Greenstar IH Rep, LLC and Gary Segal v. Tutor Perini Corporation, CA 12885-VCS

Background

In 2011 Tutor Perini acquired GreenStar; the Merger Agreement provided five annual "Earn-Out Payments" to Interest Holders based on 25% of Pre-Tax Profit above $17.5M, subject to an $8M yearly cap and a mechanism to carry excess/shortfalls between years.
Tutor Perini prepared Pre-Tax Profit Reports for Years 1–4 (and paid $8M for Years 1–2), but did not pay Earn-Outs for Years 3–4 and did not prepare a Year 5 report; IH Rep (the interest-holder representative) seeks unpaid Earn-Outs (~$19.38M plus interest).
The Merger Agreement provides that a Pre-Tax Profit Report is binding on the parties if IH Rep approves it or fails to object in writing within 30 days; disputed reports go to a Neutral Accountant.
Tutor Perini alleges that Segal (former CEO of GreenStar subsidiary Five Star) provided false or inflated financial inputs that caused overstated Pre-Tax Profit calculations and thus inflated prior Earn-Outs; Tutor Perini asserted affirmative defenses and counterclaims for fraud and offset against Segal.
IH Rep moved for judgment on the pleadings on the Earn-Out Claims (Counts I–III); Segal moved to dismiss Tutor Perini’s fraud and offset counterclaims for failure to plead fraud with particularity.

Issues

Issue	IH Rep's Argument	Tutor Perini's Argument	Held
Whether undisputed Pre-Tax Profit Reports that were not objected to are binding and therefore give rise to Earn-Out payment obligations	The Merger Agmt. makes undisputed Pre-Tax Profit Reports binding; IH Rep did not object, so Earn-Outs are due	The underlying Pre-Tax Profit figures must be accurate (GAAP-compliant) and Tutor Perini can avoid payment if reports were based on inaccurate/false inputs	Held for IH Rep: the contract unambiguously makes undisputed Pre-Tax Profit Reports binding; Tutor Perini must pay Earn-Outs based on those reports
Whether a term should be implied (via the covenant of good faith) requiring Earn-Outs be paid only if Pre-Tax Profit calculations were actually accurate	IH Rep: no gap exists; parties provided an expedited dispute process and binding rule for undisputed reports	Tutor Perini: imply a term requiring accuracy; otherwise interpretation is absurd or unfair	Held for IH Rep: no gap to fill; implied covenant cannot be used to contradict express agreement
Whether Tutor Perini may assert offset/affirmative defenses based on Segal’s alleged misconduct to avoid paying IH Rep	IH Rep: Segal is a nonparty; his alleged misconduct cannot relieve Tutor Perini’s contractual obligations to IH Rep	Tutor Perini: may offset amounts paid/owed to account for harm from Segal’s alleged fraud	Held for IH Rep: Segal is a nonparty to the earn-out right; alleged wrongdoing by a nonparty does not excuse performance or permit offset against IH Rep’s contractual rights
Whether Tutor Perini pleaded fraud against Segal with sufficient particularity under Court of Chancery Rule 9(b)	N/A	Alleged that Segal caused Five Star to provide inaccurate assumptions on specific projects (Hudson Yards, Baccarat, Carnegie 57) that inflated Pre-Tax Profit	Held for Segal: fraud counterclaim dismissed for failure to plead specifics (who, when, what figures, how false, Segal’s role/knowledge); no leave to amend sought in opposition period

Key Cases Cited

Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993) (standards for judgment on the pleadings)
Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168 (Del. Ch. 2006) (fraud pleading particularity and limits on allegations of improper accounting)
Salamone v. Gorman, 106 A.3d 354 (Del. 2014) (contract interpretation principles: enforce parties’ clear words)
In re Viking Pump, Inc., 148 A.3d 633 (Del. 2016) (give effect to contract as whole; parties’ intent controls)
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126 (Del. Ch. 2009) (scope of implied covenant of good faith and fair dealing)