Deluxe Entertainment Services Inc. v. DLX Acquisition Corporation and Deluxe Media Inc.

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
March 29, 2021
Peter B. Ladig, Esquire Srinivas M. Raju, Esquire
Brett M. McCartney, Esquire Angela Lam, Esquire
Bayard, P.A. Richards, Layton & Finger, P.A.
600 N. King Street, Suite 400 920 N. King Street
Wilmington, DE 19801 Wilmington, DE 19801
RE: Deluxe Entertainment Services Inc. v. DLX Acquisition Corporation
and Deluxe Media Inc.,
Civil Action No. 2020-0618-MTZ
Dear Counsel:
This letter opinion addresses the issues raised by Defendants’ motion for
judgment on the pleadings (the “Motion”).1 For the following reasons, the Motion
is granted.
I. BACKGROUND
This action arises from a stock transfer whereby plaintiff Deluxe
Entertainment Services, Inc. (“Plaintiff” or “Seller”) sold all the outstanding shares
1
Docket Item (“D.I.”) 36. On this motion for judgment on the pleadings, I draw all facts
from the pleadings and documents integral to them. Citations in the form “Compl. ¶ ––”
refer to the plaintiff’s complaint, available at D.I. 1. Citations in the form “Answer ¶ ––”
refer to the defendants’ answer to the complaint, available at D.I. 30. Citations in the form
“Hr’g Tr.” refer to the transcript of the December 11 oral argument on the Motion, available
at D.I. 47.
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of its wholly owned subsidiary, defendant Deluxe Media Inc. (together, with its
subsidiaries, “Target”), to defendant DLX Acquisition Corporation (“Buyer,” and
together with Target, “Defendants”), an affiliate of the private equity firm Platinum
Equity (“Platinum”). I refer to the stock transfer as the “Transaction.” Before the
Transaction, Seller was a leading “video creation to distribution” company, and
Target was Seller’s distribution subsidiary.2 All of Target’s assets, except for those
excluded by the parties’ purchase agreement (the “Purchase Agreement”),3 were
transferred in the Transaction.
The Transaction closed on June 30, 2020.4 At closing, several million dollars
in cash remained in Target’s bank accounts (the “Disputed Cash”).5 Seller alleges it
failed to sweep those funds from Target before closing “for various practical and
2
See Compl. ¶¶ 1, 4, 6.
3
Answer Ex. 1 [hereinafter “Purchase Agr.”]; see also Answer Ex. 2. The Purchase
Agreement’s schedules are attached as Exhibit 2; for clarity, I cite both using “Purchase
Agr.”
4
See Compl. ¶ 1.
5
See id. The actual amount of cash in question is unclear. Seller’s complaint suggests that
the Disputed Cash was “over $9.1 million,” which Defendants deny. Compare id., with
Answer ¶ 1. During briefing on the motion to expedite, Seller filed a declaration stating
that the correct amount was $9.8 million. See D.I. 23. Seller’s briefs on the Motion appear
to reference the $9.8 million figure. See, e.g., D.I. 41 at 1 (“almost $10 million”). The
amount of the Disputed Cash is irrelevant to my analysis.
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technical reasons,”6 and Buyer does not dispute Seller had the right to sweep those
funds before closing.7
Seller’s controller first discovered the issue with the Disputed Cash on July
1.8 Later that day, on a phone call with Platinum and its liquidity expert, Seller asked
Buyer to return the Disputed Cash, citing “wrong pocket” provisions in the Purchase
Agreement and the “cash-free nature of the deal.”9 Buyer refused, insisting that the
Purchase Agreement did not compel it to return the Disputed Cash.10 Over the next
two weeks, Seller, its liquidity expert, and its financial advisor for the Transaction
contacted representatives from Platinum and former Seller employees (now
Buyer/Target employees), but could not secure the Disputed Cash’s return.11
6
Compl. ¶ 26.
7
Buyer’s counsel conceded at oral argument that Seller would have been within its rights
to sweep the Disputed Cash, or at least some of it, from Target’s bank account prior to
closing. See Hr’g Tr. 9:9–10:2.
8
See Compl. ¶ 26.
9
See id. Around the same time, the parties had an ancillary dispute over Buyer’s failure to
properly fund its payroll and rent after closing. See id. ¶¶ 27–29. The parties have not
otherwise referenced this dispute, and it does not appear to bear on Seller’s claims in this
action.
10
See id. ¶ 1; Answer ¶ 1.
11
See Comp. ¶¶ 29–31.
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Conversations between Seller’s general counsel and a Platinum representative on
July 13 and July 22 were similarly fruitless.12
On July 24, Seller filed its verified complaint (the “Complaint”) seeking, in
effect, to claim or claw back the Disputed Cash.13 Seller presents three alternative
approaches. Count I alleges that Buyer’s failure to return the Disputed Cash amounts
to a breach of the Purchase Agreement.14 Count II claims that that this failure is a
breach of the implied covenant of good faith and fair dealing. 15 Count III asks the
Court to reform the Purchase Agreement to address this issue.16
The Complaint was accompanied by a motion to expedite,17 which the Court
denied on August 10.18 On August 18, Defendants filed their answer to the
Complaint (the “Answer”), denying most of Seller’s substantive allegations and
attaching a copy of the Purchase Agreement.19 On October 2, Defendants filed the
12
See id. ¶¶ 32–33.
13
See generally id.
14
See id. ¶¶ 37–44.
15
See id. ¶¶ 45–49.
16
See id. ¶¶ 50–53.
17
See D.I. 2.
18
See D.I. 24.
19
See generally Answer.
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pending Motion, seeking judgment on the pleadings in their favor.20 The parties
fully briefed the Motion, and the Court took it under advisement after oral argument
on December 11.21
II. ANALYSIS
The standard for a motion for judgment on the pleadings is familiar.
[A] trial court is required to view the facts pleaded and the inferences
to be drawn from such facts in a light most favorable to the non-moving
party. The court must take the well-pleaded facts alleged in the
complaint as admitted. A motion for judgment on the pleadings may
be granted only when no material issue of fact exists and the movant is
entitled to judgment as a matter of law.22
The proper interpretation of a contract is a question of law, and so judgment on the
pleadings is a proper framework to enforce unambiguous contracts.23
20
D.I. 36.
21
See D.I. 46; see generally Hr’g Tr.
22
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,
1205 (Del. 1993) (citations omitted).
23
OSI Sys., Inc. v. Instrumentarium Corp., 892 A.2d 1086, 1090 (Del. Ch. 2006); accord
Lillis v. AT & T Corp., 904 A.2d 325, 329–30 (Del. Ch. 2006) (“[J]udgment on the
pleadings . . . is a proper framework for enforcing unambiguous contracts because there is
no need to resolve material disputes of fact. . . . If the contract’s meaning is unambiguous,
[and that meaning supports the movant’s claim or defense], the court must grant judgment
on the pleadings in favor of the moving party.” (internal quotation marks omitted) (quoting
NBC Universal v. Paxson Commc’ns Corp., 2005 WL 1038997, at *5 (Del. Ch.
Apr. 29, 2005))).
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The Purchase Agreement, while “heavily negotiated,”24 is unremarkable in
that it presumes all Company Assets are included in the Transaction unless
specifically excluded. Seller makes no argument that the Purchase Agreement
specifically excluded the Disputed Cash or made it subject to being clawed back.
Rather, Seller argues the parties never intended to transfer the Disputed Cash to
Buyer as evidenced by (1) the Purchase Agreement’s definition of net working
capital for purposes of calculating the purchase price, and (2) extrinsic evidence
about the parties’ negotiations leading up to the Purchase Agreement, which Seller
contends reflects the parties’ otherwise undocumented agreement that the
Transaction would be “cash-free, debt-free.” These arguments fail to demonstrate a
breach of contract or the implied covenant, and fail to support a claim for
reformation.
A. Buyer Is Entitled To Judgment On Seller’s Breach Of
Contract Claim.
Count I of the Complaint alleges that Buyer breached the Purchase Agreement
by either taking the Disputed Cash in the first instance, or by failing to remit it after
the Transaction closed. At the pleading stage, a plaintiff alleging a breach of contract
must plead (1) the existence of a contractual obligation, (2) a breach of that
24
See Compl. ¶ 16.
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obligation, and (3) damages as a result.25 In interpreting contracts, Delaware courts
aim to “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.”26 “Delaware adheres to the objective theory of contracts, [meaning that]
a contract’s construction should be that which would be understood by an objective,
reasonable third party.”27 In doing so, the Court will “give effect to the plain-
meaning of the contract’s terms and provisions,”28 “will read a contract as a whole
and . . . will give each provision and term effect, so as not to render any part of the
contract mere surplusage.”29 “Contract terms themselves will be controlling when
25
See VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003); see also
Carlson v. Hallinan, 925 A.2d 506, 524 (Del. Ch. 2006) (“Three elements are necessary to
prove the existence of an enforceable contract: 1) the intent of the parties to be bound by
it, 2) sufficiently definite terms and 3) consideration.”).
26
Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (internal quotation marks omitted)
(quoting GMG Cap. Inv., LLC. v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779
(Del. 2012)); see Sunline Com. Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836,
846 (Del. 2019) (“To determine what contractual parties intended, Delaware courts start
with the text.”).
27
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (internal quotation
marks omitted) (quoting NBC Universal, 2005 WL 1038997, at *5).
28
Id. at 1159–60; see also GRT, Inc. v. Marathon GTF Tech., Ltd., 2012 WL 2356489, at
*4 (Del. Ch. June 21, 2012) (“When interpreting a contract, a court must give effect to all
of the terms of the instrument and read it in a way that, if possible, reconciles all of its
provisions.”).
29
Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396–97 (Del. 2010).
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they establish the parties’ common meaning so that a reasonable person in the
position of either party would have no expectations inconsistent with the contract
language.”30
“Unless there is ambiguity, Delaware courts interpret contract terms
according to their plain, ordinary meaning,” without resorting to extrinsic
evidence.31 Extrinsic evidence cannot itself create ambiguity: “[e]xtrinsic, parol
evidence cannot be used to manufacture an ambiguity in a contract that facially has
only one reasonable meaning.”32
“Under basic principles of Delaware contract law, and consistent with
Delaware’s pro-contractarian policy, a party may not come to court to enforce a
contractual right that it did not obtain for itself at the negotiating table.”33 Delaware
law presumes parties are bound by the language of the agreement they negotiated,
30
Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997).
31
Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012).
32
United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007); see also
Eagle Indus., Inc., 702 A.2d at 1232 (“If a contract is unambiguous, extrinsic evidence may
not be used to interpret the intent of the parties, to vary the terms of the contract or to create
an ambiguity.”).
33
GRT, Inc., 2012 WL 2356489, at *7.
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especially where, as here, the parties are sophisticated entities that have engaged in
arms-length negotiations.34
1. The Purchase Agreement Transfers All Target
Assets Except Certain Excluded Assets, Which
Do Not Encompass The Disputed Cash.
Under the Purchase Agreement’s terms, Seller agreed “to sell and assign to
Buyer, and for Buyer to purchase and pay for” all of Target’s shares (the “Target
Shares”) in exchange for a cash payment.35 In other words, Seller sold Target to
Buyer by transferring all Target Shares to Buyer.36 “[I]t is a general principle of
corporate law that all assets and liabilities are transferred in the sale of a company
effected by a sale of stock.”37 When Seller agreed to sell Buyer all the Target Shares,
34
See W. Willow-Bay Ct., LLC v. Robino-Bay Ct. Plaza, LLC, 2007 WL 3317551, at *9
(Del. Ch. Nov. 2, 2007) (“The presumption that the parties are bound by the language of
the agreement they negotiated applies with even greater force when the parties are
sophisticated entities that have engaged in arms-length negotiations.”), aff’d, 985 A.2d 391(Del. 2009); see also id. at *9 n.82 (noting that the parties were “sophisticated” because
they had “extensive experience” in the industry and “ample access to counsel”).
35
See Purchase Agr. at 5.
36
See id. § 2.1.
37
In re KB Toys Inc., 340 B.R. 726, 728 (D. Del. 2006); see US Ecology, Inc. v. Allstate
Power Vac, Inc., 2018 WL 3025418, at *6 (Del. Ch. June 18, 2018) (citing KB Toys Inc.,
340 B.R. at 728), aff’d, 202 A.3d 510 (Del. 2019); Viking Pump, Inc. v. Century Indem.
Co., 2 A.3d 76, 99 (Del. Ch. 2009) (“The familiar default rule in stock sales is that a change
in the ownership of a company does not affect the rights and liabilities of the company.”
(citing KB Toys Inc., 340 B.R. at 728)).
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it agreed to sell all the Target’s assets.38 Thus, by default, Target’s pre-closing assets
and liabilities transferred with its shares.39
In keeping with this default principle, the parties did not enumerate the assets
Buyer was purchasing, but rather negotiated provisions that carved certain assets and
liabilities out of the Transaction, and provided means for returning those assets if
they were inadvertently transferred. Section 1.2 of the Purchase Agreement defines
38
The Purchase Agreement defined the Target’s “Company Assets”:
“Company Assets” means all assets, properties or rights of any kind or
nature of any member of the Company Group or solely or primarily used by
the Company Group in the conduct of its business (i) including the Deluxe
name and brand and all other company names and brands used by the
Company Group, and (ii) excluding, for the avoidance of doubt, assets,
properties or rights transferred out of the Company Group pursuant to the
Restructuring.
Purchase Agr. § 1.2 (defining “Company Assets”). The Purchase Agreement refers to the
Target as the “Company,” and its subsidiaries as the “Company Group.” See id. at 5; id. §
1.2 (defining “Company Group”). Thus, by its plain meaning, “all assets . . . of any kind
or nature of any member of the Company Group” includes the Disputed Cash, owned by
the Target. See id. § 1.2 (defining “Company Assets”).
39
See KB Toys Inc., 340 B.R. at 728; US Ecology, Inc., 2018 WL 3025418, at *6; Viking
Pump, Inc., 2 A.3d at 99.
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“Excluded Assets” as those listed in Schedule 1.2.40 Seller does not advance any
argument that the Disputed Cash is an Excluded Asset.41
The Purchase Agreement includes two “wrong pocket” provisions to correct
certain erroneous transfers after closing (the “Wrong Pocket Provision(s)”). While
Seller makes passing reference to the Wrong Pocket Provisions,42 it does not offer
any explanation as to why they would compel Buyer to return the Disputed Cash.
Neither Wrong Pocket Provision applies to the Disputed Cash.
40
Purchase Agr. § 1.2 (defining “Excluded Assets”). That Schedule enumerates:
1. All assets, operations and Intellectual Property solely or primarily
used to provide the Excluded Businesses.
2. Any amounts payable by the landlord of the Wardour Street Lease to
Deluxe 142 Limited (“Deluxe 142”), as described further in Item 1 on
Schedule 4.9(c).
3. All amounts payable by NASG to the Company or Parent in
connection with the sale of the business unit known as “Deluxe
Archive Solutions”, as described further in Item 6 on Schedule 4.7(b).
See id. Sched. 1.2.
41
See D.I. 41 at 22 (acknowledging “the Target’s pre-closing cash is not included in
Schedule 1.2 of the Purchase Agreement, which identifies the Excluded Assets in the
transaction (the ‘Excluded Asset Schedule’)”). Indeed, there appears to be no connection
between the Disputed Cash and any of the categories of Excluded Assets.
42
See id. at 13 (“Plaintiff’s controller promptly requested this cash from Platinum (as it
was entitled to do under the Purchase Agreement’s ‘wrong pocket’ provision) on and after
July 1, 2020, when Plaintiff’s controller first discovered that the Buyer and Target were
treating the cash that was in the Target at closing as if it belonged to Buyer.”). This
statement also appears in the Complaint. See Compl. ¶ 26; see also id. ¶ 1.
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One Wrong Pocket Provision applies to payments Target received from any
customer or other counterparty “to the extent that such payment constitutes an
Excluded Asset.”43 As explained, Seller does not allege and cannot argue that the
Disputed Cash is an Excluded Asset.
The other Wrong Pocket Provision addresses assets “solely or primarily
related to the Designated Services, the Excluded Business or any obligation, liability
or commitment not forming part of the Company Liabilities.”44 If one of these assets
has been “transferred to a member of the Company Group [Target] in error,” Buyer
must remit it to the Seller.45 Seller does not allege or argue that the Disputed Cash
related to any of the Designated Services,46 the Excluded Business,47 or otherwise
43
See Purchase Agr. § 6.14(c).
44
See id. § 6.14(b).
45
See id.
46
See id. § 1.2 (defining “Designated Services” to include certain “services of Parent and
its Subsidiaries (excluding the Company Group [Target])”). There is no allegation that
Disputed Cash belonged to the Parent before closing and, in fact, allegedly was in the
Target’s accounts prior to closing. See Compl. ¶ 1 (“When the [Transaction] closed . . .
certain of the Target’s subsidiaries had cash in them that had not been swept from certain
accounts before closing.”).
47
See Purchase Agr. § 1.2 (defining “Excluded Business” to include, inter alia, business
or operations within certain clauses in the definition of “Designated Services,” or those
related to the provision of certain creative services).
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was outside of the Company Liabilities,48 as those terms are defined. The Complaint
does not specify what the Disputed Cash relates to, and fails to connect it in any way
to a Wrong Pocket Provision.49
Thus, the Purchase Agreement presumes all Company Assets are included in
the Transaction unless specifically excluded. Seller makes no argument that the
Disputed Cash was in any way excluded or subject to being clawed back. Seller
does not contend that any of these provisions of the Purchase Agreement were
breached.
2. The Purchase Agreement’s Definition Of Net
Working Capital, As Negotiated, Pertains To
Calculating The Purchase Price, Not Identifying
Assets As Transferred Or Excluded.
Against this unambiguous and essentially undisputed backdrop, Seller argues
the Purchase Agreement does not transfer Target’s cash to Buyer based on the
Purchase Agreement’s calculation of the purchase price, which directs a calculation
48
See id. (defining “Company Liabilities” to include “all Liabilities of any member of the
Company Group [Target],” with certain exceptions).
49
See Compl. ¶¶ 1, 26.
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of net working capital that excludes cash. The Purchase Agreement set the purchase
price according to the definition of “Closing Date Purchase Price.”50
“Closing Date Purchase Price” means (a) one hundred ninety-five
million dollars ($195,000,000); plus (b) the difference of (which
amount may be a positive or negative number) (i) estimated Net
Working Capital as set forth in the Purchase Price Certificate minus (ii)
Target Net Working Capital; minus (c) the Closing Date Indebtedness;
minus (d) the Adjustment Escrow Amount; minus (e) the Indemnity
Escrow Amount; minus (f) an amount equal to all unpaid Transaction
Bonuses; minus (g); the Indian Business Transfer Holdback Amount;
minus (h) accrued but unpaid income Taxes which amount is deemed
to be $500,000.51
In turn, the definition of “Net Working Capital” reflects the parties’ agreement that
cash would be excluded from that calculation:
50
See Purchase Agr. § 2.1. Seller does not specify the actual final purchase price but does
not allege that Buyer did not satisfy its obligation to pay.
51
See id. § 1.2 (defining “Closing Date Purchase Price”).
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“Net Working Capital” means, as of 12:01 a.m. New York City time
on the Closing Date, (a) the sum of the current assets of the Company
Group set forth on the line items and subject to the adjustments set forth
on Schedule 2.4; minus (b) the sum of the current liabilities of the
Company Group set forth on the line items and subject to the
adjustments set forth on Schedule 2.4 (which schedule shall not include
any Transaction Bonuses), in each case, calculated in accordance with
the Accounting Principles. An illustrative example of the calculation
of Net Working Capital is set forth on Schedule 2.4. For purposes of
the calculation of “New Working Capital”, current liabilities shall
include all deferred rent (including the portion of any Security Deposit
applied toward the payment of any rent or any other amount due under
any applicable Real Property Lease which has not been replenished as
of the Closing, including those set forth on Schedule 4.9(b)(ii)),
deferred vendor payments, any other deferred payments, and related
penalties, and all accrued and unpaid non-income taxes as of the
Closing, including any accrued and unpaid non-income Taxes arising
in connection with the Restructuring transactions.52
The “illustrative example of Net Working Capital . . . set forth on Schedule 2.4”
excludes cash as a “definitional adjustment.”53
In the days before closing, as required by the Purchase Agreement,54 Seller
delivered its “Purchase Price Certificate” with a Net Working Capital worksheet
that, as agreed, excluded cash.55
52
See id. (defining “Net Working Capital”).
53
See id. Sched. 2.4.
54
See id. § 1.2 (defining “Purchase Price Certificate”); see also id. § 2.3(a)(vi).
55
See Compl. ¶ 24.
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Seller argues that the Purchase Agreement’s exclusion of cash from Net
Working Capital, and thus from the Closing Date Purchase Price, indicates the
parties’ clear intent that the Transaction would be “cash-free, debt-free.”56 Seller
asks too much of these provisions: they simply exclude cash from the calculation of
the final purchase price. The definition of Net Working Capital excludes cash from
the calculation of Net Working Capital as a “definitional adjustment” for purposes
of calculating the Closing Date Purchase Price.57 The purchase price adjustments
are just that: adjustments to how much Buyer paid, not to what assets the Buyer
purchased. Nothing in these purchase price provisions indicate the parties’ intention
to exclude cash, or any of the other adjustments to Net Working Capital, from the
assets transferred by the Transaction.58
56
See id. ¶ 39 (“Under the plain language of the Purchase Agreement, cash was excluded
from the calculation of Net Working Capital which reflects the parties’ meeting of the
minds that cash was not an asset that was being transferred to Buyer under the Purchase
Agreement.”).
57
See Purchase Agr. § 1.2 (defining “Net Working Capital” and “Closing Date Purchase
Price”); id. Sched. 2.4.
58
Other assets and liabilities excluded from the calculation of Net Working Capital include
“Short Term Debt,” “Accrued Interest,” “Earn Out Payable,” “Accrued Taxes,”
“Intercompany & Related Parties,” and “Deferred Rent.” See id. None of these assets or
liabilities are listed in the “Excluded Assets, Excluded Liabilities” schedule in the Purchase
Agreement. Compare id., with id. Sched. 1.2.
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Had the parties intended to do so, they could have easily drafted a provision
stating that assets excluded from the calculation of Net Working Capital are not
transferred. Indeed, the Excluded Assets provision makes clear the parties knew
how to exclude assets from the Transaction. In the face of the Purchase Agreement’s
plain terms, “an objective, reasonable third party” would not understand the example
Net Working Capital calculation in Schedule 2.4 to exclude cash from the
Transaction.59 Torturing this provision to alter the scope of the Transaction would
rewrite the parties’ “heavily negotiated”60 bargain and secure for Seller “a
contractual right that it did not obtain for itself at the negotiating table.”61
Seller has contended that “at worst,” the Purchase Agreement is ambiguous in
its treatment of cash, so the Court may reach its proffered extrinsic evidence and
conclude the parties intended the Transaction to exclude cash.62 But the Purchase
Agreement is not ambiguous on this point, so I do not reach Seller’s arguments about
the parties’ negotiation history. Nor can this negotiation history itself create
ambiguity, as “[e]xtrinsic, parol evidence cannot be used to manufacture an
59
See Osborn, 991 A.2d at 1159 (quoting NBC Universal, 2005 WL 1038997, at *5).
60
See Compl. ¶ 16.
61
See GRT, Inc., 2012 WL 2356489, at *7.
62
See Compl. ¶ 40.
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ambiguity in a contract that facially has only one reasonable meaning.”63 Extrinsic
evidence about the parties’ negotiations—over the definition of Net Working Capital
or otherwise—cannot alter the conclusion that the Purchase Agreement transferred
all of Target’s assets to Buyer.64
The Motion is granted with respect to Count I.
B. Buyer Is Entitled To Judgment On Seller’s Claim For Breach
Of The Implied Covenant Of Good Faith And Fair Dealing.
In Count II, Seller argues that the implied covenant of good faith and fair
dealing requires Buyer to return the Disputed Cash. Having failed to identify a gap
in which the implied covenant could operate, Seller’s claim fails.
63
United Rentals, Inc., 937 A.2d at 830; see also Eagle Indus., 702 A.2d at 1232.
64
Count I alleges a breach of the Purchase Agreement, not the breach of any other
agreement between the parties. See Compl. ¶¶ 37–44. To the extent Seller argues that
Buyer breached a separate agreement that the Transaction would be “cash-free, debt-free,”
this argument also fails. By its plain terms, the Purchase Agreement supersedes the parties’
prior agreements and understandings:
This Agreement together with the Services Agreement, the Escrow
Agreement, the Confidentiality Agreement and any annexes, exhibits and
schedules to any of the foregoing constitute the entire agreement by and
among the parties and their respective Affiliates relating to the Transactions
and supersede any and all prior agreements, understandings, negotiations and
communications, whether oral or written, that may have been made or
entered into by or among any of the parties or any of their respective
Affiliates relating to the Transactions.
Purchase Agr. § 11.5. Seller’s reformation arguments are addressed infra.
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“The implied covenant of good faith and fair dealing inheres in every contract
and requires a party in a contractual relationship to refrain from arbitrary or
unreasonable conduct which has the effect of preventing the other party to the
contract from receiving the fruits of the bargain.”65 “[I]mposing an obligation on a
contracting party through the covenant of good faith and fair dealing is a cautious
enterprise and instances should be rare,”66 especially “when the contract easily could
have been drafted to expressly provide for it.”67 “It must be clear from what was
expressly agreed upon that the parties who negotiated the express terms of the
contract would have agreed to proscribe the act later complained of had they thought
to negotiate with respect to that matter.”68 The implied covenant “cannot be used to
circumvent the parties’ bargain, or to create a free-floating duty unattached to the
underlying legal documents.”69
65
Kuroda v. SPJS Hldgs., LLC, 971 A.2d 872, 888 (internal quotation marks omitted).
66
Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *6 (Del. Ch.
Aug. 25, 2006).
67
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146 (Del. Ch. 2009) (quoting
Allied Cap. Corp. v. GC–Sun Hldgs., L.P., 910 A.2d 1020, 1035 (Del. Ch. 2006)).
68
Lonergan v. EPE Hldgs., LLC, 5 A.3d 1008, 1018 (Del. Ch. 2010) (alterations and
internal quotation marks omitted) (quoting Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del.
Ch. 1986)).
69
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005) (alterations and
internal quotation marks omitted) (quoting Glenfed Fin. Corp., Com. Fin. Div. v. Penick
Corp., 647 A.2d 852, 858 (N.J. Super. Ct. App. Div. 1994)).
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“To state a claim for breach of the implied covenant, the [p]laintiff[] must
allege a specific implied contractual obligation, a breach of that obligation by the
defendant, and resulting damage to the plaintiff.”70 An essential predicate for the
application of the implied covenant is the existence of a “gap” in the relevant
agreement.71 There is no gap in which the implied covenant can operate “where the
subject at issue is expressly covered by the contract, or where the contract is
intentionally silent as to that subject.”72
Such is the case here. The parties contemplated the possibility that an asset
could be inadvertently transferred at closing, and drafted the Wrong Pocket
Provisions to address that possibility. An unintended asset transfer is not an
70
Wiggs v. Summit Midstream P’rs, LLC, 2013 WL 1286180, at *9 (Del. Ch.
Mar. 28, 2013) (internal quotation marks omitted) (quoting Fitzgerald v. Cantor, 1998 WL
842316, at *1 (Del. Ch. Nov. 10, 1998)).
71
See Fortis Advisors LLC v. Dialog Semiconductor PLC, 2015 WL 401371, at *4 (Del.
Ch. Jan. 30, 2015); see also Gerber v. EPE Hldgs., LLC, 2013 WL 209658, at *10 (Del.
Ch. Jan. 18, 2013) (“The implied covenant provides a limited gap-filling tool that allows a
court to impose contractual terms to which the parties would have agreed had they
anticipated a situation they failed to [address].”); Dunlap, 878 A.2d at 441 (noting that the
implied covenant is “employed to analyze unanticipated developments or to fill gaps in [a]
contract’s provisions”).
72
See Dave Greytak Enters., Inc. v. Mazda Motors of Am., Inc., 622 A.2d 14, 23 (Del. Ch.
1992), aff’d, 609 A.2d 668 (Del. 1992).
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“unanticipated development,”73 but rather is “expressly covered by the contract.”74
As in US Ecology, Inc. v. Allstate Power Vac, Inc., “the parties to the Purchase
Agreement anticipated that there were circumstances under which [Buyer] would be
obliged to [return certain wrongfully transferred assets],”75 and “included an explicit
provision obligating”76 Buyer to do so. “They chose not to [include such a
provision], however, with respect to the [Disputed Cash].”77 To use the implied
covenant to add the Disputed Cash to the list of Excluded Assets would be “to create
a free-floating duty unattached to the underlying legal documents.”78
The Motion is granted with respect to Count II.
C. Buyer Is Entitled To Judgment On Seller’s Reformation
Claim.
In Count III, Seller contends that if the Purchase Agreement’s plain language
does not evidence the parties’ agreement that the Disputed Cash was to be excluded
73
See Dunlap, 878 A.2d at 441.
74
See Mazda, 622 A.2d at 23.
75
See US Ecology, Inc., 2018 WL 3025418, at *7.
76
See id. at *6.
77
See id. at *7.
78
See Dunlap, 878 A.2d at 441 (alterations and internal quotation marks omitted) (quoting
Glenfed Fin. Corp., 647 A.2d at 858).
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from the Transaction, then the absence of such language is the result of a scrivener’s
error. Seller urges the Court to reform the Purchase Agreement.
“Generally, reformation is appropriate when an agreement has been made . . .
but in reducing such agreement or transaction to writing . . . the written instrument
fails to express the real agreement or transaction.”79 As Chancellor Bouchard has
explained:
Reformation is not an equitable license for the Court to write a new
contract at the invitation of a party who is unsatisfied with his or her
side of the bargain; rather, it permits the Court to reform a written
contract that was intended to memorialize, but fails to comport with,
the parties’ prior agreement.80
“[A] party seeking reformation by definition admits that had he read the document
more carefully, he would have noticed and corrected the mistake.”81
There are two principal bases for a claim for reformation: mutual mistake and
unilateral mistake.82 “[S]uch mistake must be as to a fact which enters into, and
79
Waggoner v. Laster, 581 A.2d 1127, 1135 (Del. 1990) (alterations omitted) (quoting
Douglas v. Thrasher, 489 A.2d 422, 426 (Del. 1985)).
80
In re TIBCO Software Inc. S’holders Litig., 2015 WL 6155894, at *13 (Del. Ch.
Oct. 20, 2015).
81
Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 68
A.3d 665, 681 (Del. 2013).
82
See Great-W. Inv’rs LP v. Thomas H. Lee Pr’s, L.P., 2011 WL 284992, at *11 (Del. Ch.
Jan. 14, 2011).
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forms the very basis of, the contract; it must be of the essence of the agreement, the
sine qua non or, as it is sometimes expressed, the efficient cause of the agreement.”83
Critically here, the relevant mistake must be one of expression, that is, “one that
relates to the contents or effect of the writing that is intended to express [the parties’]
agreement.”84 Reformation based on mistake “must be applied narrowly so as to
ensure to contracting parties that in only limited circumstances will the court look
beyond the four corners of a negotiated contract.”85
At the pleading stage, a claim for reformation based on a mutual mistake will
survive a motion to dismiss under Court of Chancery Rule 12(b)(6) only if it alleges:
“(i) that the parties reached a definite agreement before executing the final contract;
(ii) that the final contract failed to incorporate the terms of the agreement; (iii) that
the parties’ mutually mistaken belief reflected the true parties’ true agreement; and
83
Liberto v. Bensinger, 1999 WL 1313662, at *12 (Del. Ch. Dec. 28, 1999) (quoting Fed.
Land Bank of Balt. v. Pusey, 1986 WL 9041, at *3 (Del. Super. Ct. July 21, 1986)).
84
Restatement (Second) of Contracts § 155 cmt. a (1981); see id. cmt. b (“If . . . the parties
make a written agreement that they would not otherwise have made because of a mistake
other than one as to expression, the court will not reform a writing to reflect the agreement
that it thinks they would have made.”); see also Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P.,
794 A.2d 1141, 1152 n.40 (Del. 2002) (citing Restatement (Second) of Contracts § 155
cmt. a).
85
Interactive Corp. v. Vivendi Universal, S.A., 2004 WL 1572932, at *15 (Del. Ch.
June 30, 2004).
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(iv) the precise mistake the parties made.”86 Similarly, a claim for unilateral mistake
requires that a plaintiff “show that the parties had come to a definite agreement that
differed materially from the written agreement,”87 and “that despite the existing
written agreement one party maintains is accurate, that existing writing erroneously
expresses the parties’ true agreement.”88 In either instance, the plaintiff must allege
the parties reached a definite agreement that differed materially from the agreement
they ultimately put into writing.89
A plaintiff must plead mistake with particularity: Court of Chancery Rule
9(b) requires that “[i]n all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with particularity. Malice, intent,
knowledge and other condition of mind of a person may be averred generally.”90
86
Great-W. Inv’rs LP, 2011 WL 284992, at *11.
87
Id.88
Scion Breckenridge, 68 A.3d at 680.
89
See Great-W. Inv’rs LP, 2011 WL 284992, at *11.
90
Ct. Ch. R. 9(b).
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Thus, a complaint for reformation based on mutual mistake will
withstand a motion to dismiss for failure to comply with the
requirements of Rule 9(b), if it alleges: “(i) the terms of an oral
agreement between the parties; (ii) the execution of a written agreement
that was intended, but failed, to incorporate those terms; and (iii) the
parties’ mutual—but mistaken—belief that the writing reflected their
true agreement and (iv) the precise mistake.”91
At the same time, the prior understanding “need not constitute a complete contract
in and of itself.”92
Seller’s allegations about the parties’ negotiation history fail to plead the
terms of a definite agreement that is materially different from the Purchase
Agreement and that the parties intended to incorporate into the Purchase Agreement.
And the mistake that has led to the perhaps unintended transfer of the Disputed Cash
is not the sort of mistake that supports reformation; it is not a mistake in the
expression of the Purchase Agreement, but rather an operational mistake by Seller
in preparing to perform.
91
Duff v. Innovative Discovery LLC, 2012 WL 6096586, at *10 (Del. Ch. Dec. 7, 2012)
(quoting Joyce v. RCN Corp., 2003 WL 21517864, at *4 (Del. Ch. July 1, 2003)).
92
Cerberus, 794 A.2d at 1152.
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1. The Parties’ Negotiation History
In November 2019, after emerging from bankruptcy, Seller began the process
of selling Target.93 Seller retained Moelis & Company LLC (“Moelis”) to run the
sale process.94 Moelis prepared an informational memorandum and an earnings
report, and sent potential buyers who expressed an interest a letter dated February
10, 2020 (the “Initial Process Letter”).95 The Initial Process Letter invited potential
buyers to submit an indication of interest by March 5, and requested that it
“indic[ate] the cash purchase price in U.S. dollars you are proposing to pay for 100%
of [Target] on a cash-free, debt-free basis (the ‘Enterprise Value’).”96 On March 5,
Platinum submitted such an indication (the “Initial IOI”).97 The Initial IOI included
an estimate of Target’s “enterprise value” between $120 and $150 million.98
On May 1, Moelis sent a second process letter (the “Second Round Process
Letter”), which similarly solicited proposals to acquire Target “on a cash-free, debt-
93
See Compl. ¶ 9.
94
See id.
95
See id.
96
Id.; see also Answer ¶ 9.
97
See Compl. ¶ 10.
98
See id. The Complaint indicates that “enterprise value” was set forth in lower case in
the Initial IOI. See id.
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free basis (the ‘Enterprise Value’).”99 The Second Round Process Letter also invited
potential buyers to review an online data room.100 Buyer and Seller then proceeded
to trade various due diligence documents in a due diligence tracker.101 The May 13
version of that tracker showed that Seller rejected certain due diligence requests
regarding Target’s “borrowing base certificates” “because the transaction was a
‘cash free/debt free deal.’”102 Platinum did not object to Seller’s response.103
On May 22, Platinum submitted a second indication of interest (the “Second
IOI”) that estimated Target’s enterprise value as $175 million.104 In response, Seller
informed Platinum that it needed to receive “net value” of no less than $175 million,
after giving effect to a net working capital adjustment at closing.105 The parties
discussed a $30 million net working capital goal, with the expectation that, at
closing, net working capital would be around $10 million.106 The parties ultimately
99
Id. ¶ 11.
100
See id. ¶ 12.
101
See id. ¶¶ 12–13.
102
Id. ¶ 13.
103
See id.
104
See id. ¶ 14.
105
See id. ¶ 15.
106
See id.
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settled on a $195 million enterprise value, anticipating that net working capital
adjustments would lead to a cash purchase price of $175 million.107
Throughout their negotiations, the parties consistently agreed to exclude the
Target’s cash from calculations of Target’s net working capital. On May 12, Moelis
added an example of a net working capital calculation to the virtual data room.108
Around this time, Moelis and Platinum held a three-hour phone call to discuss net
working capital, during which “Platinum agreed with excluding cash from the Net
Working Capital calculation.”109 The parties also exchanged several documents
addressing net working capital in advance of closing. On June 9, a Platinum
representative sent Moelis a spreadsheet Platinum prepared entitled “AM – Project
Rocket – Supporting Schedules_6.4.20.xlsx.”110 This spreadsheet deducted cash
from the “Reported Net Working Capital” as a “Definitional Adjustment” to
calculate “Definitional Net Working Capital.”111
107
See id.
108
See id. ¶ 12.
109
Id.
110
Id. ¶ 16.
111
Id.
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On June 25, Moelis emailed Platinum’s counsel a projected closing balance
sheet for Target and a projected net working capital calculation.112 The projected
net working capital calculation continued to exclude cash as a Definitional
Adjustment.113 The balance sheet also indicated Target would have no cash at
closing.114 Platinum sent Moelis another net working capital spreadsheet on June
28, which continued to exclude cash from that calculation.115
The parties continued to communicate in the days leading up to the closing.
Around June 26 or 27, Platinum requested certain “must-have” information from
Seller regarding its funding needs post-closing, including a cash flow forecast.116 In
response, on June 28, Seller’s liquidity consultant sent Platinum and its liquidity
consultant several documents showing Target’s starting cash balance as zero.117 The
Transaction closed on June 30.118
112
See id. ¶ 17.
113
See id.
114
See id.
115
See id. ¶ 21.
116
See id. ¶ 18.
117
See id. ¶ 19.
118
See id. ¶ 1.
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2. Seller Has Not Pled A Mistake For Which Reformation
Is Available.
Seller’s allegations fall well short of pleading an actionable mistake for the
purposes of a reformation claim.
Seller principally contends the parties had an agreement that cash would be
excluded from the calculation of net working capital.119 But this agreement is
reflected in the Purchase Agreement: it does not “differ[] materially” from the terms
of the Purchase Agreement, as required for reformation.120 And as explained, I have
considered and rejected Seller’s argument that the agreement to exclude cash from
the price calculation evidences an agreement to exclude the Disputed Cash as a
transferred asset. The fact that the parties agreed to exclude cash from the net
working capital calculations early on in their negotiations does not change that
conclusion.
Seller also contends that pre-close negotiations reveal the parties intended for
the transaction to be “cash-free, debt free,” such that they did not intend to transfer
cash to Buyer. These negotiations fail to amount to a definite agreement. The back-
119
See D.I. 41 at 31 (“The Complaint pleads with particularity the negotiation process
whereby the parties agreed to the ‘cash-free, debt-free’ transaction structure, specifically
the calculation of Net Working Capital, which excludes the Target’s pre-closing cash from
its calculus.” (citing Compl. ¶¶ 15–17, 21)).
120
See Scion Breckenridge, 68 A.3d at 680.
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and-forth about Target’s “Enterprise Value” in the Initial Process Letter, the Initial
IOI, and the Second Round Process Letter does not evidence an agreement that the
Disputed Cash was excluded from the assets sold in the Transaction. Seller’s use of
the phrase “cash-free, debt-free” in those communications is specifically about the
Target’s valuation.121 Any agreement the parties reached via those communications
concerned how to value Target, not what assets would ultimately transfer at closing.
Seller also alleges that it indicated Target would not hold any cash via the
June 25 projected balance sheet and June 28 projected cash flow it shared with
Platinum.122 Seller’s unilateral documents cannot stand in for a definite agreement
between the parties. The Complaint merely alleges that Seller sent documents and
that Buyer did not object to them.123 It would be unreasonable to infer from Buyer’s
silence in response to Seller’s documents that the parties struck a “definite
agreement” that cash was not to be transferred in the Transaction.124 Seller fails to
121
See, e.g., Compl. ¶ 9.
122
See id. ¶¶ 17, 19.
123
See id. ¶¶ 17, 19–20.
124
Compare id., with Great-W. Inv’rs LP, 2011 WL 284992, at *11 (recounting allegations
in which one party informed the counterparty of the first party’s belief of what the contract
meant, and the counterparty agreed to that meaning and that the “wording should be
modified to convey that meaning expressly”), and Duff, 2012 WL 6096586, at *10
(recounting allegations of conversations between both parties that could support a
reasonable inference of a common understanding). See also Envo, Inc. v. Walters, 2009
WL 5173807, at *5 (Del. Ch. Dec. 30, 2009) (“This is not the type of error one would
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allege the parties struck an agreement that cash would be excluded from the
Transaction. Without such an allegation, there can be no claim for reformation.125
More fundamentally, Seller offers no evidence of a scrivener’s error in the
Purchase Agreement. Seller “does not identify what error was made when reducing
[the Purchase Agreement] to writing,”126 nor any mistake as to the “contents or effect
of a writing that expresses the agreement.”127 Nor does Seller identify an erroneous
belief “relat[ing] to the facts as they exist[ed] at the time of the making of the
contract.” 128
Rather, the “mistake” at issue was Seller’s failure to sweep the Disputed Cash
from Target’s bank account, separate and apart from the terms of the Purchase
expect business parties to miss. Indeed, to credit [plaintiff’s] claim, the Court would have
to draw unreasonable inferences from the facts alleged, which is not permitted on a motion
to dismiss.”), aff’d, 2013 WL 1283533 (Del. Mar. 28, 2013) (TABLE).
125
See Great-W. Inv’rs LP, 2011 WL 284992, at *11; Scion Breckenridge, 68 A.3d at 680.
126
See Richard B. Gamberg 2007 Family Tr. v. United Rest. Gp., L.P., 2018 WL 566417,
at *6 (Del. Ch. Jan. 26, 2018) (alterations and internal quotation marks omitted) (quoting
Lions Gate Ent. Corp. v. Image Ent. Inc., 2006 WL 1668051, at *8 (Del. Ch. June 5, 2006)).
127
Restatement (Second) of Contracts § 151 cmt. a.
128
Id. (“In this Restatement the word ‘mistake’ is used to refer to an erroneous belief. A
party’s erroneous belief is therefore said to be a “mistake” of that party . . . . [T]he erroneous
belief must relate to the facts as they exist at the time of the making of the contract. A
party’s prediction or judgment as to events to occur in the future, even if erroneous, is not
a ‘mistake’ as that word is defined here. An erroneous belief as to the contents or effect of
a writing that expresses the agreement is, however, a mistake.”).
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Agreement. Seller’s failure to sweep Target’s cash is an operations or accounting
mistake, which is crucially distinguishable from a scrivener’s error in the underlying
agreement itself that can be remedied by reformation.129 Seller’s mistake in its own
preparation to perform the parties’ accurate agreement cannot justify reforming that
agreement.130 Seller bears the risk of that mistake.131 The Court will not change the
terms of the parties’ bargain to accommodate Seller’s error in preparing to perform
under the agreement that reflects that bargain.
The Motion is granted with respect to Count III.
129
Cf. In re Estate & Tr. of Kalil, 2018 WL 793718, at *8–10 (Del. Ch. Feb. 7, 2018)
(MASTER’S REPORT) (declining to reform a trust on the basis of a mistake, when the
mistake in question was Settlor’s mistake in titling assets in an account, not in drafting the
terms of the trust; and noting, “Settlor’s mistake was in titling the Account, and that
because that mistake did not affect the expression, inclusion or omission of specific terms
in the [] Trust—but rather, affects only the title of the Account—reformation is not
appropriate . . . . There was no scrivener’s error—the Trusts’ language expresses the
Settlor’s intent. Settlor’s failure to retitle the Account is not a mistake in expression for
which reformation is available.”), exceptions overruled and report adopted by 2018 WL
11028294 (Del. Ch. June 11, 2018), aff’d sub nom. Kalil v. Kalil, 2021 WL 252837 (Del.
Jan. 22, 2021) (TABLE).
130
See Restatement (Second) of Contracts § 155 cmt. b & illus. 4–5.
131
See id. § 154 cmt. a (“For example, it is commonly understood that the seller of farm
land generally cannot avoid the contract of sale upon later discovery by both parties that
the land contains valuable mineral deposits, even though the price was negotiated on the
basic assumption that the land was suitable only for farming and the effect on the agreed
exchange of performances is material. In such a case a court will ordinarily allocate the
risk of the mistake to the seller, so that he is under a duty to perform regardless of the
mistake.”).
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III. CONCLUSION
For the foregoing reasons, the Motion is GRANTED. To the extent an order
is required to implement this conclusion, IT IS SO ORDERED.
Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms