Pazos v. AdaptHealth, LLC

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
CYNTHIA PAZOS, )
Petitioner, )
)
v. ) C.A. No. N23C-02-164
) PRW CCLD
ADAPTHEALTH LLC, )
Respondent. )
Submitted: April 11, 2024
Decided: July 30, 2024
Issued: August 12, 2024*
Upon Respondent’s Motion to Dismiss,
GRANTED.
Upon Petitioner’s Motion for Summary Judgment,
DENIED.
MEMORANDUM OPINION AND ORDER
Kelly E. Farman, Esquire, Matthew W. Murphy, Esquire (argued), Edmond S. Kim,
Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for
Petitioner Cynthia Pazos.
Steven L. Caponi, Esquire (argued), Matthew B. Goeller, Esquire, Megan E.
O’Connor, Esquire, K&L GATES LLP, Wilmington, Delaware, Attorneys for
Respondent AdaptHealth LLC.
WALLACE, J.
_____________________________
* This decision is issued after providing the parties an opportunity to request redaction of certain
confidential information—none were made—and with the Court’s own necessary corrections.
Petitioner Cynthia Pazos sold her company to Respondent AdaptHealth LLC.
That sale was executed through an agreement that allowed the parties to dispute
certain post-closing calculations. One such dispute arose, and the agreement’s
resolution procedures were invoked.
Pursuant to those procedures, an independent accountant was tasked with
resolving the parties’ post-closing calculations dispute. The agreement’s provisions
state that the independent accountant’s determination is final and binding upon the
parties, absent manifest error.
Ms. Pazos objected to the independent accountant’s determination. She says
that the independent accountant committed manifest errors. Ms. Pazos initially
identified several manifest errors she says the independent accountant committed.
She has brought four of them to the Court for review.
After both parties filed dispositive motions, the Court requested limited
discovery to better understand the independent accountant’s determination and the
Court’s scope of review. With that limited discovery complete, the record is now
clear; the independent accountant committed no manifest errors. And despite
Ms. Pazos’s repeated asks to do so, the Court won’t otherwise interfere with the
independent accountant’s contracted-for authority to resolve the parties’ dispute
using its own substitute accountancy.
Accordingly, and for the reasons further explained now, AdaptHealth’s
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Motion to Dismiss is GRANTED, and Ms. Pazos’s Motion for Summary Judgment
is DENIED.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. THE PARTIES
Petitioner Cynthia Pazos is the founder and former chief executive officer of
Diabetes Management and Supplies, LLC (“DMS”) and a Louisiana resident.1 DMS
was a provider of diabetes products and services, including testing supplies and
insulin pumps.2
Respondent AdaptHealth LLC is a Delaware limited liability company.3
AdaptHealth operates a national network of medical equipment companies that
provide products and services to outside-hospital patients.4
B. THE AGREEMENT
Ms. Pazos sold DMS to AdaptHealth via a Membership Interest Purchase
Agreement (the “MIPA”) executed on December 31, 2020.5
The MIPA included certain post-closing purchase price adjustment
calculations.6 Under its section 2.4, DMS was required to deliver a certificate at
1
Verified Petition to Vacate Expert Report (“Pet.”) ¶ 12 (D.I. 1).
2
Id. ¶ 14.
3
Id. ¶ 13.
4
Id.
5
Id. ¶ 17.
6
Id. ¶ 18; id., Ex. A (“MIPA”) § 2.4.
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Closing “setting forth the Estimated Closing Cash Amount and the Estimated
Closing Working Capital.”7 AdaptHealth would then prepare and deliver to
Ms. Pazos, within 90 days of closing and “in accordance with the Accounting
Principles,” “a consolidated balance sheet of the Company and the Subsidiary as of
the Closing Date (without giving effect to the Transactions) and a statement (the
“Closing Date Statement”) . . . .”8
The MIPA then provides dispute resolution provisions for disagreements
about the Closing Date Statement.9 Under those provisions, Ms. Pazos had 30 days
to review the Closing Date Statement provided by AdaptHealth and the ability to
object.10 If the parties couldn’t resolve an objection themselves, section 2.4(b)(iii)
describes what happens next:
Resolution of Disputes. If Seller and Buyer fail to reach an agreement
with respect to all of the matters set forth in the Statement of Objections
before expiration of the 30 calendar days after delivery of the Statement
of Objections, then any amounts remaining in dispute (“Disputed
Amounts”) shall be submitted for resolution to an impartial nationally
recognized firm of independent certified public accountants as the
Parties shall mutually agree (an “Independent Accountant”) who, acting
as experts and not arbitrators and making all calculations in accordance
with the Accounting Principles, shall resolve the Disputed Amounts
only and make any adjustments to the Post-Closing Adjustment, as the
case may be, and the Closing Date Statement.11
7
MIPA § 2.4(a).
8
Id. (underlining in original).
9
Id. § 2.4(b).
10
Id. §§ 2.4(b)(i)-(ii).
11
Id. § 2.4(b)(iii) (underlining in original).
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Section 2.4(b)(iii) further states that:
The Independent Accountant’s determination shall be final and binding
on the Parties and shall not be subject to appeal or further review absent
manifest error. In resolving any disputed item, the Independent
Accountant may not assign a value to any item greater than the greatest
value for such item claimed by either Party or less than the smallest
value for such item claimed by either Party. The Independent
Accountant shall determine and include in its report an award of the
costs of its review and report based on the extent to which the Parties
prevail in such matter.12
“Accounting Principles” is defined in the MIPA as,
those accounting methods, practices, principles, policies and
procedures, together with those classifications, judgments and
valuation and estimation methodologies, used in the preparation of the
Illustrative Working Capital Calculation, in each case, to the extent
consistent with GAAP . . . .13
The “Illustrative Working Capital Calculation” is attached as Exhibit B to the
MIPA.14 It provides calculations of DMS’s current assets and current liabilities.15
Notably, unbilled pump receivables is not included as a line item on the attached
Illustrative Working Capital Calculation.16
C. THE DISPUTE
In April 2021, AdaptHealth emailed Ms. Pazos its Closing Date Statement.17
12
Id.
13
Id. § 1.1 (Definitions).
14
Id., Ex. B (Illustrative Working Capital Calculation).
15
See id.
16
See id.
17
Pet. ¶ 18.
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Ms. Pazos objected to that statement, taking issue with AdaptHealth’s purported
exclusion of unbilled pump receivables from the Working Capital calculation as well
as AdaptHealth’s inventory obsolescence figure.18 The parties then invoked the
dispute resolution procedures outlined in MIPA Section 2.4(b)(iii).19 Unable to
resolve the dispute, the parties selected CohnReznick LLP as the “Independent
Accountant” contemplated by the MIPA.20
Both parties submitted opening statements to the Independent Accountant.21
As an exhibit to her opening statement, Ms. Pazos attached correspondence from
December 29 and 30, 2020 (the “December Correspondence”).22 The December
Correspondence contained a back-and-forth between AdaptHealth and Ms. Pazos’s
counsel with Illustrative Working Capital Calculation drafts.23 AdaptHealth attached
to its opening statement a worksheet by Elliot Davis LLC (the “Worksheet”).24 Both
parties then served rebuttal statements to the other sides’ arguments.25 Next, the
Independent Accountant asked both parties questions about the specifics of the
dispute, the parties’ interpretations of the term “Accounting Principles,” and
18
Id. ¶¶ 19, 25; see id., Ex. G (Statement of Objections) (D.I. 4).
19
Pet. ¶ 22; see MIPA § 2.4(b)(iii).
20
Pet. ¶ 22.
21
Id. ¶¶ 25, 32.
22
See generally id., Ex. H (“December Correspondence”) (D.I. 5).
23
Id.
24
See generally Pet., Ex. I (“Worksheet”).
25
Pet. ¶ 33.
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questions about the Illustrative Working Capital Computation.26
In February 2022, the Independent Accountant issued its report resolving the
dispute (the “Independent Accountant’s Report”).27 The Independent Accountant
determined that the unbilled pump receivables should not be included in the Closing
Working Capital, and that the parties agreed to a 2.1 percent inventory obsolescence
reserve.28 The Independent Accountant’s Report further stated that it considered “all
information and documentation provided by both parties,” and the “relevant
accounting standards governing the Disputed Amounts, as well as the nature,
completeness, and accuracy of the support provided by the parties.”29 The
Independent Accountant’s Report attached the Worksheet as Exhibit A.30
Ms. Pazos requested reconsideration and clarification of the expert’s
determination.31 She complained of five allegedly manifest errors she believed the
Independent Accountant committed.32 The Independent Accountant responded to
that reconsideration request (the “March Response Letter”) by informing Ms. Pazos
that it had reviewed its original report and the parties’ papers and determined that it
26
Id. ¶ 34.
27
Id. ¶ 36; id., Ex. B (“Independent Accountant’s Report”).
28
Independent Accountant’s Report at 4-6.
29
Id. at 2.
30
Id., Ex. A (Illustrative Working Capital Calculation).
31
Pet. ¶ 44; id., Ex. C (“Pazos’s Reconsideration Request”).
32
Pazos’s Reconsideration Request at 2-6.
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did not commit any manifest errors.33 Dissatisfied, Ms. Pazos brought this lawsuit.34
D. PROCEDURAL BACKGROUND
This action came to the Superior Court by way of a 10 Del. C. § 1902
transfer.35 Ms. Pazos’s petition brings one count requesting declaratory judgment
that the Independent Accountant’s Report constitutes manifest error.36
AdaptHealth has moved to dismiss the petition.37 Ms. Pazos opposes
AdaptHealth’s motion and has cross-moved for summary judgment.38 AdaptHealth
responded to Ms. Pazos’s cross-motion by asking for Rule 56(f) discovery.39
The Court heard argument on the parties’ cross-motions.40 At that hearing the
Court ordered limited discovery from the Independent Accountant to answer two
33
Pet. ¶ 45; id., Ex. D (“March Response Letter”). The Independent Accountant did note that it
committed an “oversight” by failing to provide an amount for total fees and expenses for its
services; those fees and expenses, it said, added up to $44,550. March Response Letter at 2.
34
Pet. ¶ 48.
35
The Court of Chancery, where this action was initially filed, raised sua sponte the issue of
subject matter jurisdiction. C.A. No. 2022-0362-MTZ (“Chancery Action”), D.I. 43. That Court
asked the parties to confer on a supplemental briefing schedule and brief the issue. Id. Instead, the
parties asked the Court of Chancery to transfer the action to this Court under 10 Del. C. § 1902.
Chancery Action, D.I. 44. The Court of Chancery granted that request. Chancery Action, D.I. 45.
36
Pet. ¶¶ 49-52.
37
See generally Respondent AdaptHealth, LLC’s Opening Brief in Support of Motion to Dismiss
the Verified Petition (“AdaptHealth’s Mot. to Dismiss”) (D.I. 16).
38
See generally Petitioner’s Combined Opening Brief in Support her Motion for Summary
Judgment and Answering Brief in Opposition to Respondent’s Motion to Dismiss (“Pazos’s Mot.
for Summ. J.”) (D.I. 12).
39
See generally Respondent AdaptHealth’s Motion For Discovery Pursuant to Superior Court
Rule 56(f) (D.I. 18).
40
D.I. 30.
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narrow questions: (1) Did the Independent Accountant actually consider the
December 20th correspondence and what weight did it give it, if any; and (2) did the
Independent Accountant consider the Worksheet as a parties’ agreed-upon
document, or as one piece of evidence that it weighed against counterevidence as to
the intent of the parties.41 The Court also asked the parties to file supplemental
briefing in light of the further record developed.42 As part of that briefing, the Court
asked the parties to address the Delaware Supreme Court’s recent decision in Terrell
v. Kiromic Biopharma, Inc., and its effect on this case.43
The Independent Accountant was deposed,44 and both parties filed their
supplemental briefs shortly thereafter.45 The Court has heard argument from the
parties on the supplemented record46 and the motions are now ripe for decision.
41
D.I. 31 (“July 20, 2023 Hr’g Tr.”) at 67-68.
42
Id. at 69-70.
43
Id. at 70.
44
D.I. 33; see generally Letter to the Hon. Paul R. Wallace providing supplemental briefing
(“AdaptHealth’s Supp. Br.”), Ex. 1 (“Independent Accountant Dep. Tr.”) (D.I. 39).
45
See generally AdaptHealth’s Supp. Br.; Petitioner’s Supplemental Brief in Further Support of
Her Motion for Summary Judgment (“Pazos’s Supp. Br.”) (D.I. 40).
46
D.I. 43.
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II. STANDARD OF REVIEW47
Summary judgment is warranted upon a showing “that there is no genuine
issue as to any material fact and that the moving party is entitled to judgment as a
matter of law.”48
Thus, on the issue raised, the burden is on the moving party to demonstrate its
prayer for summary judgment is supported by undisputed facts or an otherwise
adequate factual record to support a legal judgment.49 “If the motion is properly
supported, then the burden shifts to the non-moving party to demonstrate that there
are material issues of fact for resolution by the ultimate fact-finder.”50
47
As just discussed, the Court granted limited discovery into the Independent Accountant’s
Report. See July 20, 2023 Hr’g Tr. at 67-68. To resolve these motions, the Court must now look
outside the pleadings and evaluate that offered through the Independent Accountant’s deposition
transcript. So, the Court is treating AdaptHealth’s Civil Rule 12(b)(6) motion to dismiss as a
motion for summary judgment and considering it under a Civil Rule 56 analysis. See Del. Super.
Ct. Civ. R. 12(b):
If, on a motion asserting the defense numbered (6) to dismiss for failure of the
pleadings to state a claim upon which relief can be granted, matters outside the
pleading are presented to and not excluded by the Court, the motion shall be treated
as one for summary judgment and disposed of as provided in Rule 56, and all parties
shall be given reasonable opportunity to present all material made pertinent to such
a motion by Rule 56.
The conversion of AdaptHealth’s motion was made clear to the parties during the first hearing,
when the Court granted limited discovery and requested supplemental briefing. See July 20, 2023
Hr’g Tr. at 68-74; Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1288 (Del. 2007)
(“Before a motion to dismiss may be converted to one for summary judgment, parties must be
given adequate notice and a reasonable opportunity to present pertinent material.”).
48
Del. Super. Ct. Civ. R. 56(c).
49
See CNH Indus. Am. LLC v. Am. Cas. Co. of Reading, 2015 WL 3863225, at *1 (Del. Super.
Ct. June 8, 2015).
50
Id.-9-
The Court may grant a motion for summary judgment when: “(1) the record
establishes that, viewing the facts in the light most favorable to the nonmoving party,
there is no genuine issue of material fact, and (2) in light of the relevant law and
those facts, the moving party is legally entitled to judgment.”51 The Court cannot
grant a motion for summary judgment “[i]f . . . the record reveals that material facts
are in dispute, or if the factual record has not been developed thoroughly enough to
allow the Court to apply the law to the factual record . . . .”52 But, at bottom, a claim
“should be disposed of by summary judgment whenever an issue of law is involved
and a trial is unnecessary.”53
These well-established standards and rules for summary judgment apply in
full when the parties have filed cross-motions for summary judgment.54 Cross-
motions for summary judgment certainly “are not per se” concessions that no
material factual disputes exist.55 But, where cross-motions for summary judgment
are filed and neither party argues the existence of a lingering genuine issue of
51
Haft v. Haft, 671 A.2d 413, 414-15 (Del. Ch. 1995) (citing Burkhart v. Davies, 602 A.2d 56,
58-59 (Del. 1991)); see also Brooke v. Elihu-Evans, 1996 WL 659491, at *2 (Del. 1996) (“If the
Court finds that no genuine issues of material fact exist, and the moving party has demonstrated
his entitlement to judgment as a matter of law, then summary judgment is appropriate.”).
52
CNH Indus. Am. LLC, 2015 WL 3863225, at *1.
53
Jeffries v. Kent Cty. Vocational Tech. Sch. Dist. Bd. of Educ., 743 A.2d 675, 677 (Del. Super.
Ct. 1999).
54
Radulski v. Liberty Mutual Fire Ins. Co., 2020 WL 8676027, at *4 (Del. Super. Ct. Oct. 28,
2020) (listing cases).
55
United Vanguard Fund, Inc. v. TakeCare, Inc., 693 A.2d 1076, 1079 (Del. 1997).
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material fact, the Court deems the motions to be the equivalent of a stipulation for
decision on the merits based on the record submitted with them.56
III. PARTIES’ CONTENTIONS
AdaptHealth moves for judgment in whole on Ms. Pazos’s petition.57
AdaptHealth first says that the Federal Arbitration Act governs the Court’s review.58
AdaptHealth rests its arbitration argument on the terms “final and binding” and
“manifest error,” and points to Viacom International, Inc. v. Winshall59 for support.60
AdaptHealth then contends that the Independent Accountant’s decision should not
be disturbed, as there were no manifest errors.61 AdaptHealth specifies that the
Independent Accountant’s methodologies are unreviewable substantive conclusions,
and that the December Correspondence does not reflect the parties’ shared intent.62
Ms. Pazos opposes AdaptHealth’s motion and moves for summary judgment
in her favor.63 In her single-count petition for declaratory judgment, Ms. Pazos says
56
Radulski, 2020 WL 8676027, at *4; Del. Super. Ct. Civ. R. 56(h).
57
See generally AdaptHealth’s Mot. to Dismiss.
58
Id. at 14-16.
59
2012 WL 3249620, at *11 (Del. Ch. Aug. 9, 2012).
60
AdaptHealth’s Mot. to Dismiss at 14.
61
Id. at 14-21; Respondent AdaptHealth, LLC’s Combined Answering Brief in Opposition to
Petitioner’s Motion For Summary Judgment and Reply Brief in Support of Respondent’s Motion
to Dismiss the Verified Petition (“AdaptHealth’s Answering Br.”) at 7-20 (D.I. 17).
62
AdaptHealth’s Mot. to Dismiss at 16-17; AdaptHealth’s Answering Br. at 14-15.
63
See generally Pazos’s Mot. for Summ. J.
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that the Independent Accountant committed “several” manifest errors.64 Ms. Pazos’s
summary judgment motion narrows those alleged errors down to four:
1) Ignoring the contemporaneous communications between the
parties manifesting their shared intent regarding unbilled pump
receivables;65
2) Rather than considering the parties’ agreement, improperly
relying on the Worksheet prepared solely by AdaptHealth;66
3) Improperly relying on the same Worksheet to incorrectly
determine the inventory obsolescence dispute;67 and,
4) Failing to make an award of costs are required by the MIPA.68
Ms. Pazos also says that the Independent Accountant provision is not an arbitration
provision, so the Federal Arbitration Act doesn’t apply.69 Ms. Pazos rests her non-
arbitration argument on the term “experts not arbitrators” and points to Chicago
Bridge & Iron Company N.V. v. Westinghouse Electric Company LLC70 for support.71
IV. DISCUSSION
A. MIPA SECTION 2.4(B)(III) IS AN “EXPERT DETERMINATION” PROVISION,
NOT AN ARBITRATION PROVISION.
As a threshold matter, the parties dispute whether MIPA Section 2.4(b)(iii) is
64
Pet. ¶¶ 49-52.
65
Pazos’s Mot. for Summ. J. at 29-32.
66
Id. at 32-35.
67
Id. at 35-38.
68
Id. at 38.
69
Id. at 23-27.
70
166 A.3d 912, 916 (Del. 2017).
71
Pazos’s Mot. for Summ. J. at 23-25.
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an arbitration provision subject to the Federal Arbitration Act, or an expert
determination provision.
Last year, our Supreme Court in Terrell v. Kiromic Biopharma, Inc. addressed
the distinction between an arbitration and an expert determination provision.72
There, the Supreme Court endorsed the approach taken by the Court of Chancery in
Penton Business Media Holdings, LLC v. Informa PLC73 for addressing whether a
dispute resolution provision calls for one or the other.74 In Penton Business, the
court explained that “the fundamental difference between an expert determination
and arbitration can be found in the type and scope of authority that is being delegated
by the parties to the decision maker.”75 With an expert determination, the contractual
provision grants limited authority to the expert to decide “a specific factual dispute
concerning a matter within the special expertise of the decision maker,” for instance
valuation.76 To the Penton Business court, the use of the term “expert not arbitrator”
signaled a “clear intent” by the parties that the provision called for an expert
determination.77
72
Terrell v. Kiromic Biopharma, Inc., 297 A.3d 610, 617-19 (Del. 2023).
73
252 A.3d 445 (Del. Ch. 2018).
74
Terrell, 297 A.3d at 617-19.
75
Penton Bus. Media Holdings, LLC, 252 A.3d at 464 (citing N.Y.C. BAR COMM. ON INT’L
COMMERCIAL ARBITRATION, PURCHASE PRICE ADJUSTMENT CLAUSES AND EXPERT
DETERMINATIONS: LEGAL ISSUES, PRACTICAL PROBLEMS AND SUGGESTED IMPROVEMENTS 4
(2013)).
76
Id.
77
Id. at 465.
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Following Terrell and Penton Business, Delaware courts have applied the
“authority test” to determine whether parties have opted for arbitration.78 “The test
turns primarily on the degree of authority delegated to the decision-maker.”79 In a
plenary arbitration, the arbitrator has “authority to decide all legal and factual issues
necessary to resolve the matter.”80 By contrast, an expert determination is typically
limited “to deciding a specific factual dispute concerning a matter within the special
expertise of the decision maker.”81
MIPA Section 2.4(b)(iii) is what’s often referred to as an Accountant True-Up
Mechanism.82 “Generally speaking, an Accountant True-Up Mechanism does not
involve arbitration under the FAA; it calls for an expert determination.”83
The Accountant True-Up Mechanism employed here is no different. It is
78
See ArchKey Intermediate Holdings Inc. v. Mona, 302 A.3d 975, 993-95 (Del. Ch. 2023); Paul
v. Rockpoint Grp., LLC, 2024 WL 89643, at *10 (Del. Ch. Jan. 9, 2024); Cedres v. Geoffrey Servs.
Corp., 2024 WL 1435110, at *2-3 (Del. Ch. Apr. 3, 2024).
79
ArchKey Intermediate Holdings Inc., 302 A.3d at 993.
80
Terrell, 297 A.3d at 618.
81
Id. (and noting that factual dispute is “usually concerning an issue of valuation”); see also Sapp
v. Indus. Action Servs., LLC, 75 F.4th 205, 213 (3d Cir. 2023) (“[E]xpert-determination provisions
typically limit the “‘decision maker’s authority to deciding a specific factual dispute within the
decision maker’s expertise.’” (quoting Ray Beyond Corp. v. Trimaran Fund Mgmt., LLC, 2019 WL
366614, at *6 (Del. Ch. Jan. 29, 2019))); see also Gary B. Born, International Arbitration: Law
and Practice § 1.01[C][2] (2nd ed. 2016) (“[E]xpert determinations frequently involve narrowly-
defined and circumscribed factual or technical issues, unlike arbitral proceedings, which seek to
resolve broader legal disputes between the parties . . . .” (emphasis added)).
82
See ArchKey Intermediate Holdings Inc., 302 A.3d at 981 (defining an “Accountant True-Up
Mechanism” as “a post-closing price adjustment mechanism in an acquisition agreement that refers
a dispute to an independent accountant.”).
83
Id. at 989; see also id. at 991-95 (explaining why an Accountant True-Up Mechanism is not an
arbitration).
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limited in scope and clear in its language. Specifically, the MIPA provision limits
the Independent Accountant’s authority solely to resolving cost adjustment
disputes.84 And, similar to the provision interpreted in Penton Business, MIPA
Section 2.4(b)(iii) uses the phrase “experts and not arbitrators,” signaling the parties’
intent.85 The phrases “manifest error” and “final and binding” do not change that
intent.86 Those phrases are oft features of an expert-determination provision.87
Accordingly, the Federal Arbitration Act doesn’t apply here. Section 2.4(b)(iii) calls
for expert determination, not arbitration.88
84
See MIPA § 2.4(b)(iii); ArchKey Intermediate Holdings Inc., 302 A.3d at 993 (“The court must
examine the nature and scope of the authority that the agreement provides.”).
85
MIPA § 2.4(b)(iii).
86
See ArchKey Intermediate Holdings Inc., 302 A.3d at 993. Indeed, a manifest error clause is
oft a feature of an expert-determination provision.
87
Clive Freedman & James Farrell, KENDALL ON EXPERT DETERMINATION §7.8-2, at 165 (5th ed.
2015) [hereinafter KENDALL ON EXPERT DETERMINATION] (“Expert determination clauses very
commonly provide that the decision will be ‘final and binding[,]’ and it is clearly in the parties’
interests that they should be so.”); id. § 14.11-1, at 346 (“Expert determination clauses often
provide that the decision is final and binding ‘in the absence of manifest error’.” (citation
omitted)).
88
For further support, compare Cedres, 2024 WL 1435110, at *2-4 (finding that the provision at
issue called for arbitration because (1) the provision required the independent party to make
judicial determinations of legal obligations in relation to the entire litigation, and (2) the provision
provided judicial proceeding-like guidelines) with MIPA § 2.4(b)(iii) (limiting the Independent
Accountant’s authority to a singular fact issue and omitting judicial proceeding-like guidelines).
To the extent AdaptHealth relies on Viacom, there the Court of Chancery found the parties
conceded that arbitration principles should be applied. 2012 WL 3249620, at *11. Accordingly,
Viacom does nothing to assist the Court here with its threshold inquiry into whether the dispute
resolution provision is an arbitration provision or an expert determination provision.
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B. THE COURT’S ROLE IN RESOLVING THIS DISPUTE IS LIMITED TO
DETERMINING WHETHER “MANIFEST ERROR” OCCURRED.
Section 2.4(b)(iii) is a contract-borne expert-determination provision. So,
Delaware rules of contract interpretation and the MIPA’s terms control the Court’s
review.89 “Delaware adheres to the ‘objective’ theory of contracts, i.e. a contract’s
construction should be that which would be understood by an objective, reasonable
third party.”90 And “[w]hen the contract is clear and unambiguous, [the Court] will
give effect to the plain-meaning of the contract’s terms and provisions.”91
Section 2.4(b)(iii) states that “[t]he Independent Accountant’s determination
shall be final and binding on the Parties and shall not be subject to appeal or further
review absent manifest error.”92
C. SO, WHAT IS A “MANIFEST ERROR” AND HOW MIGHT CONTRACTING
PARTIES ASSIST A COURT IN MORE FACILELY DETERMINING WHETHER
ONE EXISTS?
“Manifest error” isn’t defined in the MIPA. And as both the parties and Court
engaged on this precise issue, it became clear there is a certain confounding paucity
89
See Penton Bus. Media Holdings, LLC, 252 A.3d at 465-67; see also Terrell v. Kiromic
Biopharma, Inc., 2022 WL 175858, at *6 (Del. Ch. Jan. 20, 2022) (applying contract interpretation
principles after finding the dispute resolution provision did not call for arbitration), aff’d, 297 A.3d
at 619 (“Applying traditional principles of contract interpretation” to the at-issue dispute resolution
provision).
90
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (citation omitted).
91
Id. at 1159-60 (Del. 2010) (citation omitted); see also Rhone–Poulenc Basic Chem. Co. v.
American Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992) (“Clear and unambiguous language
. . . should be given its ordinary and usual meaning.”).
92
MIPA § 2.4(b)(iii) (emphasis added).
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of Delaware authority thereon. That said, one authoritative English law treatise on
expert determinations93 is oft-cited94 and illuminating here as it speaks directly—of
and in the very same language95—to the questions the Court must resolve.
Therein, the term “manifest error” as used in an expert-determination
provision is explained thusly:
A manifest error has been referred to as a “plain and obvious error[,]”
or an error which is “obvious or easily demonstrable without extensive
investigation[.]”96
Too, “manifest error” should be “confined to errors which are obviously capable of
affecting the [determination] . . . .”97 This construct aligns well with the American
understanding of “manifest error”98—as well as Delaware’s in similar context.99
93
KENDALL ON EXPERT DETERMINATION, supra.
94
E.g., Sapp, 75 F.4th at 211; Paul v. Rockpoint Grp., LLC, 2024 WL 89643, at *10-11 (Del. Ch.
Jan. 9, 2024); ArchKey Intermediate Holdings Inc., supra; Penton Bus. Media Holdings, LLC,
supra.
95
See KENDALL ON EXPERT DETERMINATION, supra, § 14.11, at 346-48 (discussing the use of the
contractual phrase “in the absence of manifest error”).
96
Id. § 14.11-2, at 347; see also id. (quoting one commentator’s observation that: “All errors are
manifest when discovered; but such clauses . . . are intended to be confined to oversights and
blunders so obvious as to admit of no difference of opinion.”).
97
Id. § 14.11-4, at 348.
98
See, e.g., Tenenbaum Living Tr. v. GCDI S.A., 682 F.Supp.3d 342, 352-55 (S.D.N.Y 2023)
(explaining meaning of “manifest error” under New York law); Hall Ponderosa, LLC v. State
Through La. State Land Off., 345 So.3d 537, 548 (La. Ct. App. 2022) (instructing that when applied
in an appeal of a judicial determination: “To reverse a fact-finder’s determination under the
manifest error standard, an appellate court must engage in a two part-inquiry: (1) the court must
find from the record that a reasonable factual basis does not exist for the finding of the trier of fact,
and (2) the court must further determine that the record establishes a finding that is clearly wrong.”
(citation omitted)).
99
“‘[M]anifest error’ . . . is most sensibly understood as a corollary to ‘evident material mistake.’”
CLP Toxicology, Inc. v. Casla Bio Hldgs. LLC, 2019 WL 1233458, at *2 (Del. Ch. Feb. 18, 2019)
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Now, “[t]he error need not be manifest at the time the decision is made, but
may become manifest as a result of subsequent investigation . . . .”100 To be sure
though, the Court’s review in deciding whether “manifest error” exists is by design
meant to be limited.101
The Court will apply that formulation here. Thus, the Independent Accountant
only committed manifest error if it made a plain and obvious error, and the record
demonstrates strong reliance on that error.
Beyond determining whether manifest error has occurred, the MIPA does not
spell out a specific role for the Court in any “appeal or further review.” But it does
spell out the role of the Independent Accountant, providing the Independent
Accountant with specific parameters.102 So, while the Independent Accountant is
(citing 9 U.S.C. § 11 and quoting Viacom, 2012 WL 3249620, at *11 n.80). And, “[r]egarding
evident material mistake, federal courts have held that ‘where the record that was before the
arbitrator demonstrates an unambiguous and undisputed mistake of fact and the record
demonstrates strong reliance on that mistake by the arbitrator in making his award, vacation or
modification may be proper.’” Id. at *1 (cleaned up) (quoting Valentine Sugars, Inc. v. Donau
Corp., 981 F.2d 210, 214 (5th Cir. 1993)).
100
KENDALL ON EXPERT DETERMINATION, supra, § 14.11-2, at 347 (citation omitted).
101
Tenenbaum Living Tr., 682 F.Supp.3d at 354-55 (discussing the scope of the court’s review for
“manifest error”).
102
MIPA § 2.4(b)(iii) states:
In resolving any disputed item, the Independent Accountant may not assign a value
to any item greater than the greatest value for such item claimed by either Party or
less than the smallest value for such item claimed by either Party. The Independent
Accountant shall determine and include in its report an award of the costs of its
review and report based on the extent to which the Parties prevail in such matter.
By way of illustration, if the items in dispute total in amount to $1,000 and the
Independent Accountant awards $600 in favor of Seller’s position, 60% of the costs
of its review would be borne by Buyer and 40% of the costs would be borne by
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afforded a broader role in resolving Cost Adjustment Statement disputes, the Court’s
role is limited only to deciding if the “manifest error” infected the expert’s
determination.103
It is now beyond debate that ADR processes have an important and salutary
purpose in the resolution of disputes of this type.104 And their inclusion by
contracting parties in the ordering of the parties’ business relationship has been
honored by Delaware’s courts. But those provisions, either by fiat or contractual
Seller. Buyer and Seller shall make available to the Independent Accountant all
relevant books and records relating to the calculations submitted and all other
information reasonably requested by the Independent Accountant.
103
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.”
(quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)));
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 445 (Del. 2005) (Ridgley, J., concurring in
part, dissenting in part) (“courts should not rewrite contracts” (citing Gertrude L.Q. v. Stephen
P.Q., 466 A.2d 1213, 1217 (Del. 1983))).
Ms. Pazos says that the Independent Accountant’s “errors are so significant and plain that no
accounting knowledge or experience is required to appreciate them . . . .” Pazos’s Mot. for Summ.
J. at 46. According to Ms. Pazos, the Court can simply re-calculate and enter judgment. See id.While it might be more efficient, the Court cannot substitute its own decision-making for that of
the expert where the parties specifically bound themselves by contract for the use of an expert to
settle disputes. The Court’s role is limited here to determining whether manifest errors occurred—
not determining the post-closing payment calculations themselves. See Tenenbaum Living Tr., 682
F.Supp.3d at 355 (“A manifest error clause avoids [the peril of a court’s erroneous financial
computations] by requiring courts not to make such determinations themselves but rather to defer
to qualified experts selected by the parties.”); id. (“for manifest error clauses to properly serve
their function, they must preclude courts from reexamining the substantive correctness of the
determination to which the clause applies”).
104
See ArchKey Intermediate Holdings Inc., 302 A.3d at 990 (“At the other end of the ADR
spectrum is an expert determination, which provides parties with a quick and relatively
inexpensive answer on an issue that calls for informed judgment.”).
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design105—as is the case here—are now with some regularity subject to judicial
review.
The scope of that review and what should be expected of an expert when
carrying out her role was the subject of some spirited discussion here. As our Court
of Chancery has explained, much of that is (and should) be defined by the contract
terms and engagement of the expert.106 For its part, the Court should usually be able
to make its manifest-error decision by considering the reasons expressed for the
expert’s determination (which might include some clarification of those reasons),
“documents which are expressly referred to in the determination and form an
essential part of the determination (such as the agreement between the parties), the
submissions of the parties which are referred to in the reasons,” and the easily
discernable facts.107
When an expert is called to duty under an express provision that her product
might be subject “to appeal or further review” by a court for “manifest error,” it
seems sensible that the parties—either in the contract itself or the joint
engagement—define the expected breadth and depth of the expert’s reporting. If
they are serious about the full utility of this dispute resolution instrument, there is
105
Id. (“Unless the contract specifies, an expert determination is not reviewable by a court.”).
106
See Penton Bus. Media Holdings, LLC, 252 A.3d at 465-69; see also Terrell, 297 A.3d at 617-
19.
107
KENDALL ON EXPERT DETERMINATION, supra, § 14.11-3, at 347-48 (citations omitted).
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little burden, but every incentive, for each of the engaging parties to ensure they
obtain an adequate report.108 Regretfully, that didn’t happen here; further
clarification and limited discovery became necessary. And that is just antithetical to
the “simple, informal, and contract-based” process expert-determinations are
supposed to be.109
With this backdrop, the Court now determines whether what Ms. Pazos posits
as manifest errors truly are.
C. THE INDEPENDENT ACCOUNTANT DID NOT MAKE MANIFEST ERRORS.
Ms. Pazos says the Independent Accountant made four manifest errors.110 Of
those, the fourth was reconciled already and warrants no further examination.111 The
other three may be disposed of now.
108
Id. at 348 (observing that when the expert doesn’t adequately set out the reasons for the
determination “it may be impossible to show that an error is manifest or a mistake is obvious, and
therefore the provision may be of limited assistance”). When initiating the expert-determination
process neither party can be sure on which side the determination will fall. But they should be
mindful that a court will always be resistant to affording advantage to a party that benefits from an
under-explained determination.
109
Id. § 1.1-1, at 1.
110
Pet. ¶ 51; Pazos’s Mot. for Summ. J. at 43-44.
111
Ms. Pazos’s fourth alleged manifest error is that the Independent Accountant failed to include
the requisite award of costs in its report. Pazos’s Mot. for Summ. J. at 38-39, 44. But Ms. Pazos
admits that the Independent Accountant acknowledged that mistake and fixed it in the March
Response Letter. Id. at 38. Ms. Pazos does not actually argue that the ‘award of costs’ failure was
a manifest error in itself. Instead, she says that the Independent Accountant’s “fail[ure] to
understand its obligations under the Agreement or to comply with its plain obligations was
indicative of the other manifest errors identified.” Id. As such, Ms. Pazos’s purported fourth
manifest error has already failed.
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1. Ms. Pazos’s First Alleged Manifest Error
Ms. Pazos first argues that the Independent Accountant made a manifest error
by “stopping its analysis with a cursory examination of the face of the final
Illustrative Working Capital Calculation”112 and “ignoring the contemporaneous
communications between the parties manifesting their shared intent regarding the
unbilled pump receivables.”113 Specifically, Ms. Pazos says the Independent
Accountant “improperly exclud[ed] unbilled pump receivables from the working
capital” even though the December Correspondence between the parties showed that
the parties agreed to include unbilled pump receivables in the working capital.114
AdaptHealth counters that the Independent Accountant considered the
unbilled pump receivables, examined the December Correspondence, and actively
addressed this issue in the March Response Letter.115 Second, AdaptHealth says the
Independent Accountant was not required to present a full analysis as part of its
report.116 Third, AdaptHealth says the December Correspondence doesn’t reflect the
parties’ shared intentions.117 And fourth, AdaptHealth says the Illustrative Working
Capital Calculation determination is a methodology that can’t form the basis for
112
Pet. ¶ 38.
113
Pazos’s Mot. for Summ. J. at 29 (cleaned up).
114
Id. at 29-32 (citing December Correspondence).
115
AdaptHealth’s Answering Br. at 9-11.
116
Id. at 11-13.
117
Id. at 14.
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manifest error.118
In its report, the Independent Accountant said that it “considered all
information and documentation provided by both parties (excluding the surrebuttal
as discussed above), including the Purchase Agreement itself.”119 The Independent
Accountant reiterated in its March Response Letter that it considered all the
documents submitted.120 And when deposed during the limited discovery period, the
Independent Accountant repeatedly stated that it considered the December
Correspondence in relation to the Illustrative Working Capital Calculation and then
made its determination on the parties’ intended inclusions.121
The Court’s role here is limited to determining whether a plain and obvious
error occurred and whether the record demonstrates a strong reliance on that error.122
The supposed mistake appears to be that the Independent Accountant didn’t consider
a correspondence indicative of the parties’ intent to include unbilled pump
receivables in the Illustrative Working Capital Calculation. But the now-clear record
indicates that the Independent Accountant did consider the December
118
Id.
119
Independent Accountant’s Report at 2. The Independent Accountant’s Report also said “its
determination is based solely upon the terms and conditions of the Purchase Agreement.” Id. at 1.
But it appears this was a misstatement, since the Independent Accountant’s Report specifically
refers to documents besides the MIPA. See id., Ex. A (Illustrative Working Capital Calculation).
120
March Response Letter at 3.
121
See, e.g., Independent Accountant Dep. Tr. at 65-72.
122
See Part IV(B), supra.
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Correspondence. And the determination of unbilled pump receivables’ inclusion or
exclusion was well within the Independent Accountant’s authority under the parties’
accountant true-up mechanism.123 Thus, Ms. Pazos’s first allegation of manifest
error fails.
2. Ms. Pazos’s Second Alleged Manifest Error
Ms. Pazos next argues that the Independent Accountant made a manifest error
by “improperly relying on the Worksheet prepared solely by AdaptHealth,” “rather
than considering the parties’ agreement.”124
Specifically, Ms. Pazos says that the Independent Accountant “compounded
its errors by relying instead on the Worksheet—a document that [the Independent
Accountant] fundamentally misunderstood and, as a result, completely
misapplied.”125 Ms. Pazos insists that purported misunderstanding is manifest
because the Independent Accountant “referred to the Worksheet as ‘the spreadsheet
that the parties employed to calculate the [I]llustrative Working Capital
[Calculation],’ and assumed that the Worksheet ‘was based on the Company’s
123
See ArchKey Intermediate Holdings Inc., 302 A.3d at 997-98 (quoting KENDALL ON EXPERT
DETERMINATION’s observation that “[i]t may be necessary for the expert, in order to decide the
point which has been referred to him, to decide a disputed point of interpretation of the contract
between the parties” and “[t]he more closely related the term or provision is to the expert’s area of
expertise, the more likely it is that an expert can interpret the term without judicial assistance.”).
124
Pazos’s Mot. for Summ. J. at 32 (cleaned up). The agreement referenced here is the December
Correspondence.
125
Id.
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financial statements, which were prepared in accordance with the tax basis of
accounting.’”126 When in reality, the Worksheet was prepared by AdaptHealth’s
advisor, Elliott Davis LLC.127
In its March Response Letter, the Independent Accountant stated that “we
found that the Buyer and Seller clearly agreed to exclude [unbilled pump
receivables] from the Working Capital Calculation” and “it bears noting that the
Seller did not object to our reliance of Exhibit A.”128
The Court ordered the Independent Accountant be deposed on this issue of
whether it considered the Worksheet as an agreed-upon document between the
parties, or as a piece of counterevidence as to the parties’ intent on including unbilled
pump receivables in the Illustrative Working Capital Calculation. During that
deposition, the Independent Accountant confirmed its knowledge that the Worksheet
was prepared by only one of the parties.129 Yet, the Worksheet’s numbers lined up
with the Independent Accountant’s own analysis of “the company’s books and
records,” as well as with numbers that were “used by [Ms. Pazos’s] own financial
advisors in doing its own quality of earnings analysis.”130 So, the Independent
126
Id. at 33 (quoting Independent Accountant’s Report at 3).
127
Id. at 32-33.
128
March Response Letter at 4.
129
Independent Accountant Dep. Tr. at 73-77, 135.
130
Id. at 77, 133.
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Accountant concluded that the Worksheet was representative of the parties’ intent
when creating the Illustrative Working Capital Calculation.131
The ability to credit and weigh documents one way or another is within the
province of this expert.132 The Independent Accountant did just that. The Court
cannot substitute its judgment or analysis, it can only determine whether there was
a plain and obvious error.133 There was not. Ms. Pazos’s second alleged manifest
error falls short.
3. Ms. Pazos’s Third Alleged Manifest Error
Last, Ms. Pazos argues that the Independent Accountant made a manifest error
by “improperly relying on the same Worksheet to incorrectly determine the
inventory obsolescence dispute.”134 Ms. Pazos says the Independent Accountant
committed a manifest error regarding the inventory obsolescence amount by
(1) “assum[ing] that the parties jointly prepared the Worksheet” and (2) failing to
explain or address “how the parties calculated the purportedly agreed-upon reserve,
131
See id. at 74-75; see also id. at 81 (“As the numbers reconcile to [the Illustrative Working
Capital Calculation], I believe that the worksheet, as you refer to it, was prepared prior to the
signing of the purchase agreement.”).
132
See MIPA § 2.4(b)(iii); Part IV(B), supra.
133
See CLP Toxicology, Inc., 2019 WL 1233458, at *1 (which might take the form of “an
unambiguous and undisputed mistake of fact”); see also Tenenbaum Living Tr., 682 F.Supp.3d at
355 (noting that proper employment of a manifest error clause “requir[es] courts not to make such
determinations themselves but rather to defer to qualified experts selected by the parties”).
134
Pazos’s Mot. for Summ. J. at 35 (cleaned up).
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or whether any agreed-upon figure deviated from month to month.”135
In its report, the Independent Accountant found that “[c]learly, the parties
agreed to a 2.1% inventory obsolescence reserve to calculate the Illustrative Working
Capital.”136 The Independent Accountant did not further explain why it believed the
parties agreed to that percentage. And this issue is not addressed in the March
Response Letter.
But, again, the Independent Accountant did not make a plain and obvious
error. Instead, the Independent Accountant decided to credit and discredit certain
documents as it saw fit. Such balancing decisions are within the Independent
Accountant’s contracted-for authority.137 The Court won’t overstep its bounds.138
Ms. Pazos loses on her third alleged manifest error claim too.
V. CONCLUSION
Ms. Pazos has failed to show that the Independent Accountant committed any
manifest errors. Acting as an expert, the Independent Accountant weighed various
documents, conducted an analysis using its subject expertise, and reached a
conclusion about the parties’ intended inclusion. That’s what these parties agreed
135
Id. at 36-37.
136
Independent Accountant’s Report at 6.
137
See MIPA § 2.4(b)(iii).
138
See ArchKey Intermediate Holdings Inc., 302 A.3d at 990; see also Tenenbaum Living Tr., 682
F.Supp.3d at 355 (“for manifest error clauses to properly serve their function, they must preclude
courts from reexamining the substantive correctness of the determination to which the clause
applies”).
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for this expert to do. And beyond review on manifest error grounds, the Court
cannot, and will not, insert its own judgment or analysis into the agreed-upon
expert’s conclusions.
Accordingly, AdaptHealth’s Motion to Dismiss is GRANTED, and Ms.
Pazos’s Motion for Summary Judgment is DENIED.
IT IS SO ORDERED.
/s/ Paul R. Wallace
___________________
Paul R. Wallace, Judge
Original to Prothonotary
cc: All Counsel via File and Serve
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