LVI Group Investments, LLC v. NCM Group Holdings, LLC

• Court: Court of Chancery of Delaware
• Decided: December 31, 2019
• Docket: CA 12067-VCG
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

LVI GROUP INVESTMENTS, LLC, ) ) Plaintiff, ) ) v. ) C.A. No. 12067-VCG ) NCM GROUP HOLDINGS, LLC, ) SUBHAS KHARA, EVERGREEN ) PACIFIC PARTNERS, L.P., ) EVERGREEN PACIFIC PARTNERS ) GP, LLC, EVERGREEN PACIFIC ) PARTNERS II, L.P., EVERGREEN ) PACIFIC PARTNERS II GP, L.P., ) EVERGREEN PACIFIC PARTNERS II ) GP, LLC, EVERGREEN PACIFIC ) PARTNERS MANAGEMENT ) COMPANY, INC., TIMOTHY ) BRILLON, MICHAEL NIBARGER, and ) TIMOTHY BERNARDEZ, ) ) Defendants. ) ) ) NCM GROUP HOLDINGS, LLC, ) Counter-Plaintiff, ) ) v. ) LVI GROUP INVESTMENTS, LLC, ) SCOTT STATE, PAUL CUTRONE, ) NORTHSTAR GROUP HOLDINGS, ) LLC, LVI PARENT CORP., BRIAN ) SIMMONS, ROBERT HOGAN, and ) CHS PRIVATE EQUITY V, L.P. ) ) ) Counter-Defendants. ) MEMORANDUM OPINION

Date Submitted: September 4, 2019 Date Decided: December 31, 2019

Rudolf Koch, Matthew W. Murphy, and Matthew D. Perri, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Steven C. Florsheim, Greg Shinall, Daniel A. Shmikler, Michael G. Dickler, and Trevor K. Scheetz, of SPERLING & SLATER, P.C., Chicago, Illinois, Attorneys for Plaintiff/Counter-Defendant LVI Group Investments, LLC.

Richard D. Heins, and Philip Trainer, Jr., of ASHBY & GEDDES, Wilmington, Delaware; OF COUNSEL: Stephen Novack, Donald A. Tarkington, Andrew D. Campbell, Elizabeth C. Wolicki, and Yvette V. Mishev, of NOVACK AND MACEY LLP, Chicago, Illinois, Attorneys for Defendant/Counter-Plaintiff NCM Group Holdings, LLC, and Defendants Evergreen Pacific Partners, L.P., Evergreen Pacific Partners II, L.P., Evergreen Pacific Partners GP, LLC, Evergreen Pacific Partners II GP, L.P., Evergreen Pacific Partners II GP, LLC, Evergreen Pacific Partners Management Company, Inc., Timothy Brillon, Michael Nibarger, and Timothy Bernardez.

Peter B. Ladig, of BAYARD P.A., Wilmington, Delaware, Attorneys for Defendant/Counter-Plaintiff NCM Group Holdings, LLC as to Claims Against Brian Simmons, Robert Hogan, and CHS Private Equity V, L.P.

John A. Sensing, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: John J. Quinn, THE LAW OFFICES OF JOHN J. QUINN; Dylan P. Kletter and Kelsey D. Bond, of BROWN RUDNICK LLP, Hartford, Connecticut, Attorneys for Defendant Subhas Khara.

Thomas A. Uebler and Kerry M. Porter, of MCCOLLUM D’EMILIO SMITH UEBLER LLC, Wilmington, Delware; OF COUNSEL: Jeffrey H. Bergman of MANDELL MENKES LLC, Chicago, Illinois, Attorneys for Brian Simmons, Robert Hogan, and CHS Private Equity V LP.

GLASSCOCK, Vice Chancellor 2 This is the latest chapter in the complicated legal saga resulting from the

creation of a demolition company, NorthStar. The parties and related entities are

described in detail below. Sufficient to this introductory exposition is that NorthStar

was formed by a combination of two large demolition contractors, which can be

identified generally as LVI and NCM. After the merger, the resulting demolition

company was known as NorthStar, and the LVI and NCM entities remained as

holding companies, containing their respective interests in NorthStar.

These ownership interests in NorthStar were determined in part by the

respective EBITDAs of the component companies. The business of these demolition

companies involved long-term—often multi-year—projects. Moreover, payment by

the owner of the property being demolished, or the contractor with which LVI and

NCM subcontracted, was only partly in cash. The business model, in fact, was for

the demolition company to monetize each contract by removing and selling valuable

scrap, the value of which was estimated at the beginning of each job. Because of the

nature of these businesses, then, accounting was somewhat complex. As described

in some detail below, the value of any job in a given accounting period was the result

of allocation of costs and revenues incurred and estimated, and gave room for both

good-faith error and (as alleged by both parties) fraud in connection with the

computing of the interests of LVI and NCM in NorthStar. Despite its name, NorthStar, starting soon after formation, had, in fact, a

trajectory: downward. 1 LVI and NCM have sued each other and related individuals

and entities, alleging the fraud referenced above. Much motion practice has

resulted. 2 This Memorandum Opinion addresses four motions for Summary

Judgment. The results are below.

Equity enthusiasts, 3 and students of Anglo-American legal history generally,

should they persevere in digesting this Decision, will note that what follows involves

tort claims in the context of a contract, and parties pursuing legal issues in way of

damages; those readers may wonder why such a clearly legal matter has been

imposed on this court of equity. At this action’s long-ago conception, the Plaintiff

and Counter-Plaintiff contemplated reallocation of their interests in NorthStar, an

equitable remedy. Thus, equitable jurisdiction was present, and litigant’s efficiency

requires that the matter remain in Chancery.

1 NorthStar’s performance was, in fact, dis-asterous. 2 See LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2018 WL 1559936 (Del. Ch. Mar. 28, 2018); LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2017 WL 3912632 (Del. Ch. Sept. 7, 2017); LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2017 WL 1174438 (Del. Ch. Mar. 29, 2017). 3 Some exist. 2 I. BACKGROUND 4

A. Parties and Relevant Non-Parties

Plaintiff and Counter-Defendant LVI Group Investments, LLC (“LVI” or

“LVI LLC”) is a Delaware limited liability company. 5 Counter-Defendant LVI

Parent Corp. (“LVI Parent”) is a Delaware corporation. 6 LVI Parent operated

through its subsidiaries and sat at the head of the LVI family of entities until shortly

before the Merger, when it created LVI LLC. 7 Where pertinent, I strive to

distinguish the LVI entities by referring specifically to “LVI LLC” and “LVI

Parent.” Otherwise, when referring generally to the pre-merger operations of the

LVI family of companies, or to allegations by and against the Plaintiff, I refer simply

to “LVI.”

Defendant and Counter-Plaintiff NCM Group Holdings, LLC (“NCM”) is a

Delaware limited liability company. 8

4 I base the facts for this summary judgment ruling on the evidence submitted under affidavit with the parties’ papers. 5 Transmittal Aff. of Hayley M. Lenahan in Support of the Defs.’ Br. In Support of Their Mot. for Summ. J., Docket Items (“D.I.”) 654–58, 686–90, 715 (“Lenahan Aff.”), Ex. 1, Ans. & Affirmative Defenses to LVI Grp. Invs., LLC’s Verified Am. Compl. (“EPP Ans.”), ¶ 6. 6 Transmittal Aff. of Matthew D. Perri, Esq. in Support of LVI Grp. Invs., LLC’s Opening Br. In Support of Its Mot. for Summ. J., D.I. 667–69, 719 (“Perri Aff.”), Ex. 15, Contribution Agreement by and among NCM Grp. Holdings, LLC, LVI Grp. Invs. LLC, NorthStar Grp. Holdings, LLC, & LVI Parent Corp. (“Contribution Agreement”), Preamble. 7 See id. Recitals. 8 Id. Preamble.

3 Defendant Subhas Khara was NCM’s former President and CEO. 9

Defendants Evergreen Pacific Partners, L.P. and Evergreen Pacific Partners

II, L.P. (the “EPP Funds”) are Delaware limited partnerships. 10 Evergreen Pacific

Partners GP, LLC and Evergreen Pacific Partners II GP, LLC (the “EPP GPs”) are

general partners to the EPP Funds and are Delaware limited liability companies. 11

Evergreen Pacific Partners II GP, L.P. is a Delaware limited partnership. 12

Evergreen Pacific Partners Management Company, Inc. (“EPP Management”) is a

Delaware corporation. 13 It provides administrative support to the EPP Funds and

the EPP GPs. 14 The EPP Funds are significant equity owners in NCM. 15

Defendants Timothy Brillon, Michael Nibarger, and Timothy Bernardez are

individuals who work with the EPP entities. 16 Brillon is the CFO and CCO of EPP

9 EPP Ans., ¶ 8. 10 Id. ¶ 9. 11 Id. 12 Id. 13 Id. 14 Lenahan Aff., Ex. 5, Dep. of Michael A. Nibarger (“Nibarger Dep.”), at 45:22–46:5. Because the parties sometimes include different portions of depositions in different exhibits, where relevant, I include a reference to the exhibit where the cited portion of the deposition may be found, even where the deposition as a whole has previously been cited. 15 See EPP Ans., ¶ 9 (detailing ownership stake of EPP Funds in NCM at the time of the transaction); see also Transmittal Aff. of John A. Sensing, D.I. 659–63 (“Sensing Aff.”), Ex. 9, Confidential Information Mem. prepared by Houlihan Lokey, at 12 (providing graphic of NorthStar corporate structure showing ownership interest of EPP). 16 EPP Ans., ¶¶ 10–12.

4 Management and also a member of the EPP GPs. 17 Nibarger is a Vice President and

Secretary of EPP Management, co-founder of the EPP Funds, and member of the

EPP GPs. 18 Bernardez is a co-President of EPP Management, co-founder of the EPP

Funds, and a member of each of the EPP GPs. 19 I refer to the EPP Funds, the EPP

GPs, EPP Management, and Brillon, Nibarger, and Bernardez collectively as “EPP.”

CHS Private Equity V L.P. (“CHS”) is a Delaware limited partnership. 20

Brian Simmons and Robert Hogan are partners of CHS. 21 I refer to Simmons,

Hogan, and CHS collectively as the “CHS Defendants.” CHS is one of several

private equity owners of LVI. 22

Nominal Defendant NorthStar Group Holdings, LLC (“NorthStar”) is a

Delaware limited liability company. 23 It was the creation of NorthStar by LVI and

NCM that was the impetus for this legal action.

17 Id. ¶ 12; Lenahan Aff., Ex. 7, Dep. of Tim Brillon (“Brillon Dep.”), at 13:20–14:10. 18 EPP Ans., ¶ 10; Nibarger Dep., at 7:21–8:4. 19 EPP Ans., ¶ 11; Lenahan Aff., Ex. 6, Dep. of Timothy D. Bernardez (“Bernardez Dep.”), at 75:10–76:13. 20 Def. NCM Grp. Holdings, LLC’s Ans., Affirmative Defenses and Third Am. Verified Countercl. to LVI Grp. Invs., LLC’s Verified Am. Compl., D.I. 789 (“NCM Countercl.”), ¶ 12. 21 Id. ¶¶ 13–14. 22 See Sensing Aff., Ex. 9, Confidential Information Mem. prepared by Houlihan Lokey, at 12 (providing graphic of NorthStar corporate structure showing CHS’ ownership interest in LVI). 23 Lenahan Aff., Ex. 8, Counter-Def. LVI Parent Corp.’s Ans. & Affirmative Defenses to NCM Grp. Holdings, LLC’s Sec. Am. Verified Countercl. (“LVI Parent Ans.”), ¶ 11; EPP Ans. ¶ 18.

5 B. Factual Background

1. LVI and NCM Merge to Form NorthStar

Prior to their merger, LVI and NCM were two of the United States’ largest

demolition and remediation companies, operating nationwide. 24 Their business

models were similar. Both companies made money through two primary channels:

site owners paid to have properties demolished, and the companies then retained and

resold salvage materials such as steel, copper, alloys, and equipment from the

building sites. 25 Both companies operated through a network of branch offices, each

overseen by a branch manager. 26 The branch managers, in turn, received reports

from project managers who supervised demolitions at particular sites. 27

In 2013, LVI and NCM entered into negotiations regarding a potential

business combination. 28 Both parties undertook extensive due diligence. 29 This

process culminated on April 23, 2014, when NCM, LVI LLC, LVI Parent, and

24 Lenahan Aff. Ex. 3, Expert Report of Louis G. Dudney, CPA/CFF, dated March 26, 2018 (“Dudney Report”), at 5; see also EPP Ans., ¶ 1. 25 See Dudney Report, at 18–20. 26 Id. at 15 (“NCM manage[d] its operations using a regional model with branch offices and satellite offices to provide broad geographic coverage and local market expertise”); Lenahan Aff., Ex. 11, Dep. of John Leonard (“Leonard Dep.”), at 18:14–21 (describing LVI branch manager responsibilities as “reviewing estimates, overseeing the execution of projects, and direct oversight of the [profits and losses] for the . . . office.”). 27 Lenahan Aff., Ex. 12, Dep. of Bryn DiLoreto (“DiLoreto Dep.”), at 29:15–30:6 (describing project manager duties). 28 EPP Ans., ¶ 18. 29 See, e.g., Perri Aff., Ex. 1, Dep. of Scott State (“State Dep.”), at 89:21–24, 96:1-20; Perri Aff., Ex. 2, Brillon Dep., at 209:6–12, 266:2–277:22.

6 NorthStar entered an agreement (the “Contribution Agreement”), under which LVI

and NCM contributed their assets to form a new company, NorthStar (the

“Merger”). 30

The structure of the Merger was unusual, and that structure is pertinent, at

least in part, to this decision. Since 2002, the LVI family of companies operated

under LVI Parent. 31 Thus, it was LVI Parent that began negotiating the Merger with

NCM, conducted due diligence, and worked with NCM to combine the businesses. 32

Shortly before the Merger, LVI Parent undertook a transformation from parent

corporation to contributed asset. On April 7, 2014—16 days before the Merger’s

consummation—LVI Parent created LVI LLC. 33 LVI Parent then merged with a

subsidiary of LVI LLC. 34 As a part of the Contribution Agreement, LVI LLC

contributed its subsidiaries (including LVI Parent, now a subsidiary), along with

NCM subsidiaries, to form NorthStar. 35 LVI Parent still exists as a subsidiary of

30 Contribution Agreement, Recitals. 31 See Lenahan Aff., Ex. 126, NCM Grp. Holdings, LLC’s Ans., Affirmative Defenses & Sec. Am. Countercl. to LVI Grp. Invs., LLC’s Verified Am. Compl. (“NCM Sec. Am. Countercl.”), Ex. B, at 9. LVI Parent was incorporated in 2002 and acquired LVI Services, Inc., through which it operated. Id. 32 LVI Parent Ans., ¶ 17 (noting LVI Parent engaged in the Merger negotiations). LVI Parent, for instance, made the required filing to obtain clearance from the FTC. Id.; Lenahan Aff., Ex. 127, NorthStar Grp. Holdings, LLC’s Opp’n To NCM Grp. Holdings, LLC’s Am. Mot. for Leave to File Sec. Am. Countercl., at Ex. H. 33 See Contribution Agreement. 34 Id. Recitals. 35 Id. § 1.2.

7 NorthStar, and it holds the stock of LVI Services, Inc., which in turn holds all the

stock of the other contributed LVI subsidiaries. 36 The parties chose this structure to

create a tax-free transaction. 37

Although no longer conducting operations following the Merger, LVI and

NCM remained in existence as holding companies that owned NorthStar equity. 38

LVI and NCM split NorthStar’s equity based largely on their respective pre-merger

Earnings Before Interest Taxation Depreciation and Amortization (“EBITDA”). 39

Using this measuring stick, LVI obtained 62.5% of the equity, and NCM 37.5% of

the equity, in NorthStar. 40

2. Terms of the Contribution Agreement

In the Contribution Agreement, both LVI and NCM warranted certain

financial statements regarding their companies (the “Warranted Financial

Statements”). 41 The Warranted Financial Statements formed the basis for the

companies’ EBITDA and thereby the divide of the equity ownership in NorthStar. 42

Under §§ 2.4(a) and 3.4(a) of the Contribution Agreement, the Warranted Financial

36 Id. 37 Id. Recitals. 38 See id. § 1.2. 39 See id. 40 Id. § 1.2(b). 41 Id. §§ 2.4(b), 3.4(b). 42 See id. Schedules 2.4(b) and 3.4(b).

8 Statements included the audited year-end financial statements for the period ending

December 31, 2012, the unaudited year-end financial statements for the period

ending December 31, 2013, and the unaudited year-end financial statements for the

two months ending February 28, 2014. 43 NCM and LVI represented that the

Warranted Financial Statements fairly presented, in all material respects, the

financial position of the businesses in accordance with Generally Accepted

Accounting Principles (“GAAP”). 44 The companies did not make representations or

warranties regarding any other financial statements. 45

The Contribution Agreement includes a merger clause in § 6.6, providing that

it would “constitute the entire Agreement between the Parties pertaining to the

subject matter herein and supersede any prior representation, warranty, covenant, or

agreement of any Party regarding such subject matter.” 46 The Contribution

Agreement also includes a non-reliance provision. Under § 5.4(f), the parties agreed

they had not “relied on any statements, representations or warranties whatsoever”

outside of the Agreement.” 47 Therefore, the Warranted Financial Statements

43 Id. §§ 2.4(a), 3.4(a). 44 Id. §§ 2.4(b), 3.4(b). 45 Id. § 5.4(f). 46 Id. § 6.6. 47 Id. § 5.4(f).

9 attached to the Contribution Agreement formed the only representations on which

the parties could successfully sue for contractual remedies, following the Merger.

The Contribution Agreement provides for specific remedies in case of breach

or misrepresentation. Section 5.4(e) limits available remedies to indemnification

claims, requests for injunctive relief, and fraud claims against the “Person who

committed such fraud.” 48 Section 5.1 limits these remedies by imposing time

restrictions on the Warranted Financial Statements. Under § 5.1(a)(iii)–(iv), the

parties’ representations regarding the Warranted Financial Statements would expire

on April 23, 2015—one year after the Merger’s execution. 49 However, the

Contribution Agreement contains a survival clause, allowing the parties to postpone

the expiration of the representations and warranties by filing a notice of claim under

§ 5.1(c):

Notwithstanding the foregoing in this Section 5.1, any representation or warranty in respect of which indemnity may be sought under Section 5.2 below, and the indemnity with respect thereto, will survive the time at which it would otherwise terminate pursuant to this Section 5.1 if notice of the inaccuracy or breach or potential inaccuracy or breach thereof giving rise to such right or potential right of indemnity will have been given to the party against whom such indemnity may be sought prior to such time. . . .50

48 Id. § 5.4(e) (“The sole and exclusive remedies of the Parties arising out of, relating to or resulting from this Agreement . . . will be strictly limited to (i) the indemnification provisions contained in this Article 5, (ii) the provisions of Section 5.6 [specific performance] and (iii) claims for fraud against the Person who committed such fraud.”). 49 Id. § 5.1(a)(iii)–(iv). 50 Id. § 5.1(c) (emphasis added).

10 Finally, in § 5.2(a)–(b), the Contribution Agreement provides for

indemnification for NorthStar and the contributed assets in case of a breach or

misrepresentation by LVI or NCM:

(a) Indemnification by NCM Holdings. Subject to the other terms of this Article 5, NCM Holdings will indemnify and hold harmless [NorthStar] and each of its Subsidiaries from and against all Losses arising out of, relating to or resulting from (i) any failure of any Surviving NCM Representation to be true or (ii) any breach of any covenant or agreement of NCM Holdings herein. 51

(b) Indemnification by LVI Holdings. Subject to the other terms of this Article 5, LVI Holdings will indemnify and hold harmless [NorthStar] and each of its Subsidiaries from and against all Losses arising out of, relating to or resulting from (i) any failure of any Surviving LVI Representation to be true or (ii) any breach of any covenant or agreement of LVI Holdings herein. 52

3. Post-Merger Litigation

Just shy of a year after the merger, NCM notified LVI of an indemnification

claim based on alleged false representations in its Warranted Financial Statements. 53

The next day, LVI notified NCM of its own indemnification claim. 54 The parties

underwent mediation as required by the Contribution Agreement, and when that

failed, commenced litigation. 55 Both parties ultimately dropped their

51 Id. § 5.2(a). 52 Id. § 5.2(b). 53 LVI Parent Ans., ¶ 28. 54 EPP Ans., ¶ 98. 55 LVI Parent Ans., ¶ 35.

11 indemnification claims and proceed solely on claims for fraud (as well as conspiracy

or aiding and abetting, and unjust enrichment claims against EPP). 56 This litigation

centers on the alleged fraud by both parties in creating their respective Warranted

Financial Statements.

After extensive discovery, each party narrowed their fraud allegations to a

limited number of pre-Merger projects of the other company. 57 LVI’s allegations

focus on four NCM projects. 58 The parties refer to these as the Apple, Pepco,

Sunoco, and DuPont Hickory projects. 59 LVI’s expert asserts that based on a review

of these projects, NCM misstated its pre-merger EBITDA by approximately $3.4

million for the trailing twelve month period ending December 31, 2013 and

approximately $5.2 million for the trailing twelve month period ending February 28,

2014. 60 NCM’s allegations, in turn, focus on six LVI projects. The parties refer to

these as the Holly Street, Alcoa, HECO, Foothill, Newark, and Lafayette projects. 61

56 See D.I. 653 (stipulating dismissal of indemnity claims and counterclaims). Section 5.4(b) of the Contribution Agreement allowed the parties to recover a maximum of $15 million for indemnity; fraud, by contrast, has no recovery cap. Contribution Agreement § 5.4(b). 57 The parties’ claims and counterclaims contemplate a wider collection of fraudulent projects, but through discovery each party has effectively reduced those allegations to the projects identified in their respective expert reports. See Dudney Report; Lenahan Aff., Ex. 51, Expert Report of Erin P. Roberts, CPA, dated March 26, 2018 (“Roberts Report”). 58 See Dudney Report, at 83–110. 59 See id. at 12. 60 Id. at 128. 61 See Roberts Report, at 5–6.

12 NCM’s expert opines that LVI fraudulently misstated its pre-Merger EBITDA by at

least $10.9 million. 62

For the reader to understand the cross-claims for fraud arising from these

unique projects, it is necessary to address the projects in detail, which this

Memorandum Opinion does, I am afraid, in wearisome fashion, below.

Also, because the parties represented that their Warranted Financial

Statements complied with GAAP, the allegations involve some basic principles of

GAAP, reviewed briefly here. First, GAAP permits the use of the percentage of

completion (“POC”) method of accounting for contracts. 63 POC allows a business

to recognize income during a long project based on the percentage of the project

completed, estimated costs of completion, and expected profit margin. 64 Both

parties used POC to create financial statements for their various demolition

projects. 65 This allowed them to record income for large projects that often took

62 Id. at 8 (“In my professional opinion, the LVI financial statements were not presented in accordance with GAAP and were materially misstated by at least $10.9 million for the six projects analyzed in this report.”). Roberts goes on to note that “after the financial statements for the two months ended February 2014 were reported, LVI (after April 2014 NorthStar) recorded incremental losses of $10.7 million through December 31, 2016 for a total loss of $21.6 million.” Id. at 7. 63 Dudney Report, at 58. 64 Id. at 58–59. 65 Id. at 58; Lenahan Aff., Ex. 4, Dep. of Louis G. Dudney, CPA/CFF (“Dudney Dep.”), at 31:5– 6.

13 more than a year to complete. 66 NCM and LVI both tracked the progress of their

projects through work-in-process (“WIP”) schedules. 67

Accounting in this fashion requires estimations, which sometimes prove

inconsistent with results actually achieved over time. “Fade” is a colloquial term

related to POC accounting. Because earnings are recognized as a project progresses,

the business does not yet know the project’s final results. If the cost of completion

is underestimated during the project, then the final earnings will be less than reported

on the financial statements, and the project will experience “fade” as the business

revises those numbers to reflect the final results. Fade can result from innocent

estimation errors, or from intentional overstatement. As both parties note, fade

necessarily occurs when a business fraudulently inflates its earnings to report better

numbers, then “reverses” those earnings once the project reaches completion and

experiences fade.

Second, GAAP permits recording some legal claims as revenue. Under

GAAP, to recognize a claim as revenue, it must be probable that it will be collected. 68

66 See Dudney Report, at 58. 67 Id. at 11 (“NCM maintained its POC accounting in work-in-process schedules . . . by-branch, by-month, and by-project. . .”); Roberts Report, at 14–34 (summarizing LVI’s WIP schedules used to maintain POC accounting on six projects). 68 Roberts Report, at 9; Lenahan Aff., Ex. 13, at ASC 605-35-25-31.

14 To be “probable of collection,” the following conditions must be met at the time the

revenue is recognized:

(a) The contract or other evidence provides a legal basis for the claim; or a legal opinion has been obtained, stating that under the circumstances there is a reasonable basis to support the claim. (b) Additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in contractor’s performance. (c) Costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed. (d) The evidence supporting the claim is objective and verifiable, not based on management’s feel for the situation or on unsupported representations. 69

If the above factors are not met, then under GAAP, the contractor should not

record the claim as revenue. 70

Third, and finally, under GAAP, a loss must be recognized when it occurs. 71

Delaying the report of a loss on financial statements is a violation of GAAP. 72

69 Lenahan Aff., Ex. 13, at ASC 605-35-25-31. 70 See id. at ASC 605-35-25-87(c) (“If it is probable that the contract price will be adjusted by an amount that exceeds the costs attributable to the change order and the amount of the excess can be reliably estimated, the original contract price shall also be adjusted for that amount when the costs are recognized as costs of contract performance if its realization is probable.”). 71 Roberts Report, at 10 (“For a contract on which a loss is anticipated GAAP requires recognition of the entire anticipated loss as soon as the loss becomes evident” (quoting Lenahan Aff., Ex. 13, at ASC 605-35-25-45 through 46)). 72 See id. (“[A] loss must be recognized when it is known and not delayed until a later date that may be more beneficial to a company.”).

15 4. LVI’s Claims against NCM, Khara, and EPP

In its original complaint, LVI sued NCM and its CEO, Subhas Khara. 73 Later,

it added NCM’s major private equity owner, EPP, as a defendant, including three

individuals associated with EPP—Brillon, Nibarger, and Bernardez. 74 NCM has not

moved for summary judgment of the underlying fraud allegations. The facts that

follow, therefore, focus on the involvement of EPP and Khara, both of whom have

moved for summary judgment, arguing—among other things—that the evidence

does not support a claim that they knew of or participated in NCM’s alleged fraud.

a. EPP’s and Khara’s Roles in NCM’s Accounting Practices

EPP and Khara were both involved in accounting practices at NCM from 2011

through the Merger. 75 EPP provided high-level guidance as well as specific

instructions. NCM would, on occasion, look to EPP for direction related to creating

financial statements. 76 Khara also looked to EPP for instructions regarding financial

73 Verified Compl., D.I. 1. 74 Pl. LVI Grp. Invs., LLC’s Verified Am. Compl. Against Defs., D.I. 262. 75 EPP and Khara both argue that most of the evidence LVI proffers is irrelevant because it concerns interim financial statements (i.e. monthly or project-specific financial statements not directly connected with the Warranted Financial Statements) that do not concern the alleged fraudulent projects. They argue that only evidence specifically connecting them to NCM’s four alleged fraudulent projects are relevant to the litigation. I decline, for purposes of these motions, to disregard evidence demonstrating the relationship between EPP, Khara, and NCM’s accounting practices, as it is relevant to determining what inferences I must make for the non-moving party. 76 Affidavit of Brian Morris, Esq. in Support of LVI Grp. Invs., LLC’s Ans. Br. in Opp’n to EPP Defs.’ Mot. for Summ. J., D.I. 692–98 (“Morris Aff.”), Ex. 18, at NORTHSTAR18608976 (NCM CG employee writing to Brillon, “we need guidance from you and EPP of how to position the cost to complete and the imputed fade for the Oct individual WIPs. . . .”); Morris Aff., Ex. 19, at NORTHSTAR16684036 (attaching monthly financials and WIP schedules to an email to Khara, 16 statements. 77 In addition, EPP actively provided instructions to NCM’s CFO, Duane

Kerr, and others regarding adjustments to financial statements. For example, on

May 12, 2012, Brillon, on behalf of EPP, told Kerr to book inventory adjustments

and asked if there was “anywhere else we have room to improve April.” 78 On July

4, 2012, Brillon sent Khara a spreadsheet of jobs in which both Brillon and the

auditors selected jobs where “the fade that we have recognized in 2012 should be

pushed back to 2011.” 79 Kerr also discussed with Brillon specific approaches to

creating NCM’s financial statements and WIP schedules. On July 26, 2013, Kerr

wrote to Brillon:

Per our discussions, we have asked our Branch managers to take an aggressive approach to their WIP schedules. This is a departure from the relatively conservative approach that we preach to our managers. Based on this aggressive approach we may have some level of WIP fade as those jobs come to completion. However, we feel that new

noting the documents were “compiled after getting guidance from EPP (Brillon related Nibarger’s instructions).”). NCM does not dispute these emails, but it notes that the employee sending them, David Whitley, was an acquired company’s COO, and Brillon reviewed his work while NCM CG’s accounting group was experiencing high turnover. See Brillon Dep., at 20:1–21:2; DiLoreto Dep., at 34:8–12, 38:21–39:12, 142:24–143:20 (“[Brillon] operated as the CFO of NCM CG for a period of time.”). Hereinafter, when exhibit page numbers begin with party designations (e.g. NORTHSTAR, EPP), I include only the relevant numerals. 77 E.g. Morris Aff., Ex. 22, at -83279 (“Tim w/o any reserve for Byron Claim Recovery we are at 2013 EBITDA of $20.9M with add backs. Our projected target was $21.5M[.] Dec EBITDA was $1.8M. Please advise as to how much should we reserve for Byron.”). 78 Morris Aff., Ex. 20, at -16666218 (“After booking the CG inventory is there anywhere else we have room to improve April at either DR or CG?”). 79 Morris Aff., Ex. 21, at -16662837 (“The auditors want to . . . book this reversal back into 2011 . . . the jobs in orange were selected by the auditors and I added the jobs in green. I think the jobs in green should be included in this analysis and the fade that we have recognized in 2012 should be pushed back to 2011 on these jobs as well.”).

17 bookings of several large high margin jobs may help us overcome any margin fade that may occur. 80

In addition to consulting on approaches to financial statements, Brillon often asked

if the numbers reflected in the financial statements could be improved. 81

Beyond general oversight, EPP and Khara were involved in specific

accounting decisions as early as 2012. This included providing target numbers for

financial statements. On November 29, 2012, after Brillon asked if there were room

for improvement in the previous month’s financial statements, Khara replied, “We

will look at it one more time and finalize it tomorrow – is there a target number?” 82

Brillon responded, “$1.8M if it is doable without being overly optimistic.” 83 Khara

answered that NCM would “get aggressive on the WIP and should be able to find it

in the WIP. However November may be soft due to the squeeze.” 84 In December

2012, NCM sent its 2012 year-end and December numbers to EPP, and Brillon noted

to Bernardez and Nibarger, “2012 EBITDA is $17.6M vs. last bank forecast of

80 Morris Aff., Ex. 27, at -16706401. 81 E.g. Morris Aff., Ex. 20, at -16666218 (“is there anywhere else we have room to improve April”); Morris Aff., Ex. 32, at -16644801 (“Is there any room for improvement on October?”); Morris Aff., Ex. 37, at -16639356 (“Any room to improve the Dec numbers or is this what you are comfortable with?”). 82 Morris Aff., Ex. 32, at -16644801. 83 Id. 84 Id.

18 $17.8M.” 85 Nibarger responded, “Do we have any room?” 86 Brillon relayed this

question to Khara, writing “Any room to improve the Dec numbers or is this what

you are comfortable with?” 87 Later that night, NCM sent revised numbers, with the

2012 EBITDA increased by $1.2 million to $18.8 million. 88

EPP’s and Khara’s involvement in 2013 continued to affect the results shown

in NCM’s financial statements. When NCM reported January 2013 EBITDA at

$800,000, Brillon wrote to Khara, “[Nibarger] would like to see if you could get this

closer to $1M.” 89 After further adjustments, NCM reported $1.032 million in

EBITDA for January. 90 When the next month’s EBITDA initially appeared lower

than expected, Kerr described to Khara his methods for adjusting the numbers:

When I finished the [February] WIPs last night I was at EBITDA <850>. I literally went through each branch WIP schedule and squeezed out earnings wherever I could (jobs that had substantial costs left to incur that could take reductions in cost estimate, and that weren’t 100% complete or <30% complete. I was literally squeezing out $3k here and $5k there. I added another $250 to Mojave revenue. All this to get to the $398 number that I’m at right now (I scrimped and scratched to pick up $1,250 – I mean, smoke was billowing out of my office!). As you can see by the revenue number (14MM), there just

85 Morris Aff., Ex. 36, at -0277715. 86 Id. 87 Morris Aff., Ex. 37, at -16639356. 88 See Morris Aff., Ex. 38, at -0204571 (sending revised financial statements); Morris Aff., Ex. 39, at -0101394 (financer emailing questions, including inquiry about “the $18.8MM [EBITDA] actuals for FY 2012.”). 89 Morris Aff., Ex. 44, at -16633711. 90 Morris Aff., Ex. 45, at -0110115 (reporting $1,032,313 EBITDA for January 2013).

19 isn’t enough work to generate earnings. I just don’t have the jobs left with backlog to squeeze earnings out. 91

On March 11, 2013, Brillon notified others at EPP about half a million dollars

of fade resulting from 2012 financial statements, and Nibarger responded, “That

cannot happen.” 92 Brillon noted the fade “is in relation to the $1.5M of found

EBITDA . . . at the end of December [2012].” 93 Correspondence around this time

also shows that Khara instructed branch managers to increase revenue and delay

reporting losses to strengthen the financial statements. 94 When NCM reported its

March EBITDA, Brillon asked, “Any chance to get this higher?” and Kerr

responded, “No. This is after squeezing every last drop out of everything (and then

some).” 95

On June 27, 2013, Khara emailed Kerr and told him, “At a minimum we have

to get at $1.5M [EBITDA] for May.” 96 The next day, Kerr emailed Brillon to offer

draft financial statements for May, which included “$1.2MM EBITDA.” 97 Brillon,

91 Morris Aff., Ex. 50, at -16631632. 92 Morris Aff., Ex. 41, at -0101338. 93 Id. 94 See Morris Aff., Ex. 52, at -16690113 (“we need $100K of Ebitda – any room on any of your projects”); Morris Aff., Ex. 53, at -15056898 (“We are going to have some fade on AK Steel as I believe the revenue is going to be less than what is stated but due to [Khara’s] instructions of wanting to finish the quarter strong we did not take the hit this month.”). 95 Morris Aff., Ex. 55, at -0203437. 96 Aff. of Brian F. Morris, Esq. in Support of LVI Grp. Invs., LLC’s Ans. Br. In Opp’n to Def. Subhas Khara’s Mot. for Summ. J., D.I. 699–703 (“Morris Aff. II”), Ex. 32, at -16701438. 97 Morris Aff., Ex. 59, at -16701751.

20 copying Nibarger on his response, noted that the forecast for May had been

“EBITDA of $2.1M.” 98 Nibarger responded, “This cannot stand.” 99 Bernardez then

instructed Brillon, “Go through the WIP today job by job with [Kerr] and [Khara] to

see where we can go up. Let’s discuss the revised results on our Monday call.” 100

Later that day, Kerr sent revised financial statements, which showed May EBITDA

as $2,004,773.101

In September 2013, Kerr sent July WIP schedule results to Khara and Brillon,

attaching “a list of jobs that had substantial fade on the July WIP. Most of these

were due to aggressive WIP cost estimates in Q1 . . . There just simply isn’t any

room on these jobs to be any more optimistic on the cost estimates in July.” 102 In

October, responding to August financial results, Brillon wrote to Khara, “is [this]

the best we show for Aug, this is lower than what we were guiding the lenders to on

the last lender call.” 103 Khara forwarded this email to Kerr, who sent revised

numbers to Brillon less than two hours later with EBITDA increased by $275,000. 104

98 Id. 99 Id. 100 Id. 101 Morris Aff., Ex. 62, at -16701877 (reporting that “[a]fter receiving feedback relative to the initial estimate of where numbers were coming in, we had managers re-evaluate some of their key jobs and made revised estimates to the same.”). 102 Morris Aff., Ex. 28, at -80041. 103 Morris Aff., Ex. 78, at -60439 through 440. 104 Compare Morris Aff., Ex. 77, at -14692929-003 (showing August EBITDA at $1.401,557) with Morris Aff., Ex. 78, at -60439 (showing August EBITDA increased to “$1.675MM”). This 21 Kerr warned that “if the final results on those jobs prove not to be as positive as what

we are expecting there will be fade experienced at the tail end of those jobs.”105

Brillon forwarded this correspondence to Nibarger and Bernardez. 106 Two months

later, reporting on October’s results, Kerr wrote that although the “initial numbers

were much lower,” NCM “went back to the branch managers to have them go over

their WIPs with a fine tooth comb for revenues and cost savings that they may not

have considered.” 107

Khara continued his involvement in NCM’s accounting practices into 2014 to

the close of the Merger. According to the WIP schedules submitted by branch

managers for February 2014, NCM showed a total loss of around $325,000. 108 Prior

to submitting the financial statements, Kerr informed Khara, “February EBITDA of

$1.3M is the best I could do. My first cut was only $100k.” 109 Khara responded,

“Please try to get it up to $1.5-$1.6M with Pepco, Teco, Duke Cape Fear, Apple,

Las Vegas Courthouse. Try to pick up $50k from 5-6 large projects – this will help

increase included $50,000 of income on the DuPont Hickory project, discussed further below. Id. (“I was able to increase the August EBITDA to $1.675MM by . . . [b]ooking . . . an additional $50k of income on the Dupont Hickory Job.”). 105 Morris Aff., Ex. 78, at -60439. 106 Id. 107 Morris Aff., Ex. 81, at -83875. 108 Dudney Report, at 55. 109 Morris Aff., Ex. 92, at -16760591.

22 at closing.” 110 Kerr responded, “Won’t b[e] easy. Will get as close as possible.”111

The next day, Kerr wrote to Khara, “Ok. Got it to . . . EBITDA $1.5M.” 112

Finally, LVI offers evidence regarding “Blue Cell Manipulations,” by which

Kerr allegedly tracked the adjustments he made to excel spreadsheets submitted by

branch managers by highlighting numbers that he changed. 113 The evidence does

not show that Khara or EPP were involved in this practice. 114 LVI suggests,

nonetheless, that the pressure—including pressure from EPP personnel and Khara—

110 Id. In his deposition, Khara denied that in this email he was referencing the merger’s closing. Morris Aff., Ex. 94, Dep. of Subhas Khara (“Khara Dep.”), at 349:1–350:4 (“When I say ‘closing,’ it means closing of the month to budget.”). 111 Morris Aff., Ex. 95, at -16760542. 112 Morris Aff., Ex. 93, at -16760538. 113 See Dudney Report, at 116–17; see also Morris Aff., Ex. 107, at -11397615 (“the highlighted blue cells on the excel spreadsheet is where Brea [i.e. management] has made adjustments”). NCM employees, including Kerr, testified they had no knowledge of the practice. See Morris Aff., Ex. 17, Dep of Duane Kerr (“Kerr Dep.”), at 54:8–55:17. LVI’s expert, Dudney, estimated that the Blue Cell Manipulations showed an overstatement of EBITDA of $2.2 million for 2013 and $0.3 million for 2014. Dudney Report, at 14. While most of the alleged Blue Cell Manipulations related to the four projects at issue, Dudney also concluded that these Blue Cell Manipulations resulted in an overstatement of EBITDA related to other projects of $850,000 in 2013 and an understatement of EBITDA in 2014 of approximately $800,000. See id. at 128, table 24. 114 LVI concedes this in its briefing. See LVI Grp. Invs., LLC’s Ans. Br. In Opp’n to EPP Defs.’ Mot. for Summ. J., D.I. 691 (“LVI Ans. Br. to EPP”), at 49 (“EPP argues that the Blue Cells were not modified by EPP. But the Blue Cells are the evidence of, and one of the mechanisms employed to effectuate, the fraud EPP participated in and directed. EPP did not need to be bookkeepers to be responsible.”); LVI Grp. Invs., LLC’s Ans. Br. In Opp’n to Def. Subhas Khara’s Mot. for Summ. J., D.I. 698 (“LVI Ans. Br. to Khara”), at 40 n.18 (“Khara’s knowledge of Kerr’s method for tracking such changes [i.e. the Blue Cell Manipulations] is irrelevant. What is relevant is that Blue Cell changes were made in response to Khara’s direction to ‘find’ more EBITDA in specified projects.”).

23 to overstate NCM EBITDA inspired the adjustments represented by the Blue Cell

Manipulations.

b. EPP’s and Khara’s Roles in NCM’s Financials Regarding the Alleged Fraudulent Projects

In contrast to the evidence showing involvement in NCM’s general

accounting practices, evidence showing EPP’s and Khara’s involvement in NCM’s

allegedly fraudulent projects—the Apple, Pepco, Sunoco, and DuPont Hickory

projects—is limited. 115

LVI alleges the Apple project experienced losses post-Merger because of an

unreasonably low bid, unreported project delays, and aggressively underreported

costs on the WIP schedules. 116 The evidence does not show that EPP or Khara

directed or adjusted any financial statements related to the Apple project. Khara was

involved in the project at a high level. He instructed that bidding on the project be

“aggressive,” but he also instructed that it should be “diligent,” and “accurate.” 117

He was aware of delays in the project’s completion, but LVI was made aware of

115 I note that NCM employees testified they had no involvement with EPP in preparing financial statements. E.g. Lenahan Aff., Ex. 15, Deposition of Manish Patel (“Patel Dep.”), at 171:19– 172:25 (denying EPP asked him to submit inaccurate financial data); Kerr Dep., at 47:9–23 (same); Lenahan Aff., Ex. 17, Deposition of Mark Canonica (“Canonica Dep.”), at 116:23–117:12 (same); Ex. 18, Deposition of Scott Williams (“Williams Dep.”), at 49:1–22 (same). 116 Dudney Report, at 85–86. 117 Morris Aff. II, Ex. 71, at -14827550 (“[W]e plan to bid this very aggressively . . . We all are very excited so let us put a strong, diligent and sincere effort to win this.”).

24 these delays prior to the Merger. 118 Finally, NCM’s Regional Manager, Mike

Canonica, knew that delays in reporting cost increases for the project on the WIP

schedules would result in fade, and he made Khara aware of this issue. 119

LVI alleges that NCM’s Warranted Financial Statements report inaccurate

numbers regarding the Pepco project. No evidence suggests EPP was involved in

financial statements related to the project. LVI offers one email sent by Khara that

ties him to the project. In that email, Khara ordered the submission of a change order

on the project with a “substantial margin on the claim to overcome shortfall in other

areas,” explaining in a subsequent email that it was “a good time to cover any

shortfall in demolition/scrap etc.” 120 After the Merger, NCM’s project manager for

118 See Morris Aff. II, Ex. 78, at -17652966 (Apple’s notification of delay); Morris Aff. II, Ex. 77, at -16760368 (Khara commenting that NCM was “blindsided” by Apple’s notification of delay); Transmittal Aff. of John A. Sensing to Def. Subhas Khara’s Reply Br. in Support of His Mot. for Summ. J., D.I. 717 (“Sensing Aff. II”), Ex. G (LVI COO John Leonard emailing Khara, “heard that there are issues at Apple and Sunday was last day. Need any help?”); Sensing Aff. II, Ex. F, Deposition of Shrenik Vora (“Vora Dep.”), at 93:10–94:5 (“[I]n March of ‘14 we had a notice of delay from Apple that came due . . . [LVI Employee] Mike told John Leonard about the notice of delay, and John inquired like if everything is okay. And so we set up a meeting . . . I met Mike on site, we discussed the project . . . we gave him a brief tour, he looked at everything and spoke with John Leonard on the phone, and he was pretty satisfied with everything, what he saw.”). 119 See Morris Aff. II, Ex. 73, at -15614872 (Canonica noting in January 2014 that “Apple has a huge increase in [costs of completion] . . . Want to update this YE WIP with projected costs so we don’t take a big fade hit in Q1 2014”); Morris Aff. II, Ex. 75, at NORTHSTAR17688571 (“OUCH! Another hit coming in May . . . All WIP fade from Apple.”); Morris Aff. II, Ex. 76, at -17688569 (“[Khara] is fully aware of the WIP fade.”). 120 Morris Aff. II, Ex. 51, at -17384195.

25 Pepco testified that the project’s numbers on the WIP schedules were inaccurate but

he did not know who had adjusted them. 121

Regarding the Sunoco project, LVI’s allegations center on the anticipated sale

of a low sulfur gas furnace (the “LSG Unit”), a multi-million-dollar piece of

machinery salvaged from the project site. LVI alleges that NCM fraudulently listed

the sale of the LSG Unit as revenue to NCM when in fact the LSG Unit had not yet

sold. Correspondence between LVI and NCM personnel shows that they discussed,

prior to the Merger, treating the LSG Unit’s potential sale as revenue on NCM’s

financial statements, despite the fact that it had not sold. 122 NCM, however,

represented to LVI that it had a letter of intent covering the sale, thus justifying

reporting the sale as revenue—in fact, the purported existence of an LOI was based

on a statement by Khara, apparently unsupported by documentation. 123

Khara was involved in the Sunoco project and to some extent in the sale of

the LSG Unit. While an early email between NCM personnel suggested the sale of

121 See Morris Aff. II, Ex. 79, Deposition of Jason Haller (“Haller Dep.”), at 54:4–55:16 (testifying there would be no reason for changing the cost of completion as demolition had not yet commenced on the project). 122 The evidence suggests miscommunications on LVI’s part. See Morris Aff. II, Ex. 84, at - 01981047 (CEO Scott State emailing CFO Paul Cutrone, “Still don’t see how they took up revenue w/o a valid sale last year. Did we challenge that in [due diligence]?” and Cutrone replying, “We definitely covered it and ultimately accepted it,” and State responding, “You should probably pull together documentation on this as it could become an issue when CHS realizes there was margin booked on $4.5MM of asset sales that weren’t sold.”). 123 Id. (email from Cutrone stating, “[Khara] claimed to have an ‘LOI to sell $5.5 mil’ but I did not ask for copy of LOI at the time.”).

26 the LSG Unit was “dead,” Khara was not included on this email. 124 However, Khara

was at least aware of the possibility that the LSG Unit would not be sold: he received

two draft financial statements, one contemplating a sale of the LSG Unit, one

without the sale included. 125 He also requested that the project manager for Sunoco

confirm the WIP schedule numbers if the LSG Unit were not sold, and he then

withheld part of the project manager’s bonus based on the uncertainty of the sale. 126

As noted above, Khara ultimately told LVI that NCM had a letter of intent to cover

the sale, but may have done so without supporting documentation. 127

In contrast to Khara’s involvement, a single email connects EPP to the Sunoco

project. On April 2, 2014, Manish Patel—a member of NCM’s accounting group—

emailed Brillon NCM’s financial statements and reported projected and actual

revenue and EBITDA for the month of February 2014. 128 The financial statements

124 See Dudney Report, at 102 (internal LVI email, not including Khara, noting “the [LSG Unit] deal is dead for Sunoco so we’ll be lucky to get $16M in revenue. . .”); Sensing Aff., Ex. 62, at - 15087110 (same). 125 Sensing Aff., Ex. 63, at -16736088 (copying Khara on email stating, “Looking at $1MM fade over the next couple months assuming we DO NOT sell [LSG Unit] as we’ve already recognized $5MM in profit. If we can’t sell, we may do better on the sale of parts and pieces so the contract value may go up from my estimate which would offset the fade.”). 126 Morris Aff. II, Ex. 82, at -16734285 (Khara asking “Duane / John what is the worst case for the Sunoco WIP if we do not sell the LSG unit?” and LVI employee Jenkins responding, “Worst case is a $1-1.25MM fade if we don’t sell LSG.”); Morris Aff. II, Ex. 83, at -849863 (Kerr noting in email to project manager that Khara withheld bonus “due to the uncertainty of the LSG sale.”). 127 Id. (email from LVI CFO Cutrone stating, “[Khara] claimed to have an ‘LOI to sell $5.5 mil’ but I did not ask for copy of LOI at the time.”). 128 Lenahan Aff., Ex. 22, at -16739174; see also Dudney Report, at 102–03.

27 attached to this email included numbers related to the Sunoco project, but the email

did not discuss the project. 129 In other words, nothing shows that issues regarding

the sale of the LSG Unit ever reached EPP.

LVI also alleges NCM fraudulently inflated earnings on the DuPont Hickory

project. Some evidence shows that EPP and Khara were involved in financial

statements related to DuPont Hickory. On November 26, 2012, Khara wrote to

Bernardez, “Tim – we received the call for the award from DuPont estimated (with

scrap) $15MM! Thanks.” 130 Next, on October 1, 2013, Brillon wrote to Khara

regarding NCM’s August’s financial results and asked, “Sage, is [this] the best we

show for Aug, this is lower than what we were guiding the lenders to on the last

lender call.” 131 Khara forwarded this email to Kerr, and Kerr responded that he was

able to increase EBITDA by, among other things, “Booking . . . an additional $50k

of income on the Dupont Hickory job.” 132

129 See id. 130 Dudney Report, at 108 n.532; Lenahan Aff., Ex. 25, at -0102225. 131 Morris Aff., Ex. 78, at -60439 through 440. 132 Id. The parties dispute whether the alleged improper inflation was corrected (or “reversed”) before the Merger. EPP points to the testimony of LVI’s expert, Dudney, that the improper adjustment to the DuPont Hickory project—$282,000—was reversed out in January 2014. Lenahan Aff., Ex. 4, Dudney Dep., at 225:14–227:3. LVI contends that Kerr’s $50,000 inflation described in the email above was reversed prior to the Merger, but that the remainder of the inflation, around $225,000, remained misstated at the time of the Merger and had to be reversed afterward. See Morris, Ex. 96, at -292329-018 (listing NorthStar “Look Back Adjustment” for 2014 financials for DuPont Hickory as “(224,040)”).

28 5. NCM’s Allegations Regarding LVI

Through discovery, NCM has narrowed its allegations regarding LVI’s

allegedly fraudulent practices to six projects, referred to as the Holly Street, Alcoa,

HECO, Foothill, Newark, and Lafayette projects. 133 Of these projects, Holly Street,

Alcoa, and HECO account for around 90% of the dollar value of the alleged fraud. 134

LVI has moved for summary judgement that it is not liable for this alleged fraud.

Each project presents a unique set of facts, and so I examine the evidence regarding

each of the six projects individually below.

133 Perri Aff., Ex. 16, Expert Rebuttal Report of Louis G. Dudney, CPA/CFF dated May 15, 2018 (“Dudney Rebuttal Report”), at 4. 134 Dudney Rebuttal Report, at 4 (“[NCM expert] Mr. Roberts opined that approximately 89% of the total alleged accounting misstatements relate to [Holly Street, Alcoa, and HECO projects].”). LVI LLC notes that in the Contribution Agreement, the parties listed certain projects under Schedule 1C that were subject to Change Orders or disputes with the clients, and NorthStar would be allowed to take losses resulting from settlements, up to an aggregate of $10 million, without the losses counting against EBITDA for loan covenant compliance purposes. State Dep., at 174:17- 178:3 (“[Schedule 1C allowed NorthStar prospectively going forward to settle projects on this list or otherwise dispense of them, and if there were EBITDA impacts, those would not flow through as amounts that would be compared to our covenants.”); Perri Aff., Ex. 3, Deposition of Paul Cutrone (“Cutrone Dep.”), at 77:21–79:23 (“if, in fact, we make a business decision down the road that results in us taking an EBITDA hit or a book hit on those [Schedule 1(c)] projects, we would have the appropriate mechanism to add it back for covenant purposes.”), 82:15–84:3 (“These claims [on Schedule 1C projects] were good claims. We didn’t want to write them off, but if it made good business sense to settle them out in the future, we didn’t want it to affect bottom line earnings.”). The Holly Street and Alcoa projects were listed on Schedule 1C. Nibarger Dep., at 322:20–324:9. NCM understood prior to the Merger that a $15.6 million cash loss was possible on the Holly Street and Alcoa projects. Perri Aff., Ex. 20, at -2621641 (Brian Simmons noting that Bernardez “defines the problem as $15.6 mm of cash exposure.”). LVI suggests that the evidence, combined with the presence of Holly Street and Alcoa on the Schedule 1C, suggest that NCM had notice that the Change Orders and claims associated with these projects might settle for less than what LVI sought. As NCM notes, however, the fact that the Contribution Agreement contemplated potential losses does not exculpate LVI in the case that it fraudulently misstated financials regarding the Holly Street and Alcoa projects.

29 One demolition term is important before proceeding: when a party demands

additional compensation—for example, for performing work outside the original

project scope, accruing unexpected costs, or when there is less scrap onsite than

represented—the party seeking the additional compensation files a “contract claim.”

In the industry, these are referred to simply as “claims.” To distinguish these claims

from the legal claims that may subsequently arise out of them, I refer to these

contract claims as “Change Orders.”

a. The Holly Street Project

NCM alleges LVI committed fraud regarding the Holly Street project because

it entered a subcontract knowing it would be unprofitable and then inflated earnings

for the project based on a lawsuit it knew was not probable of collection, as required

by GAAP. Holly Street involved the abatement, decommissioning, and demolition

of a power plant for the City of Austin, Texas.135 LVI served as subcontractor to the

project’s general contractor, TRC. 136 Under its September 2011 subcontract, LVI

would receive $11.7 million, a figure that included $3 million in cash and $8.7

million in estimated scrap value recovered from the site. 137

135 Roberts Report, at 14. 136 Id. at 15. 137 Perri Aff., Ex. 25, Subcontract with LVI Facility Services Inc. for the Holly Street Power Plant Project (“TRC Subcontract”), at -54549.

30 As the execution of the subcontract approached, LVI expressed doubts that

there would be sufficient levels of copper scrap on the demolition site to realize the

estimated scrap value. On March 11, 2011—six months prior to executing the

subcontract—LVI wrote to TRC that it was “unlikely that there is 950,000 lbs. of

copper remaining at the site.” 138 The City of Austin offered to allow LVI to inspect

the site for copper, but on June 22, LVI employee Michael Marcheschi warned CEO

Scott State and COO John Leonard that if LVI inspected the site, it would be

“conceding that [it] could verify [the scrap quantities]; we are going to get one day

to find an additional 2.5 in scrap we didn’t find in many days there.” 139 On June 26,

Marcheschi estimated that if LVI based its bid on the presence of $7.4 million of

scrap value, then the Holly Street project could see as large as a $2.6 million shortfall

in scrap. 140 Around this time, Marcheschi told State, “it was a bad idea to go forward

with the contract with TRC.” 141 Leonard was initially opposed to the contract as

well until he conducted a site visit. 142

138 Lenahan Aff., Ex. 62, at -23891. 139 Lenahan Aff., Ex. 70 at -2028581. 140 Lenahan Aff., Ex. 106, at -8279 through 280. Marcheschi noted in this same email, however, that he had a “high degree of confidence in reducing the ‘shortage’ from $2.6 to $2.1” based on a site visit, and possibly reducing it further to $719,212.38 based on representations on the site owner’s website. Id. 141 Lenahan Aff., Ex. 71, Deposition of Michael Marcheschi (“Marcheschi Dep.”), at 119:19–24. 142 See Marcheschi Dep. 120:12–121:25 (testifying that Leonard was “opposed to signing the contract,” but that after he visited the site and made calculations, he “thought the numbers worked.”).

31 The next month, July 2011, TRC informed LVI that the City of Austin had

indeed overstated the amount of copper at the site by 600,000 pounds, and TRC

interpreted its agreement with LVI as assigning LVI the risk of a scrap shortfall. 143

LVI disagreed and warned TRC that if it signed the general contract with the City of

Austin, it was “absent any contract discussions on key provisions with [LVI].” 144

During the negotiations of the subcontract that followed, LVI and TRC

adjusted the copper estimate in the subcontract downward from the City of Austin’s

initial representation of 950,000 pounds to 320,000 pounds. 145 LVI and TRC entered

the subcontract on September 9, 2011. 146 The subcontract included a provision that

143 Lenahan Aff., Ex. 59, at -4363 (TRC representative noting her “understanding of our agreement” was that “LVI has inspected the Holly Street site and is satisfied that the known scrap and salvage value at the site is at least $8,700,000. LVI will take the risk of scrap quantities and value if scrap and salvage value is less than $8,700,000.”). 144 Lenahan Aff., Ex. 59, at -4361. 145 Compare Perri Aff., Ex. 26, at -23891 (March 2011 proposal suggesting 950,000 pounds of Copper) with TRC Subcontract, at -84549 (executed subcontract showing 320,000 pounds of Copper on Exhibit E, Scrap and Salvage schedule). I note that Schedule E on the subcontract also lists 970,000 pounds of “Copper, Motor Breakage,” that LVI does not include in its calculation of an adjustment to 320,000 pounds of copper, which it appears to calculate from the sum of “Copper, Transformers, Turbines, etc.” “Copper, Buss Bar, Unit #3,” and “Copper Wire, Net Recovery.” NCM does not seem to rebut or oppose LVI’s contention that the Subcontract only estimates 320,000 pounds of Copper. See NCM Grp. Holdings, LLC’s Response in Opp’n. to LVI Grp. Invs. LLC’s Mot. for Summ. J., D.I. 686 (“NCM Ans. Br.”), at 26–27 (“LVI argues . . . that the final contract between LVI and TRC reflected a lesser amount of copper, which was a result of LVI’s due diligence. Yet, this argument is a red herring as the amount of copper in the contract is not at issue.”). Moreover, if LVI earlier stated it was unlikely there was 950,000 pounds of copper on-site, it seems equally unlikely that it would then increase its estimation of on-site copper to 1,290,000 pounds. Based on the foregoing, I do not consider the amount of copper estimated in the TRC Subcontract—320,000 pounds—to be a disputed fact between the parties. 146 TRC Subcontract, at -84504.

32 contemplated the pursuit of “a Change Order based on actual scrap quantities being

less than as stated in the Project Bid Documents. . . .”147 In other words, LVI

expected that the subcontract would protect its interests by giving rise to a request

for a Change Order. 148 The parties dispute whether the subcontract between TRC

and LVI guaranteed a minimum total scrap value. 149

Based on scrap shortfall that in fact occurred, as well as other issues that arose,

LVI began discussing potential Change Orders with TRC more than a year before

Merger discussions began. 150 On October 25, 2012, a project manager at LVI

147 See TRC Subcontract, at -84507 (“In addition, to the extent the parties are successful in obtaining a Change Order based on actual scrap quantities being less than as stated in the Project Bid Documents, the parties shall share equally in the net proceeds of such Change Order.”). 148 State Dep. 361:7–367:24 (“We were relying on our contract with TRC and their obligations under our contract to affect certain recoveries or conditions with the City. And if in fact they breached those negotiations in our contract with TRC, that could impact the overall project, but it would not impact our ability to seek recovery either directly or through litigation.”). 149 Compare Perri Aff., Ex. 61, Marcheschi Dep. 71:10–24 (noting that the subcontract between LVI and TRC includes “a guaranteed minimum as far as the value of the total scrap”) and State Dep., at 362:8–363:14 (“[The TRC Subcontract] protected our rights by giving us certainty that there were minimum thresholds [of scrap] that had to be met, and that work conditions would have to be honored for us to proceed at the price that we offered to proceed at.”) with Lanahan Ex. 69 at -19223413 (Auditor Grant Thornton’s email to LVI General Counsel noting it “had a look at the attached TRC contract and cannot see an obligation from the [general contractor] or the property owner on the minimum scrap value”) (emphasis in original). 150 See Perri Aff., Ex. 27 (March 14, 2012 notice in shortfall of Copper scrap from representation of 950,000 pounds); Perri Aff., Ex. 50 (July 9, 2012 notice of additional costs resulting from an emergency boiler abatement); Perri Aff., Ex. 51 (August 9, 2012 response from TRC confirming presence of asbestos resulting in increased costs for emergency abatement). NCM offers several emails as evidence that LVI improperly reported earnings on the project because it understood there would be a scrap shortfall. In November, David Pearson, LVI’s regional manager, asked Marcheschi why cupronickel was being carried on the books. Lenahan Aff., Ex. 65, at -1631934 (“Can you refresh my memory on why we carried CuNi and how much – what do we have to support our position?”). Marcheschi told Pearson that during contract negotiations, he was told to “go back out to the site and search for more copper,” despite the fact that, as noted above, LVI 33 emailed Leonard, informing him that Holly Street was operating at a loss of $1.9

million. 151 This figure, according to the email, excluded “the claim for copper and

CuNi” shortfall. 152 With damages from potential claims and Change Orders

included, the job showed a profit of $200,000. 153 Ultimately, LVI sued TRC for

$9.6 million for its failure to pursue a Change Order with the site owner (the “TRC

Claim”). 154 LVI then discounted the claim, booking $4.9 million in revenue in 2013

based on the lawsuit. 155 LVI’s auditor, Grant Thornton, concluded in its financial

audit that LVI had a basis for its claim sufficient to recognize the revenue. 156

In 2017, the court hearing the TRC Claim denied TRC’s motion for summary

judgment, which TRC based on the argument that LVI had accepted the risk of

shortfall because it had inspected the site. 157 In 2018, NorthStar—who by that point

understood there was not 950,000 pounds, and in part to make up for this, it listed CuNi [i.e. cupronickel] the site owners claimed was present in on-site boilers. Id. at -1631933. 151 Lenahan Aff., Ex. 66 at -25135. 152 Id. 153 Id. 154 Perri Aff., Ex. 8, Dep. of Greg DiCarlo (“DiCarlo Dep.”), at 84:18–85:25. 155 See Perri Aff., Ex. 23, at -16733384 (presentation noting that the claim was expected to be $8 million to $10 million and recognizing revenue based upon the claim); Roberts Report, at 16. 156 See Perri Aff, Ex. 29, at -303 (stating GAAP standard for recognizing revenue based on a claim and discussing the Holly Street project: “Included as an exhibit to the [TRC subcontract] is a listing of expected scrap quantities and dollar value of $8.7M which was relied on by the Company when [it] calculated the contract price, as such, the Company is entitled to be made whole for reductions in the expected scrap quantities.”). 157 See Perri Aff., Ex. 53, Order Denying Mot. for Partial Summ. J., and Denying Mot. to Strike, at 24–25 (“While the Contract Documents do include language whereby LVI agreed that it carefully examined the Plant conditions under which the Project was to be performed, and that it entered into the Project on the basis of its own examination, investigation, and evaluation, . . . these 34 owned the litigation asset—settled the claims with TRC and received a payment of

approximately $2.3 million. 158

b. The Alcoa Project

NCM alleges LVI committed fraud regarding the Alcoa project because LVI’s

internal analysis, developed based on settlement offers with the site owner, showed

lower gross profits and contract value than it represented in its Warranted Financial

Statements. The Alcoa project was a demolition, remediation, and restoration

project in Frederick, Maryland. 159 LVI and Alcoa signed the contract for the project

on March 2, 2011. 160 Difficulties accrued with the project, including disputes over

the scope of the work, additional costs allegedly caused by Alcoa, and interference

with scrap recovery. 161

In February 2013, LVI informed Alcoa of Change Orders based on these

disputes. 162 Beginning in July, LVI and Alcoa negotiated to reduce the scope of the

provisions are not followed by any risk-allocation language . . . Accordingly, TRC’s motion for summary judgment is denied as to its contention that LVI allocated any risk of . . . salvage shortfalls to itself pursuant to the Contract Documents.”). 158 Perri Aff., Ex. 13, Aff. of Gregory G. DiCarlo (“TRC paid LVI Facility Services, Inc. approximately $2.3 million and released its approximately $3 million in claims against that subsidiary.”). 159 Perri Aff., Ex. 4, Leonard Dep., at 166:13–18. 160 Perri Aff., Ex. 32, Compl. in the Cir. Ct. for Frederick Cnty. MD (“Alco Compl.”), ¶ 24. 161 DiCarlo Dep., at 47:10–48:15. 162 Perri Aff., Ex. 33 (notifying ALCOA of Change Order requests).

35 project and the contract value through Change Orders. 163 LVI and Alcoa sent

settlement offers based on the de-scope, and LVI developed internal analyses of the

project’s value and estimated gross profit based on the settlement offers. 164 Both the

settlement offers that LVI sent to Alcoa as well as the internal analyses based on

these offers indicate that LVI excluded the value of its claims against Alcoa from

the settlement negotiations and its internal analyses. 165 In a “Counter offer and

scope resolution” sent to Alcoa on October 28, 2013, LVI included an attachment

labeled “LVI Counter Offer to Alcoa 8/28 Descope Settlement Offer.” 166 In this

attachment, it proposed that Alcoa owed a contract value to LVI of $777,959.40, and

it noted, “This number excludes LVI claims.” 167 In contrast to this number, LVI

163 Roberts Report, at 19; Lenahan Aff., Ex. 110 (letter to Alcoa negotiating descope); Lenahan Aff., Ex. 111 (letter to Alcoa “Re.: Counter offer and scope resolution”). 164 See Roberts Report, at 19 (“LVI developed several internal analyses that evaluated LVI’s estimated gross profit position based on offers proposed by both LVI and Alcoa relating to contract de-scope.”); Perri Aff., Ex. 36 (containing internal analysis developed based on the proposed offers of each party). 165 Though shown by documents explained below, LVI personnel also corroborated this in testimony. Leonard Dep., at 195:22–196:14 (“Alcoa 8/29 Settlement Offer . . . doesn’t include the claim that [LVI] had against them already”), 197:5–23 (“[The settlement offer] had nothing to do with the total settlement . . . we still had, obviously, a discussion regarding our entitlement on the claim”); Cutrone Dep., at 125:18–126:23 (Alcoa’s settlement offer “does not contemplate additional claims that LVI was putting forth”). 166 Perri Aff., Ex. 35, at -222020-005. 167 Id. (“Contract Value Owed to LVI . . . excludes LVI claims”). Notably, some of the exhibits offered by the parties differ on this issue. NCM’s exhibit leaves out the attachment (included in LVI’s exhibit) sent to Alcoa advising that the settlement negotiation “excludes LVI claims.” Compare id. (executed version including attachment at page -222020-005 noting contract value “excludes LVI claims”) with Lenahan Aff., Ex. 111 (unexecuted version not including attachment).

36 developed an internal analysis that incorporated both the de-scoped project value as

well as “Potential Claims,” which resulted in a calculation that Alcoa owed LVI a

contract value of $10,055,520.00.” 168

Ultimately, on October 4, 2013, LVI sued Alcoa, seeking $10.1 million in

damages (the “Alcoa Action”). 169 In November, reacting to the lawsuit, Alcoa

modified the project’s scope.170 LVI’s internal analyses based on the settlement

offers—discussed above—showed a negative gross profit; by contrast, LVI reported

a positive gross profit on its November WIP schedule and year-end 2013 WIP

schedule. 171 LVI also calculated the contract value at $22.9 million on its internal

analyses, but it reported a contract value of $27.4 million to its financial accountant,

Grant Thornton, and on its year-end financial statements. 172

168 Perri Aff., Ex. 36, at -2002647-007. 169 See Alcoa Compl., at -548354. 170 Roberts Report, at 19; Lenahan Aff., Ex. 112 (“This letter is to inform you of Alcoa’s decision to modify the existing scope of work at the Eastalcoa facility.”). 171 Roberts Report, at 19. The discrepancy between these numbers as of November 2013 was $4.3 million. Id. LVI updated their internal analyses in February 2014, and the discrepancy reduced to $3.8 million. Id. 172 Id. at 19–20.; see also Lenahan Aff., Ex. 93, at -304.

37 LVI personnel testified they were confident in the claim’s strength. 173

Ultimately, NorthStar settled the claim with Alcoa post-Merger for a small sum. 174

c. The HECO Project

NCM alleges that LVI knew profits were fading in the HECO project but

fraudulently delayed recognizing those losses until after the Merger. The HECO

project involved asbestos abatement, demolition, and equipment removal for

Hawaiian Electric Company, Inc. 175 LVI entered the contract on December 15, 2011

and began work in 2012, but it left the job in June 2012 due to difficulties with the

site owner. 176 LVI then negotiated a Change Order, executed in December 2013,

and returned to work on the site. 177 New problems developed soon after LVI’s

return, and it began to contemplate the need for another Change Order to address

new costs. 178

173 See DiCarlo Dep., at 56:15–57:12 (“we had a very strong basis for recovery on our claims”); Leonard Dep., at 205:7–17 (“we believed all of the CIE was recoverable”). 174 The parties dispute whether the size of the settlement indicated that the claim was originally weak or if NorthStar settled for a low value to create further business opportunities with Alcoa. See Leonard Dep., at 201:16–202:3; DiCarlo Dep., at 59:10–60:16. 175 Lenahan Aff., Ex. 79, at -1543903. 176 Lenahan Aff., Ex. 79, at -1543907; Perri Aff., Ex. 11, Dep. of Joe Catania (“Catania Dep.”), at 128:7–18. 177 Perri Aff., Ex. 37, Am. No. 4 to Major Construction Serv. Contract Between Hawaiian Elec. Co., Inc. & LVI Environmental Serv., Inc. 178 See Leonard Dep., at 604:9–610:6 (describing renewed troubles on the HECO project).

38 LVI personnel sent several emails regarding the HECO project that NCM

offers as evidence of fraud. On March 7, 2014, CEO Scott State forwarded an email

to COO John Leonard about scrap prices to which he added, “Scrap starting to

fade.” 179 Leonard wrote back, “I know. Issue at Poletti.” 180 Leonard then responded

to State’s email a second time, adding, “And HECO.” 181 On March 11, CFO Paul

Cutrone emailed personnel on the HECO project and requested that they “thin down”

costs associated with accounts payable and bill payments and “push some to April”

in order to “start managing quarter end balances.” 182

On the date of the Merger, Cutrone emailed Leonard and State, noting, “We

have deferred margin erosion on HECO.” 183 Cutrone later testified he deferred

margin erosion because of the opportunity to recover based on LVI’s Change Orders

with the site owner. 184 Finally, in May 2014, after the Merger, Joe Catania, the

179 Perri Aff., Ex. 39, at -2122048. 180 Id. 181 Perri Aff., Ex. 38, at -2122045. 182 Lenahan Aff., Ex. 80, at -2121458 (requesting to “thin down” payments associated with “LVI AP Payment Audit List”); see also Perri Aff., Ex. 67, Catania Dep. 98:5–100:17 (noting that request to “thin this down” relates to postponing payments to vendors on the LVI accounts payable list). 183 Lenahan Aff., Ex. 81 at -355683. 184 See Perri Aff., Ex. 68, Cutrone Dep., at 140:5–141:25 (“the deferral is because HECO was starting to have cost overruns, and it was my understanding that we’d have margin erosion if we did not recover either operationally or through advancement of change order and/or claim with the client to recover. And until I had better clarity around that, I deferred . . . I’m expecting recovery of [the erosion] and the monetizing of that overrun either through production gains or . . . favorable change orders with the client.”).

39 regional manager for the HECO project, asked Leonard if he could begin recording

around $1 million total loss for the project, or “post the hit.” 185 Leonard emailed

back, “What?” 186 He testified his puzzlement stemmed from the fact that he

expected the anticipated Change Order to give rise to claims that would keep the

project profitable. 187

After the Merger, NorthStar’s CFO, Jeff Adix, opined that HECO was

overstated as of December 31, 2014 because the Change Orders did not properly

give rise to revenue recognition under GAAP. 188 Adix also stated, however, that he

would not consider HECO overstated as of the date of the Merger due to the project’s

history of successfully negotiating Change Orders. 189

d. The Foothill Project

NCM alleges that LVI made baseless adjustments to the financial statements

on the Foothill project, fraudulently inflating profits. The Foothill project was an

185 Lenahan Aff., Ex. 83, at -1899392 (“Post the hit? [Cutrone] told Lenny this would be a good month for it[.] Post half? About 1mil total.”). 186 Perri Aff., Ex. 69, at -1899361. 187 Perri Aff., Ex. 62, Leonard Dep., at 136:13–22 (“I believed, based on discussions, that we were going to put together a claim that was going to recoup all costs, plus overhead and profit from HECO.”). 188 Lenahan Aff., Ex. 84, at -2910 (“In my opinion, based on the work performed, there is substantial evidence that the 12/31/14 reported results for the HECO project were significantly overstated relative to the value of that project . . . In my opinion, the cause of the misstated HECO results was an over-reliance by the Company’s former CFO on the outcome of an assumed future claim, without taking the necessary steps to fully validate a claim of this size. . .”). 189 Id. at -2914 through -2915.

40 abatement, demolition, and site clearing at the Foothill De Anza Educational

Center. 190 LVI entered the contract on August 8, 2013. 191 It estimated the total

contract value at $5 million, with $2.7 million in scrap value. 192

On February 20, 2014, a regional controller emailed LVI’s Northern

California Branch President, Michael Kinelski, to confirm that the estimated gross

profit of $461,000 reflected in the January 2014 WIP schedule was accurate. 193

Kinelski confirmed the accuracy the following day. 194 The regional controller then

provided COO Leonard with the draft January WIP for Foothill on February 24,

noting that “[Kinelski] forecasts the job to make 451k GP. As of Dec 2013 we

reflected job to date [gross profits] of $819k. I’m in the process of finding additional

[gross profits] from other Branches so we can adjust the job as of Dec.” 195 LVI made

upward adjustments to the WIP, and three days later the regional controller sent an

email to Kinelski, noting, “We would like to adjust Foothill for Jan as follows,” and

showing a gross profit for the project of $878,762. 196 Kinelski responded, “Ok with

190 Lenahan Aff., Ex. 88, Foothill De Anza Educational Center Demolition Work Order dated 8/8/2013. 191 Id. at -436904. 192 Lenahan Aff., Ex. 89, at -1976866; Lenahan Aff., Ex. 90 at -1912010. 193 Lenahan Aff., Ex. 91, at -2219557 (“I see the Job by Job is reflecting Foothill with a revenue of 6.5 mil and a GP of 461k. Is this accurate? I hope not.”). 194 Id. at -2219556 (“Unfortunately the $460k is where it looks like we’ll end up right now.”). 195 Lenahan Aff., Ex. 92, at -192009. 196 Lenahan Aff., Ex. 95, at -2221011.

41 me.” 197 The final January WIP recorded gross profits of $879,000. 198 The

adjustment carried over to February, resulting in a total increase of estimated gross

profits from the draft WIP schedule of approximately $418,000. 199

At his deposition, Kinelski testified that he expected the gross profit to be

$460,000, and that he could not identify a basis for the upward adjustment. 200 LVI

claims the basis for the adjustment was a potential Change Order on the project. 201

e. The Newark Project

The Newark project involved a partial demolition at the airport in Newark,

New Jersey. 202 NCM alleges that LVI fraudulently included revenue for the Newark

project based on a claim it knew it could not collect. LVI entered a subcontract in

April 2012 with Jervis B. Webb Company for a fixed price of approximately $8.2

million. 203 LVI began to experience operational setbacks soon after the start of the

197 Id. at -2221010. 198 Roberts Report, at 33. 199 Roberts Report, at 32–33. 200 Lenahan Aff., Ex. 94, Dep. of Michael Kinelski (“Kinelski Dep.”), at 95:1–24 (“Q: [A]s of February 21 you expected the gross profit to be $460,000, correct? A: That is correct. Q: Did anything change between February 21 to March 14 which would have increased the gross profit on the job? A: Not that I can remember. Q: Had you discussed a change with anyone other than in this E-mail? A: No, I don’t think so.”). 201 See Perri Aff., Ex. 12, Kinelski Dep., at 79:16–80:1 (“at this time we were well underway with claim at a project called the Blue Cube at Foothill . . . we were well underway and we had claims with our owner, our customer, as well as a subcontractor. . .”). 202 Leonard Dep., at 229:9–230:25. 203 Roberts Report, at 22; Lenahan Aff., Ex. 113, at -368583 (“Contract Price $8,207,265.00”).

42 project—prior to the Merger—and it had difficulty estimating its cost of

completion. 204

LVI increased the Newark project’s revenue based on a Change Order it

internally viewed as likely unsuccessful. 205 In November 2013, LVI assembled

plans to file a Change Order and increased the contract value by $500,000 based on

these plans. 206 The next month, LVI prepared to submit its Change Order for

$640,000. 207 Along with the draft, an LVI employee wrote, “Most of this is going

to be disputed and shaky at best.” 208 LVI employee Bowman then sent the draft

claim to COO Leonard, noting, “As discussed, not a lot of confidence in this should

we actually submit but this will get you to the number.” 209 Bowman then sent the

204 Leonard Dep., at 231:14–233:11, 237:10–238:11; Perri Aff., Ex. 41, at -2109372 (“How the hell do we not have a clue [about cost to complete Newark project] at this point?”); Perri Aff., Ex. 56, at -2029355 (“Don’t kill the messenger, I have asked every question imaginable for the last 6 months trying to get [cost to complete the Newark project] right. I don’t have an answer. . .”). 205 Lenahan Aff., Ex. 96, at -2029356 (LVI President Bowman stating, “Given the contract language that I am familiar with I do not feel very confident that we will be able to have substantial success claim wise.”); Lenahan Aff., Ex. 97, at -2797139 (Bowman stating “you can see by the emails attached that there isn’t much confidence in any of this sticking.”); Lenahan Aff., Ex. 77, Dep. of Gary Bowman (“Bowman Dep.”), at 273:24–274:9 (“the contract basically allowed the customer to do whatever they wanted. . .”). 206 Roberts Report, at 22–24; see also Lenahan Aff., Ex. 114, at -4396600. 207 Perri Aff., Ex. 43, at -2797142 (“Total: $640,000”). 208 Id. at -2797140. 209 Id. at -2797139.

43 proposed Change Order to LVI Senior Vice President Frank Aiello, noting, “you can

see by the emails attached that there isn’t much confidence in any of this sticking.” 210

Bowman continued to express serious doubts about the Change Order’s

strength. 211 The $500,000 revenue remained on the financials through the Merger.

In July 2014, Bowman told another employee that Newark was overstated by

$500,000 due to the inclusion of the claim. 212 In addition, LVI personnel had been

told to refrain from adding monthly costs to the Newark project as they became

known, thus “freezing” the margin until after the Merger. 213 In August 2014,

following the Merger, LVI circulated a forecast of Newark’s results and suggested

that it needed to reverse out $500,000 for the Change Order revenue by decreasing

the total contract value. 214 Ultimately, LVI obtained $100,000 on the Change Order,

and after the Merger it revised the contract value down by $400,000. 215

210 Id. 211 Bowman Dep., at 274:3–9 (“I didn’t feel as though we had the proper documentation to demonstrate that we were being held up in a way so significant that it would be worth pursuing.”). 212 Lenahan Aff., Ex. 98, at -83372 (“We have over 300,000 in WA work revenue to which the cost has hit the job but the revenue cannot be recognized since we over stated the revenue by 500,000 for the potential claim value and are now simply trying to backfill the gap.”). 213 Lenahan Aff., Ex. 98, at -83372 (Bowman noting, “We never completed adding the add’l costs we knew about many months ago, we were told to discontinue adding them each month—we would need to dig back to get specific amounts but we definitely never added the total cost that we realized we were short from months ago.”). 214 See Bowman Dep., at 306:2–307:7. 215 Roberts Report, at 23; see also Lenahan Aff., Ex. 119 at -2288123 (reversing project value as part of Schedule 1C); Lenahan Aff., Ex. 48 (same).

44 f. The Lafayette Project

NCM alleges that LVI improperly delayed reporting known costs on the

Lafayette project. Lafayette was an interior demolition and hazardous waste

removal for historical buildings in the Washington D.C. area. 216 The branch

manager for the project, David Rymers, emailed LVI’s regional controller, Frank

Rapuzzi, in March 2013 to identify issues concerning cost-overruns, estimation

difficulties, and timing for recording losses. 217 The same month, Rapuzzi emailed

CFO Paul Cutrone to inform him that the project had estimated additional costs of

$300,000 that had not been recorded. 218 In September 2013, Paul Cattan, another

LVI regional controller, explained that for August 2013’s project results, he utilized

Rymers’ percent-complete numbers, except in cases where using these numbers

created a decrease in revenue for the month, in which case he changed to the prior

month’s percentage complete, to avoid recording losses.219 Additionally, the

January 2014 job cost report contained edits adding approximately $325,283 in costs

to the Lafayette project and noting the costs were “provided last month but not

216 Lenahan Aff., Ex. 121, Subcontract Agreement. 217 Lenahan Aff., Ex. 100 at -117472. 218 Lenahan Aff., Ex. 101, at -2747540-541 (“Despite the addition of $200K in CO’s as just discussed, we had to keep the job flat for the month . . . he is trying to phase it in but we have $300k issue on this job.”). 219 Lenahan Aff., Ex. 122, at -4201289 (“[Rymers] – we used your % completes except in cases that created a decrease in revenue for the month in which case I changed to the prior months % complete”).

45 entered in Dec.” 220 Finally, in November 2014—after the Merger—Rymers stated

in an email to fellow LVI employees Paul Cattan and Richard Hubbs, “Recall I had

a $560k loss for [Lafayette] estimated that I wanted to project at end of 2013 and

was told to reverse in dec 2013 and recognize sometime in 2014. [] But to date we

have not.” 221

6. Post-Merger Events

NorthStar, starting soon after the Merger, performed poorly. Following the

formation of the new company, four LVI directors served on NorthStar’s seven-

member board of managers. 222 LVI’s CEO, Scott State, continued on as CEO of

NorthStar, while NCM’s CEO, Khara, became President and a member of the

NorthStar Board of managers. 223 NorthStar experienced a personnel shakeup as it

220 Lenahan Aff., Ex. 124, at -2422145. 221 Lenahan Aff., Ex. 102, at -2526817. LVI disputes that this loss was ever reversed. See Perri Aff., Ex. 22 (Job-by-job WIP schedule containing financial information for the Lafayette project); Perri Aff., Ex. 71, Dep. of Paul Cattan (“Cattan Dep.”), at 18:7–25 (testifying that a “job-by-job” WIP schedule shows the loss was not reversed, and that this WIP schedule would ultimately be reflected in the Warranted Financial Statements). 222 See Sensing Aff., Ex. 1, at -16723256. 223 Id. (“It is agreed that Scott State will serve as the CEO of [NorthStar], and Sage Khara will serve as President of [NorthStar].”).

46 executed planned rearrangements following the Merger. 224 In addition, it closed

several NCM branch offices as well as NCM’s National Business Center. 225

Problems also arose with projects post-close. Losses and write-offs emerged

from LVI and NCM legacy projects. 226 In addition, NorthStar entered many new

projects that saw costs in excess of expected revenue. 227 A trough in the market

price of scrap metal led to additional declines in revenue due to lower-value resales

of scrap from demolition projects. 228 As an added trouble, the ongoing litigation

between LVI and NCM delayed company audits, which in turn made NorthStar

224 See Sensing Aff., Ex. 4, at -497763 (“Management is forecasting $9.3 million in potential headcount synergies from the elimination of 123 positions in the combined companies . . . Overall, the reductions assumed represent an 18.4% reduction in overall headcount levels . . . including a 40% reduction in estimators, a 35% reduction in branch managers, and a 31% reduction in sales personnel.”). 225 Id. (“Management is forecasting $1.5 million in annual facility savings . . . for 15 facilities to be consolidated (6 LVI and 9 NCM)”); Sensing Aff, Ex. 10, Deposition of John Kling (“Kling Dep.”), at 8:15–9:5, 130:11–24 (describing the operation and closure of the NCM National Business Center); Sensing Aff., Ex. 11, Deposition of Jim Hall (“Hall Dep.”), at 238:10–239:7, 241:22–242:18 (describing how post-Merger synergies shook up operations). 226 E.g. Roberts Report, at 7–8. 227 Sensing Aff, Ex. 14, at -30536 (listing “Top 20 Problem Projects – Q4-2015”); Sensing Aff, Ex. 15, at -2965 (Listing “Jobs with Contract Values > 2M In Progress as of 01/31/2015,” showing many with cost in excess of revenue); Sensing Aff, Ex. 16, at -28775 (same for jobs “In Progress as of 09/30/2016”), Sensing Aff., Ex. 17, at -330721 (same for jobs “In Progress as of 3/31/16”), Sensing Aff., Ex. 18, at -29346 (same for jobs “In Progress as of 6/30/16”); Sensing Aff., Ex. 19, at 11 (same for jobs “In Progress as of 12/31/16”); Sensing Aff., Ex. 20, at 11 (same for jobs “In Progress as of 03/31/17”). 228 See Sensing Aff, Ex 21 (providing “Large Scrap Status Summary” indicating declining prices); Sensing Aff., Ex. 22, Deposition of Karan “Sam” Shah (“Shah Dep.”), at 181:15–183:4 (testifying that drop in scrap value led to reduced profitability on NorthStar jobs); Sensing Aff., Ex. 23 (NorthStar requesting Change Order on Pepco project due to reduction in scrap value).

47 noncompliant with certain lending covenants and damaged its ability to secure

bonds. 229 This, in turn, negatively impacted its ability to bid on new jobs. 230

LVI and NCM put NorthStar up for sale in October 2016. 231 During the sale

process, based on its business performance, NorthStar reduced its financial forecasts

several times. 232 As a result, many bidders dropped out, and in June 2017, LVI and

NCM sold their equity stakes in NorthStar to JF Lehman for a “zero cash equity

return” for either company. 233

229 See Sensing Aff., Ex. 24, Deposition of Jose Carlos (“Carlos Dep.”), at 48:11–50:5 (noting litigation caused delays in the audit process), 150:14–152:7 (testifying that litigation required a “lookback” audit); Sensing Aff., Ex. 25, Deposition of Robert Hogan (“Hogan Dep.”), at 228:9– 11 (noting lack of an audit caused LVI to fall out of compliance with loan covenants), Sensing Aff., Ex. 28, State Dep., at 467:16–468:6 (describing difficulties obtaining bonds as a result of the lack of audit); Sensing Aff., Ex. 29, Deposition of Michael Roberts (“Roberts Dep.”), at 30:5–16 (explaining that absence or delay of an audit would lead to difficulty obtaining surety credit), 42:9– 14 (explaining that finance company declined to provide “payment performance bonding to NorthStar” due to the audit problems). 230 Sensing Aff., Ex. 30, at 11–12 (“[T]he delayed issuance of financial statements caused by the Investor Dispute had a negative impact on the Company’s ability to bid on certain job opportunities, which led to the Company underperforming financially during the year ended December 31, 2016 and beyond. . .”). 231 See Sensing Aff., Ex. 9, Confidential Information Mem., prepared by Houlihan Lokey Capital. 232 E.g. Sensing Aff., Ex. 34, Fund III LPAC Memo. NorthStar dated April 5, 2017, at 4 (“in late March the Company put out a revised 2017 forecast, which shows year-end EBITDA of $38.9 million, compared with original budget of $54 million.”). 233 In other words, JF Lehman purchased NorthStar for an amount less than its total debt, and LVI and NCM received nothing from the sale. See Sensing Aff., Ex. 36, Agreement and Plan of Merger among JFL-NGS Partners, LLC, Polaris Merger Sub, LLC, & NorthStar Grp. Holdings, LLC dated as of June 12, 2017.

48 C. Procedural History

This case has a long and somewhat tortuous procedural history. I focus only

on procedure pertinent to the four motions addressed in this Memorandum Opinion.

LVI filed its original complaint on March 3, 2016, against NCM and Khara. 234

NCM responded on April 4, 2016 with a counterclaim against LVI and a third-party

complaint against Scott State, Paul Cutrone, and NorthStar. 235 NCM amended its

counterclaim and third-party complaint, and on August 23, 2016, LVI, State,

Cutrone, and NorthStar all moved to dismiss.236 On March 29, 2017, I granted the

motions to dismiss with regard to the derivative claims but denied the motions to

dismiss regarding fraud claims. 237

On May 3, 2017, LVI filed an amended complaint, adding the EPP entities as

a defendants. 238 On May 23, EPP moved to dismiss LVI’s amended complaint. 239 I

largely denied EPP’s motion to dismiss on March 28, 2018. 240 On April 10, 2018,

NCM filed a second amended counterclaim, adding LVI Parent as a counter-

234 D.I. 1. 235 D.I. 28. 236 D.I. 118–22. 237 D.I. 236. 238 D.I. 262. 239 D.I. 294. 240 LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2018 WL 1559936 (Del. Ch. Mar. 28, 2018) (granting dismissal of the negligent misrepresentation claims and denying dismissal of other claims).

49 defendant. 241 Several months later, on June 29, 2018, NCM and LVI each

voluntarily dismissed their indemnity claims against the other. 242 NCM, EPP,

Khara, LVI, LVI Parent, and Scott State all moved for summary judgment in June

and July 2018. 243 I held oral argument on the motions for summary judgment on

November 28, 2018. 244

Shortly after that argument, on December 6, 2018, NCM filed a third amended

counterclaim, adding Brian Simmons, Robert Hogan, and CHS Private Equity V LP

as counter-defendants. 245 The CHS counter-defendants moved to dismiss on

December 20, 2018.246 The CHS counter-defendants then moved for summary

judgment on May 31, 2019. 247 After briefing completed on these latest motions, I

heard oral argument on September 4, 2019 on the CHS counter-defendants motions

to dismiss and for summary judgment. 248 What follows is my decision resolving the

241 D.I. 627. 242 D.I. 653. LVI explained that “LVI LLC and NCM have stipulated to dismiss their parallel claims for indemnification, because the exclusive contractual remedy relating to such claims is no longer available.” LVI Grp. Invs., LLC’s Mot. for Summ. J., D.I. 665, at 3 n.2. 243 D.I. 654, 659, 664–65, 674. 244 D.I. 781. 245 D.I. 789. 246 D.I. 794. 247 D.I. 854. 248 D.I. 888.

50 four motions for summary judgment filed on June 29 and 30, 2018 by NCM, EPP,

Khara, LVI, and LVI Parent. 249 My reasoning follows.

II. ANALYSIS

Summary judgment may be granted if there is “no genuine issue as to any

material fact” and the moving party is “entitled to a judgment as a matter of law.” 250

The Court “must view the evidence in the light most favorable to the non-moving

party.” 251 The Court must not weigh evidence and instead must “determine whether

or not there is any evidence supporting a favorable conclusion to the nonmoving

party.” 252 This requires the non-moving party to “set[] forth specific facts

demonstrating that there is a genuine issue for trial.” 253 Of special importance in the

context of claims for fraud, “[w]hen an ultimate fact to be determined is one of

motive, intention or other subjective matter, summary judgment is ordinarily

249 As addressed below, Defendants NCM and EPP filed their motion for summary judgment jointly, with NCM joining only in part. 250 Ct. Ch. R. 56(c). 251 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2017 WL 3168966, at *2 (Del. Ch. July 26, 2017) (quoting Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 1998 WL 731660, at *2 (Del. Ch. Oct. 9, 1998)). 252 Id. (quoting In re El Paso Pipeline Partners, L.P. Derivative Litig., 2014 WL 2768782, at *8 (Del. Ch. June 12, 2014)). 253 Klig v. Deloitte LLP, 36 A.3d 785, 793 (Del. Ch. 2011).

51 inappropriate.” 254 Nonetheless, when evidence of scienter is absent from the record,

summary judgment may be appropriate. 255

Regarding contracts, summary judgment is unavailable if evidence is required

to resolve ambiguities; that is, if the contractual language is “fairly susceptible [to]

different interpretation[s].” 256 This does not negate the fact that “the intent of the

parties as to its scope and effect are controlling, and the court will attempt to

ascertain their intent from the overall language of the document.” 257

A. LVI’s Motion for Summary Judgment

LVI has moved for summary judgment on NCM’s allegations of fraud and

fraudulent inducement. The elements of the two claims are the same:

(1) the defendant made a false representation; (2) the defendant knew the representation was untrue or made the statement with reckless indifference to the truth; (3) the defendant intended for the plaintiff to rely on the representation; (4) the plaintiff justifiably relied on the

254 Great Hill Equity, 2017 WL 3168966, at *2 (quoting Cont’l Oil Co. v. Pauley Petroleum, Inc., 251 A.2d 824, 826 (Del. 1969)); see also Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 2009 WL 3756700, at *4 (Del. Ch. Nov. 9, 2009) (“Where intent or state of mind is material to the claim at issue . . . summary judgment is not appropriate. In such cases, the court should evaluate the demeanor of the witnesses whose states of mind are at issue during examination at trial.”) (internal quotation marks omitted). 255 E.g. Krahmer v. Christie’s Inc., 2006 WL 4782304, at *4 (Del. Ch. Oct. 17, 2006) (granting summary judgment on fraud claim because of lack of evidence contradicting good faith belief in truth of statement); Wolf v. Magness Constr. Co., 1994 WL 728831, at *5 (Del. Ch. Dec. 20, 1994) (granting summary judgment because of lack of evidence suggesting a knowing or reckless misrepresentation). 256 ITW Glob. Invs. Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2017 WL 1040711, at *6 (Del. Super. Ct. Mar. 6, 2017) (quoting GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012)). 257 Id. (quoting Riverbend Cmty., LLC v. Green Stone Eng'g, LLC, 55 A.3d 330, 336 (Del. 2012)).

52 representation; and (5) the plaintiff suffered causally related damages. 258

In the Contribution Agreement, LVI represented that the Warranted Financial

Statements disclosed the financial position of its businesses in accordance with

GAAP. 259 NCM’s allegations of fraud regarding six LVI projects center largely on

two GAAP violations: (1) reporting claims or Change Orders as revenue when they

were not probable of collection, and (2) delaying reporting losses when the losses

were known. 260 To survive this motion for summary judgment, therefore, NCM

must offer some evidence from which I may conclude that (1) the Warranted

Financial Statements were not GAAP compliant, (2) LVI knew they were not GAAP

compliant, and (3) LVI nonetheless intentionally offered them to induce NCM’s

reliance (in this case, to enter the Merger).

258 Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 807 (Del. Ch. 2014) (citing Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del.1983); In re Wayport, Inc. Litig., 76 A.3d 296, 323 (Del. Ch. 2013); Paron Capital Mgmt., LLC v. Crombie, 2012 WL 2045857, at *5 (Del. Ch. May 22, 2012)). 259 Contribution Agreement, § 3.4(b). 260 The GAAP standards for these two rules are stated in the facts and reiterated here. To be “probable of collection,” the following conditions must be met at the time of revenue recognition: (1) the contract or other evidence provides that a legal basis for the claim or a legal opinion has been obtained; (2) additional costs are unforeseen and not the result of deficiencies in contractor performance; (3) costs associated with the claim are identifiable and reasonable; and (4) the evidence supporting the claim is objective and verifiable, not based on management’s feel. Roberts Report, at 9; Lenahan Aff., Ex. 13, at ASC 605-35-25-31. Under GAAP, a loss must be recognized when it occurs. Roberts Report, at 10.

53 Each of the six LVI projects presents a unique set of facts and operates as a

motion-in-miniature. As noted above, for the purposes of deciding the motion, I

view the facts in the light most favorable to NCM, not weighing the evidence but

drawing all reasonable inferences in its favor. In discussing the projects and the

related allegations of fraud below, I will not repeat a full description of each project,

which is provided in the Background section of this Memorandum Opinion in

dolorous detail. Based on a review of the projects, I find summary judgment is

warranted on the Alcoa project, and it is not warranted for the Holly Street, HECO,

Foothill, Newark, and Lafayette projects. My reasoning follows.

1. The Holly Street Project

In the Holly Street project, LVI subcontracted the demolition of a power plant

in Texas. When a scrap shortfall occurred, LVI sued the general contractor for $9.6

million and—relying on the value of this lawsuit—booked revenue of $4.9 million.

LVI’s fraud, according to NCM, is that it knew this claim was not probable of

collection because it anticipated the scrap shortfall beforehand.

The parties agree on most of the facts. LVI anticipated a shortfall early on

and remained skeptical about the amount of scrap. By July 2011, the site owner

admitted scrap was overstated, but the general contractor nonetheless entered a

contract with the site owner. LVI negotiated its subcontract to reflect a reduced—

and more realistic—amount of scrap on the site and to contemplate a Change Order

54 in the event of what by that point was an anticipated scrap shortfall. 261 When the

shortfall occurred, the general contractor refused to pursue a Change Order with the

site owner, and LVI sued the general contractor under the subcontract for this failure.

At the end of 2013, LVI’s financial auditor concluded that LVI had a basis sufficient

under GAAP to recognize revenue from the claim. 262

The parties disagree on several facts, however, and drawing conclusions in

NCM’s favor, as I must, I find three disputed facts material, precluding summary

judgment here. The parties’ disagreements center on the strength of LVI’s claim

and the contractual protections afforded by the subcontract. First, the parties

disagree over whether the subcontract provided LVI with a guaranteed minimum

value of scrap. NCM points out that LVI’s auditor told it shortly before the Merger

that it reviewed the subcontract and did not see “an obligation” of minimum scrap

value from the general contractor or the site owner; by contrast, LVI personnel all

testified that the subcontract did provide a guarantee minimum scrap. 263 Second, the

261 Compare Perri Aff., Ex. 26, at -23891 (March 2011 proposal suggesting 950,000 pounds of Copper) with TRC Subcontract, at -84549 (executed subcontract showing 320,000 pounds of Copper on Exhibit E, Scrap and Salvage schedule). 262 See Perri Aff, Ex. 29, at -303 (“Included as an exhibit to the [TRC Subcontract] is a listing of expected scrap quantities and dollar value of $8.7M which was relied on by the Company when [it] calculated the contract price, as such, the Company is entitled to be made whole for reductions in the expected scrap quantities.”). 263 Compare Perri Aff., Ex. 61, Marcheschi Dep. 71:10–24 (noting that the subcontract between LVI and TRC includes “a guaranteed minimum as far as the value of the total scrap”) and State Dep., at 362:8–363:14 (“[The TRC Subcontract] protected our rights by giving us certainty that there were minimum thresholds [of scrap] that had to be met, and that work conditions would have to be honored for us to proceed at the price that we offered to proceed at.”) with Lenahan Aff., Ex. 55 parties disagree over whether the subcontract gave LVI a firm basis to pursue a

Change Order, when the general contractor’s agreement with the site owner did not

guarantee a Change Order in case of a shortfall. In other words, did LVI enter its

subcontract knowing that when the shortfall occurred, the general contractor would

be obliged to pursue a Change Order with the site owner without a contractual basis

with the site owner on which to rely? Third, the parties dispute whether LVI

assumed the risk of a shortfall in the subcontract. While post-merger litigation

shows the subcontract did not clearly allocate the risk, this only reinforces the

conclusion that at the time it entered the subcontract, LVI did so without a clear

contractual right to avoid such a risk.

These three disputes raise factual issues of whether LVI booked the revenue

in good faith or whether it booked the revenue despite a belief that it did not have

the contractual or legal protections to vindicate its claim, in order to induce a

favorable merger. These disputed facts ultimately go to whether LVI had knowledge

of an improper financial statement and nonetheless represented otherwise to NCM.

While the evidence suggests—and LVI’s testimony and the opinion of its

auditor corroborates—that there may have been ample basis to support its

representations, I cannot as a matter of law disregard the facts tending to prove

69 at -19223413 (Auditor Grant Thornton’s email to LVI General Counsel noting it “had a look at the attached TRC contract and cannot see an obligation from the [general contractor] or the property owner on the minimum scrap value”) (emphasis in original).

56 otherwise. In other words, the inferences from which I conclude that NCM may

prove this claim are weak, but sufficient.

2. The Alcoa Project

In the Alcoa project, LVI contracted for demolition work at Alcoa’s site in

Frederick, Maryland. This project was contentious, leading to LVI’s claim that

Alcoa had violated its contract with LVI in a variety of ways and that Change Orders

were due. After LVI sued Alcoa, it showed the project as profitable on its financial

statements. By contrast, internal analyses based on settlement offers with Alcoa

stated a number that showed the project at a loss. NCM argues this discrepancy

shows an intentional inflation of earnings that amounts to fraud. Nonetheless, the

undisputed facts show that LVI is entitled to a judgment.

Following the commencement of its lawsuit against Alcoa seeking $10.1

million, LVI recorded a total contract value on its 2013 year-end financial statements

of $27.4 million with $3 million in gross profit. 264 LVI’s internal analyses showed

a contract value of $22.9 million, with a negative gross profit. The settlement offers

sent to Alcoa reflect this lower value, but when stating the “Contract Value Owed to

LVI,” one of the offers specified that this amount “excludes LVI claims.” 265 This

suggests that the internal analyses based on these settlement offers also excludes the

264 Roberts Report, at 19–20.; see also Lenahan Aff., Ex. 93, at -304. 265 Perri Aff., Ex. 35, at -222020-005 (“Contract Value Owed to LVI . . . excludes LVI claims”).

57 value of the claims. This conclusion is corroborated by a further internal analysis

that adds the reduced project value together with LVI’s potential claims and shows

a contract balance due from Alcoa of $10,055,520. 266 NCM contends this internal

analysis cannot support summary judgment because “[t]here is no evidence that the

numbers in that document had any basis in fact or any verifiable support.” 267

Countering the veracity of the numbers, however, does not create a material dispute

that anything other than the exclusion of LVI’s claims against Alcoa caused the

discrepancy between the year-end financial statements on the one hand, and the

settlement offers and the internal analyses based on those offers on the other hand.

Even viewing the evidence in the light most favorable to NCM, I find this to be the

reasonable conclusion.

NCM contends that even if the discrepancy is explained by LVI’s claim, there

remains a question of fact about whether the accounting for the claim was proper.

But this does not raise a material fact about whether LVI committed fraud. NCM

does not offer any evidence that anyone at LVI doubted the strength of its claim or

any evidence that they should have doubted it; in fact, the evidence suggests that

LVI personnel, including its General Counsel, believed in the claim’s strength. 268 In

266 Perri Aff., Ex. 36, at -2002647-007. 267 NCM Ans. Br., at 34. 268 See DiCarlo Dep., at 56:15–57:12 (“we had a very strong basis for recovery on our claims”); Leonard Dep., at 205:7–17 (“we believed all of the CIE was recoverable”).

58 sum, even viewing the facts in the light most favorable to NCM, there is no evidence

presented that suggests an improper inflation of gross profits or contract value. Nor

is there evidence presented that suggests reporting the lawsuit as revenue on the year-

end financial statements not only violated GAAP, but from which I may infer that

LVI knew it violated GAAP and offered it to NCM nonetheless.

3. The HECO Project

The HECO project required LVI to demolish a power plant in Hawaii, and the

contract price included scrap value estimates that were not fulfilled. NCM offers

four email exchanges as evidence of fraud on the HECO project, arguing that LVI

understood the project to be a loss but nonetheless deferred the loss until after the

Merger. While the evidence is scant, it nonetheless creates an issue of material fact.

Resolving that factual issue in favor of NCM, I cannot say, as a matter of law, that

fraud is precluded.

In the first exchange, CEO Scott State wrote to COO John Leonard, “scrap

starting to fade”; Leonard wrote back, “I know. Issue at Poletti”; then Leonard

responded again, adding, “And HECO.” 269 This is not, as NCM argues, an

ambiguous exchange. Leonard’s first response notes that fading scrap prices are an

issue at Poletti. His second email notes that fading scrap prices are also an issue at

HECO. NCM’s interpretation—that Leonard was signaling not only that HECO

269 Perri Aff., Ex. 39, at -2122048.

59 financials were fading but also that he understood LVI would be operating at a loss

with respect to HECO—unreasonably stretches the evidence. I do not find that this

evidence implies fraud on the part of LVI. Likewise, in the second email exchange,

LVI’s CFO, Paul Cutrone, requested that costs be “thinned down” and pushed to

April, but this fails to imply fraud. 270 This email related to accounts payable and

cash flow, and there is no indication that it affected revenue reporting.

The final two email exchanges, however, viewing the evidence in the light

most favorable to NCM, create issues of material fact, if narrowly, that preclude

summary judgment. Cutrone wrote to Leonard and State on the date of the Merger,

“We have deferred margin erosion on HECO.” 271 Following the Merger, LVI

employee Joe Catania asked Leonard if he could “post the hit,” meaning record

around $1 million total loss for the HECO project that had been deferred. 272 LVI

argues that Leonard’s one-word response—“What?”—is exculpatory, but I find it

insufficient to establish that Leonard expected in good faith that anticipated claims

would keep the project profitable. 273 Similarly, Cutrone’s later deposition testimony

270 Lenahan Aff., Ex. 80, at -2121458 (requesting to “thin down” payments associated with “LVI AP Payment Audit List”). 271 Lenahan Aff., Ex. 81, at -355683. LVI points out that this email concerns financials for the first quarter of 2014, including March 2014, but deferred margin erosion arguably concerns margin erosion that went unreported at an earlier date, potentially during the period covered by the Warranted Financial Statements. 272 Lenahan Aff., Ex. 83, at -1899392. 273 Perri Aff., Ex. 69, at -1899361.

60 that he deferred margin erosion because of the opportunity to recover based on LVI’s

claim, on a cold record, is insufficient to resolve a factual dispute over whether LVI

knew it had losses on the HECO project and intentionally delayed stating them on

the financials until after the Merger.

These latter two exchanges, again narrowly, create an issue of material fact

about whether LVI knew about a loss prior to the merger but intentionally delayed

reporting it in violation of GAAP. Thus, as a matter of law, I cannot grant summary

judgment.

4. The Foothill Project 274

The Foothill project required LVI to demolish a school. NCM argues that

LVI intentionally and artificially inflated gross profits for the Foothill project on the

January 2014 WIP, which then improperly carried over into the Warranted Financial

Statements ending in February 2014. The parties cite to different parts of the record

and construe email exchanges in different ways, but the evidence shows a dispute of

material fact that precludes summary judgment on the Foothill project.

274 LVI argues that summary judgment is warranted for these last three projects—Foothill, Newark, and Lafayette—because any fraudulent misstatements could not have been large enough to be material to NCM’s decision to enter the merger. This is, at the very least, disputed for two reasons NCM outlines. First, NCM’s expert testified to the materiality of these projects. See Lenahan Aff., Ex. 74, Roberts Dep., at 231:9–16. Second, although the amounts may be smaller compared with the other projects, they form a portion of NCM’s total claim for a misstatement of $10.9 million, a material figure.

61 The record shows that LVI employee Michael Kinelski received the first draft

for the January WIP schedule from a regional controller, and he approved numbers

reflecting a gross profit of $460,000. 275 These numbers were passed on to COO

Leonard. 276 Someone at LVI—the record is unclear who—made a significant

upward revision to the gross profit in the WIP schedule. 277 The regional controller

sent a second draft to Kineslki, writing, “We would like to adjust Foothill for Jan as

follows,” and this draft stated gross profits of $878,762. 278 Kinselski approved the

numbers, writing back, “Ok with me.” 279

The disputed material fact is whether there was any basis for the adjustment.

LVI states the basis for the adjustment was a Change Order, and it cites to Kinelski’s

deposition. In the passage LVI cites, Kinelski is discussing emails between himself

and the regional controller dated July 16, 2014: “at this time we were well underway

with claim at a project called the Blue Cube at Foothill . . . we were well underway

and we had claims with our owner, our customer, as well as a subcontractor. . .”280

LVI does not offer evidence, however, showing that the Foothill Change Orders

275 Lenahan Aff., Ex. 91, at -2219557. 276 Lenahan Aff., Ex. 92, at -192009. 277 Lenahan Aff., Ex. 95, at -2221011. 278 Id. 279 Id. at -2221010. 280 Perri Aff., Ex. 12, Kinelski Dep., at 79:16-80:1.

62 discussed in Kinelski’s deposition regarding emails sent in July 2014 served as the

basis for the adjustment to gross profit in the January and February WIP schedules.

It is unclear whether these later emails explain or relate to the adjustments. NCM,

in turn, cites to another passage in Kinelski’s deposition in which he states he did

not know who adjusted the profits from $460,000 to $878,000, that he had not

expected such a change, and that he was unaware of any changes on the Foothill

project that would have given rise to the adjustment. 281

In sum, while a factfinder might agree with LVI that the adjustment was part

of a healthy give-and-take over numbers, the parties have a dispute of material fact

as to whether the adjustment to gross profits for Foothill had any basis to justify it.

Resolving this issue in favor of NCM, it is reasonable to infer that LVI knew it was

an artificial inflation that could not be achieved, and nonetheless fraudulently stated

the inflated figure in its Warranted Financial Statements.

5. The Newark Project

The Newark project involved an LVI contract to demolish airport baggage-

handling equipment. The undisputed evidence shows that LVI recorded revenue of

$500,000 based on a planned Change Order. 282 LVI personnel on the project saw

281 Lenahan Aff., Ex. 94, Kinelski Dep., at 94:16–95:24. 282 Roberts Report, at 22–24; see also Lenahan Aff., Ex. 114, at -4396600.

63 the claim as shaky, unfounded, and unlikely to stick. 283 They communicated this

message, but the revenue nonetheless remained on the financial statements until after

the Merger, at which time LVI reversed its value by $400,000. 284 LVI essentially

argues that because the Newark job team “was failing spectacularly,” their judgment

on the claim’s worth was suspect and reasonably omitted from the financial

reporting. That is one inference, but the instant motion requires me to consider

another; the inference that LVI maintained the revenue despite a clear message from

its employees closest to the project that the claim was not as valuable as reported.

An issue of material fact remains as to whether LVI intentionally maintained

artificially inflated revenue until after the Merger, and thus knew its Warranted

Financial Statements violated GAAP.

6. The Lafayette Project

LVI undertook the Lafayette project in connection with renovation of historic

properties in the District of Columbia. The parties dispute four material facts about

whether LVI intentionally misstated its financial statements, thus precluding

summary judgment for the Lafayette project. First, LVI employee Rappuzi emailed

CFO Paul Cutrone in March 2013 and told him that the project had incurred

283 Lenahan Aff., Ex. 96, at -2029356; Lenahan Aff., Ex. 97, at -2797139; Lenahan Aff., Ex. 77, Bowman Dep., at 273:24–274:9. 284 Roberts Report, at 23; see also Lenahan Aff., Ex. 119 at -2288123 (reversing project value as part of Schedule 1C; Lenahan Aff., Ex. 48 (same).

64 $300,000 in unreported costs. 285 The parties dispute whether the Warranted

Financial Statements properly reflect these known costs. Second, in August 2013,

another LVI employee, Cattan, stated that he was switching accounting methods

with the intent to show more revenue. 286 The parties dispute whether this caused the

improper reporting of revenue on the financial statements. Third, $325,000 in costs

for December 2013 were not reported until January 2014 without explanation, which

affected the 2013 Warranted Financial Statements. 287 Fourth and finally, yet another

LVI employee, Rymers, testified that he was instructed to reverse a known loss at

the end of 2013 and delay reporting it until 2014. The parties dispute whether

Rymers followed these instructions, and thus whether this known loss was

intentionally delayed until after the Merger. 288

Thus, the parties disagree about whether known costs went unreported,

whether LVI personnel intentionally manipulated accounting methods to artificially

inflate profits, whether an unexplained delay in reporting over $325,000 in costs had

any basis, and whether LVI improperly and intentionally delayed reporting an

285 Lenahan Aff., Ex. 101, at -2747540-541. 286 Lenahan Aff., Ex. 122, at -4201289. 287 Lenahan Aff., Ex. 124, at -2422145. 288 As noted in the factual recitation, LVI attempts to show the loss was not improperly reversed by pointing to “job-by-job” reports showing the loss was reported. See Perri Aff., Ex. 22; Perri Aff., Ex. 71, Cattan Dep., at 18:7–25. The parties, however, also dispute whether these “job-by- job” reports are reflected in the Warranted Financial Statements. See NCM Ans. Br., at 53.

65 additional $560,000 in costs. LVI’s argument that these “minor alleged

discrepancies” may not even have been reviewed by LVI senior management does

not warrant summary judgment when NCM has offered evidence that could create,

at this stage, an inference of intentional improper misstatement of financials.

B. NCM and EPP’s Motion for Summary Judgment

EPP has moved for summary judgment on LVI’s claims for fraud, fraudulent

inducement, conspiracy to commit or aiding and abetting fraud, and unjust

enrichment. 289 NCM joins EPP’s motion as it relates to the timeliness of LVI’s fraud

claims. NCM has not moved for summary judgment on the underlying allegations

of fraud against it.

1. LVI’s Fraud Claims are not Time-Barred

NCM joins with EPP in arguing that LVI’s fraud claims are not timely under

a plain reading of the Contribution Agreement. At the summary judgment stage,

“the intent of the parties as to [a contract’s] scope and effect are controlling, and the

court will attempt to ascertain their intent from the overall language of the

document.” 290 Summary judgment is only denied if the contractual language is

289 I dismissed LVI’s claim against EPP for negligent misrepresentation in my decision of March 29, 2018. See LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2017 WL 1174438 (Del. Ch. Mar. 29, 2017). 290 ITW Glob. Invs. Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2017 WL 1040711, at *6 (Del. Super Ct. Mar. 6, 2017) (quoting Riverbend Cmty., LLC v. Green Stone Eng’g, LLC, 55 A.3d 330, 336 (Del. 2012)).

66 “fairly susceptible [to] different interpretation[s],” requiring evidence to resolve

ambiguities. 291 Moreover, “Contract terms are not ambiguous merely because the

parties to the contract disagree.” 292

NCM and EPP base their argument on § 5.1(c), “Timing of Claim,” a

provision that relates to the survival of the representations and warranties for the

Warranted Financial Statements. That section provides:

Notwithstanding the foregoing in this Section 5.1, any representation or warranty in respect of which indemnity may be sought under Section 5.2 below, and the indemnity with respect thereto, will survive the time at which it would otherwise terminate pursuant to this Section 5.1 if notice of the inaccuracy or breach or potential inaccuracy or breach thereof giving rise to such right or potential right of indemnity will have been given to the party against whom such indemnity may be sought prior to such time (regardless of when the Losses in respect thereof may actually be incurred). 293

According to the Defendants, this provision permits the survival of indemnity claims

only. Under the Defendants’ argument, the provision’s express references to

indemnity—particularly, “and the indemnity with respect thereto”—mean that the

provision only allows the survival of indemnity claims. For all other causes of

action, the representations and warranties expire. If the parties wanted other causes

of action to survive, the Defendants argue, they would have said so by including a

291 Id. (quoting GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012)). 292 Seidensticker v. Gasparilla Inn, Inc., 2007 WL 4054473, at *2 (Del. Ch. Nov. 8, 2007). 293 Contribution Agreement, § 5.1(c).

67 phrase such as “and all other remedies with respect thereto” rather than “and the

indemnity with respect thereto.”

LVI, by contrast, argues that this misses the point of § 5.1(c). The provision,

it argues, is cumulative: if notice of inaccuracy or breach is timely filed, then the

representations and warranties survive, and the related indemnity also survives. If

the parties meant for other remedies to expire, they would have said so.

I do not find the contract ambiguous. Section 5.1(c) concerns the survival of

representations and warranties. It defines the scope of the representations and

warranties as those “in respect of which indemnity may be sought.” 294 It also

provides that the indemnity itself will survive with the representations and

warranties. 295 I read the provision as doing exactly what it purports to do, and

nothing more. The fact that the parties did not mention fraud cannot be read as an

intent to cause potential fraud claims to expire. In other words, the warranties have

not expired, and if those warranties were fraudulent, a fraud action remains

contractually viable.

The language in the Contribution Agreement’s remedies clause treats fraud

separately from indemnification. That provision limits remedies to “(i) the

indemnification provisions contained in this Article 5, (ii) the provisions of Section

294 Contribution Agreement, § 5.1(c). 295 Id. (“. . . and the indemnity with respect thereto. . .”).

68 5.6 [specific performance] and (iii) claims for fraud against the Person who

committed such fraud.” 296 In other words, fraud is not contained by the Contribution

Agreement in the same way indemnification and specific performance are, nor does

the contract limit fraud claims to the parties to the Agreement. Given this treatment,

the explicit extension of the right to indemnification upon notice of a claim is

necessary to preserve that right. As such, it does not imply an intent to extinguish

fraud claims based on the warranties. Section 5.1(c) does not imply a positive intent

to extinguish the otherwise-broad remedy for fraud and preserves fraud actions

based on the representations and warranties thereby preserved.

In sum, § 5.1(c) operates to preserve the representations and warranties if

notice is timely given, and it also preserves the indemnity related to those

representations and warranties. I find that the parties did not express the intent, in

light of the contract as a whole, to extinguish the fraud cause of action by leaving it

out of the survival clause in § 5.1(c). Therefore, summary judgment on this

argument is denied.

296 Id. § 5.4(e).

69 2. EPP is Entitled to Summary Judgment for Fraud and Fraudulent Inducement

“The elements of fraudulent inducement are the same [as] those of common

law fraud.” 297 As I have described, to demonstrate fraud, a plaintiff must show:

(i) a false representation, (ii) the defendant’s knowledge of or belief in its falsity or the defendant’s reckless indifference to its truth, (iii) the defendant’s intention to induce action based on the representation, (iv) reasonable reliance by the plaintiff on the representation, and (v) causally related damages. 298

EPP’s motion does not seek summary judgment on the underlying fraud allegations

against NCM; rather, EPP argues that summary judgment is warranted because the

evidence does not show that it made or caused NCM to make the false

representations, and thus LVI cannot show that EPP committed fraud with regard to

the Merger.

LVI’s evidence regarding EPP falls generally into two buckets. The first

bucket is evidence purporting to show that EPP played a high-level role in NCM’s

accounting practices and participated in or directed earnings mismanagement. The

second bucket is evidence purporting to show that EPP played a role in the

Warranted Financial Statements or in the financials associated with the four alleged

fraudulent projects. To put it plainly, the first bucket is heavy, and the second bucket

297 Smith v. Mattia, 2010 WL 412030, at *5 n.37 (Del. Ch. Feb. 1, 2010). 298 Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 49 (Del. Ch. 2015) (citing Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983)).

70 is light. EPP argues that I should entirely disregard any evidence that does not

specifically tie EPP to those four projects or the Warranted Financial Statements. I

disagree: the evidence regarding EPP’s general role in NCM’s accounting practices

is circumstantial evidence that is relevant, particularly with respect to the inferences

that I must draw at this stage of the proceedings.

I find that LVI does not meet its burden to put forward evidence on the first

prong of fraud, in other words, to show that EPP made a false representation. After

I denied EPP’s earlier Motion to Dismiss this claim, the parties engaged in extensive

discovery, but even after discovery, the record does not contain any evidence

showing that EPP—a separate entity from NCM—made or directly caused NCM to

make the false representations at issue in this litigation. Therefore, as a matter of

law, the evidence does not support a claim for fraud against EPP. 299

299 As the parties note, I denied EPP’s Motion to Dismiss on March 28, 2018, finding that LVI adequately alleged a claim of fraud, and that the fact that “the representations and warranties in the agreement were made by NCM, not [EPP] . . . is not fatal to LVI’s fraud claims.” LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2018 WL 1559936 (Del. Ch. Mar. 28, 2018). I based that finding on the public policy against allowing parties to limit their exposure for fraudulent activity. See Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A2d 1032, 1064 (Del. Ch. 2006); Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 61 (Del. Ch. Nov. 24, 2015). Having reviewed the evidence after substantial completion of discovery, I find LVI’s fraud claim lacking. However, because I deny summary judgment of the conspiracy claim against EPP below, EPP faces potential liability for their association with NCM’s allegedly fraudulent activities, but as conspirators, not fraudsters.

71 3. EPP is not Entitled to Summary Judgment for Conspiracy to Commit or Aiding and Abetting Fraud and Fraudulent Inducement 300

In contrast to fraud, conspiracy does not require showing a false

representation by the defendant. 301 Instead, it requires showing “(1) the existence of

a confederation or combination of two or more persons; (2) that an unlawful act was

done in furtherance of the conspiracy; and (3) that the conspirators caused actual

damage to the plaintiff.” 302 Conspiracy is an intentional tort, and therefore it requires

some evidence regarding scienter by EPP. 303 EPP argues for summary judgment on

the conspiracy claim because it contends there is no evidence of an intentional

agreement between it and NCM. A conspiracy claim, however, does not require

LVI, even at trial, “to prove the existence of an explicit agreement.” 304 Rather, a

claim for conspiracy can rely on circumstantial evidence from which a reasonable

300 LVI pled aiding and abetting fraud as an alternative to conspiracy to commit fraud. See Pl. LVI Grp. Invs., LLC’s Verified Am. Compl. Against Defs., D.I. 262, ¶¶ 122–36. The parties have not briefed the alternative aiding and abetting claim, and because I find summary judgment is not warranted on the conspiracy, I do not reach the alternative claim. 301 In my Decision of March 29, 2018, I rejected the argument from EPP that the exclusive remedies clause in § 5.4(e) of the Contribution Agreement prohibited a conspiracy claim based on the principle that “where a conspiracy exists, the acts of each co-conspirator with respect to the aim of the conspiracy are attributable to the acts of the other co-conspirators under a theory of agency,” and thus “all members of a conspiracy to commit fraud have committed such fraud.” LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2018 WL 1559936, at *14 (Del. Ch. Mar. 28, 2018). 302 Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1036 (Del. Ch. 2006). 303 Binks v. DSL.net, Inc., 2010 WL 1713629, at *11 (Del. Ch. Apr. 29, 2010). 304 In re Am. Int’l Grp., Inc., 965 A.2d 763, 806 (Del. Ch. 2009).

72 factfinder can conclude there was an agreement. 305 Similarly, intent can be inferred

from circumstantial evidence. 306

LVI offers significant circumstantial evidence of EPP’s involvement with

NCM’s accounting, and I find that, taken as a whole, this evidence is sufficient to

support its claims for a conspiracy to commit fraud. I will not recount the evidence

in detail, which is set out in full in the Background section of this Memorandum

Opinion. Viewing the evidence in the light most favorable to LVI, as I must for this

motion, the proffered evidence leads to a reasonable conclusion that EPP was

involved in earnings mismanagement related to NCM’s accounting practices.

Moreover, EPP exerted influence over those practices. It guided NCM on how to

approach WIP schedules. 307 On more than one occasion, it requested additional

EBITDA or provided targets and watched NCM’s numbers morph to comply with

its requests, sometimes over the course of just a few hours. 308 It instructed when

revenues and fade should be recognized. 309 When EPP expressed displeasure over

305 See id. 306 ITW Glob. Invs. Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2017 WL 1040711, at *8 (Del. Super. Ct. Mar. 6, 2017) (quoting Goldsborough v. 397 Props., LLC, 2000 WL 33110878, at *2 (Del. Super. Sept. 29, 2000)). While ITW Glob. involved fraud claims, I find the principle regarding circumstantial evidence equally applicable to a conspiracy to commit fraud. 307 Morris Aff., Ex. 27, at -16706401 (email from Kerr to Brillon, noting, “Per our discussions, we have asked our Branch managers to take an aggressive approach to their WIP schedules.”). 308 See Morris Aff., Ex. 20, at -16666218; Morris Aff., Ex. 32, at -16644801; Morris Aff., Ex. 59, at -16701751; Morris Aff., Ex. 62, at -16701877. 309 Morris Aff., Ex. 21, at -166662837.

73 the numbers, results were nearly instantaneous. 310 I conclude that evidence is

sufficient to draw the inference that EPP knew of the allegedly-fraudulent financial

representations related to the Merger, and that it assisted or agreed with NCM to

induce LVI’s reliance thereon.

To the extent EPP denies the evidence shows that it engaged in any earnings

mismanagement, this in itself creates a dispute of material fact about EPP’s

relationship to NCM’s accounting practices.311 Importantly, EPP engaged in the

creation of NCM accounting practices of the very kind alleged with relation to the

projects at issue in this litigation. In addition, while EPP argues that there is no

indication that any of its involvement in NCM’s accounting affected the Warranted

Financial Statements, this is also a disputed material fact. LVI’s expert, Dudney,

did not expressly point to misstatements in the Warranted Financial Statements

traceable to EPP’s involvement. LVI argues, however, that logically any improper

310 See Morris Aff., Ex. 59, at -16701751 (“This cannot stand”); Morris Aff., Ex. 41, at -101338 (“That cannot happen.”). 311 EPP also points to the across-the-board denials by NCM employees that they ever received instructions from EPP to manipulate financial statements. Lenahan Aff., Ex. 15, Patel Dep., at 171:19–172:25 (denying EPP asked him to submit inaccurate financial data); Lenahan Aff., Ex. 17, Canonica Dep., at 116:23–117:12 (same); Lenahan Aff., Ex. 18, Williams Dep., at 49:1–22 (same). The evidence offered, however, shows that EPP contained its involvement to interactions with executives like CEO Khara and CFO Duane Kerr, and so the testimony by NCM employees serves only to further establish a material dispute.

74 delay of fade until a project’s completion would translate into a misstatement of the

Warranted Financial Statements if the project spanned multiple years. 312

In any case, at this stage, the lack of “smoking gun” evidence showing an

explicit agreement by EPP to participate in the alleged fraudulent accounting related

to the four projects or the Warranted Financial Statements does not support summary

judgment. I find there is sufficient circumstantial evidence that creates a genuine

issue of material fact over whether EPP intentionally agreed with NCM to create

fraudulent statements and induce LVI based on those statements. Because EPP held

most of NCM’s equity, had the opportunity to direct the accounting at a high level

and in a suspect manner, and had the motive to inflate financials to increase NCM’s

stake in the Merger, I find the evidence, reviewed above, sufficient at this stage to

reasonably infer an agreement between EPP and NCM regarding the alleged fraud.

Therefore, I deny EPP’s Motion for Summary Judgment on LVI’s claim of

conspiracy to commit fraud.

4. EPP is Entitled to Summary Judgment for Unjust Enrichment

Finally, EPP has moved for summary judgment of LVI’s claim for unjust

enrichment. “The elements of unjust enrichment are: (1) an enrichment, (2) an

impoverishment, (3) a relation between the enrichment and impoverishment, (4) the

312 LVI also lists projects associated with the alleged earnings mismanagement that experienced profit reversals post-Merger. See LVI Ans. Br. To EPP, at 16–18. EPP disputes whether this evidence shows that the alleged earning mismanagement caused these later profit reversals.

75 absence of justification, and (5) the absence of a remedy provided by law.” 313 EPP

asserts that the evidence of enrichment is insufficient to withstand summary

judgment. To avoid summary judgment, there must be facts from which I may infer

each element. The enrichment, further, must not be speculative, attenuated, or too

indirect to support a relationship to the loss.314 The remedy—disgorgement of the

unjust enrichment—is equitable; it falls away if there is a tort remedy available. LVI

is actively pursuing such a tort remedy, of course, and the unjust enrichment claim

therefore necessarily provides only an alternative remedy. Thus, I must examine the

record to see whether, even if (and only if) EPP proves not to have committed the

torts LVI has alleged, it nonetheless must disgorge gains from the Merger.

LVI offers three pieces of evidence regarding EPP’s unjust enrichment. First,

it states that “the EPP Defendants were unjustly enriched when they received 37.5%

of LVI in exchange for their worthless interest in NCM.” 315 But EPP did not receive

37.5% of LVI; NCM received 37.5% of NorthStar. In other words, the Merger,

according to LVI, benefitted EPP because the enterprise value of its stake in

NorthStar was more valuable than its larger stake, pre-Merger, in NCM.

Presumably, this benefit was unjustified, because it resulted, per LVI, from NCM’s

313 Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (quoting Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988)). 314 Id. at 60–61. 315 LVI Ans. Br. to EPP, at 53.

76 fraud. But if EPP is itself an innocent investor, what value has been transferred to it

from LVI? The evidence is that the combined entity has been sold, with NCM—and

indirectly EPP—retaining no equity value. There is nothing in the record to show

that EPP ever realized any value from the Merger. If it had, any such value would

have had an attenuated relationship to the loss suffered by LVI, which only indirectly

benefitted EPP by “enriching” a company largely—but not entirely—owned by EPP.

This sort of relationship has been considered too attenuated to the impoverishment

to support an unjust enrichment claim. 316 In any event, there is simply no evidence

that EPP realized a gain related to the impoverishment.

LVI next points to management fees paid to EPP Management (one of the

EPP entities) under the Contribution Agreement. 317 The provision in the

Contribution Agreement simply states that NCM paid fees it owed to EPP

Management, and that it would pay all outstanding fees. This does not suggest the

fees were incurred because of or as a result of the Merger. NCM already owed the

fees, and the Contribution Agreement clarified that NCM would pay them. There is

316 See Vichi v. Koninklijke Philips Elecs. N.V., 62 A.3d 26, 61 (Del. Ch. 2012) (“[Defendant] only benefitted to the extent that the reduction of risks of [subsidiary’s] failure improved [defendant’s] balance sheet and increased the ‘potential dividends’ [defendant] might have collected from [subsidiary]. In any event, the direct benefit of [the] loan ran to [subsidiary], not to [defendant].”). 317 Contribution Agreement, § 1.3(d) (“The parties acknowledge that $1,345,207.85 was paid prior to the Funding Date to Evergreen Pacific Partners Management Company, Inc. . . NCM Holdings shall and hereby does assume all other accrued and unpaid management and letter of credit fees and expenses due and owing by the NCM Subsidiaries to Evergreen Pacific Partners Management Company, Inc. . .”).

77 nothing indicating the payment of the fees was unjustified, or worked an enrichment

on any EPP entity.

Similarly, LVI points to $5.4 million in preexisting loans made by EPP to

NCM, more than $15 million in indemnity related to NCM’s surety program, and

$1.5 million in promissory notes, and it alleges that only the Merger’s consummation

allowed NCM to either pay EPP back or keep the surety from being triggered. 318 An

allegation that EPP received benefits because the bargain struck between LVI LLC

and NCM put NCM in a better position to fulfill preexisting obligations to EPP is

the sort of indirect relationship between harm and benefit that falls short of the

showing required for equity to act. Again, to support a claim for unjust enrichment,

the enrichment must be unjustified. Simply alleging that NorthStar/NCM were able

to satisfy pre-existing obligations to EPP, post-Merger, does not state a claim for

unjust enrichment. 319

For the reasons explained above, summary judgment is warranted in favor of

EPP on LVI’s unjust enrichment claim. EPP also argues that it is immune from an

unjust enrichment claim under the exclusive-remedies provision of the Contribution

318 LVI Ans. Br. to EPP, at 54; Morris Aff., Exs. 113–16. 319 I emphasize again that if EPP conspired to defraud LVI, or aided and abetted NCM’s fraud, there is a legal recovery available, obviating application of the equitable unjust enrichment claim.

78 Agreement. LVI counters that the contractual limitations are inapplicable to EPP, a

non-party. Because of my decision above, I need not reach the issue.

C. Khara’s Motion for Summary Judgment

Khara has moved for summary judgment on LVI’s claims for fraud and

fraudulent inducement. As noted above, common law fraud and fraudulent

inducement require showing the same elements:320

(i) a false representation, (ii) the defendant’s knowledge of or belief in its falsity or the defendant’s reckless indifference to its truth, (iii) the defendant’s intention to induce action based on the representation, (iv) reasonable reliance by the plaintiff on the representation, and (v) causally related damages. 321

Unlike EPP, Khara is not a separate entity from NCM for the purpose of LVI’s fraud

claim because, as an employee and executive, he acted as NCM’s agent. Therefore,

Khara cannot—and does not—argue that even if he facilitated fraud, that fraud was

in fact perpetrated by NCM, and not by him. Instead, Khara bases his motion on

two arguments attacking the evidence regarding other prongs of LVI’s fraud claim:

first, that LVI has not properly shown that the alleged fraud proximately caused its

damages; second, that even if NCM committed fraud, LVI has not shown that Khara

facilitated it. For the reasons explained below, I do not consider either argument

persuasive.

320 Smith v. Mattia, 2010 WL 412030, at *5 n.37 (Del. Ch. Feb. 1, 2010). 321 Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 49 (Del. Ch. 2015) (citing Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983)).

79 1. Khara’s Argument Regarding Causation does not Warrant Summary Judgment

Khara’s first argument centers on the last element of fraud: causation. Even

if fraud occurred, Khara argues, LVI has not offered any evidence showing that the

fraud caused the damages LVI seeks, which are substantial. Instead, Khara contends

that the parade of business horribles following the Merger—personnel shakeup,

branch closings, underperforming projects, damaging litigation, historic troughs for

scrap markets—more than adequately account for NorthStar’s southbound

trajectory. In the face of this alternate causation, Khara argues it is improper for LVI

to turn to him as a source of recovery for its bad business investment. At this stage

of the litigation, I disagree.

To succeed—as Khara points out—LVI needs to offer evidence showing

damages causally related to Khara’s fraud. 322 At the summary judgment stage, this

requires evidence that the fraud directly caused some damages; in other words,

enough evidence to show that LVI deserves the opportunity to prove the amount at

trial. Khara’s argument improperly conflates the summary judgment showing with

a post-trial damages analysis, demanding that LVI offer evidence showing it was

NCM’s fraud in the Merger that proximately led to the zero cash equity sale in 2017.

But LVI is not required to show this. Assuming that fraud occurred, LVI need only

322 Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 815 (Del. Ch. 2014) (“To be actionable, a fraudulent misrepresentation or omission must cause the plaintiff to suffer damages.”).

80 offer evidence that the fraud produced some damages to survive summary judgment

regarding causation. 323 To my mind, LVI has done so in two ways.

First, having offered some evidence of fraud related to the Merger, to create

an inference that the fraud caused NorthStar’s decline, it is enough at this point to

show that some allegedly fraudulent NCM projects underperformed expectations

following the Merger. Viewing the evidence in the light most favorable to LVI, as

I must at this stage, I can reasonably conclude that misrepresented financial

statements caused, to some degree, NorthStar’s losses.

Second, LVI offers an argument for damages that does not depend on any

post-Merger decline in NorthStar’s value. LVI split NorthStar’s equity with NCM

based largely on the companies’ respective EBITDAs. Therefore, if NCM

fraudulently inflated its EBITDA in its Warranted Financial Statements, then to the

extent of NCM’s misstatement, LVI surrendered a portion of equity it should have

received, and it did so in direct proportion to the fraudulent misstatement. Thus, if

there were underlying misstatements on NCM’s part, then LVI has offered evidence

of causally related damages because LVI entered the Contribution Agreement and

unreasonably split NorthStar’s equity with NCM to the extent that NCM’s EBITDA

was fraudulently misstated in the Warranted Financial Statements.

323 The issue of Khara’s intent is dealt with separately below.

81 2. Khara’s Argument Regarding Knowledge of Fraud does not Warrant Summary Judgment

Khara next argues that summary judgment is warranted because LVI’s

evidence does not show his involvement in the alleged fraud. For the purpose of this

motion, Khara argues that if fraud in fact occurred, LVI’s evidence fails to show that

he knew about it or participated in it. 324 This requires LVI to offer evidence from

which I may infer Khara’s “contemporaneous knowledge or reckless disregard” of

his involvement in fraudulent practices. 325 Because fraud requires scienter, evidence

of mere negligence on Khara’s part is insufficient to support a reasonable conclusion

of fraud. 326

At the summary judgment stage, “intent can be inferred from circumstantial

evidence.” 327 It is uncommon for a motion for summary judgment to be granted,

324 Khara’s briefing on his Motion for Summary Judgment includes arguments that could be read as seeking judgment on portions of the underlying allegations of fraud, despite the fact that NCM itself has not moved for summary judgment. For instance, on pages 34–35 of his opening brief, Khara argues that LVI has failed to offer any evidence that the 2012 Warranted Financial Statements were materially misstated. See Def. Subhas Khara’s Opening Br. in Support of his Mot. for Summ. J., D.I. 659 (“Khara Opening Br.”), at 34–35. In addition to arguing he lacked knowledge of the fraud, Khara also attacks the strength of LVI’s evidence of the underlying fraud regarding the four allegedly fraudulent projects and the so-called Blue Cell Manipulations. See id. at 37–47. Considering Khara’s briefing as a whole, however, it appears he concedes that the underlying fraud is a disputed material fact and focuses his argument on his own knowledge of and involvement with that fraud, and this is how I treat his argument for the sake of determining his motion. 325 See Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 810 (Del. Ch. 2014) (quoting Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs., Inc., 854 A.2d 121, 154 (Del. Ch. 2004)). 326 See DRR, L.L.C. v. Sears, Roebuck & Co., 949 F. Supp. 1132, 1141 (D. Del. 1996). 327 ITW Glob. Invs. Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2017 WL 1040711, at *8 (Del. Super. Ct. Mar. 6, 2017).

82 therefore, solely on failure of proof of intent. In ITW Glob. Invs. Inc., the Superior

Court concluded that based on “a wealth of circumstantial evidence relating to

knowledge” summary judgment was improper because “[t]his evidence could

prompt a factfinder to conclude that [the defendant] was involved in a ‘pattern of

deception.’” 328 In EPP’s similar motion, I found the evidence offered that EPP

directed and manipulated NCM’s project WIP schedules and interim financial

statements to be the sort of circumstantial evidence on which a reasonable factfinder

could rely in connection with the conspiracy claim, thus precluding summary

judgment on that claim. A similar analysis applies to the fraud claim against Khara.

The evidence shows that he directed the adjustments of NCM financial statements

in response to EPP’s requests or target numbers. 329 Khara often played the “go-

between,” receiving instructions from EPP and overseeing their implementation. 330

In addition, Khara himself made requests of CFO Kerr to reach target numbers on

financial statements. 331

In addition to this oversight, LVI’s evidence shows that Khara was involved

in various capacities with the four alleged fraudulent projects. He oversaw the

328 Id. at *9. 329 E.g. Morris Aff., Ex. 22, at -83279; Morris Aff., Ex. 21, at -166662837; Morris Aff., Ex. 32, at -16644801. 330 E.g. Morris Aff., Ex. 44, at -16633711; Morris Aff., Ex. 78, at -60439. 331 Morris Aff., Ex. 92, at -16760591.

83 bidding for the Apple project, and the regional manager informed him that delays in

reporting costs would lead to fade. 332 Khara was directly involved in the financials

for the Pepco project, instructing subordinates to submit Change Orders and noting

how the Change Order should relate to other items in the financials. 333 On the

Sunoco project, Khara understood that there were issues with the unsold LSG Unit,

and he represented to LVI that NCM had a letter of intent for a sale, which LVI

relied on to accept the reported revenue in the Merger. 334 When Khara instructed

Kerr to increase EBITDA to a target number to “help at closing,” Kerr responded

that he did so, in part, by “[b]ooking . . . an additional $50k of income on the Dupont

Hickory job.” 335

In sum, beyond Khara’s role in implementing EPP’s instructions regarding

interim financials and WIP schedules, the evidence shows that he was involved with

the financials for each of the four allegedly fraudulent projects in some capacity.

The burden will be on LVI to show at trial that all the elements of fraud on Khara’s

part are met. I find, however, sufficient circumstantial evidence to create a dispute

332 See Morris Aff. II, Ex. 73, at -15614872; Morris Aff. II, Ex. 75, at -17688571; Morris Aff. II, Ex. 76, at -17688569. 333 Morris Aff. II, Ex. 51, at -17384195. 334 See Morris Aff. II, Ex. 84, at -1981047 (“[Khara] claimed to have an ‘LOI to sell $5.5 mil’ but I did not ask for copy of LOI at the time.”). 335 Dudney Report, at 35–36; Morris Aff., Ex. 78, at -60439 through 440.

84 of material fact regarding Khara’s knowing involvement in the underlying fraud and

his fraudulent intent. 336

D. LVI Parent’s Motion for Summary Judgment

LVI Parent has moved for summary judgment on NCM’s claims of fraud and

fraudulent inducement. The elements of fraud have been repeated sufficiently

above. The parties agree on the relevant substantive facts, namely that (1) LVI

Parent negotiated the merger with NCM, (2) LVI Parent created LVI LLC shortly

before the Merger, (3) LVI Parent became a subsidiary of LVI LLC, and (4) LVI

LLC then contributed LVI Parent to NorthStar as part of the Contribution

Agreement. Further, the parties do not dispute that LVI Parent created the financials

that became the Warranted Financial Statements attached to the Contribution

Agreement. Nor do the parties disagree that LVI Parent made no representations

about the Warranted Financial Statements in the Agreement.

Rather than a factual dispute, the parties disagree about a unique question of

law created by the unique merger structure: when two companies contribute

subsidiaries as assets to form a third company, and they maintain an equity stake in

that new company, can they sue the contributed entities for fraud? To state the issue

stripped of nuance, NCM argues that liability in tort inhered in LVI Parent, that none

336 Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 810 (Del. Ch. 2014) (quoting Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs., Inc., 854 A.2d 121, 154 (Del. Ch. 2004)).

85 of the transactions at issue transferred this liability to any other entity, and therefore

the liability still resides in LVI Parent. LVI parent, on the other hand, argues with

equal conviction that in light of the structure of this transaction, a holding that an

asset contributed to NorthStar is itself liable for fraud in the creation of NorthStar

would be nonsensical. It appears that this question, in light of the structure of the

Merger, is one of first impression.

I hesitate to decide this issue without a record at trial. The trial will go forward

in any event, and an opinion granting summary judgment here would be, in practice,

advisory if the LVI interests in general prove not fraudsters. Summary judgment is

inappropriate where, as here, “upon an examination of all the facts, it seems desirable

to inquire thoroughly into them in order to clarify the application of the law to the

circumstances.” 337 Therefore, LVI Parent’s motion for Summary Judgment is

denied without prejudice to the legal issues inherent therein.

III. CONCLUSION

For the foregoing reasons, I grant in part and deny in part LVI’s Motion for

Summary Judgment. Specifically, that motion is granted as it relates to the Alcoa

project and denied as it relates to the remainder of the allegedly fraudulent projects.

I grant in part and deny in part EPP and NCM’s Motion for Summary Judgment.

Specifically, that motion is granted on the claims against EPP for fraud and unjust

337 Ebersole v. Lowengrub, 180 A.2d 467, 470 (Del. 1962).

86 enrichment and denied as to the remainder. I deny Khara’s Motion for Summary

Judgment. I deny LVI Parent’s Motion for Summary Judgment without prejudice

to the legal issues raised therein. The relevant parties should submit a form of order

consistent with this Memorandum Opinion, and should submit memoranda

regarding how my decision here affects the pending Motion to Dismiss and Motion

for Summary Judgment filed by the CHS Defendants, and the pending Motion for

Summary Judgment filed by Scott State, if at all.