Aveanna Healthcare, LLC v. Epic/Freedom, LLC

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
AVEANNA HEALTHCARE, LLC )
(F/K/A BCPE EAGLE BUYER LLC), )
)
Plaintiff, )
)
v. )
) C.A. No. N20C-08-055 AML CCLD
EPIC/FREEDOM, LLC, and )
WEBSTER CAPITAL CORPORATION )
(A/K/A WEBSTER CAPITAL )
PARTNERS, and WEBSTER EQUITY )
PARTNERS), )
)
Defendants. )
Submitted: April 29, 2021
Decided: July 29, 2021
MEMORANDUM OPINION
Upon Plaintiff’s Motion for Judgment on the Pleadings:
DENIED
Upon Plaintiff’s Ch. Ct. R. 56(f) Motion for An Extension of Time:
GRANTED
Upon Defendants’ Motion for Judgment on the Pleadings:
DENIED
Upon Epic/Freedom LLC’s Motion for Summary Judgment:
DENIED WITHOUT PREJUDICE
Richard L. Renck, Esquire, Tracey E. Timlin, Esquire, of DUANE MORRIS LLP,
Wilmington, Delaware, Robert M. Castle, III, Esquire, Randy D. Gordon, Esquire,
of DUANE MORRIS LLP, Dallas, Texas, Attorneys for Plaintiff Aveanna
Healthcare, LLC.
Kenneth J. Nachbar, Esquire, Miranda N. Gilbert, Esquire, of MORRIS, NICHOLS,
ARSHT & TUNNELL LLP, Wilmington, Delaware, R. Todd Cronan, Esquire,
Joseph P. Rockers, Esquire, of GOODWIN PROCTER LLP, Boston, Massachusetts,
Attorneys for Defendants Epic/Freedom, LLC and Webster Capital Corporation.
LEGROW, J.
The buyer and the seller executed interrelated purchase agreements that
memorialized the buyer’s acquisition of two companies from the seller. To value
the companies, the buyer used an accounting model that assumed the accuracy of
certain financial statements prepared by the seller and its owner during the diligence
phase of the parties’ negotiations. The truth of those financial statements
contractually was represented and warranted by the companies, but not by the seller
or its owner. After the transaction closed, however, the buyer allegedly discovered
the seller and its owner falsified the financial statements in a knowing, concerted
effort to induce the buyer to agree to a purchase price higher than the seller and its
owner otherwise could have achieved. The buyer filed this fraud action to recover
damages from the seller and its owner for their knowledge of, and participation in,
the companies’ false contractual representations.
The seller responded with breach of contract counterclaims arising from the
buyer’s alleged failure to pay the entire agreed upon purchase price. Under the
purchase agreements, the seller was entitled to receive an upfront payment, future
payment of a federal tax refund, and distribution of escrowed funds. The buyer
agreed to remit the tax refund to the seller no later than ten business days after the
buyer received it. The seller was entitled to automatic distribution of the escrow
funds unless the buyer properly lodged an indemnification claim against the seller
within one year of the transaction’s closing. The seller alleges the buyer wrongfully
refused to remit the refund despite the seller’s attempts to collect it. The seller also
alleges the buyer sidestepped the parties’ indemnification notice requirements,
which enabled the buyer to withdraw the escrow funds without the seller’s objection.
The parties have denied all wrongdoing and now move for judgment on the
pleadings as to their respective claims.
The parties’ motions present three independent questions that are controlled
by unambiguous contract language arrived at through sophisticated, arms-length
negotiation. First, may the seller and its owner escape liability for contractual fraud
by citing anti-reliance language inapplicable to fraud claims that challenge a seller’s
knowledge of a company’s false contractual representations? Second, may the buyer
withhold the tax refund by invoking self-styled “conditions” unrelated to the
refund’s release? Third, did the buyer validly extract escrow funds held for the seller
by providing an indemnification notice solely to the parties’ escrow agent despite
the buyer’s duty to deliver a single notice to the escrow agent and the seller
concurrently?
The Court answers each of these questions in the negative and declines to
resolve any embedded factual issues. Accordingly, and for the reasons discussed
below, the parties’ motions for judgment on the pleadings are DENIED. Because
fact discovery is necessary for the buyer’s tax dispute defenses, the buyer’s motion
for an extension of time to respond to the seller’s summary judgment motion is
2
GRANTED. Finally, because the seller’s summary judgment motion presents
equitable arguments, but also because this litigation’s procedural history warrants
granting the seller an opportunity to revise its arguments, that motion is DENIED
WITHOUT PREJUDICE.
BACKGROUND
This case concerns Aveanna Healthcare, LLC’s (“Aveanna” or “Buyer”)
acquisition of Epic Acquisition, LLC and FHH Holdings, Inc. (the “Companies”)
from Epic/Freedom, LLC (“Epic” or “Seller”) through an all-cash-for-stock
transaction that was memorialized in a stock purchase agreement (the “SPA”) to
which Aveanna, Epic, and the Companies are parties. Aveanna contends Epic and
its owner, Webster Capital Corporation (“Webster” and together with Epic,
“Defendants”), priced the deal based on false contractual representations of the
Companies’ financials, inducing Aveanna’s acceptance of negative value assets.1
Seller responded with two breach of contract counterclaims. First, Epic
claims Aveanna improperly is withholding a federal tax refund afforded Seller under
the SPA despite Buyer’s duty to remit that refund no later than ten business days
after Buyer receives it. Second, Epic claims Aveanna wrongfully extracted escrow
funds segregated under a companion purchase agreement (the “Escrow Agreement”)
1
Aveanna initially sued a number of Defendants’ managers in their individual capacities. It since
has dismissed its claims against them. D.I. 34–35.
3
to true up the sale price by circumventing that agreement’s notice and objection
procedures.
A. The Parties
Aveanna develops and sells home healthcare technology and personalized
therapeutic services.2 Aveanna operates primarily in the “enteral solution” space.
Enteral solutions are food consumption products designed to assist patients who
have difficulty ingesting nutrients without synthetic aids.3
Before the sale, Epic offered services and supplies similar to those offered by
Aveanna.4 When Epic entered the enteral solution industry, it began targeting the
populations from which Aveanna solicited its clients.5 Epic’s expansion into
Aveanna’s market segment was pioneered by Webster, a private equity firm that
owned a majority stake in Epic.6
B. The Sale
During the fall of 2015, Webster directed Epic to purchase various home
healthcare assets, including two lucrative enteral solution businesses.7 Epic’s
acquisition of those firms strengthened Epic’s influence over what was acclaimed
2
D.I. 1, Compl. ¶ 14.
3
Id.
4
Id. ¶ 15.
5
Id.
6
Id. ¶¶ 8, 15.
7
Id. ¶ 15.
4
publicly as a billion-dollar sector.8 Given that news, Webster decided to put Epic’s
enteral lines up for sale in April 2016.9
Defendants hired investment banks and private consultants who generated
financial performance analyses and documentation through which prospective
buyers independently could assess Epic’s financial health.10 The reports purported
to disclose the full extent of Epic’s performance during its 2016 fiscal year.11
Around the fall of 2016, Aveanna expressed interest in purchasing Epic. A
deal for Aveanna would include synergies, as managing Epic’s enteral assets would
allow Aveanna to control a wider share of the enteral solution market. Preliminary
negotiations between Aveanna and Defendants concluded in December 2016, at
which time Aveanna and Epic reached a purchase agreement in principle.12 Under
that agreement, Aveanna would acquire the Companies through an all-cash-for-stock
merger. Before the merger, Epic would convey all its enteral assets to the
Companies.
To finalize the transaction, the SPA’s parties conducted diligence. Aveanna
priced the Companies based on the projections and analyses prepared by
8
Id. ¶ 16; see generally D.I. 44, Ex. A, Amy Or, Webster Capital Explores Sale of Epic Health
Services, Wall St. J., https://www.wsj.com/articles/webster-capital-explores-sale-of-epic-health-
services-1461245592 (last updated Apr. 21, 2016, 9:33 AM).
9
Compl. ¶ 16.
10
Id. ¶ 31.
11
Id. ¶ 18.
12
Id.
5
Defendants’ advisors.13 The reports would survive closing as the contractually-
defined and incorporated “Financial Statements.” Using the Financial Statements,
Aveanna developed an earnings before interest, taxes, depreciation, and amortization
(“EBITDA”) model. Based on that model, Aveanna agreed to purchase the
Companies for $950 million.14 That figure aligned with price ranges produced by
Defendants’ third-party advisors, suggesting the Financial Statements were reliable.
With that understanding, the transaction closed on March 16, 2017.15
C. The Terms
1. The SPA
In addition to the parties’ material representations, the SPA contains language
governing the scope of permissible reliance, the viability of fraud claims, and the
procedures surrounding tax refunds and indemnification claims and notices.
a. Representations; Anti-Reliance; Fraud Carve-Outs
Under SPA Section 3.4, the Companies—but not Defendants—represented
the truth of the Financial Statements. Specifically, the Companies represented that
the Financial Statements “present fairly in all material respects the consolidated
13
Id. ¶ 21.
14
The purchase price was subject to adjustments that could increase or decrease the price
depending on certain corrections. See D.I. 3, Ex. A § 2.3 (hereinafter “SPA”). For example, a
revision to the Companies’ net working capital increased the purchase price if the revised amount
exceeded the total identified pre-closing. Id. § 1.1 (defining “Net Working Capital Adjustment
Amount”); id. § 2.3(b) (providing for increase); id. § 2.4 (describing payment procedure).
15
Compl. ¶ 20.
6
financial condition and results of operations of Seller” and that the Financial
Statements “were prepared in accordance with GAAP applied on a consistent
basis.”16 The Companies also represented that they had no undisclosed liabilities.17
In the same Article, the SPA’s parties drafted broad anti-reliance language
that precluded Aveanna from relying on any representation not memorialized in the
SPA. Specifically, the SPA’s parties agreed:
NONE OF SELLER, THE COMPANIES OR ANY OF THEIR DIRECT OR
INDIRECT SUBSIDIARIES OR OWNERS, INCLUDING, WITHOUT
LIMITATION CAPITAL III, L.P., WEBSTER CAPITAL II, L.P.,
WEBSTER CAPITAL II-QP, L.P., WEBSTER OR ANY OF THE
REPRESENTATIVES, MEMBERS, MANAGERS, EMPLOYEES,
DIRECTORS, OFFICERS, STOCKHOLDERS OR AFFILIATES OF ANY
OF THEM HAS MADE ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, OF ANY NATURE WHATSOEVER . . . OTHER
THAN THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY
SET FORTH IN THIS AGREEMENT, THE TRANSACTION
DOCUMENTS AND THE CERTIFICATES CONTEMPLATED HEREBY
AND THEREBY AND THE COMPANIES AND ALL SUCH PERSONS
HEREBY DISCLAIM ANY SUCH OTHER REPRESENTATIONS AND
WARRANTIES.18
To reinforce this intent, the SPA’s parties further agreed:
[N]one of Seller, the Companies, their direct and indirect Subsidiaries or any
representatives, members, managers, employees, officers, directors,
stockholders or Affiliates of any of them, including, without limitation,
Webster Capital II, L.P., Webster Capital II-QP, L.P., Webster Capital III,
L.P. and their Affiliates, has made, and shall not be deemed to have made, any
representations or warranties in the materials relating to the business of the
Companies or their Subsidiaries made available to Buyer, including due
16
SPA § 3.4(b).
17
Id. § 3.4(c).
18
Id. § 3.20(a).
7
diligence . . . and no statement contained in any of such materials or made in
any such presentation shall be deemed a representation or warranty hereunder
or deemed to be relied upon by Buyer or any of its Affiliates in executing,
delivering and performing this Agreement and the transactions contemplated
hereby.19
Highlighting the party-specific nature of the SPA’s representations, Article IV—
where Seller made separate representations—repeats this language verbatim.20
To reinforce its disclaimer of extra-contractual reliance, Aveanna expressly
acknowledged the Companies’ and Defendants’ disclaimer of any extra-contractual
representation:
None of Seller, the Companies, their direct and indirect Subsidiaries or any
representatives, members, managers, employees, officers, directors,
stockholders or Affiliates of any of them, including, without limitation,
Webster Capital II, L.P., Webster Capital II-QP, L.P., Webster Capital III,
L.P. and their Affiliates and representatives, has made, and shall not be
deemed to have made, any representations or warranties in the materials
relating to the business of the Companies or their Subsidiaries made available
to Buyer, including due diligence . . . or in any presentation concerning the
business of the Companies and their Subsidiaries or others in connection with
the transactions contemplated hereby or otherwise. . . . Buyer further
acknowledges and agrees that, except for the representations and warranties
contained herein, in the Transaction Documents and the certificates
contemplated hereby and thereby, . . . any cost estimates, projections or other
predictions, data, financial information, memoranda or offering materials or
presentations, including any offering memorandum or similar materials made
available by Seller, the Companies their direct or indirect Subsidiaries or
owners or any . . . Affiliates of any of them, are not and shall not be deemed
to be or to include representations or warranties of any of the foregoing . . .
and are not and shall not be deemed to be relied upon by Buyer or any of its
19
Id. § 3.20(b).
20
Id. § 4.7(a)–(b).
8
Affiliates executing, delivering and performing this Agreement and the
transactions contemplated hereby.21
Aveanna also agreed, through an integration clause, that the SPA is a fully-merged
document.22
The SPA’s parties carved contractual fraud liability out from the SPA’s
extensive anti-reliance and integration language. In Article III—where the
Companies alone made representations—the SPA explains:
[N]othing contained in this Agreement shall be construed to limit the recourse
of any party in the event of fraud with respect to the representations and
warranties set forth in this Agreement. . . .23
This language reappears three times.24 Most notably, the SPA’s parties included this
language in a provision titled “No Recourse.” Under the No Recourse provision, the
SPA’s parties generally agreed they could not sue each other’s non-party
“Affiliates.”25 But they also specifically agreed Affiliates can be pursued on a claim
“with respect to fraud involving the representations and warranties contained in
Article III [i.e., those by the Companies], Article IV [i.e., those by Seller], and
Article V [i.e., those by Buyer], or any certificate.”26
21
Id. § 5.8.
22
Id. § 10.16.
23
Id. § 3.20(c).
24
Id. § 4.7(c) (the Seller’s representations); id. § 9.4(b) (indemnification); id. § 10.17 (remedies).
25
Id. § 10.17. The SPA defines “Affiliate” to include a party’s controlling owner. Id. § 1.1.
26
Id. § 10.17.
9
b. Tax Returns; Tax Refunds
A federal tax refund served as partial consideration for the sale. The SPA’s
parties crafted a reticulated system for filing tax returns, remitting tax refunds, and
defending audits initiated by the Internal Revenue Service (the “IRS” or the
“Government”). First, under Section 6.9(e), Buyer and Seller agreed to “cooperate”
on return filings (the “Cooperation Provision”). The Cooperation Provision states:
Buyer, Seller and the Companies and their Subsidiaries shall cooperate fully,
as and to the extent reasonably requested by the other parties, in connection
with the filing of Tax Returns, the filing of any amended Tax Return for a Pre-
Closing Tax Period (which amended Tax Return may only be filed at the
request of Seller), any Tax audits, Tax proceedings or other Tax-related
claims, the authorization and execution of any appropriate powers of attorney
to accomplish the foregoing, allowing Seller to review Tax Returns to
determine or verify the proper amounts payable as refunds hereunder. . . .27
Next, under Section 6.9(f), the SPA’s parties enshrined Epic’s right to any
refund disbursed in connection with the Companies’ transaction-based tax returns
(the “Refund Provision”). The Refund Provision explains:
Seller shall be entitled to receive from Buyer, the Companies or their
Subsidiaries all refunds (or credits for overpayments) of Taxes of the
Companies and their Subsidiaries (including any interest thereon) attributable
to Pre-Closing Tax Periods (including as a result of any Transaction
Deductions). . . .28
27
Id. § 6.9(e).
28
Id. § 6.9(f).
10
The Refund Provision charges Aveanna with filing an “IRS Form 1139 for any
eligible carryback periods of the Companies and their Subsidiaries.”29 Once
disbursed, Aveanna must remit the refund to Epic “no later than ten business days
after receipt by” Aveanna.30 The Refund Provision further provides that a remitted
refund must reflect “the net of any [t]axes owed with respect to or as a result of such
refund . . . and net of any expenses incurred in obtaining the refund.”31 If a remitted
refund subsequently is “disallowed or clawed back” by the Government “for any
reason,” the SPA’s parties agreed Epic “shall (or shall cause its equity holders to)
return the full amount of such refund, plus any interest, penalties, and associated
costs and legal fees.”32 Last, the Refund Provision declares:
Notwithstanding anything herein to the contrary, any refund (or credit for
overpayment) requested and/or payable to Seller pursuant to the provisions of
this Section [] shall only be claimed and/or payable to the extent such refund
(or credit for overpayment) is based on Tax positions that are claimed with a
minimum “more likely than not” level of comfort, as reasonably determined
in consultation with Seller pursuant to the provisions of this Section [] and
[the Cooperation Provision].33
Finally, under Section 6.9(b), the SPA’s parties planned for IRS audits (the
“Audit Provision”). Under the Audit Provision, Epic has the power “to control . . .
any audit . . . with respect to the [t]axes or [t]ax [r]eturns of the Companies . . .
29
Id.
30
Id. (capitalization omitted).
31
Id.
32
Id.
33
Id.
11
including, . . . a [t]ax refund or credit to which [Epic] is entitled under [the Refund
Provision].”34 The Audit Provision affords Aveanna the qualified right to
“participate” in an audit “at its own expense.”35 But Epic may exclude Aveanna
from the audit’s defense unless Epic intends to settle the audit in a manner that would
“increase[e] a [t]ax liability of the Companies.”36 Only if Epic intends to do so does
it need Aveanna’s consent.37
c. Indemnification Claims; Indemnification Claim Notices
The SPA articulates the grounds and procedures for making “Indemnification
Claims.” Under SPA Section 9.2(a)(i), Epic must indemnify Aveanna for, among
other things, “the breach or inaccuracy of any representation or warranty made by
the Companies or Seller” in the SPA or its attached documents. To lodge such an
Indemnification Claim, Aveanna must send Epic an “Indemnification Claim
Notice.”38 The SPA defines an Indemnification Claim Notice as “written notice
describing a claim for indemnification under this Agreement, the amount thereof (if
known and quantifiable), and the basis thereof.”39
34
Id. § 6.9(b).
35
Id.
36
Id.
37
Id.
38
Id. § 9.5(a); see id. § 9.4(a)(i) (explaining, in the context of a limitations period, that
Indemnification Claim Notices are pre-conditions to coverage).
39
Id. § 1.1.
12
After being notified, Epic may, “upon reasonable notice,” “access . . .
[Aveanna’s] books and records . . . solely for the purposes of evaluating and
responding to [an] Indemnification Claim, resolving any disputes with respect
thereto, or responding to any matters or inquiries raised in [an] Indemnification
Claim Notice.”40 In any event, the SPA observes that Aveanna is not entitled to
indemnification until its losses exceed an “Indemnification Threshold” of $7.125
million—i.e., the sum escrowed from the sale price for Indemnification Claims.41
2. The Escrow Agreement
Buyer and Seller executed the Escrow Agreement contemporaneously with
the SPA. In addition to truing up the sale price, the Escrow Agreement allocates
litigation risk by depositing collateral (the “Escrow Funds”) with a third-party
custodian (the “Escrow Agent”) as security for Indemnification Claims.42 Among
the Escrow Agent’s duties is its agreement to receive and respond to requests to
release the Escrow Funds ahead of their automatic distribution to Seller, which was
40
Id. § 9.5(a).
41
Id. § 9.4(a)(iii).
42
D.I. 46, Ex. A Recitals & § 2 (hereinafter “EA”). The Buyer’s capital contribution comprised
(i) $15 million or “Adjusted Escrow Funds”; and (ii) $7.125 million or “Indemnity Escrow Funds”.
Id. § 2(a). Both Funds are captured by the EA’s definition of “Escrow Funds”. Id. § 2(a)(ii). As
a result, it seems reasonably clear that the entire $22.125 million operates to true up the sale price.
The parties, however, do not dilate on the $15 million, focusing instead solely on proper ownership
of the $7.125 million. Accordingly, and for simplicity, this decision uses “Escrow Funds” as
shorthand for the Indemnity Escrow Funds only.
13
scheduled for March 16, 2018 (the “Final Escrow Release Date”).43 Central to this
dispute is the concept of an early release.
Under Escrow Agreement Section 4(b), Buyer may request that the Escrow
Agent release the Escrow Funds “at any time prior” to the Final Escrow Release
Date.44 To do so validly, Buyer must take two steps. First, Buyer must “make a
claim for indemnification from Seller pursuant to Section 9.2 of the” SPA. 45 As
observed, SPA Section 9.2 describes the grounds for indemnification, not the
procedure for lodging an Indemnification Claim Notice.46 The Escrow Agreement
does not incorporate any other section in Article IX of the SPA. Second, Buyer must
deliver concurrently to the Escrow Agent and Seller a written notice (an
"Indemnification Notice") describing the claim, the amount thereof (if known
and quantifiable, and which may include the amount of Losses actually
suffered by the Buyer Indemnified Party and/or Losses which may in good
faith be expected to be suffered by the Buyer Indemnified Party assuming in
each case that all of the facts and circumstances forming the basis of the
indemnification were true) and the basis of the claim (an "Indemnification
Claim").47
Although the Escrow Agreement’s Indemnification Claim is titled and defined
identically in the SPA, the Escrow Agreement’s “Indemnification Notice” is titled
and defined differently than the SPA’s Indemnification Claim Notice.48
43
Id. § 4(f).
44
Id. § 4(b).
45
Id.
46
Compare SPA § 9.2, with id. § 9.5.
47
EA § 4(b).
48
Compare id. (containing a “good faith” element), with SPA § 1.1 (omitting such element).
14
After Buyer takes these steps, Seller has 30 days to exercise one of two
options.49 Seller may choose not to contest Buyer’s Indemnification Notice.
Alternatively, Seller may file a written objection to Buyer’s Indemnification Notice
(a “Dispute Notice”).50 If Seller timely files a Dispute Notice, then the Escrow Agent
may not release the Escrow Funds until the parties resolve the issue.51 But, if Seller
does not object, or if Seller fails to object before the 30-day deadline, then the
Escrow Agent must release to Buyer the sum requested.52
Even in cases of no contest or neglect, however, the Escrow Agreement does
not penalize Seller with a waiver of its right to challenge a release. To the contrary,
the Escrow Agreement provides:
No failure or delay by a party hereto in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, and no single or partial exercise
thereof shall preclude any right of further exercise or the exercise of any other
right, power or privilege.53
This “No Waiver” provision concludes by referencing Section 4, where the notice
and objection procedures reside.
The right of the Parties to receive all or a portion of the Escrow Funds under
the circumstances described in Section 4 above is in addition to, and not in
lieu of, any other remedies that any Person may have against another Person
pursuant to the [SPA] in the event of a breach of, or other liability under, the
[SPA].54
49
EA § 4(b).
50
Id.
51
Id. § 4(c).
52
Id. § 4(b).
53
Id. § 15.
54
Id.
15
D. The Post-Closing Discoveries
After the transaction closed, the Companies experienced financial problems
that prompted Aveanna to conduct an internal investigation. The investigation
revealed material inaccuracies in, and undisclosed liabilities masked by, the
Financial Statements.55 Specifically, Aveanna learned the Defendants:
(1) booked phantom returns on the Companies’ enteral assets, inflating
earnings with unliquidated or disputed profits while hiding present losses;56
(2) overstated revenue from the Companies’ rehabilitation assets by failing to
adjust accounts receivable reserves to a level appropriately reflective of the
Companies’ cash streams and by ignoring evidence suggesting a need for
adjustments;57
(3) understated the costs of goods sold by the Companies’ enteral lines,
resulting in the appearance of minimal production expenses that concealed an
unreconciled accounting of inventory-based and other net operating losses;58
(4) understated the Companies’ insurance expenses by declining to record
reserves for incurred but unreported malpractice and professional liability
claims;59
(5) omitted the extent of the Companies’ exposure to liability under the
Affordable Care Act;60 and
(6) omitted the Companies’ breach of a patent license with a third party, which
Aveanna was required to settle.61
55
Compl. ¶¶ 22–23.
56
Id. ¶¶ 26–47.
57
Id. ¶¶ 48–51.
58
Id. ¶¶ 52–58.
59
Id. ¶¶ 59–64.
60
Id. ¶¶ 65–68.
61
Id. ¶¶ 69–74.
16
Aveanna contends these misstatements were not mere scrivener’s errors, but
rather were the fruits of a concerted effort to deceive prospective buyers and inflate
the Companies’ sale price. As support for that contention, Aveanna pleads e-mail
messages exchanged by managers on the sell-side during the sale process which
suggest Defendants curated, or at least knew about, the falsity of the Financial
Statements.62 As examples, when Defendants’ managers learned that the Companies
were underperforming before the merger,
(1) Epic’s then-Chief Financial Officer wrote that Defendants would “fix” the
Financial Statements so the Statements would “hit the . . . results” Defendants
desired;63
(2) a Webster vice president instructed Defendants’ advisors to “scrub” the
Financial Statements, and to “remove[]” “anything . . . detrimental”;64 and
(3) Epic’s former Chief Financial Officer exclaimed to another Epic officer
that “[e]very $10K” of artificial earnings added to the Financial Statements
would generate “$1,200–1,500” more in sale profits for the sell-side’s
managers “at a 10X [EBITDA] multiple!”65
At the pleadings stage, these messages and others make it reasonably conceivable
that Defendants knew the Companies suffered considerable reversals, were overly
leveraged, and could not be advertised credibly at the EBIDTA multiples
Defendants’ analysts projected and buyers were expected to match. These messages
62
Id. ¶¶ 31, 33–39, 41–47.
63
Id. ¶¶ 39, 41.
64
Id. ¶ 46.
65
Id. ¶ 47.
17
also support a reasonable inference that Defendants knew erasing detrimental entries
from the Companies’ Financial Statements would hew the Companies’ EBIDTA to
the prices Aveanna’s model estimated.
E. The Escrow Dispute
Based on this investigation, Aveanna sent Epic an Indemnification Claim
Notice on December 21, 2017. In that Notice, Aveanna cited its fraud allegations as
the basis for its Indemnification Claim.
[B]ecause Buyer valued the Companies based on the operating results
presented by Seller and the Companies in the Financial Statements (and,
particularly, based on EBITDA), Buyer’s Losses as a result of these breaches
include the diminution in value of the Companies associated with these
representation and warranty breaches. Such diminution in value is calculated
by taking into account the multiple used by Buyer to determine the enterprise
value of the Companies (12.2x [] EBITDA). Accordingly, Buyer suffered
Losses in an amount equal to at least $85,644,0001 as a result of these
breaches. As such, Buyer demands payment in cash of an aggregate amount
equal to the [] Escrow Funds.66
In that last sentence, Aveanna referenced the Escrow Funds obliquely. Aveanna’s
Indemnification Claim Notice did not mention that Aveanna would be seeking an
immediate release of the Escrow Funds under Escrow Agreement Section 4(b).
But on the same day, and at the same time, Aveanna sent an Indemnification
Notice to the Escrow Agent.67 The Indemnification Notice, which is facially shorter
than the Indemnification Claim Notice, did not contain as much granularity as the
66
D.I. 46, Ex. B at 3–4.
67
D.I. 46, Ex. C.
18
latter. To fill the gaps, Aveanna attached the Indemnification Claim Notice it sent
Epic for the Escrow Agent’s review.68 Aveanna, however, did not send the
Indemnification Notice it sent the Escrow Agent to Epic for Epic’s review.
On January 24, 2018—33 days later—Epic responded to the Indemnification
Claim Notice.69 Epic tentatively denied Aveanna’s allegations and noted that it
would continue to assess the Indemnification Claim.70 Epic also reserved its right,
under the SPA, to access Aveanna’s books and records.71 About two months later,
Epic sent Aveanna a follow-up letter. In its follow-up letter, Epic maintained its
view that Aveanna’s fraud allegations were baseless.
Oblivious to Aveanna’s Indemnification Notice, Epic never filed a Dispute
Notice with the Escrow Agent.72 Without a Dispute Notice, the Escrow Agent
treated Aveanna’s request as uncontested, and the Agent released the Escrow Funds
at the end of 30 days. Despite Epic’s challenges to the allegations, Aveanna never
mentioned the Escrow Funds’ release to Epic.
F. The Tax Refund Dispute
In late 2018, the Companies filed their tax returns. Consistent with the
Cooperation Provision, Buyer and Seller collaborated on those returns.73 Buyer and
68
Id. at 2; id. at Attach.
69
D.I. 46, Ex. D.
70
Id.
71
Id.
72
D.I. 2, Defs.’ Ans. & Countercls. ¶ 47.
73
Id. ¶ 50.
19
Seller sought to maximize an eventual refund by taking tax positions that asserted
advantageous tax losses. Buyer and Seller anticipated the Companies’ refund would
be credited in early 2019 and that their work would earn a $7 million payment from
the IRS.
From the Government’s perspective, a refund would belong to the Companies,
not to Epic. As a result, a refund would be disbursed directly to the Companies.
Under the SPA, Aveanna was obliged to intercept the Companies’ refund and remit
it to Epic within ten business days.
In the late spring of 2019, having heard nothing about the refund, Epic
contacted Aveanna for an update. Aveanna replied that it had received the refund,
but that it would not relinquish it.74 As justification for that position, Aveanna
opined that the refund likely would be subject to an IRS audit. Epic objected.75
Weeks later, the Government did initiate an audit.76 When Epic inquired, Aveanna
asserted control over the audit. Epic initially consented to Aveanna’s control over
the audit, but then changed course.77 On August 27, 2020, Epic sent Aveanna a
74
Id. ¶ 51.
75
Id. ¶ 52.
76
Id. ¶ 53.
77
D.I. 32, Pl.’s Ans. to Defs.’ Countercls. ¶ 51. Epic concedes its initial consent. E.g., D.I. 51 at
7–8.
20
demand letter in which Epic claimed that Aveanna’s maneuvering violated the
SPA.78 Aveanna later ceded control of the audit, but it has not remitted the refund.79
G. Procedural History
1. The Initial Superior Court Litigation
On August 6, 2020, Aveanna sued Defendants in this Court, seeking (i)
damages from Defendants for fraudulent inducement and common law fraud
stemming from their alleged knowledge of the misrepresentations and omissions in
the Financial Statements; (ii) damages from Webster for aiding and abetting fraud;
and (iii) a declaratory judgment that Aveanna is entitled to the Escrow Funds.80
On August 28, 2020, Epic filed counterclaims against Aveanna, seeking (i)
specific performance of the tax refund’s release and audit; (ii) advancement of the
formerly-named individual defendants’ expenses; and (iii) declarations that:
Aveanna’s fraud claims are barred by the SPA; Epic is entitled to the tax refund and
to control the audit; and Epic is entitled to the Escrow Funds.81 As to the Escrow
Funds, Epic also alleged a breach of the SPA.82
After filing its counterclaims, Epic moved to transfer the entire case to the
Court of Chancery based on its specific performance and advancement
78
D.I. 3, Ex. C.
79
Pl.’s Ans. to Defs.’ Countercls. ¶ 49.
80
Compl. ¶¶ 82–101.
81
Defs.’ Ans. & Countercls. ¶¶ 77–96.
82
Id. ¶ 95.
21
counterclaims.83 In response, Aveanna moved to dismiss Epic’s counterclaims
under this Court’s Civil Rule 12(b)(1), arguing this Court lacked subject matter
jurisdiction over the specific performance and advancement counterclaims and that
the Court of Chancery would not be the appropriate forum to litigate Aveanna’s legal
claims.84
On October 8, 2020, the Court granted Aveanna’s motion and dismissed
Epic’s specific performance and advancement counterclaims without prejudice to
Epic transferring those claims to the Court of Chancery.85
2. The Court of Chancery Litigation
On October 21, 2020, Epic sued Aveanna in the Court of Chancery for specific
performance of the tax refund’s release and audit, and advancement of the formerly-
named individual defendants’ expenses.86
During the Court of Chancery litigation, the parties resolved two issues. First,
the parties settled the advancement counterclaim.87 Second, Aveanna ceded control
of the tax audit to Epic.88 Those agreements winnowed Epic’s complaint down to
its specific performance claim for the tax refund’s release. Epic moved for summary
83
D.I. 3, Defs.’ Mot. to Transfer.
84
D.I. 5, Pl.’s Opening Br. in Supp. of Mot. to Dismiss at 4–9.
85
D.I. 45, 47.
86
See generally Epic/Freedom, LLC, et al. v. Aveanna Healthcare, LLC (f/k/a BCPE Eagle Buyer,
LLC), No. 2020-0980 (hereinafter “Ct. Ch. Dkt. __”).
87
Id. 19.
88
Id. 50.
22
judgment on that relief.89 In response, Aveanna again moved to dismiss on subject
matter jurisdiction grounds, arguing that, though framed as equitable, the claim
really was a legal one over which this Court could exercise jurisdiction.90 Aveanna
also moved under Chancery Court Rule 56(f) for an extension of time to pursue
discovery before opposing Epic’s summary judgment motion.91
On March 19, 2021, the Court of Chancery accepted Aveanna’s arguments
and granted Epic the option to transfer its claim to this Court.92 In doing so, the
Court of Chancery reasoned that this Court could provide adequate legal remedies,
e.g., damages for breach of the SPA, or a declaration that Aveanna has breached the
SPA.93 The Court of Chancery also rejected Epic’s prejudice arguments, which were
based on the fact that Epic had filed a fully briefed summary judgment motion. The
court noted that Epic could have deferred its briefing, and, alternatively, that this
Court likely would not require Epic to re-brief the motion.94 Having concluded that
specific performance would be inappropriate relief, the court did not rule on Epic’s
summary judgment motion or Aveanna’s Rule 56(f) motion.
89
Id. 26.
90
Id. 29.
91
Id. 54.
92
Id. 56; see generally Epic/Freedom, LLC v. Aveanna Healthcare, LLC, 2021 WL 1049469 (Del.
Ch. Mar. 19, 2021).
93
Epic/Freedom, 2021 WL 1049469, at *2–4.
94
Id. at *4–5.
23
In light of the court’s decision, Epic requested a transfer of its tax refund claim
to this Court.95 The Court of Chancery granted that request.96 The Court of
Chancery litigation now is closed.
3. The Instant Superior Court Litigation
In addition to Epic’s previously filed summary judgment motion and
Aveanna’s Rule 56(f) motion, the parties have moved for judgment on the
pleadings.97 On April 29, 2021, the Court heard argument on the motions.98
PARTIES’ CONTENTIONS
A. Judgment on the Pleadings
1. Defendants’ Motion
In support of their motion, Defendants argue Aveanna’s fraud claims are
mostly, if not entirely, based on extra-contractual representations and therefore are
barred by the SPA’s anti-reliance language. Defendants further contend they cannot
95
Ct. Ch. Dkt. 57.
96
Id. 59.
97
D.I. 43, 46.
98
D.I. 62 (hereinafter “Hr’g Tr.”). Given Aveanna’s Rule 56(f) motion, the Court did not request
oral argument on Epic’s summary judgment motion. At the hearing, however, the Court
questioned whether it had jurisdiction to resolve Epic’s summary judgment motion, which is based
on equitable relief alone. Hr’g Tr. at 91–93; see Stroud v. Milliken Enters., Inc., 552 A.2d 476,
477 (Del. 1989) (dismissing appeal on subject matter jurisdiction grounds after having raised the
issue sua sponte at oral argument); see generally KT4 Partners LLC v. Palantir Techs. Inc., 2021
WL 2823567, at *24 (Del. Super. Ct. June 24, 2021) (observing that “the Court may question its
own subject matter jurisdiction sua sponte at any time” (alteration and internal quotation marks
omitted)). Given that colloquy, and Epic’s brief, the Court finds it lacks subject matter jurisdiction
over the relief on which Epic has moved. See infra Analysis.B.3. Accordingly, and for the
procedural reasons discussed below, this decision denies Epic’s motion without prejudice.
24
be liable for contractual fraud because the truth of the Financial Statements was
represented by the Companies, not them. Defendants assert Aveanna inadequately
has “shown” Defendants’ knowledge of the Companies’ alleged misrepresentations,
and that they did not sign any closing certificates assuring Aveanna of the Financial
Statements’ accuracy. As a third alternative basis for dismissal, Defendants contend
Aveanna’s reliance was not justified because it received pre-closing price
adjustments to account for misstatements in the Financial Statements. Finally,
Defendants maintain Aveanna insufficiently has pleaded Webster’s participation in
the sale process, precluding aiding and abetting liability. Because of that, and due
to a lack of contractual means for reaching Webster directly, Defendants contend
Webster must be dismissed from this case.
In opposition, Aveanna cites Defendants’ managers’ messages in arguing its
complaint sufficiently pleads Defendants’ knowledge of the Companies’ alleged
misrepresentations. In Aveanna’s view, these well-pleaded allegations are enough
to support a reasonable inference that both Defendants are liable directly for fraud,
and alternatively, that Webster secondarily is liable for fraud. Similarly, Aveanna
points to the SPA’s fraud carve-outs in contending Defendants cannot escape
liability for intentional fraud. Aveanna also insists the reasonableness of its reliance
is a factual issue not amenable to resolution at this stage.
25
2. Aveanna’s Motion
In support of its motion, Aveanna argues Epic’s tax refund counterclaim is
unripe because Aveanna’s duty to release the refund is subject to unsatisfied
conditions precedent. In Aveanna’s view, the parties must reach a “more likely than
not level of comfort” on the tax positions reflected by the refund before Aveanna is
obliged to remit it. Aveanna also maintains the SPA’s “net of any taxes owed”
language implies Aveanna may withhold a refund until an IRS audit concludes,
which it has not in this case. Separately, Aveanna contends Epic has waived its
escrow release counterclaim by not timely filing a Dispute Notice. Alternatively,
Aveanna argues it has not violated the Escrow Agreement’s notice and objection
procedures because it informed Epic and the Escrow Agent of its Indemnification
Claim at the same time. Aveanna insists a single notice of its intent to access the
Escrow Funds is not required under the Escrow Agreement or the SPA. Aveanna
suggests Epic should have inquired if it were unsure of whether the Escrow Agent
received an Indemnification Notice from Aveanna.
In opposition, Epic argues there are no conditions precedent to Aveanna’s tax
refund release duties. Epic contends the “more likely than not” standard refers to
tax positions taken during the return stage, not the refund stage. Epic also asserts
the “net of any taxes owed” language reflects normal deductions subtracted from
most refunds, and the audit procedures, in being controlled exclusively by Epic,
26
would preclude Aveanna from conferring with Epic on deductions during an audit
anyway. As to the escrow issue, Epic argues the Escrow Agreement’s unambiguous
No Waiver language undermines Aveanna’s waiver arguments. Moreover, Epic
maintains the Escrow Agreement defines a single Indemnification Notice that is
required in addition to the SPA’s Indemnification Claim Notice. Epic asserts
Aveanna’s reading would frustrate the purpose of the Indemnification Notice, which
is to afford Epic an opportunity to dispute control over the Escrow Funds. For that
reason, Epic insists it had no duty to inquire into whether an Indemnification Notice
has been filed.
B. The Rule 56(f) Motion
In support of its motion, Aveanna argues discovery is necessary to prove its
fact-based defenses to Epic’s tax refund counterclaim because Epic alone possesses
evidence suggesting it waived its immediate entitlement to the refund and agreed to
Aveanna holding the refund until the IRS’s audit concludes. As to waiver, Aveanna
asserts any contractual no-waiver provisions may themselves be waived, but
Aveanna requires discovery to satisfy the waiver standard. Aveanna also contends
discovery is necessary to reveal the parties’ mutual intent on how the Refund
Provision, which may be ambiguous, should be construed.
In opposition, Epic contends the SPA prohibits waiver, rendering Aveanna’s
waiver-based discovery requests meritless. Alternatively, Epic contends, to the
27
extent a waiver may be found, Epic unambiguously retracted its waiver. Epic also
asserts a subsequent agreement allowing Aveanna to withhold the refund does not
exist, and if it did, Aveanna should have possession of the relevant material without
discovery. Taken together, Epic insists Aveanna’s motion amounts to nothing more
than a delay tactic that should be rejected.
STANDARD OF REVIEW
A party may move for judgment on the pleadings under Superior Court Civil
Rule 12(c).99 In deciding a motion under that rule, the Court accepts the truth of all
well-pleaded facts and draws all reasonable factual inferences in favor of the non-
moving party.100 The Court accords the party opposing a Rule 12(c) motion the same
benefits as a party defending a motion to dismiss under Rule 12(b)(6).101
Accordingly, this Court will grant a motion for judgment on the pleadings only if,
after drawing all reasonable inferences in favor of the non-moving party, there is no
material fact in dispute and the moving party is entitled to judgment as a matter of
law.102
99
Del. Super. Ct. Civ. R. 12(c).
100
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., 624 A.2d 1199, 1205
(Del. 1993).
101
Alcoa World Alumina LLC v. Glencore Ltd., 2016 WL 521193, at *6 (Del. Super. Ct. Feb. 8,
2016), aff’d sub nom., Glencore Ltd. v. St. Croix Alumina, LLC, 2016 WL 6575167 (Del. Nov. 4,
2016); see Silver Lake Off. Plaza, LLC v. Lanard & Axilbund, Inc., 2014 WL 595378, at *6 (Del.
Super. Ct. Jan. 17, 2014) (“The standard for a motion for judgment on the pleadings is almost
identical to the standard for a motion to dismiss.” (internal quotation marks omitted)).
102
V&M Aerospace LLC v. V&M Co., 2019 WL 3238920, at *3 (Del. Super. Ct. July 18, 2019).
28
ANALYSIS
Resolution of the parties’ motions turns on the proper interpretation of various
provisions in the SPA and the Escrow Agreement. A contract’s proper interpretation
is a question of law.103 In construing a contract, the Court strives “to fulfill the
parties’ shared expectations at the time they contracted.”104 “[B]ecause Delaware
adheres to an objective theory of contracts,” the Court also must interpret the
contract in a manner that “would be understood by an objective, reasonable third
party.”105 The Court therefore reads the agreement as a whole, giving purpose to
each provision.106 To that end, the Court construes “clear and unambiguous terms
according to their ordinary meaning.”107
“[J]udgment on the pleadings is a proper framework for enforcing
unambiguous contracts,” which only have one reasonable meaning and therefore do
103
Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d 1262, 1266–67 (Del. 2017).
104
Leaf Invenergy Co. v. Invenergy Renewables LLC, 210 A.3d 688, 696 (Del. 2019) (internal
quotation marks omitted).
105
Id. (internal quotation marks omitted).
106
E.g., Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396–97 (Del. 2010); see
Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 1177, 1183 (Del. 1992) (“[A] contract
should be interpreted in such a way as to not render any of its provisions illusory or meaningless.”);
NAMA Holdings, LLC v. World Mkt. Ctr. Venture, LLC, 948 A.2d 411, 419 (Del. Ch. 2007)
(“Contractual interpretation operates under the assumption that the parties never include
superfluous verbiage in their agreement, and that each word should be given meaning and effect
by the court.”), aff’d, 2008 WL 571543 (Del. Mar. 4, 2008).
107
Leaf Invenergy, 210 A.3d at 696 (internal quotation marks omitted); see Salamone v. Gorman,
106 A.3d 354, 368 (Del. 2014) (“Contract terms themselves will be controlling when 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.” (internal quotation marks omitted)).
29
not create “material disputes of fact.”108 As explained below, none of the provisions
in either agreement is ambiguous. The SPA’s anti-reliance language does not bar
Aveanna’s fraud claims. The SPA’s tax provisions unconditionally require Aveanna
to release tax refunds within ten business days of their receipt. And the Escrow
Agreement’s notice and objection procedures require Aveanna to deliver a single
Indemnification Notice to the Escrow Agent and Epic concurrently. Accordingly,
judgment on the pleadings cannot be granted to any moving party.
A. Defendants can be liable for contractual fraud.
1. Aveanna’s fraud claims are based on contractual representations and
therefore fall outside the SPA’s anti-reliance language.
Delaware enforces bilaterally negotiated agreements on their terms “as a
matter of fundamental public policy.”109 The policy promotes commercial
consistency and predictable legal outcomes.110 That policy will, however, yield to
108
Lillis v. AT&T Corp., 904 A.2d 325, 329–30 (Del. Ch. 2006) (alteration omitted); see also VLIW
Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003) (observing that ambiguity
creates a fact dispute and that a court cannot dismiss breach of contract allegations unless the
movant’s construction of the disputed term “is the only reasonable construction as a matter of
law”); see generally Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012)
(observing that a contract term is ambiguous only if it is “fairly or reasonably susceptible to more
than one meaning”).
109
NACCO Indus., Inc. v. Applica, Inc., 997 A.2d 1, 35 (Del. Ch. 2009); accord Sycamore Partners
Mgmt., L.P. v. Endurance Am. Ins. Co., at *5 (Del. Super. Ct. Feb. 26, 2021).
110
E.g., Change Cap. Partners Fund I, LLC v. Volt Elec. Sys., LLC, 2018 WL 1635006, at *4 (Del.
Super. Ct. Apr. 3, 2018) (“With very limited exceptions, Delaware courts will enforce the
contractual scheme that the parties have arrived at through their own self-ordering, both in
recognition of a right to self-order and to promote certainty of obligations.” (alterations omitted)
(quoting Ascension Ins. Holdings, LLC v. Underwood, 2015 WL 356002, at *4 (Del. Ch. Jan. 28,
2015))).
30
“overriding” public policy concerns,111 including Delaware’s “firm public policy
against fraud.”112 In Delaware, contractual freedom ends where attempts to
“immunize” contractual fraud begin.113
Striking a balance of these competing policies, Delaware has developed a
body of law that permits sophisticated parties contractually to shift the risks posed
by post-closing fraud claims.114 One such risk-allocation device is an anti-reliance
provision that cabins “the universe of information” on which an aggrieved party later
may ground a fraud claim.115 Using anti-reliance language, sophisticated
counterparties “are free to limit the possibility of future claims of fraud or
misrepresentation by contractually specifying what representations the parties are
and are not making and relying upon.”116 Through this exchange, parties necessarily
agree that fraud claims are not viable when they are based on representations on
which parties agreed they were not relying, even if the facts underpinning those
111
Unbound Partners Ltd. P’ship v. Invoy Holdings Inc., 251 A.3d 1016, `1032 (Del. Super. Ct.
2021).
112
Infomedia Grp., Inc. v. Orange Health Sols., Inc., 2020 WL 4384087, at *4 (Del. Super. Ct.
July 31, 2020).
113
ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1061 (Del. Ch. 2006).
114
E.g., EMSI Acquisition, Inc. v. Contrarian Funds, LLC, 2017 WL 1732369, at *8–9 (Del. Ch.
May 3, 2017).
115
FdG Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842, 858 (Del. Ch. 2016)
(internal quotation marks omitted), aff’d, 2016 WL 5845786 (Del. Sept. 30, 2016).
116
Infomedia, 2020 WL 4384087, at *4.
31
claims are egregious. Put differently, by this arrangement, parties eliminate “extra-
contractual” fraud claims while preserving “intra-contractual” fraud claims.117
Delaware law permits sophisticated counterparties to disclaim reliance on
extra-contractual statements, i.e., representations that are not memorialized in a
fully-integrated agreement, even if those representations induced the agreement’s
acceptance.118 But to eliminate extra-contractual fraud remedies, “the [parties’]
intent to preclude reliance on extra-contractual statements must emerge clearly and
unambiguously from the contract.”119 If the contract’s language, “when read
together, can be said to add up to a clear anti-reliance clause by which the plaintiff
has contractually promised that it did not rely upon statements outside the contract's
four corners,” a fraud claim resting on extra-contractual statements will be barred.120
117
See generally RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 A.3d 107, 117 (Del. 2012)
(explaining distinction). The term “intra-contractual fraud” is a bit of redundancy; any fraud claim
based on false contractual representations is “intra-contractual.” Still, for the sake of clarity, the
Court uses this term where appropriate as a helpful tool for drawing sharp distinctions between
fraud claims based on extra-contractual representations and those based on contractually
memorialized representations.
118
E.g., Pilot Air Freight, LLC v. Manna Freight Sys., Inc., 2020 WL 5588671, at *21 (Del. Ch.
Sept. 18, 2020); Anschutz Corp. v. Brown Robin Cap., LLC, 2020 WL 3096744, at *13 (Del. Ch.
June 11, 2020); IAC Search, LLC v. Conversant LLC, 2016 WL 6995363, at *6 (Del. Ch. Nov. 30,
2016); Haney v. Blackhawk Network Holdings, Inc., 2016 WL 769595, at *5 (Del. Ch. Feb. 26,
2016); ITW Global Invs. Inc. v. Am. Indus. Partners Cap. Fund IV, L.P., 2015 WL 3970908, at *8
(Del. Super. Ct. June 24, 2015); Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544,
551–56 (Del. Ch. 2001).
119
Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004).
120
Id.32
In contrast, Delaware law prohibits disclaimers of contractual fraud.121
Delaware law does not permit a contract’s parties to insulate themselves from
liability for knowingly false representations memorialized in their agreement.122
Instead, contracting parties only may limit the remedies available for contractual
fraud under certain conditions.123 Accordingly, Delaware courts will enforce
agreements that clearly bar extra-contractual fraud claims but will not enforce
agreements that bar intra-contractual fraud claims no matter the agreements’
clarity.124
The SPA—governed by Delaware law125—maps these boundaries. As a
starting point, Section 3.20 narrows the scope of permissible reliance to the
representations made within the SPA. The accuracy of the Financial Statements and
the completeness of the Companies’ liability disclosures are two such memorialized
121
See ABRY, 891 A.2d at 1062 (“[T]here is little support for the notion that it is efficient to
exculpate parties when they lie about material facts on which a contract is premised.”).
122
E.g., Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 136–37 (Del. Ch. 2009) (“Because
of Delaware’s strong public policy against intentional fraud, a knowingly false contractual
representation can form the basis of a fraud claim, regardless of the degree to which the agreement
purports to disclaim or eliminate tort remedies.” (citing ABRY, 891 A.2d at 1061–64)); Surf's Up
Legacy Partners, LLC v. Virgin Fest, LLC, 2021 WL 117036, at *11 (Del. Super. Ct. Jan. 13,
2021) (“Delaware courts refuse to enforce contracts purporting to condone—or at least insulate—
intentional fraud.”).
123
E.g., Express Scripts, Inc. v. Bracket Holdings Corp., 248 A.3d 824, 830–32 (Del. 2021).
Counterparties only can limit remedies for frauds committed with less than an intentional mental
state. See id.124
E.g., RAA, 45 A.3d at 117 (“[F]raud claims based on representations outside of a merger
agreement . . . can be disclaimed through non-reliance language . . . [but] fraud claims based on
‘false representations of fact made within the contract itself’ . . . cannot be disclaimed.” (alteration
omitted) (quoting ABRY, 891 A.2d at 1059)).
125
SPA § 10.9.
33
representations.126 Next, in Section 5.8, Aveanna expressly affirmed it was not
permitted to rely on any statements made outside the SPA.127 Finally, to close the
circle, the SPA’s parties agreed the SPA is a fully-integrated document that contains
the parties’ complete understanding within its four corners.128 And, in respect for
Delaware’s “abhorrence” of false contractual statements,129 the SPA’s parties carved
out of the SPA’s anti-reliance language any fraud claims based on contractual
representations.130 Taken together, these provisions exclude reliance on extra-
contractual representations and bar fraud claims premised on statements that are not
expressly contained within the SPA.131 Accordingly, the SPA bars Aveanna’s fraud
claims only if they challenge representations external to the SPA.
They do not. Aveanna’s fraud claims challenge the Financial Statements and
disclosed liabilities representations. Aveanna alleges the contractually incorporated
reports that make those representations true or false were whitewashed by
Defendants. As support for that allegation, Aveanna cites the findings from its post-
closing investigation, including Defendants’ managers’ e-mail messages. Aveanna
126
Id. § 3.4(b)–(c).
127
See, e.g., McDonald’s Corp. v. Easterbrook, 2021 WL 351967, at *6 (Del. Ch. Feb. 2, 2021)
(observing that anti-reliance provisions are enforceable only if the parties “forthrightly affirm that
they are not relying upon any representation or statement of fact not contained [in the contract]”
(alteration in original) (internal quotation marks omitted)).
128
SPA § 10.16.
129
ABRY, 891 A.2d at 1058.
130
SPA §§ 3.20 (c), 4.7(c), 9.4(b), 10.17.
131
See Kronenberg, 872 A.2d at 593.
34
did not discover the messages until the SPA already had been executed. Aveanna,
therefore, did not rely on any statements in those messages in deciding to acquire
the Companies. Instead, Aveanna relied only on what it was permitted to rely on:
the Financial Statements. Had Aveanna now asserted reliance on extra-contractual
representations, its fraud claims plainly would be barred by the SPA’s anti-reliance
language. Because it has not, however, Aveanna’s fraud claims are not barred.
In arguing Aveanna’s fraud claims impermissibly are tethered to extra-
contractual representations, Defendants likewise point to their managers’ e-mail
messages. Defendants argue those messages are, in a literal sense, “extra-
contractual,” and they therefore cannot sustain a contractual fraud claim under the
SPA. Defendants, however, mistakenly conflate the question of whether a plaintiff
has relied on extra-contractual representations in the face of valid anti-reliance
language with the question of whether the “evidence” the plaintiff intends to adduce
is sufficient to prove contractual fraud.
Memorialized or not, a representation, by definition, is a statement, usually
one of fact, made to induce a party to enter into a contract with the speaker.132 The
messages, unearthed after Aveanna already had chosen to enter the SPA, cannot be
representations; Aveanna could not have reviewed them in deciding whether to deal
132
See, e.g., Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983); Representation,
Black’s Law Dictionary (11th ed. 2019) (“A presentation of fact . . . made to induce someone to
act, esp[ecially] to enter into a contract. . . .”).
35
with Epic. Indeed, Aveanna does not contend the messages are false representations.
Instead, Aveanna contends the messages are probative of the Financial Statements’
falsity. Aveanna may point to “external sources of information” to demonstrate the
falsity of contractual representations without running afoul of the SPA’s anti-
reliance language.133
More importantly, Defendants’ reasoning invariably would prevent a plaintiff
from using post-closing discoveries of fraud to establish that a contractual
representation is false—vitiating most fraud claims. In other words, Defendants
invite the Court to collapse the well-established distinction between extra-
contractual and intra-contractual fraud claims. The very precedents on which
Defendants rely, Infomedia Group, Inc. v. Orange Health Solutions, Inc.134 and 3M
Company v. Neology, Inc.,135 contradict that result.
In Infomedia, the plaintiff grounded its fraud claim exclusively on extra-
contractual misrepresentations and omissions.136 The agreement, however,
contained enforceable anti-reliance language that barred fraud claims asserting
reliance on extra-contractual misrepresentations and omissions.137 As a result, this
Court dismissed the complaint. Here, Aveanna has not repeated the Infomedia
133
Prairie Cap. III, L.P. v. Double E Holdings Corp., 132 A.3d 35, 52 (Del. Ch. 2015).
134
2020 WL 4384087 (Del. Super. Ct. July 31, 2020).
135
2019 WL 2714832 (Del. Super. Ct. June 28, 2019).
136
2020 WL 4384087, at *1.
137
Id. at *3–4.
36
plaintiff’s mistake. Aveanna challenges SPA representations that incorporate
statements on which Aveanna contractually was permitted to rely. Moreover,
because of the plaintiff’s theories, the Infomedia court had no occasion to consider
the effect of anti-reliance language on claims alleging false contractual
representations.
Unlike the Infomedia plaintiff, the Neology claimant brought both extra-
contractual and intra-contractual fraud claims.138 Like the Infomedia agreement, the
Neology agreement contained enforceable anti-reliance language.139 Given that
language, the Neology court dismissed the extra-contractual fraud claims, but
permitted the intra-contractual fraud claims to proceed.
[The agreement’s fraud carve-out] . . . confines [fraud] claim[s] to the
representations and warranties in Article 3 and Article 4 of the APA and
excludes reliance on any extra[-]contractual representations as required by the
Non-Reliance Clause. Neology's fraud claims are permitted under the APA
because they focus on an alleged misrepresentation in APA Section 3.5. To
the extent, however, that Neology is relying on extra[-]contractual
representations to support its fraud claims, reliance on those representations
is barred by the Non-Reliance Clause. . . .140
Here, SPA Section 3.20(c), the parties’ fraud carve-out, “confines” Aveanna’s
possible claims to the representations contained in the SPA. And, as discussed, the
representations concerning the Financial Statements are contained in SPA Section
138
Neology, 2019 WL 2714832, at *13–14.
139
Id. at *2.
140
Id. at *13.
37
3.4. Aveanna’s intra-contractual fraud claims thus “focus[]” on Section 3.4. As a
result, Aveanna’s intra-contractual fraud claims bypass the SPA’s anti-reliance
language.
Undeterred, Defendants argue Neology stands for the proposition that “a broad
anti-reliance provision—even with a fraud carve-out—prohibits a sophisticated
buyer from relying on extra-contractual statements to support essential elements of
its fraud claim.”141 Putting aside their flawed premise (i.e., that Aveanna’s fraud
claims are extra-contractual), Defendants suggest the mere pleading of extra-
contractual information infects otherwise permissible intra-contractual fraud claims
and renders them extra-contractual. Neither Neology’s facts nor its reasoning
permits this extreme inference. To the contrary, Delaware courts distill extra- and
intra-contractual representations, and have deployed the same analysis Neology
undertook in doing so.142 Properly understood, Neology simply stands for the
proposition that parties may not disguise an extra-contractual fraud claim as an intra-
contractual fraud claim to avoid anti-reliance language. As explained, however,
Aveanna’s fraud claims do not so masquerade. Accordingly, they are not barred by
the SPA.
141
D.I. 57 at 6 (emphasis omitted).
142
E.g., Novipax Holdings LLC v. Sealed Air Corp., 2017 WL 5713307, at *12–13 (Del. Super.
Ct. Nov. 28, 2017) (dismissing extra-contractual fraud claims but allowing intra-contractual fraud
claims to proceed despite existence of anti-reliance language); accord CLP Toxicology, Inc. v.
Casla Bio Holdings LLC, 2020 WL 3564622, at *17, *19 (Del. Ch. June 29, 2020).
38
2. That the Companies made the challenged representations is of no
moment because Aveanna adequately has alleged Defendants knew about
the Companies’ false contractual representations.
Moving beyond their anti-reliance arguments, Defendants alternatively
contend they cannot be liable for contractual fraud because the Companies
represented the truth of the Financial Statements, not Defendants. As their principal
authority for this contention, Defendants offer ABRY Partners V, LP v. F & W
Acquisition LLC.143 Defendants do not dispute ABRY’s prohibition on intentional
fraud disclaimers.144 Defendants also do not seem to dispute ABRY’s “knowledge
exceptions”—e.g., that a seller can be liable for the false contractual representations
of “the company” if the buyer adequately pleads the seller’s knowledge of the
company’s misrepresentations.145 Nonetheless, Defendants insist ABRY’s holding
hinged on the seller’s endorsement of the company’s representations through signed
“officer” or closing certificates, providing a contractual mechanism for suing the
seller that Defendants avoided here. ABRY, however, was not so limited, and
decisions following ABRY undercut Defendants’ efforts to constrain ABRY’s reach.
143
891 A.2d 1032 (Del. Ch. 2006).
144
See, e.g., id. at 1064 (“To the extent that the Stock Purchase Agreement purports to limit the
Seller’s exposure for its own conscious participation in the communication of lies to the Buyer, it
is invalid under the public policy of this State.”).
145
See, e.g., id. (“[T]he public policy of this State will not permit the Seller to insulate itself from
[fraud] if the buyer can show . . . the Seller knew that the Company’s contractual representations
and warranties were false.”).
39
a. Signed closing certificates were not essential to ABRY’s holding.
The ABRY case involved a buyer’s acquisition of a seller’s146 portfolio
company that was memorialized in a “carefully negotiated” purchase agreement.147
“Before discussing the [agreement’s] particular terms,” the court contextualized the
sale as one in which the seller, primarily a hedge fund and its affiliates, would have
an “intense interest” in generating returns.148 Given that context, the court found it
“not surprising” that the agreement “recognized a distinction between the seller and
the company . . . in addressing questions relating to liability.”149 One way the
agreement recognized that distinction was by “carefully delineating what party is
responsible for which representations and warranties.”150 The court found “the most
important representation[]” in the agreement was one made “by the company and
not by the seller”—a representation that the company’s financial statements,
disclosed during the diligence phase, were accurate.151 The buyer expressly
acknowledged that this representation was one “of the company alone.”152
146
The court’s definition of “seller” comprised an asset management conglomerate of investment
funds and affiliates together with the selling stockholder that owned the acquisition vehicle that
contained the underlying asset. Id. at 1037. The acquisition vehicle and the asset collectively were
“the company.” Id. As discussed below, the ABRY sell-side’s composition and managerial style
bear a meaningful resemblance to the sell-side’s operations in this case.
147
Id. at 1063.
148
Id. at 1038, 1040. For clarity, capitalization of ABRY umbrella terms (e.g., “buyer”) that are
identical to ones used in this decision has been omitted throughout.
149
Id. at 1041. The court also assumed that the seller was not familiar with the company’s
management intimately, making separate representations doubly important. Id. at 1040–41.
150
Id. at 1041.
151
Id. at 1042.
152
Id. at 1043.
40
Still, the seller “back[ed] up the company’s representations” in two ways.153
First, the seller signed an “officer’s certificate” that, among other things, affirmed
the accuracy of the company’s representations.154 The court characterized the use of
a certificate as not “novel” and “rudimentary” to “anyone familiar[]” with stock
acquisitions.155 Second, and more importantly, the seller “put its wallet behind the
company’s representations and warranties” by agreeing to indemnify the buyer “if
the company’s representations and warranties were incorrect.”156 The
indemnification provision was the crux of the case. It purported to limit the buyer’s
recourse for future claims of intentional, contractual fraud solely to exhaustion of an
indemnity account.157 The court explained the seller had negotiated for this
limitation to control its exposure to the “broadly-defined” liabilities it had assumed
earlier, including a duty to indemnify the company’s representations without regard
to “materiality qualifiers” that elsewhere were imposed by the agreement’s bring-
down clause.158
After the transaction closed, the buyer “uncover[ed] a host of serious financial
problems” with the company that could not have been concealed absent intentional
153
Id.154
Id.155
Id. at 1041.
156
Id. at 1043.
157
Id. at 1044–45.
158
Id. at 1043–44.
41
fraud.159 Specifically, the buyer contended the company and the seller “working in
concert, schemed together to manipulate the company’s financial statements in order
to fraudulently induce the buyer into purchasing the company at an excessive
price.”160 As support for that theory, the buyer pointed to communications
exchanged between the sell-side parties during the sale process in which the seller’s
and the company’s managers seemed to misrepresent the company’s financial
statements intentionally.161 The court held those conversations supported a
reasonable inference that the seller “had the opportunity and the motive to work with
[the company’s] management to influence the financial statements and the operating
decisions to achieve desired numbers.”162 The buyer therefore sued to rescind the
agreement “largely on the basis that the company made false representations . . . and
the seller provided a false officer’s certificate.”163 The seller moved to dismiss the
complaint because the buyer sought recission rather than damages from the
indemnity account.
The parties’ arguments did not turn on, let alone prioritize, the certificates.
The seller argued that even if the seller committed intentional fraud, the buyer could
159
Id. at 1038.
160
Id.161
Id. at 1051.
162
Id.163
Id. at 1045.
42
not “hold the seller responsible for representations and warranties made by the
company” because
the parties carefully set forth which representations and warranties were made
by the Company and which were made by the Seller. . . . In addition, the Buyer
agreed to the Exclusive Remedy Provision stating that the only remedy that it
had against the Seller for contractual misrepresentations was limited to . . . an
Indemnity Claim. And, in that event, the Seller's liability is capped at the
extent of the Indemnity Fund. . . . [T]he Seller only agreed to back Company
representations to the extent of the Indemnity Fund.164
In opposition, the buyer responded with textual arguments that the court rejected as
neither “linguistically [n]or logically appealing.”165 The court then summarized the
buyer’s alternative argument this way.
[T]he Buyer contends that even if the Stock Purchase Agreement does limit
the Seller's liability for misrepresentation to an Indemnity Claim by the Buyer,
public policy overrides that aspect of the Agreement. According to the Buyer,
a provision limiting in any manner the liability of a contracting party for
misrepresentation is void. The public policy interest in deterring fraudulent
conduct[,] says the Buyer, . . . prevents even sophisticated private equity firms
from shaping acquisition agreements in which parties trade off price for
limitations on liability.166
The buyer thus pitted the commercial inefficiency of contractual fraud against the
commercial efficiency of enforcing voluntarily-negotiated contracts as written.
In considering the buyer’s argument, the court did not focus its analysis on
the closing certificates. Instead, the court identified policy considerations that
164
Id. at 1052.
165
Id. at 1053–55.
166
Id. at 1052–53.
43
counseled against importing wholesale fraud exceptions into the realm of mergers
and acquisitions. The court questioned whether “judicial decisions” are “the only
way that commercial norms of fair play are instilled,” since other factors, such as
notoriety, could cause buyers “to discount the value of the tainted seller's portfolio
companies” and “to demand greater remedial flexibility.”167 Similarly, the court
observed that “[p]ermitting a party to sue for relief that it has contractually promised
not to pursue” could “create the possibility that buyers will face . . . uncompensated
costs,” e.g., zero-sum litigation that increases expenses inversely with monetary
relief from the fraudulent transaction.168 The court also worried that holding a seller
liable for its portfolio company’s contractual wrongdoing could blur the distinctness
inherent to the corporate form.169
Against that conceptual framework, the court nevertheless acknowledged that
“a concern for commercial efficiency does not lead ineluctably to the conclusion that
there ought to be no public policy limitations on the contractual exculpation of
misrepresented facts.”170 In line with this reasoning, the court found “little support
for the notion that it is efficient to exculpate parties when they lie about the material
facts on which a contract is premised.”171 Using the word “lie,” the court drew on a
167
Id. at 1061.
168
Id. at 1062.
169
Id. at 1063.
170
Id. at 1062.
171
Id.44
“moral difference” dividing intentional and “unintentional misrepresentations of
fact.”172 Using that distinction, the court held if a seller “knew that the company’s
contractual representations were false,” the seller cannot “insulate” itself from
contractual fraud by hiding behind the company’s representations.173 To
demonstrate the requisite knowledge, the court crafted a disjunctive test under which
the buyer must prove the seller “acted with an illicit state of mind, [i.e.,] that the
seller knew that the representation was false and either [(i)] communicated it to the
buyer directly itself or [(ii)] knew that the company had.”174
The closing certificates reappeared toward the end of the court’s analysis.
In this case, that distinction [between speakers] is largely of little importance
because of the Officer's Certificate provided by the Seller. In that certificate,
the Seller certified that (1) each representation and warranty of the Company
and Seller was true and correct as of the closing date; (2) the Seller and
Company performed and complied in all material respects with the
agreements and covenants required to be performed or complied with; and (3)
between the date of signing the Stock Purchase Agreement and closing, there
had been no change, event or condition of any character which had or would
172
Id. The court held that liability for unintentional misrepresentations of fact may be relegated
to an indemnity account consistent with public policy. Id. at 1035 (“Delaware law permits
sophisticated commercial parties to craft contracts that insulate a seller from a rescission claim for
a contractual false statement of fact that was not intentionally made.”); id. at 1064 (“If the
Company's managers intentionally misrepresented facts to the Buyer without knowledge of falsity
by the Seller, then the Buyer cannot obtain rescission or damages, but must proceed with an
Indemnity Claim subject to the Indemnity Fund's liability cap.”); see also id. at 1062 (“The level
of self-investigation expected from a seller . . . seems to be a more legitimate subject for bargaining
than whether the seller can insulate itself from liability for lies.”); id. at 1064 n.85 (“[I]t is not
unrealistic to assume that the contracting parties knew that there were public limitations that would
come into play, to the extent the contract attempted to exculpate the Seller for lies about contractual
representations.”).
173
Id. at 1064.
174
Id. (emphasis added).
45
reasonably be expected to constitute a material adverse effect for the
Company.175
In other words, the seller “knew that the [company’s] representation was false” and
both “communicated it to the buyer directly itself” and “knew the company had.”176
Having alleged facts that conceivably could satisfy the court’s knowledge test, the
buyer was permitted to seek remedies outside the indemnity account.
ABRY’s facts bear meaningful resemblance to those alleged here. Both cases
involve sophisticated parties who executed carefully negotiated stock purchase
agreements that memorialize an acquisition of a private equity firm’s portfolio
company. Both agreements differentiate the seller and the company’s
representations. Both agreements contain indemnity caps (though the SPA carves
fraud out from them). Both sets of sellers contractually agreed to indemnify the
company’s representations. And both buyers discovered post-closing management
messages indicating the controllers’ knowledge of the companies’ falsely
represented financial statements. The only obvious difference is the ABRY seller
signed an officer’s certificate, whereas Defendants did not.
But the logic that animated ABRY neither hinges on nor requires the existence
of signed closing certificates. Rather, ABRY’s logic can be distilled to the following
175
Id. (emphasis added)
176
Id.46
principles, which, given the factual similarities, fairly can be transplanted into this
case mutatis mutandis.
In portfolio company acquisitions, there are particularly “intense” incentives
for sellers to distance themselves from fraud claims. Those claims may have the
counterproductive effect of increasing transaction costs in a sale conceived to
reorganize a portfolio without depreciating the value of the seller’s other assets under
management. To avoid or limit those losses, sellers frequently (i) push litigation
risks onto the companies they sell by “carefully delineating” their own
representations from their companies’ representations; and (ii) cap recourse for
misrepresentations with indemnification provisions. Delaware will respect these
risk allocation techniques as a matter of commercial deference unless these
techniques “insulate” sellers from liability for their knowledge of, or participation
in, false contractual representations. Conversely, however, those limitations will not
protect a non-representing seller when the buyer adequately pleads the seller was
conscious of the company’s lies.
Using these principles, the ABRY court treated the certificates as direct
evidence of the seller’s knowledge of the company’s fraudulent representations,
finding the seller communicated its knowledge personally through the certificates.177
177
E.g., id. at 1051 (“Moreover, Dominguez signed the Officer's Certificate required for the
transaction to close in his capacity at both the Company and the Seller and certified that the
Company's representations as to the financial statements were correct at the closing. . . . The Buyer
47
The court accordingly assigned “little importance”178 to its distinction between the
speakers. The fact that the seller and the company communicated the same
fraudulent knowledge satisfied both disjunctive prongs of the court’s test. Given the
blatancy of the seller’s knowledge, the court found the seller not only could be liable
for its own communications, but also for its knowledge of the company’s
communications. Necessarily, then, the seller would have been liable for the
company’s fraudulent communications regardless of whether the seller had made its
affirmations in signed closing certificates.
The linchpin of ABRY’s analysis, therefore, was the seller’s knowledge, not
its assurances. The ABRY court did not hold that the seller contractually must vouch
for the company’s representations through a signed closing certificate to be a proper
fraud defendant. Instead, the court ruled broadly that a seller may be liable for
intentional fraud whenever the seller knows the company’s contractual
representations are false.179 That explains why the court wrote “in this case” when
pleads, and the Seller does not refute, that Dominguez is a principal of the Seller, which is being
sued for fraudulent representation.”); id. at 1051–52 (“I . . . will accept two of the Buyer's primary
contentions as true for the sake of argument: (1) . . . that the Company made misrepresentations in
its financial statements, the accuracy of which was represented and warranted in the Stock
Purchase Agreement by the Company and in the Officer's Certificate by the Seller; and (2) that
the [undisclosed liabilities] could have constituted a material adverse effect under . . . the Stock
Purchase Agreement, thereby triggering a contractual duty to disclose the underlying facts to the
Buyer on the Company's part, and on the Seller's part in the context of the Officer's Certificate.”).
178
Id. at 1064.
179
Id. at 1064.
48
reintroducing the closing certificates.180 In the appropriate case, signed closing
certificates may lighten the plaintiff’s pleading burden. Whether the seller
communicated a false contractual representation, or the company did, is of “little
importance” when the seller knowingly signed for both.
This conclusion is not a new interpretation of ABRY’s scope. Post-ABRY
decisions confirm that a seller can be liable for its knowledge of the company’s fraud
regardless of closing certificates.
b. Post-ABRY decisions make clear that signed closing certificates
are not prerequisites for holding a seller liable for the company’s
fraud.
The Supreme Court often has cited ABRY approvingly.181 It has declared
ABRY “accurately states Delaware law and explains Delaware’s public policy” of
enforcing agreements that circumscribe some fraud liability.182 Still, the Supreme
Court positively has cited ABRY’s knowledge exception only in passing.183
Similarly, most lower courts have discussed ABRY in connection with choice-of-law
analyses, breach remedies, and anti-reliance jurisprudence, but not for the
180
Id.181
E.g., RSUI Indem. Co. v. Murdock, 248 A.3d 887, 904–05 & n.85 (Del. 2021); NGL Cap., LLC
v. NGL Energy Partners LP, 249 A.3d 77, 96–97 & n.152 (Del. 2021); Hazout v. Tsang Mun Ting,
134 A.3d 274, 293 n.68 (Del. 2016); NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d
175, 180 n.14 (Del. 2015); EV3, Inc. v. Lesh, 114 A.3d 527, 529 n.3 (Del. 2014); SIGA Techs., Inc.
v. PharmAthene, Inc., 67 A.3d 330, 341–42 & nn.34–35 (Del. 2013).
182
RAA, 45 A.3d at 119; see Express Scripts, 248 A.3d at 830.
183
See Express Scripts, 248 A.3d at 831 n.30.
49
knowledge exception.184 Many others have examined the knowledge exception with
respect to the seller’s own fraud, but not the company’s.185 But the cases that have
visited a seller’s knowledge of the company’s wrongdoing hold that, even “absent a
contractual portal,”186 a fraud claim may be maintained against a seller for the
company’s false contractual representations if the buyer successfully pleads the
seller “‘knew that the [c]ompany’s representations and warranties were false.’”187
In Prairie Capital III, L.P. v. Double E Holding Corp.,188 the Court of
Chancery confronted a fraud challenge to a portfolio company transaction. The
buyer alleged, among other things, that the seller knew the company falsely had
represented the truth of its financial statements.189 The seller, who neither
represented the truth of the financial statements, nor provided a signed officer’s
certificate, countered that it could not be liable for the company’s misrepresentations
above the parties’ contractual indemnification ceiling.190
184
E.g., Focus Fin. Partners, LLC v. Holsopple, 250 A.3d 939, 962–69 (Del. Ch. 2020) (choice of
law); Pilot Air, 2020 WL 5588671, at *21–23 (anti-reliance); Firmenich Inc. v. Nat. Flavors, Inc.,
2020 WL 1816191, at *10 (Del. Super. Ct. Apr. 7, 2020) (remedies).
185
E.g., Swipe Acquisition Corp. v. Krauss, 2020 WL 5015863, at *11 (Del. Ch. Aug. 25, 2020);
Anschutz, 2020 WL 3096744, at *15; Addy v. Piedmonte, 2009 WL 707641, at *20–21 (Del. Ch.
Mar. 18, 2009).
186
EMSI, 2017 WL 1732369, at *9.
187
Id. (quoting ABRY, 891 A.2d at 1064).
188
132 A.3d 35 (Del. Ch. 2015).
189
Id. at 59.
190
Id.
50
In rejecting the seller’s argument, the court first observed that a speaker may
sustain vicarious liability for a false representation the speaker makes to a third
person “[i]f the misrepresentation is made for the purpose of having it
communicated” by that third person to the intended listener.191 Under those
circumstances, the court reasoned that agency law principles would undermine the
speaker’s attempt to escape wrongdoing by using a mouthpiece.192 Turning to
ABRY, the court noted that ABRY grappled with how to apply this guidance “to
representations made by ‘the Company’ in stock purchase agreements.”193 After
working through ABRY’s reasoning, the court held “the scope of a contractual fraud
claim swe[eps] [] broadly” enough to capture a seller for its knowledge of the
company’s false contractual representations.194 In so holding, the court observed
that when a seller causes the Company to “repeat” through contractual
representations “false sales numbers” the seller “affirmatively encouraged,” the
seller “sp[eaks] for the Company” and therefore can be liable for its “participat[ion]”
in the Company’s fraud.195 With this understanding, the court permitted the buyer’s
191
Id. (internal quotation marks omitted).
192
Id. at 59–60.
193
Id. at 60.
194
Id. at 60–61 (citing ABRY, 891 A.2d at 1064).
195
Id. at 61 (internal quotation marks omitted); see also id. (“At the pleadings stage, it is reasonably
conceivable that [non-representing sell-side parties] can be held liable for fraudulent contractual
representations made by the Company. . . . [T[hey approved all documents and reports before
anything was sent to [the buyer]. In other words, [they] were the brains behind the Company’s
business activities and the voice that relayed the details of those activities to the world.”).
51
contractual fraud claims to proceed against the seller. More critically, the court
allowed the buyer’s claims to proceed even though the seller did not provide a signed
closing certificate.
The relative unimportance of signed closing certificates was brought into
sharper focus by this Court’s decision in ITW Global Investments Inc. v. American
Industrial Partners Capital Fund IV, L.P.,196 which adopted ABRY’s reasoning. In
ITW, the buyer argued it did not need to plead the seller’s knowledge of the
company’s misrepresentations because, in the buyer’s view, the seller’s signed
closing certificates established the seller’s knowledge conclusively.197 This Court
rejected that argument as “unavailing.”198 In doing so, this Court observed that the
ABRY seller signed a closing certificate, but the Prairie Capital seller did not.199
Harmonizing both decisions, this Court held closing certificates are “one factor”
“among many” that could lead to a finding that the seller knew the company’s
contractual representations were false.
The execution of Officer’s Certificates constitutes one factor, to be considered
among many, that could support a showing of knowledge. In [ABRY] and
Prairie Capital, the Court of Chancery looked at numerous facts and
circumstances which could, if proven, support the conclusion that the [seller]
knew of [the company’s] misrepresentations.200
196
2017 WL 1040711 (Del. Super. Ct. Mar. 6, 2017).
197
Id. at *8.
198
Id.
199
Id. at *7.
200
Id. at *8 (first citing ABRY, 891 A.2d at 1051; and then citing Prairie Cap., 132 A.3d at 60–62,
65).
52
ITW makes clear that a closing certificate neither is necessary nor sufficient to
sustain a fraud claim against the seller based on the company’s contractual
representations.
Recent decisions issued by the Court of Chancery retreat even further from
reliance on closing certificates. For example, in LVI Group Investments, LLC v.
NCM Group Holdings, LLC,201 the seller did not issue a closing certificate, but the
Court of Chancery held the buyer could maintain a fraud claim against the seller for
knowing about the company’s alleged misrepresentations.202 The same was true in
ChryonHego Corp. v. Wight203 and Roma Landmark Theaters, LLC v. Cohen
Exhibition Company LLC.204 Neither case involved signed closing certificates. Yet,
both cases implemented ABRY’s knowledge exception to find a fraud claim
satisfactorily pleaded against a seller for knowing about the company’s alleged
misrepresentations.205 Collectively, these cases observe that knowledge may be
derived from a variety of sources. No single source is dispositive.
In sum, ABRY and its progeny teach that a seller can be liable for the
company’s false contractual representations—even without a closing certificate—as
201
2018 WL 1559936 (Del. Ch. Mar. 28, 2018).
202
Id. at *13 (As the [seller] point[s] out, the representations and warranties in the agreement were
made by [the company], not the [seller]. But that is not fatal to [the buyer’s] fraud claims.” (first
citing ABRY, 891 A.2d at 1064; and then citing Prairie Cap., 132 A.3d at 61)).
203
2018 WL 3642132 (Del. Ch. July 31, 2018).
204
2020 WL 5816759 (Del. Ch. Sept. 30, 2020).
205
Roma Landmark, 2020 WL 5816759, at *10–14; ChryonHego, 2018 WL 3642132, at *10.
53
long as the buyer adequately pleads the seller knew the company’s contractual
representations were false. Accordingly, the viability of Aveanna’s fraud claims
turns on whether Aveanna’s complaint adequately pleads Defendants’ knowledge of
the Companies’ alleged contractual fraud. It does.
c. Under Rule 9(b), Aveanna sufficiently has pleaded knowledge.
Aveanna has brought common law fraud and fraudulent inducement claims
against Defendants. These claims have the same elements,206 specifically:
(i) a false representation, usually one of fact, made by the defendant;
(ii) the defendant's knowledge or belief that the representation was false, or
was made with reckless indifference to the truth;
(iii) an intent to induce the plaintiff to act or to refrain from acting;
(iv) the plaintiff's action or inaction taken in justifiable reliance upon the
representation; and
(v) damage to the plaintiff as a result of such reliance.207
Relatedly, to hold a non-contract party liable for aiding and abetting contractual
fraud, a plaintiff must allege “(i) underlying tortious conduct; (ii) knowledge; and
(iii) substantial assistance.”208
Under Superior Court Civil Rule 9(b), fraud claims must satisfy a heightened
pleading standard.209 Rule 9(b) requires that “the circumstances constituting fraud”
206
See Maverick Therapeutics, Inc. v. Harpoon Therapeutics, Inc., 2020 WL 1655948, at *26 &
n.339 (Del. Ch. Apr. 3, 2020); see also Surf’s Up, 2021 WL 117036, at *12 (“[A]ll fraud claims
require proof of the same or nearly the same elements.”).
207
Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 144 (Del. Ch.
2004) (formatting added) (quoting Stephenson, 462 A.2d at 1074).
208
Agspring Holdco, LLC v. NGP X US Holdings, L.P., 2020 WL 4355555, at *20 (Del. Ch. July
30, 2020) (internal quotation marks omitted).
209
Del. Super. Ct. Civ. R. 9(b).
54
be pleaded with particularity.210 “The factual circumstances that must be stated with
particularity refer to the time, place, and contents of the false representations; . . . the
identity of the person(s) making the misrepresentation; and what that person(s)
gained from making the misrepresentation.”211 “Essentially, . . . the plaintiff must
allege circumstances sufficient to apprise the defendant of the basis of the claim.”212
Knowledge, in contrast, “may be averred generally.”213 The same is true for
an accomplice’s knowledge.214 In either case, allegations “that give rise to an
inference of knowledge on the part of the pleader need not be pleaded with
particularity.”215 Given this liberal standard, pleading knowledge in the contractual
fraud context “is relatively easy.”216 “[A]n allegation that a contractual
representation is knowingly false typically will be deemed well pled (even if
210
Avve, Inc. v. Upstack Techs., Inc., 2019 WL 1643752, at *5 (Del. Super. Ct. Apr. 12, 2019)
(internal quotation marks omitted); see generally Mooney v. E.I. du Pont de Nemours & Co., 2017
WL 5713308, *6 (Del. Super. Ct. Nov. 28, 2017) (“Rule 9’s particularized pleading requirement
ensures that a plaintiff cannot pursue a fraud claim merely because business plans did not pan
out.”).
211
Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 207–08 (Del. Ch. 2006), aff’d
sub nom., Trenwick Am. Litig. Tr. v. Billett, 2007 WL 2317768 (Del. Aug. 14, 2007).
212
H–M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 145 (Del. Ch. 2003).
213
Del. Super. Ct. Civ. R. 9(b).
214
E.g., Agspring, 2020 WL 4355555, at *20 (“Like the pleading requirements for fraud, the
knowledge element of an aiding and abetting claim under Delaware law may be averred generally.
. . .”).
215
Kahn Bros. & Co., Inc. Profit Sharing Plan & Tr. v. Fischbach Corp., 1989 WL 109406, at *5
(Del. Ch. Sept. 19, 1989); see Desert Equities, 624 A.2d at 1208 (“Intent and state of mind . . .
may be averred generally because any attempt to require specificity in pleading a condition of
mind would be unworkable and undesirable.” (internal quotation marks omitted)).
216
Prairie Cap., 132 A.3d at 62.
55
ultimately difficult to prove).”217 Still, when a fraud claim, “at its core,” charges a
defendant with knowing something, “there must, at least, be sufficient well-pleaded
facts from which it can be reasonably inferred that this ‘something’ was knowable
and that the defendant was in a position to know it.”218 This “position to know”
requirement governs fraud claims that charge a seller with knowing the company’s
contractual representations were false.219
Aveanna’s allegations satisfy Rule 9(b). After the transaction closed,
Aveanna alleges it discovered the Companies had undisclosed operational and
financial impairments. Those discoveries prompted Aveanna to retain forensic
analysts who, after investigating the Companies, concluded the Financial Statements
were not compiled in compliance with GAAP and did not truthfully represent the
Companies’ financial health. Following that investigation, Aveanna uncovered
electronically-stored messages shared privately among Defendants’ managers
during the sale process that indicated Defendants knew the Companies had
misrepresented the Financial Statements. For example,
(i) in September 2016, one of Seller’s consultants reported that its analysis of
“lagged cash collections” did not support the revenues reported in the
Financial Statements. In response, Seller’s former Chief Financial Officer
wrote that one of Webster’s partners “direct[ed]” the consultant to rewrite the
analysis such that a buyer could “find[] no changes to the . . . EBIDTA” the
217
Pilot Air, 2020 WL 5588671, at *24 (citing ABRY, 891 A.2d at 1050).
218
Metro Commc’n, 854 A.2d at 147 (internal quotation marks omitted).
219
See, e.g., LVI, 2018 WL 1559936, at *13 (“The question is whether [the buyer] has pleaded
facts suggesting that the falsity of the financial statements ‘was knowable and that [the seller was]
in a position to know it.” (alterations omitted) (quoting Metro Commc’n, 854 A.2d at 147)).
56
Companies had boasted. Webster had written the same on its own behalf in
July 2016.220
(ii) In May 2016, Epic’s then-CFO wrote to one of the Companies’ financial
officers, explaining he was “very concerned” that the revenue earned by
Seller’s enteral accounts receivable would show a shortfall for Q1 and Q2
2016.221
(iii) In June 2016, Epic’s then-CFO wrote to the same financial officer that
Seller likely would need to “write-off” the accounts receivable, which showed
a $2 million deficit.222
(iv) In July and August 2016, Epic’s then-CFO wrote that he anticipated
Seller’s efforts to collect receivables would be “futile,” putting Epic in a “$4
million hole” “on an aggregate basis.” That loss projection would rise to $5.2
million by September.223
(v) Speaking about those deficits, Epic’s then-CFO planned to “get [them]
fixed.” In October 2016, he wrote that Seller’s reported EBITDA was “set in
stone,” requiring Defendants to manipulate Seller’s balance sheets to “hit the
. . . results” Defendants’ advisors forecasted.224
(vi) By late October 2016, Defendants, using accounting gambits like
“pickups,” wrote that they (artificially) had achieved the results its advisors
had forecasted.225
(vii) Shortly before Buyer and Seller reached their December letter of intent,
one of the Companies’ executives wrote to another of the Companies’
executives that the Companies had been missing their net-revenue targets “for
many months.” In response, the receiver cautioned that further
communications with Seller should take place over the phone, as e-mails
would be “discoverable if the new owners take action.”226
220
Compl. ¶¶ 31, 45.
221
Id. ¶ 33.
222
Id. ¶¶ 34–35.
223
Id. ¶¶ 36–37.
224
Id. ¶¶ 39, 41.
225
Id. ¶ 42.
226
Id. ¶ 43.
57
(viii) At the same time, Epic’s then-CFO explained that it would be
“disruptive” to disclose these losses during the sale process, noting further
that key members of Defendants would not “raise [their] hand[s] to say” the
Financial Statements were inaccurate.227
(ix) Finally, approximately one month before disclosing the Financial
Statements, a Webster vice president wrote to one of Defendants’ consultants
that Epic’s “databooks” should be “scrub[bed]” “to give buyers only what
they really need to get to the revenue and EBIDTA” Defendants had set. The
same officer added that the consultant should be “mindful of anything that
could be detrimental to Epic,” as Webster would “want that removed.”228
These well-pleaded allegations support a reasonable inference that
Defendants colluded to conceal many of the Companies’ material liabilities and to
manipulate the Financial Statements in a manner that unnaturally achieved the
projections Defendants had advertised. Plainly, therefore, these well-pleaded
allegations also support a reasonable inference that Defendants were “in a position
to know” that the Companies’ Financial Statements would be false if the Statements
were not revised before disclosure.229 Accordingly, Aveanna’s fraud claims may
proceed beyond the pleadings stage.
In opposition, Defendants press two unpersuasive arguments. First,
Defendants emphasize repeatedly that Aveanna has not “shown” the Defendants’
knowledge of fraud. This refrain ignores Rule 9(b). Under Rule 9(b), a claimant’s
227
Id. ¶ 44.
228
Id. ¶ 46.
229
Metro Commc’n, 854 A.2d at 147.
58
knowledge allegations need only be averred generally, not with trial-ready proof.230
And, on a pleadings-stage motion, Aveanna is entitled to benefit from favorable
inferences, e.g., that Defendants contrived the Financial Statements to meet their
EBIDTA targets and induce a misleadingly-priced deal. Second, Webster insists,
because it is not a party to the SPA, it cannot be snared in direct fraud liability.
Under the SPA, however, the parties carved fraud perpetrated by Affiliates out from
the No Recourse provision.231 Webster is an Affiliate of Epic, its majority-controlled
portfolio company.232 The parties unambiguously agreed that Affiliates like Webster
could not avoid direct liability for their knowledge of the Companies’ false
contractual representations.
4. Defendants’ remaining challenges present factual issues not amenable
to resolution on a motion for judgment on the pleadings.
Separate from their legal arguments, Defendants minimize Webster’s
involvement in the sale process, fault Aveanna for expecting fluid GAAP principles
and an EBITDA model to produce trustworthy data, and stress that certain pre-
closing disclosures rectified the errors Aveanna bemoans. These fact-intensive
230
Del. Super. Ct. Civ. R. 9(b); see Surf’s Up, 2021 WL 117036, at *15 (rejecting challenge to
fraud claim that would have required claimant to prove fraud at the pleadings stage).
231
SPA § 10.17.
232
Id. § 1.1.
59
critiques cannot be resolved at the pleadings stage.233 The undisputed facts in the
record do not support judgment in Defendants’ favor.
A complaint sufficiently pleads substantial assistance if it alleges “the
secondary actor . . . provided assistance . . . or participation in aid of the primary
actor’s allegedly unlawful acts.”234 As explained, Aveanna alleges Webster partners
and officers “direct[ed]” Defendants’ advisors to fabricate the Financial Statements
so as to legitimize Defendants’ asking price. Aveanna also alleges a Webster vice
president instructed one of Defendants’ consultants to “scrub” detrimental liabilities
from the Financial Statements. At the pleadings stage, these allegations are more
than sufficient to apprise Webster of its “participation in” fraud235 and of its “position
to know” of the misrepresentations.236
Moreover, it is reasonable, at this stage, to conclude Aveanna was justified in
evaluating the Companies using an EBIDTA model and GAAP principles.
Defendants based the Companies’ financials on an EBIDTA analysis and the
233
E.g., McDonald’s, 2021 WL 351967, at *9 (“[T]he reasonableness of a plaintiff’s reliance is a
factual inquiry that is typically resolved with the benefit of discovery rather than at the pleadings
stage.” (internal quotation marks omitted)); id. at *9 n.60 (collecting authority); NACCO, 997 A.2d
at 32 (The line between reasonable and unreasonable reliance “is difficult to draw and not
something [courts ordinarily] address on” a challenge to the pleadings.); see also Wilmington Tr.
Co. v. Aetna Cas. & Sur. Co., 690 A.2d 914, 916 (Del. 1996) (“Whether . . . reliance on a
misrepresentation was reasonable is a question for the jury.”).
234
Agspring, 2020 WL 4355555, at *21 (internal quotation marks omitted); see Restatement
(Second) of Torts § 876 cmt. d (1977).
235
Agspring, 2020 WL 4355555, at *21 (internal quotation marks omitted).
236
Metro Commc’n, 854 A.2d at 147; see Agspring, 2020 WL 4355555, at *20 (observing that the
“position to know” requirement applies to accomplices as well as principals).
60
Companies themselves represented that the Financial Statements were prepared “in
accordance” with GAAP.237 A buyer justifiably may rely on contractual
representations.238 Finally, Defendants’ claim that a pre-closing, $6 million
downward adjustment corrected misstatements about the Companies’ enteral assets
is unresponsive to Aveanna’s allegations. According to Aveanna, the enteral assets
were overvalued by $6.9 million, not $6 million.239 Defendants’ reactive, and
incomplete, attempt to avoid a post-closing fraud claim with last-minute diligence
further supports the reasonable inference that the price had been adjusted to throw
Aveanna farther from their trace.
To reiterate, the SPA’s anti-reliance language is inapplicable to Aveanna’s
fraud claims. Defendants directly may be liable for their alleged knowledge of the
Companies’ false contractual representations. Direct liability aside, the complaint
supports a reasonable inference that Webster may have aided and abetted fraud.
Defendants are free to pursue their fact-based challenges, and to clarify their role in
the diligence process, with discovery. Their motion is denied.
237
SPA § 3.4(c).
238
See, e.g., FdG Logistics, 131 A.3d at 858 (“Delaware law enforces clauses which identify
specific information on which a party has relied and foreclose reliance on other information.”).
239
Compl. ¶ 29.
61
B. Aveanna’s withholding of Epic’s tax refund amounts to breach of the SPA
unless Aveanna can establish a fact-based defense to breach.
1. Under the SPA, Aveanna plainly was required to remit Epic’s tax
refund no later than ten business days after receiving it.
Turning to Aveanna’s motion, the Court begins with the parties’ tax refund
dispute. SPA Section 6.9 details a sequential procedure for filing returns and
remitting refunds. First, under the Cooperation Provision, Aveanna and Epic
collaborate on tax positions likely to minimize regulatory scrutiny and to maximize
a refund. Second, Aveanna directs the Companies to file a return that embodies
those positions. Third, under the Refund Provision, Aveanna intercepts, on Epic’s
behalf, any refund disbursed to the Companies. Finally, Aveanna remits the refund
to Epic no later than ten business days after Aveanna intercepts it.
Aveanna admits it intercepted a refund from the collaborative return the
Companies filed. Aveanna, however, did not remit the refund to Epic within the ten-
day deadline. Under the SPA’s plain language, therefore, Aveanna violated the
parties’ refund procedures. Accordingly, Aveanna is not entitled to judgment as a
matter of law.
2. There are no conditions precedent in the Refund Provision.
Aveanna’s unwillingness to remit the refund puts it in breach of the SPA.
Recognizing this, Aveanna tries to graft two “conditions precedent” onto its refund
release duties. In Aveanna’s view, the Refund Provision’s “more likely than not
62
level of comfort” language is a condition that requires the parties to confer on the
tax positions expressed in the refund before Aveanna releases it. Aveanna explains,
without such a conference, Aveanna might remit a refund imperiled by an IRS
clawback claim, leaving Aveanna responsible for a delta while Epic receives a
windfall. As support for this reading, Aveanna identifies a second condition in the
Refund Provision: the “net of any taxes owed” language. Aveanna insists, by
including this language, the parties tacitly agreed that no refund may be released
until an IRS audit is initiated and ultimately concludes. Aveanna’s reasoning is
difficult to follow and, more importantly, is not supported by the SPA.
The existence of a condition precedent is a question of contract interpretation,
and therefore, of law.240 A condition precedent is “an act or event, other than a lapse
of time, that must exist or occur before a duty to perform something promised
arises.”241 Although “[t]here are no particular words that must be used to create a
condition precedent,”242 a condition precedent must be expressed clearly and
240
See, e.g., Casey Emp. Servs., Inc. v. Dali, 1993 WL 478088, at *4 (Del. Nov. 18, 1993).
241
Thomas v. Headlands Tech Principal Holdings, L.P., 2020 WL 5946962, at *5 (Del. Super. Ct.
Sept. 22, 2020) (emphasis added) (internal quotation marks omitted); see Restatement (Second) of
Contracts § 224 (1981) (hereinafter the “Restatement of Contracts”) (same). Delaware trial courts
have followed the Restatement of Contracts when analyzing issues related to conditions precedent.
E.g., S’holder Rep. Servs. LLC v. Shire US Holdings, Inc., 2020 WL 6018738, at *18–19 (Del. Ch.
Oct. 12, 2020); SJM Soft.Com, Inc. v. Cross Country Bank, 2003 WL 1769770, at *12–13 (Del.
Super. Ct. Apr. 2, 2003). The Supreme Court likewise has looked to the Restatement of Contracts
for guidance on conditions precedent. E.g., Williams Cos., Inc. v. Energy Transfer Equity, L.P.,
159 A.3d 264, 273 & n.34 (Del. 2017) (“Williams II”); id. at 277–78 & n.56 (Strine, C.J.,
dissenting). The Court, therefore, invokes the Restatement of Contracts where appropriate.
242
Thomas, 2020 WL 5946962, at *5 (internal quotation marks omitted); see also Shire, 2020 WL
6018738, at *18 (“[T]he difference between a condition precedent and a condition subsequent ‘is
63
unambiguously.243 If the Court finds a condition precedent, then the burden is on
the party claiming breach to demonstrate that the condition on which the underlying
obligation is contingent has been satisfied.244 An unexcused and unsatisfied
condition keeps a dependent duty from accruing, thwarting an otherwise ripe breach
claim.245
The first of Aveanna’s conditions concerns the Refund Provision’s “more
likely than not level of comfort” language.246 “More likely than not” is a term of art
under federal tax regulations.247 It is one of three degrees of certainty measured by
one of substance and not merely of the form in which the provision is stated.’” (quoting
Restatement of Contracts § 230 cmt. a)).
243
E.g., Voltaire Contractors, Inc. v. Coastal Mech., Inc., 1986 WL 13982, at *1 (Del. Super. Ct.
Dec. 1, 1986); accord Thomas, 2020 WL 5946962, at *5; see also QC Holdings, Inc. v. Allconnect,
Inc., 2018 WL 4091721, at *7 (Del. Ch. Aug. 28, 2018) (“For a condition to effect a forfeiture, it
must be unambiguous. If the language does not clearly provide for a forfeiture, then a court will
construe the agreement to avoid causing one.” (internal quotation marks and citation omitted)).
244
E.g., Shire, 2020 WL 6018738, at *17; see also Williams II, 159 A.3d at 273 (“[O]nce a breach
of a covenant is established, the burden is on the breaching party to show that the breach did not
contribute materially” to the non-occurrence of the condition. (citing Restatement of Contracts §
245 cmt. b)).
245
See, e.g., Lennox Indus. Inc. v. All. Compressors LLC, 2020 WL 4596840, at *3 & n.15 (Del.
Super. Ct. Aug. 10, 2020) (dismissing claim as unripe because claimant failed to undertake
compulsory pre-litigation dispute resolution, which was a “condition precedent to litigation”
(internal quotation marks omitted)); cf. Brazen v. Bell Atl. Corp., 1997 WL 153810, at *2 (Del.
Ch. Mar. 19, 1997) (“[The] claim is not dependent on occurrence of [a] condition precedent, and
is, therefore, ripe for adjudication.”); see generally Restatement of Contracts § 235(2) (“When
performance of a duty under a contract is due any non-performance is a breach.” (emphasis
added)).
246
See SPA § 6.9(f).
247
See 26 C.F.R. § 1.6694–2(b) (describing penalties for “understat[ed]” tax returns “due to an
unreasonable position” and discussing the “more likely than not” standard); see also Williams Cos.,
Inc. v. Energy Transfer, L.P., 2016 WL 3576682, at *11 (Del. Ch. June 24, 2016) (“Williams I”),
aff’d, Williams II, 159 A.3d 264; see generally Michael B. Lang & Jay A. Soled, Disclosing Audit
Risk to Taxpayers, 36 Va. Tax Rev. 423, 427–30 (2017) (explaining “audit risk” in connection
with tax positions filed during the return phase).
64
a “should” opinion in which a tax professional advises a client on whether the IRS
is likely to challenge a tax position the client seeks to take.248 A tax professional
renders a “more likely than not” recommendation when the client’s proposed
positions have at least a “51%” chance of earning regulatory imprimatur.249
Temporally, then, the client must be advised on the “more likely than not” standard
before a return is filed.250 Given the inclusion of other technical tax language in the
Refund Provision, the only reasonable reading of the “more likely than not” phrase
is one that is consistent with its technical meaning.251
Aveanna’s proffered reading is not reasonable. The Refund Provision
declares that a refund is “payable to the extent such refund . . . is based on [t]ax
positions that are claimed with a ‘more likely than not’ level of comfort, as
reasonably determined in consultation with Seller pursuant to the provisions of this
Section [] and Section 6.9(e) [i.e., the Cooperation Provision].”252 An organic
reading of the Refund Provision’s cross-reference to the Cooperation Provision is
248
Williams I, 2016 WL 3576682, at *11.
249
Id.250
See Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1, 40–41 (Del.
2017) (observing, in the context of creating reserves for potential “tax benefits,” that the payor
first must “recognize[] the financial statement effects of a tax position when it is more likely than
not . . . the position will be sustained upon examination” (emphasis and internal quotation marks
omitted)); see also LSVC Holdings, LLC v. Vestcom Parent Holdings, Inc., 2017 WL 6629209, at
*7–8, *12 (Del. Ch. Dec. 29, 2017) (finding reading of “more likely than not” standard that would
govern tax positions during the return phase the most “consistent with ordinary business practice”).
251
See, e.g., In re Verizon Ins. Coverage Appeals, 222 A.3d 566, 572–74 (Del. 2019) (interpreting
the “plain meaning” of contractual term “securities claim” in reference to meaning the term
“securities” has under federal and state securities statutes and rules).
252
SPA § 6.9(f) (emphasis added).
65
that the parties must have “determined” a “more likely than not level of comfort” on
the “[t]ax positions” “claimed” during the Cooperation stage. In other words, the
“more likely than not level of comfort” must have been reached before the
Companies’ tax returns were filed, not after Aveanna received the refund. Similarly,
the Refund Provision’s self-reflexive reference (“reasonably determined . . .
pursuant to this Section []”) connects the comfort level to Aveanna’s duty to file an
“IRS Form 1139.”253 Consistent with the Cooperation Provision, Aveanna must
“consult[]” with Epic before filing that return form so the parties can take “tax
positions” with a “more likely than not” comfort level.
The Refund Provision’s treatment of clawback claims further underscores that
Aveanna must release the return unconditionally. Under the Refund Provision, if
the IRS claws back a refund “for any reason,” Epic (or its investors) pays the
Government, not Aveanna.254 Put differently, if the IRS concludes the Companies
were wrong to think their tax return positions had been “more likely than not”
passable, Epic faces disgorgement, not Aveanna.255 Although it is true that, in this
situation, the Government would pursue Aveanna (via the Companies) until Epic
253
Id.
254
Id.
255
This part of the Refund Provision brings the “more likely than not” language closer to a
condition subsequent, assuming it can be a condition at all. See, e.g., Shire, 2020 WL 6018738, at
*18 (explaining conditions subsequent). If so, proving the condition subsequent had been satisfied
would be Aveanna’s burden, not Epic’s. Id.66
intervenes, Aveanna, a sophisticated counterparty, accepted that reality.256
Accordingly, Aveanna’s leading theory in favor of a condition—i.e., covering a
deficiency judgment while Epic absconds with the original check—is unfounded.
In sum, it makes little sense, as Aveanna has argued, for the parties to
strategize tax positions with a “more likely than not” comfort level during the Refund
stage. Without tax positions, a return never would have been filed. Without a return,
a refund never would have been disbursed. The “more likely than not” language
plainly does not amount to a condition precedent.
In another trip to the well, Aveanna claims the “net of any taxes owed” or “net
of any expenses owed” language in the Refund Provision also is conditional.
According to Aveanna, this language implicitly references the Audit Provision,
allowing Aveanna to guard the refund until an IRS audit is complete. This assertion,
made elliptically in a paragraph in Aveanna’s opening brief,257 was not expanded
meaningfully until Aveanna’s reply258 and only then most strenuously at oral
argument.259 An argument raised for the first time at a motion’s hearing, or in a
256
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, 2009 WL 4154356 (Del. Nov. 24, 2009).
257
D.I. 46 at 28–29.
258
D.I. 55 at 12–14.
259
Hr’g Tr. at 54, 58, 60, 62–64; e.g., id. at 62 (“[Counsel for Aveanna]: ‘I think [the Court] can
give us judgment just on the net of any taxes owed [language].’”).
67
reply brief, fairly may be deemed waived.260 But even if not waived, this argument
would fail on the merits.
As an initial matter, Aveanna’s analysis presupposes that an IRS audit is
inevitable. But Aveanna offers nothing in the SPA—or from commercial practice
or experience generally—that suggests the Government always audits refunds.261
More importantly, Aveanna does not explain why the Court should imply a reference
to the Audit Provision when the parties clearly knew how to cross-reference tax
provisions explicitly when they wanted to do so.262 Indeed, courts routinely find the
exclusion of a particular cross-reference is intentional and a byproduct of
negotiation.263 In any event, the “net of any taxes owed” language does not
reasonably signal the Audit Provision. This language most naturally means a proper
260
E.g., Emerald Partners v. Berlin, 726 A.2d 1215, 1224 (Del. 1999); Ethica Corp. Fin. S.r.L v.
Dana Inc., 2018 WL 3954205, at *3 & n.37 (Del. Super. Ct. Aug. 16, 2018).
261
But see SPA § 6.9(b) (omitting the likelihood of an audit and instead discussing audit control
procedures for “any audit”); but see also Hr’g Tr. at 63 (“The Court: ‘But, again, the net of any
taxes owed [language] assumes an automatic audit that is not referenced in the contractual
language.’” “[Counsel for Aveanna]: ‘It’s there for a reason, and the reason is an automatic audit.
. . . You don’t need to know the ins and outs of audits. . . . It has a purpose.’”); but see generally
Lang & Soled, supra note 247, at 427 (describing the “probability” of an IRS audit as “low”).
262
See SPA § 6.9(f) (explicitly referencing § 6.9(e)).
263
See, e.g., McDonald’s, 2021 WL 351967, at *5 (“If the parties intended to incorporate [a
separate provision], they would have been explicit, just as they were when incorporating other
provisions. . . . Without this clear expression of intent, the Court has no cause to rewrite [the
agreement] to include commitments the parties themselves chose not to incorporate.” (citation
omitted)); Active Asset Recovery, Inc. v. Real Est. Asset Recovery Servs., Inc., 1999 WL 743479,
at *11 (Del. Ch. Sept. 10, 1999) (finding that omission of a specific term in a contract “speaks
volumes” about the parties’ intent when construing included terms (citing 3 Corbin on Contracts
§ 552 (1960))); see also Fortis Advisors LLC v. Shire US Holdings, Inc., 2017 WL 3420751, at *8
(Del. Ch. Aug. 9, 2017) (analogizing counterparties’ omission of specific terms to the statutory
canon of expresio unius est exclusio alterius, which provides that an omission presumptively is
intentional when other terms are included instead).
68
refund reflects subtractions for ordinary “taxes owed” to federal or state authorities,
such as when a taxpayer underpays her taxes during an income year.
Finally, even if the Court implied a reference to the Audit Provision, it would
not lend Aveanna interpretive assistance. Under the Audit Provision, Epic
presumptively controls an IRS audit. Epic may exclude Aveanna from an audit’s
defense entirely, preventing an opportunity mutually to recalculate for deductions.264
A compulsory audit, therefore, still would not permit Aveanna to withhold a refund.
There are no conditions precedent in the Refund Provision. Aveanna
unconditionally was obliged to remit the refund to Epic within ten business days of
intercepting it. It did not. Accordingly, Aveanna is not entitled to judgment as a
matter of law. To the contrary, Aveanna has violated the SPA by withholding the
refund unless it can prevail on one of its fact-based affirmative defenses.
3. Aveanna is entitled to discovery on its defenses.
While this case still was pending in the Court of Chancery, Aveanna moved
in the Court of Chancery under Rule 56(f) for an extension of time to respond to
Epic’s separately-pending summary judgment motion. Aveanna has argued
discovery is necessary (i) to obtain extrinsic evidence of the parties’ intent in drafting
the Refund Provision; (ii) to prove Epic waived its right to challenge an immediate
release of the refund; and (iii) to establish the existence of a post-closing
264
SPA § 6.9(b).
69
modification to the SPA through which the parties agreed Aveanna could withhold
the refund until the IRS’s audit concludes. As set forth above, the Refund Provision
is unambiguous, and Aveanna’s request to discover extrinsic evidence of the parties’
intent therefore is moot, leaving Aveanna’s request to obtain discovery regarding its
waiver and modification defenses.
Court of Chancery Rule 56(f) is identical to this Court’s Civil Rule 56(f).265
A motion under Rule 56(f) is directed to a court’s “broad discretion.”266 “[A] party
opposing summary judgment may, pursuant to . . . Rule 56(f), request limited
discovery if it cannot present facts essential to oppose the summary judgment
motion.”267 To invoke Rule 56(f), the requesting party must provide an affidavit
stating the scope of proposed discovery.268 The requesting party bears the burden of
demonstrating the discovery proposed is specific and relevant “in light of applicable
265
Compare Del. Super. Ct. Civ. R. 56(f), with Ch. Ct. R. 56(f).
266
Brick v. Retrofit Source, LLC, 2020 WL 4784824, at *3 (Del. Ch. Aug. 18, 2020) (internal
quotation marks omitted); see Schillinger Genetics, Inc. v. Benson Hill Seeds, Inc., 2021 WL
320723, at *16 (Del. Ch. Feb. 1, 2021) (“The Rule 56(f) opportunity to present affidavits or engage
in discovery . . . is necessarily circumscribed by the discretion of the trial court. . . .” (second
ellipsis in original) (alteration omitted) (quoting Malpiede v. Townson, 780 A.2d 1075, 1091 (Del.
2001))).
267
Corkscrew Mining Ventures, Ltd. v. Preferred Real Est. Fund Invs., Inc., 2011 WL 704470, at
*3 (Del. Ch. Feb. 28, 2011).
268
Id. at *3; see Ch. Ct. R. 56(f).
70
law.”269 An extension is appropriate where the core facts needed to oppose summary
judgment “are within the exclusive knowledge” of the movant.270
Aveanna has complied with Rule 56(f)’s affidavit requirement.271 Through
the affidavits, Aveanna’s Vice President of Tax has declared that Aveanna incurred
significant expense in defending the IRS’s audit solely because Epic had agreed to
Aveanna’s withholding of the refund.272 Epic’s agreement may express or imply a
waiver—a fact-based inquiry.273 A waiver or a modification may defeat a breach
argument. But evidence of waiver or an agreement is not in the record or in
Aveanna’s possession. A scarce record on these questions, coupled with Aveanna’s
lack of possession and the specificity and relevance of its limited, fact-based
requests, warrants an extension of time. Accordingly, discovery is appropriate
before the Court considers summary judgment on Epic’s tax refund counterclaim.
269
Schillinger Genetics, 2021 WL 320723, at *16 (internal quotation marks omitted); see Brick,
2020 WL 4784824, at *3 (“[T]he onus is on the non-moving party to state with some degree of
specificity . . . the additional facts sought by the requested discovery.” (internal quotation marks
omitted)).
270
Corkscrew Mining, 2011 WL 704470, at *3.
271
Ct. Ch. Dkt. 54, Exs. A & B; cf. Comet Sys., Inc. S’holders’ Agent v. MIVA, Inc., 980 A.2d
1024, 1033 (Del. Ch. 2008) (denying Rule 56(f) motion that had not been presented with an
accompanying affidavit).
272
E.g., Ct. Ch. Dkt. 54, Ex. B ¶¶ 6–8.
273
E.g., Topspin Partners, L.P. v. RockSolid Sys., Inc., 2009 WL 154387, at *2 (Del. Ch. Jan. 21,
2009) (deferring waiver as a jury question); see also Realty Growth Invs. v. Council of Unit
Owners, 453 A.3d 450, 456 (Del. 1982) (observing that the facts surrounding waiver must be
“unequivocal in character”). As a result, the Court rejects Epic’s contractual anti-waiver
arguments, as contractually afforded protections against waivers themselves may be waived if facts
so indicate. See Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 27 A.3d 522, 529–30 (Del. 2011).
71
This case’s procedural posture further supports that conclusion. Epic sought
summary judgment in the Court of Chancery for specific performance of the tax
refund. That motion has been transferred in its original form, and Epic intends to
submit it that way. This Court, however, lacks subject matter jurisdiction to grant
specific performance. The Court therefore cannot rule on Epic’s unedited motion.
That in mind, the Court of Chancery found Epic’s “specific performance” claim truly
presents a damages or declaratory claim. As a result, the motion is not doomed.
Instead, Epic must brief its motion anew with legal, rather than equitable,
arguments.274 Accordingly, Epic’s motion is denied without prejudice to it renewing
that motion once the contemplated discovery is complete.
C. Under the Escrow Agreement’s plain language, Aveanna wrongfully
withdrew the Escrow Funds.
The final issue raised by Aveanna’s motion involves the Escrow Funds.
Through its motion, Aveanna seeks a judgment that it is not violating the Escrow
Agreement by continuing to hold the Escrow Funds while the parties’ dispute
continues.275 To support that request, Aveanna first argues Epic has waived its right
274
The Court is mindful of the Court of Chancery’s correct observation that this Court ordinarily
does not require a transferred litigant to re-brief motions submitted in a sister court. Epic/Freedom,
2021 WL 1049469, at *4–5 (citing 10 Del. C. § 1902). Epic, however, has not explained how the
Court workably can reduce its unchanged equitable arguments to legal judgment. Given the unique
litigation history of this case—and the administrative problems a second transfer undoubtedly
would cause—it is appropriate to order Epic to file a new motion, should it decide that summary
judgment remains a prudent course. For these reasons, this order should be deemed exceptional.
275
At oral argument, Aveanna clarified that it does not seek a judgment that it “owns” the Escrow
Funds. Hr’g Tr. at 69. Instead, Aveanna seeks a judgment that it rightfully may hold the Escrow
72
to challenge the Escrow Funds’ early release by failing to file a Dispute Notice
within the 30-day objection period. Aveanna then contends that, regardless of
waiver, it properly obtained the Escrow Funds’ early release by notifying Epic and
the Escrow Agent of its Indemnification Claim at the same time. Aveanna’s
assertions call for interpretation of the Escrow Agreement and its interaction with
the SPA. As discussed below, neither agreement validates Aveanna’s non-
conforming notice.
1. Epic did not waive its challenge to the Escrow Funds’ release.
Under Escrow Agreement Section 4(b), Epic has 30 days to object to
Aveanna’s Indemnification Notice. If Epic does not object by that deadline, the
Escrow Agent must release the Escrow Funds to Aveanna. Importantly, Section 4(b)
does not provide that a failure to timely object to an Indemnification Notice
precludes Epic from challenging that Notice by other means (e.g., a breach of
contract claim based on Section 4(b)). In fact, the opposite is true. Under the Escrow
Agreement’s No Waiver provision, a failure to exercise a right under the Agreement
does not operate as a waiver of that unexercised right.276
Funds until it proves an indemnifiable Loss. Id. at 70–71. As a result, the Court does not reach
the parties’ arguments on whether a valid release establishes a permanent or temporary interest in
the Escrow Funds.
276
EA § 15.
73
On this plain language, Epic’s failure to file a Dispute Notice is not fatal to its
challenge to Aveanna’s possession of the Escrow Funds. Assuming an
Indemnification Notice properly is delivered, a failure to file a Dispute Notice allows
Aveanna to hold the Escrow Funds while its Indemnification Claim is resolved.277
A timely Dispute Notice simply would block an early release; it would not transmit
a claim charging a breach of the Escrow Agreement. A breach claim therefore can
be pursued in addition to, or in spite of, a timely Dispute Notice. Accordingly, the
No Waiver provision saves Epic from an argument that a Dispute Notice is a
prerequisite to suing for breach of the Escrow Agreement.
Aveanna’s argument to the contrary relies on cases that did not consider anti-
waiver language. For example, in HC Companies, Inc. v. Myers Industries, Inc.,278
the agreement penalized untimely objections to an escrow release with a waiver.279
The seller missed the deadline. As a result, and without anti-waiver language, the
Court of Chancery ruled that the seller waived a challenge to the release.280
Similarly, in PR Acquisitions, LLC v. Midland Funding LLC,281 the parties
structured their purchase and escrow agreements with two separate indemnification
277
See SPA § 9.4(a)(iii) (providing that “Loss” must be proven before a party is entitled to
indemnification).
278
2017 WL 6016573 (Del. Ch. Dec. 5, 2017).
279
Id. at *6.
280
Id. at *6, *8.
281
2018 WL 2041521 (Del. Ch. Apr. 30, 2018).
74
notice procedures.282 The Court of Chancery found that providing an
indemnification notice under the purchase agreement, but not the escrow agreement,
would result in a waiver of the right to challenge an escrow release.283 Citing
“human error,” the buyer did not file a notice under either agreement before the
expiration date.284 By consequence, the court deemed a challenge to the escrow
release waived. In doing so, the court enforced contractual compliance strictly,
finding no exception (e.g., anti-waiver language) to the buyer’s notice duties.285
Finally, in Winshall v. Viacom International, Inc.,286 the parties agreed
indemnification claims would be lost unless they were made within 18 months of
the transaction’s closing. The buyer made its first three claims during that window,
but did not make its last claim until after the window closed.287 As justification for
delaying its fourth claim, the buyer argued that “placeholder” language in its timely
notices had reserved the buyer’s right to bring future claims at any time.288 The
Court of Chancery rejected that unilateral attempt to extend the deadline, explaining
the sellers expressly had bargained for repose in the form of a cut-off date.289 Here,
282
Id. at *6 n.66.
283
Id. at *6–7. The Court of Chancery did not use the term “waiver,” but its ruling is to that effect.
284
Id. at *6.
285
Id. at *7.
286
2012 WL 6200271 (Del. Ch. Dec. 12, 2012), aff’d, 76 A.3d 808 (Del. 2013).
287
Id. at *8.
288
Id.
289
Id.
75
however, Epic expressly bargained for the No Waiver provision. Accordingly, the
Escrow Agreement permits Epic’s challenge.
2. Aveanna failed to deliver “an Indemnification Notice” “to Epic and the
Escrow Agent” “concurrently.”
a. The SPA and the Escrow Agreement contemplate different
Notices.
SPA Section 9.2(a)(i) authorizes Aveanna to seek indemnification from Epic
for inaccuracies in the SPA’s representations and warranties. To do so, Aveanna
must send Epic an Indemnification Claim Notice. One purpose of an
Indemnification Claim Notice is to inform Epic of an Indemnification Claim. In
context, another purpose of an Indemnification Claim Notice is to provide Epic with
an opportunity to investigate and respond to the claim. That is why, under SPA
Section 9.5, an Indemnification Claim Notice triggers Epic’s inspection rights.
Section 9.5 opens a pathway to Aveanna’s books and records, review of which Epic
may need to mount a defense to an Indemnification Claim. Under the SPA, a books
and records demand may be made at any “reasonable” time. There is no other
concrete deadline for making a books and records demand or for answering an
Indemnification Claim Notice generally.
If Aveanna “makes a claim for indemnification . . . [under] Section 9.2” of the
SPA, and wishes to extract the Escrow Funds early, Aveanna gains an additional
76
duty under the Escrow Agreement.290 To obtain control over the Escrow Funds,
Aveanna must “deliver concurrently to the Escrow Agent and Seller a written notice
(an ‘Indemnification Notice’).”291 As observed previously, the Escrow Agreement’s
Indemnification Notice is titled and defined differently than the SPA’s
Indemnification Claim Notice. An Indemnification Notice also serves different
purposes. An Indemnification Notice (i) alerts the Escrow Agent to an active
Indemnification Claim; (ii) starts the clock on the Escrow Agent’s early release
duties; and (iii) affords Epic an opportunity to lodge a Dispute Notice within 30 days.
As further evidence that the Indemnification Notice is a separate document, the
Escrow Agreement does not incorporate SPA Section 9.5—i.e., where the concept
of an Indemnification Claim Notice resides. It only incorporates SPA Section 9.2—
i.e., where the concept of an Indemnification Claim resides.
That the parties contemplated two separate notices is reasonable in light of
their decision to draft separate objection procedures. Those procedures, in turn, have
distinct purposes. Under the SPA, Epic may object to an Indemnification Claim
Notice at any reasonable time. Epic’s objection goes to a Claim’s merits. Epic’s
inspection rights under the SPA are designed to facilitate Claim resolution between
the parties. The “reasonable” time parameters offer generous latitude for doing so.
290
EA § 4(b).
291
Id.
77
In contrast, under the Escrow Agreement, Epic must object to an
Indemnification Notice within 30 days. Epic’s Dispute Notice does not go to the
merits of an Indemnification Claim. Instead, Epic’s Dispute Notice is designed to
mediate practical control over the Escrow Funds while an Indemnification Claim is
pending. Given the involvement of capital and a third party (the Escrow Agent), a
more rigid timeframe is sensible. The Escrow Agent, who otherwise would be
investing the Escrow Funds,292 must ensure they are liquid by a specific time. And
the Funds’ value, which fluctuates, may be determined more predictably when there
is a specific day on which the Escrow Funds will be released. That is particularly
important because Buyer may choose the exact amount subject to early release,
including the full amount available to Seller on the Final Escrow Release Date.
Looking to each agreement as a whole, an Indemnification Notice and an
Indemnification Claim Notice are not the same, although they may contain much of
the same content. To discharge the parties’ mutual intent, Aveanna must deliver
both Notices to their designated addressees in order to commence the Escrow Funds’
early release process.
b. Epic did not receive an Indemnification Notice.
Aveanna sent Epic an Indemnification Claim Notice when it determined
Defendants may have committed contractual fraud. Epic responded 33 days later,
292
See id. § 3(a).
78
contesting the allegations and invoking its inspection rights. The timing plainly was
reasonable. The response plainly was reasonable. The SPA’s notice and objection
procedures were respected.
At the same time, and on the same day, Aveanna sent the Escrow Agent—but
not Epic—an Indemnification Notice. The Escrow Agreement, however,
unambiguously affords Epic the right to receive an Indemnification Notice, too. The
Escrow Agreement requires delivery of “an Indemnification Notice” “to the Escrow
Agent and Seller.”293 Aveanna attached a copy of Epic’s Indemnification Claim
Notice in its message to the Escrow Agent. But Aveanna did not attach a copy of
the Escrow Agent’s Indemnification Notice in its message to Epic. Without
knowledge that Notice had been sent to the Escrow Agent, Epic could not have been
expected to file a Dispute Notice with the Escrow Agent. Without a proper
Indemnification Notice, Aveanna was prohibited from accessing the Escrow Funds.
Accordingly, Aveanna is not entitled to judgment as a matter of law on its continued
possession of the Escrow Funds.
Aveanna resists this conclusion by advancing a few unreasonable readings of
the parties’ agreements. Aveanna begins by arguing an Indemnification Notice and
an Indemnification Claim Notice are interchangeable. But that position gives no
meaning to two differently-titled and defined terms that exist in two separate
293
Id. § 4(b) (emphasis added).
79
contracts executed with different procedures and transactional aims. Indeed, it is
difficult to imagine the parties engineered their agreements using Aveanna’s
construction. It would not be rational for the parties to execute a $950 million
arrangement by which Seller can learn of a transaction-based Indemnification Claim,
contest it, and then decide to defend it, under the SPA, but still be deemed
uninterested in the fate of the Claim’s funding—which also constitutes sale
consideration—under the Escrow Agreement. Strict compliance with two different
Notices and Notice procedures closes this circle.294
Relatedly, Aveanna insists a single Indemnification Notice is not required by
the Escrow Agreement. But the Escrow Agreement’s plain language expresses
singularity. Section 4(b) declares Aveanna must deliver “a written notice (an
‘Indemnification Notice’).”295 Far from grammatical trifles, the singular articles
evince deliberation. Without “a” single Indemnification Notice, Epic would be
caught unawares by an early release. And, as here, the Escrow Agent incorrectly
would believe that Epic is indifferent to Aveanna’s race toward the Escrow Funds.
Aveanna next cites Black’s Law Dictionary to bolster its view that, even if a
single Notice were required, its two Notices functioned as one because both Epic
294
See PR Acquisitions, 2018 WL 2041521, at *6–7 & n.66 (observing that strict compliance with
a purchase agreement’s notice procedures, without more, does not amount to strict compliance
with a contemporaneously executed escrow agreement’s separate notice procedures as well).
295
EA § 4(b).
80
and the Escrow Agent learned of the Indemnification Claim “concurrently”—i.e.,
“at the same time.” This effort fails at its inception because notice of an
Indemnification Claim is not equivalent with notice of a request for the Escrow
Funds’ early release. Even so, in attempting to redefine the two Notices, Aveanna
redefines “concurrent,” too. Black’s defines concurrent not as “at the same time,”
but rather as “operating at the same time.”296 Black’s elsewhere defines “operate”
as “to function properly.”297 Similarly, generic dictionaries define operate as “to
produce an appropriate effect.”298 Taken together, an Indemnification Notice only
“function[s] properly” if it “produce[s]” the “appropriate” effect of notifying the
Escrow Agent and Epic “at the same time” of Aveanna’s intent to obtain an early
release of the Escrow Funds.
Notice delivered “at the same time” would be “simultaneous,” not concurrent.
“Simultaneous” describes an event’s timing only.299 “Concurrent” describes an
296
Concurrent, Black’s Law Dictionary (11th ed. 2019) (emphasis added); but see D.I. 46 at 16
(noting the word “operating” but then omitting it to focus only on the phrase “at the same time”).
297
Operate, Black’s Law Dictionary (2d online ed.), https://www.thelawdictionary.org/operate
(last visited July 9, 2021).
298
Operate, Merriam-Webster.com, https://www.merriam-webster.com/dictionary/operate (last
visited July 9, 2021). The Supreme Court has compared Merriam-Webster with Black’s in
construing undefined terms. E.g., Spintz v. Div. of Fam. Servs., 228 A.3d 691, 700 (Del. 2020);
USAA Cas. Ins. Co. v. Carr, 225 A.3d 357, 360 (Del. 2020). Accordingly, the Court follows that
example. See Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del. 2006)
(“Under well-settled case law, Delaware courts look to dictionaries for assistance in determining
the plain meaning of terms which are not defined in a contract.”); accord In re Solera Coverage
Appeals, 240 A.3d 1121, 1132 n.67 (Del. 2020).
299
Simultaneous, Merriam-Webster.com, https://www.merriam-webster/dictionary/simultaneous
(last visited July 9, 2021) (“existing or occurring at the same time; exactly coincident”).
81
event’s timing and its effect.300 To illustrate the difference, Black’s uses “concurrent
interest,” with a reference to “concurrent estate,” as an example.301 A concurrent
interest in land, such as a joint tenancy, is a property right owned by “two or more
persons at the same time.”302 Joint tenants have the right to occupy the land
“simultaneously,” but they need not do so. A unified conveyance of ownership
rights “at the same time” in the same title is enough to make their “concurrent”
interest “operate.”303 Stated negatively, the joint tenancy right is ineffective unless
granted pursuant to a single instrument.304 By analogy, the same is true for an
Indemnification Notice. It is ineffective unless it is singular (i.e., the same Notice),
transmits the same content, is addressed to Epic and the Escrow Agent, and is
delivered to them at the same time.
For completeness, Black’s also defines concurrent as “covering the same
matters,”305 which likewise is a contextually apt definition.306 A single
300
See supra notes 295–98 & accompanying text.
301
Concurrent, Black’s Law Dictionary (11th ed. 2019).
302
Concurrent Estate, in id.(using joint tenancy as an example).
303
See, e.g., Banks v. Banks, 135 A.3d 311, 317–18 (Del. Ch. 2016) (applying the four “unities”
of a joint tenancy, of which same “title” and “time” are two (internal quotation marks omitted)).
304
See 2 Tiffany on Real Property § 418 (3d ed. 2015) (“Joint tenants have one and the same
interest, accruing by one and the same conveyance, commencing at one and the same time, and
held by one and the same undivided possession.” (emphasis added)).
305
Concurrent, Black’s Law Dictionary (11th ed. 2019).
306
See Tetragon Fin. Grp. Ltd. v. Ripple Labs Inc., 2021 WL 1053835, at *4 (Del. Ch. Mar. 19,
2021) (explaining that “the mere existence of multiple definitions does not itself create ambiguity”
where context suggests one definition is more appropriate than others); E.I. du Pont de Nemours
& Co. v. Admiral Ins. Co., 711 A.2d 45, 59 (Del. Super. Ct. 1995) (“If the mere existence of
different dictionary definitions constitutes an ambiguity, drafting unambiguous contractual
82
Indemnification Notice addressed both to the Escrow Agent and Epic that “cover[s]
the same matter[]”—the Escrow Funds’ early release—delivered “at the same time”
plainly is what the parties meant by “concurrently.” Properly construed, then,
Aveanna sent an Indemnification Notice—which covers one matter—to the Escrow
Agent, and an Indemnification Claim Notice—which covers another matter—to
Epic, simultaneously. Aveanna failed to send an Indemnification Notice to the
Escrow Agent and Epic concurrently.
As a last resort, Aveanna departs from its plain meaning analysis and
speculates that Aveanna or the Escrow Agent would have told Epic about the
Indemnification Notice if Epic just had asked. But Escrow Agreement Section 4(b)
contains no duty to inquire. Rather, the parties bargained for a single
Indemnification Notice that informs all parties of the same claim at the same time.
The Court will not insert contractual obligations that Aveanna, a sophisticated entity,
willingly chose to omit.307
Once Aveanna made an Indemnification Claim, it did not need to pursue the
Escrow Funds’ immediate release.308 When it did, however, it plainly was required
language would be impossible without defining almost every word. Standing alone, multiple
dictionary definitions do not prove all differing definitions are reasonable.” (citation omitted)).
307
See W. Willow-Bay, 2007 WL 3317551, at *9 (observing that sophisticated parties especially
are bound by the contract language they voluntarily choose); cf. NAMA Holdings, 948 A.2d at 419(observing that the inclusion of a certain term is intentional and must be given effect).
308
Compare D.I. 46, Ex. B (Indemnification Notice dated Dec. 21, 2017), with EA § 4(f)
(scheduling Escrow Final Release Date for Mar. 16, 2018), and EA § 4(b) (permitting the Buyer
to request an early release at “any time prior” to the Final Escrow Release Date).
83
to send Epic an Indemnification Notice. It did not. Accordingly, Aveanna is not
entitled to judgment as a matter of law as to its continued possession of the Escrow
Funds.
CONCLUSION
For the foregoing reasons, the parties’ motions for judgment on the pleadings
are DENIED, Aveanna’s Rule 56(f) motion is GRANTED, and Epic’s summary
judgment motion is DENIED WITHOUT PREJUDICE.
IT IS SO ORDERED.
84