Julius v. Accurus Aerospace Corp.Julius v. Accurus Aerospace Corp.
- Reporters:
- ,
- Before:
- Zurn Vice Chancellor
Raymond J. DiCamillo, Kevin M. Gallagher, Sara C. Hunter, and Ryan D. Konstanzer, RICHARDS, LAYTON & FINGER P.A., Wilmington, Delaware; Thad J. Bracegirdle and Andrea Schoch Brooks, WILKS, LUKOFF & BRACEGIRDLE, LLC, Wilmington, Delaware; Adam H. Offenhartz, Peter M. Wade, David F. Crowley-Buck, and Lauren M. Kobrick, GIBSON, DUNN & CRUTCHER LLP, New York, New York, Attorneys for Defendants and Counterclaim-Plaintiffs Accurus Aerospace Corporation and Accurus Aerospace Wichita LLC.
ZURN, Vice Chancellor.
Boeing parts generated significant revenue for the company. At the time of contracting, all parties knew the sellers’ contracts for dozens of high-revenue Boeing parts expired at the end of 2016. This was a common occurrence in the industry, and it was typical for parts to be added to and removed from the sellers’ master contract with Boeing. On most occasions, Boeing would request a quote for expiring parts and afford the sellers the opportunity to re-bid on those parts.
Throughout the due diligence process and at the time of closing, both the buyers and sellers believed in good faith that Boeing would give the company the opportunity to re-bid on all parts expiring at the end of 2016, as Boeing had done for other expiring parts in the past. Aware of the value derived from producing these parts, the buyers elected to pursue the acquisition. The deal closed, and the parties placed a portion of the purchase price in an escrow fund, anticipating the possibility of litigation.
Though there was no guarantee the company would win the Boeing contracts, the buyers walked into a situation that was worse than they expected. Months after
Seeking redress for the lost bid opportunity, the buyer refused to consent to release the escrow funds. The sellers filed suit to obtain those funds. The buyers counterclaimed, alleging breaches of representations and warranties in the governing asset purchase agreement. The parties filed cross-motions for partial summary judgment on the issue of liability on all counts brought by all parties. For the reasons explained below, I find that the sellers are entitled to summary judgment on the buyers’ counterclaim and that the buyers are entitled to summary judgment on the sellers’ affirmative claims.
I. BACKGROUND
Plaintiff Bradley E. Julius brings five affirmative claims for relief, in his capacity as Seller Representative, on behalf of BKJ Holdings, Inc. (f/k/a ZTM, Inc.) (ZTM or the Company), the Bradley E. Julius Revocable Trust, the Kelly Julius Revocable Trust, Kelly E. Julius, and himself (collectively, Sellers). In response, Defendants Accurus Aerospace Corporation and Accurus Aerospace Wichita LLC (f/k/a ZTM Acquisitions, LLC, f/k/a ZTM Aerospace, LLC) (collectively,
A. ZTM Succeeds In The Aviation Parts Industry, And Boeing Becomes ZTM‘s Most Valuable Customer.
Julius founded ZTM, which he owned and controlled as Trustee of the Bradley E. Julius Revocable Trust, together with Kelly Julius as Trustee of the Kelly Julius Revocable Trust.2 ZTM operated out of Wichita, Kansas, one of the key aerospace supply regions in the United States.3 ZTM manufactured large, complex precision aerospace parts and assemblies for major commercial aviation and military customers.4 By 2015, ZTM had grown to a business of 126 employees with over $35 million in anticipated revenue.5 ZTM‘s primary customer was The Boeing Company (Boeing), which accounted for more than half of its sales.6 In 2014, revenue from Boeing-related entities comprised 66.3% of ZTM‘s sales.7 ZTM
The relationship between ZTM and its customers, such as Boeing, followed an industry-standard pattern. Airplane parts manufacturers typically enter into a Long Term Agreement (LTA), or master contract, with customers like Boeing.9 That LTA establishes the terms on which the supplier will manufacture parts for the customer.10 The LTA often contains separate sub-contracts for specifically identified parts, which may expire before the LTA does.11 ZTM and Boeing entered into a master contract that included sub-contracts for certain Boeing parts.12 Some of those contracts were set to expire at the end of 2016, before the master contract‘s expiration date.13
Suppliers can bid on sub-contracts to manufacture parts.14 When Boeing bids out parts, it typically sends a Request for Proposal (RFP) or Request for Quotation (RFQ) to the supplier.15 After receiving the RFQ or RFP from manufacturers like
The award letter identifies the specific parts Boeing has awarded to the manufacturer.17 Via amendment, those parts roll on or are added to the master contract.18 But if the manufacturer bid for parts under an expiring contract and Boeing decided to award those expiring parts to another company, then the expiring parts would roll off of the master contract at their expiration date.19 ZTM maintained master electronic files on its internal system that contained all RFQs, RFPs, award letters, and related documents.20
Manufacturing parts for Boeing through this process was the bread and butter of ZTM‘s business.21 Although winning a contract renewal bid with Boeing was not guaranteed, the opportunity to re-bid on existing contracts was critical to
For example, the Company proactively reached out to Boeing to secure such opportunities in 2015.25 In the summer and fall of 2015, ZTM received four RFQs offering the opportunity to bid to renew parts that were expiring at the end of 2015.26 ZTM received an award letter in December 2015 for those RFQs.27 Upon receiving that award letter, Jamie Woodson, ZTM‘s business manager, identified parts for which ZTM was not provided the opportunity to re-bid, and contacted Boeing for an explanation.28 The value of those parts was approximately $2 million in sales in 2015.29 Similarly, upon learning in 2015 that Boeing was offering the opportunity to re-bid on certain parts expiring in 2016 and 2017, Julius and Woodson contacted Boeing and took immediate steps to secure ZTM‘s ability to re-bid on those parts.30
Rowan Taylor founded Liberty Hall Capital Partners, L.P (Liberty) in 2011. Liberty is a private equity firm focused exclusively on investments in the aerospace industry.31 Liberty formed Accurus in November 2013,32 and continues to control Accurus through an affiliate.33 Accurus is a buyer of aerospace manufacturing companies. Liberty, either independently or through Accurus, acquired six aerospace companies prior to acquiring ZTM.34
In 2015, Julius decided to sell ZTM. He hired Koch Siedhoff Hand & Dunn, LLP (Koch) to assist with the sale.35 During the sale process, ZTM marketed itself as the second largest interior shop for Boeing Commercial.36 In August 2015, ZTM‘s broker, Ed Dunn, approached Accurus about a potential sale of ZTM‘s assets, property, and rights.37 Dunn sent an executive summary of the opportunity to Liberty.38
all information, in whatever form or format and however it may be embodied, concerning the Disclosing Party that are furnished, made available, or otherwise disclosed to a Receiving Party by or on behalf of the Disclosing Party, orally or in writing, and whether or not such Evaluation Materials in whole or in part are protectable trade secrets independent from this Agreement; and includes the business plans, historic financials, projected financials, PowerPoint presentations, software, contracts, agreements, understandings, notes, analyses, compilations, studies or other documents or materials whether prepared by any Party or others, which contain or reflect all or any portion of such materials.41
In the Confidentiality Agreement, Liberty and ZTM agreed, [T]he other Party does not make any representation or warranty as to the accuracy or completeness of such other Party‘s Evaluation Materials.42
After signing the Confidentiality Agreement, Accurus determined that the timing was not right for Accurus to make an acquisition.43 ZTM then struck a deal
Sometime before March 2, ZTM began producing documents for Liberty to review to evaluate the ZTM acquisition.47 As part of Buyers’ due diligence, ZTM prepared spreadsheets of projections for Buyers to review, which included information on the airplane part numbers under contract, part quantities, the contract expiration dates, pricing, gross margins, sales, projected sales, and other financial information.48 Woodson prepared the projections under the direction of Dunn and Arthur Hoopes of Koch.49
In an email dated March 2, Liberty requested ZTM‘s revised forecasts for 2016 through 2019.50 On March 4, on behalf of Sellers, Dunn sent several
On March 16, Dunn notified Liberty that ZTM discovered a formula error that affected the sales projections, which caused a swing of approximately $1.9 million in revenue.54 Sellers corrected the error and circulated revised projections on March 16.55 The parties did not circulate any additional revised forecasts.56 Liberty did not revise its offer to purchase ZTM.57
The projection spreadsheets included tabs specific to Boeing airplane models that listed each part number that ZTM was manufacturing.58 Within each tab, ZTM identified parts for which it would not have the opportunity to re-bid when their contracts expired.59 If a part was no longer available for re-bid, it was marked with
After due diligence began but before the parties executed the APA on June 3, ZTM communicated with Boeing about parts expiring at the end of 2016 and new parts, and provided Buyers with information regarding those communications.65 For example, on March 2, Woodson emailed Boeing with a list of expiring parts, stating: Below is the list of parts we were discussing yesterday that were on the RFQs that extended 2015 but are expiring in 2016 that we were told we lost. If there is an opportunity to re-bid these we would be very interested in fighting to keep this work
During this period, Buyers and their consultants also sought part information from ZTM70 and specifically requested that ZTM clarify the status of parts identified in the projections.71 For example, on February 19, Hoopes emailed Dunn regarding a write up of 2015 Follow on and 2016 expiring parts, and stated that ZTM has a large number of Boeing parts that are due to expire at the end of 2016 [and] ZTM
As Liberty‘s primary negotiator with responsibility for reviewing the APA, Taylor knew prior to executing the APA that certain Boeing parts were expiring at the end of 2016, and that there was no guarantee that Accurus would win a bid to continue manufacturing expiring parts.74 ZTM informed Accurus that they believed the Company would have the opportunity to bid on the expiring parts.75 As Julius testified: At the time of the sale . . . everybody thought the opportunity to quote [the expiring parts] would come.76 However, ZTM never promised those parts to Accurus or Liberty.77
C. Accurus Purchases ZTM Pursuant To The APA.
Accurus purchased ZTM‘s assets pursuant to an Asset Purchase Agreement executed on June 3, 2016 (the APA).78 The deal closed on July 29 (the Closing). The APA contains an integration clause that states: The Transaction Documents constitute the entire agreement and understanding of the Parties and supersede all
The APA also contains a number of representations and warranties. Section 3.25(d) states: Seller has disclosed to Buyer any material disputes, complaints, or issues with respect to any customers or suppliers and the manner in which Seller proposes to resolve such disputes, complaints or issues.81 Section 3.25(a) states:
Since the Balance Sheet Date, no customer, distributor, or supplier of the Business has terminated or materially reduced or altered its business relationship with Seller or Seller Subsidiary or materially changed the terms on which it does business with either, or threatened that it intends to cancel, terminate, or otherwise materially reduce or alter its business relationship with either.82
Since the Balance Sheet Date, the Seller Group has conducted its operations in the ordinary and usual course of business consistent with past practice, and there has not been any: (a) event, occurrence, or development that has had, or reasonably could be expected to have, individually or in the aggregate, a Material Adverse Effect.83
The APA defines the Balance Sheet Date as December 31, 2015. Finally, Section 3.28 states:
No representation or warranty made by Seller in this Agreement and no statement contained in the Disclosure Schedule to this Agreement or any certificate or other document furnished or to be furnished to Buyer pursuant to this Agreement, including the other Transaction Documents, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading.84
The APA does not include an explicit representation or warranty as to the accuracy of the projections Sellers shared with Defendants prior to entering into the APA. The parties did not attach ZTM‘s sales projections to the APA. The APA does not reference the sales projections, nor does it incorporate them by reference. Nor does the APA guarantee that Buyers would be able to renew expiring parts, or even that Boeing would allow Buyers to bid on such parts.
Under the terms of the APA, Buyers deposited funds with an escrow agent for the exclusive purpose of satisfying Accurus in the event Accurus suffered indemnifiable losses (the Indemnity Escrow Amount).87 Pursuant to the APA, the parties entered into a separate Escrow Agreement on July 28, 2016.88 Bank of America, National Association Global Custody and Agency Services, as escrow agent, agreed to hold the $3 million escrow amount in an escrow fund.89 The Escrow Agreement echoes the APA‘s procedures and standards.90
After the Closing, Boeing sent the Company an award letter, completing a bidding cycle that began with an RFQ Boeing issued before the acquisition.91 Buyers compared the parts in the award letter with ZTM‘s projections provided during due diligence.92 Buyers discovered 53 parts included on ZTM‘s projections under contracts expiring at the end of 2016, and identified as available for rebid, were not on the award letter (the Lost Parts).93 The revenue from the Lost Parts represented approximately 10% of ZTM‘s total projected sales from 2017 through 2019: $3.96 million in 2017, and $4.62 million in 2018 and 2019.94
Boeing had awarded the Lost Parts to other suppliers before December 15, 2015, and as early as 2013 and 2014.95 Sellers were not aware that Boeing had awarded the Lost Parts to other suppliers prior to the acquisition; Buyers do not
E. Litigation Ensues.
Dissatisfied with the Company‘s inability to re-bid on the Lost Parts, Buyers decided to take action. On April 5, 2017, Accurus asserted a Direct Claim against Sellers.100 In the Direct Claim, Accurus claimed losses from Sellers’ alleged breaches of the APA that exceeded the amount of funds remaining in the Indemnity
Julius then sought relief in this Court. Julius filed his initial Complaint on September 1,102 and an Amended Complaint on September 26.103 In Counts I through IV of the Amended Complaint, Sellers seek a declaratory judgment that Accurus breached the Escrow Agreement and the APA, as well as specific performance of the Escrow Agreement or, in the alternative, a mandatory injunction for breach of the APA.104 In Count V, Sellers allege Buyers breached the implied covenant of good faith and fair dealing by withholding the escrowed funds and asserting invalid indemnification claims.105 On October 11, Buyers filed a counterclaim against Sellers, alleging they overpaid for ZTM’s assets.106 Buyers’ counterclaim alleges a single count of breach of the APA, and is specifically limited to “the breach of express representations in the APA.”107
II. ANALYSIS
On their cross-motions for partial summary judgment, the parties ask me to determine the issue of liability on all counts asserted by Sellers and Buyers.110 Summary judgment is appropriate where there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law.111
Where the parties have filed cross motions for summary judgment and have not presented argument to the Court that there is an issue of fact material to the disposition of either motion, the Court shall deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motions.112
In cases involving questions of contract interpretation, like this one, courts will grant summary judgment in two scenarios: (1) when the contract is unambiguous, or (2) when the extrinsic evidence fails to create a triable issue of material fact.113 In fact,
This matter is suited for resolution on the record presented at the summary judgment stage. The parties agree that there are no genuine disputes of material fact and that the APA and Escrow Agreement are clear and unambiguous.115 Consequently, I resolve this issue on narrow grounds, looking only to the language of the agreements between the parties.
The parties have struggled over whether the projections are part of the APA and whether Buyers disclaimed reliance on the projections by way of the APA’s integration clause.116 Sellers have consistently argued that the projections have no bearing on the outcome of this matter. Buyers’ position has been more nuanced and has evolved throughout the duration of the dispute.117 Buyers eventually conceded that the allegedly inaccurate sales projections are not part of the APA, asserting they
I conclude that Sellers did not breach the terms of the APA and therefore are entitled to partial summary judgment on Buyers’ Counterclaim. I also conclude that Buyers did not breach the Escrow Agreement or implied covenant of good faith and fair dealing and are entitled to partial summary judgment on Counts I through V of Sellers’ Amended Complaint.
According to Buyers, Sellers breached Sections 3.25(a), 3.25(d), 3.28, and 3.7(a) of the APA by failing to notify Buyers that (1) Boeing had awarded the Lost Parts to other suppliers in 2013 and 2014 and (2) therefore, Accurus did not have the opportunity to bid on the Lost Parts. Buyers contend that, pursuant to the APA, they “were purchasing, among other assets, [] the opportunity to bid to renew the Lost Parts”119 and that “the opportunity to re-bid on [the Lost Parts] was addressed within the representations and warranties” in the APA.120
Because this case involves questions of contract interpretation, I look to the language of the APA to determine whether summary judgment is appropriate.
The principles governing contract interpretation are well settled. Contracts must be construed as a whole, to give effect to the intentions of the parties. Where the contract language is clear and unambiguous, the parties’ intent is ascertained by giving the language its ordinary and usual meaning. Courts consider extrinsic evidence to interpret the agreement only if there is an ambiguity in the contract.121
“When interpreting a contract, a court must give effect to all of the terms of the instrument and read it in a way that, if possible, reconciles all of its provisions.”122 “[A] court will prefer an interpretation that harmonizes the provisions in a contract
Contracting parties allocate risk through representations and warranties.125 Delaware courts “respect the ability of sophisticated businesses . . . to make their own judgments about the risk they should bear and the due diligence they undertake, recognizing that such parties are able to price factors such as limits on liability.”126 Consistent with Delaware’s pro-contractarian policy, “a party may not come to court to enforce a contractual right that it did not obtain for itself at the negotiating table.”127 Delaware law presumes parties are bound by the language of the agreement they negotiated, especially when the parties are sophisticated entities that have engaged in arms-length negotiations.128
1. Sellers Did Not Breach Section 3.25(d) of the APA Because There Were No “Disputes,” “Complaints,” or “Issues” With Respect To Boeing And The Lost Parts.
Buyers argue that the fact that “ZTM no longer had the opportunity to bid to renew the Lost Parts” was a “material issue” that Sellers were obligated to disclose under Section 3.25(d).130 Section 3.25(d) states: “Seller has disclosed to Buyer any material disputes, complaints, or issues with respect to any customers or suppliers and the manner in which Seller proposes to resolve such disputes, complaints or issues.”131 The parties disagree as to whether the lost opportunity to bid is a material “issue” with Boeing. Because the APA is unambiguous, I discern the parties’
Dictionary definitions assist in discerning the usual and ordinary meaning of “issue.”133 Black’s Law Dictionary defines “issue” as “a point in dispute between two or more parties.”134 Merriam-Webster defines “issue” as: “a vital or unsettled matter;” a “concern” or “problem;” “a matter that is in dispute between two or more parties;” and “the point at which an unsettled matter is ready for a decision.”135
Reading the APA as a whole bolsters my interpretation of “issues.” The other terms in Section 3.25(d), namely “disputes” and “complaints,” reinforce the conclusion that the parties intended to adopt the plain and ordinary meaning of “issues.”137 Black’s Law Dictionary defines “dispute” as a “conflict or
Buyers eschew the plain meaning of “issues” and argue for a broader reading. Buyers contend I should not interpret “issues” in a way that harmonizes it with “disputes” and “complaints,” arguing that “defining an agreed-upon contractual term as a redundancy violates the established canon of contract interpretation that a contract should not be read to render terms superfluous.”141 “While redundancy is
Prior to the sale of the Company, Sellers identified and actively responded to a lost opportunity to bid on 44 parts valued at approximately $2 million in sales, which is less than the $3.3 million in sales in 2015 for the Lost Parts.146 The 2015 lost opportunity became an “issue” between Boeing and ZTM. ZTM actively sought the opportunity to bid on parts, and Boeing responded with RFQs indicating that ZTM lost the opportunity to bid on certain parts. Shortly thereafter, ZTM took
The facts surrounding the Lost Parts are distinct. No “issue” arose when Boeing awarded the Lost Parts to other suppliers and ZTM lost the opportunity to bid on those parts. Neither Boeing nor ZTM raised any problem or made any inquiry about the Lost Parts when Boeing awarded those parts to other suppliers in 2013 and 2014. Buyers offer no evidence that Boeing alerted ZTM that the Lost Parts were awarded to other suppliers in 2013 or 2014, or that such an alert became a “matter [] in dispute”148 between the parties. ZTM was not aware of a loss that became a “vital or unsettled matter”149 in ZTM’s relationship with Boeing. In 2013 and 2014, ZTM had no occasion to respond to Boeing’s decision to award the Lost Parts to other suppliers, raise for Boeing’s consideration the question of whether ZTM would be able to re-bid on the Lost Parts, or actively pursue the opportunity to re-bid on the Lost Parts. ZTM did not know that it had lost that opportunity.
The fact that Boeing awarded the Lost Parts to other suppliers is not, by itself, evidence of a dispute, complaint, or issue between ZTM and Boeing. ZTM and
Rather, after Boeing awarded the Lost Parts to other suppliers, ZTM and Boeing continued their business relationship without any dispute until Accurus voiced its concerns after Closing. In a June 2016 letter to Boeing, Jim Gibson, then-President of Accurus, recognized ZTM’s “good standing with The Boeing Company.”150 One month before the parties signed the APA, Boeing sent ZTM three award letters awarding ZTM additional parts to manufacture.151 After the Closing, Boeing renewed its contracts for “most of the parts set to expire in 2016 for which [Accurus] had the opportunity to bid.”152
When the parties signed the APA, Boeing and ZTM had a good working relationship and had no disputes, issues, or complaints between each other, under the plain meaning of these terms. Thus, Sellers did not breach Section 3.25(d) by failing to disclose Boeing’s decisions to move the Lost Parts to another supplier.
Buyers also allege that Sellers breached Sections 3.25(a) and 3.7(a) of the APA. In particular, Buyers argue that by awarding the Lost Parts to other suppliers, Boeing materially changed or reduced its business relationship with ZTM under Section 3.25(a), and that Boeing’s choice to award the Lost Parts to other suppliers and the Company’s consequent inability to bid on those parts constituted a Material Adverse Effect under Section 3.7(a). Buyers have failed to demonstrate that Sellers breached the APA under the plain meaning of both Sections.
Both Sections contain dispositive temporal cutoffs. Section 3.25(a) states:
Since [December 31, 2015], no customer, distributor, or supplier of the Business has terminated or materially reduced or altered its business relationship with Seller or Seller Subsidiary or materially changed the terms on which it does business with either, or threatened that it intends to cancel, terminate, or otherwise materially reduce or alter its business relationship with either.153
Section 3.7(a) states:
Since [December 31, 2015], the Seller Group has conducted its operations in the ordinary and usual course of business consistent with past practice, and there has not been any: (a) event, occurrence, or development that has had, or reasonably could be expected to have, individually or in the aggregate, a Material Adverse Effect.154
Buyers contend the Balance Sheet Date has no bearing on my analysis. Buyers contend the lost opportunity to bid is tethered to the dates Boeing could have sent ZTM RFQs for the Lost Parts, December 31, 2015 through June 3, 2016, rather than the earlier date on which Boeing decided not to give ZTM the opportunity to bid.155 With respect to Section 3.25(a), Buyers argue “the relevant period is the time of contracting in June 3, 2016, the date of signing the APA.”156 Buyers rely on Taylor’s testimony that “the fundamental asset[] purchased was the right to be able to renew and compete to renew parts when they expired;”157 on the fact that “[a]fter
Similarly, under Section 3.7(a), Buyers argue that “the loss of the opportunity to bid to renew the Lost Parts constituted a Material Adverse Effect after the Balance Sheet Date”161 “because after December 31, 2015, they should have received RFQs for the Lost Parts, or understood that the lack of an RFQ signaled that the parts were awarded to other manufacturers.”162 According to Buyers, ZTM’s failure to receive RFQs for the Lost Parts or follow up with Boeing to determine their status (as ZTM did in 2015 for other lost parts) rendered the lost opportunity to bid a “live issue after
I assume for purposes of this analysis that losing the opportunity to bid on the Lost Parts amounted to a material reduction in ZTM’s relationship with Boeing, or a Material Adverse Effect.165 Even so, I conclude ZTM did not breach Sections 3.25(a) and 3.7(a) because the triggering event occurred before the Balance Sheet Date. Boeing conclusively eliminated ZTM’s opportunity to bid on the Lost Parts when it awarded the Lost Parts to other suppliers in 2013 and 2014. Boeing could not have sent ZTM an RFQ for the Lost Parts before December 31, 2015, because Boeing had already awarded those parts to other suppliers. Buyers have not demonstrated that Boeing took any adverse action related to the Lost Parts after December 31, 2015, and before either the execution of the APA on June 3, 2016 or the Closing on July 28, 2016.
Under Section 3.25(a), there was no material reduction in the Company’s business since December 31, 2015 because Boeing awarded the Lost Parts to other
3. Sellers Did Not Breach Section 3.28 Of The APA Because Sellers’ Representations And Warranties Did Not Contain Any Untrue Or Misleading Statement Of Material Fact With Respect To The Lost Parts.
Buyers argue that the alleged breaches of Section 3.25(a), 3.25(d), and 3.7(a) are also breaches of Section 3.28. Section 3.28 is a catch-all provision that states:
No representation or warranty made by Seller in this Agreement and no statement contained in the Disclosure Schedule to this Agreement or any certificate or other document furnished or to be furnished to Buyer pursuant to this Agreement, including the other Transaction Documents, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading.167
Sellers made these representations and warranties truthfully at the time of contracting. As discussed at length above, the lost opportunity to bid on the Lost Parts was not an “issue” that required disclosure under Section 3.25. Likewise, that loss was not a material reduction in ZTM’s business or Material Adverse Effect that occurred since the Balance Sheet Date. Because Sellers did not breach Sections 3.25(a), 3.25(d), or 3.7(a), Buyers cannot prevail under Section 3.28.
Those predicate sections failed to shift to Sellers any risk that Accurus would not have the opportunity to bid on the Lost Parts. Sections 3.25(a), 3.25(d), 3.28, and 3.7(a) do not contain any representations or warranties that required Sellers to notify Buyers that Boeing had awarded the Lost Parts to other suppliers in 2013 or 2014, or that guaranteed Buyers would have the opportunity to bid on the Lost Parts
Buyers recognize that representations and warranties “serve an important risk allocation function.”169 Sellers informed Buyers that the Lost Parts were expiring in 2016. Sellers also informed Buyers of Sellers’ sincere, yet unsubstantiated, belief that “the opportunity to quote [the Lost Parts] would come”170 and that “those parts [the Lost Parts] were available to be bid on.”171 Yet, Buyers failed to protect the uncertain future of the Lost Parts in the APA. If preserving opportunities to bid on potentially lost parts was so valuable to Buyers, they could have bargained for explicit protections against lost opportunities. They failed to do so. Taylor, who led the APA negotiations for Buyers, confirmed he never requested that the APA include any protection against the possibility that the Lost Parts would not be renewed after calendar year 2016.172 By failing to negotiate for contractual protections related to the Lost Parts, Buyers bore the full risk of loss.
Buyers contend they are entitled to indemnification under Section 8.3(a) of the APA. Buyers are correct that Sellers are required to indemnify Buyers for breaches representations and warranties under the plain language of Section 8.3(a).173 Because Sellers did not breach the APA’s representations and warranties, Buyers are not entitled to indemnification under Section 8.3(a).
B. Buyers Are Entitled To Partial Summary Judgment On Counts I Through V Of Sellers’ Amended Complaint.
Buyers are entitled to partial summary judgment on Sellers’ affirmative claims for relief. Under the APA and the Escrow Agreement, escrowed funds not subject to a pending or unresolved claim for indemnification were required to be disbursed to Sellers on the first business day following May 31, 2017.174 Sellers contend that Buyers have improperly retained the escrowed funds for indemnification from Sellers’ alleged breaches of the APA.175
Sellers contend Buyers proceeded on a meritless breach theory, and assert a trio of claims for relief. First, Sellers contend Buyers breached both the APA and Escrow Agreement by wrongfully refusing to release the escrow funds. Second,
As explained above, Sellers indeed prevailed over Buyers’ breach theory. Accordingly, pursuant to the Escrow Agreement and the APA, Buyers must release the escrowed funds. But Buyers’ refusal to do so while their breach of contract claim was pending was not itself a breach of those agreements. Sellers have also failed to identify any contractual gap to invoke the implied covenant, and have failed to demonstrate that Buyers acted in bad faith. Because Buyers’ claims were made in good faith and were not frivolous, Sellers are not entitled to attorney’s fees.
1. Buyers Are Entitled To Summary Judgment On Counts I Through IV Of Sellers’ Amended Complaint Because Buyers Did Not Breach The APA Or Escrow Agreement.
In Counts I through IV, Sellers allege Buyers breached the APA and Escrow Agreement by seeking indemnification in accordance with those agreements’ terms, and seek a mandatory injunction to remedy that breach or specific performance of the Escrow Agreement. Sellers do not dispute that Buyers followed the agreed-upon procedures.176 Rather, Sellers allege Buyers breached the APA by following those
Following negotiated and agreed-upon indemnification procedures is not evidence of a breach of contract.177 The agreements permitted Buyers to withhold escrow amounts after asserting a Direct Claim. Even though Buyers’ that claim was ultimately unsuccessful, Buyers did not breach the APA and Escrow Agreement by pursuing that claim in accordance with bargained-for terms. Buyers did not breach the APA or the Escrow Agreement.
Sellers contend Buyers breached the implied covenant of good faith and fair dealing because Buyers’ Counterclaim is baseless, because Buyers breached the Escrow Agreement, and because Buyers do not have an indemnification claim.178 Specifically, Sellers assert Buyers “demonstrated a lack of good faith and fair dealing by intentionally delaying the release of the Indemnity Escrow Fund and asserting improper and invalid indemnification claims against the Indemnity Escrow Fund.”179 The implied covenant does not reach Sellers’ theory. Further, Sellers have failed to demonstrate that Buyers acted in bad faith by following agreed-upon procedures in the APA and Escrow Agreement.
“The implied covenant of good faith and fair dealing inheres in every contract.”180 The implied covenant “involves a cautious enterprise, inferring contractual terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated.”181
We will only imply contract terms when the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected. When conducting this analysis, we must assess the parties’ reasonable expectations at the time of contracting and 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.182
A claim for breach of the implied covenant cannot be based “on conduct authorized by the terms of the agreement.”183 Determining whether the implied covenant applies turns on the language of the contract itself.184
Here, no “gap” exists in either the APA or Escrow Agreement that requires the cautious enterprise of inferring terms beyond those agreements’ clear language. The parties designed the APA and Escrow Agreement for just this situation. Those contracts contemplated that Buyers would potentially bring a breach of contract claim against Sellers, and that Buyers would subsequently seek indemnification for bringing those claims. The APA expressly permitted Buyers to bring a Direct Claim against Sellers, and the Escrow Agreement provided bargained-for procedures for
Buyers did not act arbitrarily or unreasonably in exercising those rights. Both Taylor, the founder and Managing Partner of Liberty, and Gibson, the former CEO of Accurus, testified that they believed ZTM breached their contractual representations.185 This testimony and other portions of the record indicate that Buyers asserted their claim against Sellers in good faith.186 And Sellers do not dispute that Buyers followed the contracts’ agreed-upon procedures. Sellers have failed to establish that Buyers acted with the bad faith required to demonstrate a breach of the implied covenant, where Buyers adhered to applicable contractual terms. Sellers cannot now obtain judicial relief from the terms of those agreements, even if they now believe they have gotten a “bad deal.”187 Buyers are entitled to summary judgment on Sellers’ implied covenant claim.
Sellers are not entitled to attorney’s fees. “Under the American Rule and Delaware law, litigants are normally responsible for paying their own litigation costs.”188 The Court recognizes an exception to this rule where a party has acted in bad faith.
The party invoking the bad faith exception bears the stringent evidentiary burden of producing clear evidence of bad-faith conduct by the opposing party. The standard is arduous: situations in which a party acted vexatiously, wantonly, or for oppressive reasons.189
“There is no single standard of bad faith that justifies an award of attorneys’ fees—whether a party’s conduct warrants fee shifting under the bad faith exception is a fact-intensive inquiry.”190 “Delaware courts have previously awarded attorneys’ fees where (for example) parties have unnecessarily prolonged or delayed litigation, falsified records or knowingly asserted frivolous claims.”191 “Ultimately, the bad faith exception is applied in extraordinary circumstances primarily to deter abusive litigation and protect the integrity of the judicial process.”192
Buyers believed Sellers breached the APA and disagreed with Sellers’ interpretation of the applicable sections. Sellers have offered no evidence that Buyers relied on their preferred interpretations of the APA in bad faith. Indeed, Buyers’ claims required the Court to interpret the APA. While I have concluded that
III. CONCLUSION
For the forgoing reasons, Sellers’ partial motion for summary judgment on the issue of liability is DENIED as to Counts I through V of Sellers’ Verified First Amended Complaint, and GRANTED as to Buyers’ Counterclaim. Buyers’ partial motion for summary judgment is GRANTED as to Counts I through V of Sellers’ Verified First Amended Complaint, and DENIED as to Buyers’ Counterclaim. The parties shall confer and submit an implementing order consistent with this opinion, and a scheduling order to address any remaining issues.
Notes
D.I. 78 at 21 (citations omitted).Buyers are not alleging that Sellers breached the APA because the forecasts provided by Sellers during due diligence turned out to be inaccurate. Buyers are not alleging that Sellers breached the APA because Buyers relied on these forecasts to value the Company. Buyers contend that Sellers breached the APA because the representations and warranties Sellers made in the APA concerning ZTM’s relationship with Boeing and the financial condition of ZTM were false. Although the forecasts are relevant to identifying, explaining, and valuing the breaches, and can be viewed as a symptom or expression of the underlying facts giving rise to the breaches, they are not the source of the breaches.
Buyers contend the term I must construe is not simply “issue,” but “material issue.” D.I. 87 at 14, 16–17. Buyers assert that this phrase carries its own, special meaning, and cite Black’s Law Dictionary. Id. at 16–17. Buyers are correct that “material issue” is its own term of art, but incorrectly assume that its specialized definition informs the contractual interpretation issue before me. Black’s Law Dictionary defines “material issue” as “an issue that must be decided in order to resolve a controversy” and offers an example: “the existence of a material issue of disputed fact precludes summary judgment.” Material Issue, Black’s Law Dictionary (11th ed. 2019). As contrast, Black’s Law Dictionary defines “immaterial issue” as “an issue not necessary to decide the point of law” and refers readers to the definition of “material issue” for further context. Immaterial Issue, Black’s Law Dictionary (11th ed. 2019). Buyers invoke a meaning of “material issue” that is a term of art in the litigation context. Buyers make no argument and offer no evidence that the parties intended import that specific term of art into the APA. Therefore, I focus on the meaning of “issue” alone, recognizing that it is modified by the term “material,” which has its own importance.
correctly point out that “the doctrine of noscitur a sociis only applies where a contractual term is ambiguous.” Zimmerman, 2012 WL 707238, at *7. Here, the parties agree that the APA is unambiguous and that I can resolve the pending motions by interpreting the terms according to their plain and ordinary meaning. I do so here, and I do not need to use the definitions of “disputes” or “complaints” to interpret the meaning of “issues.” Rather, reading the APA as a whole, I note those consistent definitions to confirm that the parties intended “issues” to be interpreted in accord with its plain meaning: a problem, concern, or matter in dispute between two parties.
the implied covenant as “the doctrine by which Delaware law cautiously supplies terms to fill gaps in the express provisions of a specific agreement“).