Thompson Street Capital Partners, IV, LP v. Sonova United States Hearing Instruments, LLC

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
PAUL R. WALLACE LEONARD L. WILLIAMS JUSTICE CENTER
JUDGE 500 N. KING STREET, SUITE 10400
WILMINGTON, DELAWARE 19801
(302) 255-0660
Steven T. Margolin D. McKinley Measley
Bryan T. Reed Alexander F. Hoeschel
GREENBERG TRAURIG, LLP MORRIS, NICHOLS, ARSHT & TUNNELL LLP
222 Delaware Avenue, Suite 1600 1201 N. Market Street
Wilmington, Delaware 19801 Wilmington, Delaware 19899
Submitted: March 5, 2024
Decided: March 25, 2024
Corrected: March 26, 2024
RE: Thompson Street Capital Partners, IV, L.P., in its capacity as Members’
Representative v. Sonova United States Hearing Instruments, LLC
C.A. No. 2023-0922-PRW
Defendant’s Motion to Dismiss
Dear Counsel:
Before the Court is the Rule 12(b)(6) Motion to Dismiss filed by Defendant
Sonova United States Hearing Instruments, LLC. For the reasons explained below,
that motion is GRANTED.
I. BACKGROUND1
Plaintiff Thompson Street Capital Partners, IV, L.P. (“Thompson Street”),
acting in its capacity as the Members’ Representative, brings this action to recover
1
The Court issues this Letter Opinion in lieu of a more formal writing mindful that the parties
have a fuller understanding of and familiarity with the factual background and operative
agreements than is recounted herein.
escrowed funds.2 Thompson Street alleges Defendant Sonova United States Hearing
Instruments, LLC (“Sonova”) provided a pretextual, invalid notice of its claims
objection in order to avoid releasing the escrowed funds. It seeks an order that
Sonova’s notice cannot serve as a basis to withhold escrowed funds, and a mandatory
injunction to release the funds.3
A. THE MERGER AGREEMENT
Sonova acquired equity interests in Alpaca Group Holdings, LLC and Alpaca
Blocker Corp. (together with Alpaca Group Holdings, LLC “Alpaca”) through the
Agreement and Plan of Merger (the “Merger Agreement”) dated January 13, 2022.4
Section 9.2 of the Merger Agreement provided Sonova indemnification rights
against Thompson Street based on breaches of certain representations and
warranties.5 Section 9.1 prescribes that claims based on certain breaches of
representations and warranties will survive until eighteen months after Closing
(“Survival Date”).6
Section 9.3.2 describes the notice procedures to submit an indemnification
2
Verified Complaint (“Compl.”) ¶ 1.
3
Id. Prayer for Relief.
4
See Defendant’s Opening Brief in Support of its Motion to Dismiss (“Op. Br.”), Ex. A (“Merger
Agreement”) (D.I. 10).
5
Merger Agreement § 9.2.
6
Id. § 9.1. The Court assumes the Survival Date coincides with the Escrow Deadline, described
below. See Compl. ¶ 13.
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claim.7 Sonova must give Thompson Street:
reasonably prompt written notice [of a Claim], but in any event
not later than 30 days after [Sonova] becomes aware of such
Claim, provided that no delay on the part of [Sonova] in notifying
[Thompson Street] will relieve the Merger Parties from any
obligation under this Article IX, except to the extent such delay
actually and materially prejudices the Merger Party. Such notice
by [Sonova] will describe the Claim in reasonable detail, will
include the justification for the demand under this Agreement
with reasonable specificity, will include copies of all available
material written evidence thereof, and will indicate the estimated
amount, if reasonably practicable, of Damages that has been or
may be sustained by [Sonova]. [Sonova] shall have no right to
recover any amounts pursuant to Section 9.2 unless the Purchaser
notifies the Members’ Representative in writing of such Claim
pursuant to Section 9.3 on or before the Survival Date.8
Section 9.3(c), cited therein, states that “[t]he Indemnity Escrow Fund shall
be [Sonova’s] sole and exclusive source of recovery for Damages under this
Agreement, other than claims for Fraud, Pre-Closing Tax Liability and breaches of
Fundamental Representations.”9 In a related escrow agreement (the “Escrow
Agreement”), “the Indemnity Escrow Fund” means $7,750,000, which is the amount
to be deposited with the escrow agent.10
B. THE ESCROW AGREEMENT
The Escrow Agreement also included notice procedures; those procedures
7
Merger Agreement § 9.3.2(a).
8
Id. § 9.3.2(a).
9
Id. § 9.3(c).
10
See Compl., Ex. B (“Escrow Agreement”) Recitals; Compl. ¶ 14.
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governed the release of the Indemnity Escrow Fund. Under Section 3(a)(ii) of the
Escrow Agreement, if Sonova “determines in good faith that it…has a claim to a
payment from the Indemnity Escrow Fund pursuant to Article IX of the Merger
Agreement (a ‘Claim’),” it must provide written notice of the Claim to the escrow
agent and Thompson Street.11 Like the Merger Agreement, the written notice “shall
specify in reasonable detail the nature and dollar amount of the Claim.”12 But unlike
the Merger Agreement, it does not require “copies of all available material written
evidence.”13
“[E]ach Claim shall be deemed to be an ‘Open Claim’ and the Escrow Agent
shall reserve within the Indemnity Escrow Amount an amount equal to the amount
of such Open Claim (such reserved amount, the ‘Claim Reserve’).”14 Section 3(a)(i)
of the Escrow Agreement then requires that the Indemnity Escrow Fund “shall be
released . . . on August 29, 2023 to the extent the balance of the account exceeded
the amount asserted for any “Open Claims” (the “Escrow Deadline”).15
C. THE NOTICE
On August 25, 2023, Sonova delivered a two-page written notice (the
11
Escrow Agreement § 3(a)(ii).
12
Id.
13
Merger Agreement § 9.3.2(a).
14
Escrow Agreement § 3(a)(ii).
15
Id. § 3(a)(i).
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“Notice”) to Thompson Street and the escrow agent of its claims for indemnification
pursuant to the notice procedures of Section 9.3.2 of the Merger Agreement and
Section 3(a)(ii) of the Escrow Agreement.16 The Notice raised concerns of improper
billing practices, such as services that were never provided, but nevertheless billed
and reimbursed.17 Specifically, it alleges that items and services were improperly
billed under the names and billing numbers of clinicians who did not personally
16
See Compl., Ex. C. (“Notice”). Paragraphs three and four of the Notice state that:
Purchaser has become aware of certain billing practices of the Company, its
Subsidiaries and the Practice Entities that Purchaser believes are not in compliance
with applicable Laws and/or third-party payor reimbursement rules or other
requirements. Specifically, Purchaser believes certain items and/or services
provided by the Company, its Subsidiaries and the Practice Entities to patients in
multiple states (including without limitation Arkansas, Michigan, New Jersey and
Tennessee) were improperly billed under the names and billing numbers of
clinicians who did not personally provide the items and/or services to those patients.
As a result of those billing practices, Purchaser believes the Company, its
Subsidiaries and the Practice Entities have billed and received payment or
reimbursement to which they are not entitled under applicable Laws and/or third-
party payor reimbursement rules and other requirements. The improper billing and
receipt of payment or reimbursement to which they are not entitled constitute
breaches of the representations and warranties of the Company contained in
Sections 3.8, 3.11, and 3.21 of the Merger Agreement. Pursuant to Section 9.2 of
the Merger Agreement, the Merger Participants agreed to indemnify and hold
harmless Purchaser from, against and in respect of any Damages resulting from
breaches of the representations and warranties contained in the Merger Agreement.
As of this date, Purchaser’s investigation and analysis of these matters is
continuing, and the aggregate amount of Damages relating to the Claim is not
known or estimable with certainty. Based upon Purchaser’s investigation and
analysis to date, Purchaser’s maximum Damages relating to the Claim are in excess
of the Indemnity Escrow Fund. Purchaser will supplement this Claim and Claim
Notice as reasonably necessary as Purchaser learns additional information and
concludes its investigation and analysis. Escrow Agent is hereby directed to
establish a Claim Reserve in the full amount of the Indemnity Escrow Fund.
17
Id.
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provide the items and/or services to those patients.18 The Notice identifies four states
where the allegedly improper billing practices occurred,19 as well as the provisions
in the Merger Agreement allegedly breached.20 The Notice states that damages are
in excess of the Indemnity Escrow Fund amount.21
Accordingly, Sonova directed the escrow agent to not release the funds.22
Based on communications with Alpaca’s former officers and a continuing employee,
Thompson Street believes that Sonova had knowledge of the facts underlying its
claims before the 30-day deadline in Section 9.3.2 of the Merger Agreement.23
Thompson Street initiated this action via its Verified Complaint alleging that
the Notice was vague and untimely.24 Thompson Street seeks declaratory relief
(Count I) and specific performance for release of the Indemnity Escrow Fund (Count
II). In its motion to dismiss, Sonova argues that the Notice satisfied the parties’
contractual requirements to prevent the release of the Indemnity Escrow Fund.25
18
Id.
19
Id.
20
Id.
21
Id.
22
Id.
23
Compl. ¶ 24.
24
Id. ¶¶ 20, 24.
25
Op. Br. at 10-13.
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II. STANDARD OF REVIEW
In resolving a Rule 12(b)(6) motion, the Court (1) accepts as true all well-
pleaded factual allegations in the complaint; (2) credits vague allegations if they give
the opposing party notice of the claim; (3) draws all reasonable factual inferences in
favor of the non-movant; and (4) denies dismissal if recovery on the claim is
reasonably conceivable.26 The Court need not “accept conclusory allegations
unsupported by specific facts or . . . draw unreasonable inferences in favor of the
non-moving party.”27
Contract interpretation is a question of law and can in the proper instance be
resolved on a motion to dismiss.28 “But, to achieve dismissal, the motion must be
supported by unambiguous contract terms.”29
A complaint fails under Rule 12(b)(6) if the plaintiff’s prayers don’t
demonstrate that is reasonably conceivable that it would be entitled to the relief
26
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Holdings LLC, 27 A.3d 531, 535 (Del. 2011).
27
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), overruled on other
grounds by Ramsey v. Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255, 1277 (Del. 2018).
28
E.g., Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006) (“Under
Delaware law, the proper interpretation of language in a contract is a question of law. Accordingly,
a motion to dismiss is a proper framework for determining the meaning of contract language.”).
29
Blue Cube Spinco, LLC v. Dow Chemical Co., 2021 WL 4453460, at *7 (Del. Super. Ct. Sept.
29, 2021) (citing VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003); GMG
Cap. Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 783 (Del. 2012).
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sought.30 “Put differently, a claim targeted for dismissal will survive [only] if ‘a
possiblity of recovery’ can be divined from it.”31
III. DISCUSSION
Recall, the specific claims Thompson Street penned and the relief sought.
This action is about the release of the Indemnity Escrow Fund; it is not about whether
Sonova has waived its right to pursue indemnification claims on the grounds that it
failed to submit a valid notice by the Escrow Deadline.32 Namely, the action is about
whether Thompson Street is entitled to a release of the Indemnity Escrow Fund on
the basis that the Notice sent to the escrow agent was invalid. As now explained, the
Notice was valid for the purpose of stopping a release of the Indemnity Escrow Fund.
A. TIMELINESS
The Notice was timely. The Escrow Deadline was August 29, 2023.33 Sonova
30
See Cent. Mortg., 27 A.3d at 537; see also VLIW Technology, 840 A.2d at 606 (Del. 2003) (a
claim survives under Rule 12(b)(6) “unless it appears with reasonable certainty that the plaintiff
cannot prevail on any set of facts which might be proven to support the allegations in the
complaint.”).
31
Unbound Partner’s Ltd. P’ship v. Invoy Holdings Inc., 251 A.3d 1016, 1023 (Del. Super. Ct.
2021) (quoting Firefighters’ Pension Sys. of Kansas Dity, Mo. Tr. v. Presidio, Inc., 2021 WL
298141, at *15 (Del. Ch. Jan. 29, 2021)); Cent. Mortg., 27 A.3d at 537 n.13 (“Our governing
‘conceivability’ standard is more akin to ‘possibility. . . .’”).
32
See Plaintiff’s Answering Brief in Opposition to Defendant’s Motion to Dismiss at 1 (D.I. 13)
(“This case is not about the existence of an indemnification provision or the merits of any
purported claim under that provision.”) (bold and underline in original); Compl. ¶ 39.
33
Escrow Agreement § 3(a)(i).
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sent the Notice on August 25, 2023.34 Thus, the Notice was timely under the Escrow
Agreement.
For thoroughness, the Court analyzes whether it was timely under the Merger
Agreement. Section 9.1 requires assertion of a claim on or before the Survival
Period, i.e., eighteen months after closing.35 In this case, Sonova met that
requirement by filing on August 25, 2023.36 Sonova must also provide “reasonably
prompt” written notice “not later than 30 days after [Sonova] becomes aware of such
claim.”37 Thompson Street alleges that various communications indicate that
Sonova was aware of the underlying facts giving rise to the claims as early January
2023.38
Yet, even if Sonova had knowledge of the underlying facts to trigger the 30-
day notice requirement, Thompson Street hasn’t pled the actual and material
prejudice needed to deem the notice untimely under Section 9.3.2(a) of the Merger
Agreement. Section 9.3.2(a) states that “no delay on the part of [Sonova] in
notifying [Thompson Street] will relieve the Merger Parties from any obligation
under this Article IX, except to the extent such delay actually and materially
34
Compl. ¶ 18.
35
Merger Agreement § 9.1.
36
Compl. ¶ 18.
37
Merger Agreement § 9.3.2(a).
38
Id. ¶ 24.
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prejudices the Merger Party.”39
Thompson Street makes three conclusory statements that Sonova’s delay
resulted in missed opportunities to reduce the damages associated with the improper
billing practice.40 Because the Court need not accept such vague and conclusory
statements unsupported by facts, Thompson Street hasn’t pled that the delay caused
actual and material prejudice. Thus, the Notice was timely.
B. SPECIFICITY
Section 3(a)(ii) of the Escrow Agreement tracks Section 9.3.2 of the Merger
Agreement. Section 9.3.2 of the Merger Agreement requires that the notice (1)
describe the claim in reasonable detail; include (2) the justification for the demand;
(3) copies of all available material written evidence thereof, and (4) any estimated
amount of damages, if reasonably practicable.41 Section 3(a)(ii), on the other hand,
requires that the notice “specify in reasonable detail the nature and dollar amount of
the Claim.”42
The Notice satisfies Section 3(a)(ii) of the Escrow Agreement. The Notice
39
Merger Agreement § 9.3.2(a).
40
Compl. ¶ 25. Specifically, Thompson suggests that the delay caused prejudice, including
“(a) increasing the risk of excess Damages by disregarding contractual and statutory
refund/repayment periods; (b) negating the Parties’ ability to negotiate with applicable third-party
payors in a timely manner where due credit would be given; and (c) potentially implicating a
greater period of noncompliance in any final damages.” Id.
41
Merger Agreement § 9.3.2(a).
42
Escrow Agreement § 3(a)(ii).
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states that Sonova “has become aware of certain billing practices…that are not in
compliance with applicable laws and/or third-party payor reimbursement rules or
other requirements.”43 The Notice continues and elaborates on the allegedly
improper billing practices, stating that Sonova:
believes certain items and/or services provided by the Company,
its Subsidiaries and the Practice Entities to patients in multiple
states (including without limitation Arkansas, Michigan, New
Jersey and Tennessee) were improperly billed under the names
and billing numbers of clinicians who did not personally provide
the items and/or services to those patients.
The Notice also identifies the allegedly breached representations, citing to
Section 3.8, 3.11 and 3.21 of the Merger Agreement. It further notes that its
investigation into the matters is pending. And, it states that damages from these
allegedly improper billing practices is in excess of the Indemnity Escrow Fund.
Section 3(a)(ii) does not require Sonova to present every minute detail or
prove the merits of its claims. Indeed, Section 3(a)(ii) does not require production
of all available written evidence. Consistent with its limited scope and purpose, the
Notice need only give notice to the escrow agent of Sonova’s pending
indemnification claims. It does just that. Count I will be dismissed.
Sonova also seeks to dismiss Count II. Both because a request for specific
performance is a remedy, and not a standalone claim, and because that remedy is tied
43
See Notice.
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the Count I’s viability, Count II will be dismissed.44
IV. CONCLUSION
The notice provisions at issue here are unambiguous and Thompson Street’s
prayers for relief are fatally lacking. Sonova’s motion to dismiss is GRANTED.
IT IS SO ORDERED.
_______________________
Paul R. Wallace, Judge*45
44
See Quadrant Structured Prod. Co. v. Vertin, 102 A.3d 155, 203 (Del. Ch. 2014) (“Injunctions
are a form of relief, not a cause of action. This court will determine what remedy (if any) it will
award after deciding the merits of Quadrant's claims, taking into account the wrongs (if any), the
nature of the harm, the facts and circumstances, and any other equities of the case. As a technical
matter, Counts III and VI are dismissed because they seek remedies rather than assert claims. Other
than cleaning up the pleadings, this ruling has no effect on the case. In the remedial stage of this
action, Quadrant may seek injunctive relief, and the court has not ruled out the possibility of a
permanent injunction, if warranted.”).
* Sitting by designation of the Chief Justice pursuant to In re Designation of Actions Filed
Pursuant to 8 Del. C. § 111 (Del. Feb. 23, 2023) (ORDER).
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