Slip Opinion
Del. Ch.2019Background:
- ZTM, an aerospace parts manufacturer in Wichita, derived ~66–70% of revenue from Boeing; many Boeing subcontracts in ZTM’s master contract were set to expire at end of 2016.
- Sellers provided Buyers (Accurus/Liberty) due‑diligence materials including sales projections that listed part‑numbers and flagged some expiring parts as unavailable for re‑bid; other parts were presented as available for re‑bid.
- Accurus purchased ZTM under an Asset Purchase Agreement (APA) executed June 3, 2016, with a $3 million indemnity escrow governed by a separate Escrow Agreement; the APA contained reps/warranties (Sections 3.25(a), 3.25(d), 3.7(a), 3.28) and an integration clause; projections were not incorporated into the APA.
- After closing, Buyers discovered 53 projected parts (the “Lost Parts”) had been awarded to other suppliers in 2013–2014, eliminating any re‑bid opportunity; Sellers did not know of those awards pre‑closing.
- Buyers asserted a Direct Claim and withheld the escrow; Sellers sued to force the escrow release and asserted Buyers breached the APA and the implied covenant; Buyers counterclaimed for breach of the APA and sought indemnity. The court decided cross motions for partial summary judgment on liability.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Sellers breached APA reps/warranties (§§3.25(a), 3.25(d), 3.7(a), 3.28) by not disclosing that Boeing had awarded the Lost Parts to others | Julius: Sellers should have disclosed the lost opportunity as a "material issue" and as a post‑balance‑sheet adverse change | Accurus: The APA’s reps/warranties do not cover events before the Balance Sheet Date; no affirmative promise to guarantee rebid rights; projections not part of the APA | No breach. Court: "issue" requires an actual dispute/complaint (none existed); §3.25(a)/§3.7(a) are limited to events after Dec. 31, 2015 and the Lost Parts were lost earlier; sellers entitled to summary judgment on counterclaim. |
| Whether Buyers are entitled to indemnification under §8.3(a) for the Lost Parts losses | Julius: Buyers seek indemnity because Sellers’ reps/warranties were false/misleading | Accurus: Indemnity only for breaches of covered reps/warranties; no breach occurred | Not entitled. Because no covered rep/warranty was breached, §8.3(a) indemnity does not apply. |
| Whether Buyers breached the APA/Escrow Agreement by withholding the escrow and asserting the Direct Claim | Julius: Withholding escrow was wrongful and breached the agreements | Accurus: APA/Escrow expressly permit asserting a Direct Claim and withholding escrow pending resolution | No breach. Buyers followed contractual indemnification procedures in good faith; Buyers entitled to summary judgment on Sellers’ Counts I–IV. |
| Whether Buyers breached the implied covenant or acted in bad faith (and whether Sellers are entitled to attorneys’ fees) | Julius: Buyers acted unreasonably/bad faith by delaying escrow release and asserting a baseless claim; seek fees | Accurus: Claims were made in good faith based on belief reps were false; procedures were followed | No breach of implied covenant and no bad faith. Court: implied covenant cannot contradict express contract rights; Buyers’ actions were authorized and not frivolous; attorneys’ fees denied. |
Key Cases Cited
- Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032 (Del. Ch. 2006) (explains allocation of risk via reps and warranties between sophisticated parties)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (describes narrow role of implied covenant and limits on rewriting contracts)
- Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228 (Del. 1997) (contract terms control parties’ intent when unambiguous)
- Northwest Nat’l Ins. Co. v. Esmark, Inc., 672 A.2d 41 (Del. 1996) (courts look to plain language for contract interpretation)
- Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872 (Del. Ch. 2009) (implied covenant applied cautiously to fill contract gaps)
- H‑M Wexford LLC v. Encorp, Inc., 832 A.2d 129 (Del. Ch. 2003) (representations limited to post‑balance‑sheet events must be tied to occurrences after that date)
- Allen v. El Paso Pipeline GP, L.L.C., 113 A.3d 167 (Del. Ch. 2014) (implied covenant cannot be used to contradict express contractual rights)