BorgWarner Inc. v. PHINA Inc.

• Court: Superior Court of Delaware
• Decided: April 10, 2025
• Docket: N24C-09-158 PRW CCLD
• Status: Published

Opinion

SUPERIOR COURT OF THE STATE OF DELAWARE PAUL R. WALLACE NEW CASTLE COUNTY COURTHOUSE JUDGE 500 N. KING STREET, SUITE 10400 WILMINGTON, DELAWARE 19801 (302) 255-0660

Date Submitted: March 12, 2025 Date Decided: April 10, 2025

Kevin R. Shannon, Esquire Jeffrey L. Moyer, Esquire Jaclyn C. Levy, Esquire Srinivas M. Raju, Esquire Charles P. Wood, Esquire Alexandra M. Ewing, Esquire POTTER ANDERSON & CORROON LLP RICHARDS, LAYTON & FINGER, P.A. 1313 North Market Street One Rodney Square Wilmington, Delaware 19801 Wilmington, Delaware 19801

Jonathan K. Youngwood, Esquire Janet A. Gochman, Esquire Jacob Lundqvist, Esquire SIMPSON THACHER & BARTLETT LLP 425 Lexington Avenue New York, New York 10017

RE: BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD Plaintiff’s Motion to Dismiss Counterclaims Dear Counsel:

The Court provides this Letter Opinion in lieu of a more formal written

decision resolving Plaintiff BorgWarner’s Motion to Dismiss Counterclaims (D.I.

14). For the reasons explained below, the Motion is mostly DENIED.

I. THE PARTIES

Plaintiff BorgWarner and Defendant PHINIA are both Delaware corporations BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 2 of 15

with their its principal places of business in Michigan.1

II. CLAIMS AND BACKGROUND

A. THE SPIN-OFF AND THIS SUIT

BorgWarner spun-off its Fuel Systems and Aftermarket businesses into a

separate entity named PHINIA via numerous agreements.2 The spin off was

completed on July 3, 2023.3

More than a year later, BorgWarner filed suit alleging that PHINIA breached

their Tax Matters Agreement (“TMA”) by keeping over $120 million in refunds

from Value Added Taxes (“VAT”).4 It also seeks a declaratory judgment that

PHINIA is obligated to forward any future payment of VAT refunds to

BorgWarner.5

In response, PHINIA raises numerous defenses and asserts four

counterclaims: a request for its own counter declaratory judgment, estoppel,

reformation, and breach of the TMA and the Separation Agreement (“SDA”)—Tax

1 Compl. ¶ 5-6 (D.I. 1). 2 Id. ¶¶ 28-31. 3 Id. ¶¶ 23-27. 4 Id. ¶¶ 28-31. 5 Id. ¶¶ 23-27. BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 3 of 15

Amounts.6 First, PHINIA seeks a declaration that it is not required to pay

BorgWarner any VAT refunds relating to the PHINIA business.7 Second, PHINIA

claims that BorgWarner is not entitled to VAT refunds relating to the PHINIA

business via estoppel, which is pled in the alternative.8 Third, PHINIA asserts that

it is entitled to reformation of the contracts, which is also pled in the alternative, to

comport the agreements to the original understanding that VAT refunds relating to

PHINIA’s business would remain with PHINIA.9 And, fourth, PHINIA alleges that

BorgWarner is in material breach of the TMA and the SDA.10

Now before the Court is BorgWarner’s Motion to Dismiss all four of

PHINIA’s counterclaims.11

B. THE AGREEMENTS

The two relevant agreements are the Separation Agreement (“SDA”) and the

Tax Matters Agreement (“TMA”).12 Those agreements state that they are fully

6 See generally Def.’s Answer & Countercl. (D.I. 11). 7 Id. ¶¶ 64-68. 8 Id. ¶¶ 69-73. 9 Id. ¶¶ 74-81. 10 Id. ¶¶ 82-89. 11 See generally Pl.’s Mot. to Dismiss Def.’s Countercl. (D.I. 14). 12 Pl.’s Mot. to Dismiss Def.’s Countercl. Ex. 1 (“SDA”) and Ex. 2 (“TMA”) (D.I. 14). BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 4 of 15

integrated and that they were both jointly drafted by the parties.13

1. The SDA

The SDA governs the spin-off process.14 It contains a transfer clause for the

transfer of rights, assets, and liabilities to PHINIA.15 The SDA also has a true-up

provision that sets a baseline cash adjustment of $300 million for PHINIA and

allows for correction after closing.16 And, it expressly states that the TMA

“[e]xclusively governs all matters relating to Taxes.”17

2. The TMA

The TMA covers the payment of tax liabilities and entitlements to refunds for

the spin-off.18 The parties tax obligations are outlined in § 2.1:

Parent shall be responsible for all Taxes reported, or required to be reported, on any Joint Return; provided, however, that to the

13 SDA §§ 11.01(b), 11.18 (“this Agreement shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring either Party by virtue of the authorship of any provisions hereof.”); TMA § 10.17 (“this Agreement shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring either Party by virtue of the authorship of any provisions hereof.”). 14 SDA at 1. 15 Id. § 2.01(a)(i). 16 Id. § 2.08, Schedule 2.08. 17 Id. § 2.02: a) the TMA shall exclusively govern all matters relating to Taxes between such parties (except to the extent that tax matters relating to employees and employee benefits-related matters are addressed in the EMA). 18 TMA at 1. BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 5 of 15

extent any such Joint Return includes any Tax Item attributable to any member of the SpinCo Group or the SpinCo Business in respect of any Post-Distribution Period, SpinCo Group shall be allocated all Taxes attributable to such Tax Items in accordance with Section 2.3.19

And § 2.5 governs tax benefits, which states:

Parent shall be entitled to all Tax Benefits (including, in the case of any refund received, any interest thereon actually received) attributable to Taxes the liability for which is allocated to Parent pursuant to this Agreement. SpinCo shall be entitled to all Tax Benefits (including, in the case of any refund received, any interest thereon actually received) attributable to Taxes the liability for which is allocated to SpinCo pursuant to this Agreement.20

Most relevant to the interpretation of the agreements, § 10.1 states that “[i]n

the event and to the extent that there shall be a conflict between the provisions of

this Agreement and the provisions of the Separation Agreement, this Agreement

shall control with respect to the subject matter hereof.”21

III. APPLICABLE LEGAL STANDARDS

“Under Superior Court Civil Rule 12(b)(6), ‘[t]he legal issue to be decided is,

whether a plaintiff may recover under any reasonably conceivable set of

19 Id. § 2.1(a). 20 Id. § 2.5(a). 21 Id. § 10.1. BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 6 of 15

circumstances susceptible of proof under the complaint.’”22 “When considering a

Rule 12(b)(6) motion, the court (i) accepts as true all well-pled factual allegations in

the complaint, (ii) credits vague allegations if they give the opposing party notice of

the claim, and (iii) draws all reasonable inferences in favor of the plaintiffs.”23

But the Court need not “accept conclusory allegations unsupported by specific

facts or . . . draw unreasonable inferences in favor of the non-moving party.”24 Nor

is the Court required to accept “every strained interpretation of the allegations”

brought by the alleging party.25

Delaware’s pleading standard is “minimal.”26 Dismissal is inappropriate

unless “under no reasonable interpretation of the facts alleged could the complaint

state a claim for which relief might be granted.”27

22 Vinton v. Grayson, 189 A.3d 695, 700 (Del. Super. Ct. 2018) (quoting L&L Broad. LLC v. Triad Broad. Co., LLC, 2014 WL 1724769, at *2 (Del. Super. Ct. Apr. 8, 2014)). 23 Ont. Provincial Council of Carpenters’ Pension Tr. Fund v. Walton, 294 A.3d 65, 84 (Del. Ch. 2023) (citing Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011)). 24 Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), overruled on other grounds by Ramsey v. Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255, 1277 (Del. 2018). 25 Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001). 26 Cent. Mortg. Co., 27 A.3d at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 895 (Del. 2002)). 27 Unbound P’rs Ltd. P’ship v. Invoy Hldgs. Inc., 251 A.3d 1016, 1023 (Del. Super. Ct. 2021) (internal quotation marks omitted); see Cent. Mortg. Co., 27 A.3d at 537 n.13 (“Our governing ‘conceivability’ standard is more akin to ‘possibility’”). BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 7 of 15

IV. DISCUSSION

A. COUNTERCLAIM 1—DECLARATORY JUDGMENT

The Court cannot—via the dismissal sought by BorgWarner here—effectively

grant declaratory judgment regarding the proper holder of the VAT refunds. True,

contract interpretation is a question of law and can, in the proper instance, be

resolved on a motion to dismiss.28 “But, to achieve dismissal, the motion must be

supported by unambiguous contract terms.”29 Moreover, the Court cannot choose

between two differing reasonable interpretations of what it might rightly view as

ambiguous contract language at the pleadings stage of a dispute.30 No, to succeed,

the dismissal movant’s interpretation must be “the only reasonable construction as a

matter of law.”31

28 E.g., Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006) (“Under Delaware law, the proper interpretation of language in a contract is a question of law. Accordingly, a motion to dismiss is a proper framework for determining the meaning of contract language.”). 29 Blue Cube Spinco LLC v. Dow Chem. Co., 2021 WL 4453460, at *7 (Del. Super. Ct. Sept. 29, 2021) (citing VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003)); see also GMG Cap. Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 783 (Del. 2012). 30 Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del. 1996); see also Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1292 (Del. 2007) (“Even if [the] Court consider[s] the [movant’s] interpretation more reasonable than the [non-movant’s], on a Rule 12(b)(6) motion it [is] error to select the ‘more reasonable’ interpretation as legally controlling.”). 31 VLIW Tech., 840 A.2d at 615 (citation omitted) (emphasis added). BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 8 of 15

PHINIA claims that interpreting the agreements to return the VAT refund

payments would violate SDA §§ 2.01, 2.08, and Schedule 2.08 because it would

impair the “working capital” requirements.32 But BorgWarner asserts that the TMA

controls all tax refund issues and that § 2.08 of the SDA isn’t relevant to this issue

because tax obligations do not affect the “working capital” provision.33

Both parties have a different understanding of the relationship between the

obligations and rights in the SDA and TMA. Ultimately, one could conclude that

either party’s interpretation is reasonable.34 There is no singular reasonable

interpretation of the two agreements and their interplay at this time.35 In sum, the

Court will not make determinations about the proper interpretation of the SDA and

TMA to determine the proper holder of the VAT refund on the current pleading

record.

Accordingly, the motion to dismiss PHINA’s declaratory judgment

counterclaim is DENIED.

32 Def.’s Br. in Opp. to Pl.’s Mot. to Dismiss Def.’s Countercl. (“Def.’s Answering Br.”) at 13- 16 (D.I. 22). 33 Pl.’s Opening Br. for Mot. to Dismiss Def.’s Countercl. (“Pl.’s Opening Br.”) at 15-20 (D.I. 14). 34 See Appriva S’holder Litig., 937 A.2d at 1292. 35 See VLIW Tech., 840 A.2d at 615. BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 9 of 15

B. COUNTERCLAIM 2—ESTOPPEL

The promissory estoppel counterclaim will not be dismissed. “Promissory

estoppel does not apply [nor should it be employed] . . . where a fully integrated,

enforceable contract governs the promise at issue.”36 But since this counterclaim

was pled in the alternative,37 the Court won’t dismiss or discount such as a theory

until the enforceability of the agreements is certain and the parties have had a full

opportunity to conduct discovery and be heard on the issue. Be sure, if the agreement

is later deemed enforceable, then the Court won’t hesitate to make parties comply

with its valid contractual agreements.38

Accordingly, the motion to dismiss the estoppel counterclaim is DENIED.

C. COUNTERCLAIM 3—REFORMATION39

None debate, reformation is only available in Chancery.40 So, this Court has

36 See SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 348 (Del. 2013) (citing Chrysler Corp. (Delaware) v. Chaplake Holdings, Ltd., 822 A.2d 1024, 1033-34 (Del. 2003)). 37 See Def.’s Answer & Countercl. ¶¶ 69-73. 38 TrueBlue, Inc. v. Leeds Equity Partners IV, LP, 2015 WL 5968726, at *5 (Del. Super. Ct. Sept. 25, 2015) (“The Court also finds no injustice in requiring the parties to abide by their contractual agreement. Plaintiffs have received the benefit of the bargain, acquired the company they desired, were aware of the payout issue, and had the means to protect themselves from that liability.”). 39 See, e.g., Travelers Indemnity Co. v. North American Phillips Corp., 1992 WL 210560, at *2 (Del. Ch. Aug. 26, 1992). As leave to request cross-designation has been granted and the motion is pending, the Court will address the merits of the reformation counterclaim. 40 2/25/2025 Mot. Hr’g. Tr. at 37 (D.I. 45). BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 10 of 15

no subject-matter jurisdiction over the specific counterclaim seeking this equitable

remedy; it’s unavailable here.41 To sidestep this jurisdictional issue PHINIA asked

the undersigned to sign on for cross-designation to the Court of Chancery “so that

the claims and all of the counterclaims may remain consolidated and proceed in the

Superior Court in one action.”42 But that proposal doesn’t really solve the

jurisdictional problem PHINIA has created. At present, there is an equitable

counterclaim pled here that this Court has no jurisdiction to hear; cross-designation

of this judicial officer does not confer jurisdiction over the claim upon this Court.

It only allows this judicial officer to hear a matter still in Chancery that is properly

pled there. In effect, right now the reformation claim is a pleading ghost as all agree

it was pled in a forum where it has neither substance nor proper abode. While no

doubt clunky, the proper solution is to have that claim pled in Chancery—which

does have jurisdiction thereover—and then request cross-designation and move for

consolidation.

Of course, as noted before by this Court, it is tempting on these occasions to

simply terminate such a mis-pled equitable claim or counterclaim right here and

41 See, e.g., Travelers Indemnity Co., 1992 WL 210560, at *2. 42 D.I. 21 (emphasis added). BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 11 of 15

now.43

And in this case, the temptation is even greater as reformation hasn’t been

pled with near sufficiency. “The equitable remedy of reformation is ‘appropriate

when the parties mistakenly believed that the written instrument properly

memorialized their agreement when, in fact, it did not.’”44

But the claim must be pled with particularity.45 To achieve this, one of the

things PHINIA must plead is “the precise mistake the parties made.”46 And to

survive a motion to dismiss, the movant should identify specific oral terms that were

43 See Bobcat North America, LLC v. Inland Waste Hldgs, LLC, 2020 WL 5587683, at *9-10 (Del. Super. Ct. Sept. 18, 2020) (“The Court can only now lament the fact that [Plaintiff] stands with the many other parties that haven’t heeded the Court’s admonitions to stop putting it in this jurisdictional and judicial resource-wasting pickle, figuratively shrug its shoulders, and enter an ill-fitting order on that lone count.”). 44 Andor Pharms., LLC v. Lannett Co., Inc., 2024 WL 1855112, at *8 (Del. Super. Ct. Apr. 29, 2024) (quoting Interim Healthcare, Inc. v. Sherion Corp., 2003 WL 22902879, at *7 (Del. Ch. Nov. 19, 2003)). 45 A claim of reformation requires: (i) that the parties reached a definite agreement before executing the final contract; (ii) that the final contract failed to incorporate the terms of the agreement; (iii) that the parties were similarly mistaken or that [one] knew of [another’s] mistake and remained silent; and (iv) the precise mistake the parties made. The requirements are cumulative, and each one must be pled with particularity. Failure to satisfy one requirement is fatal to the claim. AECOM v. SCCI Nat’l Holdings, Inc., 2023 WL 6294985, at *6 (Del. Ch. Sept. 27, 2023) (citations omitted). 46 Id. (citations omitted). BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 12 of 15

not followed and “show[] how the written terms deviated from those oral terms.”47

In its counterclaim, PHINIA asks for “reformation of the contracts to comport

to the original understanding of the parties that VAT refunds relating to PHINIA’s

business would remain with PHINIA.”48 And vaguely asks the Court to deem that

“[a]ny provisions of the SDA and TMA contrary to this basic assumption constitute

a mistake materially affecting the agreed-upon exchange of performances.”49 Even

in its answering brief, PHINIA makes no clarification and merely asks the court to

rely on “[a]mple extrinsic evidence [that] demonstrates this,” but doesn’t reference

said evidence or cite any exhibits.50 This just isn’t enough.51

PHINIA makes no reference to any “precise mistake the parties made.”52

PHINIA fails to aver, with sufficient particularity, any oral terms that weren’t

followed or explain how the contract was improperly drafted. Without more, the

47 Acme Markets, Inc. v. Oekos Kirkwood, LLC, 2023 WL 4873317, at *7 (Del. Ch. July 31, 2023) (referencing Joyce v. RCN Corp., 2003 WL 21517864, at *4 (Del. Ch. July 1, 2003)). 48 Def.’s Answer & Countercl. ¶ 81. 49 Id. ¶ 79. 50 Def.’s Answering Br. at 31-32. 51 Acme Markets, 2023 WL 4873317, at *7 (“A claim for reformation is not viable when supported only by averments that a bad deal was memorialized; the Plaintiff needed—and failed— to support the claim with factual averments demonstrating that the Parties reached a definite agreement different than the one memorialized. Without such, the Plaintiff has failed to plead a reasonably conceivable claim for reformation and Count III should be dismissed.”). 52 See AECOM, 2023 WL 6294985, at *6 (citations omitted). BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 13 of 15

Court would not be able to say—were it permitted to speak thereon—that these

pleadings set out a reasonably conceivable reformation claim.53

Accordingly, BorgWarner’s motion is DENIED insofar as it seeks outright

dismissal of the reformation counterclaim. PHINIA may seek that counterclaim’s

transfer to the Court of Chancery under 10 Del. C. § 1902, or elect to have this Court

enter an order of dismissal without prejudice.54 PHINIA’s counsel are to submit an

order on notice within 10 days; and if transfer is sought, a status report and amended

package seeking cross-designation once the matter is properly before the Court of

Chancery.

D. COUNTERCLAIM 4—BREACH-OF-CONTRACT

PHINIA’s breach-of-contract counterclaim regarding the TMA and the SDA

survives. To have “well pleaded” a count, PHINIA must simply give BorgWarner

adequate notice of the claim.55 Dismissal of a breach-of-contract claim is only

53 As an aside, the Court finds it concerning that PHINIA claims that it “had no control in the drafting process, [and] did not assume the risk of any mistake.” See Def.’s Answer & Countercl. ¶ 80. This directly contradicts the “jointly drafted” language in the SDA and TMA. SDA § 11.18; TMA § 10.17. No doubt, “[u]nder Delaware law, sophisticated parties are bound by the terms of their agreement.” See Glaxo Grp. Ltd. v. DRIT LP, 248 A.3d 911, 919 (Del. 2021). 54 See, e.g., Bobcat N.A., 2020 WL 5587683, at *10. 55 See Vinton, 189 A.3d at 700; see also Cent. Mortg. Co., 27 A.3d at 536 (citing Savor, Inc., 812 A.2d at 895). A viable breach-of-contract counterclaim here requires three elements: (1) a contractual obligation, (2) a violation of duty under the contract by BorgWarner, and (3) resulting damages to PHINIA. BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 14 of 15

proper if BorgWarner “has offered the singular reasonable construction of the

operative language as a matter of law, and that construction reveals there has been

no breach.”56

The Court finds that PHINIA has met the burden of making a well pleaded

complaint. There are two fully integrated agreements conveying contractual

obligations, an alleged violation of BorgWarner failing to pay taxes that were its

responsibility, and the alleged harm resulting from PHINIA paying those taxes

instead.57 Also, BorgWarner has not offered “the singular reasonable construction

of the operative language as a matter of law;” PHINIA’s contrary interpretation of

the agreements is at least reasonable.58

Since the minimal pleading standard is met and there appears to be more than

one reasonable interpretation of the at-issue agreements and their interplay, the

motion to dismiss PHINIA’s breach-of-contract counterclaim is DENIED.

See Carlson v. Hallinan, 925 A.2d 506, 529 (Del. Ch. 2006). 56 See Anschutz Corp. v. Brown Robin Cap., LLC, 2020 WL 3096744, at *9 (Del. Ch. June 11, 2020) (citing Caspian Alpha Long Credit Fund, L.P. v. GS Mezzanine P’rs 2006, L.P., 93 A.3d 1203, 1205 (Del. 2014)). 57 Def.’s Answer & Countercl. ¶¶ 82-89. 58 See Anschutz Corp., 2020 WL 3096744, at *9 (citing Caspian Alpha Long Credit Fund, 93 A.3d at 1205). BorgWarner Inc. v. PHINIA Inc. C.A. No. N24C-09-158 PRW CCLD April 10, 2025 Page 15 of 15

V. CONCLUSION

Plaintiff BorgWarner’s Motion to Dismiss Counterclaims is DENIED. Three

of PHINIA’s four counterclaims survive; the reformation counterclaim may be

transferred or dismissed as explained above.

IT IS SO ORDERED. /s/ Paul R. Wallace _________________________ Paul R. Wallace, Judge

Original to Prothonotary