East Balt LLC v. East Balt US, LLC

• Court: Court of Chancery of Delaware
• Decided: May 28, 2015
• Docket: CA 10462-VCN
• Status: Published

Opinion

EFiled: May 28 2015 03:40PM EDT Transaction ID 57304968 Case No. 10462-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE

JOHN W. NOBLE 417 SOUTH STATE STREET VICE CHANCELLOR DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179

May 28, 2015

Peter J. Walsh, Jr., Esquire John P. DiTomo, Esquire Jacob R. Kirkham, Esquire Morris, Nichols, Arsht & Tunnell LLP Potter Anderson & Corroon LLP 1201 North Market Street 1313 North Market Street Wilmington, DE 19801 Wilmington, DE 19801

Re: East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN Date Submitted: February 27, 2015

Dear Counsel:

Plaintiffs seek the release, over Defendants’ objections, of funds held in

escrow, where the money was placed to indemnify Defendants against certain

risks. Defendants challenge the subject matter jurisdiction of this Court to hear

Plaintiffs’ claims. Although Plaintiffs seek money, they submit that a court of law

cannot afford them the certain, efficient, and complete relief available from this

Court through an order compelling specific performance and the payment of funds

out of escrow. East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 2

I. BACKGROUND

In November 2012, East Balt US, LLC (f/k/a OEP East Balt Holdings LLC)

and OEP East Balt B.V. (together, the “Defendants”) purchased certain assets and

assumed certain liabilities of East Balt, Inc. (the “Seller”).1 The Seller owned and

operated, directly and through subsidiaries, businesses that mixed, baked,

marketed, and distributed bakery products. Pursuant to the Asset Purchase

Agreement (the “APA”), Defendants paid over $250 million, consisting of

assumed debt and approximately $70 million in cash. Seller later converted into

East Balt LLC (“East Balt”), the limited liability company plaintiff in this action.

Under the APA, a portion of the purchase price (the “Escrow Amount”) was

placed in escrow, pursuant to an escrow agreement (the “Escrow Agreement”) with

JPMorgan Chase Bank, National Association (the “Escrow Agent”), to indemnify

Defendants against potential losses from post-closing claims subject to the APA’s

indemnity provision. Seller and K.F. Trust No. 1 (the “Trust,” and with East Balt,

1 Defendants were formed, specifically for the acquisition, by the private investment arm of JP Morgan Chase & Co. Verified Compl. (the “Complaint” or “Compl.”) ¶ 2. The facts set forth herein are drawn from the Complaint and the exhibits attached thereto, and are assumed true for purposes of this motion. East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 3

“Plaintiffs”) agreed jointly and severally to indemnify Defendants for, inter alia,

breaches of representations or warranties, noncompliance with covenants,

misstatements regarding the Seller’s indebtedness, and particular third party

claims.2

The Escrow Amount was to be released eighteen months after closing (the

“Release Date”), unless Defendants had asserted indemnifiable claims. On the

Release Date, the parties to the APA were to “execute joint written instructions to

the Escrow Agent to release the then existing Escrow Amount to Seller . . . less the

amount of unresolved claims for indemnification asserted by the Purchaser

Indemnitees, which have not been paid. Such unreleased amount shall be retained

by the Escrow Agent.”3

Up until the Release Date, Defendants could make a claim for

indemnification by providing written notice (a “Claim Notice”) “promptly after . . .

receiv[ing] any written notice of any Proceeding against or involving [them] . . . or

otherwise discover[ing] the liability, obligation or facts giving rise to such claim

2 The Trust was Seller’s sole stockholder and is now the sole member of East Balt. 3 Compl. Ex. A (APA) § 9.5.2. The Escrow Agreement echoes this procedure. Compl. Ex. B (Escrow Agmt.) § 2.01(b). East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 4

for indemnification . . . .”4 Any such Claim Notice was required to describe the

nature and estimated amount of Defendants’ loss.

On June 27, 2014, the last business day before the Release Date, Defendants

sent a Claim Notice to Plaintiffs and the Escrow Agent, asserting seven purported

claims for indemnity from the Escrow Amount, totaling more than $7.9 million.

Accordingly, the Escrow Agent made no disbursement on the Release Date. On

July 8, 2014, Plaintiffs responded to the Claim Notice through an objection letter,

which contested Defendants’ entitlement. Under these circumstances, the Escrow

Agent is required to hold the disputed funds until (i) the parties reach a written

agreement or (ii) a court of competent jurisdiction enters a final and non-

appealable order or judgment resolving the dispute, which is certified in writing by

Defendants’ counsel.5

II. NATURE AND STAGE OF THE PROCEEDINGS

Plaintiffs filed their Complaint on December 16, 2014, asserting breach of

the APA and the Escrow Agreement. They alleged that Defendants have

4 APA § 9.6.1. 5 Escrow Agmt. § 2.01(a). East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 5

(i) asserted claims and losses for which they are not entitled to indemnification,

(ii) failed to provide the requisite support for their stated claims, and

(iii) wrongfully refused to provide the Escrow Agent with joint written instructions

directing the release of the Escrow Amount. Plaintiffs also charge Defendants with

breach of the implied covenant of good faith and fair dealing.

Relevant to the current motion is Plaintiffs’ requested relief—specific

performance of the APA and the Escrow Agreement. Plaintiffs seek an order

requiring Defendants to provide joint written instructions directing the Escrow

Agent to release the remaining Escrow Amount, as well as an order compelling

Defendants to supply complete and accurate information on the claims and losses

for which they seek indemnification. Alternatively, this Court could declare that

Defendants’ indemnity claims are invalid and direct the Escrow Agent to disburse

the funds to Plaintiffs.

Defendants have moved to dismiss pursuant to Court of Chancery

Rule 12(b)(1) for lack of subject matter jurisdiction. They note that this is a

contractual indemnification case, ultimately revolving around $7.9 million held in

escrow, for which the legal remedy of money damages appears adequate. East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 6

Plaintiffs counter that they do not seek damages from Defendants, but the release

of the Escrow Amount held by the Escrow Agent. Plaintiffs assert that the

Superior Court’s powers are inadequate because it cannot compel the Escrow

Agent (a nonparty) to deliver the Escrow Amount to them, nor can it compel

Defendants to perform affirmative actions, i.e., provide written instructions to the

Escrow Agent directing release of funds or provide information in accordance with

the APA.

III. ANALYSIS

Unless provided with a statutory grant of jurisdiction, this Court may only

hear cases that involve the assertion of an equitable right or the invocation of an

equitable remedy.6 Claims involving legal rights and remedies may be heard under

the “clean-up” doctrine once a basis for equitable jurisdiction has been

established.7 Because Plaintiffs have neither brought equitable causes of action nor

claims for which the legislature has bestowed jurisdiction on this Court, the Court

may only hear this action if Plaintiffs’ request for equitable relief is proper.

6 See, e.g., Willis v. PCA Pain Ctr. of Va., Inc., 2014 WL 5396164, at *2 (Del. Ch. Oct. 20, 2014). 7 Id. East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 7

Specific performance, which Plaintiffs seek, is an equitable remedy “by

which a court of equity may compel the actual accomplishment of a contract by the

party bound to fulfill it.”8 Such relief “is designed to take care of situations where

the assessment of money damages is impracticable or somehow fails to do

justice.”9 A party is not entitled to specific performance if an award of damages

would be “as complete, practical, and efficient to the ends of justice and its prompt

administration as the equitable remedy . . . [and would be] available to the plaintiff

as a matter of right.”10

Equitable jurisdiction is “determined from the face of the complaint as of the

time of filing, with all material factual allegations viewed as true.”11 The Court

takes a realistic view of the complaint and will not hear a case where a complete

legal remedy exists despite a plaintiff’s prayers for traditional equitable relief.12

8 Donald J. Wolfe, Jr. & Michael A. Pittenger (“Wolfe & Pittenger”), Corporate and Commercial Practice in the Delaware Court of Chancery, § 12.03[a], at 12-39 (2014). 9 Equitable Trust Co. v. Gallagher, 102 A.2d 538, 546 (Del. 1954). 10 Wolfe & Pittenger, § 12.03[b][2], at 12-42. 11 Int’l Bus. Machs. Corp. v. Comdisco, Inc., 602 A.2d 74, 78 (Del. Ch. 1991). 12 Id. East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 8

“A practical analysis of the adequacy of any legal remedy, then, must be the point

of departure for each matter which comes before this Court.”13

***

Defendants argue that, here, an assessment of money damages would be

neither impracticable nor would it fail to do justice.14 Supposedly, a monetary

judgment would make Plaintiffs whole. At first blush, a “focus upon the

allegations of the complaint in light of what the [P]laintiff[s] really seek[] to gain”

favors Defendants’ argument for dismissal.15 Plaintiffs seek possession of money

currently held by the Escrow Agent. Damages of $7.9 million could compensate

Plaintiffs should they prevail on the merits. Defendants question why specific

performance or mandatory injunctive relief, as opposed to the payment of the

entire amount at issue, would be necessary to satisfy Plaintiffs.16

13 Id. 14 See W. Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2007 WL 3317551, at *12 (Del. Ch. Nov. 2, 2007). 15 See Medek v. Medek, 2008 WL 4261017, at *3 (Del. Ch. Sept. 10, 2008). 16 Specific performance and mandatory injunctive relief are closely related. Simplistically stated, both compel action, but specific performance requires a contract to be enforced. East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 9

Defendants also note that the Superior Court can grant declaratory relief

regarding rights under a contract, and could thus establish entitlements to the

Escrow Amount.17 Plaintiffs respond that a declaration entitling them to the

Escrow Amount would be an insufficient remedy because those funds would not

necessarily be released unless a court were to order affirmative action, either

requiring Defendants to authorize the release, compelling their counsel to certify

the court’s order, or ordering the Escrow Agent to release the money. While the

Superior Court could declare rights, it would be unable to compel the Escrow

Agent to deliver the Escrow Amount or order Defendants to act.

Defendants reply that declaratory relief would be adequate here because the

Escrow Agent is required to release the Escrow Amount if a court of competent

jurisdiction enters a final and non-appealable judgment that is certified as such by

Defendants’ counsel.18 They argue that the Superior Court, pursuant to its

contempt powers, has the power to direct counsel. Thus, according to Defendants,

17 10 Del. C. § 6501 (“[C]ourts of record within their respective jurisdictions shall have power to declare rights, status and other legal relations whether or not further relief is or could be claimed.”). 18 Escrow Agmt. § 2.01(a). East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 10

a court of law can provide an adequate remedy, and this Court lacks subject matter

jurisdiction.

Although Defendants’ arguments for dismissal are not without merit, this

Court has held, in materially similar circumstances, that it is capable of providing a

more “certain, prompt, complete, [and] efficient” remedy than is available at law.19

In SecNet Holding, LLC v. Potash, the plaintiff sought an order compelling an

escrow agent, which was not a party to the action, to release $750,000. The Court

concluded that even if plaintiff could obtain a judgment for damages in a law court,

“defendants . . . failed to show how plaintiff could then enforce its judgment as to

the sum held in escrow.”20 “Because recourse would fall to this Court to enforce

the judgment and a legal remedy [was] not adequate or as certain, prompt,

complete or efficient as the equitable remedy . . . plaintiff lack[ed] an adequate

remedy at law . . . .”21

19 SecNet Hldg., LLC v. Potash, C.A. No. 7781-VCP, at 34 (Del. Ch. Apr. 2, 2013) (TRANSCRIPT). 20 Id. 21 Id. at 33-34. East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 11

In SecNet, the escrow agent was required to release disputed funds upon

receipt of “a certified copy of a final, non-appealable order or judgment of a court

of competent jurisdiction as to the proper distribution of all or a portion of such

Disputed Amount.”22 The Court relied on Xlete, Inc. v. Willey23 to conclude that a

remedy at law would be inadequate.24 In Xlete, this Court explained that it “has the

power to specifically enforce escrow agreements which are by their very nature

fiduciary relationships.”25

Funds are placed in escrow to provide a convenient source of money that

may be owed. Because a damages award, or the potential enforcement of

declaratory relief through a law court’s contempt powers, would not be as “certain,

prompt, complete, or efficient” as the equitable remedies that Plaintiffs seek, this

Court has subject matter jurisdiction over the Complaint.26

22 Verified Second Am. Compl. Ex. 2, § 4(a)(vii), SecNet Hldg., C.A. No. 7781- VCP. 23 1977 WL 5188, at *1 (Del. Ch. June 6, 1977). 24 SecNet Hldg., C.A. No. 7781-VCP, at 33-35. 25 Xlete, 1977 WL 5188, at *1. 26 Given this conclusion, it is unnecessary to address the import of the forum selection clauses in the APA and Escrow Agreement. East Balt LLC v. East Balt US, LLC C.A. No. 10462-VCN May 28, 2015 Page 12

IV. CONCLUSION

For the reasons stated above, Defendants’ Motion to Dismiss is denied.

IT IS SO ORDERED.

Very truly yours,

/s/ John W. Noble

JWN/cap cc: Register in Chancery-K