Sparton Corp. v. Joseph F. O'Neill
12403-VCMR
| Del. Ch. | Aug 9, 2017Background
- Sparton acquired Hunter Technology under a Merger Agreement in April 2015; Joseph O’Neil was the Representative for Hunter’s stockholders and optionholders.
- The Agreement included Article V financial-statement representations (GAAP, based on company books) and indemnities by sellers for breaches, but limited recovery for amounts included in the final Allocable Amount (including working capital) except for fraud.
- Parties used a pre-closing working capital estimate (based on March 31, 2015 financials) with a $750,000 escrow cap as the exclusive remedy for shortfalls under Section 3.03, except for fraud.
- Sparton alleges O’Neil and certain other defendants inflated accounts receivable (by adding or later writing down invoices) to boost the working capital estimate, then caused write-downs before closing so Sparton overpaid by millions.
- Sparton also alleges O’Neil breached obligations to use commercially reasonable efforts to resolve items listed on a Specific Indemnity Schedule (e.g., SBOE tax claim, DTSC cleanup claim).
- Defendants moved to dismiss all claims except Sparton’s Expenses Claim; court considered contractual exclusivity, an anti-reliance clause, and Rule 9(b) pleading requirements.
Issues
| Issue | Sparton’s Argument | Defendant’s Argument | Held |
|---|---|---|---|
| Whether Specific Indemnity Claim states a breach of contract | O’Neil failed to use commercially reasonable efforts to resolve listed liabilities, leaving Sparton liable | Agreement makes indemnity-escrow the sole remedy and obligation terminated Oct. 14, 2016; Sparton has not shown breach or that procedures are excused | Dismissed — Sparton’s allegations are conclusory and do not plead breach or excuse from contractual procedures |
| Whether Working Capital Claim survives contractual exclusivity | Contractual limits are unenforceable because the merger was fraudulently induced by inflated financials | Agreement provides exclusive remedy (escrow payment) for shortfalls except for fraud; anti-reliance clause bars extra-contractual claims | Dismissed — claim depends on fraud, which is not adequately pleaded |
| Whether Sparton adequately pleaded fraud under Rule 9(b) | O’Neil and others knowingly misrepresented financials and manipulated invoices to induce Sparton to accept inflated working capital | Plaintiffs must plead particularized facts (who, what, when, how); anti-reliance bars reliance on extra-contractual statements; knowledge must be pled with facts | Dismissed — plaintiffs failed to identify specific misrepresentations, defendants’ individual acts, invoice details, timing, or facts supporting defendants’ knowledge |
| Whether anti-reliance and indemnity carve-outs allow recovery | Fraud exception to indemnity carve-out preserves claim if fraud is pleaded | Anti-reliance clause prevents reliance on extra-contractual statements; indemnity/allocable amount limitations apply absent pleaded fraud | Held for defendants — fraud not adequately alleged, so contractual limitations bar recovery (claims dismissed) |
Key Cases Cited
- In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162 (Del. 2006) (pleading standards and Rule 12(b)(6) framework).
- Savor, Inc. v. FMR Corp., 812 A.2d 894 (Del. 2002) (standard for accepting well-pleaded allegations at motion to dismiss).
- In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59 (Del. 1995) (limits on conclusory allegations in pleadings).
- Abry P’rs V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006) (Rule 9(b) particularity for fraud and discussion of anti-reliance clauses).