Prairie Capital III, L.P. v. Double E Holding Corp.
132 A.3d 35
| Del. Ch. | 2015Background
- Sale of Double E Parent LLC: Prairie Capital (sellers) sold Double E to Double E Holding (Incline) on April 4, 2012; closing same day; $27 million purchase price and $500,000 escrow for indemnities.
- Prairie Capital partners (Killackey, McNally) served as directors and oversaw the sale process; CEO Fortin and CFO Vancura led management and deal communications.
- Incline alleged that management and Prairie Capital falsified shipment/invoice records in March 2012 (and earlier) to meet a $3.2M March sales target, inducing Incline to close.
- Buyer/Incline filed Claim Notice June 28, 2013 (two days before escrow distribution), then intervened in Sellers’ Representative’s suit to compel escrow release and asserted counterclaims for fraud, aiding-and-abetting, conspiracy, and contractual indemnification under SPA Sections 3.6(a), 3.12, 3.15, and 3.22.
- Defendants moved to dismiss under Court of Chancery Rule 12(b)(6) and Rule 9(b); court treated well-pled facts as true for pleading-stage review.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether buyer may plead fraud based on extra-contractual statements/omissions outside SPA | Buyer: relied on oral/written due diligence statements and financials outside SPA; those were fraudulent | Defendants: SPA contains exclusive representations/integration clauses that preclude reliance on extra-contractual statements | Dismissed: fraud claims premised on extra-contractual statements/omissions barred by clear anti-reliance language in SPA (Exclusive Representations + Integration clauses) |
| Whether contractual representations in SPA (Sections 3.6(a), 3.15, 3.22, 3.12) were actionable fraud bases | Buyer: SPA reps were false (accounts receivable, no-change, financials, compliance) because of fabricated shipments/invoices pre- and during March 2012 | Defendants: reps were made only by the Company and thus individuals/private equity cannot be liable; some reps limited to earlier dates | Partially denied: fraud claims may proceed based on Sections 3.15 and 3.22 and Section 3.6(a) as to the unaudited (Jan 31, 2012) financials; Section 3.6(a) re: audited (2010) financials and Section 3.12 (compliance with law) dismissed as pleaded |
| Whether non-company actors (management and Prairie Capital) can be liable for fraudulent contractual representations made by the Company | Buyer: Fortin, Vancura, and Prairie partners knowingly participated and intended their statements to be communicated to induce the deal | Defendants: only Company made the reps; individuals/PE cannot be liable for company statements | Denied: at pleading stage human agents and PE directors plausibly held accountable where alleged to have made/caused/approved the false statements and intended they be communicated to buyer |
| Adequacy/scope of Claim Notice for contractual indemnity (Count IV) | Buyer: June 28, 2013 notice described financial misstatements and breaches sufficiently to preserve SPA indemnity claims | Sellers’ Rep: notice insufficient for pre-March 2012 breaches and challenges some section-specific notice requirements | Mixed: notice adequate for indemnity claims tied to March 2012 breaches of Sections 3.6 and 3.22 and for 3.15 as described; inadequate to preserve indemnity claims for pre-March 2012 periods (those remain available only under fraud theory) |
Key Cases Cited
- Abry P'rs V, L.P. v. F&W Acq. LLC, 891 A.2d 1032 (Del. Ch.) (integration and anti-reliance clauses enforceable; limits extra-contractual fraud claims)
- Kronenberg v. Katz, 872 A.2d 568 (Del. Ch.) (contract must contain sufficiently clear anti-reliance language to bar extra-contractual fraud claims)
- Savor, Inc. v. FMR Corp., 812 A.2d 894 (Del. 2002) (pleading standard; accept well-pled allegations and reasonable inferences on motion to dismiss)
- Stephenson v. Capano Dev., Inc., 462 A.2d 1069 (Del. 1983) (elements of common-law fraud)
- RAA Mgmt., LLC v. Savage Sports Hldgs., Inc., 45 A.3d 107 (Del. 2012) (Delaware enforces clauses identifying the specific information a party relied upon)