B&C Holdings Inc. v. Temperatsure Holdings, LLC

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
B&C HOLDINGS, INC., a Colorado
corporation,
Plaintiff/
Counterclaim Defendant,
C.A. No. N19C-02-105 AML CCLD
Vv.
)
)
)
)
)
)
TEMPERATSURE HOLDINGS, )
LLC, a Delaware limited liability )
company, )
)
Defendant/Counterclaim Plaintiff/ )
)
)
)
)
)
)
Third Party Plaintiff,
V.
CHRISTOPHER SMITH,
Third Party Defendant.
Submitted: January 28, 2020
Decided: April 22, 2020
MEMORANDUM OPINION
Upon Plaintiff’s and Third Party Defendant’s Motions for Summary
Judgment: GRANTED
Upon Defendant’s Motion for Summary Judgment: DENIED
Attorneys and Law Firms
Philip Trainer, Jr., Esquire, and Randall J. Teti, Esquire, of ASHBY & GEDDES,
Wilmington, Delaware, and Paul H. Schwartz, Esquire, of SHOEMAKER
GHISELLI + SCHWARTZ LLC, Boulder, Colorado, Attorneys for
Plaintiff/Counterclaim Defendant B&C Holdings, Inc. and Third-Party Defendant
Christopher Smith.
Elizabeth M. McGeever, Esquire, of PRICKETT, JONES & ELLIOTT, P.A.,
Wilmington, Delaware, and S. Kirk Ingebretsen, Esquire, of SHOOK HARDY &
BACON L.L.P., Denver, Colorado, Attorneys for Defendant/Counterclaim
Plaintiff/Third Party Plaintiff Temperatsure Holdings, LLC.
LEGROW, J.
This dispute concerns the meaning of language in a promissory note,
specifically what constitutes a “Principal Statement” within the note’s terms. The
promissory note defined and secured an earn-out payment that formed part of the
consideration that buyer, the defendant in this action, agreed to pay seller, the
plaintiff, when it purchased seller’s temperature controlled packaging systems
business.' The note specified how the earn-out — the note’s principal — was to be
determined and paid to seller. The amount of the earn-out depended on the buyer’s
calculation of the purchased business’s consolidated profits over a specified period
after the sale.”
Although it is clear from the note that buyer’s delivery of a Principal
Statement to seller was a preliminary step in the process for finalizing the note’s
principal, the parties disagree over which of two documents constitute the operative
“Principal Statement.” On July 7, 2017, buyer’s CFO sent an email to seller’s co-
owner and former CEO stating that “[y]ou should receive $125,000 which is 5
months interest on the note.” It is undisputed that five months of interest in the
amount of $125,000 equates to a $6,000,000 principal amount, which was the
maximum earn-out that could be achieved under the parties’ agreement. Over a year
later, however, on August 6, 2018, buyer’s president sent seller an email stating that
' B&C's Opening Br. in Supp. of Mot. for Summ. J. (hereinafter “B&C Mot.”) 1.
? Id., Ex. 1 Temperature Holdings, LLC Subordinated Promissory Note (hereinafter “Note”) § 2(a).
3 Id., Ex. 28.
it was providing long overdue gross profit statements along with a spreadsheet
purporting to be a Principal Statement. * That spreadsheet stated the note’s Principal
was $946,671.° Seller took the position that the August 2018 communication was
late and, in any event, barred by the note’s terms because the July 2017 email was a
Principal Statement and its calculations became final and binding after seller did not
dispute the calculation within the contractually-specified period.
When buyer rejected seller’s demand for $6,000,000 under the terms of the
note, seller initiated this breach of contract and declaratory judgment action against
buyer. In response, buyer filed counterclaims, affirmative defenses, and a third-
party complaint for breach of fiduciary duty. All parties have filed motions for
summary judgment. The dispositive issue presented by the cross-motions is which
document constitutes buyer’s “Principal Statement” under the note. Because I find
that the 2017 email constitutes a Principal Statement according to the note’s plain
meaning, I conclude the principal is $6,000,000. I further find there are no disputed
facts upon which a fact finder could conclude the seller’s former CEO, who also
became a member of buyer’s board, breached his fiduciary duties. My reasoning
follows.
4 Id., Ex. 72; Compl. § 73-74.
> Id.
FACTUAL AND PROCEDURAL BACKGROUND
Unless otherwise noted, the facts are drawn from the complaint and the record
the parties provided with their briefs. On April 7, 2016, Temperatsure Holdings,
LLC (“Temperatsure” or the “Company’’) purchased Temperatsure, LLC (“Opco’)
from B&C Holdings, Inc. (““B&C”).© The parties agreed that a contingent “earn-
out” payment would form part of the sale’s consideration.’ The earn-out was secured
by a promissory note (the “Note”), which defined how the parties would (i) calculate
the earn-out, (ii) communicate regarding the amount of the earn-out, and (iii) resolve
any disputes arising from that process.®
The Note
The Note specifies the Principal will be based on Opco’s Last Twelve Months’
Gross Profit (“LTM Gross Profit”).? The Note defines “LTM Gross Profit” as the
following:
the gross profit performance of [Temperatsure] and Opco, measured by
the last twelve months’ (“LTM”) consolidated gross profit of
[Temperatsure] and Opco determined in accordance with United States
generally accepted accounting principles (“GAAP”) as of the last day
of each month between (and including) January 31, 2017 and July 31,
2017[.]'°
° Compl. ¥ 1.
7 Temperatsure’s Combined Answering Br. in Opp’n to B&C Mot. and Opening Br. in Supp. of
Cross-Mot. for Summ. J. (hereinafter “Temperatsure Mot.”) 1.
8 Id.
Note § 1(ii)-(iii).
10 See id. § 1(ii).
The months of January 2017 through July 2017 were defined as the
“Evaluation Period.”!! If the LTM Gross Profit reached $19,000,000 in any month
of the Evaluation Period, the Principal would be $6,000,000.!2 If LTM Gross Profit
never exceeded $18,000,000, the Principal would be $0.'° If the highest LTM Gross
Profit for any month in the Evaluation Period was between $18,000,000 and
$19,000,000, the Principal would be between $0 and $6,000,000, determined on a
straight-line basis using that highest LTM Gross Profit."4
“TF Jollowing the end of each month during the Evaluation Period,” the Note
required Temperatsure to “prepare, or cause to be prepared, a statement (each, a
‘LTM Gross Profit Statement’) setting forth the determination of the amount of the
LTM Gross Profit for the applicable month.”!° Each “LTM Gross Profit Statement”
was to include “reasonable supporting documentation for the estimates and
calculations contained therein (together with any information reasonably requested
by [B&C]).”'°
According to Section 2(b) of the Note, Temperatsure would determine the
Principal “based on the greatest LTM Gross Profit set forth on any LTM Gross Profit
Statement delivered with respect to the Evaluation Period” and provide a Principal
"Td, § 1(ii).
12 Td. § (iii).
13 Tq.
14 Td.
15 Td. § 2(a).
16 Td.
Statement “as soon as practicable after the LTM Gross Profit Statement for the
month ended July 31, 2017 is prepared, but in no event later than fifteen (15) days
following the last day of the Evaluation Period.”!’ Section 2(c) of the Note provides:
Within fifteen (15) days after the Evaluation Period, [Temperatsure]
will deliver to [B&C] a statement setting forth its calculation of the
Principal to [B&C] (the “Principal Statement”).'®
Section 2(c) of the Note also includes a detailed dispute resolution process
setting forth exactly when the Principal is considered “finally determined.” Section
2(c) of the Note provides:
[B&C] will have from the time the Principal Statement is delivered to
[B&C] until 5:00pm Pacific Time, on the fifteenth day after the date of
such delivery (the “Dispute Period”) to dispute any elements of or
amounts reflected on the Principal Statement that affect the calculation
of the Principal (the “Dispute’).!?
If a dispute notice is delivered, Temperatsure has 15 days to notify B&C that
it disagrees (the “Dispute Response”). If Temperatsure does not deliver a Dispute
Response, B&C’s calculation of Principal is deemed “final and binding” and
“effective as of the first day following the end of the Evaluation Period.””°
Finally, if Temperatsure delivers a Dispute Response and the parties are
unable to reach agreement, an accountant shall arbitrate “each element of the
"7 Td. § 2(b)-(c).
18 Td. § 2(c).
19 Td,
20 Td.
Dispute.”?! As above, once the Dispute is resolved, the final determined Principal
amount is “effective as of the first day following the end of the Evaluation Period.”
The Note requires Temperatsure to “pay simple interest (computed on the
basis of a three hundred sixty-five (365)-day year) on unpaid Principal, accruing
from the date on which the Principal is finally determined to be any amount greater
than $0 pursuant to Section 2, at the rate of 5.00% per annum.””? The initial annual
interest rate of 5% increases to 10% if Temperatsure defaults.7* Interest under the
Note is due quarterly.”
Smith and Kahle Correspond
Temperatsure’s CFO, Robert Kahle, performed the LTM Gross Profit
calculations.” Sometime in February 2017, Kahle verbally informed B&C’s co-
owner and Temperatsure’s former CEO, Christopher Smith, that the LTM Gross
Profit as of January 31, 2017 had exceeded the $19 million threshold set forth in
Section 1(iii) of the Promissory Note, and the Principal therefore would be
$6,000,000.7” According to Temperatsure, Kahle’s assessment of the LTM Gross
21 Td.
2 Td.
3 Td. § 3.
4 Td.
°5 Td.
© Compendium of Transcripts cited in B&C’s Mot., Tab 4, Dep. of Robert Kahle (hereinafter
“Kahle Dep.”) 52:17-21.
*7 See id., Tab 2, Dep. of Christopher P. Smith (hereinafter “Smith Dep.”) 109:6-14.
6
Profit as of January 31, 2017 was inconsistent with GAAP.”8 Specifically,
Temperatsure alleges Kahle’s computation relied on internal financial statements
that were not GAAP-compliant and did not account for depreciation on costs of
goods sold.”? Although he made this communication, Kahle never sent B&C any
monthly LTM Gross Profit Statements during the Evaluation Period.*°
Nonetheless, Kahle later confirmed that Principal calculation in writing.
Smith sent Kahle the following email on June 28, 2017:
Rob
Obviously I am not too worried about it but you should plan on paying
my Qtrly Note Payment in July sometime unless you want to do it in
June.*!
Kahle then responded:
CP
Thanks for the reminder. We’ve got it accrued. I just need to check the
cash balance after the shareholder distribution. It won’t be a problem.°?
One week later, on July 7, 2017, Kahle sent Smith the following email (the “July
2017 Email”) in response to Smith’s request for payment, stating:
The interest payment is being wired today. You should receive
$125,000 which is 5 months interest on the note.
28 See Kahle Dep. 58:20-22.
*? See id. 62:10-17.
3° See id. 60:12-15; Smith Dep. 65:9-17.
3! See Aff. of Elizabeth M. McGeever (hereinafter “McGeever Aff.”), Ex. B.
32 I,
33 See id., Ex. D.
At the Note’s 5% rate, annual interest on $6,000,000 is $300,000, or $25,000
per month.** By stating that the interest was $25,000 per month, it is beyond dispute
that Temperatsure had calculated the Principal as $6,000,000.*°
Consistent with Kahle’s representations, Temperatsure wired $125,000 to
B&C the same day.*° On July 22, 2017, Kahle reported to Temperatsure’s Board
37 Because B&C stood to receive the
that the interest payment had been made.
maximum earn-out, Smith considered “the matter settled” and decided “not to call
out [Temperatsure’s] failure to provide B&C Holdings with LTM Gross Profit
Statements and supporting documentation as required.”*8
Temperatsure Repeatedly Affirms the $6,000,000 Principal
On November 3, 2017, Temperatsure paid B&C $75,000 for another quarter’s
interest, again reflecting a $6,000,000 Principal.*? Over the next eight months, each
monthly Temperatsure board packet expressly reported the $6,000,000 Principal,
multiple members of Temperatsure’s Special Litigation Committee (“SLC”)
34 B&C Mot. 7.
35 See id.
36 Case information Statement, Exs. 5-6, Decl. of Christopher P. Smith in Supp. of Pl.’s Answering
Br. in Opp’n to Def.’s Mot. to Dismiss or Stay (“Smith Decl.”) § 8.
37 B&C Mot., Ex. 23 at 23813.
38 See Compl. § 43.
° Def.’s Answer to Pl.’s Compl. and Third Party Compl. (hereinafter “Answer”) 17; see B&C
Mot., Ex. 11 (SLC member Fry acknowledging that Temperatsure paid B&C $200,000 in total).
8
reviewed LTM Gross Profit figures, and no member ever articulated to Smith a
concern that the $6,000,000 Principal wrongly was calculated.”
On April 9, 2018, the Company’s auditors asked SLC member Dietz Fry
directly whether the $6,000,000 earn-out had been achieved.*! After acknowledging
to the auditors that “[w]e initially thought that the earn-out was achieved,” Fry and
Silva Behrens re-examined the matter “with an understanding of the accounting
errors made throughout the period.””” At the end of the day on April 9, 2018,
Behrens, copying Fry, confirmed to the auditors that “Yes,” the “LTM figure during
some months throughout the measurement period were above” the $19,000,000
threshold.*? Fry did not correct his associate’s answer. * Instead, over the next two-
and-a-half months he treated the Principal as $6,000,000, even serving as the
Board’s point person in communications with Smith about a possible B&C
conversion of the $6,000,000 Note into equity. As late as June 27, 2018, the same
day the Company formally proposed to B&C that it convert its $6,000,000 Note,
new CFO Thomas Bell informed the auditors: “[B]ased on our best available current
information, we believe the earn-out threshold was achieved.’“© | When
4° See Smith Decl. J 19 & Ex. 13.
4! See B&C Mot., Ex. 2-H.
42 See id., Ex. 2.
3 See id.
4 See id., Ex. 2-H.
45 See id., Ex. 51.
46 Id.
Temperatsure did change its position in July 2018, Bell still reported to Fry: “As part
of the audit process I advised [the auditors] that we believed the earn-out was earned
and that we had no reason to believe it was not earned (which was an accurate
statement at the time).’4”
By June 2018, Temperatsure was approaching the limit on debt-to-EBITDA
ratio in its bank covenants.‘* On June 27, 2018, Temperatsure sent B&C a proposed
conversion agreement that said: “The original principal amount and total accrued
interest owed to [B&C] pursuant to the Note is $6,075,000.°4° The agreement
proposed that B&C exchange the Note for 6,075,000 super-preferred LLC units in
Temperatsure.°° As Fry has admitted, this document was Temperatsure’s proposal
to B&C “that B&C convert what Temperatsure was at that time stating to be a 6-
million-dollar debt plus some accrued interest into super-preferred equity.”>! B&C
declined the proposal when it learned that the conversion might trigger a large tax
liability.
“7 Td, Ex. 57.
“8 Compendium of Transcripts cited in B&C Mot., Tab 6, Dep. of Mark Dorman (hereinafter
“Dorman Dep.”) R119:6-9.
9 B&C Mot., Ex. 14 at 14022.
59 Id.
>! Compendium of Transcripts cited in B&C Mot., Tab 1, Dep. of J. Dietz Fry (hereinafter “Fry
Dep.”) 136:6-13.
% Td. at 190:17-191:12.
10
The August 2018 Spreadsheet
About two weeks after B&C refused to convert the debt, SLC member Derek
Johnson emailed the Board that “while previously we as a board were under the
opinion that the earn-out was fully achieved we now have a spreadsheet from the
company that appears to show the earn-out was not fully achieved[.]”°? Smith
responded to Johnson’s email by reminding the SLC members that the Note does
not allow recalculations.** Outside Smith’s presence, Fry and new CFO Thomas
Bell described Temperatsure’s new calculation as a revision to Temperatsure’s first
Principal calculation.>>
On August 6, 2018, Temperatsure’s president, Tony Aleide sent Smith an
email stating that it was providing “copies of the LIM gross profit statements for
the Months of January 2017 to July 2017, along with supporting documentation.”>°
The email also stated it was providing the Principal Statement pursuant to Section
2(c) the Note, referring to an attached single-page spreadsheet (the “August 2018
3 Smith Decl., Ex. 11.
4 Compl. 72.
°5 See, e.g., B&C Mot., Ex. 27 at 004 (referring to “yesterday’s earn-out recalculation’’) (emphasis
added); Ex. 56 (attaching “the first pass at the revised calculation for CP’s earn-out”) (emphasis
added); Ex. 58 (discussing how to communicate to the bank that the earn-out was “being
reassessed’) (emphasis added); Ex. 59 at 54 (referring to the “restated seller note”) (emphasis
added).
°° Compl. FJ 73-74; B&C Mot., Ex. 72.
11
Spreadsheet”).°’ The August 2018 Spreadsheet claims that the Principal is
$946,671.°°
The Principal Dispute
On August 21, 2018, B&C’s counsel wrote to Temperatsure to remind it of its
July 2017 Email, its repeated affirmations of its $6,000,000 Principal calculation,
and the Note’s provisions that a Principal Statement becomes “final and binding
upon the parties” if B&C does not dispute it.°? B&C explained that “[t]he
Company’s attempt to change the Principal long after it was established is of no
effect,” hence “no ‘Dispute’ exists under the Note that requires a B&C response.”°
B&C added that it also disagreed with the August 2018 Spreadsheet’s accounting
revisions.°! It concluded by demanding that Temperatsure pay all past due interest.
Temperatsure rejected B&C’s demand.” Although Temperatsure conceded
that B&C had said it did not intend its August 21 letter to be a Dispute Notice,
Temperatsure said it would construe the letter that way anyway. On August 27,
57 Td.
8 Id.
°? Case Information Statement, Exs. 5-6, Decl. of Paul H. Schwartz in Supp. of Pl.’s Answering
Br. in Opp’n to Def.’s Mot. to Dismiss or Stay (“Schwartz Decl.”’), Ex. 1.
6° Td. at 1.
6! Td. at 4-7.
° Id. at 7.
63 Schwartz Decl., Ex. 2.
64 Td. at 1-2.
12
2018, B&C sent Temperatsure a Notice of Event of Default.° Three days later,
B&C filed this action, seeking (1) a declaration that the Note’s Principal is
$6,000,000 and Temperatsure owes past-due interest based on that amount, and (2)
damages for breach of contract. On September 5, 2018, Temperatsure sent B&C
what it termed a “Dispute Response” declaring its intent to appoint an Arbitrating
.6’ Temperatsure then commenced an arbitration, but told B&C it would
Accountant
hold the arbitration in abeyance until there was a judicial determination that a
“Dispute” existed or that such question should be resolved by the Arbitrating
Accountant. On April 18, 2019, the Court issued a bench ruling denying
Temperatsure’s motion to dismiss for lack of jurisdiction, holding that whether a
Dispute exists under the Note is a question of substantive arbitrability reserved for
the Court. The question of substantive arbitrability, as well as the merits of the
parties’ dispute, now are ripe for resolution through the pending cross-motions for
summary judgment.
B&C originally filed its Complaint in the Court of Chancery. On February
12, 2019, the Court of Chancery transferred the action to this Court’s Complex
Commercial Litigation Division under 10 Del. C. 1902. After this Court denied
65 Schwartz Decl., Ex. 3; see also Note § 9(a)(ii) (failure to pay accrued interest within five
business days of being due is event of default).
66 Compl. {ff 88-99.
67 Schwartz Decl., Ex. 4.
68 C.A. No. 2018-0645-JTL.
13
Temperatsure’s motion to dismiss for lack of jurisdiction, Temperatsure answered
the complaint, asserted affirmative defenses, and filed counterclaims against B&C
and a third-party complaint against Smith. On December 10, 2019, B&C, Smith,
and Temperatsure filed motions for summary judgment. The parties briefed those
motions, and the Court heard argument on January 28, 2020.
The Parties’ Contentions
B&C argues its claims in this action are not subject to arbitration and it is
entitled to summary judgment on the merits of its declaratory judgment claim. With
respect to jurisdiction, B&C argues there is no “Dispute” requiring arbitration
because the principal amount is determined by the July 2017 Email. As to the merits,
B&C contends the July 2017 Email is the Principal Statement because (1)
Temperatsure sent the email to B&C; (2) whether Kahle intended the email to be a
Principal Statement is irrelevant; (3) the requirements placed on Temperatsure in
Section 2(b) do not modify the definition of Principal Statement; (4) a statement
setting forth the Principal is sufficient to constitute a Principal Statement; (5) paying
interest early does not prevent a Company statement from being a Principal
Statement; and (6) Temperatsure delivered other statements to B&C setting forth its
$6,000,000 Principal calculation.
In its cross-motion, Temperatsure argues it is entitled to summary judgment
on the pending claims. In its counterclaims, Temperatsure seeks a declaration that
14
(1) according to Section 2(b), “preparation and delivery of GAAP-compliant LTM
Gross Profit Statements is a condition precedent to determining the Principal amount
of the Note;” (2) the July 2017 Email “is not a Principal Statement as contemplated
by the Note;” and (3) the August 2018 Spreadsheet is “the only Principal Statement
sent pursuant to Section 2(c) of the Note.” Temperatsure also claims B&C unjustly
was enriched “in the form of its receipt of purported interest payments in the total
amount of $200,000.”
Temperatsure contends the July 2017 Email cannot be the Principal Statement
because (1) based on the Note’s express provisions, an email that does nothing more
than reference the anticipated payment of already accrued interest cannot, as a matter
of law, be the Principal Statement; (2) interest cannot accrue until after the Principal
Statement is delivered; (3) B&C’s reliance on purported “extrinsic evidence” as
proof that a Principal Statement must have been delivered misstates the law and
disregards the undisputed facts; (4) the Note’s terms do not support increasing the
Principal Amount from the $946,671 amount calculated in August 2018 to
$6,000,000 due to delay or purported breaches by Temperatsure of its obligation to
supply timely LTM Gross Profit Statements or the Principal Statement; and (5)
enforcing the $6,000,000 Principal would result in a windfall to B&C. Temperatsure
argues that since the August 2018 Spreadsheet is the Principal Statement, and that
statement timely was disputed by B&C, arbitration is required.
15
In its response to B&C’s Complaint, Temperatsure also asserted six
affirmative defenses, including that B&C’s claims are barred by Smith’s unclean
hands and by the failure to satisfy a condition precedent. In its third-party complaint,
Temperatsure argues Smith breached his contractual and fiduciary duty of loyalty
and candor by failing to inform the Board that the Note’s procedures were not being
followed and by directing Kahle to pay interest that was neither due nor payable.
In his motion, Smith argues he is entitled to summary judgment on
Temperatsure’s third-party claims because (1) Smith did not have a duty to inform
the board that the Note’s “procedures” were not being followed, and (2) Smith did
not direct Kahle to pay interest.
ANALYSIS
Summary judgment should be awarded if “the pleadings, depositions, answers
to interrogatories and admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law.”©? Where, as here, the parties have filed
cross motions for summary judgment and have not argued an issue of material fact
precludes “disposition of either motion, the Court shall deem the motions to be the
6° Super. Ct. Civ. R. 56(c).
16
equivalent of a stipulation for decision on the merits based on the record submitted
with the motions.””°
To determine what document constitutes the Principal Statement, the Court
must interpret the Note’s plain terms and apply that interpretation to the undisputed
facts. The proper construction of a contract is a question of law for the Court.”!
When interpreting a contract, the Court gives priority to the parties’ intentions as
reflected within the contract’s four corners.” To determine what the parties
intended, “Delaware courts start with the text.””? The Court must construe the
contract “as a whole, giving effect to all provisions therein.””* Clear and
unambiguous language will be given its ordinary meaning.”
In Section 2(c), the Note defines Principal Statement as “a statement setting
forth [Temperatsure’s] calculation of the Principal.”’® Interpreted in accordance
with the rules of contract construction, the Note unambiguously provides that a
Principal Statement is any statement that sets forth Temperatsure’s Principal
70 Td. 56(h).
™ Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992).
” Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 145 (Del. 2009) (citing E.L. du Pont de Nemours
& Co, v. Shell Oil Co., 498 A.2d 1108, 1113-14 (Del. 1985)); Nw. Nat'l Ins. Co. y. Esmark, Inc.,
672 A.2d 41, 43 (Del. 1996).
” Sunline Com. Carriers, Inc. v. CITGO Petro. Corp., 206 A.3d 836, 846 (Del. 2019) (citation
omitted).
™ GMG Cap. Invs., LLC y. Athenian Venture Partners I, L.P., 36 A.3d 776, 779 (Del. 2012)
(quoting £.J. du Pont de Nemours and Co., 498 A.2d at 1113)).
3 Id. at 780.
7 Note § 2(c).
17
calculation. B&C offers the only reasonable interpretation of that phrase, and the
July 2017 Email squarely falls within the phrase’s meaning.
A. The July 2017 Email is the Principal Statement under the Note’s ordinary
meaning.
Under Delaware law, courts give a contract’s words their ordinary meaning
and do not “torture” those words to impart ambiguity where none exists.”’ Section
2(c) of the Note states:
Within fifteen (15) days after the Evaluation Period, the Company will
deliver to the Holder a statement setting forth its calculation of the
Principal to the Holder (the “Principal Statement”). The Holder will
have from the time the Principal Statement is delivered to the Holder
until 5:00 p.m., Pacific Time, on the fifteenth day after the date of such
delivery (the “Dispute Period”) to dispute any elements of or amounts
reflected on the Principal Statement that affect the calculation of the
Principal (the “Dispute”).”8
As explained below, the July 2017 Email satisfies each element of this
definition.
i. “Principal Statement”
The words the parties used to define “Principal Statement” do not require the
statement to have any degree of formality or contain any minimum quantum of data,
apart from the figure Temperatsure determined was the Note’s Principal.
“Statement” ordinarily is defined as “something stated,” such as a single declaration
™” Rhone—Poulenc Basic Chems. Co., 616 A.2d at 1196.
78 Note § 2(c).
18
or remark, a report of facts, or opinions.” “Statement” also is defined as “a summary
of activity in a financial account over a particular period of time.”®° Under these
definitions, there is no suggestion that a statement must be comprehensive. The
email, therefore, can qualify as a statement.
The July 2017 Email is a statement that Temperatsure delivered to B&C that
sets forth what Temperatsure calculated the Principal to be. It provides: “The
interest payment is being wired today. You should receive $125,000 which is 5
months interest on the note.”*! There is no dispute that $125,000 for five months’
interest at the Note’s 5% annual rate equals a $6,000,000 Principal.
ii. “Within”
The term “within” is used as a function word to indicate “before the end of.”®
That meaning supports B&C’s interpretation because the email was sent “before the
end of” 15 days after the Evaluation Period. “Within” also can be used as a function
word to indicate a specified difference or margin, such as “within” a mile of town.™
Interpreting “within” as meaning “before the end of” is consistent with the parties’
intent to structure the Note so the amount of the earn-out promptly was finalized.
7 Statement, Merriam-Webster, https://www.merriam-webster.com/dictionary/statement.
8° Td.
5! B&C Mot., Ex. 28.
82 Within, Merriam-Webster, https://www.merriam-webster.com/dictionary/within.
83 See id.
19
In contrast, although Temperatsure contends the word “within” prohibits
delivery of the statement before the end of the Evaluation Period, that argument is
not logical in the context of the parties’ agreement. If the maximum payment is
reached before the end of the Evaluation Period, there would be no uncertainty left
in what was to be paid to B&C and no need to conduct any further evaluation.
Indeed, there is no dispute that this is exactly what happened here. Furthermore, no
other statement regarding the Principal was sent within 15 days after the Evaluation
Period, including the August 2018 Spreadsheet on which Temperatsure relies.
Accordingly, focusing on the word “within” adds little to the current dispute,
because even Temperatsure’s proffered Principal Statement does not fit its
interpretation of that word.
iii. “Setting Forth”
To “set forth” simply is defined as “to give an account or statement of.”** The
July 2017 Email gave such a statement.
iv. “Calculation”
“Calculation” means “the process or an act of calculating” or “the result of an
act of calculating.”®> In choosing which definition should control the meaning of
Principal Statement, it is logical to consider how the word is used in other parts of
84 Set Forth, Merriam-Webster, https://www.merriam-webster.com/dictionary/set%20forth.
85 Calculation, Merriam-Webster, https://www.merriam-webster.com/dictionary/calculation.
20
the Note. In Section 2(a), the Note states that “[e]ach LTM Gross Profit Statement
will (a) include reasonable supporting documentation for the estimates and
calculations contained therein (together with any additional information reasonably
requested by the Holder)/[.]”*°
To give meaning to “supporting documentation” for the calculations, it
appears that the word “calculation” as used in that section means the end result,
rather than a statement with mathematical formulas or processes. Section 2(a)’s very
existence also supports the conclusion that the Principal Statement need not state
anything more than the amount of Principal. Had the parties intended a Principal
Statement to contain supporting calculations, they easily could have included in
Section 2(c) language similar to Section 2(a). And, Section 2(a) shows why a
Principal Statement would not need to include any level of detail. If Temperatsure
was communicating that the maximum possible earn-out had been achieved, there
would be no need to include documentation supporting its calculation. Conversely,
where the maximum target was not achieved, the LTM Gross Profit Statements
would contain all Temperature’s figures and formulas.
ve “Any”
Finally, the fact that Section 2(c) requires B&C to “dispute any elements of
or amounts reflected on the Principal Statement” within 15 days does not mean that
86 Note § 2(a).
21
the July 2017 Email necessarily required a granular level of detail. Again, when
Temperatsure determined that the maximum $6 million earn-out was achieved, it
would be absurd to think the parties expected any level of detail since there was
nothing for B&C to dispute in those circumstances. The use of the word “any” does
not require that there be any elements of or amount reflected on the Principal
Statement at all. “Any” means “any part, quantity, or number” and “a or some
9987 l 88
without reference to quantity or extent.”°’ Any could in fact mean none at al
B. Temperatsure’s interpretation is not reasonable and the Principal
unambiguously is $6,000,000.
When a contract is clear and unambiguous, the Court accords its terms and
provisions their plain meaning.®’ A contract is ambiguous only when a provision is
susceptible to more than one interpretation,” and not “simply because the parties do
not agree upon its proper construction.”®! If the contract is ambiguous, resolving
87 Any, Merriam-Webster, https://www.merriam-webster.com/dictionary/any.
88 See id.
8° Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010); Rhone-Poulenc Basic
Chems. Co. v., 616 A.2d at 1195 (“Clear and unambiguous language . . . should be given its
ordinary and usual meaning. Absent some ambiguity, Delaware courts will not destroy or twist
policy language under the guise of construing it.”) (internal citations omitted).
°° GMG Capital Invs., LLC, 36 A.3d at 780 (citing Eagle Indus., Inc. v. DeVilbiss Health Care,
Inc., 702 A.2d 1228, 1232 (Del. 1997) (finding an ambiguity exists where “the provisions in
controversy are fairly susceptible of different interpretations or may have two or more different
meanings”)).
9! Td. at 780 (quoting Rhone—Poulenc Basic Chems. Co., 616 A.2d at 1196).
22
that ambiguity becomes an issue for trial, so that the fact finder may consider
extrinsic evidence to construe the contract and determine the parties’ intent.””
The summary judgment record here precludes a reasonable trier-of-fact from
agreeing with Temperatsure’s contention that the August 2018 Spreadsheet, rather
than the July 2017 Email, is the Principal Statement. Temperatsure’s proffered
interpretation is contrary to the Note’s plain language. Interpreting the Note in that
way would deny B&C the benefit of its bargain with Temperatsure, result in
superfluous verbiage, negate the earn-out’s overall scheme, and lead to absurd
results. Because the Note is clear and unambiguous, the Principal is $6,000,000 as
stated in the July 2017 Email.
i. Temperatsure’s interpretation would deny B&C the benefit of its
bargain.
Delaware emphasizes the importance of affording parties the benefit of their
bargain when interpreting agreements.”? Temperatsure argues the July 2017 Email
cannot be a Principal Statement because Temperatsure did not (i) first deliver the
LTM Gross Profit Statements with supporting information, or (ii) send the “Principal
Statement” within 15 days after the Evaluation Period. Temperatsure’s counterclaim
and affirmative defense similarly posit that the “GAAP-compliant LTM Gross Profit
2 Id. at 783 (citing Eagle Indus., Inc., 702 A.2d at 1232; Lawrence M. Solan, Pernicious Ambiguity
in Contracts & Statutes, 79 Chi-Kent L. Rev. 859, 862 (2004); United Rentals, Inc. v. RAM Hldgs.,
Inc., 937 A.2d 810, 841-42 (Del. Ch. 2007)).
°3 SLMSoft.Com, Inc. v. Cross Country Bank, 2003 WL 1769770, at *11 (Del. Super. Apr. 2, 2003).
23
statements and delivery of a Principal Statement based on those delivered GAAP-
compliant LTM Gross Profit statements was a condition precedent to enforcement
of the Note.””* Those requirements to which Temperatsure points, however, were
covenants intended for B&C’s benefit, rather than conditions precedent, and their
non-performance therefore does not excuse Temperatsure from being bound by its
calculation of Principal.
The distinction between a covenant and a condition precedent is that non-
occurrence of a covenant, unlike a condition precedent, does not release
Temperatsure from its obligation to perform under the Note.> Generally, a
condition precedent is a term rendering performance by one party contingent upon a
condition or performance of another.”° This condition “must be performed or happen
before a duty of immediate performance arises on the promise which the condition
°4 See Answer at 8.
% Sarissa Cap. Domestic Fund LP y. Innoviva, Inc., 2017 WL 6209597, at *24 n.263 (Del. Ch.
Dec. 8, 2017) (“Th[e] distinction between ‘condition precedent’ and ‘covenant’ is significant. . .
The press release as a ‘condition precedent’ would allow Innoviva to walk away from the
settlement if Sarissa failed to perform; the press release as “covenant” would allow Innoviva to sue
for breach of contract if Sarissa failed to perform. Non-performance of the ‘covenant,’ however,
would not provide a basis for Innoviva to walk away from the deal (unless, of course, Sarissa
committed a material breach of the press release term after the parties engaged in good faith
negotiations of the press release language).”) (internal citations omitted). See generally 2
Farnsworth on Contracts § 8.2 at 415 (3d ed. 2004) (“Although a condition is usually an event of
significance to the obligor, this need not be the case. In exercising their freedom of contract the
parties are not fettered by any test of materiality or reasonableness. If they agree, they can make
even an apparently insignificant event a condition.”).
6 SLMSoft.Com, Inc., 2003 WL 1769770, at *12.
24
qualifies.”®’ Necessarily, whether a condition is one precedent to performance by
the other party is divined from the parties’ intent.?® Courts look to an agreement’s
terms as evidence of that intent:
Although no particular words are necessary for the existence of a
condition, such terms as ‘if,’ provided that,' ‘on condition that,’ or some
other phrase that conditions performance usually connote an intent for
a condition rather than a promise. While there is no requirement that
such phrases be utilized, their absence is probative of the parties’
intention that a promise be made rather than a condition imposed, so
t 99
that the terms will be construed as a covenant.
Viewing the Note as a whole, and considering its unambiguous terms, ‘it is
evident that the “basic terms and procedures” relied upon by Temperatsure are
covenants for B&C’s benefit. As the party in control of Opco, Temperatsure
possessed the necessary information to calculate the Principal; the exchange of LTM
Gross Profit Statements and the timeframe in which a Principal Statement was
required to be delivered were intended to ensure B&C (i) was aware of Opco’s
performance during the Evaluation Period so it understood how Principal was
calculated, and (ii) received its consideration in a timely manner. Nothing in the
°7 13 Williston on Contracts § 38:7 (4th ed. 2019). See generally Marvel v. Conte, 1978 WL 8409,
at *4 (Del. Ch. Oct. 24, 1978).
°8 See 13 Williston on Contracts § 38.16 (ilations omitted).
” Id. § 38:7; see also Restatement (Second) of Contracts § 227 (“Conditions: (1) In resolving
doubts as to whether an event is made a condition of an obligor's duty, and as to the nature of such
an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the
event is within the obligee's control or the circumstances indicate that he has assumed the risk. (2)
Unless the contract is of a type under which only one party generally undertakes duties, when it is
doubtful whether (a) a duty is imposed on an obligee that an event occur ... the first interpretation
is preferred if the event is within the obligee's control.”).
25
Note’s language suggests these promises were conditions precedent to Temperatsure
delivering a Principal Statement or being bound by a Principal Statement it did
deliver. Temperatsure’s argument erroneously conflates the Note’s covenants with
its conditions precedent in an effort to avoid the unavoidable implications of the July
2017 Email.
Even if the GAAP compliance requirement could be construed as a condition
precedent imposed for both parties’ protection and benefit, both parties effectively
waived this condition through their performance under the Note. A condition
precedent may be waived by the party for whose benefit the contingency clause was
inserted in the contract.!°° And, a condition precedent may be waived by conduct
that demonstrates such an intention.'°! Here, B&C’s and Temperatsure’s conduct
evinces such an intent. On July 7, 2017, Temperatsure made the interest payment as
promised in the email.!°? On November 3, 2017, the Company paid B&C $75,000
for another quarter’s interest consistent with the $6,000,000 Principal.!° Over the
next eight months, each monthly Board packet reported the $6,000,000 Principal
expressly.' On June 27, 2018, the Company sent a proposed conversion agreement
100 Nemeth v. Patterson-Schwartz and Assoc., Inc., 1987 WL 12444, at *3 (Del. Super. June 12,
1987) (citing 17A C.J.S. Contracts § 491 (1963); 91 C.J.S. Vendor and Purchaser § 110 (1955)).
101 Td.
102 Smith Decl. § 8.
103 Answer at 17, 951; Ex. 11.
104 See Smith Decl. J 19 & Ex. 13.
26
that stated the original principal amount and total accrued interest was $6,075,000.!%
Before August 2018, neither party expressed to the other any dispute with the
calculation set forth in the July 2017 Email.'°° Since an acceptable earn-out payment
was obtained within the time authorized under the Note, the potential contingency
would present no obstacle to enforcing the agreement.
Temperatsure additionally argues the July 2017 Email is not the Principal
Statement because (1) Kahle did not intend it to be a Principal Statement, and (2) the
email was sent to Smith at his Company email address, not to the address at which
B&C was to receive notice under the Note.'®” As to the first argument, Temperatsure
contends Kahle’s belief that the threshold for the full earn-out had been met was not
based on GAAP-compliant LTM Gross Profits Statements for the Evaluation Period.
Temperatsure also argues that Kahle only was following Smith’s orders as his
subordinate and did not actually intend to set forth “the Company’s determination
of the Principal, if any, owed under the terms of the Promissory Note.”!® Even if
all those facts are true, however, Kahle’s subjective beliefs and intent at the time he
sent the e-mail are irrelevant to whether the July 2017 Email meets the Note’s
definition of Principal Statement.
105 B&C Mot., Ex. 14 at 14022.
106 B&C Mot., Ex. 72.
10? See Temperatsure Mot. 6, 23, 27-28.
108 Td. at 23.
27
Similarly, as to Temperatsure’s second argument, the email address where the
July 2017 Email was sent has no bearing on the Court’s analysis.'? There is no
specification in the Note that the Principal Statement must be sent to the notice
address for B&C.'!° Even if a Principal Statement is something for which formal
“Notice” was required under the Note, in cases where a party has argued a lack of
strict compliance with a contractual notice provision, Delaware courts have found
substantial compliance with a notice provision where the party “actually transmitted
notice to whom it was due.”!!! Here, the notice was sent to Smith’s email address
and there is no dispute that Smith received actual notice. It is clear that the email
was sent to Smith in his capacity as B&C’s representative. Only B&C was entitled
to payments under the Note, and the email Kahle sent to Smith’s company address
asked “[w]here do you want the interest payments on your note to go?” and said
“you should receive $125,000 which is 5 months interest on the note.”!!?
ii. Temperatsure’s interpretation would result in “superfluous
verbiage.”
Furthermore, Temperatsure’s interpretation would result in “superfluous
verbiage.” When interpreting contracts, this Court construes the contract as a
Td. at 27-28.
''° There is a Notice Provision in the Note specifying where formal notice must be sent. See Note
§ 8.
''l PR Acquisitions, LLC v. Midland Funding LLC, 2018 WL 2041521, at *7 (Del. Ch. Apr. 30,
2018).
12 B&C Mot., Ex. 28.
28
whole,'? “gives meaning to every word in the agreement[,] and avoids
*»114_ Temperatsure’s
interpretations that would result in ‘superfluous verbiage.
interpretation ignores the “final and binding” language in Section 2(c).
In Greenstar IH Rep, LLC v. Tutor Perini Corp., the Court of Chancery
rejected an interpretation almost identical to Temperatsure’s.''> In that case, the
defendant argued it was not bound to make earnout payments under a merger
agreement because the amounts the defendant disclosed to the plaintiff in tax profit
reports were based on inaccurate information.''® The defendant argued this result
was supported by the plain language of the merger agreement in which the earn-out
amount was to be based on “pre-tax profits,” which in turn were to be based on
financials prepared in compliance with GAAP and free of material inaccuracies.
Since the amounts disclosed in the pre-tax profit reports did not reflect the actual
pre-tax profits, the defendant contended the amounts could not be the basis for the
earn-out payments. The Court of Chancery rejected the defendant’s interpretation,
finding it was contrary to the merger agreement’s plain language that the pre-tax
profit report was “binding” on both of the parties. The Court stated:
"3 GMG Cap. Invs., LLC, 36 A.3d at 779 (citing E.L du Pont de Nemours & Co., 498 A.2d at
1113).
"4 Seidensticker v. Gasparilla Inn, Inc., 2007 WL 4054473, at *3 (Del. Ch. Nov. 8, 2007) (citing
NAMA Hldgs., LLC v. World Mkt. Cir. Venture, LLC, 948 A.2d 411, 419 (Del. Ch. 2007)).
115.9017 WL 5035567 (Del. Ch. Oct. 31, 2017), judgment entered, (Del. Ch. 2017), aff'd, 186 A.3d
799 (Del. 2018), and aff'd, 186 A.3d 799 (Del. 2018).
116 Td.
29
The Merger Agreement, at Section 2.14(a), spells out unambiguously
how the Earn—Out Payments for each of the five Earn—Out Years are to
be calculated. This calculation is expressly dependent upon
[Defendant’s] calculation of Pre-Tax Profit as disclosed in its Pre-Tax
Profit Reports. At Section 2.14(b), the parties evidenced their intent to
streamline the Earn—Out Payments by agreeing to a process by which
they would settle earn-out related disputes in an expedited and extra-
judicial manner. If the parties do not invoke this process, then “[t]he
Pre—Tax Profit Report and the Pre—Tax Profit for the twelve-month
period reflected [on the report], shall be binding upon the Interest
Holder Representative, Stockholders and Parent.” Thus, reading
Section 2.14(a) and Section 2.14(b) together, the terms unambiguously
provide that the Pre—Tax Profits [Defendant] disclosed in its Pre—-Tax
Profit Reports, having not been disputed, are binding upon both
[parties] and the required Earn—Out Payments must be calculated and
paid from these amounts. To accept [Defendant’s] construction of
Section 2.14 would be to render the language “shall be binding”
superfluous—a result, under our law, that must be “avoided.”!!”
Here, Defendant’s arguments similarly would render the Note’s “final and
binding” language superfluous. Under Section 2 of the Note, Temperatsure must
deliver a Principal Statement to B&C. After the Principal Statement is delivered,
[i]f the Holder does not deliver to the Company within the Dispute
Period a written notice of the Dispute that sets forth in reasonable detail
the elements and amounts of which the Holder disagrees then (i) the
Principal Statement and the calculation of the Principal will be deemed
to have been accepted and agreed to by the Holder and will be final and
binding upon the parties; and (ii) the Principal set forth in the Principal
Statement will be the Principal for all purposes of this Note, effective
as of the first day following the end of the Evaluation Period.'!®
"7 Td. at *6.
118 Note § 2(c).
30
Reading the Note as a whole, Section 2’s purpose is to provide B&C with a
mechanism by which to dispute Temperatsure’s initial calculation. If not disputed
within the established timeframes, the Principal Statement and the calculation of the
Principal are binding upon both B&C and Temperatsure, and the required earn-out
payments must be calculated and paid from these amounts. To accept
Temperatsure’s interpretation would render the language “will be final and binding”
meaningless.
iii. | Temperatsure’s interpretation would negate the earn-out’s overall
scheme, further denying B&C the benefit of its bargain.
The basic rule of contract construction gives the parties’ intentions priority.''?
In upholding that intention, a court must construe the agreement as whole, giving
effect to all its provisions.'”? When interpreting contracts, the meaning inferred from
a particular provision cannot control the meaning of the entire agreement if such an
inference conflicts with the agreement's overall scheme or plan.!!
The earn-out contemplated by the parties is typical of earn-outs in corporate
acquisitions. In a highly complex corporate transaction, an earn-out allows parties
9 Radio Corp. of Am. v. Philadelphia Storage Battery Co., 6 A.2d 329, 340 (Del. 1939); see also
Pennwalt Corp. v. Plough, Inc., 676 F.2d 77, 80 (3d Cir. 1982); DuPont v. Wilmington Trust Co.,
45 A.2d 510 (Del. Ch. 1946); Restatement (Second) of Contracts § 202.
120 Radio Corp. of Am., 6 A.2d at 340.
121 GMG Cap. Invs., LLC, 36 A.3d at 779 (citing EL. du Pont de Nemours & Co., 498 A.2d at
1113).
31
to bridge a valuation gap that may arise during their negotiations.!2?_ An earn-out
provision creates a contingent payment obligation for the acquirer that becomes
payable if certain targets are met during the post-closing period.'*? Through the
contingent payment structure of an earn-out, the parties agree to defer the ultimate
valuation question until a later time when uncertainties with respect to valuation
have been resolved.'** An earn-out does not, however, give the acquirer license
continually to revisit the valuation question once the contractual time to do so has
passed.
Recognizing this reality, the Court of Chancery in Greenstar rejected the
defendant’s argument that it could avoid its payment obligation because the pre-tax
profits it previously calculated and delivered were based on financial statements that
were not GAAP compliant:
Nothing in the Definitions Section reasonably can be read to negate or
qualify Section 2.14's mandate that if [Plaintiff] does not object within
thirty days of receiving a Pre—Tax Profit Report, the report and the Pre—
Tax Profit stated therein are binding on all parties. Instead, the
Definitions Section simply defines how [Defendant] must calculate
Pre—Tax Profit—it must do so “in accordance with past practices and
based upon financial statements (prepared in accordance with GAAP
consistently applied) of the [Defendant].” Section 2.14 makes no
reference to this Definition, nor do the express terms of the provision
even hint that the parties intended to relieve [Defendant] of its earn-out
obligations in the event [Defendant] is later able to demonstrate that it
'22 Brian JM Quinn, Putting Your Money Where Your Mouth Is: The Performance of Earnouts in
Corporate Acquisitions, 81 U. Cin. L. Rev. 127, 134 (2012).
123 Tq. at 133.
124 Td.
32
failed properly to calculate Pre-Tax Profit by relying on inaccurate
financial statements that it prepared. What Section 2.14 does make clear
is that once [Defendant] prepares the Pre—Tax Profit Report, and
provides it to [Plaintiff], if [Plaintiff] does not timely object, the report
and the Pre-Tax Profit disclosed therein are “binding.” !>
OK OK
Had the parties intended to allow [Defendant] to withhold Earn—Out
Payments whenever it believed it had calculated Pre-Tax Profits based
on inaccurate information, they easily could (and surely would) have
provided such language as part of the bespoke process they agreed to
in Section 2.14. They did not. Therefore, I will not imply a term that is
inconsistent with the intent of the parties as evidenced by the express
terms of the agreement.!*°
In a similar manner to the defendant in Greenstar, Temperatsure argues the
July 2017 Email cannot be a Principal Statement because the Note’s “basic terms
127 were not followed, and Temperatsure therefore could not at the
and procedures
time it sent the email have made a final determination of the Note’s Principal
amount. Temperatsure contends this result is supported by the Note’s plain
language, which states that the Principal has to be based on the LTM Gross Profit.
The parties agreed to base the contingent payment on Opco’s LTM Gross
Profits calculated over the seven-month Evaluation Period. If Opco achieved the
target in any one of those months, the contingent payment would be due and the
parties’ valuation differences would be resolved. Accordingly, at the point that
25 GreenStar IH Rep, LLC, 2017 WL 5035567, at *7.
126 Td. at *8.
!27 Temperatsure Mot. at 2.
33
Kahle notified Smith that the maximum payout had been reached, the valuation
uncertainty appeared resolved to both parties. All that remained was to fulfill the
Note’s payment obligations. It was not until a year later that Temperatsure
purportedly recognized its mistaken calculation and sent the August 2018
Spreadsheet as the Principal Statement under the Note. Temperatsure’s position that
the August 2018 Spreadsheet constitutes the Principal Statement, however,
disregards the Note’s other fundamental provisions regarding finality of the
determination and therefore contravenes the parties’ clear intentions. To hold
otherwise would negate the earn-out’s overall scheme.
Just as in Greenstar, the definition of LTM Gross Profit cannot be read to
negate or qualify Section 2’s mandate that if B&C does not object within the Dispute
Period, the Principal Statement and its Principal calculation will be binding. The
definition of LTM Gross Profit describes how Temperatsure must calculate the
Principal in accordance with GAAP. Section 2 makes no reference to this definition,
nor do the provision’s express terms relieve Temperatsure of its earn-out obligations
in the event it failed to calculate the Principal properly. Rather, Section 2 defines
the Principal Statement as Temperatsure’s statement setting forth its calculation. It
was anticipated through the dispute resolution process that the initial calculation,
even if incorrect, still would become the Principal if B&C failed to dispute it.
34
Temperatsure essentially has argued that its miscalculations and failure to
fulfill its obligations should be reinterpreted as though Temperatsure never sent a
Principal Statement until August 2018.'78 The parties did not, however, negotiate a
mechanism by which Temperatsure could retreat from a Principal calculation it later
concluded was erroneous. Temperatsure’s understanding is contrary to the benefits
contemplated by the agreement, where both parties benefited from a provision that
limited the time to dispute the Principal.
iv. Temperatsure’s interpretation would lead to absurd results.
The general absurdity of Temperatsure’s position requires little further
analysis. Considered purely from a logical standpoint, Temperatsure’s argument
would require the Court to conclude: (1) Temperatsure’s previous calculation of
Principal, on which both sides relied from a period of 13 months, was meaningless
because Temperatsure did not comply with its own obligations (a) to provide
monthly statements of its gross profit, or (b) calculate gross profit according to
GAAP; and (2) B&C was required to demand Temperatsure perform its obligations
and B&C’s failure to do so imperils its earn-out, even though B&C had no reason to
insist upon strict compliance once the full earn-out was achieved. The Court simply
is not persuaded that sophisticated parties are required to behave irrationally.
128 Under this counterfactual reality, B&C apparently raised no objection to the absence of any
Principal Statement and blindly accepted interest payments without knowing what they
represented.
35
Section 2 makes clear that once Temperatsure delivers the Principal Statement
and B&C does not timely object, the Principal disclosed is binding. Even
Temperatsure acknowledges that the Note deems an undisputed Principal Statement
“final and binding.”!”? As such, B&C is entitled to summary judgment on its claims
unless the Company can establish at least a triable factual issue as to one or more of
its affirmative defenses.'°° The only remaining affirmative defense the Company
raises in its answering brief is that Smith breached his duties of loyalty and candor,
which, as detailed below, is unconvincing. As such, B&C is entitled to a declaration
that the Principal is $6,000,000. Because B&C was entitled to the interest payment
it received, Temperatsure’s counterclaim that B&C unjustly was enriched similarly
fails.
C. Smith did not breach his duties of loyalty and candor.'*!
There is no dispute that Smith, as a Temperatsure board member, owed the
Company fiduciary duties. Temperatsure contends Smith breached his duties in
accepting an interest payment on B&C’s behalf that was not yet technically due and
by failing to advise Temperatsure’s board that Temperatsure was not providing LTM
Gross Profit Statements.
129 See, e.g. Temperatsure Mot. at 3.
130 See Scureman v. Judge, 626 A.2d 5, 14 (Del. Ch. 1992), aff'd sub nom., Wilmington Tr. Co. v.
Judge, 628 A.2d 85 (Del. 1993).
'31 The undersigned was designated to sit as Vice Chancellor on the Court of Chancery “for the
purpose of hearing equitable claims or defenses” by Chief Justice Leo E. Strine, Jr. on June 27,
2019.
36
Temperatsure first argues Smith breached his fiduciary duty of loyalty by
“directing a subordinate to pay interest that was not due or payable.”!*? It is plain
from the record (and acknowledged by all parties) that everyone misinterpreted the
Note’s interest provision. Section 3 of the Note states that interest “accru[es] from
the date on which the Principal is finally determined to be any amount greater than
$0 pursuant to Section 2.”'33 Under Section 2(c), the Principal could not become
final and binding until at least 15 days elapsed following delivery of the Principal
Statement without B&C sending Temperatsure a Dispute Notice.!*4
Accordingly,
interest could not have accrued until 15 days after Kahle’s July 2017 Email. Despite
that language, on February 3, 2017, in a response to a question from Temperatsure’s
auditors about how Temperatsure should value the Note on its 2016 financial
statements, Fry stated to the auditors and Kahle: “I think at this point it’s very likely
that [the $6,000,000 earn-out] will be earned and we’re happy to accrue accordingly
27135
Based on his understanding of this statement, Kahle directed then Controller
Mary Stoltenberg to accrue a monthly $25,000 interest obligation beginning with the
month of February 2017.6 There is no showing that Smith realized Kahle’s
132 See Temperatsure Mot. at 45-47.
133 Note § 3.
134 Tq. § 2(c).
'35 B&C Mot., Ex. 16 at 7964,
136 Kahle Dep. at 129:6-131:13; B&C Mot., Ex. 29.
37
interpretation was incorrect. In fact, each Temperatsure board member, including
Smith, failed to notice the early accrual and payment.'*’? Even the August 2018
Spreadsheet that Temperatsure argues is its definitive statement of Principal under
the Note indicates that interest began accruing in the first quarter of 2017.'°8
Notwithstanding these undisputed facts, Temperatsure cites Smith’s June 28,
2017 email as evidence of Smith’s disloyalty. That email stated: “Obviously I am
not to[o] worried about it but you should plan on paying my Qtrly Note Payment in
July sometime unless you want to do in June.” Even if this could be interpreted as
a direction, it is undisputed that Smith and Kahle already had discussed the Principal,
and Kahle directed the controller to pay the interest even before the email was
sent.'3? Smith’s request that Temperatsure begin paying interest that both sides
mistakenly believed was due cannot be construed as disloyal behavior.
As to its argument that Smith breached his duty of candor by failing to advise
the Board that Temperatsure was breaching its obligation to provide LTM Gross
Profit Statements to B&C during the Evaluation Period, neither the facts: nor
Delaware case law supports Temperatsure’s position. Under the facts as Smith knew
them, B&C achieved the maximum earn-out within the first month of the Evaluation
137 See, e.g., B&C Mot., Ex. 11 (Fry, Bell, and Silva Behrens discussing in May 2018 that by
March 2018, that Temperatsure “should have paid a total of $350K in interest [i.e., 14 months’
worth] since inception”).
138 See B&C Mot., Ex. 72 at 48884 (stating that 6 quarters of interest had accrued as of August 6,
2018).
139 See B&C Mot. at 36 (discussing Ex. 65).
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Period. B&C therefore would have no reason to insist that Temperatsure provide
the monthly statements at issue. Without any facts suggesting that Smith knew
Kahle was not following GAAP or otherwise was miscalculating the Principal
amount, there is no plausible argument that Smith acted disloyally or with
incomplete candor by failing to alert Temperatsure’s board to this technical violation
of the Note.
CONCLUSION
For the foregoing reasons, Temperatsure’s Motion for Summary Judgment is
DENIED, and B&C’s and Smith’s Motions for Summary Judgment are
GRANTED. B&C and Smith shall submit a conforming form of order within fifteen
days reflecting the amount of principal and interest due under the Note. Before
filing, B&C shall afford Temperatsure a meaningful opportunity to review and
respond to the proposed order. Ifthe parties disagree as to the order’s contents, B&C
shall so advise the Court by a letter accompanying the proposed order. Temperatsure
then may file a responsive letter within five business days. IT IS SO ORDERED.
39