently that Centre has
written down to zero, and that Centre has agreed to allow Company Seller to pursue
directly for its own account.)”18 Counsel for CLP replied “[a]s for the assigned AR,
I was expecting more on the schedule. Also, where is the schedule that shows equal
16
Id. ¶ 26; see id. at Ex. D (E-mails between Seller Defendants and Lazard Regarding ALS
Notes).
17
Id. at Ex. D.
18
Id. at Ex. E (E-mails between Counsel for Seller Defendants, Lazard, and Counsel for CLP
Regarding Revised SPA).
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reduction in AR on the estimated closing balance sheet?”19 Counsel for CLP further
stated that the purchase price would be reduced by $ with Seller Defendants
collecting “the receivables” and indicated it was not aware of whether the $
in Accounts Receivable on the Net Working Capital statement includes the items in
Schedule 8.12.20
On December 15, 2017, former CLP principal, William James, stated via
e-mail that “[g]iven all of the changes that have happened on the fly in the last 12
hours for the closing BS/NWC, we need to add the closing balance sheet estimate
somewhere and clearly the changes we made to it (A/R for accounts being assigned
to Casla, etc.).”21
The final SPA Schedule 8.12 assigns Accounts Receivable due from
InHealth Diagnostics, LLC and Intire Tox Screen to ABS.22 It does not include the
ALS Notes or Balance and the SPA makes no mention of ALS.23 In accordance with
Schedule 8.12, the Closing Net Working Capital schedule provides for an adjustment
19
Id.
20
Am. Countercl., Ex. E.
21
Id. at Ex. O (E-mail from Former CLP Principal William James Regarding Accounts
Receivable at Closing).
22
Countercl. Def.’s Opening Br. 48, Dec. 11, 2020 (D.I. 104) (hereinafter “Countercl. Def.’s
Open. Br.”).
23
Id. at 47-48.
-8-
in the amount of $ .24 The schedule states “[t]he Company prior to close
executed two notes receivable with [ALS] which by definition are excluded from
working capital.”25 The removal of the ALS Balance from ABS’s Most Recent
Balance ultimately reduced the purchase price paid by CLP to Seller Defendants and
the Balance was not incorporated into the Calculation of the Closing Net Working
Capital Amount.26
On December 18, 2017, one day after closing, Jared Rochwerg of Seller
Defendants e-mailed ABS inquiring about the status of the ALS Balance and Seller
Defendants’ right to collect on the Balance via the ALS Notes.27 Janet McGrath, an
ABS employee, replied that another ABS employee was handling the situation and
that she would get an update on the notes.28
In early January 2018, Ms. McGrath followed up with Mr. Rochwerg
regarding the ALS Notes and forwarded him the executed Notes via e-mail.29 In that
24
Am. Countercl., Ex. P (ABS Closing Net Working Capital Schedule).
25
Id.
26
Id. ¶ 31.
27
Id. ¶ 32, Ex. F (E-mail from Jared Rochwerg to Janet McGrath regarding status of ALS Notes).
28
Id.
29
Id. ¶ 33.
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communication, Ms. McGrath wrote “[w]e finally received the ALS notes. What do
we need to do as next steps? Casla took these, right [?]”30
Five months later, Samuel Hines of Casla reached out to Mr. James via
telephone to discuss the ALS Notes.31 During the conversation, Hines requested
CLP honor its agreement and transfer the ALS Balance, any corresponding ALS
Notes or the right to collect on the Balance to Seller Defendants.32 Mr. James refused
to transfer the Balance or any amounts collected thereunder or the right to collect on
the Balance via the ALS Notes due to the potential that Seller Defendants might
attempt to collect on the Balance too aggressively.33 And CLP has yet to transfer
the Balance, any corresponding Notes, or the right to collect on the Balance to Seller
Defendants.34
30
Am. Countercl. ¶ 33, Ex. G (E-mail from Janet McGrath to Jared Rochwerg regarding received
ALS Notes).
31
Id. ¶ 34.
32
Id.
33
Id.
34
Id. ¶ 35.
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C. THE PTO ACCRUAL
In early March 2018, CLP provided its Closing Balance Sheet and Closing
Date Schedule to Seller Defendants.35 After receiving CLP’s working capital
position, Seller Defendants contacted Ms. McGrath to request supporting documents
and information relating to CLP’s working capital.36 Ms. McGrath didn’t provide a
substantive response due to a “no contact” order instituted by CLP between Seller
Defendants and ABS employees, who were told by CLP that they would be fired
“for cause” for speaking with Seller Defendants.37
On or about March 30, 2018, Seller Defendants issued a Dispute Notice to
CLP relating to CLP’s Closing Net Working Capital Amount calculation.38 Seller
Defendants issued it without prejudice and reserved their rights with respect to all
disputed claims as CLP hadn’t given access to ABS’s books and records
beforehand.39
Nine days before the conclusion of the review period, Seller Defendants again
requested CLP provide the details of PTO accruals as of closing and a copy of
35
Id. ¶ 57.
36
Am. Countercl. ¶ 58.
37
Id. ¶¶ 59-60.
38
Id. ¶ 61.
39
Id. ¶ 62.
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management’s adjusted calculations in its Exhibit A to the Dispute Notice.40
CLP provided these materials on April 11, 2018, after the review period ended.41
After unsuccessful attempts to resolve their disputes, the parties engaged in
the Post-Closing Purchase Price Adjustment dispute process with Grant Thornton,
the Designated Accounting Firm.42 Seller Defendants submitted their Opening
Submission to Grant Thornton, challenging CLP’s recordation of ABS’s accruals
related to earned PTO, including the methodology used to calculate the PTO
accruals.43 Seller Defendants argued that CLP’s calculation of PTO Accruals in the
amount of $ was: (1) based on unsupportable assumptions; (2) was grossly
overstated; (3) an inaccurate reflection of earned-to-date unused PTO balance; and,
(4) inconsistent with the accounting policy, methodologies, and practice used in
preparing the Most Recent Balance Sheet.44 According to Seller Defendants, the
proper calculation yielded $ .45 CLP replied that Seller Defendants failed to
raise this dispute in the Dispute Notice or prior to the end of the Review Period.
40
Id. ¶ 63.
41
Id. ¶ 64.
42
Am. Countercl. ¶¶ 66-67.
43
Id. ¶¶ 67-68, Ex. K (Seller Defendants’ Opening Submission to Grant Thornton).
44
Id. ¶ 69.
45
Id. ¶ 70.
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Grant Thornton declined to rule on the dispute relating to the PTO accruals
because Seller Defendants didn’t include it in the Dispute Notice.46 Grant
Thornton—citing its own reading of the terms of the SPA and its understanding of
its review authority granted—said it could not review the PTO accrual dispute.47
Grant Thornton specifically noted in its report that:
Additional disputes arising from or pertaining to adherence to the
SPA, or lack thereof (i.e., providing reasonable access to
documents, etc.) likely requires a legal interpretation which
would have to be addressed outside of this dispute process. An
assessment of this nature is outside the bounds of my engagement
as an Arbitrator at the Designated Accounting Firm.48
D. THE CONTINGENT PAYMENTS
In September 2018, Seller Defendants learned that CLP created a separate,
“specialty testing” entity called CanMedLabs, a laboratory that conducts testing and
analysis for cannabis and cannabis-related products.49 Seller Defendants also
learned that CLP set up another partnership with Specialty Testing Solutions, a
company that engages in laboratory testing of cannabis products.50 According to
46
Id. ¶ 78.
47
Id. ¶ 79.
48
Am. Countercl. ¶ 79; see id. at Ex. N (Grant Thornton Designated Accounting Firm Report).
49
Id. ¶¶ 44-45.
50
Id. ¶ 46.
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Seller Defendants, CLP promoted alternative business opportunities instead of
promoting ABS. Seller Defendants allege CLP included no payments from the
“cannabis testing entity” on ABS’s 2018 Audited Financials, which showed a Gross
Profit of $ .51
So Seller Defendants sent CLP a letter stating that it learned of CLP’s efforts
to avoid the Contingent Payment by establishing an off-the-books entity engaged in
cannabis testing, utilizing ABS employees, and utilizing the entities to service ABS
customers.52 Seller Defendants said they wanted discovery into efforts and
communications relating to the entity and intended to seek to recover any amounts
improperly diverted from Seller.53
CLP replied about a month later that:
[T]here is no claim relating to the so-called ‘off-balance sheet
cannabis testing entity’ or evidence that there was some intent by
Buyer to use the separate entity to shelter income to avoid
making a contingent payment to Seller. The contingent payment
calculation is not a ripe dispute as the Company’s 2018 audited
financials have not been provided to Seller under the timing
outlined in Section 3.3 of the [SPA] . . . . Buyer has planned to
include the numbers in the contingent payment calculation for
this entity and its auditor is fully aware of the creation of the
entity.54
51
Id. ¶¶ 50-51.
52
Id. ¶ 48, Ex. H (Seller Defendants Letter to CLP’s Indemnification Claim Notice).
53
Id. at Ex. H.
54
Am. Countercl., Ex. I at 10 (Oct. 19, 2018 CLP Response Letter to Seller Defendants’ Sept.
21, 2018 Letter).
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On May 7, 2019, CLP delivered the 2018 Audited Consolidation Financials
as well as the required certification that Seller Defendants were not entitled to a
Contingent Payment because the Gross Profit was more than $ below the
$ threshold for Seller Defendants to be paid a Contingent Payment.55
After delivery, Seller Defendants requested access to ABS’s books and records to
determine whether the 2018 Audited Consolidated Financials included CLP’s
cannabis testing entity.56 Counsel for CLP assured Seller Defendants that “the
audited 2018 consolidated financial statements for CLP Testing, Inc. cover the
financial position of all ABS related subsidiaries, including the ‘cannabis testing’
entity identified in Sellers’ September 21, 2018 letter.”57
After receiving CLP’s letter, Seller Defendants initiated the Section 3.3(c)
Litigation in the Court of Chancery, seeking access to ABS’s books and records.58
During the litigation, the parties mutually agreed to a 90-day extension for Seller
Defendants to contest the Gross Profit and Contingent Payment calculation up to and
including September 19, 2019.59 The parties later extended Seller Defendants’
55
Countercl. Def.’s Open. Br. 11.
56
Id. at 12.
57
Id. (citing Transmittal Aff. of Elizabeth Powers, Ex. D, Jul. 11, 2019 (D.I. 19) (CLP Response
Letter to Seller Defendants’ May 16, 2019 Letter)).
58
Id.
59
Id. at 12-13.
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deadline to issue a Contingent Payment Dispute Notice an additional 60 days until
November 8, 2019.60 Seller Defendants have yet to deliver a Dispute Notice to
CLP.61
II. PARTIES CONTENTIONS
A. CLP’S COMPLAINT
In October 2018, CLP filed its complaint against Seller Defendants for
fraudulent inducement, fraud, breach of contract, unjust enrichment, disgorgement,
civil conspiracy, and fraudulent transfer.62 It alleges Seller Defendants defrauded
CLP of millions of dollars through various avenues, including concealing the loss of
important customers and manipulating the EBITDA for the sale of ABS.63
B. SELLER DEFENDANTS’ COUNTERCLAIMS
Seller Defendants’ Amended Counterclaims outline five causes of action.64
Counterclaim Count I is a breach-of-contract claim, alleging CLP breached SPA
Section 3.3 by committing acts to reduce ABS’s profitability and thus avoid meeting
60
Id. at 13.
61
Countercl. Def.’s Open. Br. 13.
62
Compl. ¶¶ 169-264, Oct. 31, 2018 (D.I. 1).
63
Id. ¶¶ 7-8.
64
Am. Countercl. ¶¶ 84-113.
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the required Gross Profit for the Earnout Period to make Contingent Payments to
Seller Defendants.65
Counterclaim Count II is also a breach-of-contract claim.66 This one alleges
CLP breached (1) SPA Section 3.2(i) by failing to provide Seller Defendants with
reasonable access to ABS’s books and records, and (2) SPA Section 3.2(b) by
withholding and delaying the necessary information to assess and identify errors
related to ABS’s PTO accrual, as well as purposely and fraudulently manipulating
the post-Closing Purchase Price Adjustment process to extract an undeserved
windfall.67
Counterclaim Count III is another breach-of-contract claim.68 Here it’s
alleged that CLP breached the agreement on the ALS Notes by refusing to transfer
to Seller Defendants the ALS Balance, any amounts collected thereunder, or the right
to collect on the ALS Balance via the ALS Notes.69
Counterclaim Count IV alleges civil conversion as an alternative to this last
breach-of-contract counterclaim to the extent that CLP exercised dominion and/or
65
Id. ¶¶ 85-89.
66
Id. at 29.
67
Id. ¶¶ 91-96.
68
Id. at 31.
69
Id. ¶¶ 98-102.
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interference over Seller Defendants’ possessory interest in the ALS Balance by
(1) directing ABS to directly collect on the ALS Balance, and (2) failing to transfer
the Balance or any right to collect on the Balance.70
Counterclaim Count V is an unjust enrichment claim—again as an alternative
to the third breach-of-contract counterclaim—alleging that
Counterclaim-Defendants were unjustly enriched in the amount of $ when
ABS received payments from ALS, even though it had no right to the ALS Balance
due to the parties’ pre-Closing oral agreement that ABS was required to transfer the
Balance and the right to collect on the Balance to Seller Defendants Holdings.71
C. CLP’S MOTION TO DISMISS
According to CLP, Seller Defendants’ counterclaims should be dismissed in
their entirety.72
First, CLP argues that Counterclaim Count I for breach of SPA Section 3.3
(1) is beyond the subject matter jurisdiction of this Court because Seller Defendants
failed to follow the Dispute Resolution Procedures and dispute the Gross Profit
70
Am. Countercl. ¶¶ 104-107.
71
Id. ¶¶ 109-113.
72
Countercl. Def.’s Open. Br. 4.
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within 45 days, and (2) otherwise failed to plead that CLP diverted revenue to avoid
the Contingent Payment.73
Second, CLP argues that Counterclaim Count II for breach of SPA Section
3.2 is beyond the subject matter jurisdiction of this Court because Seller Defendants
failed to dispute (1) the PTO Accrual Issue in the Closing Net Working Capital
Arbitration, and (2) the treatment of the PTO Accruals in the Dispute Notice.74
Third, CLP argues that Counterclaim Count III for breach of contract, Count
IV for civil conversion, and Count V for unjust enrichment fail to plead an interest—
contractual or otherwise—in the ALS Notes that would be required to support any
of those breach-of-contract, conversion, and unjust enrichment claims.75
III. STANDARD OF REVIEW
“Under Rule 12(b)(6), ‘the legal issue to be decided is whether a plaintiff may
recover under any reasonably conceivable set of circumstances susceptible of proof
under the complaint.’”76 Under that Rule, the Court will
(1) accept all well pleaded factual allegations as true, (2) accept
even vague allegations as “well pleaded” if they give the
73
Id. at 29, 33.
74
Id. at 36, 41.
75
Id. at 43.
76
Vinton v. Grayson, 189 A.3d 695, 700 (Del. Super. Ct. 2018) (quoting L&L Broad, LLC v.
Triad Broad. Co., 2014 WL 17224769, at *2 (Del. Super. Ct. Apr. 8, 2014)). Court of Chancery
Rule 12(b)(6) and Superior Court Rule 12(b)(6) are identical.
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opposing party notice of the claim, (3) draw all reasonable
inferences in favor of the non-moving party, and (4) not dismiss
the claims unless the plaintiff would not be entitled to recover
under any reasonably conceivable set of circumstances.77
“If any reasonable conception can be formulated to allow Plaintiffs’ recovery, the
motion must be denied.”78
The Court must accept as true all well-pleaded allegations for Rule 12(b)(6)
purposes.79 And every reasonable factual inference will be drawn in the non-moving
party’s favor.80 If the claimant may recover under that standard, then the Court must
deny the motion to dismiss.81 This is because “[d]ismissal is warranted [only] where
the plaintiff has failed to plead facts supporting an element of the claim, or that under
no reasonable interpretation of the facts alleged could the complaint state a claim for
which relief might be granted.”82
77
Vinton, 189 A.3d at 700. (quoting Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs.,
LLC, 27 A.3d 531, 535 (Del. 2011)).
78
Vinton, 189 A.3d 700 (citing Cent. Mortg. Co., 27 A.3d at 535).
79
Anderson v. Tingle, 2011 WL 3654531, at *2 (Del. Super. Ct. Aug 15, 2011).
80
Wilmington Sav. Fund Soc’y, F.S.B. v. Anderson, 2009 WL 597268, at *2 (Del. Super. Ct. Mar.
9, 2009) (citing Doe v. Cahill, 884 A.2d 451, 458 (Del. 2005)).
81
Spence v. Funk, 396 A.2d 967, 968 (Del. 1978).
82
Hedenberg v. Raber, 2004 WL 2191164, at *1 (Del. Super. Ct. Aug. 20, 2004).
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“Unlike the standards employed in Rule 12(b)(6) analysis, the guidelines for
the Court’s review of [a] Rule 12(b)(1) motion are far more demanding of the
non-movant.”83 The plaintiff must shoulder the burden of proving that jurisdiction
exists.84 And in determining whether the plaintiff has, the Court need not accept its
factual allegations as true and is free to consider facts not alleged in the complaint.85
Each of these well-established rules that the Court applies to a suit-initiating
plaintiff’s claims are of equal utility when assessing an answering defendant’s (i.e.,
counterclaim-plaintiff’s) counterclaims.86
IV. DISCUSSION
A. COUNTERCLAIMS I AND II: SUBJECT MATTER JURISDICTION.
Under 12(b)(1), CLP first argues that Counterclaim Count I for breach of SPA
Section 3.3 is beyond the subject matter jurisdiction of this Court because Seller
Defendants failed to follow the Dispute Resolution Procedures and dispute the Gross
Profit within 45 days.87 Seller Defendants argue in response that the claim is not
83
Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1284 n.14 (Del. 2007) (quoting
Phillips v. Cty. of Bucks, 1999 WL 600541, at *1 (E.D. Pa. Aug. 9, 1999)).
84
Appriva, 937 A.2d at 1284 n.14.
85
Id.86
inVentiv Health Clinical, LLC v. Odonate Therapeutics, Inc., 2021 WL 252823, at *4 (Del.
Super. Ct. Jan. 26, 2021).
87
Countercl. Def.’s Open. Br. 29-30.
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subject to arbitration because it concerns the legal issue of breach of the SPA, not an
accounting issue.88
CLP next argues that Counterclaim Count II for breach of SPA Section 3.2 is
beyond the Court’s subject matter jurisdiction because Seller Defendants failed to
dispute (1) the PTO Accrual Issue in the Closing Net Working Capital Arbitration,
and (2) the treatment of the PTO Accruals in the Dispute Notice.89 Seller Defendants
respond here, again, that the PTO Accrual claim is not subject to arbitration because
it concerns the legal issue of breach of the SPA, not an accounting issue.90
When considering a motion to dismiss for lack of subject matter jurisdiction,
the Court must address the nature of (1) the wrong alleged, and (2) the remedy
sought, to determine whether a legal, as opposed to an equitable, remedy is available
and adequate.91 If a claim is properly committed to arbitration and is thus arbitrable,
this Court lacks subject matter jurisdiction because arbitration provides an adequate
legal remedy.92 Delaware’s public policy strongly favors arbitration unless the
88
Countercl. Pls.’ in Opp. To Countercl. Def.’s Mot. to Dismiss 14-15, Jan. 11, 2021 (D.I. 113)
(hereinafter “Countercl. Pls.’ Ans. Br.”).
89
Countercl. Def.’s Open. Br. 36-37.
90
Countercl. Pls.’ Ans. Br. 15-16.
91
Carder v. Carl M. Freeman Cmtys., LLC, 2009 WL 106510, at *3 (Del. Ch. Jan. 5, 2009).
92
Id.- 22 -
parties did not contractually agree to arbitrate.93 A motion to dismiss for lack of
subject matter jurisdiction will be granted if the dispute is one that, on its face, falls
within the contract’s arbitration clause.94
Delaware courts will compel a party to arbitrate only if the contract reflects
that the parties clearly and intentionally bargained for whether and how to arbitrate.95
Whether parties agree to arbitrate is commonly referred to as “substantive
arbitrability” and is an issue for resolution by the Court.96 “Procedural arbitrability”
questions, on the other hand, are decided by the arbitrator.97
Issues of substantive arbitrability are “gateway questions relating to the scope
of an arbitration provision and its applicability to a given dispute, and are
presumptively decided by the court.”98 Procedural arbitrability issues “concern
93
Id.; see also NAMA Holdings, LLC v. Related World Mkt. Ctr., LLC, 922 A.2d 417, 429 (Del.
Ch. 2007) (“Because the strong public policy in favor of arbitration embodied in federal law is
given equal respect in this State, a motion to dismiss for lack of subject matter jurisdiction will be
granted if the ‘dispute is one that, on its face, falls within the arbitration clause of the contract.’”
(citation omitted) (quoting SBC Interactive, Inc. v. Corp. Media Partners, 714 A.2d 758, 761 (Del.
1998))); Anadarko Petroleum Corp. v. Panhandle E. Corp., 1987 WL 13520, at *8 (Del. Ch. July
7, 1987) (“Both Delaware and federal law recognize a strong public policy in favor of
arbitration.”).
94
NAMA Holdings, LLC, 922 A.2d at 429-30.
95
Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396 (Del. 2010).
96
Viacom Int’l, Inc. v. Winshall, 2012 WL 3249620, at *12 (Del. Ch. Aug. 9, 2012), aff’d, 72
A.3d 78, 82 (Del. 2013).
97
Viacom Int’l, Inc, 2012 WL 3249620, at *12.
98
Id.- 23 -
whether the parties have complied with the terms of an arbitration provision, and are
presumptively handled by arbitrators.”99 Procedural arbitrability issues include
“whether prerequisites such as time limits, notice, laches, estoppel, and other
conditions precedent to an obligation to arbitrate have been met, as well as
allegations of waiver, delay, or a like defense to arbitrability.”100
The only question a court should decide is whether the subject matter in
dispute falls within an arbitration provision.101 If the subject matter to be arbitrated
is the calculation of an earn-out, or the amount of working capital, or the company’s
net worth at closing, then all issues as to what financial or other information should
be considered in performing those calculations are to be decided by the arbitrator.102
1. The Court Lacks Subject Matter Jurisdiction Over Counterclaim I.
In contending that CLP breached Section 3.3 by creating separate “special
testing” entities to divert funds away from ABS and avoid meeting the Gross Profit
99
Id.100
Id.101
Viacom Int’l, Inc., 72 A.3d at 82-83 (“Only when there is a question regarding whether the
parties should be arbitrating at all is a question of arbitrability raised for the court to resolve.”
(cleaned up)).
102
Id. at 83 (“Once it is determined . . . that the parties are obligated to submit the subject matter
of a dispute to arbitration, ‘procedural’ questions that grow out of the dispute and bear on its final
disposition should be left to the arbitrator.” (cleaned up)); see Weiner v. Milliken Design, Inc.,
2015 WL 401705, at *10 (Del. Ch. Jan. 30, 2015) (holding an arbitrator should decide issues when
dealing with earn-out calculations and related definitions of “Revenue” because the parties agreed
to resolve earn-out calculation disputes through arbitration).
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required to trigger the Contingent Payments, Seller Defendants ask the Court to
decide issues of procedural arbitrability. The Court can’t do that. SPA Section 3.3
clearly provides for arbitration of unresolved disputes that arise in the process of the
calculation and payment of the Contingent Payments. The fact that CLP also
breached the SPA does not transform the procedural and formal requirements of that
provision into “gateway questions” of substantive arbitrability. Again, the only
question the Court should decide here is “whether the subject matter of [the]
dispute”—here, funds diverted from the Gross Profit and Contingent Payment
calculation—falls within Section 3.3’s arbitration provision.103 It does; particularly
insofar as the calculation of Gross Profit is fundamental to the understanding of
whether CLP diverted funds from ABS.
During the Section 3.3 Chancery litigation, the parties agreed to extend the
Dispute Notice deadline for an additional 150 days. Put differently, Seller
Defendants bargained for and received extra time to arbitrate the issues of which it
now complains. Notably, Seller Defendants failed to file a Dispute Notice. Even
with their failure to file a Dispute Notice, however, it’s clear from Seller Defendants’
actions that they contemplated and agreed to participate in the arbitration process for
103
Viacom Int’l, Inc., 72 A.3d at 83; see LDC Parent, LLC v. Essential Utils., Inc., 2021 WL
1884847, at *5-6 (Del. Super. Ct. Apr. 28, 2021) (holding questions that require accounting
expertise will implicate the agreement’s dispute resolution provision and declining to determine
whether the Independent Accounting Firm will act as an expert or an arbitrator).
- 25 -
issues related to calculation of Gross Profit. No doubt, the Court cannot adjudicate
matters that parties contractually agreed to arbitrate. So, Count I is not yet within
the Court’s jurisdiction. And so, the Court cannot provide the legal remedy Seller
Defendants now seek. 104
Seller Defendants’ claim that they were relieved of their obligation to issue a
Dispute Notice due to the doctrine of futility does not transform the procedural and
formal requirements of Section 3.3 into gateway questions of substantive
arbitrability. Even if the Court did accept Seller Defendants’ futility argument, the
subject matter of the issue—in Seller Defendants’ own words, “challenging that they
have diverted revenue that must be included in their calculation”—still falls within
Section 3.3’s arbitration provision, and as such, is an issue of procedural arbitrability
left for an arbitrator to decide.105
Looking objectively at the subject matter in dispute, as well as Seller
Defendants’ very own characterization of it, it is clear that Seller Defendants present
an issue of procedural arbitrability suitable for an arbitrator to decide. And this Court
cannot exercise subject matter jurisdiction over a claim properly committed to
104
Although the Court must dismiss Seller Defendants’ Counterclaim Count I, it may well be that
Seller Defendants’ argument that it was relieved of its obligation to issue a Dispute Notice due to
futility is cognizable. But, because the issue presents as one of procedural arbitrability, it is not
justiciable here and now. And so, Counterclaim Count I is dismissed without prejudice—at least
until completion of the arbitration process.
105
Oral Arg. Tr. at 30, Mar. 18, 2021 (D.I. 122) (emphasis added).
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arbitration. Accordingly, CLP’s motion to dismiss Counterclaim Count I for lack of
subject matter jurisdiction is GRANTED.
2. The Court Has Subject Matter Jurisdiction Over Counterclaim II.
When saying that CLP breached Section 3.3 by failing to grant reasonable
access to ABS’s books and records as required by SPA Section 3.2(c)(i), Seller
Defendants ask the Court to decide issues of substantive arbitrability and sufficiently
sustain their burden to prove the Court’s jurisdiction over such exists. Section
3.2(c)(i) of the Agreement suggests no arbitration requirement. It commands that
CLP:
shall provide [Seller Defendants] and any Representatives,
accountants or advisors retained by [Seller Defendants] with
reasonable access to the books and records of [ABS] for the
purpose of enabling [Seller Defendants] and their respective
accountants and advisors to calculate, and to review [CLP’s]
calculation and preparation of, the Closing Net Working Capital
Amount . . . .106
Looking at the subject matter of dispute—here, whether CLP granted reasonable
access to ABS’s books and records—the dispute does not fall within any arbitration
provision. So, the subject matter of the dispute is a gateway question relating to the
scope of an arbitration provision. And so, Counterclaim Count II is an issue of
substantive arbitrability that lies within this Court’s subject matter jurisdiction.
106
Am. Countercl. ¶ 55.
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What’s more, the parties previously engaged in the arbitration process for the
dispute over the PTO accrual calculation and Grant Thornton declined to rule on the
dispute. According to Grant Thornton:
Additional disputes arising from or pertaining to adherence to the
SPA, or lack thereof (i.e., providing reasonable access to
documents, etc.) likely requires a legal interpretation which
would have to be addressed outside of this dispute process. An
assessment of this nature is outside the bounds of my engagement
as an Arbitrator at the Designated Accounting Firm.107
Grant Thornton expressly determined that assessing whether CLP provided
reasonable access to documents was outside the bounds of its role as arbitrator.
Looking at the Agreement’s language itself (aided by Grant Thornton’s
arbitration determination), it’s clear that the question of whether CLP failed to grant
reasonable access to ABS’s books and records doesn’t fall within any arbitration
provision. Because the parties did not contractually agree to arbitrate disputes
related to reasonable access to books and records, arbitration provides no adequate
legal remedy. Consequently, the Court has subject matter jurisdiction over
Counterclaim Count II alleging breach of contract for failure to grant reasonable
access to books and records. And so, CLP’s request to dismiss that count for lack
of subject matter jurisdiction is DENIED.
107
Id. ¶ 79, Ex. N.
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B. COUNTERCLAIM COUNTS I, II, AND III: BREACH OF CONTRACT.
Under 12(b)(6), CLP argues Seller Defendants failed to adequately state
breach-of-contract claims that (1) CLP diverted revenue to avoid the Contingent
Payment, and (2) Seller Defendants have an interest, contractual or otherwise, in the
ALS Notes.
Seller Defendants argue in response that they have pled in sufficient detail
that (1) CLP caused ABS to take direct actions to lower its Gross Profit for the
primary purpose of reducing or eliminating the Contingent Payment, and (2) the
parties confirmed the ALS Balance exchange in writing and as such, Seller
Defendants have an interest in the Balance.
To reiterate, the Court lacks subject matter jurisdiction for claims related to
what financial or other information should be considered in performing the
calculation of the Contingent Payment, and Counterclaim Count I must therefore be
dismissed on that basis alone. In turn, the Court need not further determine whether
Seller Defendants adequately state their charge of breach-of-contract for diverting
revenue to reduce ABS’s Gross Profit to avoid the Contingent Payment in that
counterclaim.
As to Seller Defendants’ breach-of-contract counterclaim (Count II) for
CLP’s failure to grant access to ABS’s books and records, CLP does not argue that
Seller Defendants failed to state a claim—instead, CLP argues Seller Defendants
- 29 -
waived the ability to dispute their lack of access to ABS’s books and records by
failing to comply with the Dispute Resolution Procedures. But, as pled, this is no
stand-alone 12(b)(6) argument for failure to state a claim. Rather, this is a mere
continuation of CLP’s already-rejected 12(b)(1) argument for lack of subject matter
jurisdiction. So the Court need address it no further.
That leaves CLP’s Rule 12(b)(6) challenge to Counterclaim Count III for
breach of the ALS Note agreement.
A plaintiff alleging breach of contract must plead: (1) the existence of an
express or implied contract; (2) the breach of an obligation imposed by the contract;
and, (3) damages resulting from such breach.108 To recover for damages, the plaintiff
must demonstrate that he substantially complied with all provisions of the
contract.109 “[T]he interpretation of a contract is a question of law suitable for
determination on a motion to dismiss.”110 There are three elements for a valid,
enforceable contract: (1) the parties intended that the contract would bind them;
(2) the terms of the contract are sufficiently definite; and, (3) the parties exchange
legal consideration.111
108
Shah v. Am. Sols., Inc., 2012 WL 1413593, at *2 (Del. Super. Ct. Mar. 8, 2012) (citing VLIW
Tech., LLC v. Hewlett–Packard Co., 840 A.2d 606, 612 (Del. 2003)).
109
Id.110
MicroStrategy Inc. v. Acacia Rsch. Corp., 2010 WL 5550455, at *5 (Del. Ch. Dec. 30, 2010).
111
Bryant v. Way, 2011 WL 2163606, at *4 (Del. Super. Ct. May 25, 2011).
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The Court interprets a contract’s words using their common and ordinary
meaning unless the contract’s own language reveals the parties specifically intended
some other meaning be given.112 If the language is clear and unambiguous, the
ordinary meaning will establish the parties’ intent.113 But language is ambiguous if
it’s reasonably susceptible to different interpretations.114 And on a motion to
dismiss, the Court can’t just choose between two differing reasonable interpretations
of such ambiguous language.115
A court will only consider recovery under an implied contract if there is no
express contract governing the parties’ rights and obligations.116 An implied
contractual obligation cannot flow from matters expressly addressed in a written
contract.117 Rather, a contract will be implied-in-fact only when the Court might
Cove on Herring Creek Homeowns.’ Ass’n Inc. v. Riggs, 2005 WL 1252399, at *1 (Del. Ch.
112
May 19, 2005).
113
MicroStrategy Inc., 2010 WL 5550455, at * 5.
114
Id.115
E.g., Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d
609, 613 (Del. 1996).
116
Weik, Nitsche & Dougherty, LLC v. Pratcher, 2020 WL 5036096, at *4 (Del. Ch. Aug. 26,
2020) (holding that defendant sufficiently pled breach of implied contract when alleging a course
of dealing that governed the parties’ relationship after plaintiffs’ resignation because the Court
could reasonably infer an implied contract existed based on the presumed intention of the parties
(citing Good v. Moyer, 2012 WL 4857367, at *5 (Del. Super. Ct. Oct. 10, 2012))).
117
Good, 2012 WL 4857367, at *5.
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fairly infer such an intent from the evidence and the agreement represents the
presumed intention of the parties as demonstrated by their conduct.118
Seller Defendants adequately allege a breach-of-contract claim for failure to
transfer the ALS Balance or the right to collect on the Balance. While they may well
have failed to sufficiently plead the existence of an express agreement, Seller
Defendants have sufficiently pled the existence of an implied agreement.
Drawing all reasonable inferences in favor of the Seller Defendants, there are
two reasonable interpretations of the parties’ treatment of the ALS Notes: (1) the
SPA specifically omitted the ALS Balance from its assigned Accounts Receivable
provision and is the express, enforceable contract that controls the parties
relationship pertaining to the ALS Balance; or (2) the ALS Agreement was
specifically omitted in light of the fact that the parties had already bargained for and
accepted a reduced sale price for ABS in exchange for Seller Defendants collecting
directly on the ALS Balance. Even under Delaware’s minimal pleading standards,
the language of the e-mail communications between CLP’s and Seller Defendants’
counsel are reasonably susceptible to differing interpretations and as such, there is
no express agreement regarding the ALS Notes.
118
Creditors’ Comm. of Essex Builders, Inc. v. Farmers Bank, 251 A.2d 546, 548 (Del. 1969)
(holding no implied contract exists when banks independently decide to extend credit to Creditors
because the parties acted in their own interest and the collision of such interests is an insufficient
reason to imply an agreement).
- 32 -
There are sufficient facts in the Counterclaim, however, that a valid and
enforceable implied contract exists. Here, the e-mails between the Lazard
Representative for CLP and Seller Defendants indicate that CLP “agreed to remove
the ALS notes from WC” and Seller Defendants would “receive 100% of the
collections from the note.”119 And counsel for each party noted that the parties
agreed Seller Defendants would enter into notes directly with ALS for the
Balance.120 Lastly, the purchase price for ABS was reduced by the value of the ALS
Notes—the ABS Closing Net Working Capital schedule submitted by CLP states
“[t]he Company prior to close executed two notes receivable with [ALS] which by
definition are excluded from working capital.”121
Given these facts, the presumed intention of the parties’ conduct
demonstrates, at the very least, that they were bound to reduce the ABS purchase
price in exchange for Seller Defendants collecting on the ALS Notes. And because
Seller Defendants have adequately alleged that: (1) an implied contract exists;
(2) CLP breached its contractual obligation to transfer the ALS Balance or the right
119
Am. Countercl., Ex. D. The Court may consider these documents on a motion to dismiss. E.g.,
Windsor I, LLC v. CWCap. Asset Mgmt. LLC, 238 A.3d 863, 873 (Del. 2020); see also Malpiede
v. Townson, 780 A.2d 1075, 1083 (Del. 2001) (“[A] claim may be dismissed if the allegations in
the complaint or in the exhibits incorporated into the complaint effectively negate the claim as a
matter of law.”).
120
Am. Countercl., Ex. E.
121
Id. at Ex. P.
- 33 -
to collect on the Balance; and, (3) due to the breach, Seller Defendants suffered
damages in the amount of $ plus interest, they have met Delaware’s minimal
pleading standard for this breach-of-contract count.
As such, CLP’s Motion to Dismiss as to Counterclaim Count III for failure to
state a breach-of-contract claim is DENIED.
C. COUNTERCLAIM IV: CIVIL CONVERSION.
CLP argues Seller Defendants failed to state a claim for conversion because
they did not plead an interest, contractual or otherwise, in the ALS Notes. Seller
Defendants argue in response that they sufficiently alleged that the parties confirmed
the ALS Balance exchange in writing and as such, Seller Defendants have an interest
in the Balance.
Conversion is the “act of dominion wrongfully exerted over the property of
another, in denial of his right, or inconsistent with it.”122 The necessary elements for
a conversion under Delaware law are that a plaintiff: (1) had a property interest in
the converted goods; (2) had a right to possession of the goods; and, (3) the property
was converted.123
122
McGowan v. Ferro, 859 A.2d 1012, 1040 (Del. Ch. 2004) (quoting Arnold v. Soc’y for Sav.
Bancorp, Inc., 678 A.2d 533, 536 (Del. 1996)).
123
Gould v. Gould, 2012 WL 3291850, at *7 (Del. Ch. Aug. 14, 2012).
- 34 -
Generally, an action in conversion will not lie to enforce a claim for the
payment of money.124 One narrow exception allows a claim for conversion of money
“only when it can be described or identified as a specific chattel, but not where an
indebtedness may be discharged by the payment of money generally.”125 So, an
action for conversion of money will only lie where there is an “obligation to return
the identical money” delivered by the plaintiff to the defendant.126
Seller Defendants plead a conversion claim seeking the payment of
$ plus interest. Again, in Delaware, a conversion claim will not lie where
the complainant simply seeks the payment of some sum of money derived from a
contract or other right.127 And Seller Defendants fail to plead that their conversion
124
Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 890 (Del. Ch. 2009); see also Stone & Paper
Invs., LLC v. Blanch, 2020 WL 3496694, at *11 (Del. Ch. Jun. 29, 2020) (“As to Clovis, the
conversion claim fails because it is a claim for the payment of money.”).
125
Kuroda, 971 A.2d at 890 (quoting Goodrich v. E.F. Hutton Grp., Inc., 542 A.2d 1200, 1203
(Del. Ch. 1988)).
126
Kuroda, 971 A.2d at 890 (internal quotation marks omitted).
127
See id. (“[T]o establish a claim for conversion apart from the contract claim, [the plaintiff]
would have to show that he had a right to the money—other than a right pursuant to the contract—
that was violated by the defendants’ exercise of dominion over the money.”); Stone & Paper, 2020
WL 3496694, at *11 (conversion claim failed because it was just a claim for the repayment of
allegedly misused money).
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claim falls within the narrow-recognized exception—i.e. that CLP has an obligation
to return the “identical money” allegedly owed.128
At bottom, Seller Defendants are seeking the satisfaction of a contractual
obligation that can be satisfied by the payment of money generally. CLP’s motion
to dismiss as to Counterclaim Count IV for failure to state a conversion claim must
be GRANTED.
D. COUNTERCLAIM V: UNJUST ENRICHMENT.
CLP argues Seller Defendants failed to state a claim for unjust enrichment
because they did not plead an interest, contractual or otherwise, in the ALS Notes.
Seller Defendants argue in response that they sufficiently alleged that the parties
confirmed the ALS Balance exchange in writing and as such, Seller Defendants have
an interest in the Balance.
Unjust enrichment is the “unjust retention of a benefit to the loss of another,
or the retention of money or property of another against the fundamental principles
of justice or equity or good conscience.”129 In order to recover on a claim of unjust
enrichment, a plaintiff must prove: (1) an enrichment; (2) an impoverishment;
128
See Kuroda, 971 A.2d at 890 (“Generally, an action for conversion of money will lie only
where there is ‘an obligation to return the identical money’ delivered by the plaintiff to the
defendant.” (cleaned up)).
129
Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988) (internal quotation
marks omitted).
- 36 -
(3) a relation between the enrichment and impoverishment; (4) the absence of
justification; and, (5) the absence of a remedy provided by law.130
Courts developed unjust enrichment as a theory of recovery to remedy the
absence of a formal contract.131 As such, claims of unjust enrichment may survive
a motion to dismiss when the validity of the contract is in doubt or uncertain.132
When the complaint alleges an express, enforceable contract that controls the
parties’ relationship, a claim for unjust enrichment will be dismissed.133
Seller Defendants adequately allege an unjust enrichment claim. The
complaint alleges that: (1) ABS was enriched by receiving the ALS Balance;
(2) Seller Defendants were unable to collect on the ALS Balance or exercise the right
to collect on the Balance; (3) ABS was enriched at Counterclaim Plaintiff’s expense;
(4) ABS had no right to the balance; and, (5) the unjust enrichment claim is in the
alternative to the breach-of-contract claim with respect to the ALS Note agreement.
130
Jackson Nat’l Life Ins. Co. v. Kennedy, 741 A.2d 377, 393-94 (Del. Ch. 1999) (citing Cantor
Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 585 (Del. Ch. 1998)).
131
ID Biomed. Corp. v. TM Techs., Inc., 1995 WL 130743, at *15 (Del. Ch. Mar. 16, 1995).
132
Bakerman v. Sidney Frank Importing Co., 2006 WL 3927242, at *18 (Del. Ch. Oct. 10, 2006)
(citing Student Fin. Corp. v. Royal Indem. Co., 2004 WL 609329, at *7 (D. Del. March 23, 2004))
(rejecting dismissal of unjust enrichment claim when complaint alleged underlying contract was
valid and subject to recission due to fraud because there was no valid contract precluding the unjust
enrichment theory).
133
Bakerman, 2006 WL 3927242, at *18 (citing Rossdeutscher v. Viacom, Inc., 768 A.2d 8, 24
(Del. 2001)).
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Importantly, Seller Defendants are not required at this point to prove their
right to recovery on this counterclaim. Instead, it must be reasonably conceivable
that they may recover under their unjust enrichment theory. The Seller Defendants
are claiming unjust enrichment in the alternative to their breach-of-contract claim.
For the reasons above, the Court will not dismiss Seller Defendants’
breach-of-contract claim regarding the ALS Notes. But given the facts underlying
that specific agreement—facts that the Court must here view in the light most
favorable to Seller Defendants—the validity of such might be viewed as in doubt or
uncertain. Yet, it is still reasonably conceivable that Seller Defendants could recover
on an unjust enrichment theory, particularly if CLP ultimately convinces the Court
at trial that there was no breach-of-contract under Counterclaim III. If that comes to
pass, the Seller Defendants could be found to have no adequate remedy provided by
law.
CLP argues that the SPA comprehensively governs the parties’ rights with
respect to the ALS Notes, and as such, there is no reasonably conceivable set of
circumstances in which Seller Defendants’ unjust enrichment claim permits
recovery. Not so.
Whether there is an express, enforceable ALS Note agreement is uncertain.
The ALS Note agreement was not incorporated into the final SPA, but appears to
have been accepted by one of CLP’s liaisons prior to closing. Again, it is reasonable
- 38 -
to interpret the parties’ agreement that either (1) the SPA alone controls the parties’
relationship as it pertains to the ALS Balance, or (2) the parties separately bargained
for and accepted a reduced sale price for ABS in exchange for Seller Defendants
collecting directly on the ALS Balance. Because the validity of the ALS Note
agreement is uncertain and there is more than one reasonable interpretation thereof,
the unjust enrichment claim can survive here.
CLP’s prayer to dismiss Counterclaim Count V for failure to state an unjust
enrichment claim is DENIED.
V. CONCLUSION
Because the Court lacks subject matter jurisdiction to decide issues related to
the calculation of Gross Profit and Contingent Payment, Counterclaim Count I
(breach of SPA Section 3.3) is DISMISSED. Because Seller Defendants here try to
engage civil conversion claim for the mere payment of a sum of money allegedly
derived from a contract right, Counterclaim Count IV (civil conversion) must be
DISMISSED.
Because the Court has subject matter jurisdiction to decide issues related to
the reasonable access of books and records, CLP’s request to dismiss Counterclaim
Count II (breach of SPA Section 3.2(i)) is DENIED. Because Seller Defendants
sufficiently pled a breach-of-contract claim for failure to transfer the ALS Balance
or the right to collect on that balance, CLP’s prayer for dismissal of Counterclaim
- 39 -
Count III (breach of the ALS Note agreement) is DENIED. And because there is
more than one reasonable interpretation of the ALS Note agreement, CLP’s Motion
to Dismiss as to Counterclaim Count V (unjust enrichment) is DENIED.
IT IS SO ORDERED.
_________________________
Paul R. Wallace, Judge
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