NASDI Holdings, LLC v. North American Leasing, Inc. ( 2019 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
KATHALEEN ST. JUDE MCCORMICK Leonard L. Williams Justice Center
VICE CHANCELLOR 500 N. King Street, Suite 11400
Wilmington, Delaware 19801-3734
August 19, 2019
Brian C. Ralston, Esquire Paul D. Brown, Esquire
Mathew A. Golden, Esquire Joseph B. Cicero, Esquire
Potter Anderson & Corroon LLP Chipman Brown Cicero & Cole, LLP
1313 N. Market Street 1313 N. Market Street, Suite 5400
P.O. Box 951 Wilmington, DE 19801
Wilmington, DE 19801
Re: NASDI Holdings, LLC v. North American Leasing, Inc.,
C.A. No. 10540-VCM
Dear Counsel:
This letter addresses the parties’ respective exceptions to the Special Master
Reports of Henry A. Silva.
In April 2014, the plaintiffs sold two operational construction and demolition
businesses to the defendants. When the transaction closed, the businesses were
actively engaged in work on numerous projects and had billed their customers for
some but not all of the work performed. To compensate the plaintiffs for work that
had been performed prior to the sale, the defendants agreed to collect and remit to
the plaintiffs payments received as a result of pre-closing work. That agreement
covered accounts receivable that had already been billed as well as unbilled work in
progress. In January 2015, the plaintiffs commenced this litigation claiming that the
defendants breached their post-closing payment obligations.
Civil Action No. 10540-VCM
August 19, 2019
Page 2
The purchase agreement named an accounting firm to resolve accounting
disputes arising out of post-closing activity. On January 29, 2016, this Court
appointed an accountant from that firm, Mr. Silva, to act as a Special Master to make
reports and recommendations on issues relating to the accounts receivable and work
in progress, including the issue of whether the post-closing work in progress report
complied with Generally Accepted Accounting Principles (“GAAP”).
On October 4, 2018, the Special Master filed two reports. The first, the
Special Master’s Report on Closing Work-in-Process (the “WIP Report”), found that
the closing work in progress report complied with GAAP. The second, the Special
Master’s Report on Closing Accounts Receivable (the “A/R Report”), recommended
that the Court award specific amounts of accounts receivable to the plaintiffs. Both
sides took exceptions to the Special Master’s reports.
In their exceptions, the defendants argued that the WIP Report and record fail
to provide sufficient analytical detail to enable the Court to conduct de novo review,
necessitating an evidentiary hearing.1
Under Court of Chancery Rule 144(a), a master’s final report must “include
factual and legal determinations sufficient to support the Master’s decision and to
1
See also C.A. No. 10540-VCM Docket (“Dkt.”) 194, Oral Arg. re Exceptions to Master’s
Report (“Oral Arg. Tr.”) at 54:12–55:2.
Civil Action No. 10540-VCM
August 19, 2019
Page 3
permit de novo review by the Court.”2 A “master’s rulings, findings of fact,
conclusions of law, and recommended disposition have no effect until they are
adopted by a judge after a ‘meaningful review.’”3
Section 6 of the Court’s Order Appointing Special Master empowered the
Special Master to build the factual and legal determinations sufficient to support his
decision, providing that:
The Special Master shall have the power to control the
proceedings before him. To the extent possible, the
Special Master shall follow the procedures set forth in [the
relevant provision of the purchase agreement]. The
Special Master’s authority includes the power to alter the
time periods contemplated by the Agreement, to require
different or additional submissions, and to determine what
discovery is appropriate in connection with the
proceedings.4
Despite the Special Master having the powers needed to build a record,
aspects of the WIP Report failed to include factual support. The WIP Report
assessed whether there were any “changes to the contract value and cost for each job
after the closing date that would have negatively impacted the percentage of
2
Ct. Ch. R. 144(a).
3
DiGiacobbe v. Sestak, 743 A.2d 180, 183 (Del. 1999) (quoting Redden v. McGill, 549
A.2d 695, 698 (Del. 1988)).
4
Dkt. 89, Order Appointing Special Master § 6.
Civil Action No. 10540-VCM
August 19, 2019
Page 4
completion at the closing date.”5 And the WIP Report concluded that the changes
in contract value and cost “appeared to be reasonable with respect to expectations
given the nature of the industry.”6 But the Report provides scant factual or legal
support for this conclusion. The appendices too are summary in nature, and the
Special Master did not conduct an evidentiary hearing.
Where the Court lacks information sufficient to conduct a de novo review of
a special master’s report, ordering an evidentiary hearing or other development of
the record is appropriate.7 In this case, an evidentiary hearing would aid the Court’s
de novo review of the WIP Report. Accordingly, the parties shall confer to select a
date for an evidentiary hearing, at which the Special Master will be called upon for
examination by the parties. The evidentiary hearing will focus on the factual bases
for the Special Master’s report; it will not involve expert testimony from each side.
In advance of the hearing, the parties shall confer with each other and the
Special Master to discuss whether it would be desirable to depose the Special Master
or develop the factual record in other ways. The Special Master may elect at his
5
Dkt. 142, Special Master Henry A. Silva’s Special Master’s Report on Closing Work-
In-Process (Oct. 4, 2018) at 2.
6
Id.
7
See generally DiGiacobbe, 743 A.2d at 184 (“De novo review generally means a new
trial or hearing on questions of fact.”).
Civil Action No. 10540-VCM
August 19, 2019
Page 5
discretion to supplement the bases for his conclusion and may invoke his powers
under Section 6 of the Order Appointing Special Master to develop those bases. The
parties shall confer on an appropriate schedule and procedure. As part of this
procedure, the Court requests supplemental submissions concerning the changes to
the contract value and cost for each job evaluated by the Special Master and the
relevant standards applied or considered by the Special Master when making his
assessment of reasonableness.
Although the parties agree that an evidentiary hearing is not necessary to
resolve exceptions to the A/R Report,8 the Court requests supplemental information
concerning the parties’ exceptions. Specifically, during oral argument, counsel for
the defendants state that they had “mapped out every piece of evidence showing the
account receivable that was listed, each check, and each piece of evidence showing
that the money was collected, either into an account or by check,” but the record is
not as clear as it could be. The defendants’ counsel offered to provide a chart. A
chart, or some other form of clarity, would be useful. The supplemental submission
should specifically identify the relevant accounts receivable and corresponding
remittances. If a receivable was not collected, identify any collection efforts.
8
See Oral Arg. Tr. at 51:15–20.
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August 19, 2019
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The plaintiffs moved to strike portions of the defendants’ reply brief in support
of the defendants’ exceptions. In the alternative, the plaintiffs sought leave to file a
sur-reply. The plaintiffs are granted leave to make sur-reply arguments in their
supplemental submission.
Very truly yours,
/s/ Kathaleen St. Jude McCormick
Kathaleen St. Jude McCormick
Vice Chancellor
KSJM/lef
cc: All counsel of record (via File & ServeXpress)