RICHARD BRODY, individuаlly and as representative of Selling Shareholders v. DCIM SOLUTIONS, LLC, and IGEM COMMUNICATIONS HOLDING, INC.
C.A. No. 2018-0507-LWW
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
June 30, 2025
Date Submitted: March 27, 2025
WILL, Vice Chancellor
Gary W. Lipkin & Devan A. McCarrie, SAUL EWING LLP, Wilmington, Delaware; Counsel for Plaintiff/Counterclaim-Defendant Richard Brody
Paul D. Brown, Kelly E. Rose & Mariska Suparman, CHIPMAN, BROWN, CICERO & COLE, LLP, Wilmington, Delaware; Counsel for Defendants/Counterclaim-Plaintiffs DCiM Solutions, LLC and iGEM Communications, Inc.
WILL, Vice Chancellor
After trial, I reach a mixed result. The buyers failed to prove fraud and can recover only the single tax liability they paid out of pocket. The seller showed that the buyers breached the parties’ sale agreements by thwarting the post-closing audit process and is entitled to the balance of the note. Judgment is for the buyers in part, and for the seller in part.
I. BACKGROUND
The following facts were stipulated to by the parties or proven by a preponderance of the evidence at trial.1
Richard Brody is a successful businessperson who, after practicing as an attorney, ran his family business of operating vending machines in New York City and northern New Jersey.2 In the mid-aughts, Brody invested capital in a technology businеss called IIS Group, LLC operated by an acquaintance, Anthony Jett.3
Brody became IIS‘s 90% owner and served as CEO and chair of its board.4 Jett, who held the remaining 10% of IIS‘s equity, was the company‘s President and handled its day-to-day operations.5 Jett‘s duties extended to financial matters, including the payment of operating expenses.6 Jett reported to Brody, but Brody exercised indirect oversight and relied on financial and accounting reports prepared by Jett or IIS‘s CFO to gain visibility into the business.7
The initial concept for IIS was to provide virtual desktop services.8 Over the years, Brody and Jett worked to expand the business through sales and acquisitions, including in the data center industry.9 One of the companies that Brody and Jett
Brody had the same role at Velocity that he held at IIS. He owned 90% of Velocity‘s equity and was (either formally or informally) the CEO.11 He reviewed Velocity‘s financial statements and oversaw its strategic direction.12 Jett, who held the other 10% of Velocity‘s equity, ran the day-to-day business.13 Employees reported to Jett, and Jett reported only to Brody.14
B. The Companies’ Taxes
As a telecommunications provider, Velocity was required by the Federal Communications Commission (FCC) to pay Federal Universal Serviсe Fund (FUSF) fees.15 Congress established the FUSF in the late 1990s to promote universal service in the telecommunications industry.16 The administration of the FUSF is handled by the Universal Service Administrative Company (USAC).17 The FCC allows carriers
Unlike Velocity, IIS was not subject to FUSF fees. It faced different tax complexities. Because IIS sold its data center equipment and services throughout the country, it was responsible for registering to do business in multiple states and remitting state sales taxes.21
C. The Sales to DCiM and iGEM
As IIS and Velocity grew, Brody became reluctant to continue infusing capital.22 In early 2016, Brody told Jett that he wanted to sell both IIS and Velocity (together, the “Sellers“).23 Jett identified Ernest Cunningham as a prospective buyer.24
In July 2016, Cunningham sent Jett an initial letter of intent for DCiM to purchase IIS and iGEM to purchase Velocity.29 The LOI contemplated a combined $10 million purchase price.30 It also confirmed that the parties would work toward a definitive agreement with “standard and customary” representations and warranties.31
Due diligence began in August 2016, with principals of both the Sellers and Buyers participating.32 The Buyers engaged in several days of on-site due diligence
iGEM‘s CFO James Tipton was tasked with assessing Velocity‘s then-current financial condition.36 About a month before closing, Tipton told Cunningham that he wanted to speak to the “[third] party who ha[d] been managing [Velocity‘s] taxes and completing [Form] 499s” but was “waiting to get USAC invoices before scheduling the call.”37 Tipton also reviewed Velocity‘s balance sheet as of August 31, 2016, which listed outstanding USAC invoices.38 Four days before closing, Tipton emailed Jett and one of the Sellers’ financial controllers, Stephen Hoffman, with “questions” on the August 2016 balance sheet—specifically, “why [Velocity was not] paying [its] USAC invoices . . . .”39 Jett responded that Velocity was “still waiting [on] credits from USAC,” which would obviate the need for
Michael McClain, the CEO of DCiM, ran diligence on IIS.41 Before closing, McClain discovered that IIS had sales tax liabilities in nine states.42 IIS had only disclosed to the Buyers sales tax liabilities owed to four states (those in which IIS had offices), totaling $185,000.43 The largest undisclosed liability McClain found was $110,000 due to the State of Illinois.44 McClain did not ask IIS about the discrepancies before closing.45
D. The MIPA and SPA
On September 30, 2016, DCiM executed a Membership Interest Purchase Agreement (the “MIPA“) to acquire all of IIS‘s membership interests.46 Brody and Jett signed the MIPA as IIS‘s “Selling Members,” and Brody signed as both IIS‘s
The MIPA and SPA include identical representations and warranties by the Sellers for the benefit of the Buyers in Article VII.50 Several are relevant here. Section 4.6(b) confirms that the Sellers’ financial statements were “present[ed] fairly and accurately, in all material respects.”51 And Section 4.6(c) states that the Sellers have “no Liabilities other than [] obligations under contracts and commitments incurred in the ordinary course of business” or those “expressly incurred pursuant to [the Purchase] Agreement[s].”52
The Purchase Agreements also included tax-related representations. In Section 4.8(b)(i), the Sellers stated that they had “timely filed all required U.S. federal, state, local and non-U.S. [tax] returns” and “timely paid all material Taxes.”53 In Section 4.8(b)(iii), the Sellers represented that “[n]o deficiency for Taxes ha[d] been threatened, claimed, assessed or proposed . . . .”54 And in Section 4.8(b)(viii), the Sellers confirmed that “[t]here [we]re (and immediately following the Closing Date there w[ould] be) no Liens on the assets of the [Seller].”55 Section 6.5(e) provided a remedy by which Brody and Jett would indemnify the Buyers for any “loss, claim, liability, expense, penalty, or other damage attributable to” taxes during the pre-closing period.56
E. The Note
Both transactions closed on September 30, 2016.57 The total purchase price was $10 million. DCiM paid $3 million for IIS—$1 million in cash and a $2 million promissory note from DCiM payable to Brody (the “Note“) that was guaranteed by
At closing, the Sellers received the cash consideration, but $2 million remained due on the Note.60 The Note was subject to post-closing adjustments based on revenue and working capital calculations.61 Under the Note, DCiM was obligated to make ten payments of $200,000 each (plus accrued interest) to Brody starting on March 31, 2017, with the last payment due on June 30, 2019 “at which time th[e] Note [would] mature . . . .”62 The Buyers assumed that the payments would be funded out of the acquired businesses’ cash flows.63
The Purchase Agreements outlined a post-closing adjustment process, primarily for the parties to reach consensus on the closing working capital figures.64 If the Sellers’ businesses were underperforming relative to negotiated revenue and EBITDA targets, the Buyers would be entitled to a set-off on the Note.65 If the parties could not resolve their dispute on post-closing working capital, the Purchase Agreements required that it be put before a designated outside auditor.66
On March 31, 2017, the Buyers gave the Sellers closing working capital, revenue run rate, and adjusted EBITDA calculations, as required by the Purchase Agreements.67 The Buyers later made several indemnification demands.68 DCiM sought indemnification for state taxes that were collected but not remitted by IIS;69 iGEM sought indemnification for outstanding FUSF fees owed by Velocity.70 The indemnification claims exceeded the balance of the Note.71
The parties engaged the Auditor on August 2, 2017.76 Its charge included determining the Sellers’ final closing working capital, revenue run rate, and annualized EBITDA.77 The Auditor completed its review of Velocity‘s calculations on November 28 and determined that Velocity‘s closing working capital adjustment was $124,544 and that its annualized EBITDA was $249,407.78 An EBITDA figure
After reviewing the report, Tipton emailed the Auditor to raise perceived inaccuracies.80 Tipton believed that if the Auditor‘s errors were corrected, it would “flip[] [EBITDA] below target” in the Buyers’ favor.81 The Auditor issued a revised calculation two days later, adjusting the final annualized EBITDA to $209,346.82 The revised amount still exceeded the contractual threshold.
The Auditor declined to make further changes, stating that its report was “final once issued and binding to the parties.”83 But after Tipton threatened to bring a malpractice claim, the Auditor said that it would consider more arguments from iGEM if the parties signed revised engagement letters.84 Brody agreed; DCiM and iGEM refused.85
No further work was completed by the Auditor, including the report on IIS.86
The parties went on to engage in years of protracted litigation.
First, the Buyers attempted to engage in binding arbitration.87 Before it got underway, in July 2018, Brody filed this suit against DCiM and iGEM.88 The parties agreed to abandon arbitration in lieu of litigation and to defer the first two payments on the Note while the suit was pending.89 DCiM and iGEM subsequently brought counterclaims against Brody and Jett.
Brody filed the operative amended complaint on November 19, 2021, advancing various claims under the Purchase Agreements against the Buyers.90 The Buyers responded with counterclaims (some of which remain pending) and a third-party claim against Jett that was subsequently resolved.91 Brody, in turn, filed a
Brody later sought partial summary judgment on his claim that the Buyers failed to place disputed funds in escrow. I granted summary judgment in his favor based on the plain terms of the Purchase Agreements.93 Settlement talks ensued but failed.94 The Buyers then abandoned their counterclaims against Brody for breaches of representations and warranties in the Purchase Agreements so that they were not obligated to escrow any funds.
At the time of trial, Brody‘s sole remaining claim is for breach of the Purchase Agreements and declaratory judgments about the failed audit process and payment of the Note.95 The Buyers’ only remaining counterclaims are against Brody for fraud regarding the Sellers’ financial statements and tax-related representatiоns and for breach of a tax indemnification provision in the Purchase Agreements.96 Each party raises certain affirmative defenses.
II. ANALYSIS
Brody and the Buyers spar over liability for two main issues: (1) the Sellers’ outstanding tax liabilities at closing; and (2) the failed audit process.
The Buyers focus on the first issue, claiming that Brody made fraudulent statements in the Purchase Agreements and then the Sellers failed to uphold their tax indemnification obligations. They seek monetary damages to cover the Sellers’ outstanding tax liabilities.
Brody focuses on the second issue, claiming that the Buyers breached the Purchase Agreements (or, alternatively, the implied covenant of good faith and fair dealing) by stalling and failing to complete the audit process. He asserts that the Buyers must pay him the full balance of the Note with interest.
A. The Buyers’ Counterclaims and Brody‘s Affirmative Defenses
The Buyers’ claims against Brody centеr on his representations about the magnitude of FUSF fees owed by Velocity and outstanding state sales taxes owed by IIS. I begin by addressing their fraud claim on these issues before turning to their breach of warranty claim. I conclude by addressing Brody‘s equitable estoppel affirmative defense. The proponent of the claim or affirmative defense has the burden to prove it by a preponderance of the evidence.101
1. Fraud
A party advancing a common law fraud claim must prove five elements:
(1) a false representation made by the defendant; (2) the defendant‘s knowledge or belief that the representation was false, or [made with] reckless indifference to the truth; (3) an intent to induce the plaintiff to act or to refrain from acting; (4) the plaintiff‘s action or inaction taken in justifiable reliance upon
Each element must be proven by a preponderance of the evidence.103 The fraud must be “material” and “concern an essential part of the transaction.”104
The Buyers meet their burden on the first element, but they fail on the second. My analysis of their fraud claim ends there.
a. False Representations
Under Delaware law, “fraud can occur [] in one of three ways: (1) an overt misrepresentation; (2) silencе in the face of a duty to speak; or (3) active concealment of material facts.”105 “Fraud need not take the form of an overt misrepresentation; it also may occur through concealment of material facts, or by silence when there is a duty to speak.”106 “[A]lthough a statement or assertion may be facially true, it may constitute an actionable misrepresentation if it causes a false
The Buyers point to several statements in the Purchase Agreements that they contend are actionable misrepresentations. They include:
- except as disclosed in the Sellers’ financial statements, the Sellers had “no Liabilities other than . . . obligations under contracts and commitments incurred in the ordinary course of business, which, individually or in the aggregate, are not material to the financial condition or operating results of the [Sellers]“;108
- the Sellers had “timely filed all required U.S. federal, state, local and non-U.S. returns, estimates, information statements and reports (the ‘Returns‘)” and “timely paid all material Taxes required to be paid by or with respect to it, whether or not shown on such Returns“;109
- the Sellers did not have “any liabilities for unpaid Taxes which had not been accrued or reserved on its Current Balance Sheet, whether asserted or unasserted, contingent or otherwise“;110
- “[n]o deficiency for Taxes has been threatened, claimed, assessed or proposed, in each case in writing, against the [Sellers]“;111
the Sellers had “no Knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Lien on the assets of the [Sellers].”112
These statements are false. The Sellers had tax liabilities that were material in the aggregate but undisclosed in the financial documents provided to the Buyers.113 The Sellers had neither timely filed all tax returns nor paid all material taxes.114 Existing tax liabilities risked liens on the Sellers’ assets.115
b. Knowledge or Reckless Indifference
“After showing that a false representation was made, a plaintiff must show that the defendant had knowledge of the falsity of the representation or made the representation with reckless indifference to the truth.”116 The record here lacks any credible evidence that Brody knew his representations about the Sellers’ financial status and outstanding tax liabilities were false when made. The Buyers thus focus
Recklessness is “conscious disregard for the truth” departing from the ordinary standard of care.117 It involves “a conscious indifference to the decision‘s foreseeable results,”118 but not “[a] deliberate state of mind.”119 A plaintiff may prove recklessness through circumstantial evidence, such as the timing of a misrepresentation.120 Recklessness can also be inferred from misstatements about matters “so simple, basic, and pervasive in nature, and so great in magnitude, that they should have been obvious to a defendant.”121 Still, “a mere allegation that a
The record lacks any evidence of a scheme to collect either sales taxes or FUSF fees without remittance or payment—much less that Brody was aware of any such scheme. Nor is there any evidence that state taxing authorities, the U.S. Treasury Department, the Sellers’ employees, or the Sellers’ customers alerted Brody to unpaid tax obligations. Instead, Brody credibly testified that he lacked firsthand knowledge of the sales and use taxes due at the time the Purchase Agreements were signed. Contrary to the Buyers’ contentions, there is also no indication that Brody directed Jett to “massag[e] the numbers” before closing.123
The Buyers contend that Brody was reckless for four reasons. First, Brody confirmed that he signed the Purchase Agreements, аffirmed the representations and warranties, and stood behind them.124 Second, Brody understood the gravity of making representations and warranties in the Purchase Agreements and that the Buyers would be relying on them.125 Third, despite these understandings, Brody took no affirmative steps to confirm that these representations and warranties were
Taken together, these facts are insufficient to prove recklessness. As CEO, Brody was not expected to personally review the Sellers’ tax bills and compare them to the Sellers’ financial statements to make a representation and warranty on those issues. Brody instead relied in good faith on Jett, who ran the business; and on professional controllers and accounting personnel, who were charged with ensuring the accuracy and completeness of the Sellers’ financial records.128 Brody‘s reliance on his management team and accounting professionals is what one would expect of a CEO and part owner of a company. His reliance cuts against a finding of fraudulent intent.129
Here, Brody was involved in the diligence process and occasionally oversaw high-level strategy for managing payables.134 But there were no “warning signs.”135 Unlike in NetApp, no facts suggest that Brody was involved in the Sellers’ tax practices or that he had reason to suspect the Sellers had outstanding tax liabilities.
Because the Buyers have not proven that Brody recklessly made false statements in the Purchase Agreements, judgment is in Brody‘s favor on the Buyers’ fraud counterclaim.
2. Breach of Tax Indemnification
The Buyers originally sought indemnification under Article VII of the Purchase Agreements for breaches of representations and warrantiеs, in the alternative to their fraud counterclaim.139 They voluntarily dismissed those breach of contract counterclaims after they were ordered to escrow the disputed funds as a
To prevail on a breach of contract claim, a party must prove the existence of a contractual obligation, the breach of that obligation, and resulting damages.141
“When interpreting a contract, the role of a court is to effectuate the parties’ intent. In doing so, [the court is] constrained by a combination of the parties’ words and the plain meaning of those words where no special meaning is intended.”142 Of “paramount importance” is what “a reasonable person in the position of the parties would have thought the language of a contract means.”143 The court will “give priority to the parties’ intentions as reflected in the four corners of the agreement” by construing the agreement as a whole and giving effect to all included provisions.144
The Buyers contend that Brody breached a duty in Section 6.5(e) of the Purchase Agreements to indemnify, defend, and hold them harmless for unpaid pre-closing tax liabilities.145 Section 6.5(e) states:
The [Selling Shareholders or Selling Members] will, severally and not jointly, indemnify and defend the [Sellers], the [Buyers], and each Affiliate of the [Buyers], and hold them harmless from and against any loss, claim, liability, expense, penalty or other damage attributable to [] all Taxes (or the non-payment thereof) of each [Seller] for all Pre-Closing Tax Periods . . . .146
The Buyers believe that this provision imposes on Brody a broad duty to satisfy the Sellers’ pre-closing tax liabilities, including IIS‘s unpaid sales taxes and Velocity‘s unpaid FUSF fees. Section 6.5(e) was breached, they argue, because Brody has refused to satisfy this duty.
Brody does not dispute that he refused to indemnify the Buyers for the Sellers’ pre-closing tax liabilities. Instead, he insists that the Buyers are only entitled to seek indemnification for claims that tax authorities have formally pursued. He points to Section 6.5(d) of the Purchase Agreements, which outlines a process to handle “notice of a claim by any Taxing authority that, if successful, could reasonably be expected to result in an indemnity payment . . . .”147 Applying that narrow limit to
Yet nothing in the Purchase Agreements suggests that the process to respond to tax “claims” in Section 6.5(d) limits the tax indemnification remedy in Section 6.5(e). Nor does Section 6.5(e) state that a “claim” is necessary to trigger the Sellers’ duty to “indemnify,” “defend,” and “hold . . . harmless.”149 To limit Section 6.5(e)‘s reach to “claims” would render the other terms in the phrase “any loss, claim, liability, expense, penalty, or other damage” superfluous.150
For example, Section 6.5(e) applies to a “liability,” which does not require a formal claim. Black‘s Law Dictionary defines “liability” as “[t]he quality, state, or condition of being legally obligated or accountable” or “[a] financial or pecuniary obligation in a specified amount.”151 A tax liability exists when taxes are owed to the government.152 Brody‘s narrow reading is thus unsupported by the terms of Section 6.5(e).
Brody next argues that Velocity‘s past-due FUSF fees are not taxes for purposes of Section 6.5(e).153 Once again, this argument is inconsistent with the terms of the Purchase Agreements. Section 6.5(e) uses the term “Taxes,” which is defined in the Purchase Agreements as:
any and all U.S. federal, state, local and non-US. taxes, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, social security (or similar), unemployment, disability, excise and property taxes, assessments and other governmental charges, duties, impositions and liabilities in the nature оf a tax, together with all interest, penalties and additions imposed with respect to such amounts . . . .”154
This unambiguous definition encompasses FUSF fees, which constitute “government charges . . . in the nature of a tax” along with “penalties.”155
b. Damages
Although Section 6.5(e) is broad enough to encompass tax liabilities and outstanding FUSF fees, the Buyers cannot presently recover damages for much of what they seek. “[I]ndemnity is an obligation by one party to make another whole for a loss that the other party has incurred.”156 The point of indemnification is “repaying a loss to make the indemnitee whole.”157 The “paradigmatic example” of an indemnity obligation is to reimburse an indemnitee who has paid a third party “a sum certain.”158
There is only one sum certain here: the $49,289.52 in taxes, interest, and penalties that DCiM paid to the State of Washington.159 Had the Buyers paid other tax obligations that the Sellers owed pre-closing, Section 6.5(e) would have provided them recourse. They chose not to pay the tax bills for the companies they had
The Buyers insist they are entitled to more because Section 6.5(e) imposes a duty to “defend” and “hold harmless.”161 Neither term supports what the Buyers seek, which is еssentially advancement of tax liabilities.
Delaware courts decline to give separate meanings to “indemnify” and “hold harmless,” viewing them as “an example of the law‘s hoary tradition of deploying joint terms . . . where technically one term would suffice.”162 “‘[H]old harmless’ does not mean advancement,” because when one is indemnified for “all out of pocket expenses,” she is “left free from harm” and “made whole.”163 As to “defend,” it is understood in this context to create a right to advancement of litigation expenses.164
Even if Section 6.5(e) contemplated the sort of tax advancement right that the Buyers envision (it does not), they have failed to prove their damages with any “reasonable certainty.”165 To show their losses, the Buyers rely on their proffered expert, Joseph W. Thompson.166 Thompson prepared calculations designed to estimate the tax burdens that could be borne by the Buyers. But he lacked the documentary invoices necessary to determine the principal, interest, and penalties assessed by the relevant tax authorities.167 Without that data, he could only speculate аbout the sums past due.168
The documentary evidence is also problematic. Three weeks before trial—and three years after the deadline for document production—the Buyers produced documents purportedly showing Velocity‘s FUSF-related liabilities.173 Four sets of documents contain account statements sent by the U.S. Treasury to Velocity for overdue FUSF charges.174 The statements are all dated September 30, 2024 and list
The documents provide few answers but raise additional questions. The U.S. Treasury account statements concern “different debts” and cannot be tied to specific USAC invoices.177 Some of the statements use “agency debt numbers” and case numbers that follow no consistent format, making it impossible to determine when certain debts originated or whether they concern an actual obligation of Velocity.178 Without invoice-level documentation, I have no reliable way to reconcile or verify what Velocity owed pre-closing.179 Neither party‘s expert had occasion to review these documents or incorporate them into their reports.
At trial, Thompson ballparked that, based on the $408,079.23 figure from Kevin in April 2024, Velocity was responsible for between $200,000 and $300,000 in FUSF liabilities at the time of closing—inclusive of interest, penalties, and
Regarding IIS, Thompson identified $520,420 of principal owed for sales and use taxes.182 He explained that the sums were identified through a “bottom-up approach” by looking at IIS‘s general ledger and certain invoices.183 He estimated another $150,000 in fees and additional costs but acknowledged that he lacked the documentation to confirm that figure.184
Even if there were responsible evidentiary bases from which to estimate IIS and Velocity‘s tax and FUSF liabilities before closing (there is not), the record suggests that an award of all outstanding tax liabilities is unwarranted. The Buyers have suffered no actual loss—save the $49,289.52 paid to Washington.185 Critically, the record suggests that the other liabilities will nevеr be paid. The U.S. Treasury statements concern an account held by Velocity that iGEM no longer uses.186 And
Indemnification is meant to make the indemnitee whole, not to provide a windfall to the indemnitee or serve as a penalty to the indemnitor.188
3. Brody‘s Affirmative Defenses
Brody asserts that the Buyers are entitled to no recovery for two reasons. First, he accuses the Buyers of material breaches of the audit process outlined in the Purchase Agreements.189 I address that argument below in the context of Brody‘s affirmative breach of contract claim.190 Second, he argues that the doctrine of unclean hands applies—also due to the Buyers’ abandonment of the contractual audit process. Both defenses fail.
The doctrine of unclean hands “protect[s] the public and the court against misuse by one who, because of his conduct, has forfeited his right to have the court consider his claims, regardless of their merit.”191 “[I]n order for the doctrine to apply
Brody cites no direct relationship between his refusal to provide tax indemnification and the Buyers’ failure to complete the contractual audit process. He argues only that the Buyers “should not be permitted to reject certain portions of the SPA and MIPA, while wielding others.”194 This link is too tenuous. I decline to apply the doctrine to bar the Buyers from recovering for the limited damages they proved.195
B. Brody‘s Claims and the Buyers’ Affirmative Defense
Brody seeks a declaratory judgment that the Buyers failed to cooperate in the audit process mandated by the Purchase Agreements. He asserts that the Purchase Agreements were breached when the Buyers interfered with the audit and refused to sign a new engagement letter with the Auditor.196 In the alternative, Brody claims
Brody prevails on his breach of contract claim because the Buyers breached their obligations regarding the audit process. They also are in breach of their obligation to pay Brody the principal and balance due on the Note. The Buyers’ equitable estoppel defense gives them no recourse.
1. Breach of the Audit Process199
Under the Purchase Agreements, if the parties could not resolve a disagreement over the closing working capital calculation, the Auditor would “resolve any remaining disagreements.”200 The parties were to “use their respective commercially reasonable efforts to cause the Auditor to determine as promptly as practicable” any working capital adjustments.201 They were also required to
The parties agreed to treat the Auditor‘s determination of closing working capital as “final, conclusive, and binding.”203
The Auditor‘s November 28, 2017 “final report” for Velocity was improper because its “decision for each disputed amount” was not “within the range of values ascribed to each item” by the parties, as the Purchase Agreements required.204 When Tipton raised questions, the Auditor explained that, after adjusting certain disputed items within the limits of values the parties ascribed, “[t]he financial outcome to both parties remain[ed] the same . . . .”205 Tipton then sent more information to the Auditor that he believed was needed to make the report “accurate.”206
The Auditor expressed its willingness to consider other arguments from iGEM, so long as the parties signed revised engagement letters with indemnification
The Buyers insisted that the Auditor commit to certain “definitions, language and processes” upfront, which the Auditor viewed as a “full scale re[-]write of the agreement” that risked imposing “undue influence” on it.215
McClain suggested to Cunningham and Tipton that the Buyers “push to terminate [the Auditor] and move forward against [the] Seller[s].”216 McClain and Tipton considered letting the Auditor “keep [its] fees” and “hold [a] liability claim over their head” to maintain “leverage” against Brody.217 Tipton agreed, writing that “nothing would make [him] happier than to hand deliver the professional liability claim to [the Auditor]. ”218 By March 2018, the audit process had ceased.
These actions by the principals of the Buyers breached Section 2.5(c) of the Purchase Agreements.219 First, iGEM refused to treat the Auditor‘s report for
The Buyers contend that the audit process “failed” when new tax liabilities were discovered because the Purchase Agreements did not address later-discovered discrepancies.220 They argue that the audit process provided only a narrow mechanism, unrelated to the fraud and contractual breaches they insist were suffered.221 But the Buyers could have pursued their fraud and indemnification claims irrespective of the audit‘s outcome. The Purchase Agreements mandated that they complete the audit process through cooperation and commercially reasonable efforts.222 They failed to uphold that promise.
2. Failure to Pay the Note
Brody also claims that the Buyers forfeited any right to obtain an adjustment on the Note due to their refusal to cooperate in the audit process.223 He seeks a declaration that the Note is due and payable to him immediately.224
The original value of the Note was $2 million, which formed part of thе total purchase price for the Sellers’ businesses.225 The Note was promised by DCiM for
paid in up to ten (10) equal payments of principal in the amount of Two Hundred Thousand Dollars ($200,000) each, plus accrued but unpaid interest, commencing on March 31, 2017 and continuing thereafter on the last day of each succeeding calendar quarter thereafter with the final installment to be made on June 30, 2019, at which time this Note shall mature and all unpaid principal and interest hereunder shall be due and payable in full.227
Schedule 1.1(ii) to the SPA outlined the payment schedule for the Note:228
| Subordinated Note | ||
|---|---|---|
| Payment Date | Payment* | Principal Balance After Payment* |
| 10/1/16 | $2,000,000 | |
| 3/31/17 | $(200,000) | $1,800,000 |
| 6/30/17 | $(200,000) | $1,600,000 |
| 9/30/17 | $(200,000) | $1,400,000 |
| 12/31/17 | $(200,000) | $1,200,000 |
| 3/31/18 | $(200,000) | $1,000,000 |
| 6/30/18 | $(200,000) | $800,000 |
| 9/30/18 | $(200,000) | $600,000 |
| 12/31/18 | $(200,000) | $400,000 |
| 3/31/19 | $(200,000) | $200,000 |
| 6/30/19 | $(200,000) | $0.00 |
| * plus interest | ||
The Purchase Agreements and Note‘s terms contemplated certain setoffs and adjustments to the Note balance. If the Sellers were entitled to indemnification under Article VII of the Purchase Agreements, the Buyers would “have a right of off-set against the [] Note for any amounts payable to them.”231 The Note was also subject to “adjustments required pursuant to Section 2.5 of the [] Purchase Agreements” upon the completion of the audit process.232 DCiM would be in default if it failed to
Neither DCiM (the borrower) nor iGEM (the guarantor) has ever made a payment to Brody under the Note. The two issues that arguably gave them latitude to withhold payment—post-closing working capital adjustments by the Auditor and indemnification claims under Article VII of the Purchase Agreements—fell away. The potential for a reduction under Section 2.5(c) of the Purchase Agreements ended when the Buyers refused to cooperate in completing the audit process. And the possibility of a set-off for indemnification was eliminated when, in August 2023, the Buyers voluntarily dismissed their claims for breaches of representations and warranties in Article VII rather than put the disputed funds in escrow.234
Brody never sent a formal written notice of the Buyers’ failure to pay, which would have triggered an “Event of Default” under the Note.235 But the pre-trial
Brody‘s opening post-trial brief also informed the Buyers that DCiM had failed to make good on its debt, which served as written notice to iGEM of DCiM‘s non-payment under the Guaranty Agreement.240 The Buyers lacked grounds to withhold that portion of the purchase price at that point. By failing to pay Brody the outstanding principal and interest on the Note, the Sellers breached obligations under the Purchase Agreements, Note, and Guaranty Agreement.
3.
The Buyers argue that “[b]ecause Brody engaged in fraudulent or similar conduct that caused [the Buyers] to overpay for the [c]ompanies by millions of dollars prior to the entry of the Purchase Agreements, he is equitably estopped from recovering on the Note.”241 To succeed on this affirmative defense,242 the Buyers must prove:
(1) conduct by the party to be estopped that amounts to a false representation, concealment of material facts, or that is calculated to convey an impression different from, and inconsistent with that which the party subsequently attempts to assert, (2) knowledge, actual or constructive, of the real facts and the other party‘s lack of knowledge and the means of discovering the truth, (3) the intention or expectation that the conduct shall be acted upon by, or influenсe, the other party and good faith reliance by the other, and (4) action or forbearance by the other party amounting to a change of status to his detriment.243
“[T]he standards for establishing the elements of equitable estoppel are stringent; the doctrine is applied cautiously and only to prevent manifest injustice.”244
III. REMEDIES
On the one hand, the Note is owed to Brody and remains unpaid. On the other hand, the Buyers purchased companies with greater tax liabilities than they anticipated. A balanced resolution of these competing interests would seem equitable. Yet the trial record on the remaining claims leaves no measure to offset the Note, making the remedy one of the more challenging aspects of this case.
Because the audit process was never completed, I cannot say with any certainty that no working capital adjustments to the Note are technically called for.
Because the Sellers also had undisclosed tax liabilities upon closing, it would be ideal to offset the Note by the balance of any proven breaches of representations and warranties. But the Buyers foreclosed that path as well when chose to drop those claims to avoid placing the disputed funds in escrow. That left them with fraud claims that they failed to prove at trial.
As to Brody, payments on the Note were to begin in 2017. Over eight years later, he has yet to see a penny of the $2 million balance. He proffered a rebuttal expert report calculating that with accrued interest, he is entitled to $3,422,094.48.248 I cannot accept that sum for two reasons. First, these calculations reflect affirmative—not rebuttal—expert work.249 Second, until service of Brody‘s pre-trial
This leads to a somewhat unsatisfying result, with neither party obtaining what they feel they are entitled to.
The Buyers proved tax indemnification damages of only $49,289.52—the amount paid to the State of Washington for IIS‘s past due fees. DCiM is entitled to that sum plus prejudgment interest at the legal rate beginning on the date of its payment to the State of Washington.250 The Buyers never paid the other outstanding liabilities they claim, leaving further indemnification under Section 6.5(e) of the Purchase Agreements unavailable.
The Note is due and payable to Brody, but only with (1) interest at the rate set by the Note accruing as of August 2013 when the Buyers dropped their Article VII claims, and (2) the default interest rate of 5% above the floor beginning on October 19, 2024 (i.e., 15 days after written notice of default).251
IV. CONCLUSION
Judgment on Brody‘s Counts I and III is entered in his favor, as set forth above. Judgment on the Buyers’ Counts I, III, and IV is also in Brody‘s favor. Judgment on the Buyers’ Count II is entered in their favor, as set forth above.
The parties are to confer on a form of order to implement this decision. That includes discussing the amounts of applicable prejudgment interest for the Buyers’ tax indemnificatiоn damages and the interest owed to Brody under the Note.
Notes
In 2019, the Buyers and Jett entered into settlement agreements that contained a series of statements accusing Brody of misconduct. See JX 408 § 1.13; JX 409 § 1.13. Jett was later deposed in this case, while he was no longer under the Buyers’ employ. He recanted certain accusations against Brody in the settlement agreements. See Jett Day 1 Dep. 134-35, 155-56; Jett Day 2 Dep. 335-36, 341-42, 390-91. But Jett‘s dеposition testimony was also internally inconsistent. See Jett Day 2 Dep. 335-36, 349. Given these contradictions, the statements in the settlement agreement and Jett‘s testimony are given little weight.
In July 2024, the United States Court of Appeals for the Fifth Circuit ruled that the FCC‘s FUSF scheme violates the nondelegation doctrine by assigning its taxing power to private entities. See Consumers’ Rsch. v. Fed. Commc‘ns Comm‘n, 109 F.4th 743, 748 (5th Cir. 2024), cert. granted sub nom. Sch., Health & Librs. Broadband Coal. v. Consumers’ Rsch., 45 S. Ct. 587 (2024). The Supreme Court granted certiorari on the matter and oral argument was presented on March 26, 2025. Consumers’ Rsch., 145 S. Ct. 587. It seems unlikely that the Supreme Court‘s pending decision on whether FUSF fees
Id..The Parties shall cooperate with the Auditor in its determination of such disputed amounts or changes and shall be entitled to address the Auditor in order to present any facts and arguments that such Party deems relevant to the Auditor‘s determinations and conclusions regarding the disputed amounts subject to review . . . .