Pilot Corporation v. Greg Abel

• Court: Court of Chancery of Delaware
• Decided: December 13, 2023
• Docket: C.A. No. 2023-0813-MTZ
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE

MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER VICE CHANCELLOR 500 N. KING STREET, SUITE 11400 WILMINGTON, DELAWARE 19801-3734

December 13, 2023

Kevin R. Shannon, Esquire William M. Lafferty, Esquire Potter, Anderson & Corroon LLP Morris, Nichols, Arsht & Tunnell LLP 1313 North Market St. 1201 N. Market St. Hercules Plaza, 6th Floor Wilmington, DE 19801 Wilmington, DE 19801

RE: Pilot Corp. v. Greg Abel et al., C.A. No. 2023-0813-MTZ

Dear Counsel:

Today I heard argument on plaintiff Pilot Corporation’s Motion to Strike

Defenses and certain defendants’ Motion for Leave to File Amended Answer and

Affirmative Defenses.1 The plaintiff’s motion is granted. The defendants’ is

denied.

I. Background

Plaintiff Pilot Corporation filed this action against defendants Greg Abel,

Kevin Clayton, Marc Hamburg, Mark Hewett, Scott Thon, Berkshire Hathaway

Inc., and National Indemnity Company (“NICO,” and collectively the “Berkshire

1 The transcript of today’s hearing has not been finalized. Citations in the form Rough Tr. – refer to a rough copy of the transcript. I also heard argument on the plaintiff’s Motion for a Protective order filed on December 11, 2023. Docket item (“D.I.”) 116. For the reasons below, that motion is now moot. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 2 of 17

Defendants”), as well as Pilot Travel Centers LLC (“PTC”).2 Berkshire acquired a

38.6% interest in PTC from Pilot and other entities in 2017. In connection with

that transaction, Berkshire, NICO, Pilot, and others entered into an investor rights

agreement (the “Investor Rights Agreement”).3 The Investor Rights Agreement

required Berkshire, through NICO, to purchase an additional 41.4% stake in PTC

in January 2023. It also granted Pilot the right to sell its remaining 20% interest to

Berkshire within sixty days of December 31, the end of PTC’s fiscal year (the “Put

Right”).4 The Put Right purchase price is equal to ten times PTC’s earnings before

interest and taxes, or EBIT, as captured in the year-end financials for that fiscal

year. The parties also entered into an LLC agreement governing PTC (the “LLC

Agreement”).5 The LLC Agreement granted Pilot a consent right over changes to

PTC’s “accounting policies,” “except as required by Applicable Law or GAAP”

(the “Consent Right”).6

Pilot alleges Berkshire caused PTC to use pushdown accounting starting in

March of 2023; Pilot fears Berkshire will cause PTC to use pushdown accounting

2 D.I. 1. 3 D.I. 1, Ex. B. 4 Id. § 2.4. 5 D.I. 1, Ex. A. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 3 of 17

for its 2023 year-end financials. Doing so would reduce PTC’s 2023 EBIT and

therefore the value of Pilot’s Put Right if Pilot exercises it in 2024. Pilot contends

the adoption of pushdown accounting is a change in PTC’s accounting policies that

triggers the Consent Right. It seeks expedited declaratory and injunctive relief to

that effect. I expedited those claims on November 3. 7 Pilot also brought a claim

for breach of fiduciary duty. I denied expedition of that claim, and stayed it

pending resolution of Pilot’s claims sounding in contract.8

In answering the complaint, the Berkshire Defendants asserted eleven

affirmative defenses, including unclean hands and in pari delicto.9 Both defenses

are based on allegations that James Haslam III, as Pilot’s “authorized agent,”

promised “illicit side payments to numerous PTC senior executives in order to

unjustly increase the value of its Put Right.”10

II. The Motion To Strike

I begin with Pilot’s motion to strike the affirmative defenses of unclean

hands and in pari delicto as originally pled and repeated in the Berkshire

6 Id. § 8.08(i). 7 D.I. 64 at 63–67. 8 Id. at 67–68. 9 D.I. 62 at 36–40. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 4 of 17

Defendants’ proposed amended answer.11 Pilot moves to strike these defenses on

the basis that they lack a sufficient nexus with Pilot’s contractual claims. Pilot has

moved only to strike the defenses as articulated in Defendants’ original answer,

and does not challenge the new allegations in the proposed amended answer on

that basis. It also has not moved to strike the defenses as to the stayed breach of

fiduciary duty claims, and so I address these defenses only as applied to Pilot’s

claims for breach of the Consent Right.12

Under Court of Chancery Rule 12(f), “the Court may order stricken from

any pleading any insufficient defense.”13 When addressing a motion to strike an

affirmative defense, the Court assumes the truth of the facts alleged in the answer

and asks whether “the challenged defense is legally sufficient.”14 Such motions are

“are granted sparingly and only when clearly warranted with all doubt being

resolved in the nonmoving party’s favor.”15

10 Id. at 38–39. 11 D.I. 109 at Mot. 12 For the avoidance of doubt, my ruling does not implicate the defense of unclean hands as applied to Pilot’s stayed claims for breach of fiduciary duty. 13 Ct. Ch. R. 12(f). 14 Holtzman v. Gruen Hldg. Corp., 1994 WL 444756, at *3 (Del. Ch. Aug. 5, 1994). 15 Salem Church (Del.) Assocs. v. New Castle Cnty., 2004 WL 1087341, at *2 (Del. Ch. May 6, 2004). Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 5 of 17

A. The Unclean Hands Defense

Pilot contends its expedited claims advance the narrow question of whether

PTC’s adoption of pushdown accounting for 2023 would violate Pilot’s Consent

Right, and that the unclean hands defense is unrelated to that contractual issue.

The Berkshire Defendants view Pilot’s claims more broadly, contending Pilot

accuses Berkshire of improperly manipulating PTC’s 2023 EBIT to alter the

valuation of the 2024 Put Right, and that their defense accuses Haslam and Pilot of

doing the same.

The unclean hands defense “applies the maxim of equity that ‘[h]e who

comes into equity must come with clean hands.’”16 “Under the doctrine, the Court

will refuse equitable relief ‘in circumstances where the litigant’s own acts offend

the very sense of equity to which he appeals.’”17 “The question raised by a plea of

unclean hands is whether the plaintiff’s conduct is so offensive to the integrity of

the court that his claims should be denied, regardless of their merit.”18 For unclean

16 Am. Healthcare Admin. Servs., Inc. v. Aizen, 285 A.3d 461, 484 (Del. Ch. 2022) (alteration in original) (quoting 1 John Norton Pomeroy, Pomeroy’s Equity Jurisprudence § 397, at 737 (4th ed. 1918)). 17 Wagamon v. Dolan, 2013 WL 1023884, at *2 n.19 (Del. Ch. Mar. 15, 2013) (quoting Nakahara v. NS 1991 Am. Tr., 718 A.2d 518, 522 (Del. Ch. 1998)). 18 Gallagher v. Holcomb & Salter, 1991 WL 158969, at *4 (Del. Ch. Aug. 16, 1991). Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 6 of 17

hands to apply, “the improper conduct must relate directly to the underlying

litigation” and “the inequitable conduct must have an ‘immediate and necessary’

relation to the claims under which relief is sought.”19

This Court has found a plaintiff’s wrongdoing lacked a sufficient nexus to a

breach of contract claim where the wrongdoing did not relate to the plaintiff’s

rights or the defendant’s obligations under the relevant agreement. In Bouchard v.

Braidy Industries, a former company director and CEO sought specific

performance of a voting agreement.20 The company defendant raised an unclean

hands defense relating to the plaintiff’s “alleged misuse of company funds,

self-dealing, or other wrongful acts” while he was a director and officer.21 The

Court reasoned the allegations of wrongdoing did “not bear an immediate and

necessary relation to [the plaintiff’s] rights under the Voting Agreement or [the

19 Nakahara v. NS 1991 Am. Tr., 718 A.2d 518, 523 (Del. Ch. 1998); Claros Diagnostics, Inc. S’holders Representative Comm. v. OPKO Health, Inc., 2020 WL 829361, at *13 (Del. Ch. Feb. 19, 2020) (“The doctrine, therefore, only applies where there exists a close nexus between the wrongdoing of the plaintiff and the relief he seeks.”); 2 John Norton Pomeroy, Pomeroy’s Equity Jurisprudence § 399, at 97 (5th ed. 1941) [hereinafter “Pomeroy’s”] (“The dirt on [the complainant’s] hands must be his bad conduct in the transaction complained of.”). 20 Bouchard v. Braidy Indus., Inc., 2020 WL 2036601 (Del. Ch. Apr. 28, 2020). 21 Id. at *13. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 7 of 17

company’s] obligations under the Voting Agreement.”22 It also noted that the

company did “not assert that [the plaintiff’s] alleged ‘self-dealing and other

wrongful conduct’ somehow affected the formation of the Voting Agreement or

otherwise relates to [the plaintiff’s] claims for breach of the Voting Agreement.”23

For those reasons, the Court found the requisite nexus lacking.24

So too here. The Berkshire Defendants allege Haslam offered to pay PTC

employees as part of a scheme to increase the value of Pilot’s Put Right. To be

sure, Pilot is pursuing its claims to inform whether it will exercise its Put Right in

2024, and presents them nestled in allegations that Berkshire caused PTC to adopt

pushdown accounting to decrease EBIT and the value of the 2024 Put Right.

Those allegations add context to the tug-of-war over PTC’s 2023 EBIT that

motivates this lawsuit. But neither Pilot’s goal for this suit, nor the broader context

offered in its complaint, informs the merits of Pilot’s contractual claim. And

neither Pilot’s goal nor its context can provide an anchor for an unclean hands

22 Id. 23 Id. at *14. 24 Id. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 8 of 17

defense: that anchor must catch on Pilot’s claims.25 Pilot’s claims are narrow:

they ask whether PTC’s adoption of pushdown accounting for 2023 would be a

change in “accounting policy” that triggers the Consent Right in the LLC

Agreement. Haslam’s actions do not inform Pilot’s rights or Berkshire’s

obligations under the LLC Agreement. They lack an “immediate and necessary

relation” to the relief sought.26 The Court “is not an avenger of wrongs comment

at large by those who resort to it for relief.”27

This Court has also found that an unclean hands defense lacks a sufficient

nexus where the plaintiff’s claim and alleged wrongdoing related to separate

agreements.28 As pled, the Berkshire Defendants’ allegations concern the Investor

Rights Agreement: the Berkshire Defendants contend those same allegations

warrant reformation or rescission of the 2024 Put Right granted by that

25 See Kousi v. Sugahara, 1991 WL 248408, at *3 (Del. Ch. Nov. 21, 1991) (rejecting the argument that background facts in the complaint could be used to establish a causal nexus for purposes of unclean hands); see also Bouchard, 2020 WL 2036601, at *13–14; In re Farm Indus., Inc., 196 A.2d 582, 589–90 (Del. Ch. 1963). 26 E. States Petroleum Co. v. Universal Oil Prod. Co., 8 A.2d 80, 82 (Del. 1939). 27 2 John Norton Pomeroy, Pomeroy’s Equity Jurisprudence, § 399, at 95–96 (5th ed. 1941). 28 Aizen, 285 A.3d at 494. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 9 of 17

agreement.29 But Pilot’s pending claims seek to enforce the Consent Right granted

by the LLC Agreement. Pilot may enforce its Consent Right without invoking its

Put Right, and vice versa. The relationship between the two offers context and

motivation, but is not immediate or necessary.30

I recognize that striking such defenses is relatively uncommon and indeed

disfavored. But no further factual development is needed for me to evaluate the

defense; I have taken the Berkshire Defendants’ allegations as true and made all

inferences in their favor, yet still conclude their defense could not prevail as a

matter of law. Further, the unclean hands defense is “at bottom . . . a ‘rule of

public policy.’”31 Of course, the defense “protects the integrity of a court of

equity, which, as a court of conscience, will decline to aid those who are

undeserving of help due to their own unconscionable conduct.”32 The requirement

that the defense be immediate and necessary to the claim also protects this court:

29 D.I. 62 at Countercl. ¶¶ 52, 54. 30 See Bouchard, 2020 WL 2036601, at *13–14. 31 Morente v. Morente, 2000 WL 264329, at *3 (Del. Ch. Feb. 29, 2000) (quoting Skoglund v. Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976)). 32 2 Donald J. Wolfe Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 15.08[a], at 15-98 (2023); see also Skoglund v. Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976) (“[T]he purpose of the clean hands maxim is to protect the public and the court against misuse by one who, because of Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 10 of 17

Litigants regularly cast stones, and it is all too easy for a litigant to invoke the doctrine of unclean hands. Its ready availability increases litigation costs, injects an additional issue for resolution into the case, and creates the risk that close calls on difficult facts will subvert the doctrine. Even if a litigant is ultimately unsuccessful in proving the defense, she may enjoy the residual benefits of painting her opponent as an unsavory character.33

Striking a tangential unclean hands defense from consideration of Pilot’s expedited

claims serves those policy interests. And the Berkshire Defendants will still be

able to present their allegations in a more relevant context: NICO has filed

counterclaims concerning Pilot’s Put Right that it has assured the Court are

coextensive with these defenses.34 Once Pilot’s expedited Consent Right claims

are resolved, this action will turn to those counterclaims.35 The motion is granted

as to the unclean hands defense.

his conduct, has forfeited his right to have the court consider his claims, regardless of their merit.”). 33 Aizen, 285 A.3d at 493. 34 The transcript of the November 30 hearing has not been finalized. I have a rough copy in which this comment appears on page 19. 35 D.I. 97 at 4–5 (explaining NICO’s counterclaims would be stayed pending resolution of the expedited claims if NICO chose not to accept the conditions for expedition); D.I. 98 (declining expedition). Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 11 of 17

B. In Pari Delicto

Pilot also moved to strike the eighth affirmative defense of in peri delicto.

“In general, ‘under the in pari delicto doctrine, a party is barred from recovering

damages if his losses are substantially caused by activities the law forbade him to

engage in.’”36 The Berkshire Defendants argue “Pilot cannot shield its claims from

the illicit conduct of its CEO that, beyond improperly inflating PTC’s 2023 EBIT,

has also changed the factual record of PTC’s implementation of pushdown

accounting—the very subject of Pilot’s claims.”37

Like their unclean hands defense, the Berkshire Defendants’ in pari delicto

defense rests on the false premise that Pilot is seeking to enforce the Put Right

through this action. Not so. As explained, it is enforcing a different right under a

different agreement. Wrongfully inflating the 2024 Put Right’s value did not

substantially cause Pilot’s injuries relating to the Consent Right. The motion is

granted as to the in pari delicto defense.

36 In re Am. Int’l Grp., Inc., Consol. Deriv. Litig., 976 A.2d 872, 883 (Del. Ch. 2009), (quoting In re LJM2 Co–Inv., L.P., 866 A.2d 762, 775 (Del. Ch. 2004)), aff’d sub nom. Teachers’ Ret. Sys. of La. v. Gen. Re Corp., 11 A.3d 228 (Del. 2010). 37 D.I. 148 at Opp. 2. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 12 of 17

II. Motion To Amend

I next address the Berkshire Defendants’ motion to amend. On December

11, less than five hours after Pilot filed its opening brief in support of its motion to

strike, the Berkshire Defendants moved to amend their answer by adding

additional grounds for their unclean hands and in pari delicto defenses.38 They

seek to add allegations that Pilot’s “improper promises were intended not only to

improperly inflate the value of [Pilot’s] Put Right, but also to improperly influence

the behavior of PTC’s employees in connection with the dispute between Pilot and

Berkshire . . . and in the implementation of pushdown accounting within PTC.”39

In particular, the Berkshire Defendants allege that after this suit was filed and got

underway, PTC’s controller modified an internal memorandum and PTC’s

financial statements to reflect that PTC did not advocate pushdown accounting to

Berkshire before Berkshire gained control, and that PTC had not committed to

using pushdown accounting in 2023. The Berkshire Defendants believe the

controller did so because he received a side payment from Haslam, but expect the

controller to deny this.

38 D.I. 123 at Mot. 39 D.I. 123, Ex. A at 39–40. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 13 of 17

After a responsive pleading has been filed, a party may amend under Rule

15(a) “only by leave of Court or by written consent of the adverse party; and leave

shall be freely given when justice so requires.”40 “This court interprets Rule 15(a)

to ‘allow for liberal amendment in the interest of resolving cases on the merits.’”41

“A party should be granted leave freely to amend its complaint, unless there is

evidence of bad faith, undue delay, dilatory motive, undue prejudice or futility of

amendment.”42 “The most important factor in this context is consideration of

undue prejudice.”43 Pilot opposes leave to amend on the grounds of undue

prejudice and futility, and addressed the Berkshire Defendants’ delay in bringing

the motion as part of the prejudice analysis.

I begin with delay. After much prodding, the Berkshire Defendants offered

a timeline by which they learned on or around November 9 or 10 that the controller

40 Ct. Ch. R. 15(a). 41 Twitter, Inc. v. Musk, 2022 WL 4087797, at *1 (Del. Ch. Sept. 7, 2022) (quoting Gould v. Gould, 2011 WL 141168, at *7 (Del. Ch. Jan. 7, 2011)). 42 U.S. Bank Nat. Ass’n v. U.S. Timberlands Klamath Falls, L.L.C., 2005 WL 2093694, at *1 (Del. Ch. Mar. 30, 2005) (internal quotation marks omitted) (quoting Fox v. Christina Square Assoc., 1995 WL 405744 (Del. Ch. June 19, 1995)). 43 Shulman v. Kolomoisky, 2023 WL 1453658, at *2 (Del. Ch. Feb. 1, 2023). Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 14 of 17

had edited the financial statements;44 their original answer with allegations of side

payments followed on November 17. 45 Even with those two inputs, the Berkshire

Defendants contend they did not have what they needed to fashion another basis

for unclean hands until they received the controller’s emails about the edited

internal memorandum (the “Memo Emails”) “shortly before” December 8.46 They

filed their motion for leave on December 11, after Pilot filed its opening brief on

the motion to strike. 47 I am skeptical that the Memo Emails added meaningful

substance to the Berkshire Defendants’ theory. Their counsel was less than

forthright at argument about when they were on notice of their theory, and having

reviewed the Memo Emails, I think they are consistent with the edits to the

financial statements. But taking the Berkshire Defendants at their word, I cannot

conclude they unduly delayed.

Taking the Berkshire Defendants at their word also compels a finding of

undue prejudice. At today’s argument, I asked their counsel what discovery they

44 Rough Tr. 59 (stating that the Berkshire Defendants learned of the financial statement edits around the time of the internal interviews); id. at 65–66 (stating that the controller informed PTC of the financial statement edits in a November 9 or November 10 interview). 45 D.I. 62. 46 Rough Tr. 55–58; D.I. 135 at Opp. ¶ 12. 47 D.I. 123. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 15 of 17

intended to pursue solely in connection with their new allegations if the motion to

strike were granted: I twice suggested that a party seeking leave to amend would

benefit from minimizing prejudice from that amendment. 48 Counsel offered a

self-described “long-winded[]” plan to explore whether the controller, as well as

others, received side payments.49 Counsel sought between five and fourteen

additional depositions to explore whether Haslam promised side payments to

twenty-eight other employees, those employees’ roles within the company, what

Haslam said when he made each of those promises, and whether each deponent

passed along the promise.50 The Berkshire Defendants also anticipated filing a

motion to compel document discovery and interrogatory responses,51 including to

obtain “text messages between Mr. Haslam and any of the employees who the

company understands to have received a side payment promise,” described as

twenty-eight different individuals.52 When pressed, counsel bemoaned the

difficulty of “line drawing” and that he would “have to think it through” as to what

48 Rough Tr. 70–71, 76. 49 Id. at 71–76. 50 Id. at 72–75. 51 Id. at 75. 52 Id. at 77, 93. Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 16 of 17

could be cut.53 The Berkshire Defendants made one-sided proposals to limit this

discovery, such as relying on declarations or limiting each deposition to one hour.

These are understandably unacceptable to Pilot, especially considering that PTC

has been interviewing its employees and sharing information with the Berkshire

Defendants.

The Berkshire Defendants’ plan is unduly prejudicial. Depositions start

tomorrow: counsel rattled off nine that are planned.54 Fact discovery ends on

December 19. 55 Trial starts January 8.56 I could curtail this plan by granting

Pilot’s motion for a protective order. But the fact that the Berkshire Defendants

insisted on facially broad discovery despite my warning that prejudice might cost

the amendment suggests they may care more about prejudicing Pilot than winning

leave to amend. Having overplayed their hand, the Berkshire Defendants have lost

this one.

53 Id. at 78–79. 54 Id. at 71. 55 D.I. 42 ¶ 1(i). 56 Id. ¶ 1(p). Pilot Corp. v. Abel, C.A. No. 2023-1068-MTZ December 13, 2023 Page 17 of 17

Sincerely,

/s/ Morgan T. Zurn

Vice Chancellor MTZ/ms

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