COURT OF CHANCERY OF THE STATE OF DELAWARE MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER VICE CHANCELLOR 500 N. KING STREET, SUITE 11400 WILMINGTON, DELAWARE 19801-3734
September 27, 2023 Joanna J. Cline, Esquire R. Montgomery Donaldson, Esquire Troutman Pepper Hamilton Sanders LLP Montgomery McCracken Walker & Rhoads LLP 1313 Market Street, Suite 5100 1105 N Market Street, 15th Floor Wilmington, DE 19801-1709 Wilmington, DE 19801
RE: AECOM, et al. v. SCCI National Holdings, Inc., Civil Action No. 2022-0727-MTZ Dear Counsel:
On September 12, I heard oral argument on AECOM and URS Holdings,
Inc.’s (together, “Sellers”) Motion to Dismiss and Motion to Strike (the “Motion”).
Sellers moved under Court of Chancery Rule 12(b)(6) to dismiss SCCI National
Holdings, Inc.’s (“Buyer”) Counterclaim Count III for reformation based on fraud
and, in the alternative, based on mutual or unilateral mistake. Sellers also moved to
strike various affirmative defenses under Court of Chancery Rule 12(f) in the event
this Court granted Sellers’ motion to dismiss. For the reasons that follow, I grant
Sellers’ motion to dismiss Count III, and deny Sellers’ motion to strike. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 2 of 26
I. BACKGROUND1
Unlike most decisions on motions to dismiss, which follow a complaint and
the motion to dismiss briefing, this decision follows over 187 docket entries. Many
of those recapitulate the background facts, and so I will rely on the parties’
familiarity with the underlying dispute and reference only those facts necessary to
adjudicate the Motion.
In 2017, AECOM purchased Shimmick Construction Company, Inc.
(“Shimmick”), a California-based construction company.2 Shimmick’s largest
projects were capital intensive and required significant contributions from AECOM;
some of these projects incurred significant losses.3 By 2019, AECOM’s “board
1 On Sellers’ motion to dismiss, I draw all facts from Buyer’s pleadings and documents integral thereto. Citations in the form of “Am. Compl.” refer to Sellers’ Verified First Amended Complaint, available at docket item (“D.I.”) 154. Citations in the form of “Am. Ans.” refer to Buyer’s Verified Answer and Affirmative Defenses to Plaintiffs’ Verified First Amended Complaint, available at D.I. 158. Citations in the form of “Countercl.” refer to Buyer’s Verified First Amended Counterclaims, available at D.I. 87. Citations in the form of “PSA” refer to the Purchase and Sale Agreement, available at D.I. 190, Ex. A. Citations in the form of “Op. Br.” refer to Plaintiffs’ Opening Brief in Support of Plaintiffs’ Amended Motion to Dismiss and Amended Motion to Strike, available at D.I. 93. Citations in the form of “Ans. Br.” refer to Buyer’s Answering Brief in Opposition to Plaintiffs’ Amended Motion to Dismiss and Amended Motion to Strike, available at D.I. 104. Citations in the form of “Reply Br.” refer to Plaintiffs’ Reply Brief In Support Of Plaintiffs’ Motion to Dismiss and Motion to Strike, available at D.I. 127. 2 Countercl. ¶ 2. 3 Id. ¶ 6. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 3 of 26
announced their approval of a plan to sell AECOM’s construction services business,
including Shimmick.”4 In the “first quarter of FY2020,” AECOM reclassified
Shimmick as “discontinued operations.”5 By June 2020, Shimmick’s legacy project
constructing the Gerald Desmond Bridge (the “GDB Project”) “was in distress and
unprofitable.”6 AECOM began marketing Shimmick to prospective buyers on July
14, 2020.7
AECOM allegedly used “atypical, lopsided recoveries to support exaggerated
soft revenue figures on GDB Project presentations, despite those inflated figures
exceeding the internal figures prepared by project-level personnel by many tens of
millions of dollars.”8 “‘Soft revenue’ is a non-GAAP financial metric.”9 In this
context, soft revenue projection metrics are “indicative of recoverable cash flow
4 Id. ¶ 9. 5 Id. ¶ 10. 6 Id. ¶ 49. 7 Id. ¶ 53. 8 Id. ¶ 56 (quoting D.I. 107, Ex. A at 2). 9 Id. ¶ 62. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 4 of 26
from claims against the project client.”10 AECOM purportedly misrepresented that
based on its projected soft revenue, the GDB Project would “generate substantial
cash flow”11 and even be “a cash bonanza.”12 Shortly after AECOM launched its
campaign, Buyer’s affiliate approached AECOM to express interest in purchasing
Shimmick.
“On July 22, . . . AECOM and Buyer’s parent executed a non-disclosure and
exclusivity agreement and began due diligence and negotiations.”13 “By the time of
the sale to Buyer, AECOM served as the guarantor on approximately $1.5 billion of
Shimmick’s bonds,”14 Shimmick had “mounting losses,”15 and its share price was
10 Id. ¶ 67 (“AECOM . . . asserted that its soft revenue projections were reliable because the soft revenue recognition process was reviewed and approved by its longtime auditor and premier global accounting firm Ernst & Young. AECOM represented to Buyer that this highly scrutinized and individualized process ensured that the soft revenue recognized on Shimmick’s books was in fact indicative of recoverable cash flow.”). 11 Id. ¶ 68. 12 Id. ¶ 67 (quoting D.I. 107, Ex. A at 2); see id. ¶ 89 (“[A] June 30, 2020 call between AECOM and DBO Partners show[s] that AECOM knew that the project had a contract value of $820 million, projected $1.02 billion costs at completion, and had already booked more than $60 million in losses . . . . GDB Project had a negative $81.4 million dollar margin. In October 2020, . . . for the quarter, the GDB Project had a reasonably possible loss of $10 million or more and a remote loss of $30 million or more.”). 13 Id. ¶ 59. 14 Id. ¶ 6; see PSA, Seller Disclosure Schedules at 165–168. This document is not consistently paginated, so I have counted the pdf pages and reference those. 15 Countercl. ¶ 6. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 5 of 26
weak.16 Shimmick was “struggling,” and Sellers and Buyer uniformly understood
that its value lay primarily in the soft revenue17 to be collected from the GDB
Project.18
After months of negotiations, on December 9, Sellers and Buyer executed the
Purchase and Sale Agreement (“PSA”).19 As is common for the sale of an asset with
an uncertain future revenue stream, the parties agreed to a de minimis base purchase
price plus an earnout payment based on a contractual formula.
And as expected for most transactions, Buyer negotiated for certain financial
information and the right to rely on it.20 The PSA provided the “Agreement and
other Transaction Documents, and the Schedules and Exhibits hereto and thereto,
and the Confidentiality Agreement, along with the Seller Disclosure Schedules and
16 Id. ¶ 11 (“Flanked by a Board mandate, growing investor pressure, a weakened share price, and a looming deadline, AECOM actively marketed Shimmick . . . .”). 17 Id. ¶ 4 (“Because Shimmick was engaged to perform several large multi-year government projects with aggregate change orders . . . Shimmick’s soft revenue was a critical component of its future cash flow and overall financial outlook.”). 18 Id. ¶¶ 12–14. 19 Id. ¶ 16. 20 See Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec., 166 A.3d 912, 932 (Del. 2017) (“The financial statement representation is the most important representation in a typical purchase agreement.”). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 6 of 26
Purchaser Disclosure Schedule” constituted the “Entire Agreement.”21 The parties
emphasized the importance of the attached exhibits and disclosure schedules within
the Entire Agreement: “[t]he Seller Disclosure Schedules and the Purchaser
Disclosure Schedules, and all schedules attached thereto, and all Exhibits attached
to this Agreement shall be construed with and as an integral part of this
Agreement.”22
The Disclosure Schedules sets forth copies of (i) pro forma unaudited combined pre-Tax income statement information of the Business for the fiscal years ended September 30, 2020 and September 30, 2019 and the eleven months ended August 31, 2020, and (ii) pro forma unaudited combined pre-Tax balance sheet information of the Business as of September 30, 2020 and September 30, 2019 and as of August 31, 2020 (collectively, and together with any notes thereto, the “Business Financial Information”).23
Sellers represented and warranted to Buyer that the Business Financial Information,
“derived from the books and records of Seller,” “fairly presents in all material
respects” Shimmick’s “pre-Tax financial condition” and “the pre-Tax results of
operations of the Business for the periods indicated.”24 And both parties agreed that
21 PSA § 11.1. 22 Id. § 11.2. 23 Id. § 3.7(a). 24 Id. § 3.7(b). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 7 of 26
while Sellers disclaimed “any and all representations and warranties, whether
express or implied,” Sellers did not disclaim, and so Buyer could reasonably rely
upon, “the representations and warranties contained in Article III” including the
representation of and warranty for the Business Financial Information’s accuracy.25
Sellers also provided specific figures to Buyer in setting the parameters for
Buyer’s earnout payment. The earnout payment amount is based on the “Retained
Claim Recovery” outlined in Section 2.13 of the PSA.26 The parties agree that
Section 2.13 requires Buyer to pay Sellers an amount “calculated by subtracting
unreimbursed costs and expenses incurred on the GDB Project from [GDB Claim
Recoveries] . . . , then multiplying the difference by 80% until AECOM has received
$64 million, and thereafter by 50%.”27
The amount of Buyer’s payment for Shimmick is based on Shimmick’s
Adjusted EBITDA as calculated under enumerated principles and an illustrative
calculation in the Disclosure Schedules.28 That calculation included a line item
25 Id. § 4.11(b). 26 Id. § 2.12. 27 Ans. Br. 11; PSA § 2.13. 28 PSA § 1.1 (defining adjusted EBITDA by “Section 1.1(a)(i) of the Seller Disclosure Schedules [which] sets forth principles for calculation of Adjusted EBITDA.”); id., Seller Disclosure Schedules § 1.1(a)(i) (providing “Principles for Calculation of Adjusted EBITDA”); id. § 1.1(a)(i)(5) (outlining one calculation principle to be that “Adjusted AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 8 of 26
showing the GDB Project producing $210.4 million in Soft Revenue.29 That
reference to $210.4 million was not the first time Buyer saw that figure; Sellers
“continually represented to Buyer that [Shimmick] would recover between $200–
$210 million for these claims and costs would be minimal.”30
Notwithstanding Sellers’ representations in the PSA and Disclosure
Schedules, the parties approached the transaction with different expectations about
Shimmick’s soft revenue. “AECOM knew that [Shimmick] was unlikely to recover
anywhere near that amount of soft revenue and heavily discounted the value of the
GDB Project claims in other documents not shared with Buyer.”31 AECOM
estimated in “an August 2020 Job Status Report for the GDB Project” “probable
revenue of $127 million for the GDB Project claims”; and, in both the September
EBITDA and Contract Revenue shall include the Business’ proportional share of Soft Revenue. Soft Revenue shall include categories set forth in Section 1.1(a)(ii) of the Seller Disclosure Schedules . . . ”); id. § 1.1 (explaining Section 1.1(a)(ii) “sets forth an illustrative calculation of [Shimmick’s] Adjusted EBITDA . . . for the fiscal year ended September 30, 2020”); id., Seller Disclosure Schedules at 207 (including as a category the “Unconsolidated EAC Soft Revenue” for the “Gerald Desmond Bridge” and showing the GDB Project producing $210.4 million in Soft Revenue recoveries). 29 Id., “Seller Disclosure Schedules” at 207. 30 Countercl. ¶ 75. 31 Id. ¶ 76. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 9 of 26
and October 2020 Job Status Reports, AECOM estimated “$131 million of probable
revenue for the same GDB Project claims.”32
The parties also approached the transaction with different expectations about
Shimmick’s post-earnout profitability. Based on the GDB Project’s $210 million in
soft revenue, Buyer believed Shimmick would keep approximately $16 million of
profit33 from the GDB claim recoveries, and that it “would [only] pay out a portion
of revenues to the extent Shimmick would not incur losses as a result.”34 But Sellers
knew that $16.5 million of profit “[would] need to be reversed.”35 Sellers anticipated
32 Id. ¶ 70. 33 See id. ¶ 14 (“AECOM also represented that the GDB Project had generated approximately $16 million of profit for Shimmick.”); see also id. ¶ 112 (“Shimmick would keep 20% of that amount, equal to $16 million, plus costs and expenses.”). 34 Id. ¶ 143; see id. ¶ 85 (“The file calculated total possible soft revenue of $210.4 million— approximately the same number included in the September WIP—by simply subtracting contract value from EAC expenses. In other words, the soft revenue was not related to change orders or claims, as had been represented to Buyer, but instead was equal to the difference between the GDB Project’s estimated costs and the money to which the Joint Venture was contractually entitled. That is, the exact amount of money needed for the GDB Project to break even.”); id. ¶ 112 (“When read in conjunction with AECOM’s representations that the GDB Project would produce over $210 million of soft revenue for the Joint Venture, Section 2.13(a)(i) gave Buyer the right to approximately $18 million plus costs and expenses. At the lower end of the range, if the Joint Venture received $200 million, Shimmick would be entitled to $80 million, or 40%. Shimmick would keep 20% of that amount, equal to $16 million, plus costs and expenses.”). 35 Id. ¶ 95; see also id. ¶ 84 (“AECOM concealed this updated information, which further suggested that its previously represented soft revenue figures of $210 million were wildly off, and never corrected its prior representations, upon which it knew Buyer was relying.”). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 10 of 26
they would be fully compensated, but that Shimmick would not break even, and
would certainly not turn a profit.36
The transaction closed in January 2021.37 At the end of that year, the GDB
Project generated approximately $130 million in soft revenue—not $210 million as
represented in Sellers’ disclosure schedules.38 “[I]ncidentally, this amount was
exactly in line with AECOM’s internal projections . . . .”39
Buyer has not paid Sellers any earnout payment, on the grounds that because
Shimmick did not profit from the GDB claim recoveries, Buyer does not owe any
funds to Sellers. The parties volleyed about the issue through the summer of 2022.
In August 2022, Sellers filed this lawsuit.
Sellers “seek[] a portion of net recoveries on the GDB Project” as set out in
Section 2.13(a)(i).40 Buyer presses counterclaims for fraud and for reformation.
Buyer also asserts various affirmative defenses, including (i) Sellers’ claims are
barred by the doctrine of unclean hands; (ii) Sellers’ claims are barred by Sellers’
Id. (“Even under the [Sellers’] optimistic scenario, the [GDB] Project still had a negative 36
margin of $2.4 million.”). 37 Id. ¶ 114. 38 Id. ¶¶ 12–15. 39 Id. ¶ 118. 40 Id. ¶ 111. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 11 of 26
own fraud; and (iii) Sellers’ material breach of the PSA suspended Buyer’s
performance obligations thereunder.41 Sellers moved to dismiss those counterclaims
and strike those affirmative defenses, and the parties briefed the Motions.42 At oral
argument on September 12, I denied the motion to dismiss Buyer’s fraud count.43
II. ANALYSIS
A. Motion To Dismiss
Buyer’s reformation count seeks “to clarify the claims-sharing scheme already
laid out in Section 2.13 so that Buyer may retain $16 million plus expenses from
funds received for GDB Claims.”44 Buyer seeks to reform Section 2.13 to reflect
that Buyer “would [only] pay out a portion of revenues” of the GDB Project “to the
extent Shimmick would not incur losses as a result.”45 Buyer seeks reformation
based on either mutual mistake, unilateral mistake, or fraud.46 Sellers moved to
dismiss for failure to state a claim under Court of Chancery Rule 12(b)(6).
41 Am. Ans. 64. 42 Op. Br. 43 D.I. 188; D.I. 192. 44 Ans. Br. 30. 45 Countercl. ¶ 143. 46 Ans. Br. 23. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 12 of 26
I begin by pausing to note that having pled a claim for fraud and sought
reformation as a remedy for that fraud, Buyer need not plead a standalone claim for
reformation in order to obtain it for fraud. A plaintiff who has pled a claim for fraud,
which reformation might remedy, need not plead a formal count for reformation:
she need only convince the Court that reformation is the proper remedy.47 As in
James River-Pennington Inc. v. CRSS Capital, Inc., as explained in my bench ruling
at oral argument, Buyer pled with sufficient particularity a claim for fraud based on
47 Brinckerhoff v. Enbridge Energy, 2012 WL 1931242, at *2, *4 (Del. Ch. May 25, 2012) (finding the complaint states a claim that “could lead to a reformation remedy,” even when the complaint did not allege a separate discrete claim in the cause of action for reformation, but explaining that the plaintiff still had to request reformation as a remedy); Brinckerhoff v. Enbridge Energy (“Brinckerhoff IV”), 159 A.3d 242, 261–62 (Del. 2017) (concluding “the Court of Chancery viewed its remedial authority too narrowly in its ability to assert reformation as a remedy, and holding that the plaintiff pled a viable claim that could lead to a reformation remedy and that “once liability has been found, and the court’s powers shift to the appropriate remedy, the Court of Chancery has broad discretion to craft a remedy to address the wrong” and “whether an equitable remedy should be ordered will depend on the Vice Chancellor’s assessment of the equities”); Mesirov v. Enbridge Energy, 2018 WL 4182204, at *6 (Del. Ch. Aug. 29, 2018) (interpreting Brinckerhoff IV to provide that reformation or recission remain viable equitable remedies that may be awarded in the Court’s discretion upon a finding of breach, and noting that “reformation or recission remain viable equitable remedies that may be awarded in the Court’s discretion upon a finding of breach”); see also Haney v. Blackhawk Network Hldgs., 2016 WL 769595, at *10 (Del. Ch. Feb. 26, 2016) (“To support a claim for reformation, the party seeking such form of relief must plead with particularity the ingredients on which it is based, namely mutual mistake or fraud, [under] Rule 9(b).”); Leaf Invenergy v. Invenergy Wind, 2018 WL 2322350, at *2 (Del. Ch. May 21, 2018) (noting an award of nominal damages instead of reformation was appropriate because while reformation is always available as a remedy even if not pled, the plaintiff had only proposed money damages). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 13 of 26
false representations.48 And, as in James River-Pennington, “one might logically
suspect reformation to be the real remedy sought by” Buyer.49 Count III need not
state a claim for reformation to be an available remedy for Count I’s claim for fraud.
In the absence of fraud, i.e. in the event Count I here fails, reformation is
available to fix a mistake in the parties’ contract.50 Against that backdrop, and with
the “necessary assumption that an unambiguous written agreement is valid on its
face and accurately reflects the intentions of the parties,”51 I turn to Sellers’ motion
to dismiss Buyer’s claim to reform the PSA to remedy mistake. Buyer alleges that
Section 2.13 “is the product of fraud, mutual mistake or unilateral mistake and
should be reformed”52 because “Buyer’s and AECOM’s intent in drafting Section
2.13 of the PSA was that Buyer would pay out a portion of revenues to the extent
48 1995 WL 106554, at *10 (Del. Ch. Feb. 9, 1995). 49 Id. at *10–*11 (finding reformation may be available as a remedy to purchase defendant under its generalized misrepresentation counterclaim and denying seller plaintiff’s motion to dismiss as to the misrepresentation counterclaim). 50 See Bank of Del. v. Claymont Fire Co. No. 1, 528 A.2d 1196, 1198 (Del. 1987) (“As for reformation, the Court of Chancery observed that such relief is granted in the absence of fraud or misrepresentation only where it is demonstrated that there was a mutual mistake, or a unilateral mistake coupled with knowing silence and clear and convincing proof of the agreement to be incorporated in the reformed instrument.”). 51 W. Willow-Bay Ct. v. Robino-Bay Ct. Plaza, 2009 WL 3247992, at *3 (Del. Ch. Oct. 6, 2009) (citing Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1156 (Del. 2002)). 52 Countercl. ¶ 141. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 14 of 26
Shimmick would not incur losses as a result.”53 This belief stemmed from Buyer’s
understanding, informed by Sellers’ representations, that the GDB Project would
produce $200 to $210 million of soft revenue.54 If this representation was accurate,
then under Section 2.13’s earnout mechanism, Shimmick would have retained
between $16 and $18 million.55
Buyer seeks extreme and “unusual” relief: to change the unambiguous terms
of its agreement with Sellers so that the agreement meets Buyer’s expectations.56
“Equity respects freedom to contract,” and so this Court will not rewrite a contract
to save parties from the unhappy consequences of a bond that they voluntarily
imposed upon themselves.57 Before this Court will grant “the high remedy of
reformation, the claimant must not only establish that the written agreement was not
the agreement intended by the parties, but also what was the agreement contemplated
by them when executed.”58 Equity will not supply the exceptional remedy of
53 Id. ¶ 143. 54 Id. ¶ 112. 55 Id. 56 See 27 Richard A. Lord, Williston on Contracts § 70:94 (4th ed.) [hereinafter “Williston on Contracts”]. 57 Martin Marietta Mat’ls v. Vulcan Mat’ls, 2012 WL 1605146, at *58 n.283 (Del. Ch. Sept. 23, 1999). 58 27 Williston on Contracts § 70:94. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 15 of 26
reformation to accommodate negligence,59 or unilateral mistake without knowing
silence,60 or a party’s dissatisfaction with agreed-upon terms.61 Reformation is only
available “when the contract does not represent the parties’ intent because of fraud,
mutual mistake or, in exceptional cases, unilateral mistake coupled with the other
parties’ knowing silence.”62 Put another way, reformation is not an over-the-counter
analgesic to imprecisely block the pain of a bad deal; rather, it is a precise
prescription intervention to ensure the deal is what the parties agreed upon.63
When considering a motion to dismiss under Rule 12(b)(6), courts will accept
“all well-pleaded factual allegations as true”64 and accept “even vague allegations in
59 Heartland Del. v. Rehoboth Mall, 57 A.3d 917, 923 (Del. Ch. 2012). 60 See Colvocoresses v. W.S. Wasserman Co. (“Colvocoresses II”), 28 A.2d 588, 589 (Del. Ch. Oct. 16, 1942) (“In the absence of some element of fraud, such a mistake must be mutual and common to both parties; a mere unilateral mistake is not within the rule . . . [except] when the mistake of one party, with respect to the meaning of some material provision of the signed contract, is accompanied not only by the other party’s knowledge thereof, but, also, by his silence.”); see also James River-Pennington, 1995 WL 106554, at *7 (“Reformation is appropriate only when the contract does not represent the parties’ intent because of . . . a unilateral mistake coupled with the other parties’ knowing silence.”). 61 See Heartland Del., 57 A.3d at 923; see also CC Fin. v. Wireless Prop., 2012 WL 4862337, at *6 (Del. Ch. Oct. 1, 2012) (asserting equity cannot “save a party from its own negligence”). 62 James River-Pennington, 1995 WL 106554, at *7. 63 Colvocoresses II, 28 A.2d at 589 (asserting the purpose of reformation “is to make an erroneous instrument express correctly the real agreement between the parties”). 64 Prairie Cap. III v. Double E Hldg., 132 A.3d 35, 49 (Del. Ch. 2015). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 16 of 26
the Complaint as ‘well-pleaded,’ if they provide the defendant notice of the claim.”65
All reasonable inferences will be drawn in favor of the non-moving party.66
Dismissal will only be granted when it appears “the [nonmoving party] would not
be entitled to recover under any reasonably conceivable set of circumstances.”67 “In
all averments of fraud or mistake, the circumstances constituting fraud or mistake
shall be stated with particularity.”68 This Court will award reformation where there
is “a clear, mutual mistake” as to the written agreement that “does not properly
record all of the material provisions” intended by the parties.69 “[K]nowledge by
one party of the other’s mistake regarding the expression of the contract is equivalent
to a mutual mistake.”70 To survive a motion to dismiss under Rule 12(b)(6), the
party seeking reformation based on mistake must allege with particularity: “(i) that
the parties reached a definite agreement before executing the final contract; (ii) that
65 Cent. Mortg. v. Morgan Stanley Mortg. Cap. Hldgs., 27 A.3d 531, 536 (Del. 2011). 66 Prairie Cap. III, 132 A.3d at 49. 67 Cent. Mortg., 27 A.3d at 535. 68 JJS, Ltd. v. Steelpoint CP Hldgs., 2019 WL 5092896, at *9 (Del. Ch. Oct. 11, 2019). Colvocoresses v. W.S. Wasserman Co. (“Colvocoresses I”), 4 A.2d 800, 803 (Del. Ch. 69
Mar. 10, 1939). 70 Tom Savage Assocs. v. Woodbridge Sch. Dist., 1994 WL 165208, at *2 (Del. Super. Apr. 20, 1994) (quoting 13 Williston on Contracts § 1548 (3d ed. 1970)). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 17 of 26
the final contract failed to incorporate the terms of the agreement;”71 (iii) that the
parties were “similarly mistaken or that [one] knew of [another’s] mistake and
remained silent;”72 and (iv) “the precise mistake the parties made.”73 The
requirements are cumulative, and each one must be pled with particularity.74 Failure
to satisfy one requirement is fatal to the claim.75 I begin and end with the first
element of a definite prior understanding.
“In order for a court of equity to reform a contract in writing,” the plaintiff
must demonstrate that the parties had “a complete mutual understanding of all the
essential terms of their bargain, for otherwise there would be no standard by which
71 Great-W. Invs. v. Thomas H. Lee P’rs, L.P., 2011 WL 284992, at *11 (Del. Ch. Jan. 14, 2011) (identifying four elements necessary for a claim of reformation based on mutual mistake to a survive Rule 12(b)(6) motion to dismiss). 72 Cerberus Int’l v. Apollo Mgmt., 794 A.2d 1141, 1152 (Del. 2002) (“Thus, Cerberus must show that: (i) MTI thought that the merger agreement gave MTI’s stockholders the proceeds of the options and warrants; (ii) either that Apollo was also similarly mistaken, or that Apollo knew of MTI’s mistake and remained silent; and (iii) that MTI and Apollo had specifically agreed that the proceeds of the options and warrants would go to MTI’s stockholders.”). 73 Great-W. Invs., 2011 WL 284992, at *11. 74 Cerberus Int’l, 794 A.2d at 1153 (“Courts generally assign the . . . burden to the entire request for reformation, rather than to the specific ‘prior agreement’ element of mutual (or unilateral) mistake claim.”). 75 Interim Healthcare v. Sherion Corp., 2003 WL 22902879, at *8 (Del. Ch. Nov. 19, 2003); see also In re TIBCO Software Inc. S’holder Litig., 2014 WL 6674444, at *16 (Del. Ch. Nov. 25, 2014). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 18 of 26
the writing could be reformed.”76 Regardless of whether a party pleads reformation
for mutual mistake or unilateral mistake plus knowing silence, the party must
establish “that the parties came to a specific prior understanding.”77 The prior
understanding “tells the Court of Chancery exactly what terms to insert in the
contract rather than being put in the position of creating a contract for the parties.”78
In other words, the requirement to plead the actual agreement between the parties
elucidates the specific correction the Court must make to their written agreement.79
76 Colvocoresses I, 4 A.2d at 803. 77 ASB Allegiance Real Est. Fund v. Scion Breckenridge Managing Member, LLC, 2012 WL 1869416, at *13 (Del. Ch. May 16, 2012) (quoting In re Tavel, 661 A.2d 1061, 1070 n.5 (Del. 1995)). 78 Id. at *13 (internal quotation marks removed). 79 Because reformation conforms a contract to the parties’ actual understanding, it requires a prior understanding. In the absence of a prior understanding, the remedy is rescission, which breaks a contractual bond that was never formed in the first place. Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 68 A.3d 665, 677 (Del. 2013) (“Avoidance and reformation are fundamentally different remedies. Avoiding or rescinding a contract essentially results in the abrogation or unmaking of an agreement and attempts to return the parties to the status quo ante. In contrast, reformation does not unmake an agreement; it corrects an enforceable agreement’s written embodiment to reflect the parties’ true agreement.” (internal quotation marks removed)). Mistake following a prior understanding supports reformation; mistake without a prior understanding supports rescission. See, e.g., Burge v. Fid. Bond & Mortg. Co., 648 A.2d 414, 420 (Del. 1994) (“In the law of contracts, a party is permitted to rescind an agreement based upon its unilateral mistake when: (1) enforcement of the agreement would be unconscionable; (2) the mistake relates to the substance of the consideration; (3) the mistake occurred regardless of the exercise of ordinary care; and (4) it is possible to place the other party in the status quo.”). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 19 of 26
West Willow-Bay v. Robino-Bay Plaza is a good example of how comparing
a specific prior agreement and the agreement as written can and should identify the
term to be altered. There, the parties to a purchase agreement set about amending it,
with a memorandum of understanding as a first step.80 The memorandum
characterized the defendant’s “obligation to secure land use approvals as one
requiring only ‘best efforts.”81 But the amendment incorporated an “unconditional”
standard instead.82 The defendant signed the amendment without noticing he was
now “unconditionally obligated to obtain the necessary land use approvals from third
parties.”83 This Court considered “whether the Second Amendment should be
reformed to incorporate a ‘best efforts’ standard by which to measure [the
defendant’s] attempts to obtain [a third party’s] consent to the proposed . . .
project.”84 This Court found that “the memorandum of understanding evidences that
both [parties] had a prior specific understanding that [defendant’s] efforts to obtain
80 2009 WL 3247992, at *2. 81 Id. at *2. 82 Id. at *3, *6. 83 Id. at *3. 84 Id. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 20 of 26
third-party consents were not unconditional, but instead would be governed by a less
rigorous-even if not clearly defined-best efforts standard.”85
Here, Buyer avers reforming Section 2.13 “will give Buyer the benefit of its
bargain had Sellers’ representations in Section 3.7(b) been true.”86 But Buyer does
not allege any prior agreement as to how obligations under Section 2.13 might
change depending on Shimmick’s soft revenue from the GDB Project. Buyer never
expressly articulates how its request to reform Section 2.13 (as opposed to any other
section) stems from a specific agreement between the parties. Buyer has not alleged
any “agreement” that Section 2.13 earnout payments are entirely conditioned upon
Buyer breaking even, in the event soft revenue projections were inaccurate or some
other circumstance caused soft revenue to fall below $200 million. Put another way,
Buyer has not pled any prior agreement that is inconsistent with Section 2.13 as
written. Indeed, Buyer’s and Sellers’ descriptions of Section 2.13 and what it
expresses are identical.87 Their agreement reflects what’s written, and what’s written
85 Id. at * 6. 86 Ans. Br. 30. 87 See id. at 11; see also Am. Compl. ¶¶ 35–45; PSA § 2.13. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 21 of 26
reflects their agreement. Buyer offers no prior agreement to which I could contrast
and conform Section 2.13’s terms.
Buyer argues reformation of Section 2.13 “will give Buyer the benefit of its
bargain had Sellers’ representations in Section 3.7(b) been true.”88 But Buyer’s
expectation is based on Sellers’ representation that soft revenue would amount to
$210 million—not any actual agreement between the parties as to what amount
Shimmick would retain after paying Sellers. The discrepancy between Shimmick’s
expected benefit and actual outcome is sourced in underlying financial information,
not Section 2.13’s terms or language. Buyer has failed to point to any particular
prior agreement between the parties that differs from Section 2.13.89
Indeed, the facts as Buyer pled them, in which Sellers misrepresented the
GDB Project’s anticipated soft revenue, are wholly inconsistent with a meeting of
the minds in a prior understanding. By Buyer’s allegations, Sellers did not actually
believe the GDB Project was a “cash bonanza,” and believed soft revenue would be
88 Ans. Br. 30. 89 Colvocoresses I, 4 A.2d at 803; see also BAE Sys. N. Am. Inc. v. Lockheed Martin Corp., 2004 WL 1739522, at *6 (Del. Ch. Aug. 3, 2004) (asserting that for a pleading of mistake to survive, the party must “allege with particularity some form of specific prior agreement”). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 22 of 26
closer to the actual $130 million than the disclosed $210 million.90 Sellers therefore
could not have agreed that Section 2.13 was conditioned upon the GDB Project
achieving at least “$200 million of soft revenue on already-earned change orders and
claims.”91 As alleged, Sellers knew Shimmick would fall short of the figures Sellers
represented to Buyer, and Sellers intended to receive all of Shimmick’s soft revenue
from Buyer. Buyer relied on the higher figures Sellers provided, intended to profit
from that soft revenue, and only then pay Sellers. This dynamic does not represent
a prior understanding; there was never a meeting of the minds. Buyer has not
successfully alleged with particularity that Buyer and Sellers agreed to Section
2.13’s contingency on the accuracy of the soft revenue projections or Business
Financial Information.
A plaintiff’s inability to allege “a definitive agreement of the parties to which
the Court can refer when forming the Agreement” is fatal to a claim for reformation
based on mistake, regardless of whether the mistake is mutual or unilateral coupled
with knowing silence.92 Buyer has not succeeded in pointing to a definitive, clear
90 Countercl. ¶ 58 (quoting D.I. 107, Ex. A at 2); see also id. ¶ 79. 91 Id. ¶ 118. 92 Interim Healthcare, 2003 WL 22902879, at *8. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 23 of 26
and particular agreement to which this Court can compare Section 2.13 as it is
written. And because Buyer and Sellers never came to an agreement on how Section
2.13 would play out based on projected soft revenues, there can be no claim to reform
the PSA to reflect that agreement. Sellers’ motion to dismiss Count III is granted.
B. Motion to Strike
Under Court of Chancery Rule 12(f), Sellers moved to strike Buyer’s second,
third and fourth affirmative defenses on the condition that Sellers’ motion to dismiss
is granted. As to Buyer’s second and third affirmative defenses, these sound in fraud
and in Buyer’s Counterclaim Count I; for the reasons stated in my September 12
bench ruling, Sellers’ motion to strike is denied.
I address separately Buyer’s fourth affirmative defense, which states that
“Sellers’ material breach of the PSA suspended Buyer’s performance obligations
thereunder.”93 “Generally, motions to strike are not favored and are granted
sparingly;”94 but under Rule 12(f), “the Court may order stricken from any pleading
any insufficient defense or any redundant, immaterial, impertinent, or scandalous
93 Am. Ans. 64. 94 Columbus Life Ins. v. Wilm. Tr., 2021 WL 537117, at *5 (Del. Super. Feb. 15, 2021). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 24 of 26
matter.”95 “The test employed in determining a motion to strike is: (1) whether the
challenged averments are relevant to an issue in the case and (2) whether they are
unduly prejudicial.”96
Sellers contend Buyer’s affirmative defense of prior material breach must be
stricken because Buyer withdrew its counterclaim that Sellers breached the PSA.
Buyer voluntarily withdrew its breach of contract claim after Sellers moved to
dismiss it on the grounds that the Buyer’s sole remedy under the PSA is
indemnification.97 From there, Sellers maintain that Buyer’s fourth affirmative
defense must be stricken because the PSA’s survival clause bars any claim for
breach.98 The parties agree that Delaware law permits an affirmative defense,
intended to bar recovery, where the same facts presented as a counterclaim seeking
a recovery would be barred by laches.99 They cursorily disagree as to the fate of that
95 Ct. Ch. R. 12(f). 96 Salem Church (Del.) Assocs. v. New Castle Cnty., 2004 WL 1087341, at *2 (Del. Ch. May 6, 2004). 97 Ans. Br. 3. 98 Reply Br. 17. 99 Winklevoss Cap. Fund v. Shaw, 2019 WL 994534, at *7 (Del. Ch. Mar. 1, 2019). AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 25 of 26
affirmative defense when that counterclaim is barred by a survival clause: Buyer
devotes a footnote, and Sellers devote a paragraph.100
Sellers offer no legal support for the proposition that a survival clause bars an
affirmative defense of prior material breach; they simply argue neither of Buyer’s
authorities provide that the defense survives.101 Sellers may be reading those cases
too narrowly. One of them, Winklevoss Capital Fund v. Shaw, quotes the Superior
Court as providing that “a defendant may amend a pleading to assert an affirmative
defense, even where the statute of limitations or other considerations would bar the
assertion of a substantially similar counterclaim.”102 Sellers’ paragraph on this issue
fails to demonstrate that Buyer’s affirmative defense of prior material breach is
irrelevant or barred by contract. Sellers have offered no basis to bar Buyer from
pressing Sellers’ failure to honor the PSA “as grounds to defend against [Sellers’]
claim that [Buyer] ha[s] not delivered all that was promised.”103 And Sellers have
not attempted to assert the defense is prejudicial.104 I cannot see how it could be.
100 Ans. Br. 32 n.13; Reply Br. 17. 101 Reply Br. 17. 102 2019 WL 994534, at *10 n.95 (emphasis added) (quoting King Const. v. Plaza Four Realty, 2012 WL 35181215 at *4 (Del. Super. Aug. 7, 2012)). 103 Id. at *10. 104 Reply Br. 17. AECOM, et al. v. SCCI Nat’l Hldgs., Inc., Civil Action No. 2022-0727-MTZ September 27, 2023 Page 26 of 26
“If [Sellers] press for a decision on the merits before trial, the [defense] may be found
to be without basis. [But it] . . . may not be stricken as an insufficient defense. Nor
should its validity be determined upon a motion to strike.”105
III. CONCLUSION
Sellers’ motion to dismiss Buyer’s Counterclaim Count III is granted in part.
Counterclaim Count III is dismissed with prejudice; reformation is dismissed as an
actionable claim. Reformation may still be available as a remedy for Buyer’s
Counterclaim Count I for fraud, should the claim be proven and a remedy be
necessary. Sellers’ motion to strike Buyer’s second, third and fourth affirmative
defenses is denied. To the extent an order is required to implement this decision, IT
IS SO ORDERED.
Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms
cc: All Counsel of Record, via File & ServeXpress 105 Vets Welding Shop v. Nix, 1988 WL 67703, at *3 (Del. Super. June 20, 1988).