Brace Industrial Contracting, Inc. v. Peterson Enterprises, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BRACE INDUSTRIAL )
CONTRACTING, INC. and PETERSON )
INDUSTRIAL SCAFFOLDING, INC., )
)
Plaintiffs, )
)
v. ) C.A. No. 11189-VCG
)
PETERSON ENTERPRISES, INC., )
RONALD A. PETERSON, ERIC )
PETERSON, KIRK PETERSON, )
RONALD A. PETERSON )
REVOCABLE TRUST, RONALD A. )
PETERSON 2010 IRREVOCABLE )
TRUST, and VERNON L. GOEDECKE )
COMPANY, INC., )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: August 1, 2016
Date Decided: October 31, 2016
Andrew S. Dupre, Michael P. Kelly, Benjamin A. Smyth, and Brian R. Lemon of
McCARTER & ENGLISH, LLP, Wilmington, Delaware, Attorneys for Plaintiffs.
Robert A. Penza and Christopher M. Coggins, of POLSINELLI PC, Wilmington,
Delaware, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor
This matter involves the sale of a business unit from one of the Defendants
(Peterson Enterprises, Inc.) to one of the Plaintiffs (Brace Industrial Contracting,
Inc.). That unit, Peterson Industrial Scaffolding (“PIS”), provides “turnkey” custom
scaffolding design, erection, and dismantling. The seller retained another business
unit, Vernon L. Goedecke, Inc. (“Goedecke”) that participates in the scaffolding
rental business; the sale contract for PIS contained a covenant restricting the retained
business.
The Plaintiffs have alleged that the Defendants have breached the restrictive
covenant provisions, and have committed breaches of contract and fraud with respect
to the sale. This post-trial Memorandum Opinion addresses the alleged breach of
the restrictive covenants, and fraud or breach of warranty with respect to inventory
the Defendants were required to transfer to the Plaintiffs under the sale contract.
Remaining issues will be referred to a Special Master for recommended resolution.
I. BACKGROUND
A. The Parties
The Plaintiffs are Brace Industrial Contracting, Inc. (“Brace”) and Peterson
Industrial Scaffolding, Inc. (“PIS”).1 Brace “is a Delaware corporation that provides
diversified and integrated industrial services within the power generation,
1
PIS is now doing business as “Platinum Scaffolding.” Prelim. Inj. Hr’g Tr. 4, Aug. 20, 2015.
1
agriculture, maritime, commercial, petrochemical, and oil and gas markets.”2 PIS
“sells scaffold, rents scaffold, erects and dismantles (“E&D”) scaffold, designs
scaffold layouts, and manages the deployment and use of scaffold assets.”3
The Defendants are Peterson Enterprises, Inc. (“PEI”), Ronald A. Peterson,
Eric Peterson, Kirk Peterson, Ronald A. Peterson Revocable Trust, Ronald A.
Peterson 2010 Irrevocable Trust, and Vernon L. Goedecke, Inc. PEI is a holding
company that owns Goedecke.4 Ronald Peterson and his sons, Eric and Kirk
Peterson, serve as Goedecke directors and officers of PEI.5
B. The Acquisition
PEI owned PIS until August 10, 2014, when Brace acquired PIS from PEI for
$18.7 million (the “Acquisition”).6 PEI owned a scaffolding business in Angola,
which was not a part of the Acquisition.7 The parties executed a series of contracts
to consummate the Acquisition. The parties entered into a Stock Purchase
Agreement (the “SPA”), in which Brace agreed to purchase PIS from PEI, and a
Transition Services Agreement (the “TSA”).8 The TSA required the Defendants to
2
Pretrial Stip. 4 (Mar. 18, 2016).
3
Id. at 5.
4
Id. at 4.
5
Id. at 5.
6
Id. at 5, 10.
7
Id. at 5. The Plaintiffs argue that since trial, the Defendants have “lost their Africa contracts.”
Pls’ Post-Trial Opening Br. (“Pls’ Opening Br.”) 40.
8
Pretrial Stip. 5, 6, 9.
2
manage aspects of PIS’s post-closing business.9 The parties also executed restrictive
covenant agreements (the “RSAs”) that prohibit the Defendants from engaging in
the “Business” in the “Territory” for five years.10 Finally, the parties entered into an
“Escrow Agreement” and a “Guaranty.”11 The Escrow Agreement was entered into
by Brace, PEI, and the Escrow Agent – Wilmington Trust, National Association.12
Under the Escrow Agreement, ten percent, or $1.87 million, of the $18.7 million
purchase price was placed in escrow.13 The $1.87 million was scheduled to be
released to PEI in equal halves on April 1, 2015 and February 10, 2016 if there were
no claims for indemnification.14 The Guaranty was executed by Ronald Peterson
and the Trust Defendants who agreed to guarantee PEI’s obligations to indemnify
Brace under the SPA.15 All of these contracts are governed by Delaware law.16
C. The Restrictive Covenants
“The Restrictive Covenants are found in the RSAs and Section 5.2 of the
SPA.”17 “The parties [have] stipulated that any breaches of the Restrictive
9
Id. at 9.
10
Id. at 8.
11
Id. at 5–6.
12
Id. at 5–6.
13
Id. at 10.
14
See id. at 10; Pls’ Opening Br. 10–11; Defs’ Post-Trial Opening Br. (“Defs’ Opening Br.”) 5,
47; Escrow Agreement 1.3(c), 1.4(a), 1.5(a).
15
See Pretrial Stip. 6–7.
16
See SPA § 7.8(a); TSA § 13; RSAs § 11; Escrow Agreement § 4.4; Guaranty § 6.3. The SPA is
found in JX 70. The RSAs are in JX 67, 74, 75, 76, 77. The TSA is in JX 68. The Escrow
Agreement is in JX 69 and the Guaranty is in JX 72.
17
Pretrial Stip. 8; SPA § 5.2.
3
Covenants would cause irreparable harm and entitle the Plaintiffs to injunctive
relief.”18 The Restrictive Covenants prohibit the Defendants from engaging in the
“Business” in the “Territory” (the United States and Canada) for five years.19
“Business” is defined as “the turnkey, integrated business of selling and renting
industrial and commercial scaffolding and the provision of related design,
engineering, erection, dismantling, and jobsite management and maintenance
services.”20 The Restrictive Covenants include a “Carve-Out,”21 as follows:
[n]otwithstanding the foregoing, (1) Seller may own, directly or
indirectly, solely as an investment, securities of any Person traded on
any national securities exchange if Seller is not a controlling Person of,
or a member of a group which controls, such Person and does not,
directly or indirectly, own five percent (5%) or more of any class of
securities of such Person, and (2) Vernon L. Goedecke Company, Inc.
and its Affiliates may continue to design, engineer, sell and rent
scaffolding equipment and other products to participants in the
Business in the Territory, provided that Vernon L. Goedecke Company,
Inc. and such Affiliates are not allowed to perform the Business in the
Territory.22
The Plaintiffs filed a Motion for Preliminary Injunction (“Plaintiffs’ Motion”)
on June 22, 2015.23 Based on the language in the Carve-Out, the Plaintiffs sought
18
Pretrial Stip. 9.
19
Id. at 8 (“From the Closing Date until five (5) years after the Closing Date (the “Restricted
Period”), Seller shall not, and shall not permit any of its Affiliates (including Vernon L. Goedecke
Company, Inc.) to, directory [sic] or indirectly: (i) engage in or assist others in engaging in the
Business in the Territory . . . .”).
20
Id. at 8; SPA Ex. A.
21
The Defendants note they would prefer this language be referred to as “confirming language”
rather than a “carve-out.” See Defs’ Opening Br. 11 n.3.
22
Pretrial Stip. 8–9.
23
Mot. for Prelim. Inj. (June 22, 2015).
4
to enjoin Goedecke’s sale and rental of PERI UP brand commercial scaffolding to
end users in the United States and Canada.24 I first addressed Plaintiffs’ Motion in
a hearing held on August 20, 2015 (the “Hearing”).25 Although I found the language
in the Carve-Out ambiguous, I found that the Plaintiffs satisfied the first prong of a
preliminary injunctive relief analysis because there was a reasonable likelihood that
the Plaintiffs would prevail on their construction of the contract, “which is that the
[C]arve-[O]ut permits only rental and sale of scaffolding by Goedecke to those
themselves in the business of providing scaffolding—that is, business-to-business
sales and rentals—and does not carve out from the prohibition retail sales or rentals
to an end user.”26 Additionally, I found that the second prong of the preliminary
injunctive relief analysis was satisfied because “the parties provided in the SPA that
breach of the non-compete would entail irreparable harm and because the probable
effect of competition on the goodwill purchased by the Plaintiffs made irreparable
harm likely. . . .”27 Following the Hearing, I issued a Letter Opinion on August 28,
2015 addressing the remaining issues with respect to Plaintiffs’ Motion.28 I found
that in light of the fact that “Goedecke’s revenue from worldwide PERI UP sales
and rentals is only a quarter of its total scaffolding-business revenue . . . and that
24
See Brace Indus. Contracting, Inc. v. Peterson Enterprises, Inc., 2015 WL 5097240, at *2 (Del.
Ch. Aug. 28, 2015).
25
See Prelim. Inj. Hr’g Aug. 20, 2015.
26
Brace, 2015 WL 5097240, at *2.
27
Id.
28
Id. at *1.
5
[the preliminary] injunction [would] apply only in the Territory, and not worldwide,”
the balance of the equities favored the preliminary injunctive relief sought. 29 I
granted Plaintiffs’ Motion, pending trial, and found that $250,000 was sufficient
surety for the Defendants should the grant of preliminary relief prove improvident.30
D. The Inventory Claims
The inventory claims consist of the first four counts in the Amended Verified
Complaint (the “Inventory Claims”).31 As part of the Acquisition, Brace purchased
all of PIS’s assets, including its scaffolding equipment, except for certain equipment
agreed to be retained by Goedecke.32 The parties stipulated that “[t]he conveyance
of PIS’s scaffolding equipment to Brace was an essential part of the Acquisition.”33
“PEI sold to Brace what PIS had been doing historically as it was operating at the
time” of Closing.34 PEI “purported to” list all assets PIS possessed at Closing,
including scaffolding equipment, in Section 3.11(b) of the SPA Disclosures (the
“Scaffolding List”).35 PEI represented and warranted in Section 3.11(b) of the SPA
that:
29
Id. at *2.
30
Id. at *3.
31
See Pls’ Post-Trial Answering Br. (“Pls’ Ans. Br.”) 4; Defs’ Opening Br. 23; Am. Verified
Compl. 16–21. Count I is for Declaratory Judgment on the SPA and Escrow Agreement. Count
II is for Breach of Contract for Fundamental Representations in the SPA. Count III is for
Declaratory Judgment on the Guaranty and Count IV is for Fraud.
32
Pretrial Stip. 6.
33
Id. at 7.
34
Id. at 6.
35
Id. at 6.
6
Section 3.11(b) of the Disclosure Schedules sets forth a true, correct
and complete list and general description of substantially all furniture,
fixtures, equipment, machinery, tools, vehicles, office equipment,
supplies, computers, telephones and other tangible personal property of
the Company or used solely in the Business and not by the Seller for
other purposes in connection with any Affiliates (the “Tangible
Personal Property”); provided, the Company also regularly uses rented
equipment from PERI USA, PERI Canada, and other third-parties for
which the Company has no ownership claim.36
Under the SPA, PEI is required to indemnify Brace for “Losses” caused by breaches
of PEI’s representations and warranties.37 On March 26, 2015, Brace sent a Notice
of Direct Claim (the “Claim Notice”) to PEI asserting that the Scaffolding List
overstated PIS’s scaffolding inventory and notifying PEI of its intent to seek
indemnification under the SPA.38 This claim prevented the scheduled disbursement
of the $1.87 million held in escrow.39 PEI rejected the Claim Notice in a letter dated
April 13, 2015 and six months later itself asserted a Direct Claim for indemnification
against Brace for alleged breaches of the SPA.40
E. Procedural History
The Plaintiffs filed their initial complaint on June 22, 2015 and an amended
complaint (the “Complaint”) on August 20, 2015.41 The Plaintiffs allege nine
different Counts, broadly based on three main claims: that the Defendants are in
36
Id. at 7; SPA § 3.11(b).
37
Pretrial Stip. 7.
38
Id. at 10.
39
See Pls’ Opening Br. 10–11; Defs’ Opening Br. 47.
40
Pretrial Stip. 10.
41
Am. Verified Compl. (Aug. 20, 2015).
7
breach of the Restrictive Covenants,42 the Inventory Claims,43 and that the
Defendants have usurped customer payments belonging to the Plaintiffs under the
TSA (the “Customer Payments Claim”).44
The Defendants answered the Complaint and simultaneously filed three
counterclaims against the Plaintiffs on October 19, 2015.45 In Counterclaim Count
I, the Defendants seek a declaratory judgment that the Plaintiffs are not entitled to
indemnification under the SPA. Instead, the Defendants seek in Counterclaim Count
II a declaratory judgment that they are entitled to indemnification from the Plaintiffs
for breaching the “Further Assurances” provision of Section 5.7 of the SPA.46
Counterclaim Count III centers on the same “Further Assurances” clause and seeks
indemnification for breach of contract.47
42
Count IX.
43
In Count I, the Plaintiffs seek Declaratory Judgment on the SPA and the Escrow Agreement. In
Count II, the Plaintiffs claim a breach of contract under the SPA’s “Fundamental Representations.”
In Count III, the Plaintiffs seek a declaratory judgment on the Guaranty. In Count IV, the Plaintiffs
claim the Defendants committed fraud with respect to Fundamental Representations in the SPA.
44
In Count V, the Plaintiffs alleged the Defendants are in breach of the TSA and allege in the
alternative in Count VI that the Defendants are in breach of the implied covenant of good faith and
fair dealing on the TSA. In Count VII, the Plaintiffs make a claim for conversion of the Customer
Payments. Finally, in Count VIII, the Plaintiffs allege that the Defendants have been unjustly
enriched from their usurpation of the Customer Payments.
45
Defs’ Ans. to Am. Verified Compl. with Countercl. 70, 72–73 (Oct. 19, 2015).
46
See SPA § 5.7 (“Following the Closing, each of the Parties shall, and shall cause their respective
Affiliates to, execute and deliver such additional documents, instruments, conveyances, and
assurances and take such further actions as may be reasonably required to carry out the provisions
hereof and give effect to the Transactions.”).
47
Defendants’ Further Assurances claims are reserved for further consideration and I will not
describe them further in this Memorandum Opinion.
8
I granted Plaintiffs’ Motion for Preliminary Injunction on the Restrictive
Covenants, discussed above, on August 28, 2015. The Plaintiffs also moved for
partial summary judgment on the counts relating to the Customer Payments Claim.48
In ruling on their Motion for Partial Summary Judgment, I ordered the Defendants
to tender the amount of Plaintiffs’ funds not in dispute, but reserved decision on the
Motion for Partial Summary Judgment pending trial.49
The matter was tried March 29, 2016 through March 31, 2016. Post-trial, the
Defendants made a Motion for Selection of Independent Accountants to help resolve
post-Closing adjustments.50 I heard argument on this Motion on July 25, 2016 and
the parties provided me with a list of conflicted accounting firms on August 1, 2016.
What follows is my post-trial Memorandum Opinion addressing the claims over the
Restrictive Covenants and the Inventory. Remaining issues shall be referred to a
Special Master.
II. ANALYSIS
A. Restrictive Covenants
Interpreting the Restrictive Covenants requires examining the term
“Business,” as defined in the SPA, and a section in the SPA referred to throughout
48
Counts V (Breach of TSA), VI (Breach of the Covenant of Good Faith and Fair Dealing on the
TSA), VII (Conversion), and VIII (Unjust Enrichment).
49
Brace Indus. Contracting, Inc. v. Peterson Enterprises, Inc., 2015 WL 8483170, at *1 (Del. Ch.
Dec. 10, 2015).
50
Mot. for Selection of Ind. Accountants (May 27, 2016) (Dkt. No. 162).
9
this litigation as a “Carve-Out.” The SPA prohibits the Defendants from engaging
in the Business in the Territory for five years after Closing.51 The SPA defines
Business as “the turnkey, integrated business of selling and renting industrial and
commercial scaffolding and the provision of related design, engineering, erection,
dismantling, and jobsite management and maintenance services.”52 The Carve-Out
then states:
[n]otwithstanding the foregoing, (1) Seller may own, directly or
indirectly, solely as an investment, securities of any Person traded on
any national securities exchange if Seller is not a controlling Person of,
or a member of a group which controls, such Person and does not,
directly or indirectly, own five percent (5%) or more of any class of
securities of such Person, and (2) Vernon L. Goedecke Company, Inc.
and its Affiliates may continue to design, engineer, sell and rent
scaffolding equipment and other products to participants in the
Business in the Territory, provided that Vernon L. Goedecke Company,
Inc. and such Affiliates are not allowed to perform the Business in the
Territory.53
To state the obvious, the language of the Restrictive Covenants is no model
of clarity. Reading both provisions in the SPA together, it is simply unclear whether
the Restrictive Covenants prohibit the Defendants from renting and selling
scaffolding, and the extent that they carve-out the right to rent and sell scaffolding
to specific customers. At the preliminary injunctive relief stage, I found, based on
the language only, that despite ambiguity the Plaintiffs’ construction was reasonably
51
Pretrial Stip. 8; SPA § 5.2(a).
52
Pretrial Stip. 8; SPA Ex. A.
53
Pretrial Stip. 8–9; SPA § 5.2(a).
10
likely to succeed. After examining the extrinsic evidence, I find that Defendants’
construction is a more reasonable interpretation.
1. The Plaintiffs’ Argument
The Plaintiffs contend that the Defendants were breaching the Restrictive
Covenants prior to the entry of the preliminary injunction, because the definition of
Business includes the phrase “selling and renting industrial and commercial
scaffolding” and the Defendants have stipulated to selling and renting scaffolding.54
According to the Plaintiffs, allowing the Defendants to thus compete with business
lines acquired by Brace would “have the practical effect of wiping out the goodwill
purchased in the Acquisition.”55
With regards to the Carve-Out, the Plaintiffs argue, based on the evidence at
trial, that this provision was included only to “facilitate Goedecke’s rentals of PERI
scaffolding to shoring customers.”56 The Plaintiffs point out that a portion of
Goedecke’s business was providing scaffolding to customers who used the
scaffolding to hold shoring materials in place on a job site. They argue that the
Carve-Out was specifically limited to this business, even though the Carve-Out
makes no explicit reference to this shoring-rental business. Specifically, the
54
Pls’ Opening Br. 42 (citing Pretrial Stip. 11).
55
Id. at 45.
56
Id. at 46 (emphasis added). This interpretation, to my understanding was not advanced by the
Plaintiffs at the Preliminary Injunction Hearing.
11
Plaintiffs contend that the Carve-Out’s phrase “participants in the Business” refers
to Goedecke’s shoring customers and that it is only these customers to whom
Goedecke can continue to sell and rent scaffolding.57 The Plaintiffs argue that
reading the Carve-Out with this intent in mind clarifies the “awkward” use of the
phrase “participants in the Business.”58 The only alternative, according to the
Plaintiffs, is “that ‘participants in the Business’ means ‘anybody’ and entitles
[Defendants] to rent and sell scaffolding to anyone,” a construction that I found
unlikely at the preliminary injunction stage and that the Plaintiffs ask me to reject as
absurd.59
2. The Defendants’ Argument
The Defendants emphasize that the “carefully negotiated” conjunctive
definition of Business purposefully includes the words “and”, “turnkey,” and
“integrated.”60 Thus, the Defendants contend that the definition of Business only
prohibits the Defendants from providing turnkey scaffolding solutions for
customers.61 Further, the Defendants argue that Business “means a scaffolding
57
See Pls’ Ans. Br. 42; Pls’ Opening Br. 47 (“Defendants cannot perform the Business, i.e. do
things done by a scaffolding company like PIS. But Defendants can interact with participants in
the Business to support Goedecke’s shoring business.”).
58
See Pls’ Opening Br. 46–47.
59
Id. at 47.
60
Defs’ Ans. Br. 5–6.
61
Defs’ Opening Br. 7 (“The definition captures turnkey scaffolding solutions and, as used in §
5.2(a), prohibits Defendants from engaging in that activity. It is no more complicated than that.”).
12
subcontractor whose business it is to do all of the activities included in the list”62
and that they have a legal right to “engage in any single activity listed in the
definition so long as [they do] not perform all of them.”63 The Defendants point out
that Goedecke, a business they retained in the sale, is “a distributor that rents and
sells scaffolding to customers who erect and dismantle it themselves.”64 Therefore,
according to the Defendants, Geodecke does not engage in the Business and is not
in breach of the Restrictive Covenants.65
The Defendants argue that the Carve-Out provision was intended to confirm
that Goedecke could continue to sell or rent scaffolding to anyone “even if the
customer also buys PIS’s turnkey solutions.”66 According to the Defendants, if the
parties intended to limit Goedecke to renting and selling scaffolding only to shoring
customers, then “the SPA would in some way have reflected that understanding.”67
Rather, the Defendants argue that the phrase “participants in the Business” was
included because the “Defendants wanted the SPA to state explicitly that Goedecke
could rent scaffolding to PIS’s customers after Closing.”68 In other words, in
Defendants’ view, the rental of scaffolding as a stand-alone activity is permitted
62
Id. at 8 (emphasis in original).
63
Defs’ Ans. Br. 10–11.
64
Defs’ Opening Br. 6–7.
65
See id. at 7.
66
Id. at 11–12 (emphasis added).
67
Id. at 13 (emphasis in original).
68
Defs’ Ans. Br. 17.
13
under the Restrictive Covenants, and the purpose of the Carve-Out is to make clear
that such rentals are allowed even to “participants in the (turnkey) Business” – that
is, PIS customers. The Defendants also argue that to interpret the Carve-Out as
limiting Goedecke’s sales and rentals to shoring customers would require Goedecke
to determine ahead of time whether any given customer intended to use the
scaffolding for shoring, which they characterize as unworkable.69
3. Standard for Contract Interpretation
This Court has recognized that restrictive covenants included in purchase
agreements are intended to protect the purchaser in its enjoyment of the business
purchased.70 Delaware law also “more readily enforce[s]” covenants not to compete
when they are part of a purchase agreement instead of an employment contract.71
What I must decide here is the intended meaning of the parties’ negotiated definition
of Business and the intended scope of the Carve-Out to that definition.
Delaware law requires me to read the contract as a whole.72 “Delaware law
adheres to the objective theory of contracts, i.e., a contract's construction should be
69
Defs’ Opening Br. 14.
70
Tull v. Turek, 147 A.2d 658, 662 (Del. 1958) (citations omitted).
71
Concord Steel, Inc. v. Wilmington Steel Processing Co., 2009 WL 3161643, at *14 n.113 (Del.
Ch. Sept. 30, 2009) (citations omitted).
72
Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (“When interpreting a contract, this Court
‘will give priority to the parties' intentions as reflected in the four corners of the agreement,’
construing the agreement as a whole and giving effect to all its provisions.”). (quoting GMG
Capital Inv., LLC. v. Athenian Venture Partners I, L.P., 36 A.3d 776, 779 (Del. 2012).
14
that which would be understood by an objective, reasonable third party.” 73 When
the plain meaning of a contract is susceptible to more than one reasonable
interpretation, “courts may consider extrinsic evidence to resolve the ambiguity.” 74
Specifically for restrictive covenants, “the covenant must be construed, if possible,
to determine what was intended by the parties when it was included in the contract.
This intent is to be determined in the light of the surrounding facts and
circumstances.”75
4. Ambiguity Analysis
Under the SPA, the Defendants may not participate in the Business for five
years. The SPA, however, is unclear as to whether Business means performing all
of the components listed as an integrated whole, as the Defendants suggest, or
whether the performance of any individual component constitutes performance of
the Business, as argued by the Plaintiffs. The definition of Business provided begins
with “turnkey” and “integrated” which suggests that the parties intended this
definition to be limited to activities that encompass all of the components that
73
Id. at 367–68 (quoting Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010).
74
Id. at 374–75 (“If the contract is ambiguous, a court will apply the parol evidence rule and
consider all admissible evidence relating to the objective circumstances surrounding the creation
of the contract. Such extrinsic evidence may include overt statements and acts of the parties, the
business context, prior dealings between the parties, [and] business custom and usage in the
industry. After examining the relevant extrinsic evidence, a court may conclude that, given the
extrinsic evidence, only one meaning is objectively reasonable in the circumstances of [the]
negotiation.”) (citing In re Mobilactive Media, LLC, 2013 WL 297950, at *15 (Del. Ch. Jan. 25,
2013) (alternations in original) (citations omitted) (internal quotation marks omitted).
75
Tull, 147 A.2d at 661–62.
15
follow. However, it is also reasonable to read the provided definition in a
“noncombinative” way, to use Defendants’ term,76 and find that Business includes
any individual performance of every component in the list provided by the
definition.
Further, with regard to the Carve-Out, I have already found its language
ambiguous.77 Since the Preliminary Injunction Hearing I have struggled with the
phrase “participants in the Business.”78 As I stated at the Hearing, “participants in
the Business” must “mean something. It can’t just mean ‘everybody’ because then
you wouldn’t need the language at all.”79 However, I find PIS’s current
interpretation unlikely: to interpret “participants in the Business” as limiting
Goedecke’s sales to shoring customers is simply unexpressed in the provision itself.
The language of the Restrictive Covenants does not clearly convey the parties’ intent
and is “susceptible to more than one reasonable interpretation.”80 Thus, I find that
the Restrictive Covenants are ambiguous and turn to considering the relevant
extrinsic evidence offered by both parties.
5. Extrinsic Evidence
a. The Definition of Business
76
Defs’ Opening Br. 7.
77
Brace, 2015 WL 5097240, at *2.
78
Prelim. Inj. Hr’g Tr. 46:1–3.
79
Id.
80
Salamone, 106 A.3d at 374.
16
The Plaintiffs argue that Business was “intended to mean the business
purchased by Brace,” which was PIS.81 PIS, the Plaintiffs argue, is not limited to
turnkey projects, but includes other components of turnkey projects as well,
including rentals of scaffolding.82 According to the Plaintiffs, “Brace would have
never consummated the Acquisition if the Restrictive Covenants permitted
Defendants to compete with PIS.”83 The Plaintiffs also contend that the Defendants
admit that they are prohibited from the business of E&D (erection and dismantling),
which the Plaintiffs argue is but one component of a turnkey project, thus
contradicting the idea that the Defendants can compete on any component in the
definition of “Business.”84 Further, the Plaintiffs point to testimony by Ron
Peterson, PEI’s CEO and lead negotiator for the sale of PIS,85 to argue that the
Defendants understood there to be a difference between E&D and a turnkey
project.86 In other words, according to the Plaintiffs, their explanation for the scope
of the Restrictive Covenants—prohibiting Goedecke from competing in the turnkey
business or any component thereof—is bolstered by Defendants’ admission that the
81
Pls’ Opening Br. 42.
82
Pls’ Ans. Br. 38.
83
Id. at 44.
84
Id. at 39.
85
Defs’ Opening Br. 2.
86
Pls’ Ans. Br. 40 (citing Trial Tr. 445:4–7 “Q. So, essentially, a turnkey project is one that
includes E&D and rentals. Is that how you would describe a turnkey project? A. Yes, I would say
so.”).
17
Restrictive Covenant prohibits E&D, which is but a component of the turnkey
business.
The Defendants argue that “E&D” is industry shorthand for turnkey
scaffolding projects.87 The Defendants present both Ron and Eric Peterson’s
testimony stating “E&D generally I think of as turnkey projects” and “[a]gain,
turnkey, integrated, E&D business, it’s generic terms, but, yeah, it basically means
that you’re doing a job end to end; you’re designing it, you bid it, you install the
scaffolding, you rent it for a while, and you tear it down, and you go to the next
job.”88 Additionally, the Defendants argue that the testimony of Ron Peterson was
“wholly consistent with the plain reading of the Business definition” in that he
understood “we’re not allowed to go out and do E&D work.”89
The Defendants also argue that a series of e-mails exchanged between the
parties while drafting the SPA supports an integrated reading of the Business
definition.90 The Defendants first cite a Ron Peterson e-mail to Brace stating “[y]ou
are buying our domestic scaffolding E&D (erection and dismantling) business.”91
Next, the Defendants cite an e-mail exchange between PEI’s counsel and Brace’s
87
Defs’ Ans. Br. 8.
88
Id. at 8 (citing Trial Tr. 444:8–9; 567:9–21). The Plaintiffs point out that testimony by Ron and
Eric Peterson is self-serving.
89
Defs’ Opening Br. 7 (citing Trial Tr. 449:23–450:4 “There’s a definition for Capital B, Business,
in the back. I’m stating the obvious here. Then that’s saying we can’t get out – we’re not allowed
to go out and do E&D work, erection and dismantling work.”).
90
Id. at 16.
91
Id.
18
counsel, in which PEI’s counsel referenced the last draft of the SPA’s definition of
Business and wrote “[t]he concept being that the Business is a turnkey erection and
dismantling scaffolding operation.”92 Brace’s attorney responded by rejecting PEI
counsel’s comment and writing “we need to stay with our definition” and that PEI
counsel’s language was “too restrictive and narrow.”93 However, Brace’s counsel
added that “if Ron [Peterson] wants to continue to sell or rent scaffolding without
any further activity, that’s fine.”94 PEI’s counsel then responded by writing:
We are not trying to get back into the E&D business of scaffolding by
our suggested definition. However, the definition you have proposed is
too restrictive on Goedecke’s current business. This concept was
clearly negotiated and agreed upon that the company we are selling
(Peterson Ind Scaff) is the erecting and dismantling portion of the
business. The definition you have proposed is restrictive to Goedecke
performing its normal course of business and we do not want to be in
breach of contract for doing what we’ve agreed to be allowed to do.
Wording of the definition needs to be altered to allow Goedecke to
continue operating as we have agreed.95
The Defendants then point to Vrettakos’ deposition testimony that he understood the
e-mail from Brace’s counsel as saying “it’s okay if Goedecke wants to continue to
sell or rent scaffolding so long as there’s no erection and dismantling.”96 The parties
ultimately agreed to Defendants’ integrated language.97
92
Id. at 17.
93
Id.
94
Id. (emphasis added) (The Defendants note that the reference to Ron Peterson here is a reference
to Goedecke).
95
Id. at 17–18 (emphasis added).
96
Id. at 18 (citing Vrettakos Dep. Tr. 63:1–5).
97
See id. at 19–20; JX 22, 32, 34 (showing updated versions of the SPA).
19
b. The “Carve-Out”
The Plaintiffs argue that the scope of the Restrictive Covenants was settled in
a May 7, 2014 e-mail between Eric Peterson, PEI’s COO,98 and Craig Kaple, Brace’s
COO.99 In this e-mail, Kaple acknowledged that the parties were “in agreement that
Brace can rent or sell scaffolding to a client as a standalone transaction” and went
on to state that Goedecke could perform its “normal sale or rental of scaffolding to
their customers” but could not “erect or dismantle scaffolding.”100 Obviously, this
e-mail strongly supports Defendants’ proposed construction of the Carve-Out. The
Plaintiffs, however, argue that the phrase “their customers,” with respect to
Goedecke, meant shoring customers only, and that both Hans Petter Hansen, Brace’s
former CEO and lead negotiator for the purchase of PIS,101 and Pete Vrettakos,
Brace’s former Chairman,102 understood this as well.103 As additional evidence of
restricting Goedecke’s sales and rentals to only shoring customers, the Plaintiffs
argue that they were told by Eric Peterson in March 2014 that the Defendants “were
going to keep $250k of material to support their shoring.”104 Additionally, the
98
Id. at 2.
99
Pretrial Stip. 6; Pls’ Opening Br. 13.
100
See Pls’ Opening Br. 14; Pls’ Ans. Br. 44 (“[T]he parties agreed that ‘Brace can rent or sell
scaffolding to a client as a standalone transaction. Goedecke can also do there [sic] normal sale or
rental of scaffolding to their customers.’”).
101
Pretrial Stip. 6.
102
Id.
103
See Pls’ Opening Br. 14 (citing Trial Tr. 42:18–22; Vrettakos Dep. Tr. 60:12–25); Pls’ Opening
Br. 47–48 (citing Trial Tr. 38:8–39:11, 69:12-18; Vrettakos Dep. Tr. 37:13–16).
104
Pls’ Ans. Br. 47; JX 15.
20
Plaintiffs cite the testimony of their lead SPA negotiators to argue that the Carve-
Out was intended to limit Goedecke to renting scaffolding to shoring customers.105
The Defendants cite Eric Peterson’s testimony to argue that the Carve-Out
was intended as confirming language.106 The Defendants also point to Ron
Peterson’s testimony at trial that the Plaintiffs developed their “concept of limiting
Goedecke’s scaffolding sales and rentals to shoring customers . . . [only] after the
lawsuit.”107 Most prominently, the Defendants point to the May 7, 2014 e-mail as
“perhaps the clearest indication of the parties’ mutual understanding.”108 According
to the Defendants, this e-mail was sent by Kaple to Hansen, Vrettakos, and Brace’s
lead counsel relaying a conversation Kaple had with Eric Peterson earlier in the
morning.109 In the e-mail, as discussed above, Kaple states “Goedecke can also do
there [sic] normal sale or rental of scaffolding to their customers” but the Defendants
emphasize that Kaple goes on to write in the following sentence that “Goedecke
can’t erect or dismantle scaffolding.”110 Additionally, the Defendants contend that
“their customers” did not mean only “shoring customers” but also Goedecke’s other
105
Id. at 42. (citing Trial Tr. 38:8–39:11, 69:12–18; Vrettakos Dep. Tr. 37:13–16).
106
Defs’ Ans. Br. 15 (citing Trial Tr. 518:24–519:4 “We didn’t want to trip up, and specifically
we didn’t want to trip up with any situation where Peterson Industrial Scaffolding had some direct
rental or rental only and trying to claim that we were in breach of the agreement on that.”).
107
Defs’ Opening Br. 14 (citing Trial Tr. 435:9–13).
108
Id. at 18.
109
Id.
110
Id. at 18–19 (emphasis added).
21
customers who rented scaffolding for purposes other than shoring.111 Moreover, the
Defendants argue that “[e]ven if the phrase ‘participants in the Business’ is
ambiguous, that does not give Brace license to give it a meaning [shoring customers]
nowhere even suggested in the SPA or by the parties during negotiations.”112
Finally, both parties point to record evidence to argue that post-Closing conduct
supports their position.113 I have considered this post-Closing evidence but I do not
find it convincing.
6. Extrinsic Evidence Analysis
In attempting to harmonize the competing extrinsic evidence offered by both
sides, I find that the Restrictive Covenants do not limit Defendants’ participation in
the business of renting and selling scaffolding, separate from E&D. I find that the
more intuitive construction, as supplemented by the extrinsic evidence, lies with
Defendants’ interpretation. First, I note that the Restrictive Covenant language is
more readily understood to prohibit only “turnkey” competition, and not components
thereof. Second, while I will not address each item of extrinsic evidence piece by
piece, I find that Defendants’ testimony regarding their understanding of E&D as
representing turnkey, end-to-end projects and the e-mails exchanged during the
SPA’s drafting in particular shift the ledger further in Defendants’ favor. Also, in
111
Defs’ Ans. Br. 17–18.
112
Defs’ Opening Br. 14.
113
See Pls’ Opening Br. 48; Defs’ Opening Br. 15, 20; Defs’ Ans. Br. 19.
22
examining the drafting history of the SPA, it is clear that the Plaintiffs deleted
“turnkey, integrated business” but then later accepted Defendants’ revisions re-
inserting the “turnkey, integrated business” language.114 Therefore, it would be
difficult for me to conclude that the Plaintiffs were not aware of Defendants’ intent
to limit the definition of Business to turnkey projects only. Turning to the Carve-
Out, I am convinced by Defendants’ argument that, if the Carve-Out was indeed
intended to limit Goedecke to renting and selling to shoring customers only, it would
likely have explicitly reflected that intent. In other words, the Defendants’ is the
more reasonable construction here: the intent of the Carve-Out was to confirm that
rentals may be made even to PIS customers. Accordingly, I find that the more
reasonable definition of Business as intended by the parties is a “turnkey,”
“integrated” business that leaves Defendants free to rent and sell scaffolding.
Additionally, I find that the Carve-Out provision was not intended to limit Goedecke
to renting and selling to only shoring customers. Considering their contract as a
whole, including extrinsic evidence, Defendants’ construction is the more likely.
Because my finding here demonstrates that the preliminary injunction was
improvidently entered, the Defendants are entitled for losses they incurred therefrom
up to the posted bond of $250,000. The parties should consult to decide whether
114
See JX 22, 32, 34 (showing updated versions of the SPA).
23
they can agree to the amount of loss or whether they require further judicial
assistance.
B. Inventory Claims
The Plaintiffs argue that they did not receive the scaffolding assets promised
to them in the SPA, ultimately resulting in total damages of $1,253,040.115
Specifically, the Plaintiffs argue that they were shorted PERI Items and Board
Items116 and that they were forced to rent equipment because of the shortages.117 The
Plaintiffs also argue in the alternative that the Defendants committed fraud.118
Section 3.11(b) of the SPA required the Defendants to disclose the inventory
equipment they would convey to Brace as part of the Acquisition.119 The Defendants
disclosed a detailed list,120 which I have referred to as the Scaffolding List. The
Defendants warranted to its accuracy in Section 3.11(b) of the SPA and agreed to
indemnify the Plaintiffs for any shortages.121 SPA Section 3.11(b) provides:
Section 3.11(b) of the Disclosure Schedules sets forth a true, correct
and complete list and general description of substantially all furniture,
fixtures, equipment, machinery, tools, vehicles, office equipment,
supplies, computers, telephones and other tangible personal property of
the Company or used solely in the Business and not by the Seller for
other purposes in connection with any Affiliates (the “Tangible
115
See Pls’ Opening Br. 1, 27; Defs’ Opening Br. 30–31.
116
“PERI Items” are components used to construct custom scaffolding; “Board Items” are planks
used to make a workable surface on the scaffolding.
117
Pls’ Opening Br. 27.
118
Id. at 32.
119
SPA § 3.11(b).
120
See JX 71.
121
Pretrial Stip. 7; SPA § 3.11(b).
24
Personal Property”); provided, the Company also regularly uses rented
equipment from PERI USA, PERI Canada, and other third-parties for
which the Company has no ownership claim.122
As further protection for the Plaintiffs, ten percent ($1.87 million) of the
purchase price was placed into escrow at Wilmington Trust that would be released
in two equal distributions on April 1, 2015 and February 1, 2016 if there were no
claims for indemnification.123 On March 26, 2015, the Plaintiffs made a claim
against the escrowed funds, alleging that they had not received all the inventory
called for in the Scaffolding List. They seek indemnification under the SPA for that
shortfall in this action. For the reasons that follow, I find that the Plaintiffs prevail
on their claim for a shortage of PERI Items and Board Items. However, I find that
the Plaintiffs fail on their claim to recover rental expenses and have also failed to
prove fraud.124
1. Procedural Requirements under the SPA
The Defendants point to what they allege are deficiencies in the notice of
claims for inventory shortages, and suggest that, as a result, Plaintiffs’ claims are
122
SPA § 3.11(b).
123
Pretrial Stip. 10. See Escrow Agreement 1.3(c), 1.4(a), 1.5(a).
124
The Plaintiffs argue that I should exclude the opinion stated by Defendants’ expert, John Placht,
because it is not based on scientific methodology, that the inventory claims require expert
testimony, and that their expert’s testimony is thus the sole evidence admissible. I must, according
to the Plaintiffs, find in their favor, therefore. The Defendants counter that Plaintiffs’ Inventory
Claims do not require expert testimony and are “readily understandable.” Given my decision,
infra, I do not need to address this argument further with respect to the inventory claims. Placht’s
opinion with respect to Defendants’ “offset” claims is discussed, infra.
25
unenforceable. I disagree. Section 6.10 of the SPA provides that the indemnification
procedure under Article VI of the SPA is the “sole and exclusive remedy” for all
claims, excluding fraud, for any breach of a representation or warranty. 125 Section
6.5(c) provides that in asserting a Direct Claim, the Indemnified Party shall give
“reasonably prompt written notice” and that “[s]uch notice . . . shall include copies
of all material written evidence.” Nonetheless, Section 6.5(c) also states “[t]he
failure to give such prompt written notice shall not, however, relieve the
Indemnifying Party of its indemnification obligations, except and only to the extent
that the Indemnifying Party forfeits rights or defenses by reason of such failure.”126
Even assuming that the Plaintiffs failed to give prompt written notice by failing to
provide material written evidence, the Defendants here have not forfeited any rights
or defenses by reason of that failure. Thus, I find that Plaintiffs’ indemnification
claim is not barred procedurally under Section 6.5(c) of the SPA.127
2. PERI Items
125
SPA § 6.10.
126
Id. § 6.5(c).
127
On another procedural note, the Defendants argue that if the Plaintiffs had factored in the receipt
of overages, discussed below, then their damages claim would be below the $300,000 “basket
amount” provided for in Section 6.4(a) of the SPA. Since I find below that the Plaintiffs are
entitled to their claim for $703,975, the Plaintiffs are already well above the $300,000 basket
provided for in Section 6.4(a) of the SPA. Thus, the parties’ arguments with respect to that section
are now moot.
26
A physical count of the scaffolding items, particularly the PERI items, 128 is
not reasonably possible. The testimony shows that the hundreds of thousands of
scaffolding fittings scattered across many job sites makes a physical inventory
inefficient and unreliable.129 The parties each suggest an alternative method for
tracking inventory and determining the amount of scaffolding equipment conveyed
to the Plaintiffs at Closing: Plaintiffs’ “Mary Sheet Analysis”130 and Defendants’
“FACTS”-based inventory system.
a. The Mary Sheet Analysis
The Mary Sheet Analysis, conducted by Plaintiffs’ expert Steven Kops,
consists of “comparing the disclosed amount of each PERI Item on the Scaffolding
List with the maximum amount of those items that Defendants could have
possessed” based upon Defendants’ purchase records.131 This maximum amount
was determined by first calculating the aggregate amount of items PEI has
historically purchased, using the “Mary Sheet” (a list of items purchased for PIS),
and then subtracting out items that Kops determined had been shipped to Africa and
were thus unavailable for transfer under the SPA.132 Shortages were then determined
128
I use the term “PERI Items” as shorthand for scaffolding items in question, most or all of which
are PERI brand.
129
See Trial Tr. 98:24–99:14.
130
The “Mary Sheet” represented the historical purchases of PERI inventory, as kept by “Mary,”
an employee of the Defendants. Trial Tr. 254:1–3.
131
Pls’ Opening Br. 26.
132
See Trial Tr. 257:22–260:22. The Defendants argue that the Plaintiffs determined that more
equipment was sent to Africa than was actually the case, but I am not convinced, nor, to my mind,
27
to exist where the inventory promised via the Scaffolding List exceeded the
maximum amount that the Defendants could have transferred at Closing.133 In other
words, if the Scaffolding List disclosed twenty units of Item X, but the Mary Sheet
Analysis showed that the maximum amount the Defendants could have possessed
was only fifteen units, Kops would conclude that the Plaintiffs had been shorted five
units of Item X. According to Kops, “[t]he logic is that you can’t convey or sell an
item that you don’t own or possess.”134
b. The “FACTS System”
The Defendants use software called “FACTS” to track their scaffolding
equipment.135 FACTS is a perpetual inventory system, which requires the accurate
inputting of ship tickets and return tickets to allow the software to create a running
list of inventory.136 A yearly physical count at random locations of random items
was conducted by third-party auditors as a check to the inventory of the FACTS
system.137 To create the Scaffolding List, Eric Peterson, along with Mark Talley,
is there a more reasonable method of determining the amount of equipment that was sent to Africa.
The items shipped to Africa were identifiable by specific shipping order numbers. Trial Tr. 258:1–
18. Moreover, Mark Talley, whose testimony I discuss below, testified that there was an easy
dividing line between North America equipment and Africa equipment and that “all but four loads
of the material” went to Africa. Trial Tr. 97:16–98:3.
133
Trial Tr. 260:4–22.
134
Id. at 262:23–24.
135
Id. at 97:10–11.
136
Id. at 97:10–15; 472:4–8.
137
See Id. at 472:9–475:3.
28
completed a final check of ship and receive tickets and then exported the inventory
data from FACTS to create the List.138
c. The Trial Testimony Indicates that the Mary Sheet Analysis is
Likely More Reliable than the FACTS System
I find that the Mary Sheet Analysis is the more reasonable method to establish
the amount of scaffolding conveyed at Closing. I note that the Mary Sheet Analysis
is inherently conservative; it might overstate the amount of inventory transferred,
but logically it cannot understate it; the Plaintiffs have shown the maximum amount
of scaffolding the Defendants could have had on hand, counted that as what was
transferred, and any shortage by comparison to the Scaffolding List indicates the
minimum amount of shortage in the items conveyed. The shortage could be greater,
but the Defendants have failed to show that the shortages are not at least as much as
the shortages found to exist by the Mary Sheet Analysis. The Defendants point out
that the method is subject to categorization errors; that purchase records may not be
infallible and item codes may “sometimes” be collapsed into one code for tracking
purposes, leading to inaccuracies in the inventory on hand.139 Nonetheless, I find
that, in light of the lack of a reliable physical inventory, the Mary Sheet Analysis
presents the best method available to quantify the inventory transferred, and that it
138
Id. at 485:1–16; 587:5–14.
139
Id. at 511:24–512:9.
29
is more likely than not that the shortage stated under Plaintiffs’ analysis is less than
or equal to the actual shortage.
By contrast, the Defendants advance the FACTS system, the same mix of
shipping receipts, third-party auditors, computer software, and physical counts they
used to produce the Scaffolding List itself. In rejecting the accuracy of the FACTS
system, I am persuaded by the testimony of Talley. Talley has been in the
scaffolding business since 1978 and worked for the Defendants before transferring
over to the Plaintiffs as a “key man” on the sell side of the transaction.140 Talley has
been involved in a majority of scaffolding purchases by PIS.141
Talley explained that there were many problems with the inventory in FACTS
before the sale.142 Inventories were taken in November of 2013 and July of 2014,
both of which Talley describes as “junk.”143 Talley testified to the difficulties of
getting all of the ship tickets in and out correctly and that “paper would get lost,”
causing the resulting inventory to be unreliable.144 With regards to field audits of
job sites, Talley discussed their extreme difficulty, explaining as an example that
“everyone in the room would go count [the inventory], and all come up with a
different number because we’ll miss this corner or we’ll miss this piece.”145
140
Id. at 83:5–84:21.
141
See id. at 86:23–87:20.
142
Id. at 98:4–13.
143
Id. at 98:3–13. I note that the parties entered into the SPA on August 10, 2014.
144
See id. at 98:6–99:24.
145
Id. at 98:20–99:16.
30
According to Talley, such physical counts were attempted three different times with
no success.146 Ultimately, Talley concluded that the Scaffolding List was not
accurate because after having problems with the inventory for nine months, those
problems did not “miraculously get fixed” shortly before Closing, when the
Scaffolding List was created from the inherently-inaccurate FACTS-based
inventory.147 Talley has provided testimony favorable to both sides in this matter,
and—in light of the fact that his personal monetary interests lie contrary to Plaintiffs’
interests in the matter of the inventory claims148—I find him to be a particularly
credible witness.149 Such a conclusion is further enhanced by contrasting Talley’s
testimony with that of Eric Peterson, PEI’s COO and a named Defendant in this
case,150 which testimony the Defendants primarily rely on to establish the accuracy
of the FACTS System.151
A portion of Eric Peterson’s trial testimony under cross examination
illustrates the problematic nature of Defendants’ method. When shown a balance
sheet that went into the SPA, Eric Peterson noticed a July pro forma adjustment that
146
Id.
147
See id. at 109:23–110:21.
148
Talley is entitled to cash based on both the escrow and working capital adjustment. If the
escrow is released in its entirety, he would receive $230,000. He is liable for up to $135,000 of
any indemnification owed to the Plaintiffs. Trial Tr. 85:22–86:12; Separation Agreement § 1.2
149
Id. at 86:1–86:12.
150
Along with his father, Ron Peterson, who through the Guaranty is personally liable for
indemnifying the Plaintiffs. See Pretrial Stip. 5, 7.
151
Id. at 472–478.
31
he did not recognize.152 Explaining that he would not have provided a balance sheet
with a July pro forma adjustment, Eric Peterson concluded that the balance sheet
was a due diligence estimate created by Brace. Most damaging, to my mind, Eric
Peterson then explained that “we may have used it in the disclosure for simplicity
because of all the disclosures we were putting together” and that he believed “in the
flurry of activity going on . . . [it] is very likely that we just grabbed the latest one
that they had . . . .”153 While this is only one example, this testimony does not
assuage my concerns about the reliability of Defendants’ method for tracking
inventory and creating the Scaffolding List. In short, I find that the Defendants were
unable to create a reliable inventory in reliance on the FACTS software and their
methodology, and that their computation of the inventory transferred under the SPA
is unreliable.
Having found that the Mary Sheet Analysis is the more reasonable method of
tracking the scaffolding equipment, the question arises of whether any shortages
shown by the Mary Sheet Analysis should be offset by items that, based on that
analysis, should have been on hand and transferred by the Defendants to the
Plaintiffs, but were not on the Scaffolding list. The Defendants argue that in cases
152
Id. at 582:22–584:23.
153
Id. at 582:22–586:5 (emphasis added). To quote Eric Peterson’s statement in full: “I believe in
the flurry of activity going on that—I don’t even remember sending a balance sheet or anything
in, so this is very likely that we just grabbed the latest one that they had and said let’s use the
financials that you got in your—I think this was from the due diligence process which happened
to be Brace’s.” Id. at 585:20–586:2.
32
where the amount of particular scaffolding items disclosed on the Scaffolding List
is less than the amount called for by the Mary Sheet Analysis, this would mean that
the Plaintiffs actually received more of that item than was represented in the
Scaffolding List, resulting in an overage.154 Talley testified on cross examination to
“at least once” counting more equipment on hand than called for by the Mary Sheet
Analysis, when the Plaintiffs were still attempting to do a physical inventory. 155 The
Defendants claim the total value of these “overages” amounts to $983,004, which,
they argue, in equity should be offset against the value of the shortages.156 The
Defendants have not shown that these items were actually transferred, and I decline
to offset the inventory shortages for three reasons. First, as noted above, the Mary
Sheet Analysis shows the maximum transferred—it thus gives the defendants credit
for items that may have been lost, stolen or worn out and discarded. This is the
rationale used by Plaintiffs’ expert, Kops, in explaining why items shown on the
Mary Sheet were not included on the Scaffolding List.157 At the least, such attrition
to the list of inventory purchased logically accounts for some, if not all, of any
overstatement of scaffolding available for transfer according to the Mary Sheet
Analysis. Second, the items that the Defendants were contractually bound to transfer
154
Defs’ Opening Br. 31. In other words, the Defendants argue an overage results if the
Scaffolding List disclosed a lesser number than the maximum amount the Defendants could have
had on hand according to the Mary Sheet Analysis.
155
See Trial Tr. 157:4–158:3.
156
Defs’ Opening Br. 32 (citing Trial Tr. 338:3–17).
157
Trial Tr. 333:2–334:1.
33
were those listed on their own inventory, and to the extent uncertainty exists, it is
because of the lack of precision in that inventory, for which they should bear the
loss. Finally, it is not clear from the record that overages, if any, have value to the
Plaintiffs; the scaffolding inventory consists of fittings used to construct a custom
scaffolding layout, and the record does not allow me to know whether any overages
complement the fittings that the Plaintiffs did receive so as to be of value to the
Plaintiffs. In other words, I accept Plaintiffs’ logic that the total number of
scaffolding items received is less important than the ratio of specific items, as the
items “are not necessarily interchangeable” from one scaffolding “set” to another.158
For all these reasons, the Defendants have failed to show that the shortfall
indicated by the Mary Sheet Analysis must be offset by potential overages suggested
by that analysis.
3. Indemnification Amount
a. Replacement Cost
Kops calculated the replacement cost for each shorted item by using PEI’s
historical purchases and multiplying the shorted amount for each item by the average
cost of that respective item.159 I find this to be the appropriate method to calculate
158
See Pls’ Opening Br. 10 (citing Trial Tr. 122:9–21, 125:6–24).
159
Trial Tr. 261:8–262:3.
34
indemnifiable loss due to inaccuracies in the Scaffolding List. Under this method,
the Mary Sheet Analysis resulted in a total shortage amount of $703,975.160
b. Rental Expenses
In addition to the value of the inventory shortages under the Mary Sheet
Analysis, the Plaintiffs argue that they are entitled to $527,981 they incurred in rental
costs.161 The SPA provides that the Business transferred uses rental scaffolding in
addition to scaffolding in inventory,162 and the Plaintiffs calculate that they rented
more than half a million dollars of additional scaffolding due to the shortage, to
complete jobs during the pendency of this action. The Defendants argue that these
rental costs constitute consequential damages, and point out that recovery of such
damages is specifically excluded under Section 6.4(e) of the SPA.163 “Consequential
damages” is not a defined term under the SPA, and I rely on the definition in Black’s
Law Dictionary, which defines consequential damages as “[l]osses that do not flow
directly and immediately from an injurious act but that result indirectly from the
act.”164 That is precisely what the Plaintiffs seek here—the indemnification amount
set out above (with interest running from the breach) makes them whole for the
160
Id. at 262:1–3.
161
Pls’ Opening Br. 27.
162
SPA § 3.11(b)
163
See Defs’ Opening Br. 45, SPA § 6.4(e) (“Except to the extent that an Indemnified Party pays
(or becomes obligated to pay) such damages in connection with a Third Party Claim, no
Indemnifying Party [will] be liable to any Indemnified Party for any punitive, incidental or
consequential damages.”).
164
See Defs’ Opening Br. 45–46; Damages, Black's Law Dictionary (10th ed. 2014).
35
shortfall between what the Defendants promised and the Plaintiffs received.
Plaintiffs’ choice to use extra rental components on particular jobs—rather than
purchasing items—led to consequential, not direct or expectation, damages. The
parties agreed to exclude claims for such damages from recovery by indemnification,
accordingly, I find that Plaintiffs’ claims for rental damages over and above the
replacement cost of inventory shortages are barred under SPA Section 6.4(e).
4. Board Items
The term “Board Items” simply refers to planks used with the scaffolding
equipment. The Plaintiffs briefly allege that they received less Board Items than the
number disclosed on the Scaffolding List, amounting to indemnification worth
$21,084.165 The Defendants do not dispute this amount, but state that a scrivener’s
error resulted in the omission from the SPA of the parties’ agreement that the
Defendants were going to keep some of the Board Items.166 The Defendants do not
seek reformation of the SPA on this ground, however. Accordingly, I find that the
Plaintiffs may recover $21,084 in damages resulting from the shortage of Board
Items, in addition to the PERI scaffolding shortage quantified above.
5. Fraud
165
Pls’ Opening Br. 27 (citing Trial Tr. 267:22–24).
166
Defs’ Ans. Br. 26.
36
The Plaintiffs argue that Defendants’ misrepresentation of the scaffolding
inventory transferred constitutes fraud.167 This argument was made in the
alternative, and is likely moot given my decision above. In any event, the Plaintiffs
have failed to meet their burden of proving scienter, which is necessary to establish
common-law fraud.168 In other words, the Plaintiffs have not shown that the
Defendants acted with knowledge or belief that the representation was false, or that
it was made with reckless indifference to the truth, in order to deceive the Plaintiffs.
The Plaintiffs allege that Eric Peterson created the Scaffolding List using FACTS
data that he should have known was inaccurate, and thus acted with the requisite
falsity or reckless indifference to the truth, in an attempt to mislead the Plaintiffs.169
However, the contract among the parties recognized that the Disclosure Schedules,
including the Scaffolding List, might contain inaccuracies, and provided a method
to redress them together with an escrow of funds to provide a remedy. Given this
factual and contractual scenario, the Plaintiffs have failed to demonstrate scienter.
167
Pls’ Opening Br. 32.
168
A finding of fraud requires the Plaintiffs prove “(1) a false representation, usually one of fact,
made by the defendant; (2) the defendant’s knowledge or belief that the representation was false,
or was made with reckless indifference to the truth; (3) an intent to induce the plaintiff to act or to
refrain from acting; (4) the plaintiff’s action or inaction taken in justifiable reliance upon the
representation; and (5) damage to the plaintiff as a result of such reliance.” Gryzbowski v. Tracy,
2013 WL 4053515, at *4 (Del. Ch. Aug. 9, 2013).
169
Citing Talley’s testimony, the Plaintiffs argue that Eric Peterson knew FACTS was inaccurate
but still used it to create the Scaffolding List, which he created as an “afterthought.” The
Defendants counter that Eric Peterson exported the FACTS data to an Excel Sheet as an
“afterthought,” but spent ample time actually verifying the data in FACTS. Pls’ Opening Br. 12;
Defs’ Ans. Br. 33 n.19.
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Finally, with respect to Plaintiffs’ suggestion that an equitable fraud analysis should
apply in this case, the Plaintiffs are correct that equitable fraud does not require proof
of scienter.170 However, equitable fraud does require a special relationship, typically
a fiduciary relationship, between the plaintiff and the defendant.171 No such
fiduciary relationship exists between these contracting parties. Thus, I find that the
Plaintiffs have failed to prove both fraud and equitable fraud.
C. Attorneys’ Fees
The parties seek attorneys’ fees and costs incurred in pursuing their claims,
under various theories. In particular, the Plaintiffs argue that Defendants’
withholding of sums collected on behalf of the Plaintiffs as part of their servicing
obligations under the TSA amounts to wrongful self-help, and that Plaintiffs’
attorneys’ fees in connection with this Customer Payments Claim—which is itself
subsumed within the truing up of accounts among the parties that will be addressed
by a Special Master, as discussed below—must be shifted onto the Defendants under
the bad-faith exception to the American rule on legal fees. Consideration of fees
shall await resolution of the remaining issues in this case.
D. Remaining Issues
170
Grzybowski, 2013 WL 4053515, at *6 n.49 (citations omitted).
171
See id. at *6 n.49; In re Wayport, Inc. Litig., 76 A.3d 296, 327 (Del. Ch. 2013).
38
Other issues remain in this case, these include, inter alia, Plaintiffs’ claim that
Defendants usurped Customer Payments owed to them under the TSA, Defendants’
proposed offsets to those claims arising from allegations over post-Close
transactions, and disputes over working capital adjustments.
Section 2.4(c)(3) of the SPA requires any disputes surrounding Post-Closing
Adjustments to be submitted to Deloitte LLP.172 Unfortunately, according to the
parties, Deloitte has a conflict and cannot serve in this capacity. In such a case,
Section 2.4(c)(3) provides that both parties should select an “impartial nationally
recognized firm of independent certified public accountants.”173 The parties have
been unable to agree on an independent accountant.
It appears to me that these remaining issues—which essentially amount to an
accounting among the parties—are largely computational in nature. Thus, for
purposes of efficiency, I am appointing Stephen Brauerman, Esquire, as Special
Master to serve the parties in their remaining disputes in this matter. Mr. Brauerman
shall select the accountant called for under Section 2.4(c)(3), and may rely on that
accountant to assist in the resolution of other remaining issues, as well. The parties
should confer and agree to a script to inform the Special Master as to his duties. To
the extent any party believes that any matter requires judicial attention outside of the
172
Id. § 2.4(c)(3).
173
Id.
39
special master process, the party should so notify me. Any such issues will be
resolved promptly before submission of the matter to the Master. In particular, the
Plaintiffs argue that certain of Defendants’ claims in offset to Plaintiffs’ retained-
payments claim must be excluded, because those claims require expert testimony,
which the Defendants failed to provide. It is not my intention to submit this issue to
the Master, and the parties should clarify what legal issues remain concerning the
offsets before submission of the matter to Mr. Brauerman.
III. CONCLUSION
For the foregoing reasons, I find that the Defendants are not in breach of the
Restrictive Covenants in the SPA. I lift the preliminary injunction I ordered in my
Letter Opinion on August 28, 2015.
Additionally, I find that the Plaintiffs are entitled to $703,975 to indemnify
them for the shortage of PERI Items and $21,084 for the shortage of Board Items,
for a total indemnification award of $725,059, together with interest. I find that the
Plaintiffs are not entitled to recover rental costs. Finally, I find that the Plaintiffs
have failed to show that the Defendants committed fraud. The parties should supply
an appropriate form of order.
40