AssuredPartners of Virginia, LLC v. Sheehan

• Court: Superior Court of Delaware
• Decided: May 29, 2020
• Docket: N19C-02-175 AML CCLD
• Status: Published

Opinion

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

ASSUREDPARTNERS OF ) VIRGINIA, LLC, ) Plaintiff, ) v. ) C.A. No. N19C-02-175 AML CCLD ) WILLIAM PATRICK SHEEHAN, ) SIG HOLDINGS, INC., ) MATTHEW A. LEE, KDW ) FINANCIAL, INC., MARK ) JOSEPH SHEEHAN, and ) BRIANNA COUGHLIN, ) ) Defendants. )

Submitted: February 21, 2020 Decided: May 29, 2020

MEMORANDUM OPINION

Upon Defendants' Motion to Dismiss: Granted in Part, Denied in Part

Attorneys and Law Firms

Gregory P. Williams, Esquire, Blake Rohrbacher, Esquire, Matthew D. Perri, Esquire, and Kevin M. Regan, Esquire, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Joseph G. Santoro, Esquire, and Roger W. Feicht, Esquire, of GUNSTER, West Palm Beach, Florida, Attorneys for Plaintiff AssuredPartners of Virginia, LLC.

Martin S. Lessner, Esquire, Lauren Dunkle Fortunato, Esquire, and Kevin P. Rickert, Esquire, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware, Attorneys for Defendants William Patrick Sheehan, SIG Holdings, Inc., Matthew A. Lee, KDW Financial, Inc., Mark Joseph Sheehan, and Brianna Coughlin.

LEGROW, J. This breach of contract action arises out of the sale of Sheehan Insurance, Inc.

to buyer, the plaintiff in this action, pursuant to an asset purchase agreement

executed on December 11, 2014. After the sale, the sellers continued to run the

business’s day-to-day operations. The agreement established a specific structure for

the business’s post-closing operations and imposed several pre-closing disclosure

obligations on the sellers, who are among the defendants in this action. To complete

the transaction, the parties also entered into an earn-out agreement, an employment

agreement calling for one of the sellers’ continued employment with the company,

a limited partnership agreement, and an equity incentive plan.

Four years later, buyer initiated this action against sellers with a complaint

alleging breaches of the asset purchase agreement’s representations and warranties.

Buyer further claims the sellers fraudulently concealed material facts with the goal

of making Sheehan Insurance, Inc. look more attractive and valuable than it was,

resulting in an inflated purchase price for Sheehan Insurance Inc.’s assets. In

particular, the sellers are alleged to have concealed liabilities and misrepresented

that the disclosed pay arrangements with its then-current employees were true and

accurate and that the financial statements provided also were true and accurate.

Sellers moved to dismiss all counts in the operative complaint as untimely and

for failure to state a claim. For the reasons explained below, I conclude the action

cannot be dismissed as untimely at this stage of the litigation, but I dismiss the

1 sellers’ fraudulent inducement and civil conspiracy claims for failure to state a claim.

As for the remaining claims, Counts I, II, and V survive under the minimal pleading

standard applicable to a motion to dismiss.

FACTUAL AND PROCEDURAL BACKGROUND

Unless otherwise noted, the following facts are drawn from the second

amended complaint and the documents it incorporates. On December 11, 2014,

Plaintiff, AssuredPartners of Virginia, LLC (“AssuredPartners”), entered into an

asset purchase agreement (“APA”), whereby the assets of Sheehan Insurance

Service, Inc. (“Sheehan Insurance”) were sold to AssuredPartners (the

“Transaction”). 1 Under the APA, AssuredPartners paid over $14 million for

Sheehan Insurance’s assets.2 Anticipating William Patrick Sheehan (“Pat”) and

Sheehan Insurance (collectively, the “Sellers”) would continue to run the business

after closing, the APA established a specific structure for the post-closing operations

and imposed several pre-closing disclosure obligations and post-closing operational

obligations on the Sellers.3

Before completing the Transaction, the parties engaged in due diligence.4

During that process, the Sellers were obligated to disclose certain information about

1 Second Amended Complaint (“SAC”) ¶ 3. 2 Id. ¶ 22. 3 Id. ¶ 23. The Court uses certain parties’ first names for clarity. No disrespect is intended. 4 Id. ¶ 5.

2 the business to AssuredPartners,5 including details about the business’s financials,

revenue, profit margins, and liabilities, as well as employee head count and pay

arrangements. 6

A. The APA

The APA, which sets forth the terms and conditions of Sellers’ sale of Sheehan

Insurance to AssuredPartners, contains several provisions essential to the parties’

dispute.

Section 2.06(c) of the APA defines the earn-out the sellers could receive and

how and when that amount would be calculated:

Within ninety (90) days after the end of the Earn-Out Period, Buyer shall calculate the Earn-Out Amount and deliver to Seller a statement (the “Earn-Out Statement”) setting forth such calculation with reasonable supporting documentation. The Earn-Out Statement shall be deemed accepted by the Seller Parties and shall be conclusive for purposes of determining the Earn-Out Amount unless Seller delivers to Buyer written notice specifying Seller’s objections to the Earn-Out Statement in reasonable detail within thirty (30) days of Seller’s receipt of the Earn-Out Statement (the “Earn-Out Objection Notice”). 7

Article 4 of the APA contains representations and warranties that the Sellers

jointly and severally made to AssuredPartners.8 APA Sections 4.12, 4.13, 4.15, 4.20,

4.23, 4.25, 4.26, and 4.33 are relevant to the Counts in the second amended

5 Id. 6 Id. 7 SAC Ex. A § 2.06(c) (hereinafter “APA”). 8 APA, Art. 4.

3 complaint. In Section 4.12, the Sellers specifically represented and warranted that

Sheehan Insurance’s financial statements that were provided to AssuredPartners

“fairly present, in all material respects, the financial condition and the results of

operations, changes in shareholders’ equity and cash flows of Seller as at the

respective dates of and for the periods referred to in such Financial Statements.”9 In

Section 4.13, the Sellers represented and warranted that there were no undisclosed

“[l]iabilities or obligations of a material nature, whether absolute, accrued,

contingent or otherwise, or whether due or to become due … required by GAAP to

be disclosed on a balance sheet.” 10

Section 4.15 warranted the completeness and accuracy of the books and

records:

The books of account, minute books, equity interest records, and other records of Seller, all of which have been made available to Buyer, have been maintained in accordance with commercially reasonable business practices, consistently applied, and fairly and accurately provide the basis for the financial position and results of operations of Seller set forth in the Financial Statements. The minute books of Seller reflect all material actions taken by the board of directors and the shareholders of Seller since its incorporation or organization. 11

Section 4.20 represented that all material contracts had been disclosed:

Schedule 4.20 lists all Material Seller Contracts (whether written or oral). Seller has delivered to Buyer a true, correct and complete copy of

9 Id. § 4.12. 10 Id. § 4.13. 11 Id. § 4.15.

4 each Material Seller Contract (as amended to date) (or a summary thereof in the case of an oral Contract). 12

Section 4.23 provided that “Schedule 4.23 contains a complete and accurate

list of the following information for each employee or director of Seller, including

each employee on leave of absence or not actively at work or layoff status: … salary

or other measure of Compensation ….”13

Section 4.25 represented there were no “Affiliate Transactions”:

Other than as set forth on Schedule 4.25, no current or former officer, director, shareholder, employee, or partner of Seller, or any of its respective Affiliates, or any individual related by blood, marriage, or adoption to any such individual, or any entity in which any such Person or individual owns any beneficial interest (a) is now a party to any Contract or transaction with Seller … or (c) receives income from any source which should properly accrue to Seller. Seller is not a guarantor or otherwise liable for any actual or potential Liability, whether direct or indirect, of any of its Affiliates.14

The APA defined “Affiliate” as “with respect to a particular Person, another Person

who controls, is controlled by or is under common control with the Person in

question.”15

Section 4.26 provided “[a]ll employee bonuses, profit sharing, vacation and

sick time and any other bonus or employee compensation or incentive plan

12 Id. § 4.20. Section 1.45 defines Material Seller Contracts as referring to “each Contract relating to the Business to which Seller is a party.” Id. § 1.45. 13 Id. § 4.23. 14 Id. § 4.25. 15 Id. § 1.06.

5 obligations are properly reflected in the Financial Statements.”16 Section 4.12

represented that “[t]he Financial Statements have been prepared from and are in

accordance with the accounting Records of Seller.”17

Section 4.33 represented that there were no material misstatements or

omissions in the APA or its schedules:

To the Knowledge of any Seller Party, the information concerning Seller set forth in this Agreement, Schedules to this Agreement and any document to be delivered by any Seller Party at the Closing to Buyer pursuant hereto, does not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated herein or therein or necessary to make the statements and facts contained herein or therein, in light of the circumstances in which they are made, not false or misleading.18

Section 6.11 prohibited the Sellers from making unauthorized post-closing

payments of “bonus, compensation, or other remuneration to any employee of Buyer

or its subsidiaries or Affiliates,” if such payments are “conditioned upon, or in any

way related to, such employee’s performance or employment with Buyer or its

subsidiaries or Affiliates during the Earn-Out Period or otherwise.”19

Finally, Section 7.01 (the “Survival Clause”) provided that the representations

and warranties contained in Articles IV and V shall survive “two (2) years after the

Closing Date.”20 Section 7.01(c) contains an exception for “fraudulently given”

16 Id. §4.26. 17 Id. §4.12. 18 Id. § 4.33. 19 Id. § 6.11. 20 Id. § 7.01

6 representations and warranties, which “shall survive the Closing Date until sixty (60)

days after the expiration of the applicable statute of limitations.”21

B. The KDW Agreement

After closing, AssuredPartners relied on Pat, Defendant Mark Joseph Sheehan

(“Mark”), and Defendant Matthew A. Lee (“Mr. Lee”) to run the business’s day-to-

day operations.22 Before the Transaction, Mr. Lee worked for Sheehan Insurance as

its chief financial officer. 23 After closing, he provided accounting services for Pat

and Sheehan Insurance’s benefit, and at AssuredPartners’ expense, through his

company, KDW Financial Corporation (“KDW Financial”). 24 AssuredPartners

entered into an Independent Contractor Agreement with KDW Financial (the “KDW

Agreement”) and Mr. Lee.25

Under that agreement, KDW Financial agreed to “provide accounting,

operational and administrative services and support for [AssuredPartners’]

insurance-brokerage business in Haymarket, Virginia […] through [Mr. Lee]….”26

Mr. Lee and KDW Financial also “each covenant[ed] and agree[d] that the Services

will be provided diligently and in good faith and in a manner substantially consistent

21 Id. § 7.01(c). 22 SAC ¶ 4. 23 Id. ¶ 12. 24 Id. 25 Id. ¶ 13. 26 Id. ¶ 87; Ex. B (hereinafter, “KDW Agreement”) at ¶ 1.

7 with [Mr. Lee]’s past practice in performing the same or similar services….” 27 Mr.

Lee and KDW Financial also agreed to provide all services “in accordance with all

applicable statutes, laws, and regulations, all policies and procedures established by

[AssuredPartners] from time to time, all rules of ethics applicable to members of the

insurance profession, and in accordance with the appropriate standard of care.” 28

C. AssuredPartners makes certain discoveries after closing.

Following the closing, AssuredPartners contends that it discovered several of

the Sellers’ representations and warranties were false and that Pat, Mark, and Lee

breached their post-closing obligations.

1. Pre-closing representations and warranties

AssuredPartners claims the Sellers knew of material information relevant to

Sheehan Insurance’s value but failed to disclose it to AssuredPartners before closing.

Specifically, AssuredPartners alleges that the Sellers knew the following

representations were false or were made with reckless indifference to their truth: (i)

that there were no undisclosed liabilities, (ii) that all material contracts and future

compensation owed to Sheehan Insurance employees had been disclosed, (iii) that

all Affiliate Transactions had been disclosed, and (iv) that all compensation owed to

Sheehan Insurance employees had been paid or would be paid before closing.29

27 SAC ¶ 88; KDW Agreement at ¶ 1. 28 SAC ¶ 89; KDW Agreement at ¶ 8.3. 29 SAC ¶ 72.

8 First, AssuredPartners argues that the Sellers failed to disclose a liability to

Defendant Brianna Coughlin (“Ms. Coughlin”). Ms. Coughlin is Pat’s wife and was

a leading sales producer for Sheehan Insurance before AssuredPartners acquired the

business.30 The revenue generated by Ms. Coughlin’s “book of business”

represented over twenty percent of Sheehan Insurance’s total revenue.31 At the time

of closing, Ms. Coughlin earned a salary of $241,777.00 from Sheehan Insurance.

After closing, Ms. Coughlin became an AssuredPartners employee.32 Pat did not

disclose to AssuredPartners that he was married to Ms. Coughlin. 33

AssuredPartners contends Ms. Coughlin was paid hundreds of thousands of

dollars of “compensation” after closing based on secret agreements between Pat,

Mark, Mr. Lee and Ms. Coughlin. 34 Mr. Lee, Mark, and Ms. Coughlin each worked

closely with Pat for years before closing and therefore were aware of the APA and

the impending closing. 35 The APA explicitly is mentioned in each of their respective

Employment/Consulting Agreements with AssuredPartners, which were made “[i]n

connection with, and conditioned upon the closing of, the Acquisition.” 36

30 Id. ¶ 15. 31 Id. 32 Id. 33 Id. 34 Id. ¶ 31. 35 Id. ¶ 17. 36 Id.

9 Before closing, Pat, Mark, and Mr. Lee signed three agreements (the

“Coughlin Guarantees”) personally guaranteeing that certain minimum payments

would be made to Ms. Coughlin after the Transaction closed.37 The three Coughlin

Guarantees were signed on December 9, 2014, the day the Sellers signed the APA.38

One of the Coughlin Guarantees was for a “previously owed commission,” plus

commissions through a period beginning before and ending after the closing. 39 The

two other Coughlin Guarantees promised that certain amounts would be paid in the

future “as part of her compensation plan.” 40

AssuredPartners alleges the Coughlin Guarantees were personal promises to

pay Ms. Coughlin if Sheehan Insurance failed to do so. 41 One of these Coughlin

Guarantees specifically referenced “the final earn out calculation” and discussed

payments “depending on the final earn out.” 42 Another of the Coughlin Guarantees

also referenced the “earn out,” but that portion appears to have been struck out. 43 In

total, the three Coughlin Guarantees awarded Ms. Coughlin over $1.1 million in

guaranteed compensation that was not disclosed to AssuredPartners.44 Ms. Coughlin

37 Id. ¶¶ 26-27. 38 Id. ¶ 28. 39 Id. 40 Id. ¶ 29. 41 Id. 42 Id., Ex. C (hereinafter, Coughlin Guarantees) at 4. 43 Coughlin Guarantees at 2. 44 SAC ¶ 45.

10 ultimately left AssuredPartners on August 1, 2017, less than five months after the

earn-out payment was made.45

AssuredPartners also alleges the Defendants failed to disclose a $139,000.00

liability to Bob Stravinski, a sales producer for Sheehan Insurance and its fourth-

highest paid employee. This liability was incurred pre-closing and paid post-closing,

but was not reported in the income statement. 46

2. Post-closing performance

AssuredPartners avers that Defendants misrepresented Sheehan Insurance’s

post-closing performance. After closing, Pat, Mark, and Ms. Coughlin became

AssuredPartners employees.47 AssuredPartners alleges these misrepresentations

were intended to inflate the earn-out due under the APA. That earn-out was based

on the business achieving certain EBITDA performance targets in the two years

following the acquisition. 48 AssuredPartners alleges that Mr. Lee and KDW

Financial facilitated these post-closing misrepresentations by manipulating financial

statements and records to misrepresent AssuredPartners’ post-closing EBITDA.49

Moreover, Mr. Lee and KDW Financial purportedly failed to properly record the

Coughlin Guarantees as a liability on the business’s financial statements.50

45 Id. ¶ 16. 46 Id. ¶ 32. 47 Id. 48 Id. 49 Id. ¶ 90. 50 Id. ¶ 91.

11 AssuredPartners alleges the false and misleading financial statements provided by

the Sellers, Mr. Lee, and KDW Financial artificially inflated EBITDA and, as a

result, the Sellers received the maximum earn-out payment, a total of over $4

million.51

3. Post-closing payments

AssuredPartners claims it has discovered evidence showing over $1 million

of improper payments to Ms. Coughlin and Bob Stravinski.52 The APA prohibited

the Sellers from making any payments to employees after closing without

AssuredPartners’ written authorization.53 The second amended complaint alleges

Pat and Sheehan Insurance did not seek the required authorization from

AssuredPartners and instead made the payments secretly.54 AssuredPartners further

alleges Mark and Pat improperly made payments to Mr. Lee after they were directed

to stop using KDW Financial’s services, and that Mark and Pat falsified expense

reimbursements to hide these unauthorized payments. 55

D. Defendants’ alleged fraudulent concealment of their wrongdoing.

AssuredPartners contends that Defendants concealed material information

both before and after closing. First, Defendants allegedly waited to sign the

51 Id. 52 Id. ¶ 37. 53 Id. ¶ 36. 54 Id. ¶¶ 37-38. 55 Id. ¶¶ 38-39.

12 Coughlin Guarantees until December 9, 2014, the day before closing, in furtherance

of a post-closing scheme to make “off the books” payments through Sheehan

Insurance to avoid the expenses properly being reported to AssuredPartners.56

Second, AssuredPartners avers that Pat, Mr. Lee, and KDW Financial fraudulently

concealed various improper payments after closing by not recording transactions

within the financial statements submitted to AssuredPartners and by using

misleading descriptions for payments within the business’s account management

software.57 AssuredPartners alleges that Defendants conspired to conceal the

Coughlin Guarantees from AssuredPartners, representing over $1.1 million in

unjustified and undisclosed payments that Pat caused to be paid post-closing through

the misappropriation of funds from AssuredPartners.58

Because of Defendants’ concealment, AssuredPartners claims it did not

discover the unauthorized payments to KDW Financial until 2018. 59 This triggered

an internal investigation by AssuredPartners that led to the discovery of additional

facts and, ultimately, to Mark’s and Pat’s termination “with cause.”60 Because of

Defendants’ concealment, AssuredPartners alleges it did not discover the Coughlin

Guarantees until January 2019.

56 Id. ¶ 42. 57 Id. ¶ 46. 58 Id. ¶ 45. 59 Id. ¶ 47. 60 Id.

13 Pat, through his agents Mr. Lee, KDW Financial, and Ryan Henson, submitted

regular financial records to AssuredPartners regarding the business’s post-closing

operations. AssuredPartners alleges those financial records omitted the liabilities

owed to Ms. Coughlin and Bob Stravinski and omitted the associated expenses when

those payments ultimately were made in 2015, 2016, and 2017.61 Because Pat

retained full control over Sheehan Insurance’s existing bank accounts with BB&T

after closing, these post-closing payments were made “off the books” without

AssuredPartners’ knowledge. 62

E. Procedural background

On February 19, 2019, AssuredPartners filed a complaint in this Court’s

Complex Commercial Litigation Division against Pat, Mark, Sig Holdings, Inc.

(“Sig”) (f/k/a Sheehan Insurance Service, Inc.), Mr. Lee, KDW Financial, and Ms.

Coughlin (collectively, “Defendants”) for breach of contract, breach of the implied

covenant, fraudulent inducement, civil conspiracy, and indemnification (the

“Superior Court Action”).

On April 15, 2019, Defendants filed purported counterclaims without an

answer, along with a motion to transfer the Superior Court Action to the Court of

Chancery under 10 Del. C. § 1902 on the basis of those counterclaims. On May 3,

61 Id. 62 Id.

14 2019, Mark and Pat filed a complaint against AssuredPartners in the Court of

Chancery concerning the termination of their employment with AssuredPartners (the

“Court of Chancery Action”).63 On June 10, 2019, this Court denied the motion to

transfer because the purported counterclaims, unaccompanied by an answer, were

not a proper pleading. By order dated June 13, 2019, the Delaware Supreme Court

designated this judge to hear the Court of Chancery Action so that one judicial

officer could resolve the parties’ overlapping and related disputes.

AssuredPartners has amended its complaint twice. The second amended

complaint asserts five counts. Count I alleges the Sellers breached the APA, while

Count II alleges the Sellers breached the implied covenant of good faith and fair

dealing. Count III alleges the Sellers fraudulently induced AssuredPartners to close

the Transaction. Count IV alleges a civil conspiracy claim against the Sellers, Mark,

Mr. Lee, and Ms. Coughlin. Count V alleges a claim for contractual indemnification

against Mr. Lee and KDW Financial.

The Court heard arguments on motions to dismiss in the Court of Chancery

Action and the Superior Court Action on February 10, 2020 (the “February 10, 2020

Hearing”). This court took the motions to dismiss under advisement after the

hearing.

63 See C.A. 2019-0333-AML.

15 F. The parties’ contentions

Defendants argue that all five counts (1) violate the contractual limitations

period, (2) are barred by the contractual limitations period, and (3) fail to state a

claim. Defendants contend that tolling does not apply to the contractual limitations

period because the APA adopts the statutory limitations period without allowing for

tolling. Even if tolling does apply, Defendants contend AssuredPartners has not

adequately pleaded tolling.

AssuredPartners argues that the claims were tolled by Defendants’ fraudulent

concealment. AssuredPartners asserts the second amended complaint alleges

Sheehan Insurance and Pat Sheehan fraudulently concealed material facts from

AssuredPartners, preventing AssuredPartners from discovering those facts during

the limitations period. AssuredPartners also argues the second amended complaint

adequately alleges claims for breach of contract, breach of the implied covenant of

good faith and fair dealing, fraudulent inducement, civil conspiracy, and contractual

indemnification.

ANALYSIS

Upon a motion to dismiss, the Court (i) accepts all well-pleaded factual

allegations as true, (ii) accepts even vague allegations as well-pleaded if they give

the opposing party notice of the claim, (iii) draws all reasonable inferences in favor

of the non-moving party, and (iv) only dismisses a case where the plaintiff would

16 not be entitled to recover under any reasonably conceivable set of circumstances. 64

The Court, however, must “ignore conclusory allegations that lack specific

supporting factual allegations.”65

A. Count I adequately pleads a breach of contract claim.

“Under Delaware law, the elements of a breach of contract claim are: (1) a

contractual obligation; (2) a breach of that obligation; and (3) resulting damages.” 66

Defendants contend the Second Amended Complaint fails adequately to plead the

requisite elements of contractual breach for the following reasons: (i) Pat did not

owe an obligation under Article IV because he is not the “Seller” as defined by the

APA; (ii) Sheehan Insurance did not breach any obligation under Article IV because

the Coughlin Guarantees only were made in Pat’s personal capacity; and (iii) the

alleged improper payments to Ms. Coughlin, Mr. Lee, KDW Financial, and Bob

Stravinski did not breach any obligation because Section 6.11 did not require

disclosure of those payments.

First, Defendants argue Pat did not owe an obligation because “[t]he vast

majority of the APA Sections that AssuredPartners alleges Sheehan Insurance and

Pat to have breached refer to representations and warranties as to the liabilities of

64 Central Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 227 A.3d 531, 536 (Del. 2011); Doe v. Cedars Academy, 2010 WL 5825343, at *3 (Del. Super. Oct. 27, 2010). 65 Ramunno v. Crawley, 705 A.2d 1029, 1034 (Del. 1998). 66 See Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 548 (Del. Super.), aff’d, 886 A.2d 1278 (Del. 2005) (internal citation omitted).

17 the “Seller,” not of Pat, as an individual.” 67 In particular, Defendants contend “[t]he

representations in Article IV are almost exclusively as to the completeness and

accuracy of the disclosures and records of the Seller (Sheehan Insurance).” 68 Article

IV is titled “Representations and Warranties of the Seller Parties.”69 The first

sentence of Article IV states that “[t]he Seller Parties jointly and severally represent

and warrant to Buyer as follows[.]”70 The APA’s first paragraph defines “Seller

Parties” as Pat Sheehan and Sheehan Insurance. 71 Therefore, under the APA’s plain

language, Sheehan Insurance and Pat both are liable for Article IV’s representations

and warranties.

Second, Defendants argue Sheehan Insurance did not breach the APA because

“Sheehan Insurance is not a party to the [Coughlin Guarantees], is not mentioned in

the [Coughlin Guarantees], and no part of the [Coughlin Guarantees] states that

payments are conditioned on Sheehan Insurance’s failure to make a payment.” 72 It

is undisputed that the Coughlin Guarantees fail to mention Sheehan Insurance.73 The

main issue before this Court is whether the phrase “personally guarantees…as part

67 Defs.’ Op. Br. in Supp. of Mot. to Dismiss (hereinafter, “Defs. Mot.”) at 19. 68 Id. at 5. (citing APA §§ 4.12; 4.20; 4.23; 4.25; 4.26). 69 APA at 17 (emphasis added). 70 Id. (emphasis added). 71 See id. at 2 (emphasis added). 72 Reply Br. in Further Supp. of Defs. Mot. at 11. 73 See generally Coughlin Guarantees.

18 of her compensation plan” implies an underlying obligation on the part of Sheehan

Insurance.

Defendants contend Pat’s personal guarantees do not imply the existence of

an underlying obligation owed by Sheehan Insurance. “Personal guarantee”

typically is defined as “[a]n arrangement in which a person becomes liable for the

debts of another party, in case the other party fails to clear their dues on time.” 74

Defendants, however, attempt to invoke a different definition, arguing “guarantee”

means “something given or existing as security such as to fulfill a future engagement

or condition subsequent.” 75 According to Defendants, “[t]he [Coughlin Guarantees]

are guarantees existing as securities—personal promises of payment to be redeemed

at a later date.”76 Defendants’ interpretation of “personal guarantee” cannot be

reconciled with the Coughlin Guarantees’ unambiguous language. The Coughlin

Guarantees recognize that Sheehan Insurance owed Ms. Coughlin a liability “as part

of her compensation plan” and that Pat, Mark, and, in some cases, Mr. Lee were

guaranteeing payments to Ms. Coughlin if Sheehan Insurance failed to make those

payments in the future.77 The Coughlin Guarantees, by their plain terms, recognize

74 Personal Guarantee, Black's Law Dictionary (2d ed. 1910), https://thelawdictionary.org/personal-guarantee/ (last visited Apr. 29, 2020). 75 Guarantee, Black’s Law Dictionary (11th ed. 2019). 76 Id. 77 See Coughlin Guarantees ((promising “the sum of $600,000 as part of her compensation plan”; promising the payment of “the correct previously owed 15 RLF1 22529685v.1 commission . . . using the same split outlined in original SIG employment agreement”; and promising “the sum of $400,000 as part of her compensation plan . . . depending on the final earn out”).

19 an underlying liability of Sheehan Insurance to make these payments.

AssuredPartners sufficiently alleges that this liability never was disclosed, breaching

several representations by Seller Parties.

Defendants further contend there is no violation of Section 6.11 because (i)

“[t]he Coughlin Guarantee payments were made pursuant to a pre-closing payment

obligation,”78 (ii) Mr. Lee and KDW Financial were not employees, 79 and (iii) the

Complaint fails to identify the holder of liability to Bob Stravinski. 80 As for the first

contention, Section 6.11 may be violated even if the payments were made pursuant

to a “pre-closing payment obligation,” because the prohibition is on post-closing

payments that are “conditioned upon, or in any way related to, such employee’s

performance or employment with Buyer or its subsidiaries or Affiliates during the

Earn-Out Period or otherwise.” 81 AssuredPartners adequately alleges that

Defendants breached this obligation by making unauthorized payments to Ms.

Coughlin that were part of her post-closing “compensation.”82 This count, therefore,

adequately is pleaded; whether the facts bear it out is a separate issue to be resolved

in discovery.

78 Defs. Mot. at 20-21. 79 Id. at 21. 80 Id. at 20 (citing SAC ¶¶ 32, 51). 81 APA § 6.11. 82 SAC ¶¶ 36-37, 44.

20 Defendants next argue that Section 6.11 only applies to payments made “to

any employee” of AssuredPartners and therefore does not encompass any allegedly

improper payments to Mr. Lee and KDW Financial. 83 It is undisputed that Mr. Lee

and KDW Financial never were employees of AssuredPartners.84 AssuredPartners’

complaint is vague as to what section of the APA the payments made to Mr. Lee and

KDW Financial allegedly violated. The second amended complaint seems to allege

that the payments were improper because AssuredPartners instructed Pat and Mark

to stop using KDW Financial and Mr. Lee. To the extent, however, that

AssuredPartners is claiming these payments violated Section 6.11, that particular

claim would fail because Mr. Lee and KDW were not employees after closing.

The second amended complaint also sufficiently alleges that the Sellers

breached the APA by not disclosing a $139,000.00 liability to Bob Stravinski, a

Sheehan Insurance sales producer. 85 This liability allegedly was incurred pre-

closing and paid post-closing, but was not reported in the income statement. 86 The

second amended complaint alleges that the Sellers represented there were no

undisclosed liabilities.87 Therefore, the second amended complaint sufficiently

83 See APA at ¶ 1. 84 SAC ¶ 13 (“KDW Financial provided accounting services as an independent contractor for AssuredPartners.”); SAC Ex. B (“Contractor is an independent contractor and shall not at any time hold itself (or any of its agents or representatives, including without limitation Service Provider) out to be employees of the Company.”). 85 SAC ¶ 32. 86 Id. 87 Id. ¶ 7.

21 alleges the Sellers had a duty to disclose the liabilities to Ms. Coughlin and

Stravinski under the APA.

B. Count II adequately alleges a breach of the implied covenant.

Under Delaware law, the “implied covenant is inherent in all contracts and is

used to infer contract terms ‘to handle developments or contractual gaps that the

asserting party pleads neither party anticipated.’”88 The covenant of good faith and

fair dealing “embodies the law's expectation that ‘each party to a contract will act

with good faith toward the other with respect to the subject matter of the contract.’”89

The good faith and fair dealing covenant protects the spirit of an agreement against

underhanded tactics that deny a party the fruits of its bargain. 90

Defendants argue AssuredPartners has not identified a contractual gap or term

to be implied. To state a claim for breach of the implied covenant in Delaware, “the

plaintiff must allege a specific implied contractual obligation, a breach of that

obligation by the defendant, and resulting damage to the plaintiff.” 91 A claimant

also must show that the parties’ expectations are so fundamental that they “d[o] not

feel a need to negotiate about them.”92 Under the minimal pleading standards

88 Dieckman v. Regency GP, LP, 155 A.3d 358, 367 (Del. 2017). 89 Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1032 (Del. Ch. 2006). 90 Marshall v. Priceline.com Inc., 2006 WL 3175318, at *4 (Del. Super. Oct. 31, 2006) (citing Kelly v. McKesson HBOC, Inc., 2002 WL 88939, at *10 (Del. Super. Jan. 17, 2002)). 91 Fitzgerald v. Cantor, 1998 WL 842316, at *2 (Del. Ch. Nov. 10, 1998). 92 Allied Capital, 910 A.2d at 1032-33 (quoting Katz v. Oak Industries, Inc., 508 A.2d 873, 880 (Del. Ch. 1986)).

22 necessary to survive a motion to dismiss, AssuredPartners adequately has alleged

that Sellers breached an implied contractual obligation under the earn-out

agreement.

The relevant contractual provision of the APA provides that, after Buyer

calculates the earn-out amount and provides its calculation to Seller, that calculation

is conclusive for purposes of determining the earn-out payment and is “deemed

accepted by the Seller Parties,” unless Seller delivers a written objection to Buyer. 93

AssuredPartners alleges the implied contractual term that the drafters would not have

needed to include in the APA’s express terms is that the Sellers had an obligation to

“provide truthful and accurate information to AssuredPartners to allow a fair and

accurate calculation of the Earn Out Payment” and “ensure that the Earn Out

Payment is fairly calculated based on the business’s actual EBITDA.” 94 According

to AssuredPartners, since both sides “had a vested interest in determining the total

amount owed post-termination, one would naturally infer that each party expected

the other to ‘act reasonably,’ work collaboratively, and, without undue delay, come

to a satisfactory amount.” 95 This expectation to act reasonably and collaboratively

is so “fundamental to sophisticated parties entering into an agreement after arms-

93 APA § 2.06(c). 94 SAC ¶ 65; see also Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 816 (Del. 2013) (“It is true that when a contract confers discretion on one party, the implied covenant of good faith and fair dealing requires that the discretion . . . be used reasonably and in good faith.”). 95 Brightstar Corp. v. PCS Wireless, LLC, 2019 WL 3714917, at *13 (Del. Super. Aug. 7, 2019) (quoting Marshall, 2006 WL 3175318, at *4).

23 length negotiations that it need not be memorialized in the terms of the agreement

itself.”96

The second amended complaint further alleges the Sellers “breached that

implied obligation by not objecting to the calculation of the Earn Out Payment and

by accepting the incorrect and unjustified maximum Earn Out Payment.” 97 The

second amended complaint alleges damages resulting from Pat Sheehan and

Sheehan Insurance acting to obtain the “maximum Earn Out Payment,” thereby

“receiv[ing] money to which they were not entitled.” 98 At this early stage, these

allegations are sufficient to sustain a claim for breach of the implied covenant.

C. Plaintiff’s claim for fraudulent inducement pleads damages that simply “rehash” the damages for breach of contract.

Defendants argue AssuredPartners’ fraudulent inducement claim fails to state

a claim because it fails to allege fraud with the requisite particularity and does not

seek damages independent from the breach of contract claim. The elements of

fraudulent inducement are: “1) a false statement or misrepresentation; 2) that the

defendant knew was false or made with reckless indifference to the truth; 3) the

statement induced the plaintiff to enter the agreement; 4) the plaintiff’s reliance was

reasonable; and 5) the plaintiff was injured as a result.” 99

96 Id. 97 SAC ¶ 66. 98 Id. 99 ITW Glob. Invs. Inc. v. Am. Indus. P’rs Capital Fund IV, L.P., 2017 WL 1040711, at *6 (Del. Super. Mar. 6, 2017) (internal citation omitted).

24 In addition to overt representations, fraud also may occur through deliberate

concealment of material facts, or by silence in the face of a duty to speak. 100 A fraud

claim can be based on representations found in a contract,101 but the allegations of

fraud must be separate from the breach of contract claim. 102 Allegations that are

focused on inducement to contract are separate and distinct conduct. 103 Furthermore,

the allegedly defrauded plaintiff must have sustained damages as a result of a

defendant's action,104 and those damages may not simply “rehash” the damages

allegedly caused by the contractual breach.105

In support of its fraudulent inducement claim, AssuredPartners alleges the

Sellers concealed the following material facts before closing: (1) Pat was married to

the second-highest paid employee of Sheehan Insurance; 106 and (2) “the guaranteed

promises of future compensation to Ms. Coughlin and significant liability to Bob

Stravinski.”107 Furthermore, AssuredPartners argues that Defendants knew these

100 Addy v. Piedmonte, 2009 WL 707641, at *18-19 (Del. Ch. Mar. 18, 2009). 101 ITW Glob. Invest. Inc. v. Am. Indus. P’rs Cap. Fund IV, L.P., 2015 WL 3970908, at *5 (Del. Super. June 24, 2015). 102 Id. at *6. 103 Id. 104 Cornell Glasgow, LLC v. La Grange Properties, LLC, 2012 WL 2106945, at *8 (Del. Super. 2012) (quoting Dalton v. Ford Motor Co., 2002 WL 338081, at *6 (Del. Super. 2002)). 105 Cornell Glasgow, 2012 WL 2106945, at *8–9 (dismissing a fraud claim because the plaintiffs' damages allegation was nothing more than a “rehash” of the allegations in its breach of contract claims); see also AFH Holding Advisory, LLC v. Emmaus Life Sciences, Inc., 2013 WL 2149993, at *13 (Del. Super. 2013) (dismissing a fraud claim because the plaintiff's damages allegation for fraud was not separate and distinct from its damages allegation for breach of contract). 106 SAC ¶¶ 8, 30. 107 Id. ¶¶ 8, 25-32, 72-74.

25 representations were false and that the omissions were misleading.108 The second

amended complaint specifically alleges Defendants’ fraudulent representations and

omissions induced AssuredPartners to sign the APA on December 10, 2014, close

the Transaction, and pay millions of dollars to Sheehan Insurance; 109

AssuredPartners reasonably relied on the false and misleading representations;110

and AssuredPartners was damaged as a result. 111

The facts of this case are similar to both Novipax Holdings LLC v. Sealed Air

Corp.112 and Abry Partners V, L.P. v. F & W Acquisition, LLC.113 In Novipax, the

plaintiff pointed to representations in the APA about how the defendant was to

conduct the business and about the business’s financial viability before closing.

After the parties closed the transaction, however, the plaintiff learned that those

representations were false, and that the defendant failed to correct the

misrepresentations before the closing in order to induce the plaintiff into closing the

Transaction. The Superior Court held those allegations sufficiently stated a claim

for fraudulent inducement. Like the Novipax Holdings plaintiff, AssuredPartners

alleges that Defendants did not correct their misrepresentations before closing in

order to induce AssuredPartners into completing the Transaction.

108 Id. ¶¶ 35, 45-46, 51. 109 Id. ¶¶ 77-78. 110 Id. ¶ 76. 111 Id. ¶¶ 78-79. 112 2017 WL 5713307, at *13 (Del. Super. Nov. 28, 2017). 113 891 A.2d 1032 (Del. Ch. 2006)

26 In Abry, the parties entered into a stock purchase agreement for the buyer's

purchase of a portfolio company.114 The stock purchase agreement contained several

representations and warranties about the company's financial statements. 115 After

the transaction closed, the buyer discovered that the seller fraudulently had

manipulated pre-signing financial statements.116 The Court of Chancery refused to

dismiss the fraudulent inducement claim, finding that the “financial statements were

represented and warranted in the Agreement and were therefore intended to induce

the Buyer to sign the Agreement and close the sale to purchase the Company.” 117

Similarly, in this case, AssuredPartners alleges the Sellers represented that Sheehan

Insurance’s financial statements accurately reflected the business’s financial status

and that there were no undisclosed material contracts or liabilities. 118 The allegations

that Sellers made those misrepresentations before closing in order to induce

AssuredPartners to close the Transaction are “separate and distinct” from any

allegations of later breaches of the APA.119

114 Novipax, 2017 WL 5713307, at *13. 115 Id. 116 Id. 117 Abry, 891 A.2d at 1034–35. 118 SAC ¶ 25. 119 See Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *16-17 (Del Ch. Nov. 19, 2013).

27 Although the two claims are different, Defendants are correct that

AssuredPartners pleads substantively identical damages for both claims.

AssuredPartners attempts to distinguish the damages based on the fact that it:

suffered separate and distinct damages because of these pre-closing acts of fraudulent inducement because AssuredPartners may have reduced the amount of consideration to be paid for the assets of Sheehan Insurance, may have negotiated for different terms regarding the Earn Out Period, and may have demanded stronger restrictive covenants from Brianna Coughlin. 120

Yet, these are simply different facts underlying the claim rather than distinct

damages. For instance, both Counts I and III allege damages from undisclosed

liabilities to Ms. Coughlin of over $1.1 million and undisclosed liabilities to Bob

Stravinski in the amount of $139,000.00. 121 Although companion fraud claims and

breach of contract claims have at times survived a motion to dismiss, in those cases

the fraud claim sought rescissory damages.122 No rescissory damages are sought in

this case. Count III therefore fails because AssuredPartners has failed to allege

120 SAC ¶ 78. 121 Id. ¶ 51, 73-74. 122 See Novipax, 2017 WL 5713307, at *14 (finding that a claim for rescission or rescissory damages separates a fraudulent inducement claim from breach of contract damages); ITW Glob. Invest. Inc., 2015 WL 3970908, at *6 (“Count I for fraud must be dismissed because it pleads damages that are simply a “rehash” of the breach of contract damages. Because Count II for fraud in the inducement pleads damages for rescission or rescissory damages, the Court will not address Count II.”); see also EZLinks Golf, LLC v. PCMS Datafit, Inc., 2017 WL 1312209, at *6 (Del. Super. Mar. 21, 2017) (finding that plaintiff's count for fraud in the inducement is materially identical to the breach of contract complaint and rejecting plaintiff's reliance on ITW because plaintiff pleads neither for rescission nor rescissory damages as did the ITW complaint).

28 damages for fraudulent inducement that are distinct from the damages it seeks for

breach of contract. 123

D. Count IV fails to state a claim for civil conspiracy.

Defendants argue that because AssuredPartners’ claim for civil conspiracy is

premised on its claim for fraudulent inducement, Count IV must fail as well. “[C]ivil

conspiracy requires, (1) a confederation or combination of two or more parties, (2)

an unlawful act done in furtherance of the conspiracy and (3) actual damage.”124

Civil conspiracy is not an independent cause of action and, instead, must be based

on an underlying unlawful act. 125 If the plaintiff fails to adequately allege the

elements of the underlying claim, the conspiracy claim must be dismissed. 126

Here, there is no underlying wrong on which a claim of conspiracy could

proceed. AssuredPartners alleges Defendants conspired to fraudulently induce it to

purchase Sheehan Insurance’s assets at an artificially inflated price and later pay

Sheehan Insurance the maximum earn-out based on misstated financials.127 As

123 This Court dismisses this claim with prejudice because the pleading deficiency persists despite Plaintiff’s multiple amendments to its complaint. 124 WaveDivision Hldgs., LLC v. Highland Capital Mgmt. L.P, 2010 WL 1267126, at *4 (Del. Super. Mar. 31, 2010) (citing Nicolett v. Nutt, 525 A.2d146, 149-50 (Del. 1987)). 125 Ramunno v. Cawley, 705 A.2d 1029, 1039 (Del. 1998). 126 Transched Sys. Ltd. v. Versyss Transit Solutions, LLC, 2008 WL 948307, at *4 (Del. Super. Apr. 2, 2008) (“To succeed on a claim of civil conspiracy Plaintiff must first have a valid underlying claim.”); Connolly v. Labowitz, 519 A.2d 138, 143 (Del. Super. 1986) (“To be actionable a civil conspiracy must embody an underlying wrong which would be actionable in the absence of the conspiracy.”). 127 SAC ¶ 81.

29 explained above, AssuredPartners fails to state a claim for fraudulent inducement.

Additionally, unless the breach also constitutes an independent tort, a breach of

contract cannot constitute an underlying wrong on which a claim for civil conspiracy

could be based.128 Likewise, a breach of the implied contractual covenant of good

faith and fair dealing cannot constitute an underlying wrong unless the breach also

constitutes an independent tort.129 Accordingly, the claim for civil conspiracy must

be dismissed.130

E. Count V adequately pleads a claim for indemnification against KDW Financial and Mr. Lee.

Defendants first argue Count V is dependent upon the success of Counts I and

II, and therefore should be dismissed as those claims are not adequately pleaded

under Rule 12(b)(6) and the terms of the APA.131 As stated above, AssuredPartners

adequately has pleaded Counts I and II, so this argument fails.

Defendants next contend the second amended complaint lacks sufficient detail

to apprise Mr. Lee and KDW Financial of the allegations against them. The second

amended complaint alleges that the KDW Agreement imposed various contractual

obligations on KDW Financial and Mr. Lee,132 that KDW Financial and Mr. Lee

128 Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 892 (Del. Ch. 2009). 129 Id. 130 Defendants separately argue the claim must be dismissed as to Ms. Coughlin for want of personal jurisdiction. In light of the foregoing analysis, the court need not reach this issue. 131 SAC ¶ 91. 132 Id. ¶¶ 87-89.

30 failed to fulfill those obligations, 133 and that those failures create an obligation to

indemnify AssuredPartners for its damages.134 More specifically, AssuredPartners

alleges that KDW Financial and Mr. Lee agreed to (1) “provide accounting,

operational and administrative services and support for [AssuredPartners’]”;135 (2)

agreed to provide all services “in accordance with all applicable statutes, laws, and

regulations, all policies and procedures established by [AssuredPartners] from time

to time, all rules of ethics applicable to members of the insurance profession, and in

accordance with the appropriate standard of care”;136 (3) “manipulated financial

statements and records to misrepresent AssuredPartners’ post-closing EBITDA”;137

(4) “failed to provide the services in good faith, in compliance with all

AssuredPartners’ policies and procedures, or in accordance with the appropriate

standard of care”;138 and (5) “[a]s a result of the willful misconduct or gross

negligence of Mr. Lee and KDW Financial, AssuredPartners suffered losses,

damages, liabilities, and expenses in the form of making the maximum Earn Out

Payment to Sheehan Insurance, making unnecessary payments to Ms. Coughlin, and

133 Id. ¶¶ 90-92. 134 Id. ¶¶ 93-94. 135 Id. ¶ 87. 136 Id. ¶ 88. 137 Id. ¶ 90. 138 Id.

31 incurring the attorneys’ fees and costs associated with this lawsuit.” 139 These

allegations are sufficient to state a claim for indemnification.

F. AssuredPartners adequately alleges that the Sellers’ fraudulent concealment tolled the statute of limitations.

Defendants argue Counts I and II are time-barred and Count V depends on

Counts I and II and therefore also must be dismissed. Under Delaware law, claims

for breach of contract and breach of the implied covenant are subject to a three-year

statute of limitations. 140 Under the settled principles of law reiterated by the

Delaware Supreme Court in Wal–Mart Stores Inc. v. AIG Life Ins. Co., courts apply

a three-step analysis to determine whether a claim is time-barred.141 First, the court

determines when the cause of action accrues.142 For breach of contract claims, “the

wrongful act is the breach, and the cause of action accrues at the time of breach.” 143

Second, the court determines whether the statute of limitations may be tolled so that

the cause of action accrues after the time of breach or injury. 144 The plaintiff must

plead with specificity the basis for tolling the statute.145 Third, if a tolling exception

139 Id. ¶ 92. 140 10 Del. C. § 8106. 141 Wal–Mart Stores Inc. v. AIG Life Ins. Co., 860 A.2d 312 (Del. 2004). 142 Id. 143 Certainteed Corp. v. Celotex Corp., 2005 WL 217032 at *7 (Del. Ch. Jan. 24, 2005) (citing Ambase Corp. v. City Investing Co., 2001 WL 167698, at *14 n. 4 (Del. Ch. Feb. 7, 2001)). 144 Wal–Mart Stores, 860 A.2d 312 (Del. 2004). 145 Young & McPherson Funeral Home, Inc. v. Butler's Home Improvement, LLC, 2015 WL 4656486, at *1 (Del. Super. Aug. 6, 2015); Eni Holdings, LLC v. KBR Grp. Holdings, LLC, 2013 WL 6186326, at *11 (Del. Ch. Nov. 27, 2013).

32 applies, the court determines when the plaintiff was on inquiry notice. 146 Even if

tolling applies, the statute of limitations begins to run from the date when the plaintiff

was on inquiry notice.147

As explained below, the APA’s Survival Clause permits tolling, and

AssuredPartners adequately pleads tolling on the basis of fraudulent concealment.

The claims concerning breach of the pre-closing obligations in Count I are timely

with time appended to account for tolling. The claims concerning breach of the post-

closing obligations in Counts I and II are timely even without any tolling. The

indemnification claim in Count V depends on the claims in Counts I and II and

therefore also is timely.

i. The Survival Clause does not bar application of the tolling doctrine.

Defendants first argue that the APA’s Survival Clause creates a valid

contractual limitations period for the claims related to representations and warranties

contained in Article IV of the APA. The Survival Clause states:

Except as otherwise provided herein, the representations and warranties contained in Articles IV and V hereof and in any certificate delivered pursuant to this Agreement shall survive the Closing for a period of two (2) years after the Closing Date provided, however, that … (c) if any representation or warranty contained in Article IV or V hereof is fraudulently given, it shall survive the Closing Date until sixty (60) days after the expiration of the applicable statute of limitations … All

146 Wal–Mart Stores, 860 A.2d 312. 147 Id.

33 covenants and other agreements in this Agreement shall survive the Closing and not terminate. 148

The parties dispute whether AssuredPartners’ allegations fall within Section

7.01(c) of the APA. Defendants argue that the APA’s two-year contractual statute

of limitations applies to all Counts because they all “arise out of the expired

representations and warranties.”149 In summary, Defendants argue (1) Count I

expressly alleges breaches of Article IV; and (2) Counts II and V correspond with

Sections 4.12, 4.13, 4.15, and 4.33 of the APA; and (3) Count V is dependent upon

the success of Counts I and II. As such, Defendants allege that all Counts accrued

on the date of the closing. Although Count I also expressly references the Sellers’

post-closing obligations under Section 6.11 to not pay “without the prior executed

written consent” of AssuredPartners “any bonus, compensation, or other

renumeration to any employee” of AssuredPartners,150 Defendants contend the

alleged breach of Section 6.11 accrued before closing because the statute of

limitations accrues at the time the Coughlin Guarantees were awarded. Defendants

do not address the express reference to Section 2.06 in Count II. 151

AssuredPartners argues that Section 7.01(c) allows for tolling.

AssuredPartners makes this argument under the apparent assumption that Section

148 APA § 7.01. 149 Defs. Mot. at 11. 150 See SAC ¶ 50. 151 See id. ¶ 63.

34 7.01(c) should apply to all counts. Furthermore, AssuredPartners contends the

Section 6.11 claim is timely even without tolling because the statute of limitations

should accrue at the time of the last payment under the Coughlin Guarantees, which

allegedly was “as late as March 2017.” 152

It is unclear, at this stage of the proceedings, whether AssuredPartners

ultimately may prove that Article IV’s pre-closing representations and warranties

were “fraudulently given,” thereby implicating Section 7.01(c). At this stage,

however, it is sufficient that AssuredPartners pleads that Sellers made

representations they knew to be false. More importantly, as set forth below, it is

immaterial at this stage whether Section 7.01(c) applies to some or all of Plaintiff’s

claims. Even if the two-year contractual limitations period in Section 7.01 applies

to these pre-closing obligations, that period nevertheless may be tolled by

Defendants’ alleged fraudulent concealment, which Plaintiff adequately pleads.

Lastly, it is clear at this stage that the parties intended the post-closing obligations

set forth in Sections 2.06 and 6.11 as covenants that “shall survive the Closing and

not terminate.” These covenants only survive for the applicable statute of limitations

period, including any tolling, as further explained below.

152 SAC ¶ 56.

35 1. Pre-closing obligations As part of the Wal-Mart analysis, this Court first must determine when the

cause of action accrues. There is no dispute that representations and warranties

concerning pre-closing obligations typically accrue at the time of the closing and

that the claims would be untimely absent any tolling.153

Second, the court must ascertain whether tolling applies. First, Defendants

argue that the clause stating representations and warranties “shall survive the

Closing for a period of two (2) years after the Closing Date” necessarily means that

all claims expired on December 11, 2016, two years after the closing, with no

allowance for tolling. Second, Defendants argue that even if the “applicable statute

of limitations” in Section 7.01(c) applies, AssuredPartners would be required to

bring its claims within three years after the Transaction closed. Defendants contend

the phrase “applicable statute of limitations” does not allow for tolling.

Under Delaware law, parties’ contractual choices are respected and there is

no special rule requiring that in order to contractually shorten the statute of

limitations, parties utilize “clear and explicit” language.154 Delaware courts have

interpreted contractual provisions that limit the survival of representations and

warranties as evidencing an intent to shorten the period of time in which a claim for

153 See CertainTeed, 2005 WL 217032, at *8 (“[U]nder 10 Del. C. § 8106, [Defendant’s] misrepresentations are also subject to a three-year statute of limitations, and whether treated as a breach of contract or as tort, the accrual date as to all of these claims was the date of Closing.”). 154 GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898, at *12 (Del. Ch. July 11, 2011).

36 breach of those representations and warranties may be brought.155 The question of

whether the parties’ contract adopts tolling turns on the contractual language the

parties chose.

In GRT, Inc. v. Marathon GTF Tech., Ltd., the Court of Chancery conducted

a tolling analysis despite a survival clause that contained language similar to the

clause here.156 The relevant language in GRT stated:

The representations and warranties of [GRT] contained in Section 3.16 shall survive until the expiration of the applicable statutes of limitations ..., and will thereafter terminate, together with any associated right of indemnification pursuant to Section 7.3. All other representations and warranties in Sections 3 and 4 will survive for twelve (12) months after the Closing Date, and will thereafter terminate, together with any associated right of indemnification pursuant to Section 7.2 or 7.3 or the remedies provided pursuant to Section 7.4.157

The Court of Chancery held that the survival clause created a one-year statute of

limitations and proceeded to consider whether tolling should apply.158 It dismissed

the breach of representation claims as barred by the statute of limitations on the

grounds that the plaintiff did not adequately plead that a tolling exception should

apply.159 Similarly, in Kilcullen v. Spectro Sci., Inc., the Court of Chancery

examined a survival clause that provided:

155 See id.; Sterling Network Exchange, LLC v. Digital Phoenix Van Buren, LLC, 2008 WL 2582920, at *1 (Del. Super. Mar. 28, 2008); Campanella v. General Motors Corp., 1996 WL 769769, at *1 (Del. Super. Nov. 6, 1996). 156 GRT, 2011 WL 2682898, at *12. 157 Id. at *7. 158 Id. at *17. 159 Id.

37 all representations and warranties in this Agreement [other than certain representations and warranties not relevant here] ... shall terminate on the date that is twelve (12) months following the Closing Date. 160

The Court of Chancery explicitly stated that the contractual limitations period

permitted tolling. 161

Section 7.01 of the APA similarly permits tolling. The contractual language

the parties selected does not expressly or impliedly eliminate tolling. Rather, the

clause simply creates a default two-year limitations period and provides for a longer

period in the event certain representations are fraudulent. If the intent was to make

the closing date the effective accrual date for bringing a claim, the contract would

have so stated.

As for Section 7.01(c), Defendants argue that even if the termination date was

set for sixty days after the expiration of the applicable statute of limitations, it does

not follow that the parties contracted to allow for tolling. Defendants contend

interpreting Section 7.01(c) to allow tolling would extend claims for fraudulent

representations under Articles IV or V for the applicable statutory period, plus time

appended to account for tolling, plus sixty additional days. Defendants argue this

interpretation would contravene Delaware law.

160 Kilcullen v. Spectro Sci., Inc., 2019 WL 3074569, at *5 (Del. Ch. July 15, 2019). 161 Id.

38 At the February 10, 2020 hearing, AssuredPartners argued that 10 Del. C. §

8106(c) expressly allows parties to extend the statute of limitations by contract.162

Before Section 8106(c) became effective on August 1, 2014, the maximum

contractual survival period was three years under a series of decisions holding that

contracting parties could shorten but not lengthen a statute of limitations. 163 Parties

now contractually may extend the statute of limitations up to a maximum of twenty

years under Section 8106(c).164

Section 8106(c) states:

Notwithstanding anything contrary in the chapter, an action based on a written contract, agreement or undertaking involving at least $100,000 may be brought within a period specified in such written contract, agreement or undertaking provided it is brought prior to the expiration of 20 years from the accruing of the cause of such cause of action. 165

Consistent with the contractarian principles undergirding Delaware law,

Section 8106(c) was adopted to allow parties to contract around Delaware’s statute

of limitations for certain actions based on a written contract, agreement or

162 See Transcript of Motions held on 2-10-20 before The Honorable Abigail M. LeGrow, Trans. 65555751, 49:18-50:19. 163 Menefee, ex rel. Menefee v. State Farm Mut. Ins. Co., 1986 WL 630314, at *1 (Del. Super. July 11, 1986) (“[A] contract provision for a longer period of limitation than provided by the applicable statute would be void as against public policy.”); Shaw v. Aetna Life Ins. Co., 395 A.2d 384, 386– 87 (Del. Super. 1978) (“Two parties contracting between themselves cannot agree to circumvent the [statute of limitations] as mandated by the legislature in its attempt to protect the public interests.”). 164 Bear Stearns Mortg. Funding Tr. 2006-SL1 v. EMC Mortg. LLC, 2015 WL 139731, at *14 (Del. Ch. Jan. 12, 2015). 165 10 Del. C. § 8106(c).

39 undertaking.166 Section 8106(c) supplants the statute of limitations in Section

8106(a) if: (1) the claims are based on a written contract; (2) the contract involved

at least $100,000; and (3) the contract specifies a period for claims to accrue. 167

There is no dispute that the claims in the complaint are based on a written contract

that involves at least $100,000.

The only remaining issue is whether the APA specified a period for claims to

accrue. Although the “period specified” can refer to a particular date, the statutory

amendment also contemplated other measures, including “a period of time defined

by reference to the occurrence of some other event or action, another document or

agreement or another statutory period” and “an indefinite period of time.” 168 If the

contract specified an indefinite period, then the action nevertheless must be brought

“prior to the expiration of 20 years from the accruing of the cause of such action.” 169

In Bear Stearns Mortg. Funding Tr. 2006-SL1 v. EMC Mortg. LLC, the Court

of Chancery held that the parties properly invoked Section 8106(c) and contracted

around the three-year statute of limitations. 170 As that court explained, a claim for

breach of the representations and warranties normally begins to accrue on the date

166 Bear Stearns Mortg. Funding Tr. 2006-SL1 v. EMC Mortg. LLC, 2015 WL 139731, at *12 (Del. Ch. Jan. 12, 2015) (citing Synopsis to House Bill No. 363). 167 Id. 168 Synopsis to House Bill No. 363 (emphasis added). 169 10 Del. C. § 8106(c). 170 2015 WL 139731 at *15.

40 of closing. 171 In Bear Stearns, however, the contract included a survival clause

providing that the representations and warranties “shall survive” the closing. 172 In

addition, the contract contained an accrual provision providing that “a cause of

action ... shall accrue” only after the defendant both discovered the breach and failed

to take remedial action. 173 The court found that the language of the accrual provision

“constituted ‘a period of time defined by reference to the occurrence of some other

event or action’ that is a sufficient ‘period specified’ for purpose of Section

8106(c).”174 As a result, the combination of the survival clause and accrual provision

“operated to extend the statute of limitations up to the statutory maximum of twenty

years.”175

In contrast, in Hydrogen Master Rights, Ltd. v. Weston, the District Court of

Delaware held the parties did not intend to extend the limitations period under

Section 8106(c) where the purchase agreement provided that the representations and

warranties “survive closing” without expressly addressing the accrual of a claim.176

The issue before this Court is whether the language extending the limitations

period for sixty days after the expiration of the “applicable statute of limitations” in

Section 7.01(c) is a sufficient “period specified” for purposes of Section 8106(c).

171 Id. at *7. 172 Id. at *15. 173 Id. 174 Id. 175 Id. 176 Hydrogen Master Rights, Ltd. v. Weston, 228 F. Supp. 3d 320, 330 (D. Del. 2017).

41 Section 7.01(c)’s reference to the applicable statute of limitations invokes the three-

year statutory period in Section 8106. That period––three years and sixty days after

a claim accrues––is a sufficiently defined period under Section 8106(c).

Additionally, unlike the “warranties survive closing” language of the purchase

agreement in Weston, the APA specifies sixty days after the applicable statute of

limitations.177 Sixty days is a clear period of time and the language used suggests

an intention to lengthen the statute of limitations. Furthermore, Section 8106(c)

expressly contemplates the use of a statutory period to define the contractual

limitations period. 178

This contractually extended limitations period also permits tolling. Contrary

to Defendants’ assertion that allowing for tolling would contravene the language

calling for only “sixty days after the applicable statute” of limitations, the tolling

doctrine defines when a claim accrues for purposes of the statute of limitations. The

“sixty days after the applicable statute of limitations” language does not indicate an

intention to shorten to statute of limitations or replace the analysis of when a claim

accrues. Rather, as described above, it extends the statute of limitations. Therefore,

Section 7.01(c) adopts a three years and sixty days limitations period for claims that

177 Id. 178 Synopsis to House Bill No. 363.

42 representations and warranties fraudulently were given, with any such claim

accruing as it otherwise would under Delaware law, including any applicable tolling.

2. Post-closing obligations

Section 7.01 of the APA provides “[a]ll covenants and other agreements in

this Agreement shall survive the Closing and not terminate.”179 This clause

encompasses the parties’ post-closing obligations in Sections 2.06 and 6.11.

First, Defendants contend that the cause of action accrued when the Coughlin

Guarantees were awarded. AssuredPartners argues the date of accrual was at the

time of the last payment in March 2017. Wal–Mart holds that a cause of action

accrues “at the time of the wrongful act, even if the plaintiff is ignorant of the cause

of action.”180 The “wrongful act” is a general concept that varies depending on the

nature of the claim at issue. 181 For breach of contract claims, the wrongful act is the

breach, and the cause of action accrues at the time of breach. 182

Unlike the alleged breaches of representations and warranties in Article IV,

which typically accrue on the date of the closing absent any tolling, these post-

closing obligations necessarily accrued after the closing. At this stage,

AssuredPartners has sufficiently alleged that “Pat and Sheehan Insurance also

179 APA § 7.01. 180 Wal-mart, 860 A.2d at 319. 181 Certainteed, 2005 WL 217032, at *7. 182 See Ambase Corp. v. City Investing Co., 2001 WL 167698, at *14 n. 4 (Del. Ch. Feb. 7, 2001).

43 breached Section 6.11” of the APA by making unauthorized payments to

AssuredPartners’ employees “as late as March 2017.” 183 Additionally,

AssuredPartners alleges the Sellers breached the implied covenant of good faith and

fair dealing in Section 2.06 by “not objecting to the calculation of the Earn Out

Payment and by accepting the incorrect and unjustified maximum Earn Out

Payment.”184 AssuredPartners further alleges that the Earn Out Payment was paid

on March 10, 2017.185 Finally, Assured Partners alleges Defendants fraudulently

concealed these payments. As set forth below, to the extent these post-closing claims

were not filed within three years of the payments being made, Assured Partners

adequately pleads tolling.

ii. AssuredPartners pleads sufficient facts for the doctrine of fraudulent concealment to apply.

To toll a limitations period on the basis of fraudulent concealment, a plaintiff

must show that the defendant “knowingly acted to prevent [the] plaintiff from

learning facts or otherwise made misrepresentations intended to ‘put the plaintiff off

the trail of inquiry.’”186 Fraudulent concealment “requires an affirmative act of

concealment by a defendant––an ‘actual artifice’ that prevents a plaintiff from

gaining knowledge of the facts or some misrepresentation that is intended to put a

183 SAC ¶ 56. 184 Id. ¶ 66. 185 Id. ¶ 16. 186 State ex rel. Brady v. Pettinaro Enters., 870 A.2d 513, 531 (Del. Ch. 2005) (quoting Halpern v. Barran, 313 A.2d 139, 143 (Del. Ch. 1973)).

44 plaintiff off the trail of inquiry.”187 Mere silence is insufficient to establish

fraudulent concealment.188 The partial disclosure of facts in a misleading or

incomplete way, however, can rise “to the level of actual artifice.”189 In addition to

actively concealing facts from the complaining party, the actor must have intended

to prevent inquiry or knowledge of the injury.190 If fraudulent concealment occurs,

then “the statute is suspended only until [the plaintiff's] rights are discovered or until

they could have been discovered by the exercise of reasonable diligence.” 191

In BTIG, LLC v. Palantir Techs., Inc., the defendants argued that the

plaintiff’s claims for tortious interference with prospective economic advantage and

civil conspiracy were untimely. The plaintiff, the broker of a potential transaction,

claimed the defendants conspired to capture the economic benefits of its potential

transaction for themselves and that the doctrines of fraudulent concealment and

“inherently unknowable injury” should apply to its claims. The Superior Court held

the plaintiff adequately had alleged tolling at the motion to dismiss stage where it

claimed (1) one of the defendants had given false statements to plaintiff in

representing that it would facilitate the plaintiff’s deal; (2) that defendant had control

187 Ryan v. Gifford, 918 A.2d 341, 360 (Del. Ch. 2007) (internal quotation marks and footnote omitted). 188 Krahmer v. Christie's Inc., 911 A.2d 399, 407 (Del. Ch. 2006). 189 In re Tyson Foods, Inc., 919 A.2d 563, 588 (Del. Ch. 2007). 190 Lock v. Schreppler, 426 A.2d 856, 860 (Del. Super. 1981); Nardo v. Guido DeAscanis & Sons, Inc., 254 A.2d 254, 256 (Del. Super. 1969). 191 State ex rel. Brady v. Pettinaro Enters., 870 A.2d 513, 531 (Del. Ch. 2005) (citing Shockley v. Dyer, 456 A.2d 798, 799 (Del.1983)).

45 over the documents that gave rise to the plaintiff’s tortious interference claim and

also had taken efforts to keep the documents from becoming public; and (3) the

documents showed that the defendants surreptitiously were scheming to “crush” and

“shut down” the transaction and thus mislead the plaintiff.192 For tort claims, the

cause of action typically accrues at the time of injury. 193 Although the defendants

argued the injury occurred when the transaction failed to close, the Superior Court

held that the doctrines of inherently unknowable injury and fraudulent concealment

applied to toll the accrual of the statute of limitations to the point at which the

documents publicly were revealed in a court filing.194

Similarly, Defendants allegedly took affirmative steps to keep

AssuredPartners from discovering the Coughlin Guarantees and the post-closing

payments. AssuredPartners pleaded facts with sufficient particularity to show that

the doctrine of fraudulent concealment ultimately may apply to toll the statute of

limitations. For example, AssuredPartners avers that (1) “[p]ursuant to payment

guarantees surreptitiously executed by Defendants Pat, Mark, Mr. Lee and Ms.

Coughlin the day before the APA was signed, Ms. Coughlin was fraudulently

awarded over $1.1 million in guaranteed compensation, which was not disclosed to

192 2020 WL 95660, at *6 (Del. Super. Jan. 3, 2020). 193 Certainteed, 2005 WL 217032, at *7 (citing Ambase Corp. v. City Investing Co., 2001 WL 167698, at *14 n.4 (Del. Ch. Feb. 7, 2001) and Kaufman v. C.L. McCabe & Sons, Inc., 603 A.2d 831, 834 (Del. 1992)). 194 BTIG, 2020 WL 95660, at *6.

46 AssuredPartners”;195 (2) “Defendants fraudulently concealed improper payments by

not recording transactions within the financial statements submitted to

AssuredPartners post-closing and using misleading descriptions for payments within

account management software”;196 (3) “Pat, through his agents Mr. Lee, KDW

Financial, and Ryan Henson, submitted regular financial records to AssuredPartners

regarding the post-closing operations of the purchased business”;197 (4) “[e]ach and

every one of the financial records failed to disclose and intentionally omitted the

liabilities owed to Ms. Coughlin and Bob Stravinski, and failed to disclose and

intentionally omitted the associated expenses when those payments were ultimately

made in 2015, 2016, and 2017”;198 (5) “Pat and Sheehan Insurance represented that

the financial statements of Sheehan Insurance provided to AssuredPartners

accurately reflected the financial status of Sheehan Insurance and that there were no

undisclosed material contracts or undisclosed liabilities”;199 (6) “Pat and Sheehan

Insurance provided false or misleading financial information to AssuredPartners,

causing AssuredPartners to believe that the company’s EBITDA was higher than it

was, in fact, and thus misrepresented the value of the business at the time of purchase

and the performance of the business at the time of the Earn Out Payment”;200 (7)

195 SAC ¶ 16. 196 Id. ¶ 46. 197 Id. 198 Id. 199 Id. ¶ 25. 200 Id. ¶ 62.

47 “[b]ecause Pat retained full control over Sheehan Insurance’s existing bank accounts

with BB&T after closing, these post-closing payments were made ‘off the books’

without AssuredPartners’ knowledge”;201 (8) “[a]s a result of Defendants’

concealment, AssuredPartners did not discover unauthorized payments to KDW

Financial until 2018”;202 (9) “[t]his triggered additional scrutiny and an internal

investigation by AssuredPartners that led to the discovery of additional facts”;203 and

(10) “[b]ecause of Defendants’ concealment, AssuredPartners did not discover the

Brianna Coughlin Guarantees until January 2019.” 204 These detailed allegations, if

proved at trial, would support tolling the statute of limitations on the basis of

fraudulent concealment.

Lastly, Defendants do not argue that AssuredPartners could have discovered

the facts underlying these claims by the exercise of reasonable diligence or that it

was on inquiry notice at any point before AssuredPartners’ discovery of the

payments. Any such argument must await further development of the factual record.

In short, dismissal on the basis of the statute of limitations would be premature at

this stage of the proceedings.

201 Id. ¶ 46. 202 Id. ¶ 47. 203 Id. 204 Id.

48 CONCLUSION

For the forgoing reasons, Defendants’ Motion to Dismiss is GRANTED as to

Counts III and IV; and DENIED as to Counts I, II, and V. IT IS SO ORDERED.