Pilot Air Freight, LLC v. Manna Freight Systems, Inc., Alan J. Meehan Revocable Trust, and Alan J. Meehan ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PILOT AIR FREIGHT, LLC )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0992-JRS
)
MANNA FREIGHT SYSTEMS, INC., )
ALAN J. MEEHAN REVOCABLE TRUST, )
and ALAN J. MEEHAN, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: June 2, 2020
Date Decided: September 18, 2020
Jody C. Barillare, Esquire of Morgan, Lewis & Bockius LLP, Wilmington, Delaware
and Troy S. Brown, Esquire, Margot G. Bloom, Esquire and Brian F. Morris, Esquire
of Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, Attorneys for
Plaintiff Pilot Air Freight, LLC.
Kurt M. Heyman, Esquire and Melissa N. Donimirski, Esquire of Heyman Enerio
Gattuso & Hirzel LLP, Wilmington, Delaware and Michael F. Cockson, Esquire and
Nathaniel J. Zylstra, Esquire of Faegre Drinker Biddle & Reath LLP, Minneapolis,
Minnesota, Attorneys for Defendants Manna Freight Systems, Inc., Alan J. Meehan
Revocable Trust and Alan J. Meehan.
SLIGHTS, Vice Chancellor
This Action involves disputes relating to an Asset Purchase Agreement
(the “APA”) whereby Plaintiff, Pilot Air Freight, LLC (“Pilot”), purchased
substantially all the assets of Defendant, Manna Freight Systems, Inc. (“Manna,” or
the “Company”) (the “Acquisition”).1 As to be expected, Manna and its direct and
indirect owners, Defendants, Alan J. Meehan Revocable Trust u/a/d/ 8/20/2007
(the “Trust”) and Alan J. Meehan (“Meehan”), as sellers, made contractual
representations and warranties in the APA to Pilot, as buyer, regarding the fitness of
Manna’s trucking business. 2 The parties agreed that Sellers would indemnify Pilot
for any breaches of the representations and warranties, 3 and that any claim for
indemnification must be filed within 15 months of the APA’s closing.4 Apart from
Sellers’ contractual representations and warranties, however, Pilot promised it was
not relying on any extra-contractual promises, representations or warranties.5
1
Verified Compl. Under Seal (“Compl.”) (D.I. 1) ¶¶ 1–4; Compl. Ex. A (the “APA”).
2
See, e.g., Compl. ¶ 35; APA Art. 5 (“Each of Seller, the Trust and Meehan jointly and
severally represent . . . .”). Meehan and the Trust together are referred to in the APA as
“Owner.” The APA designates Manna as “Seller.” Throughout this Opinion, when
quoting from the APA, I will follow this convention. For ease of reference, however,
I designate Manna and the Owner, collectively, as “Sellers” when addressing Sellers’
representations and warranties in order to avoid repeated references to “Seller, the Trust
and Meehan jointly and severally” as the actual parties who made the “Representations and
Warranties By Seller” as per the APA. APA Art. 5.
3
APA § 9.1 (“Indemnification by Seller”).
4
APA § 9.1, § 9.3 (“Survival”).
5
APA § 9.8 (“Limitation of Representations and Warranties”).
1
A significant aspect of Pilot’s thesis in support of the Acquisition was that it
could “market its [own] logistics services to Manna’s customers and therefore
expand its customer base.” 6 Given the “critical importance” of Manna’s existing
customer relationships, a significant component of Pilot’s valuation of Manna was
Manna’s “projected future customer revenues.”7 To buttress its valuation, Pilot
bargained for a specific representation regarding the stability of the Company’s
relationship with its “30 largest customers for calendar year 2017.”8 It also
bargained for post-signing protection in the form of a representation that, between
signing and closing, Sellers had not received notice from any of Manna’s top
customers of an intent materially to decrease the volume of business with the
Company. 9
The Acquisition closed on July 16, 2018. More than fifteen months later, on
December 11, 2019, Pilot filed this Action alleging fraud, breach of representations
and warranties and breach of the implied covenant of good faith and fair dealing.10
According to Pilot, at some point after closing, it discovered that three of the
6
Compl. ¶ 2.
7
Id.
8
APA § 5.27 (“Customers”).
9
Compl. ¶ 25; APA § 5.27.
10
Compl. ¶ 96(a) (alleging Sellers breached various representations and warranties).
2
Company’s top customers from 2017 were “no longer [] customer[s] at all.” 11 This
discovery has prompted Pilot to allege that Sellers “initiated a scheme to
misrepresent to Pilot the declining or essentially ended nature of certain of its
material customer relationships” as soon as Sellers realized “the value Pilot placed”
on Manna’s customer relationships. 12
Manna has moved to dismiss under Court of Chancery Rule 12(b)(6) for
failure to state viable claims. According to Manna, the indemnification claims are
untimely and the implied covenant and fraud claims are not well-pled.
Despite the “critical importance” of customer relationships to Pilot’s plans for
Manna’s assets, it offers no viable excuse for waiting until after the 15-month
contractual limitations period expired to seek indemnification.13 To avoid dismissal
of its indemnification claims, Pilot conjures an argument that Sellers “put Pilot off
the ‘trail of inquiry’” by employing an “‘actual artifice’ to [] prevent Pilot from
learning about the true status of [the] customer relationships.”14 But after giving
Pilot the benefit of all reasonable inferences flowing from the Complaint, it is not
11
Compl. ¶ 43 (Modus was a “lost customer”), ¶ 55 (Personal Comfort was “no longer a
customer at all”), ¶ 72 (Big Fig “no longer intended to be a customer”).
12
Compl. ¶ 34.
13
Compl. ¶ 2.
14
Pl.’s Answering Br. in Opp’n to Defs.’ Mot. to Dismiss Pl.’s Verified Compl. (“PAB”)
(D.I. 23) at 22.
3
reasonably conceivable that the Sellers did anything to prevent Pilot from
discovering within the contractual limitations period that the three “critical”
customers it has identified were, in Pilot’s words, “no longer [] customer[s] at all.”15
The APA was a “heavily negotiated” contract that “cover[ed] a large number
of specific risks explicitly.” 16 One of those risks was that Manna’s top customers
would go elsewhere. The APA’s bargained-for “representations and warranties
serve an important risk allocation function” by allowing Pilot to fine-tune its risk
preferences regarding these top customers. 17 Given that Pilot knowingly bargained
away the right to seek indemnification for breaches of the relevant representations
and warranties after 15 months from closing, Pilot may not avail itself of a remedy
that, by its own hand, no longer exists. Accordingly, Pilot’s indemnification claims
must be dismissed.
The implied covenant claim parrots the allegations supporting the claim for
indemnification. This is not surprising given that the gravamen of the claim is that
Sellers acted in bad faith by falsely representing in the APA the state of Manna’s
15
Compl. ¶ 55.
16
In re Tibco Software Inc. S’holders Litig., 2014 WL 6674444, at *18 (Del. Ch. Nov. 25,
2014).
17
Id.; Julius v. Accurus Aerospace Corp., 2019 WL 5681610, at *15 (Del. Ch. Oct. 31,
2019).
4
relationship with key customers. This topic is covered expressly in the APA; there
is no room for the implied covenant. That claim must also be dismissed.
Apart from a minor dispute involving Manna’s accounts receivable, 18 this
leaves Pilot with fraud claims. In this regard, Pilot alleges Sellers “fraudulently
induce[d] Pilot to proceed to Closing” (later defined) by making certain false
statements regarding a number of customers within the Agreement.19 After carefully
reviewing the Complaint and the APA, I am satisfied the bulk of the alleged fraud is
pled with particularity, not barred by the APA’s non-reliance clause and not
otherwise barred as bootstrapped breach of contract claims. The motion to dismiss
the contractual fraud claims, therefore, must be denied.
I. BACKGROUND
I have drawn the facts from well-pled allegations in the Verified Complaint
and documents incorporated by reference or integral to that pleading.20 For purposes
18
As explained below, the Complaint does well-plead a breach of contract claim with
respect to certain Excluded Liabilities.
19
Compl. ¶ 4.
20
Compl.; Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004)
(noting that on a Motion to Dismiss, the Court may consider documents that are
“incorporated by reference” or “integral” to the complaint).
5
of Defendants’ Rule 12(b)(6) motion, as I must, I accept those well-pled facts as
true. 21
A. The Parties and Relevant Non-Parties
Pilot is a “worldwide provider of transportation and logistics services.”22
Until Pilot acquired substantially all its assets, Manna was also engaged in the
trucking and logistics industry. 23 The Trust is Manna’s sole shareholder.24
Meehan is an individual who resides in Minnesota.25 He is alleged to be
Manna’s founder and the sole settlor and grantor of the Trust. 26 Meehan was
Manna’s CEO at all relevant times before the closing. 27
Non-Parties, Modus Furniture International (“Modus”), Personal Comfort
Beds (“Personal Comfort”), Big Fig Mattress (“Big Fig”) and General Electric
21
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169 (Del. 2006).
22
Compl. ¶¶ 1, 7.
23
Compl. ¶¶ 1, 8.
24
Compl. ¶ 9.
25
Compl. ¶ 10.
26
Id.27
Id.
6
(“GE”) were Manna customers. 28 Non-party, Forward Air Corp. (“Forward Air”),
was a Manna supplier. 29
B. Pilot and Manna’s Strategic Overlap
Prior to the Acquisition, Manna’s business focused on providing “final mile”
delivery services, specializing in more difficult deliveries “(i.e., mattress
delivery).” 30 This business relied heavily on revenue generated from repeat
customers. 31 Pilot saw the Acquisition as a means to expand its global transportation
and logistics business by adding “final mile” delivery service to its existing logistics
offerings. 32 By adding this piece of the delivery puzzle, Pilot would be positioned
to “provide customers with a complete package of delivery solutions” and could then
offer its “full mile” services to Manna’s “last mile customers.” 33
28
Compl. ¶¶ 36, 55, 68, 77, 84.
29
Compl. ¶ 78.
30
Compl. ¶ 1. “Final (or last) mile” deliveries take product from intermediate depos to the
final destination.
31
Id.
32
Compl. ¶¶ 1, 2, 27.
33
Compl. ¶ 31. “Full mile” deliveries take product from origination to final destination.
7
C. The APA
Pilot, Manna, the Trust and Meehan signed the APA on June 26, 2018
(the “Signing”).34 The Acquisition of substantially all of Manna’s assets closed
three weeks later, on July 16, 2018 (the “Closing” or “Closing Date”).35
Not surprisingly, the APA contains a series of interrelated provisions whereby
Sellers (i) disclaimed all extra-contractual representations and warranties,
(ii) explicitly provided Pilot with a discrete list of contractual representations and
warranties about the Company, (iii) represented that the contractual representations
and warranties were true as of the Signing and the Closing, (iv) set aside a portion
of the purchase price in escrow to serve as Pilot’s exclusive source of recovery
should Pilot prove that the representations and warranties were untrue as of the date
they were made, (v) agreed to indemnify Pilot out of the escrow fund for any losses
arising out of a breach of the contractual representations and warranties and
(vi) contractually specified the date by which any claims for breaches of Sellers’
representations and warranties must be brought. 36
34
APA (recitals); Compl. ¶ 1. The APA includes a Delaware choice-of-law provision and
provides that the exclusive jurisdiction and venue for APA disputes shall be the state and
federal courts of the State of Delaware. APA § 14.7; Compl. ¶ 13.
35
APA § 1.1 (“Purchased Assets”); Compl. ¶¶ 17–18. The purchase price was $18,000,000
subject to certain net working capital and tax adjustments. APA § 2.1 (“Purchase Price”).
36
APA § 9.8 (“Limitation of Representations and Warranties”), § 5 (“Representations and
Warranties By Seller”), § 5 (Sellers’ Representations and Warranties made as of the
Signing), § 8.2 (Sellers’ representations and warranties true as of the Closing), § 9.1
8
The Non-Reliance Provision
The APA contains a non-reliance provision whereby Pilot agreed that it was
not relying on any extra-contractual representations or warranties when it entered
into the APA. 37 Specifically, in Section 9.8 of the APA, captioned “Limitation of
Representations and Warranties,” Pilot agreed:
Except for the representations and warranties expressly set forth in
Article 5, the Seller and the Owners are not making and shall not be
deemed to have made, any other representations or warranties, written
or oral, statutory, express or implied, concerning the Seller, the Owners,
the Purchased Assets, the Assumed Liabilities, the Business or any
other matter related to this Agreement, all of which are otherwise being
accepted by Purchaser “AS IS AND WHERE IS.” . . . EXCEPT AS
EXPRESSLY PROVIDED IN ARTICLE 5, NEITHER THE SELLER
NOR THE OWNERS HAS MADE, AND THE SELLER AND THE
OWNERS HEREBY EXPRESSLY DISCLAIM AND NEGATE,
AND PURCHASER HEREBY EXPRESSLY WAIVES AND
AGREES THAT IT IS NOT RELYING ON, ANY
REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED, AT
COMMON LAW, BY STATUTE OR OTHERWISE RELATING TO,
AND PURCHASER HEREBY EXPRESSLY WAIVES AND
RELINQUISHES ANY AND ALL RIGHTS, CLAIMS AND
CAUSES OF ACTION AGAINST THE SELLER, THE OWNERS
AND THEIR REPRESENTATIVES IN CONNECTION WITH, THE
ACCURACY, COMPLETENESS OR MATERIALITY OF ANY
STATEMENTS, INFORMATION, DATA OR OTHER MATERIALS
(WRITTEN OR ORAL) OR DOCUMENTS HERETOFORE
FURNISHED OR MADE AVAILABLE TO PURCHASER AND ITS
(“Indemnification by Seller”), § 9.4(b) (Sellers’ liability “shall not exceed” the “Escrow
Amount” subject to narrow exceptions), § 9.6 (discussing the “Escrow”), § 9.5 (discussing
“Survival”).
37
APA § 1.1; Compl. ¶ 17.
9
REPRESENTATIVES BY OR ON BEHALF OF THE SELLER OR
THE OWNERS. 38
Relatedly, in Section 14.4, the parties agreed the APA, “together with all
disclosure schedules, . . . constitutes the entire agreement between the parties.”39
To remove all doubt, the APA reiterates that it was to “supersede any prior
understandings, agreements, or representations and warranties by or among the
parties.”40 When read together, Article 9 and Section 14.4 make clear that Pilot had
no right to rely on Sellers’ extra-contractual statements concerning Manna and its
business. 41
The APA distinguishes between Sellers’ extra-contractual representations and
warranties (on which Pilot agreed it would not rely) and the contractual
representations and warranties for which Pilot bargained in the APA. In Section 9.1,
the APA states:
Nothing in this Agreement shall limit or restrict any of Purchaser’s
rights to maintain or recover any amounts at any time in connection
with any action or claim based upon intentional fraud by Seller or
Owner in this Agreement.42
38
APA § 9.8 (capitalization in original).
39
APA § 14.4 (“Entire Agreement”).
40
Id.
41
APA §§ 9.1, 9.8, 14.4.
42
APA § 9.1 (emphasis supplied).
10
Accordingly, the APA preserves Pilot’s right to bring a claim for “intentional fraud”
at “any time,” provided the basis for the alleged fraud arises out of Sellers’
representations and warranties in the APA.
Sellers’ Representations and Warranties
As the relevant provisions make clear, the risk allocation scheme manifested
in the APA placed singular focus on the promises the parties made to each other in
the contract itself. Relevant here, Sellers represented and warranted to Pilot that, as
of the Signing, and then as of Closing: 43
• Section 5.6 (Financial Statements): except as set forth in the
disclosure schedules, the Company’s financial statements for the year
ended 2016 and 2017, as well as the interim period ended April 30,
2018 (the “Interim Financial Statements”) “present fairly, in all
material respects, the financial position of Seller at such dates and the
results of operations of Seller for such respective periods in conformity
with . . . [GAAP].” 44
43
APA Art. V (“Each of Seller, the Trust and Meehan jointly and severally represent and
warrant to Purchaser, as of the [Signing], as follows:”); § 8.2(a) (“The representations and
warranties of Seller and Owner contained in Article 5 shall be true and correct in all
respects (without giving effect to any update of the Disclosure Schedules pursuant to
Section 10.7) on and as of the Closing Date with the same effect as though made at and as
of such date (except those representations and warranties that address matters only as of a
specified date, the accuracy of which shall be determined as of that specified date in all
respects), except for any inaccuracy in any representation and warranty that, individually
or in the aggregate with any other such inaccuracy, has not had a Material Adverse
Effect.”); § 8.2(i) (discussing officer certificates). Critically, while Sellers made these
representations at Signing and then again at Closing, to the extent a specific statement
“addresses matters only as of a specified date, the accuracy” of such statement “shall be
determined as of that specified date in all respects.” § 8.2(a) (emphasis supplied).
44
APA § 5.6.
11
• Section 5.8 (Absence of Changes): Except as set forth on the
Company’s disclosure schedules, since April 30, 2018 to Closing, there
has not been: (a) any Material Adverse Effect, (b) any “damage,
destruction or loss” adversely affecting the “properties or assets of the
Business in any material respect” or (c) any “transactions with respect
to the Business not in the ordinary course.”45
• Section 5.24 (Accounts Receivable): except as set forth in disclosure
schedules, all of the accounts receivable reflected on the Company’s
financial statements “will be actual and bona fide receivables” that are
stated “in accordance with GAAP.” And, to the Knowledge46 of the
Seller, there are not any amounts in excess of $10,000 due in respect of
any such individual account receivable that is in dispute.47
• Section 5.27 (the “Customer Rep”): “Set forth on Schedule 5.27
hereof is a true and complete list of Seller’s 30 largest customers for
calendar year 2017 (by revenue attributable to such customers)
(“Material Customers”) . . . Except as indicated on Schedule 5.27, . . .
neither Seller nor Owner has received written notice or, to the
Knowledge of Seller, any oral notice from any Material Customer that
any Material Customer intends or expects, after the Closing Date, to
stop or materially decrease the volume of, or change, adjust or modify
in any materially adverse manner any of the material terms . . . with
respect to its purchasing of services from Seller.”48
• Section 5.28 (Vendors): the Company’s disclosure schedules contain
“a true and complete list” of the Company’s “30 largest vendors for
calendar year 2017. . . . Since January 1, 2016, neither Seller nor Owner
has received written notice, or to the Knowledge of Seller, any oral
notice” that any such vendor “intends or expects to stop or materially
45
APA § 5.8; see also APA § 5.6 (discussing the “Interim Balance Sheet”), § 8 (discussing
closing conditions).
46
The APA defines “Knowledge” to mean the actual knowledge of Meehan or the
Company’s COO or CFO. APA § 9.1(p).
47
APA § 5.24.
48
APA § 5.27.
12
change . . . any of the material terms . . . with respect to its provision of
goods or services” to the Company. 49
Two aspects of the Customer Rep are particularly important to Pilot’s breach
and fraud claims. First, Sellers disclosed a list of the Company’s 30 largest
customers “for calendar year 2017.”50 On its face, the Customer Rep says nothing
about Manna’s largest customer during any other time period. This leaves a six-
month gap between the period addressed in the Customer Rep (i.e., the end of 2017)
and the Signing (June 26, 2018).51 Second, Sellers represented that no Material
Customer from the list had notified the Company of an intent to “stop or materially
decrease” their purchases “after the Closing Date” (a “Business Reduction
Notification”). 52
Another key aspect of Sellers’ disclosure is the “disclosure statements” carve-
out. As noted, Sellers’ representations and warranties are qualified by the phrase
“except as set forth” on the Company’s disclosure statements. 53 Accordingly, if
49
APA § 5.28.
50
APA § 5.27.
51
Compare APA § 5.27 (disclosing the Company’s largest customers “for calendar year
2017), with Compl. ¶ 16 (signing occurred on June 26, 2018).
52
APA § 5.27 (emphasis supplied).
53
See, e.g., APA § 5.8 (“Except as set forth on Schedule 5.8”), § 5.6 (“Except as set forth
on Schedule 5.6”).
13
Sellers disclosed a fact in a disclosure statement, that disclosure, in essence, was
carved out of Sellers’ representations and warranties.
Sellers provided the first disclosure statement to Pilot at Signing
(the “Original Disclosure Schedules”). Under Section 10.7, Sellers then had the
option to update (or not) the disclosure schedules before Closing (the “Updated
Disclosure Schedules”):54
Seller and the Owners may from time to time before Closing update the
Disclosure Schedules regarding any matter about which they obtain
Knowledge after the date hereof that would constitute a breach of any
of the representations and warranties in this Agreement in the form of
a written supplement or amendment delivered to Purchaser; provided,
any such update by Seller and the Owners shall be made within
seven (7) days of Seller first obtaining such Knowledge. No such
supplement or amendment shall have any effect on the satisfaction of
the conditions to closing set forth in Section 8.2; provided, however, if
Purchaser proceeds with the Closing, then Purchaser and the other
Purchaser Indemnified Persons shall be deemed to have waived any
right or claim pursuant to the terms of this Agreement or otherwise,
including for indemnification pursuant to Article 9, with respect to any
and all matters disclosed pursuant to any such supplement or
amendment at or before the Closing, and the representations and
warranties shall be qualified by any matters set forth in such supplement
or amendment. 55
As the APA makes clear, the information contained on the Updated Disclosure
Schedules would not affect (one way or the other) Pilot’s obligation to close, but if
54
APA § 10.7 (“Updating Disclosure Schedules”); Compl. ¶ 22.
55
APA § 10.7.
14
Pilot “proceeds with the Closing,” then Pilot would waive any claim with respect to
the matters disclosed.56
Indemnification and Survival
Section 9.1 of the APA defines Pilot’s indemnification rights:
From and after the Closing and subject to the limits set forth in this
Article 9, Seller and each Owner, jointly and severally, shall indemnify,
defend and hold Purchaser . . . harmless from and against any and all
loss, liability, damage, or expense . . . (collectively “Losses”) that
[Purchaser may] suffer, sustain, incur or become subject to, arising out
of, resulting from or due to: (a) any breach or inaccuracy when made of
any representation and warranty of Seller or Owner in this Agreement;
(b) the non-fulfillment of any covenant, agreement or other obligation
of Seller or Owner under this Agreement; (c) any Excluded Liabilities;
. . . (g) IC Liabilities incurred by Seller to the extent arising out of
Seller’s operations prior to the Closing Date, up to the remaining
Escrow Amount then held in escrow under the Escrow Agreement. 57
While broad, the right to indemnification under the APA, in most instances, is not
indefinite. In a section of the APA entitled “Survival,” Pilot agreed that most of the
Sellers’ representations and warranties, including the key ones at issue here, would
survive for only 15 months after Closing:
All representations and warranties set forth in this Agreement shall
survive for a period of 15 months after the Closing; provided, however,
that the Fundamental Representations and the representations and
warranties made by Purchaser in Sections 6.1 (Corporate Organization
and Standing), 6.2 (Authority), and 6.3 (Brokers) shall survive until the
56
APA § 8.2(i), § 8.2(a) (stating that Pilot was not obligated to close unless
“[t]he representations and warranties of Seller and Owner contained in Article 5 shall be
true . . . as of the Closing Date”).
57
APA § 9.1.
15
expiration of the statute of limitations plus sixty (60) days. All
covenants, indemnities and agreements of [Manna] and the Owners
shall survive for three (3) years after the Closing Date (after which such
obligations shall terminate), except (i) each of Section 10.2 and
Section 10.3 shall survive in accordance with its terms, and (ii) the
indemnification obligations of Seller and Owners with respect to
Fundamental Representations shall continue in accordance with the
terms of this Section 9.3. . . . No claim for indemnification as to
representations and warranties under this Agreement may be made after
the expiration of the applicable period set forth in this Section 9.3 and
[Manna] and the Owners shall have no Liability for any claims made
after the expiration of such applicable period for breach of or an
inaccuracy when made of a representation or warranty. All demands or
claims for indemnification under this Agreement shall be in writing and
shall set forth with reasonable specificity the basis for such demand or
claim and the amount of such claim (if known). 58
The practical impact of the Survival clause is that claims for breach of
representations and warranties subject to the clause must be brought within
15 months of Closing. Thereafter, the claims are time barred.
On the same day as the Closing, the parties entered into an escrow agreement,
which required that $1,500,000 be placed into escrow to cover timely claims brought
by the buyer (Pilot) for indemnification (the “Escrow Property”). 59 If no claims for
indemnification were presented within 15 months after Closing, any amount
remaining in the escrow was to be distributed to Sellers. 60
58
APA § 9.3 (emphasis supplied).
59
Compl. ¶ 19.
60
Compl. ¶ 20.
16
D. Business Reduction Notifications
“In 2017 and 2018, Manna’s business relationships with certain key customers
fell into jeopardy.” 61 Indeed, several customers “advised Manna that they intended
to terminate their relationship with Manna.” 62 According to Pilot, when Manna
learned that several of the Company’s key clients would be leaving the fold, its
management (including Meehan) “initiated a scheme to misrepresent to Pilot the
declining or essentially ended nature of [these] material customer relationships.”63
Pilot flags three troubled customer relationships that it believes Manna had a duty to
disclose under the APA.
Modus
In the Original Disclosure Schedules, Sellers identified Modus as Manna’s
fourth largest customer by revenue “for calendar year 2017.” 64 Specifically, the
Sellers represented Modus’ billed revenue for 2017 was $2,317,000.65 Pursuant to
Sellers’ contractual obligation to disclose Business Reduction Notifications, the
Original Disclosure Statement revealed that “[i]n 2018 and in the ordinary course of
61
Compl. ¶ 3.
62
Id.
63
Compl. ¶ 34.
64
Compl. ¶ 36; APA § 5.27.
65
Compl. ¶ 36.
17
business, Modus . . . decreased the volume of services purchased from [Manna].” 66
The Original Disclosure Statement did not reveal, however, that six months before
Signing, Modus notified Manna that it intended to terminate its business with the
Company. 67 Upon receiving this notice, Manna’s management began to identify
Modus as a “lost customer.” 68
Personal Comfort
The Sellers’ Original Disclosure Schedule listed Personal Comfort as the
Company’s twenty-fifth largest customer during 2017 with aggregated billed
revenue of $446,000. 69 Despite this significant business during 2017, by Signing,
Personal Comfort was no longer a Manna customer. 70 Indeed, Sellers knew at least
a month before Signing that Personal Comfort was no longer transacting business
with the Company due to customer service issues.71
By the time Sellers received Personal Comfort’s Business Reduction
Notification before Signing, the Original Disclosure Schedules had been issued and
66
Compl. ¶ 49.
67
Compl. ¶¶ 37, 38.
68
Compl. ¶ 39.
69
Comp. ¶ 55.
70
Id.
71
Compl. ¶ 63.
18
made no mention of Personal Comfort’s cessation of business. 72 It was not until
well after receiving Personal Comfort’s Business Reduction Notification that Sellers
finally disclosed the bad news regarding the loss of Personal Comfort’s business on
the Updated Disclosure Schedule. 73
Big Fig
On the Original Disclosure Schedule, Sellers listed Big Fig as the Company’s
twenty-fourth largest customer in 2017 with revenue of $452,000. 74 Pilot alleges
Sellers were aware, as of April 20, 2018, that Big Fig was “dissatisf[ied]” with
Manna’s services.75 And, on information and belief, Pilot alleges “Big Fig advised
Sellers prior to Closing that it no longer intended to be a customer of Manna’s.”76
Neither the Original nor the Updated Disclosure Schedule contained any mention of
Big Fig’s Business Reduction Notification. 77
72
Compl. ¶¶ 63–64.
73
Compl. ¶¶ 63, 64, 67.
74
Compl. ¶ 68.
75
Compl. ¶¶ 70–72.
76
Compl. ¶ 72.
77
Id.
19
Separately, Pilot maintains Sellers never disclosed that a $127,144 receivable
from Big Fig was “uncollectible and in dispute.” 78 Even though Sellers disclosed a
$50,000 reserve against this receivable, Pilot claims Sellers “had actual knowledge
that the full amount of the receivable was uncollectible.”79
*****
The chart below summarizes the Business Reduction Notifications Pilot
alleges Sellers received and yet failed to disclose in order to induce Pilot to sign the
APA and close the Acquisition:80
Remainder of Page Intentionally Left Blank
78
Compl. ¶ 75.
79
Id.
80
Compl. ¶¶ 16, 18. As noted, the APA was signed on June 26, 2018, and the Acquisition
closed on July 16, 2018.
20
Method and date of
Alleged date Sellers received
Sellers’ disclosure of
Business Reduction Content of disclosure
Business Reduction
Notification from a customer
Notification
“In 2018 and in the ordinary course of
Footnote to Original
business, Modus . . . [has] decreased
Modus December 29, 2017 [1] Disclosure Schedule, dated
the volume of services purchased from
June 26, 2018 [2]
Seller.” [3]
Updated Disclosure
Schedules, dated July 16, “In 2018 and in the ordinary course of
Personal May 24, 2018 or June 27, 2018 2018 (more than 7 days business, Personal Comfort [] no
Comfort at the latest [4] after Sellers received longer purchases services from Seller.”
Business Reduction [6]
Notification) [5]
On April 20, 2018, the Sellers
knew Big Fig had made
complaints. [7] “Upon
Big Fig information and belief, Big Fig No disclosure [9] No disclosure
advised Sellers prior to Closing
that it no longer intended to be
a customer.” [8]
[1] Compl. ¶ 37; [2] Compl. ¶ 49; [3] Compl. ¶ 49; [4] Compl. ¶¶ 59, 63; [5] Compl. ¶ 64; [6] Compl. ¶ 64; [7]
Compl. ¶ 70; [8] Compl. ¶ 72; [9] Compl. ¶ 72.
E. Vendor Rates and Customer Service Setoff Disputes
In addition to negative customer relationship developments pre-Signing and
pre-Closing, Manna experienced negative pre-Closing developments related to its
vendors and shipping liabilities. According to Pilot, neither of these issues were
adequately disclosed in either the Original or the Updated Disclosure Schedules.81
First, in the Original Disclosure Schedule, Sellers disclosed that Forward Air
was Manna’s third largest vendor. 82 Sellers also disclosed that “in 2018 and in the
81
Compl. ¶¶ 77–82, 83–86.
82
Compl. ¶ 79.
21
ordinary course of business, Forward Air [] has increased its prices.”83 Sellers
included this disclosure because “Forward Air gave [notice of] a rate increase of
5.9%” that would “go effective” on “9-1.18” (two months after Closing). 84 Pilot
alleges Sellers’ actual disclosure (i.e., “in 2018” and in the “ordinary course,”
Forward Air increased its prices) led it to believe that Forward Air’s price increase
“had already occurred and was already reflected in” the Company’s financial
disclosures. 85
Second, GE was a pre-Closing customer of Manna’s. 86 After the Closing, GE
informed Pilot that it was claiming a set-off of payments owed in the aggregate
amount of $69,440 due to certain “shipment issues.”87 Originally, GE claimed these
losses occurred post-Closing. 88 After an investigation, however, GE determined it
83
Compl. ¶ 79.
84
Compl. ¶ 81. It is unclear when Pilot alleges the price increase took place. Compare
Compl. ¶ 81 (“beginning of June”), with Compl. ¶ 81 (stating an increase will “go effective
[] 9-1.18”).
85
Compl. ¶ 80.
86
Compl. ¶ 84.
87
Compl. ¶¶ 84–85.
88
Compl. ¶¶ 84–86.
22
“had made an administrative error, and realized that all of the complained of losses
occurred prior to Closing.” 89
F. Procedural History
Pilot sent Sellers an indemnification demand (the “Demand”) on October 14,
2019. 90 The Demand claimed Pilot suffered damages in excess of $6.9 million
because of Sellers’ alleged wrongdoing in connection with the APA.91 Sellers
disagreed and rejected the Demand. With this dispute unresolved, the Escrow
Property cannot be released unless and until the parties issue written joint
instructions for release of the funds to the escrow agent or a court of competent
jurisdiction enters a final, non-appealable judgment resolving the claims. 92
After negotiations proved unsuccessful, Pilot filed the Complaint in this Court
on December 11, 2019 (more than 15 months post-Closing).93 The Complaint
comprises six counts. In Counts I and II, Pilot claims Sellers breached the APA,
89
Compl. ¶ 86.
90
Compl. ¶ 88.
91
Id.
92
Compl. ¶ 89.
93
Compl. ¶ 1.
23
giving Pilot a right to indemnification and release of the Escrow Property. 94 Pilot’s
breach of contract claims fall into four buckets.
First, Pilot alleges it received inadequate disclosure of the Business Reduction
Notifications from Modus, Personal Comfort and Big Fig before the Closing. 95 With
respect to Modus, Pilot concedes the Original Disclosure Schedules revealed that,
“[i]n 2018 and in the ordinary course of business,” Modus “decreased the volume of
services purchased from Seller.”96 But Pilot alleges this disclosure was false and
intentionally misleading because Modus’ 90% purchasing reduction was not
“ordinary course.”97 As for Personal Comfort, Pilot concedes Sellers disclosed that
“in 2018 and in the ordinary course of business, Personal Comfort Beds no longer
purchases services from Seller.”98 Despite this disclosure, Pilot argues it came too
late because it (a) should have been included on the Original Disclosure Statement
and (b) was added to the Updated Disclosure Schedules more than 7 days after
Sellers received notice from Personal Comfort. 99 Finally, as for Big Fig, Pilot
94
Compl. ¶¶ 91–110.
95
Compl. ¶¶ 37, 55, 71–72.
96
Compl. ¶ 49.
97
Id.
98
Compl. ¶¶ 64, 67.
99
Compl. ¶ 67; see APA § 10.7 (stating that, to be effective, any updated disclosure must
be made “within seven (7) days of [Manna] first obtaining such Knowledge”).
24
contends Sellers did not make any disclosure of Big Fig’s Business Reduction
Notification even though it was received pre-Closing.100
Taken together, Pilot argues these factual allegations state viable claims for
breach of the Customer Rep (requiring disclosure of Business Reduction
Notifications)—as well as the representations in Section 5.6 (accuracy of financial
statements) and Section 5.8 (absence of material adverse effect). 101 On the latter
claim, it appears Pilot would have the Court conclude that these three customers’
departure had such a severe impact on the Company as a whole that it caused a
“Material Adverse Effect.”102 Pilot levels this claim even though the total loss of
Modus, Personal Comfort and Big Fig would have accounted for no more than 6%
of the Company’s total revenue even if the Company added no new customers during
2018. 103
Pilot’s theory as to Section 5.6 is even less clear. Pilot does not allege the
Company’s financial statements were inaccurate (i.e., that the Company made more
100
Compl. ¶¶ 71–72.
101
Compl. ¶¶ 51–52, 66–67, 73.
102
Compl. ¶¶ 50, 65.
103
See Compl. ¶ 36 ($2,317,000 revenue attributed to Modus during 2017), ¶ 47 (Modus’
2017 revenue was 4% of total revenue), ¶ 55 ($446,000 revenue attributed to Personal
Comfort during 2017), ¶ 68 ($452,000 revenue attributed to Big Fig during 2017). The
product of $2,317,000 and 100 divided by 4 renders the Company’s total revenue during
2017 (i.e., $57,925,000).
25
or less money than Sellers reported). Rather, Pilot appears to argue that because
Manna failed to disclose the Business Reduction Notifications, the Company’s
financial statements no longer “present fairly . . . the financial position of [Manna]”
on a prospective basis. 104 And yet, to be clear, Pilot does not allege Sellers provided
it with any financial forecasts—only backwards-looking financial statements.
Second, and unrelated to the Business Reduction Notification claims, Pilot
alleges Sellers breached the representation in Section 5.24 of the APA because the
Big Fig receivable of $127,114 on the Company’s disclosure statements was not a
“bona fide” receivable. 105 The Complaint alleges Sellers had “actual knowledge that
the full amount of the receivable was uncollectible.” 106
Third, Pilot brings a claim predicated on the verb tense of Sellers’ disclosure
related to Forward Air’s price increase. Specifically, Pilot argues that when it was
told Forward Air “has increased its prices,” it was misled to believe that “the price
increase . . . was already reflected” in the Company’s financial statements
104
Compl. ¶ 51; PAB at 29–31.
105
Compl. ¶¶ 74–76; see APA § 5.24 (Sellers’ representation that “[a]ll of the accounts
receivable reflected on the Interim Balance Sheet are . . . actual and bona fide
receivables . . . . Such accounts receivable . . . are stated [] in accordance with GAAP . . . .
Except as set forth on [the Original Disclosure Schedule], to the Knowledge of [Manna],
there are not (i) any amounts in excess of $10,000 due . . . that is in dispute”).
106
Compl. ¶¶ 74–76.
26
(it was not). 107 This, by Pilot’s lights, constitutes a breach of Sellers’ representation
in Section 5.28 (captioned “Vendors”).108
Fourth, Pilot makes breach claims unrelated to Sellers’ representations and
warranties. Specifically, it alleges Sellers breached Sections 10.7 and 3.2 of the
APA by failing to update the Original Disclosure Schedules within 7 days of
becoming aware of any matter that would constitute a breach of their representations
and warranties (Section 10.7) and failing to accept responsibility for GE’s offset
claim of $69,440 as an “Excluded Liability” (Section 3.2).109
In Counts III–VI, Pilot repurposes the factual predicates of its breach of
contract claims to plead breach of the implied covenant of good faith and fair
dealing, fraud, fraudulent inducement and negligent misrepresentation,
respectively. 110
107
Compl. ¶¶ 79–80 (emphasis in original).
108
Compl. ¶¶ 77–82; see APA § 5.28 (“Set forth on [the Original Disclosure Schedules] is
a true and complete list of [Manna’s] 30 largest vendors . . . . Since January 1, 2016, neither
[Manna] nor Owner has received written notice . . . that any Material Vendor intends or
expects to . . . materially change . . . any of the material terms . . . with respect to its
provision of goods.”).
109
Compl. ¶¶ 23, 83–86; PAB at 9, 20.
110
Compl. ¶¶ 111–165.
27
In response, Sellers have moved to dismiss the Complaint under Court of
Chancery Rule 12(b)(6) for failure to plead viable claims and Rule 9(b) for failure
to plead fraud with particularity. 111
II. ANALYSIS
The standards for deciding a motion to dismiss under Court of Chancery
Rule 12(b)(6) is well-settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof. 112
A. Breach of Contract Claims (Counts I–II)
To prevail on a breach of contract claim, Pilot must plead and prove “(1) the
existence of a contract; (2) the breach of an obligation imposed by the contract; and
(3) damages that the plaintiff suffered as a result of the breach.”113 Of these
elements, only the second is in dispute.114
111
D.I. 12; Ct. Ch. R. 12(b)(6); Ct. Ch. R. 9(b).
112
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citation omitted).
113
Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *6 (Del. Ch.
Nov. 19, 2013).
114
See Defs.’ Opening Br. in Supp. of Mot. to Dismiss Pl.’s Verified Compl. (“DOB”)
(D.I. 14) at 29.
28
Breach of contract claims are susceptible to disposition on a motion to dismiss
“[w]hen the language of [the] contract is plain and unambiguous.” 115 Contract
language is ambiguous “only when the provisions in controversy are reasonably or
fairly susceptible of different interpretations or may have two or more different
meanings.”116 If the plaintiff has proffered a reasonable construction upon which its
claim of breach rests, the motion to dismiss must be denied.117
Pilot’s Indemnification Claims
The main thrust of Pilot’s breach of contract claim is that certain Seller
representations and warranties were untrue (both at Signing and again at Closing)
and that Pilot is thus entitled to indemnification under Section 9.1 of the APA.118
In particular, many of Pilot’s claims turn on the Customer Rep in Section 5.27 and
the allegations that while Modus, Personal Comfort and Big Fig were top customers
during 2017, by the summer of 2018, Sellers knew those customers would no longer
do business with Manna. 119 Pilot maintains these customer departures triggered
115
Id.116
AT&T Corp. v. Lillis, 953 A.2d 241, 252 (Del. 2008) (quotations omitted).
117
Caspian Alpha Long Credit Fund, L.P. v. GS Mezzanine P’rs 2006, L.P., 93 A.3d 1203,
1205 (Del. 2014); Kahn v. Portnoy, 2008 WL 5197164, at *1 (Del. Ch. Dec. 11, 2008).
118
Compl. ¶ 96 (alleging breaches of Sections 5.6, 5.8, 5.24, 5.27 and 5.28).
119
Compl. ¶¶ 37–39, 55, 68–69.
29
Sellers’ obligation to disclose their receipt of a Business Reduction Notification
under Section 5.27. 120 Even though Sellers did disclose that Modus and Personal
Comfort had reduced their purchases during 2018, Pilot alleges the disclosure
schedules were misleading because they stated Modus and Personal Comfort had
decreased purchases “in the ordinary course” of business, and there was no
disclosure as to Big Fig.121
The default statute of limitations for breach of contract is three years.122
Delaware law, however, permits parties to shorten the three-year statute of
limitations by contract if “(1) the claims are based on a written contract; (2) the
contract involved at least $100,000; and (3) the contract specifies a period for claims
to accrue.”123 There is no dispute that Pilot’s indemnification claims are based on a
written contract that involves at least $100,000.124 The parties dispute the third
element—whether the APA sets a contractual limitations period.
120
Compl. ¶¶ 49, 64, 72.
121
Id.122
10 Del. C. § 8106(a).
123
10 Del. C. § 8106(c); AssuredPartners of Va. v. William Patrick Sheehan, 2020
WL 2789706, at *15 (Del. Super. Ct. May 29, 2020).
124
See APA § 2.2(c) (discussing the “Estimated Cash Purchase Price”).
30
In Delaware, the default rule is that representations and warranties do not
survive closing, but parties may agree to create a contractual survival period if they
so choose:
Absent contract language providing to the contrary, pre-closing
representations about the acquired property interest become ineffective
post-closing under the same rationale that causes representations about
real property to merge with a warranty deed. . . . [But] [p]arties can
contract for representations to survive closing by incorporating a
survival clause in the transaction agreement. 125
To the extent representations and warranties survive closing, claims that a party’s
representations were false must be brought within the applicable limitations period,
whether contractual or statutory as the case may be. 126
“There is no special rule requiring that in order to contractually shorten the
statute of limitations, parties [must] utilize clear and explicit language.”127 Rather,
“Delaware courts have interpreted contractual provisions that limit the survival of
representations and warranties as evidencing an intent to shorten the period of time
125
Bear Stearns Mortg. Funding Tr. 2006-SL1 v. EMC Mortg. LLC, 2015 WL 139731,
at *14 (Del. Ch. Jan. 12, 2015) (internal quotation and citation omitted).
126
See Shaw v. Aetna Life Ins. Co., 395 A.2d 384, 386 (Del. Super. Ct. 1978) (“The
Delaware decisions follow the general principle that contractual limitation of actions
periods are valid if they are reasonable.”).
127
GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898, at *12 (Del. Ch. July 11,
2011) (internal quotation omitted).
31
in which a claim for breach of those representations and warranties may be brought,
i.e., the statute of limitations.”128
In the APA, the parties agreed Sellers’ representations and warranties (other
than fundamental representations and warranties that are not at issue) “shall survive
for a period of 15 months after the Closing.” 129 Pilot filed the Complaint more than
15 months after the Closing. 130 Given this express limitations period, and the settled
law that claims for breaches of representations and warranties accrue at closing,
Pilot’s claims for breaches of Sellers’ representations and warranties are untimely.131
Pilot attempts to escape this conclusion by making four arguments, each of
which it foreswore in the APA itself. First, Pilot reasons that because Manna’s
indemnity obligations survive for “3 years after the Closing date,” that must mean
that Pilot can sue Manna for breached representations and warranties any time within
128
Id.129
APA § 9.3.
130
Compare APA § 9.3 (stating “all” representations and warranties “shall survive for a
period of 15 months after the Closing”), and Compl. ¶ 18 (The APA closed on July 16,
2018.), with D.I. 1 (showing that the Complaint was filed on December 11, 2019).
131
GRT, 2011 WL 2682898, at *6 (“Because representations and warranties about facts
pre-existing, or contemporaneous with, a contract's closing are to be true and accurate when
made, a breach occurs on the date of the contract's closing and hence the cause of action
accrues on that date.”).
32
three years post-Closing. 132 This is wrong. In Section 9.3, Pilot expressly
acknowledged that:
No claim for indemnification as to representations and warranties
under this Agreement may be made after [15 Months] . . . and Seller
and the Owners shall have no Liability for any claims made after the
expiration of such applicable period for breach of or an inaccuracy
when made of a representation or warranty. 133
Because I must “interpret contractual provisions in a way that gives effect to
every term of the instrument,” I must give effect to Section 9.3, which specifically
and explicitly subjects breach of representation and warranty claims to a truncated
15-month survival period.134 This reading dovetails with the more general 3-year
indemnification period because other indemnification obligations (such as the
obligation to defend against certain third party claims) are not swept into the 15-
month survival clause for inaccurate representations and warranties.135 Stated
differently, Sellers’ obligations to indemnify Pilot for damages caused by inaccurate
representations and warranties subject to the 15-month limitations period are a
132
PAB at 16.
133
APA § 9.3 (emphasis supplied).
134
Aircraft Serv. Int’l, Inc. v. TBI Overseas Hldgs., Inc., 2014 WL 4101660, at *3
(Del. Super. Ct. Aug. 5, 2014); see also DCV Hldgs., Inc. v. Con Agra, Inc., 889 A.2d 954,
961 (Del. 2005) (“Specific language in a contract controls over general language, and
where specific and general provisions conflict, the specific provision ordinarily qualifies
the meaning of the general one.”).
135
See APA § 9.5 (captioned “Notice and Opportunity to Defend”).
33
subset of the losses for which Pilot is entitled indemnity. 136 But, as to this subset,
Pilot committed that any claims would be brought within 15 months of Closing.
Second, Pilot argues “written notice is plainly sufficient to” toll the 15-month
survival period.137 As Pilot sees it, because it gave Sellers a written demand notice
on October 14, 2019 (within 15 months of Closing), it had until the expiration of the
3-year indemnification period to file its claims. 138 Pilot points to the following
language from Section 9.3 as support for its tolling argument:
All demands or claims for indemnification under this Agreement shall
be in writing and shall set forth with reasonable specificity the basis for
such demand or claim and the amount of such claim (if known). 139
No matter how emphatically Pilot argues “written notice is plainly sufficient,”
nothing in the APA says that an indemnification demand (rather than filing suit) will
toll the survival period.140 Pilot expressly agreed that “[n]o claim for
indemnification” would be filed after 15 months post-Closing; its post hoc spin is
unreasonable.
136
See APA § 9.1 (obligating Sellers to indemnify Pilot for, among other things, “(a) any
breach . . . of any representation and warranty of [Manna],” “(b) the non-fulfillment of any
covenant,” “(c) any Excluded Liabilities,” “(d) any Excluded Taxes”).
137
PAB at 18.
138
Compl. ¶ 88; PAB at 17–18.
139
PAB at 18 (citing APA § 9.3).
140
PAB at 18.
34
This is not a novel proposition. While it is true that “[p]arties may
contractually agree that an indemnification notice tolls the limitation period until the
underlying claim is resolved,” the APA contains no such tolling provision.141
In Delaware, by default:
when parties have shortened the statute of limitations by providing that
representations and warranties survive only through a specified date,
the party claiming breach must file suit within the specified time period.
Providing notice within the specified time period is not enough.142
To be sure, the APA requires that indemnification “demands” be made in writing,
but Pilot’s argument conflates contractual conditions precedent to asserting an
indemnification claim (i.e., written notice) with the contractual 15-month limitations
period. There is nothing inconsistent with “a contractual limitations period that
requires the parties to preserve rights by filing a lawsuit, but that still provides for
extrajudicial dispute resolution procedures.” 143
141
See, e.g., Aircraft, 2014 WL 4101660, at *4 (involving the following contractual
language: “if written notice of a violation or breach of any specified representation . . . is
given to the party charged with such violation or breach during the period provided . . .
such representation [or] warranty . . . shall continue to survive”).
142
Friedman Fleischer & Lowe, LLC v. Accentcare, Inc., 2016 WL 6967898, at *3
(Del. Ch. Nov. 29, 2016) (citing ENI Hldgs., LLC v. KBR Gp. Hldgs., LLC, 2013
WL 6186326, at *9–10 (Del. Ch. Nov. 27, 2013); GRT, 2011 WL 2682898, at *9–10)
(emphasis supplied).
143
ENI, 2013 WL 6186326, at *10 (stating “[i]t is not a reasonable interpretation of the
SPA that KBR can preserve a lawsuit based on an expired representation or warranty
merely by providing notice before the applicable Termination Date”); see also Kilcullen v.
Spectro Sci., Inc., 2019 WL 3074569, at *6 (Del. Ch. July 15, 2019) (“Because Spectro’s
claim notice did not toll the statute of limitation, Spectro’s Indemnification Counterclaims
35
Third, Pilot argues the APA did not require it to file suit within 15 months
because the APA did not expressly state that representations and warranties
“terminated on the survival expiration date.” 144 As noted, Delaware does not require
explicit language to set a contractual limitations period. 145 Where, as here, a contract
provides “the representations and warranties of the Seller . . . shall survive until” a
specified date, such language unambiguously sets a contractual limitations period.146
And even if this language were not enough to set a limitations period (it is), to
reiterate, Section 9.3 states “no claim” for inaccurate representations and warranties
“may be made after” 15 months of Closing. 147
Finally, Pilot claims the contractual limitations period should be tolled
because Sellers “acted to affirmatively conceal the wrong.”148 In this regard, I gather
based on the representations provision are dismissed as time-barred.”); GRT, 2011
WL 2682898, at *15 (“The most persuasive authorities conclude that [a] survival clause
with a discrete survival period has the effect of granting the non-representing and
warranting party a limited period of time in which to file a post-closing lawsuit.”)
(emphasis supplied).
144
PAB at 16 (emphasis in original).
145
GRT, 2011 WL 2682898, at *12.
146
See Aircraft, 2014 WL 4101660, at *3 (holding the following language set a contractual
limitations period: “the representations and warranties of the Seller contained in
Section 2.15 hereof shall survive until the second anniversary of the Closing Date”).
147
APA § 9.3.
148
PAB at 21 (citing Lincoln v. Snyder, 722 F. Supp. 546, 563 (D. Del. 2010)).
36
Pilot seeks to invoke the doctrine of fraudulent concealment. 149 “Under this
doctrine, a plaintiff must allege an affirmative act of ‘actual artifice’ by the defendant
that either prevented the plaintiff from gaining knowledge of material facts or led
the plaintiff away from the truth.” 150 While not stated clearly in its briefs, Pilot’s
theory seems to be that the top Customer Rep “put Pilot off the ‘trail of inquiry,’”
meaning that Pilot relied on the top Customer Rep and did not notice the departure
of key customers until it was too late.151
The fraudulent concealment doctrine cannot resuscitate Pilot’s
indemnification claims because “relief” from the limitations period “extends only
until the plaintiff is put on inquiry notice.” 152 “No theory will toll the statute beyond
the point where the plaintiff was objectively aware, or should have been aware, of
facts giving rise to the wrong.”153 Importantly, “inquiry notice does not require
actual discovery of the reason for injury,” but instead “exists when plaintiff becomes
149
PAB at 21 (citing CertainTeed Corp. v. Celotex Corp., 2005 WL 217032, at *8 (Del. Ch.
Jan. 24, 2005)).
150
In re Tyson Foods, Inc., 919 A.2d 563, 585 (Del. Ch. 2007).
151
PAB at 22.
152
Tyson Foods, 919 A.2d at 585.
153
Id.37
aware of facts sufficient to put a person of ordinary intelligence and prudence on
inquiry which, if pursued, would lead to the discovery of injury.” 154
Pilot has pled that when it took over Manna’s business, the Company’s
“fourth” largest customer (accounting for $2,317,000 in revenue) had reduced its
purchases by “90%,” and the Company’s “twenty-fifth” largest customer “was no
longer a customer at all.”155 Pilot alleges these departures were so significant that
they caused a Material Adverse Effect (as defined in the APA) on the Company
before Closing.156 This means that Pilot believes the Company had experienced such
a “significant deterioration” in its business that the “fundamentals of the deal” were
threatened.157 In other words, by the time Pilot took the helm at the Company, ship’s
alarms had been ringing for months. Against this backdrop, even after affording it
all reasonable inferences, Pilot cannot make a reasonably conceivable case for
fraudulent concealment given that it was indisputably on inquiry notice of the
alleged breach well within the limitations period.158
154
Certainteed, 2005 WL 217032, at *7 (internal quotation omitted).
155
Compl. ¶¶ 48, 54–55.
156
Compl. ¶ 101; PAB at 32.
157
Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *47 (Del. Ch. Oct 1, 2018)
(construing a contractual “MAE Condition”).
158
See, e.g., Compl. ¶ 55 (“Personal Comfort was no longer a customer at all” by “June 26,
2018”). Pilot’s citation to Vice Chancellor Glasscock’s decision in MKE Holdings v.
Schwartz is misplaced. PAB at 22 (citing MKE Hldgs. LTD., v. Schwartz, 2020
38
The Survival clause represents bargained-for “risk allocation.”159 If Pilot
wanted a longer period within which to ascertain whether Sellers’ representations
and warranties were accurate, it could have shifted that risk to the Sellers by
negotiating a longer survival period. Now that Pilot memorialized the terms of its
agreement with Sellers in the form of a clear and unambiguous contract, the Court
cannot allow Pilot to re-trade rights it knowingly bargained away. 160 For this reason,
Pilot’s claims for breaches of Sections 5.6, 5.8, 5.24, 5.27 and 5.28 must be
dismissed. 161
WL 467937, at *11 (Del. Ch. Jan. 29, 2020)). There, defendants solicited a $7 million
investment by touting a company’s financial performance while taking affirmative steps to
shield specific, negative accounting reports from plaintiffs’ due diligence review. The
plaintiffs received the relevant accounting memoranda only after they made a books and
records demand. Id. at *11–12. Here, on the other hand, Pilot has not pled that Sellers
stashed away unflattering documents in a forgotten filing cabinet. Rather, key customers
that had been a focus of Pilot’s due diligence review stopped sending any business to
Manna before the APA closed. Under any reasonably conceivable set of circumstances
susceptible of proof, if Pilot had exercised “reasonable diligence,” it would have
discovered its injury from these lost customers immediately after the Closing. Certainteed,
2005 WL 217032, at *7.
159
In re Tibco, 2014 WL 6674444, at *18.
160
GMG Capital Inv., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012)
(“The Court will give priority to the parties’ intentions as reflected in the four corners of
the agreement.”).
161
See Compl. ¶¶ 96(a), 101.
39
Pilot’s Remaining Breach of Contract Claims
Having determined that Pilot’s claims for breach of Sellers’ representations
and warranties are untimely, I turn to Pilot’s remaining breach of contract claims.
Pilot maintains that even if its claims under Article 5 (Sellers’ representations and
warranties) are untimely, it has stated a viable claim under two provisions of the
APA that are not subject to the 15-month survival period. I agree, at least as to one
of the remaining breach claims.
Even though not separately pled in the Complaint, Pilot has argued in its
Answering Brief that it stated a separate claim for breach of Section 10.7. 162 Pilot’s
newfound claim appears to rest on its interpretation of the APA that Sellers “were
required to update” the Original Disclosure Schedules if they received a Business
Reduction Notification. 163 That is not what Section 10.7 says. To the contrary, it
states, in relevant part:
[Manna] and the Owners may from time to time before Closing update
the Disclosure Schedules regarding any matter about which they obtain
Knowledge . . . that would constitute a breach of any of the
representations and warranties in this Agreement . . . provided, any such
update . . . shall be made within seven [] days of [Manna] first obtaining
such Knowledge. No such supplement or amendment shall have any
effect on the satisfaction of the conditions to closing . . . provided,
however, if [Pilot] proceeds with the Closing, then [Pilot] . . . shall be
162
Compare PAB at 20 (arguing Pilot breached Section 10.7), with Compl. ¶¶ 96, 101
(alleging breaches of Sections 3.2, 5.6, 5.8, 5.24, 5.27, 5.28 and 9.1 of the APA).
163
See Compl. ¶ 23 (citing APA § 10.7).
40
deemed to have waived any right or claim pursuant to the terms of this
Agreement . . . with respect to any and all matters disclosed.164
On its face, Section 10.7 is permissive not mandatory.165 It does not create
new obligations. Indeed, to the extent Sellers provide updated disclosures, the
supplemental disclosure has no impact on whether (or not) their representations and
warranties were accurate when made. 166 It is true that if updated disclosures were
given more than seven days after Manna obtained the relevant Knowledge, then
Sellers could not rely on the Updated Disclosure Schedules to argue that Pilot had
waived its right to seek indemnification by proceeding to Closing. But that is a
separate question from whether Section 10.7 creates an obligation. On its face, it
does not.
Pilot next alleges it is entitled to indemnification for certain “Excluded
Liabilities” under Sections 3.2 and 9.1(c) of the APA related to Manna’s customer,
164
APA § 10.7 (emphasis supplied).
165
See Miller v. Spicer, 602 A.2d 65, 67 (Del. 1991) (“The use of the verb ‘shall’ . . .
generally connotes a mandatory requirement while the verb ‘may’ is deemed permissive.”)
(citation omitted).
166
APA § 10.7.
41
GE. 167 Since this allegation does not involve an inaccurate representation or
warranty subject to the 15-month survival period, it is not time barred.168
According to Pilot, after Closing, “GE [] determined that it had made an
administrative error,” and asserted that it had suffered a loss of $69,440 due to a
“shipment issue[]” that Manna caused “prior to Closing.”169 After it discovered the
“shipment issue,” GE “set-off and reduced its payments to Pilot.”170 Tracing this
factual allegation through the APA, Pilot argues this pre-Closing “shipment issue”
was an “Excluded Liability” for which it is entitled to indemnification under
Section 9.1(c). 171
The APA defines “Excluded Liabilities” as, among other things, “[a]ny
liabilities or obligations with respect to [Manna’s shipping business] arising prior to
the Closing Date”; but, “for the avoidance of doubt,” Excluded Liabilities do not
include any “Assumed Liabilities”—even if they arose prior to Closing. 172 In turn,
167
Compl. ¶ 83.
168
See APA § 3.2 (stating Pilot “shall not assume or in any way become liable for . . .
Excluded Liabilities”); § 9.1 (requiring Sellers to indemnify Pilot for “Excluded
Liabilities”).
169
Compl. ¶ 86.
170
Compl. ¶ 85.
171
See APA § 9.1(c).
172
APA § 3.2(a).
42
“Assumed Liabilities” include “all Services Liabilities to the extent of the reserves,
accruals, and allowances in the Final Net Working Capital.” 173 Finally, the APA
defines “Services Liabilities” as “all liabilities and obligations incurred in
connection with Seller’s delivery of products in the ordinary course of business,
including related to customer claims for cargo damages or loss, or related to property
damage incurred in the ordinary course of business in connection with the delivery
of products.”174
The upshot is that the APA allocates Manna’s pre-Closing liabilities to
Sellers—except for all “Services Liabilities” which Pilot assumes up to the net
working capital target. 175 Pilot has not alleged the GE liability would cause Services
Liabilities to exceed the net working capital target. This means the parties’ dispute
turns on whether (or not) it is reasonably conceivable the GE liability is something
other than a “Services Liability.” 176 To put an even finer point on the disagreement,
I must decide whether it is reasonably conceivable that GE’s set-off of $69,440—
caused by “shipment issue[s]”—is a liability “incurred in connection with [Manna’s]
173
APA § 3.1(c).
174
APA § 12(aa) (definition of “Services Liabilities”) (emphasis supplied).
175
See APA §§ 3.1–3.2.
176
APA § 3.1(c) (stating Pilot assumed all “Services Liabilities to the extent of . . . the
Final Net Working Capital”).
43
delivery of products in the ordinary course of business” (i.e., a “Services
Liability”). 177
If the GE liability is a “Services Liability,” then the GE liability is Pilot’s to
bear as an “Assumed Liability.” 178 While Pilot has pled nothing more about the GE
liability than a vague reference to its origin (“shipment issues”) and its amount, I am
satisfied there exists a “reasonably conceivable set of circumstances susceptible of
proof” in which a reasonable factfinder could conclude the GE liability was incurred
outside the ordinary course of business.179 As such, it is reasonably conceivable that
Pilot is entitled to indemnification for the GE liability as an Excluded Liability under
Section 3.2, and Pilot has stated a viable (albeit narrow) claim for breach of contract
on that basis.
B. Pilot’s Implied Covenant Claim (Count III)
In Count III, Pilot alleges Sellers breached the implied covenant of good faith
and fair dealing by:
(i) intentionally misrepresenting and omitting material information in
order to fraudulently induce Pilot into signing the Asset Purchase
Agreement and to subsequently close the acquisition; (ii) falsely
engineering its disclosures to misrepresent and overstate customer
revenue; (iii) intentionally delaying making disclosures and making
disclosures that are intentionally ambiguous and misleading;
177
APA § 12(aa) (definition of “Services Liabilities”).
178
Id.
179
CML V, LLC v. Bax, 28 A.3d 1037, 1040 (Del. 2011).
44
(iv) manipulating [Manna’s] gross revenue calculations to reflect a time
period that did not fairly and accurately portray the financial condition
of Manna prior to closing; and (v) refusing to execute the joint written
instructions in order to release the Escrow Property. 180
While the laundry list of generalized grievances is lengthy, Count III rests on the
same factual allegations that support Pilot’s breach of contract claims. 181 And for
that reason, none of the grievances can sustain a viable claim for breach of the
implied covenant.
The implied covenant of good faith and fair dealing “involves a ‘cautious
enterprise,’ inferring contractual terms to handle developments or contractual gaps
that the asserting party pleads neither party anticipated.”182 Courts will not “rewrite
the contract to appease a party who later wishes to rewrite a contract he now believes
to have been a bad deal. Parties have a right to enter into good and bad contracts,
the law enforces both.” 183
Each of Pilot’s implied covenant allegations fails for two reasons. First, Pilot
cannot state a viable implied covenant claim by recycling its allegations that Sellers
180
APA § 120.
181
Compl. ¶¶ 111–124 (“Sellers covenanted that [they] would act in good faith to provide
accurate and truthful representations.”).
182
Nemec v. Schrader, 991 A.2d 1120, 1125 (Del. 2010).
183
Id. at 1126.
45
breached express provisions in the APA. 184 It is black letter law that where the APA
“expressly addresses a particular matter” (such as Manna’s top Customers and the
absence of Business Reduction Notifications), Manna cannot salvage its untimely
breach of contract claims by recasting them under the implied covenant. 185
Second, and relatedly, Pilot has not identified a “gap that the implied
covenant might fill.”186 Pilot would have the Court infer a “free-floating duty,”
unattached to the APA, requiring Sellers to “provide accurate and honest
representations of Manna’s financial condition.”187 Specifically, Pilot takes issue
with Sellers’ strategic negotiation of the Customer Rep (by only agreeing to disclose
Manna’s top customers in 2017 rather than 2018), and argues this negotiation tactic
amounted to bad faith “manipulat[ion]” of the “substance and timing” of Sellers’
184
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *10 (Del. Ch.
Dec. 22, 2010) (finding implied covenant claim not available when “the subject at issue is
expressly covered by the contract”) (internal quotations & citation omitted); see also Fortis
Advisors LLC v. Dialog Semiconductor PLC, 2015 WL 401371, at *3 (Del. Ch. Jan. 30,
2015) (“Where the contract speaks directly regarding the issue in dispute, existing contract
terms control . . . such that implied good faith cannot be used to circumvent the parties’
bargain.”) (internal quotations and citation omitted).
185
Brightstar Corp. v. PCS Wireless, LLC, 2019 WL 3714917, at *12 (Del. Super. Ct.
Aug. 7, 2019) (“Where a contract expressly addresses a particular matter, ‘an implied
covenant claim respecting that matter is duplicative and not viable.’”) (quoting Edinburgh
Hldgs. v. Educ. Affiliates, Inc., 2018 WL 2727542, at *9 (Del. Ch. June 6, 2018)).
186
Allen v. El Paso Pipeline GP Co., L.L.C., 113 A.3d 167, 183 (Del. Ch. June 20, 2014).
187
PAB at 39; Longerman v. EPE Hldgs., LLC, 5 A.3d 1008, 1017 (Del. Ch. 2010)
(“Implied good faith cannot be used to circumvent the parties’ bargain, or to create a free-
floating duty unattached to the underlying legal documents.”).
46
disclosures. 188 If the implied covenant worked to circumvent carefully negotiated
representations and warranties in this manner, then it could be weaponized by any
dissatisfied deal party to re-trade the deal regardless of what was bargained-for. That
is not how contractarian expectations or the implied covenant work.
Contrary to Pilot’s argument, it is precisely because the parties carefully
negotiated the “substance and timing” of Sellers’ representations and warranties that
Pilot cannot identify a gap within which the implied covenant might fit.189 Indeed,
the representations and warranties Sellers are alleged to have breached served an
“important risk allocation function” regarding the possibility that Manna’s financial
position would deteriorate before Closing.190 Because the parties explicitly
addressed the issues about which Pilot now complains, the implied covenant cannot
188
PAB at 39; see, e.g., APA § 5.27 (requiring disclosure of the Company’s to customers
for “calendar year 2017”).
189
See PAB at 39.
190
In re Tibco, 2014 WL 6674444, at *18 (discussing the role of representations and
warranties in “heavily negotiated” agreements and their “important risk allocation
function”) (internal quotations omitted); see also Emp.’s Ret. Sys. of City of St. Louis v.
TC Pipelines GP, Inc., 2016 WL 2859790, at *6 (Del. Ch. May 11, 2016) (“The Courts
apply the implied covenant . . . cautiously to infer contractual terms or gaps to address
situations that the contracting parties did not anticipate.”).
47
“create rights that contradict an express contractual provision” of the APA.191
Count III fails as a matter of law.
C. Fraud Claims (Counts IV-VI)
Even though Pilot packages its fraud claims in three, separate counts, it is hard
to tell them apart—not only from each other, but also from the breach of contract
claims I have addressed above. In Counts IV–VI, Pilot alleges that the same course
of conduct underlying its breach of contract claims also gives rise to actionable
fraud, fraudulent inducement and negligent misrepresentation.192 In response,
Sellers maintain all of Pilot’s fraud claims should be dismissed because they (i) are
untimely, (ii) impermissibly bypass the APA’s non-reliance provision, (iii) fail to
plead fraud with particularity as required by Court of Chancery Rule 9(b) and (iv) are
duplicative of Pilot’s breach of contract claims. 193 I address each argument seriatim.
191
Great-West Inv’rs LP v. Thomas H. Lee P’rs, L.P., 2011 WL 284992, at *5 (Del. Ch.
Jan. 14, 2011); see APA § 5.8 (captioned “Absence of Changes”); § 5.27 (requiring notice
of Business Reduction Notifications).
192
See Compl. ¶ 127(a) (alleging representations regarding Modus were false), ¶ 129
(alleging representations in Section 5.6, 5.8, 5.24 and 5.28 were false), ¶¶ 139–54, 156–65
(similar); see also Fortis Advisors, 2015 WL 401371, at *9 (noting that “a claim for
negligent misrepresentation is often referred to interchangeably as equitable fraud”).
193
DOB at 44–52, 54–55.
48
The APA Does Not Unambiguously Require Pilot’s Fraud Claims to
be Brought Within 15 Months
Before turning to the other aspects of Pilot’s fraud claims, I address Sellers’
threshold argument that Pilot’s fraud claims are untimely. “Delaware’s statute of
limitations for claims sounding in fraud . . . is three years.”194 Even though Pilot has
brought this action within the statutory limitations period, Sellers argue that
Section 9.3 not only bars Pilot’s breach of representation and warranty claims
(as discussed above), but also requires dismissal of Pilot’s fraud claims. 195
Sellers concede that no Delaware court has adopted this line of reasoning, but
urges the Court to embark on a three-step analytical expedition to reach their
heretofore-uncharted destination.196 First, the default rule in Delaware is that
representations and warranties do not survive closing. 197 A survival clause, in
essence, gives breath to any claim predicated on a party’s representations and
warranties only for as long as the clause allows. Second, Pilot promised not to rely
on any statements about the Company other than those embodied in Sellers’
194
Winklevoss Capital Fund, LLC v. Shaw, 2019 WL 994534, at *5 (Del. Ch. Mar. 1, 2019)
(citing 10 Del. C. § 8106).
195
Telephonic Oral Arg. on Defs.’ Mot. to Dismiss (D.I. 34) at 18–20.
196
Id.
197
Bear Stearns, 2015 WL 139731, at *14 (“Absent contract language providing to the
contrary, pre-closing representations about the acquired property interest become
ineffective post-closing.”).
49
contractual representations and warranties. 198 Third, in the APA, Pilot agreed that
Sellers would have “no Liability for any claims made after the expiration” of the 15-
month survival period “for breach of or an inaccuracy when made of a representation
or warranty.” 199 Together, Sellers argue these three steps lead to the inescapable
conclusion that Pilot’s fraud claims, which must be based on Sellers’ representations
and warranties in the APA, come too late.200 In other words, while Delaware law
does not permit a party to “‘lie’ intentionally” in a contract, and a non-reliance
provision cannot bar claims for “intentional fraud” predicated upon knowing
falsehoods in a party’s “written representations,” nothing in our law prohibits a party
from agreeing not to bring such a claim after a prescribed limitations period
expires.201
198
APA § 9.3.
199
Id. (emphasis supplied).
200
H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 144 (Del. Ch. 2003) (stating a plaintiff
must plead he “acted or did not act in justifiable reliance on” defendant’s representation)
(emphasis supplied).
201
See Abry P’rs V, L.P. v. F&W Acq. LLC, 891 A.2d 1032, 1062 (Del. Ch. 2006) (cited
approvingly in RAA Mgmt., LLC v. Savage Sports Hldgs., Inc., 45 A.3d 107, 116 (Del.
2012)) (stating “there is 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” (i.e., contractual
representations and warranties); CLP Toxicology, Inc. v. Casla Bio Hldgs. LLC, 2020
WL 3564622, at *17 (Del. Ch. June 29, 2020) (discussing “intentional fraud” claims
generally and stating that, even though plaintiffs “expressly represented . . . that they were
not relying on any extra-contractual representations,” their “fraud claims may proceed
based on the written representations in the SPA”).
50
I do not dwell on the soundness of Sellers’ argument because the APA does
not purport to limit “intentional fraud” claims to a 15-month contractual limitations
period. While Section 9.3 does provide that Sellers will have “no Liability for any
claims” based upon “breach” or “inaccuracy” of their representations and warranties
beyond 15 months,202 Section 9.1 makes clear that “[n]othing in this Agreement shall
limit” Pilot’s right to recover “any amounts at any time in connection with any action
or claim based upon intentional fraud by [Sellers] in this Agreement.” 203
Section 9.1 can be reconciled with Section 9.3 because the former expressly
trumps the latter’s broad language when it states “nothing in this agreement” shall
limit Pilot’s right to bring a claim for “intentional fraud.”204 At some point, in
another case, this court may be called upon to assess the enforceability of a party’s
unambiguous promise to bring intentional fraud claims only within a contractual
limitations period, but the APA does not call this question. Indeed, Section 9.1
unambiguously preserves Pilot’s right to bring intentional fraud claims “at any
time.” 205 Given this clear language, Sellers cannot credibly argue that Pilot’s
intentional fraud claims are untimely.
202
APA § 9.3 (emphasis supplied).
203
APA § 9.1 (emphasis supplied).
204
Id.
205
Id.
51
The APA Precludes Extra-Contractual Fraud Claims
Sellers read the APA as precluding fraud claims based on extra-contractual
promises, representations or warranties.206 I agree.
In his seminal Abry Partners decision, then-Vice Chancellor Strine reinforced
this court’s dedication to upholding the “free will” of sophisticated parties by
enforcing non-reliance provisions like those in the APA. 207 Abry offers the
following guidance: do not disavow reliance on extra-contractual statements unless
you mean it.208 If a sophisticated party agrees he is relying only on those
representations and warranties in a written contract, and says as much in the contract,
he “may not reasonably rely on information that [he] contractually agreed did not
form a part of the basis for [his] decision to contract.”209 With this in mind, this
court does not hesitate to dismiss fraud claims premised on extra-contractual
representations when the parties’ contract contains an unambiguous mutual covenant
206
See DOB at 46.
207
Abry, 891 A.2d at 1058.
208
Id. (“The enforcement of non-reliance clauses recognizes that parties with free will
should say no rather than lie in a contract.”).
209
H-M Wexford, 832 A.2d at 142 n.18; see also ev3, Inc. v. Lesh, 114 A.3d 527, 529 n.3
(Del. 2014) (“Delaware courts seek to ensure freedom of contract and promote clarity in
the law in order to facilitate commerce.”); RAA Mgmt., 45 A.3d at 118–19 (“Abry Partners
accurately states Delaware law and explains Delaware’s public policy in favor of enforcing
contractually binding written disclaimers of reliance on representations outside of a final
agreement of sale or merger.”).
52
that neither relied upon extra-contractual promises in connection with their decision
to enter the contract or to make (or receive) promises within the contract.210
In Section 9.8, Pilot agreed Sellers did not make and “shall not be deemed to
have made, any [] representations or warranties, written or oral, statutory, express or
implied.” 211 And Pilot “EXPRESSLY WAIVE[D] AND AGREE[D] THAT IT IS
NOT RELYING ON, ANY REPRESENTATION OR WARRANTY” (other than
those embodied in the APA) whether “EXPRESS” or “IMPLIED.” 212 In other
words, if Sellers did not say it in the APA, as a matter of law, it was not said. In a
futile effort to escape the legal consequence of its promise, Pilot attempts to expand
the universe of statements (or omissions) on which it is entitled to rely in two ways;
neither are persuasive.
First, Pilot argues the non-reliance provision does not extend to “Pilot’s
fraudulent omission and concealment claims” because Pilot did not disclaim reliance
210
Abry, 891 A.2d at 1057.
211
APA § 9.8.
212
Id. (emphasis in original); see also id. (Pilot “expressly waives and relinquishes any and
all rights, claims and causes of action against the [Sellers] . . . in connection with, the
accuracy, completeness or materiality of any statements, information data or other
materials (written or oral) or documents heretofore furnished or made available to
[Pilot] . . . by or on behalf of the [Sellers.]”); APA § 14.4 (“This Agreement . . . constitutes
the entire agreement between the parties with respect to the subject matter hereof . . . and
supersede any prior understandings, agreements, or representations and warranties by or
among the parties, written or oral, to the extent they related in any way to the subject matter
hereof or thereof.”).
53
on the “omission” of information or the “completeness” of the information in
Sellers’ representations and warranties.213 Wrong. Pilot promised not to rely on the
“completeness or materiality of any statements, information, data or other materials
(written or oral) or documents heretofore furnished . . . to [it].” 214 This non-reliance
provision is unambiguous, explicit and comprehensive; Pilot “forthrightly affirm[ed]
that [it was] not relying upon any representation or statement of fact not contained
[in the contract],” including whether any statement was “complete.”215
213
PAB at 49.
214
APA § 9.8 (emphasis supplied, original in all caps).
215
Kronenberg v. Katz, 872 A.2d 568, 591 (Del. Ch. 2004); see also Infomedia Gp., Inc. v.
Orange Health Sols., Inc., 2020 WL 4384087, at *8 (Del. Super. Ct. July 31, 2020) (“[T]he
TransDigm court distinguished its holding from other Delaware precedent on the basis that
the anti-reliance clause at issue did not refer to ‘omissions’ and did not disclaim the
‘accuracy or completeness’ of information provided in due diligence.”) (citing TransDigm
Inc. v. Alcoa Glob. Fasteners, Inc., 2013 WL 2326881, at *8 (Del. Ch. May 29, 2013)
(“There is no argument, however, that Alcoa agreed in the Purchase Agreement that
TransDigm was making no representation as to the ‘accuracy and completeness’ of the
information TransDigm provided to Alcoa.”)); RAA Mgmt., 45 A.3d at 115 (addressing a
non-reliance provision including “completeness” language, “RAA acknowledged that . . .
Savage would have no liability, and could not be sued, for any allegedly inaccurate or
incomplete information provided by Savage to RAA during the due diligence process.”);
Infomedia, 2020 WL 4384087, at *8 (“That express repudiation of the validity and
completeness of information provided during due diligence distinguishes the Purchase
Agreement from the stock purchase agreement at issue in TransDigm.”); Wind Point P’rs
VII-A, L.P. v. Insight Equity A.P. X Co., LLC, 2020 WL 5054791, at *17 (Del. Super. Ct.
Aug. 17, 2020) (noting that in the absence of an “accuracy and completeness” clause,
“Wind Point has adequately pleaded fraudulent concealment in the Complaint”
notwithstanding the non-reliance provision). I note that some aspects of TransDigm have
been questioned (or, at least, distinguished) by some Delaware authority—see, e.g., Prairie
Capital III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 54 (Del. Ch. 2015) (noting that
“[t]o the extent TransDigm suggests that an agreement must use a magic word like
“omissions,” then I respectfully disagree with that interpretation”—but TransDigm’s
54
Pilot concedes that when there is “an express waiver with respect to the
accuracy or completeness of the information provided,” all extra-contractual
fraudulent omission claims are waived.216 As illustrated in TransDigm, where the
parties elect not to include a “completeness” provision in their non-reliance clause,
they are expressing an intent not to include fraudulent omission claims within the
prohibitive scope of the clause.217 Their decision to include the “completeness”
language, on the other hand, exemplifies an unambiguous intent to preclude extra-
contractual fraudulent concealment and omission claims. 218
Second, Pilot argues that Sellers deceptively negotiated limitations on the
scope of the Customer Rep, thereby rendering those pre-contract negotiations
fraudulent and yet not barred by the non-reliance clause because they resulted in a
knowingly false contractual promise. 219 I gather the theory is that while the APA
was being negotiated, Pilot requested a representation of the Company’s 30 largest
observation regarding the effect of “completeness” language has not been questioned and,
in my view, the court got the construction of a non-reliance clause with that language just
right.
216
PAB at 49 (“Delaware Courts have long held that even when a buyer promises not to
rely on representations outside a contract, this does not waive otherwise-viable claims for
fraudulent omissions in the absence of . . . ‘an express waiver with respect to the accuracy
or completeness of the information provided by the Defendants.’”).
217
TransDigm Inc., 2013 WL 2326881, at *8.
218
Id.; RAA Mgmt., 45 A.3d at 115; Wind Point, 2020 WL 5054791, at *17.
219
Compl. ¶¶ 45–50.
55
customers during 2018—which would have revealed falling revenue attributed to
Modus, Personal Comfort and Big Fig. 220 Sellers allegedly recognized that a top
customer list for 2018 would torpedo the deal, so they pushed Pilot to agree that the
top customer list would be limited to 2017. This dynamic, according to Pilot, takes
the non-reliance clause out of the picture.
Pilot misapprehends the scope of the clause it agreed to as interpreted under
our law. If a dissatisfied buyer could bring a fraud claim against a seller for truthful
representations and warranties that allegedly are the product of a failure to “fairly
and accurately portray the financial condition” of a company, non-reliance
provisions would be meaningless, and sellers would have a free-floating (legally
enforceable) duty to disclose any and all information relevant to a company’s value,
whether asked for or not. 221 If critical information lurks within the interstices of a
220
Id.; ¶ 127(f) (alleging Sellers fraudulently “manipulate[ed] [Manna’s] gross revenue
calculations to reflect a time period that did not fairly and accurately portray the financial
condition of Manna prior to closing.”) (emphasis supplied); PAB at 47 (“Pilot seeks fraud
damages because it has discovered damning emails that reveal that Sellers intentionally
manipulated and engineered the disclosures in the APA to misrepresent the true status of
Manna’s pre-Closing customer relationships.”) (emphasis supplied).
221
Compl. ¶ 127(f). Indeed, if a seller negotiated an agreement with no representations
and warranties, a dissatisfied buyer could bring a claim for fraud arguing (as Pilot does
here) that the seller had “engineered” its disclosures to “misrepresent the true status” of the
Company. PAB at 47.
56
counterparty’s truthful representations and warranties, a sophisticated party has a
means to flush that out: negotiate for more fulsome disclosures, full stop.222
The net effect of an enforceable non-reliance provision and carefully
negotiated representations and warranties is to “define what information the Buyer
relied upon in deciding to execute the Agreement.” 223 In connection with Pilot’s
investigation of the Company’s value, each representation and warranty is like a
piece of a puzzle that Sellers placed on the puzzle table for Pilot’s benefit. Once
Pilot was satisfied it had seen enough of the picture, it stopped negotiating for
additional puzzle pieces and agreed to purchase the Company. 224 Of course, each of
the individual puzzle pieces must be free from defect so that the image depicted is
true. But now that Pilot has assumed control of the Company after assembling the
puzzle to its satisfaction, it cannot construct a fraud claim upon the notion that it
222
For example, if a seller represents that a car has not been crashed any time during 2012–
2017 or 2019–2020, and a buyer purchases a car promising to rely only on that
representation, the buyer cannot bring a fraud claim if the car was, in fact, crashed during
2018. In the face of a non-reliance provision, the parties’ representations and warranties
“form[] the reality upon which the parties premise[] their decision to bargain.” Abry, 891
A.2d at 1058. With that said, nothing here should be read as prohibiting a buyer from
presenting evidence of extra-contractual omissions as part of its broader presentation in
support of a contractual fraud claim. The point is that the omissions, themselves, cannot
be the bases of fraud claims when the contract contains a non-reliance clause as broad as
the one in the APA.
223
Id. at 1041.
224
Id. at 1058 (Representations and warranties “form[] the reality upon which the parties
premised their decision to bargain.”).
57
needed more, or different, pieces in the APA to see the full picture.225 Aggressive
bargaining is not fraud.
Pilot Has Pled Contractual Fraud With Particularity
Having determined that Pilot may only rely upon the representations and
warranties within the APA to state a claim for fraud, I address the Sellers’ third
ground for dismissal—that Pilot has failed to plead fraud with the particularity
required by our law. The prima facie elements of fraud are well settled:
(1) the defendant falsely represented or omitted facts that the defendant
had a duty to disclose; (2) the defendant knew or believed that the
representation was false or made the representation with a reckless
indifference to the truth; (3) the defendant intended to induce the
plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable
reliance on the representation; and (5) the plaintiff was injured by its
reliance. 226
To meet the particularity requirement, Rule 9(b) often will require a plaintiff
making a fraud claim to allege: “the time, place, and contents of the false
representation, the identity of the person(s) making the representation, and what he
intended to obtain thereby.” 227 “When a party sues based on a written contract, as
225
Cf. Compl. ¶ 127(f); PAB at 42 (“Sellers fraudulently manipulated the disclosures they
made regarding the status of Manna’s customer relationships to make it appear that the
business was worth more than it actually was in order to induce Pilot to purchase Manna
at an inflated price.” (citing Compl. ¶¶ 37–49, 67, 72, 129–133, 142–48, 150)).
226
Abry, 891 A.2d at 1050.
227
Wexford, 832 A.2d at 145; see also Trenwick Am. Litig. Tr. v. Ernst & Young LLP, 906
A.2d 168, 207–08 (Del. Ch. 2006) (Strine, V.C.), aff’d sub nom. Trenwick Am. Litig. Tr. v.
Billett, 931 A.2d 438 (Del. 2007) (noting that the relevant factors include “the time, place,
58
[Pilot] has done here, it is relatively easy to plead a particularized claim of fraud.”228
“The plaintiff can readily identify who made what representations where and when,
because the specific representations appear in the contract. The plaintiff likewise
can readily identify what the defendant gained, which was to induce the plaintiff to
enter into the contract.” 229 Given that state of mind and knowledge may be averred
generally when pleading fraud, an allegation that a contractual representation is
knowingly false typically will be deemed well pled (even if ultimately difficult to
prove).230
The Complaint well-pleads that Sellers made three knowingly false statements
in the APA that conceivably amount to fraud. 231 First, Pilot alleges Sellers stated in
and contents of the false representations; the facts misrepresented; the identity of the
person(s) making the misrepresentation; and what that person(s) gained from making the
misrepresentation”).
228
Prairie Capital, 132 A.3d at 62; see also Swipe Acq. Corp. v. Peter M. Krauss, et al.,
2020 WL 5015863, at *9 (Del. Ch. Aug. 25, 2020) (same).
229
Prairie Capital, 132 A.3d at 62; see also Swipe, 2020 WL 5015863, at *9 (same).
230
Abry, 891 A.2d at 1050.
231
Pilot’s allegations with respect to Forward Air fall short of a viable fraud claim. Pilot
alleges that Sellers disclosed that Forward Air, a vendor of Manna, had increased its prices
and made it seem as if “the price increase had already occurred and was already reflected
in the Interim Balance Sheet.” Compl. ¶ 80. Pilot stops short of alleging that the balance
sheet or income statements themselves were fraudulent, instead insisting that Sellers
intentionally misled Pilot into thinking “the price increase was already booked as an
expense in Manna’s Financial Statement.” Compl. ¶ 82. Yet, nothing in either
Schedule 5.28 or the related representation says or even implies the price increase was or
was not reflected in the Interim Balance Sheet. And Pilot does not even generally plead
that Sellers intended or had knowledge that the representation they made to Pilot regarding
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the APA that Modus “decreased the volume of services purchased” from the
Company “in the ordinary course of business.”232 In reality, Modus had decreased
its purchases by “90%,” a reduction that “can hardly be considered ‘ordinary
course.’” 233
Second, Sellers disclosed in the APA that Personal Comfort “no longer
purchases services from” the Company “in the ordinary course of business.” 234 This
statement is alleged to be false because Sellers knew Personal Comfort’s decision to
terminate its business with Manna was anything but “ordinary course.” Instead, the
the price increase was false when made. Even if Sellers had knowledge of a price increase,
this does not support an inference they knew that their disclosures gave the impression that
the price increase had already occurred. It is not surprising, therefore, that the Complaint
makes no such allegation. The fraud claim based on allegedly manipulated “gross revenue
calculations to reflect a time period that did not fairly and accurately portray the financial
condition of Manna prior to Closing” also fails. Compl. ¶ 127f. Pilot fails to cite a single
case where the court found a plaintiff had pled a viable fraud claim based on revenue
calculations that were the subject of highly fluid negotiations between the parties. Pilot
could have negotiated for access to gross revenue calculations for the time periods in
question, but it surely cannot blame Sellers for failing to give it something that it did not
bargain for in the agreement. Finally, the fraud claim based upon Big Fig’s accounts
receivable likewise fails to state a claim. The Updated Disclosure Schedule plainly refutes
that the Sellers “had actual knowledge that the full amount of the receivable was
uncollectible.” Compl. ¶ 74; DOB, Ex. 2 at 28. The schedule indicates that Big Fig had in
fact paid down some of its accounts receivable and Pilot alleges nothing to suggest that Big
Fig had given any indication the payments would stop. DOB, Ex. 2 at 28.
232
Compl. ¶ 49.
233
Id. (emphasis in original).
234
Compl. ¶ 64 (emphasis omitted).
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abrupt departure “resulted from, among other things, ‘several failures that went
horribly wrong.’” 235
Third, Pilot alleges Sellers represented they had not received a Business
Reduction Notification from Big Fig even though Big Fig “advised Sellers prior to
Closing that it no longer intended to be a customer of Manna’s.” 236 According to
Pilot, Sellers affirmatively made “the false statement that Big Fig was Sellers’
twenty-fourth largest customer . . . despite having Knowledge that Big Fig was no
longer a customer at all.”237 While the APA makes no specific reference to “the size
of various customers at any time after December 31, 2017,” 238 Section 5.27 of the
APA does provide that “neither Seller nor Owner has received written notice or, to
the Knowledge of the Seller, any oral notice from any Material Customer that any
Material Customer intends or expects, after the Closing Date, to stop or materially
decrease” its business. 239 Pilot alleges Big Fig did precisely that, and that Sellers
knew it when they made the Customer Rep. 240
235
Compl. ¶ 65.
236
Compl. ¶ 72.
237
Compl. ¶ 127c.
238
DOB at 17–18.
239
APA § 5.27.
240
Compl. ¶ 127a–b. Sellers argue that “after the Closing Date” implies that if Big Fig
notifies Sellers of their intent to end their relationship pre-Closing, that information need
not be disclosed. APA § 5.27; DOB 30–32. Pilot responds that this is an “absurd” reading
61
*****
Pilot has pled reasonably conceivable fraud claims regarding the status of
Modus, Personal Comfort and Big Fig as Manna customers. Otherwise, its claims
of contractual fraud are not well-pled and must be dismissed.
Pilot’s Fraud Claims Are Not Bootstrapped Breach of Contract
Claims
As has become customary in cases involving fraud claims asserted alongside
breach of contract claims, Sellers argue Pilot’s fraud claims must be dismissed
because they are nothing more than “bootstrapped” breach of contract claims.241
Delaware courts will find that improper bootstrapping has occurred when the
plaintiff simply “add[s] the words ‘fraudulently induced’ or alleg[es] that the
contracting parties never intended to perform” as a means to plead fraud in cases
of Section 5.27. PAB at 24. While I do not favor the characterization, I agree that Sellers’
construction is unreasonable. Under Sellers’ reading, even if Sellers knew pre-Closing that
a major customer they had disclosed as in the fold had, in fact, left the fold, they would
have no obligation to alert Pilot to that fact since Pilot bargained only for an assurance that
a major customer would not leave after Closing. That is not what the contract says. Sellers
also contend that Pilot categorically cannot rest its allegations of fraud with respect to Big
Fig on mere “information and belief.” Compl. ¶ 72; DOB at 51. I reject that argument as
well. See H-M Wexford, 832 A.2d at 145–46 (allowing a fraud claim based upon
“information and belief” to survive dismissal when plaintiff well pled “the representations
[in a contract] were false when made” and “the defendants knew they were false”). Given
the facts pled regarding the circumstances of Big Fig’s departure, the Complaint places
Sellers on heightened notice of the bases for Pilot’s allegation that Sellers knew prior to
Closing that Big Fig would cease doing business with Manna. Compl. ¶¶ 69–71, 75, 143.
241
A key word search on the Westlaw™ Legal Research site, Delaware database, for
“bootstrap! /s fraud!” revealed 64 hits as of this writing.
62
where the parties are bound by contract. 242 The bootstrapping is deemed improper
because the plaintiff has simply tacked on conclusory allegations that the defendant
made the contract knowing it would not or could not deliver on its promises.243
As our law in this area has evolved, it is now clear that improper bootstrapping
does not occur: (1) “where a plaintiff has made particularized allegations that a seller
knew contractual representations were false or lied regarding the contractual
representation,”244 (2) “where damages for plaintiff's fraud claim may be different
from plaintiff's breach of contract claim,” 245 (3) when the conduct occurs prior to the
execution of the contract “and thus with the goal of inducing the plaintiff’s signature
and willingness to close on the transaction”246 or (4) when the breach of contract
242
Iotex Commc’ns, Inc. v. Defries, 1998 WL 914265, at *5 (Del. Ch. Dec. 21, 1998).
243
Swipe, 2020 WL 5015863, at *11; Smash Franchise P’rs, LLC v. Kanda Hldgs., Inc.,
2020 WL 4692287, at *16 (Del. Ch. Aug. 13, 2020) (“A bootstrapped fraud claim thus
takes the simple fact of nonperformance, adds a dollop of the counterparty’s subjective
intent not to perform, and claims fraud.”).
244
Swipe, 2020 WL 5015863, at *11; Anschutz Corp. v. Brown Robin Capital, LLC, 2020
WL 3096744, at *15 (Del. Ch. June 11, 2020) (recognizing that the bootstrapping rule does
not apply where the plaintiff/buyer . . . can plead “either: (1) that the Seller knew that the
Company’s contractual representations and warranties were false; (2) that the Seller itself
lied to Buyer about a contractual representation and warranty” or (3) because damages for
fraud would be distinct from damages for breach of contract (quoting Abry, 891 A.2d at
1064)).
245
Swipe, 2020 WL 5015863, at *11.
246
In re Bracket Hldg. Corp. Litig., 2017 WL 3283169, at *8–9 (Del. Super. Ct. July 31,
2017).
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claim is not well-pled such that there is no breach claim on which to “bootstrap” the
fraud claim. Pilot’s fraud claims fall squarely within several, if not all, of these non-
bootstrapping spaces.
At the outset, this clearly is not a case where Sellers are alleged to have entered
into the APA with no intent to perform. According to Pilot, Sellers had every intent
to sell Manna’s assets. They just hoped Pilot would not discover that the business
was not as valuable as Sellers represented it was. In this regard, Pilot has alleged
with particularity three instances in which Sellers knew that its contractual
representations with respect to its customers were false. Pilot alleges these
statements were made in the APA to induce Pilot into Closing; a separate and distinct
claim from any of its breach of contract claims. 247 And Pilot’s fraud damages are
arguably distinct from its breach damages. As the APA makes clear, Pilot’s breach
of contract damages are capped at the Escrow amount.248 Finally, no breach of
contract claim implicated by the fraud claims has survived dismissal. There is,
therefore, no claim to which the fraud claims can be bootstrapped.
247
Compl. ¶ 4.
248
APA § 9.1; Swipe, 2020 WL 5015863, at *12 (“The anti-bootstrapping rule also does
not apply here because Plaintiff might be entitled to greater damages through its fraud
claim than its breach of contract claim.”).
64
III. CONCLUSION
For the foregoing reasons, the Motion to Dismiss is GRANTED as to
Counts I, II, III, and VI, except as to the breach of contract claim regarding GE and
the “Excluded Liability.” The Motion to Dismiss Count IV and V is DENIED,
except to the extent the claims rest on alleged Forward Air price increases,
manipulation of gross revenue calculations, the Big Figs accounts receivable or
extra-contractual statements or omissions.
IT IS SO ORDERED.
65