Richard Brody v. DCiM Solutions, LLC

• Court: Court of Chancery of Delaware
• Decided: June 30, 2025
• Docket: 2018-0507-LWW
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

RICHARD BRODY, individually and as ) representative of Selling Shareholders, ) ) Plaintiff/Counterclaim- ) Defendant, ) ) v. ) C.A. No. 2018-0507-LWW ) DCIM SOLUTIONS, LLC, and IGEM ) COMMUNICATIONS HOLDING, ) INC., ) ) Defendants/Counterclaim- ) Plaintiffs. )

MEMORANDUM OPINION

Date Submitted: March 27, 2025 Date Decided: June 30, 2025

Gary W. Lipkin & Devan A. McCarrie, SAUL EWING LLP, Wilmington, Delaware; Counsel for Plaintiff/Counterclaim-Defendant Richard Brody

Paul D. Brown, Kelly E. Rose & Mariska Suparman, CHIPMAN, BROWN, CICERO & COLE, LLP, Wilmington, Delaware; Counsel for Defendants/Counterclaim-Plaintiffs DCiM Solutions, LLC and iGEM Communications, Inc.

WILL, Vice Chancellor This case is about the 2016 sale of two companies the plaintiff owned. Neither

the seller nor the buyers are content with the deal they struck, leading to seven years

of fitful litigation. The plaintiff-seller insists that the buyers are wrongfully

withholding payments on a promissory note after ending a post-closing adjustment

process in bad faith. The defendant-buyers respond that they were defrauded over

the seller’s undisclosed tax liabilities and are entitled to indemnification.

After trial, I reach a mixed result. The buyers failed to prove fraud and can

recover only the single tax liability they paid out of pocket. The seller showed that

the buyers breached the parties’ sale agreements by thwarting the post-closing audit

process and is entitled to the balance of the note. Judgment is for the buyers in part,

and for the seller in part.

I. BACKGROUND

The following facts were stipulated to by the parties or proven by a

preponderance of the evidence at trial.1

1 Joint Pre-trial Stipulation and Order (Dkt. 270) (“PTO”). The trial record includes live testimony of three fact and two expert witnesses, 465 joint exhibits, and seven deposition transcripts. Trial testimony is cited as “[Name] Tr. __.” See Trial Tr. Vols. I and II (Dkts. 275-76). Exhibits are cited by the numbers provided on the parties’ joint exhibit list as “JX __,” unless otherwise defined. See PTO Ex. A (Dkt. 259). Pincites refer to internal pagination or, if a document lacks internal pagination, by the last four digits of Bates stamps. Deposition transcripts are cited as “[Name] Dep. __.” 1 A. IIS and Velocity

Richard Brody is a successful businessperson who, after practicing as an

attorney, ran his family business of operating vending machines in New York City

and northern New Jersey.2 In the mid-aughts, Brody invested capital in a technology

business called IIS Group, LLC operated by an acquaintance, Anthony Jett.3

Brody became IIS’s 90% owner and served as CEO and chair of its board.4

Jett, who held the remaining 10% of IIS’s equity, was the company’s President and

handled its day-to-day operations.5 Jett’s duties extended to financial matters,

including the payment of operating expenses.6 Jett reported to Brody, but Brody

exercised indirect oversight and relied on financial and accounting reports prepared

by Jett or IIS’s CFO to gain visibility into the business.7

The initial concept for IIS was to provide virtual desktop services. 8 Over the

years, Brody and Jett worked to expand the business through sales and acquisitions,

including in the data center industry.9 One of the companies that Brody and Jett

2 Brody Tr. 7-9. 3 Id. at 9-11; see Brody Dep. 11-12, 14-15; Jett Day 1 Dep. 9-11. 4 Brody Tr. 13; PTO ¶ II.C.iii. 5 Brody Tr. 11-12; PTO ¶¶ II.C.ii, iv. 6 Brody Tr. 17-18. 7 Id. at 12-13, 18-19. 8 Id. at 10; see PTO ¶ II.C.i. 9 Brody Tr. 14. 2 added to their portfolio was Velocity Network Communications, Inc., which

provided Voice over Internet Protocol (VoIP) services.10

Brody had the same role at Velocity that he held at IIS. He owned 90% of

Velocity’s equity and was (either formally or informally) the CEO.11 He reviewed

Velocity’s financial statements and oversaw its strategic direction.12 Jett, who held

the other 10% of Velocity’s equity, ran the day-to-day business.13 Employees

reported to Jett, and Jett reported only to Brody.14

B. The Companies’ Taxes

As a telecommunications provider, Velocity was required by the Federal

Communications Commission (FCC) to pay Federal Universal Service Fund (FUSF)

fees.15 Congress established the FUSF in the late 1990s to promote universal service

in the telecommunications industry.16 The administration of the FUSF is handled by

the Universal Service Administrative Company (USAC).17 The FCC allows carriers

10 Id. at 14-15. 11 Id. at 15-16, 64-65; Brody Dep. 24. 12 Brody Tr. 63-65. 13 Id. at 16. 14 Id. at 65; Brody Dep. 23-24. 15 Tipton Tr. 133-34; Brody Dep. 32-34; see PTO ¶ II.F.i. 16 See In the Matter of Rep. on the Future of the Universal Serv. Fund, 37 F.C.C. Rcd. 10041, 10042-43 (2022). The FUSF is used to support the provision of telecom services to low-income customers and those living in high cost or rural areas. Id.; PTO ¶ II.F.ii. 17 PTO ¶ II.F.iii. 3 like Velocity to recover FUSF fees by charging allocable shares of the fees to end

consumers.18 Consumer fees are then recorded as current liabilities on the

company’s balance sheet until the USAC invoices are paid.19 If the company fails

to pay its FUSF fees, those liabilities are submitted to the United States Treasury

Department and become delinquent debts owed to the federal government.20

Unlike Velocity, IIS was not subject to FUSF fees. It faced different tax

complexities. Because IIS sold its data center equipment and services throughout

the country, it was responsible for registering to do business in multiple states and

remitting state sales taxes.21

C. The Sales to DCiM and iGEM

As IIS and Velocity grew, Brody became reluctant to continue infusing

capital.22 In early 2016, Brody told Jett that he wanted to sell both IIS and Velocity

(together, the “Sellers”).23 Jett identified Ernest Cunningham as a prospective

buyer.24

18 Tipton Tr. 198-202 (comparing FUSF fees and sales taxes). 19 Id. 20 Id. at 135-36. 21 Brody Dep. 105-06. 22 Brody Tr. 39-40. 23 Id. at 39; Brody Dep. 35. 24 Brody Tr. 40; Brody Dep. 36-37. 4 Cunningham is the CEO and majority stockholder of iGEM Communication

Holding, Inc., and holds an equity stake in DCiM Solutions, LLC (with iGEM, the

“Buyers”).25 Both iGEM and DCiM are Texas corporations.26 iGEM supplies voice,

data, and mobile telecommunication services to multinational enterprises.27 DCiM

provided data center infrastructure optimization solutions and sold related

equipment.28

In July 2016, Cunningham sent Jett an initial letter of intent for DCiM to

purchase IIS and iGEM to purchase Velocity.29 The LOI contemplated a combined

$10 million purchase price.30 It also confirmed that the parties would work toward

a definitive agreement with “standard and customary” representations and

warranties.31

Due diligence began in August 2016, with principals of both the Sellers and

Buyers participating.32 The Buyers engaged in several days of on-site due diligence

25 Cunningham Dep. 6-7. 26 PTO ¶¶ II.A.ii-iii. 27 Tipton Tr. 133. 28 McClain Dep. 168; Cunningham Dep. 9-10; McClain Tr. 290-91. DCiM ceased operations in August 2023. It has no cash and holds only de minimis assets on which its lender has a first position lien. See McClain Tr. 289. 29 JX 199 (Letter of Intent from iGEM and DCiM) (“LOI”); PTO ¶ II.D.i. 30 LOI ¶ 2; see Tipton Tr. 154. 31 LOI ¶ 7; see Brody Tr. 71. 32 Tipton Tr. 139; McClain Tr. 297. 5 at the Sellers’ Fort Washington, Pennsylvania office.33 The Buyers were focused on

2016 financial information, including their balance sheets, to validate the Sellers’

present value.34 During the process, the Buyers learned that the Sellers had certain

tax liabilities: Velocity owed FUSF fees and IIS owed state sales taxes.35

iGEM’s CFO James Tipton was tasked with assessing Velocity’s then-current

financial condition.36 About a month before closing, Tipton told Cunningham that

he wanted to speak to the “[third] party who ha[d] been managing [Velocity’s] taxes

and completing [Form] 499s” but was “waiting to get USAC invoices before

scheduling the call.”37 Tipton also reviewed Velocity’s balance sheet as of

August 31, 2016, which listed outstanding USAC invoices.38 Four days before

closing, Tipton emailed Jett and one of the Sellers’ financial controllers, Stephen

Hoffman, with “questions” on the August 2016 balance sheet—specifically, “why

[Velocity was not] paying [its] USAC invoices . . . .”39 Jett responded that Velocity

was “still waiting [on] credits from USAC,” which would obviate the need for

33 Tipton Tr. 139; see Jett Day 1 Dep. 146. 34 See Tipton Tr. 237-39; McClain Tr. 358 (discussing narrow focus on 2016 financial information to validate the balance sheet); see also Tipton Dep. 23. 35 Tipton Tr. 173, 238-39; see also JX 250. 36 Tipton Dep. 22-23; Tipton Tr. 172-73. 37 JX 216. 38 Tipton Tr. 155; Tipton Dep. 40-42. 39 JX 250; see Brody Tr. 24. 6 payments.40 There was no further discussion of Velocity’s FUSF liabilities until

after closing.

Michael McClain, the CEO of DCiM, ran diligence on IIS.41 Before closing,

McClain discovered that IIS had sales tax liabilities in nine states.42 IIS had only

disclosed to the Buyers sales tax liabilities owed to four states (those in which IIS

had offices), totaling $185,000.43 The largest undisclosed liability McClain found

was $110,000 due to the State of Illinois.44 McClain did not ask IIS about the

discrepancies before closing.45

D. The MIPA and SPA

On September 30, 2016, DCiM executed a Membership Interest Purchase

Agreement (the “MIPA”) to acquire all of IIS’s membership interests.46 Brody and

Jett signed the MIPA as IIS’s “Selling Members,” and Brody signed as both IIS’s

40 JX 247; JX 328 at 1 (reflecting Brody’s statement that “the expectation is the[] [invoices] will never be paid . . . [they] should get a working capital credit from a reduction in the Payables total”); see Tipton Tr. 244. 41 McClain Dep. 8-9, 90. 42 McClain Tr. 362; see McClain Dep. 122-23; JX 256. 43 McClain Tr. 362; Thompson Tr. 440. 44 JX 256. 45 McClain Tr. 362. 46 JX 266 (closing binder) Tab B.1. (IIS Membership Interest Purchase Agreement) (“MIPA”). 7 representative and the “Selling Member Representative.”47 Simultaneously, iGEM

executed a Share Purchase Agreement (the “SPA,” and with the MIPA, the

“Purchase Agreements”) to acquire all of Velocity’s issued and outstanding capital

stock.48 Brody and Jett signed the SPA as Velocity’s “Selling Shareholders,” and

Brody signed as the representative of Velocity and the “Selling Shareholder

Representative.”49

The MIPA and SPA include identical representations and warranties by the

Sellers for the benefit of the Buyers in Article VII.50 Several are relevant here.

Section 4.6(b) confirms that the Sellers’ financial statements were “present[ed] fairly

and accurately, in all material respects.”51 And Section 4.6(c) states that the Sellers

have “no Liabilities other than [] obligations under contracts and commitments

incurred in the ordinary course of business” or those “expressly incurred pursuant to

[the Purchase] Agreement[s].”52

47 MIPA ‘5548-49. Brody’s signature line referred to him as the “President” of IIS. Id. at ‘5548. That seems to be an error. See supra notes 4-5 and accompanying text. 48 JX 266 (closing binder) Tab A.1 (Velocity Network Communications, Inc. Share Purchase Agreement) (“SPA”); see PTO ¶ II.D.iv. 49 SPA ‘5278-79. 50 See, e.g., SPA §§ 4.1(a), 4.6(b)-(c); MIPA §§ 4.1(a), 4.6(b)-(c). The SPA and MIPA are governed by Delaware law. SPA § 9.10; MIPA § 9.10. 51 SPA § 4.6(b); MIPA § 4.6(b). 52 SPA § 4.6(c); MIPA § 4.6(c). “Liabilities” is defined to include all manner of “debts, liabilities, commitments, losses, deficiencies, charges, claims, damages, demands, costs, fees, expenses and obligations . . . whether accrued or fixed, absolute or contingent, matured or unmatured, known or unknown, on- or off-balance sheet, including those 8 The Purchase Agreements also included tax-related representations. In

Section 4.8(b)(i), the Sellers stated that they had “timely filed all required U.S.

federal, state, local and non-U.S. [tax] returns” and “timely paid all material

Taxes.”53 In Section 4.8(b)(iii), the Sellers represented that “[n]o deficiency for

Taxes ha[d] been threatened, claimed, assessed or proposed . . . .”54 And in Section

4.8(b)(viii), the Sellers confirmed that “[t]here [we]re (and immediately following

the Closing Date there w[ould] be) no Liens on the assets of the [Seller].”55 Section

6.5(e) provided a remedy by which Brody and Jett would indemnify the Buyers for

any “loss, claim, liability, expense, penalty, or other damage attributable to” taxes

during the pre-closing period.56

E. The Note

Both transactions closed on September 30, 2016.57 The total purchase price

was $10 million. DCiM paid $3 million for IIS—$1 million in cash and a $2 million

promissory note from DCiM payable to Brody (the “Note”) that was guaranteed by

arising under any Contract, law, statute, ordinance, regulation, rule, code, common law or other requirement or rule enacted or promulgated by any Governmental Entity.” SPA § 1.1; MIPA § 1.1. 53 SPA § 4.8(b)(i); MIPA § 4.8(b)(i); see infra note 154 and accompanying text (discussing the definition of “Taxes” in the Purchase Agreements). 54 SPA § 4.8(b)(iii); MIPA § 4.8(b)(iii). 55 SPA § 4.8(b)(viii); MIPA § 4.8(b)(viii). 56 SPA § 6.5(e); MIPA § 6.5(e). 57 PTO ¶ II.D.iv; see JX 266. 9 iGEM.58 iGEM paid $7 million for Velocity—$4 million in cash and about $3

million in assumed bank debt.59

At closing, the Sellers received the cash consideration, but $2 million

remained due on the Note.60 The Note was subject to post-closing adjustments based

on revenue and working capital calculations.61 Under the Note, DCiM was obligated

to make ten payments of $200,000 each (plus accrued interest) to Brody starting on

March 31, 2017, with the last payment due on June 30, 2019 “at which time th[e]

Note [would] mature . . . .”62 The Buyers assumed that the payments would be

funded out of the acquired businesses’ cash flows.63

58 PTO ¶ II.D.iii; MIPA § 2.2; see also JX 266 (closing binder) Tab B.4 (Secured Subordinated Promissory Note) (“Note”) ‘5567. 59 PTO ¶ II.D.iv; see JX 266 (closing binder) Tab A.12 (Velocity Funds Flow Statement) ‘5875. 60 Brody Tr. 43; Tipton Tr. 248-49. 61 The EBITDA and revenue multiples are implied based on the transaction and documented in the LOI. See Tipton Tr. 153-54; LOI 2. The sale price for IIS was based on a 5x EBITDA multiple. Thompson Tr. 405-06. The sales price for Velocity was based on a 1.5x revenue multiple. Id. 62 Note § 1(a); see SPA sched. 1.1(ii) at ‘5281; MIPA sched. 1.1(ii) at‘5551; see also MIPA 8 (defining “Scheduled Note Balance” as “the scheduled principal and accrued but unpaid interest expected to be outstanding under the Promissory Note set forth on Schedule 1.l(ii) prior to giving effect to any payments or reductions made thereunder in accordance with Article VII”); see also infra note 227-228 and accompanying text (outlining the Note payment schedule). 63 Tipton Tr. 149. 10 F. The Post-Closing Adjustment Process

The Purchase Agreements outlined a post-closing adjustment process,

primarily for the parties to reach consensus on the closing working capital figures.64

If the Sellers’ businesses were underperforming relative to negotiated revenue and

EBITDA targets, the Buyers would be entitled to a set-off on the Note.65 If the

parties could not resolve their dispute on post-closing working capital, the Purchase

Agreements required that it be put before a designated outside auditor.66

On March 31, 2017, the Buyers gave the Sellers closing working capital,

revenue run rate, and adjusted EBITDA calculations, as required by the Purchase

Agreements.67 The Buyers later made several indemnification demands.68 DCiM

sought indemnification for state taxes that were collected but not remitted by IIS;69

iGEM sought indemnification for outstanding FUSF fees owed by Velocity.70 The

indemnification claims exceeded the balance of the Note.71

64 SPA § 2.7; MIPA § 2.6. 65 See Brody Tr. 46-47; McClain Tr. 302-03; see also SPA § 2.7(b); MIPA § 2.6(b). 66 See SPA § 2.7(b); MIPA § 2.6(b). 67 PTO ¶ II.E.ii. 68 See Brody Tr. 101-04; McClain Tr. 295-96; Tipton Tr. 166; see JX 389; JX 390 (Officer’s Certificate under MIPA § 7.6(b)); JX 392 (Officer’s Certificate under SPA § 7.6(b)). 69 McClain Tr. 295-96; JX 390; Tipton Tr. 166. 70 JX 392 ¶ 1; Tipton Tr. 166. 71 McClain Tr. 295-96. 11 Brody formally objected, triggering the audit process.72 The Purchase

Agreements required that disputes over the closing working capital calculation be

resolved by a neutral and independent auditor: Bee Bergvall & Co. (the “Auditor”),

an accounting firm in Warrington, Pennsylvania.73 The Purchase Agreements

described the parties’ obligations in the audit process and the mandate of the

Auditor.74 The Auditor’s determination of closing working capital would be “final,

conclusive, and binding.”75

The parties engaged the Auditor on August 2, 2017.76 Its charge included

determining the Sellers’ final closing working capital, revenue run rate, and

annualized EBITDA.77 The Auditor completed its review of Velocity’s calculations

on November 28 and determined that Velocity’s closing working capital adjustment

was $124,544 and that its annualized EBITDA was $249,407.78 An EBITDA figure

72 JX 331 (IIS Objection Letter); JX 340 (Velocity Objection Letter); McClain Tr. 295-96, 340-41. 73 PTO ¶ I.A.3; see also MIPA §§ 2.5(c), 2.6(b); SPA §§ 2.5(c), 2.7(b); Our Team, Bee Bergvall & Co. (last visited June 29, 2025), https://bbcocpa.com/our-team/. 74 SPA § 2.5(c); MIPA § 2.5(c). 75 SPA § 2.7(b) (stating that “the determination of the Auditor . . . shall be final, conclusive and binding on the Parties”); MIPA § 2.6(b) (same). 76 See JX 352 (engagement letter). 77 See id. at 2. 78 JX 356 at 4-5. The Auditor was engaged to issue a report on DCiM as well, but never issued it due to the subsequent disputes with iGEM. See McClain Tr. 350; infra notes 212-18 and accompanying text. 12 over the SPA’s $200,000 threshold meant that no closing adjustment would be made

with respect to EBITDA—an outcome unfavorable to the Buyers.79

After reviewing the report, Tipton emailed the Auditor to raise perceived

inaccuracies.80 Tipton believed that if the Auditor’s errors were corrected, it would

“flip[] [EBITDA] below target” in the Buyers’ favor.81 The Auditor issued a revised

calculation two days later, adjusting the final annualized EBITDA to $209,346.82

The revised amount still exceeded the contractual threshold.

The Auditor declined to make further changes, stating that its report was “final

once issued and binding to the parties.”83 But after Tipton threatened to bring a

malpractice claim, the Auditor said that it would consider more arguments from

iGEM if the parties signed revised engagement letters.84 Brody agreed; DCiM and

iGEM refused.85

No further work was completed by the Auditor, including the report on IIS.86

79 See SPA § 2.7(b); Tipton Tr. 149. 80 JX 358; JXs 360-61. 81 JX 459; see JX 365. 82 JX 359 at ‘199-204. 83 JX 367. 84 JX 404; JX 368 at 1; see JX 388; JXs 395-97; see also Brody Tr. 51-52. 85 See JXs 405-06; JX 460; see also Brody Tr. 54; infra notes 212-14 and accompanying text. 86 McClain Tr. 350. 13 F. This Litigation

The parties went on to engage in years of protracted litigation.

First, the Buyers attempted to engage in binding arbitration.87 Before it got

underway, in July 2018, Brody filed this suit against DCiM and iGEM.88 The parties

agreed to abandon arbitration in lieu of litigation and to defer the first two payments

on the Note while the suit was pending.89 DCiM and iGEM subsequently brought

counterclaims against Brody and Jett.

Brody filed the operative amended complaint on November 19, 2021,

advancing various claims under the Purchase Agreements against the Buyers.90 The

Buyers responded with counterclaims (some of which remain pending) and a third-

party claim against Jett that was subsequently resolved.91 Brody, in turn, filed a

87 PTO ¶ I.B.8; see MIPA § 7.6; SPA § 7.6. 88 Dkt. 1. 89 See PTO ¶¶ I.B.8-9. 90 Verified Am. Compl. (Dkt 147) (“Compl.”). 91 Def.-Countercl. Pl. DCiM Solutions, LLC’s Answer to Am. Compl. with Countercls. (Dkt. 154) (“DCIM Countercls.”); Def. and Countercl.-Pl. iGEM Communications Holding, Inc.’s Answer to Verified Am. Compl. with Verified Countercls. (Dkt. 155) (“iGEM Countercls.”). In 2019, the Buyers and Jett entered into settlement agreements that contained a series of statements accusing Brody of misconduct. See JX 408 § 1.13; JX 409 § 1.13. Jett was later deposed in this case, while he was no longer under the Buyers’ employ. He recanted certain accusations against Brody in the settlement agreements. See Jett Day 1 Dep. 134-35, 155-56; Jett Day 2 Dep. 335-36, 341-42, 390-91. But Jett’s deposition testimony was also internally inconsistent. See Jett Day 2 Dep. 335-36, 349. Given these contradictions, the statements in the settlement agreement and Jett’s testimony are given little weight. 14 third-party claim against Jett that he subsequently voluntarily dismissed.92

Brody later sought partial summary judgment on his claim that the Buyers

failed to place disputed funds in escrow. I granted summary judgment in his favor

based on the plain terms of the Purchase Agreements.93 Settlement talks ensued but

failed.94 The Buyers then abandoned their counterclaims against Brody for breaches

of representations and warranties in the Purchase Agreements so that they were not

obligated to escrow any funds.

At the time of trial, Brody’s sole remaining claim is for breach of the Purchase

Agreements and declaratory judgments about the failed audit process and payment

of the Note.95 The Buyers’ only remaining counterclaims are against Brody for fraud

regarding the Sellers’ financial statements and tax-related representations and for

breach of a tax indemnification provision in the Purchase Agreements.96 Each party

raises certain affirmative defenses.

92 See Dkt. 177. 93 See Dkts. 172, 175. 94 Dkt. 189. 95 See PTO ¶¶ III.A, IV.A. 96 See PTO ¶ III.B, IV.B. 15 A two-day trial was held from October 30 to 31, 2024.97 The parties filed

opening post-trial briefs on February 20, 2025.98 They completed post-trial briefing

on March 19.99 The matter was submitted for decision after post-trial argument on

March 27.100

II. ANALYSIS

Brody and the Buyers spar over liability for two main issues: (1) the Sellers’

outstanding tax liabilities at closing; and (2) the failed audit process.

The Buyers focus on the first issue, claiming that Brody made fraudulent

statements in the Purchase Agreements and then the Sellers failed to uphold their tax

indemnification obligations. They seek monetary damages to cover the Sellers’

outstanding tax liabilities.

Brody focuses on the second issue, claiming that the Buyers breached the

Purchase Agreements (or, alternatively, the implied covenant of good faith and fair

dealing) by stalling and failing to complete the audit process. He asserts that the

Buyers must pay him the full balance of the Note with interest.

97 Dkt. 274; see also Dkts. 275-76. 98 Pl. Countercl. Def. Richard Brody’s Post-trial Br. (Dkt. 283) (“Brody’s Opening Br.”); Defs.’ Post-trial B. (Dkt. 284) (“Buyers’ Opening Br.”). 99 Pl. Countercl. Def. Richard Brody’s Post-trial Answering Br. (Dkt. 289) (“Brody’s Answering Br.”); Defs.’ Post-trial Answering Br. (Dkt. 290) (“Buyers’ Answering Br.”). 100 Dkt. 293; see Tr. of Post-trial Oral Arg. (Dkt. 294) (“Post-trial Tr.”). 16 Each side prevails, in part. The Buyers fail to show fraud but prove that Brody

breached the tax indemnification obligations in the Purchase Agreements. They can

recover one of the outstanding liabilities, however. Brody is entitled to a declaratory

judgment that the Buyers breached the Purchase Agreements and must pay him the

Note with interest.

A. The Buyers’ Counterclaims and Brody’s Affirmative Defenses

The Buyers’ claims against Brody center on his representations about the

magnitude of FUSF fees owed by Velocity and outstanding state sales taxes owed

by IIS. I begin by addressing their fraud claim on these issues before turning to their

breach of warranty claim. I conclude by addressing Brody’s equitable estoppel

affirmative defense. The proponent of the claim or affirmative defense has the

burden to prove it by a preponderance of the evidence.101

1. Fraud

A party advancing a common law fraud claim must prove five elements:

(1) a false representation made by the defendant; (2) the defendant’s knowledge or belief that the representation was false, or [made with] reckless indifference to the truth; (3) an intent to induce the plaintiff to act or to refrain from acting; (4) the plaintiff’s action or inaction taken in justifiable reliance upon

101 See e.g., Revolution Retail Sys., LLC v. Sentinel Techs., Inc., 2015 WL 6611601, at *9 (Del. Ch. Oct. 30, 2015) (“Proof by a preponderance of the evidence means proof that something is more likely than not.”); In re Coverdale, 1987 WL 758002, at *3 (Del. Ch. Aug. 3, 1987) (“The burden of proof in civil cases in Delaware is typically one of preponderance of the evidence . . . .” (citation omitted)). 17 the representation; and (5) causally related damages to the plaintiff.102

Each element must be proven by a preponderance of the evidence.103 The fraud must

be “material” and “concern an essential part of the transaction.”104

The Buyers meet their burden on the first element, but they fail on the second.

My analysis of their fraud claim ends there.

a. False Representations

Under Delaware law, “fraud can occur [] in one of three ways: (1) an overt

misrepresentation; (2) silence in the face of a duty to speak; or (3) active

concealment of material facts.”105 “Fraud need not take the form of an overt

misrepresentation; it also may occur through concealment of material facts, or by

silence when there is a duty to speak.”106 “[A]lthough a statement or assertion may

be facially true, it may constitute an actionable misrepresentation if it causes a false

102 Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 773 (Del. 2014). 103 NetApp, Inc. v. Cinelli, 2023 WL 4925910, at *12 (Del. Ch. Aug. 2, 2023). 104 Maverick Therapeutics, Inc. v. Harpoon Therapeutics, Inc., 2020 WL 1655948, at *31 (Del. Ch. Apr. 03, 2020) (quoting Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2018 WL 6311829, at *33 (Del. Ch. Dec. 3, 2018)). 105 In re Am. Int’l Grp., Inc., Consol. Deriv. Litig., 965 A.2d 763, 804 (Del. Ch. 2009), aff’d sub nom. Tchrs.’ Ret. Sys. of La. v. PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011). 106 Paron Cap. Mgmt., LLC v. Crombie, 2012 WL 2045857, at *5 (Del. Ch. May 22, 2012), aff’d, 62 A.3d 1223 (Del. 2013) (quoting Winner Acceptance Corp. v. Return on Capital Corp., 2008 WL 5352063, at *6 (Del. Ch. Dec. 23, 2008)). 18 impression as to the true state of affairs, and the actor fails to provide qualifying

information to cure the mistaken belief.”107

The Buyers point to several statements in the Purchase Agreements that they

contend are actionable misrepresentations. They include:

(1) except as disclosed in the Sellers’ financial statements, the Sellers had “no Liabilities other than . . . obligations under contracts and commitments incurred in the ordinary course of business, which, individually or in the aggregate, are not material to the financial condition or operating results of the [Sellers]”;108

(2) the Sellers had “timely filed all required U.S. federal, state, local and non-U.S. returns, estimates, information statements and reports (the ‘Returns’)” and “timely paid all material Taxes required to be paid by or with respect to it, whether or not shown on such Returns”;109

(3) the Sellers did not have “any liabilities for unpaid Taxes which had not been accrued or reserved on its Current Balance Sheet, whether asserted or unasserted, contingent or otherwise”;110

(4) “[n]o deficiency for Taxes has been threatened, claimed, assessed or proposed, in each case in writing, against the [Sellers]”;111

107 Norton v. Poplos, 443 A.2d 1, 5 (Del. 1982). 108 MIPA § 4.6(c); SPA § 4.6(c); see also MIPA § 4.6(b)(iii) (representing that IIS’s financials “present fairly and accurately, in all material respects, the financial condition and results of operations, as of the dates thereof or for the periods covered thereby”); SPA § 4.6(b)(iii) (same regarding Velocity’s financials). 109 MIPA § 4.8(b)(i); SPA § 4.8(b)(i). 110 MIPA § 4.8(b)(v); SPA § 4.8(b)(v). 111 MIPA § 4.8(b)(iii); SPA § 4.8(b)(iii). 19 (5) the Sellers had “no Knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Lien on the assets of the [Sellers].”112

These statements are false. The Sellers had tax liabilities that were material

in the aggregate but undisclosed in the financial documents provided to the

Buyers.113 The Sellers had neither timely filed all tax returns nor paid all material

taxes.114 Existing tax liabilities risked liens on the Sellers’ assets.115

b. Knowledge or Reckless Indifference

“After showing that a false representation was made, a plaintiff must show

that the defendant had knowledge of the falsity of the representation or made the

representation with reckless indifference to the truth.”116 The record here lacks any

credible evidence that Brody knew his representations about the Sellers’ financial

status and outstanding tax liabilities were false when made. The Buyers thus focus

112 MIPA § 4.8(b)(viii); SPA § 4.8(b)(viii). 113 See Tipton Tr. 139-40, 175; McClain Tr. 305-09, 364; McClain Dep. 39. 114 See Brody 99; Brody Dep. 59 (“My understanding is that there were some taxes that were not paid by the entity.”); Tipton Tr. 174-75, 180-81, 188-89; McClain Tr. 306-07; JX 298; JXs 307-08; JX 310; JXs 312-15; JX 413. 115 See Tipton Tr. 177-79; McClain Tr. 339. 116 Great Hill, 2018 WL 6311829, at *32; see also Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 143 (Del. Ch. 2004) (explaining that fraud “require[s] a certain level of scienter on the part of the defendant; a misrepresentation must be made either knowingly, intentionally, or with reckless indifference to the truth” (citation omitted)). 20 on whether Brody acted with reckless indifference to the veracity of the

representations.

Recklessness is “conscious disregard for the truth” departing from the

ordinary standard of care.117 It involves “a conscious indifference to the decision’s

foreseeable results,”118 but not “[a] deliberate state of mind.”119 A plaintiff may

prove recklessness through circumstantial evidence, such as the timing of a

misrepresentation.120 Recklessness can also be inferred from misstatements about

matters “so simple, basic, and pervasive in nature, and so great in magnitude, that

they should have been obvious to a defendant.”121 Still, “a mere allegation that a

117 Maverick, 2020 WL 1655948, at *28; see also Deloitte LLP v. Flanagan, 2009 WL 5200657, at *8 (Del. Ch. Dec. 29, 2009) (describing recklessness as “an extreme departure from the standards of ordinary care”). 118 Wolf v. Magness Constr. Co., 1994 WL 728831, at *5 (Del. Ch. Dec. 20, 1994) (citation omitted). 119 Express Scripts, Inc. v. Bracket Hldgs. Corp., 248 A.3d 824, 834 (Del. 2021); see also Restatement (Third) of Torts: Liab. for Econ. Harm § 10(c) (Am. L. Inst. 2020) (noting that “‘reckless’ has a range of meanings in law” and that “[t]he recklessness sufficient to support a claim of fraud occurs when a speaker acts in conscious disregard of a risk that a statement is false, as by offering it without qualification while knowing that it may well be untrue”). 120 See Deloitte, 2009 WL 5200657, at *8; see also id. at *8 n.88. 121 NetApp, 2023 WL 4925910, at *14 n.197 (quoting PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 684 (6th Cir. 2004)); see also In re Oxford Health Plans Inc. Secs. Litig., 51 F. Supp. 2d 290, 295 (S.D.N.Y. 1999) (noting that recklessness could be inferred from “[a]n egregious refusal to see the obvious[] or to investigate the doubtful” (citation omitted)). 21 defendant ‘knew or should have known’ about a false statement is not sufficient to

plead the requisite state of mind.”122

The record lacks any evidence of a scheme to collect either sales taxes or

FUSF fees without remittance or payment—much less that Brody was aware of any

such scheme. Nor is there any evidence that state taxing authorities, the U.S.

Treasury Department, the Sellers’ employees, or the Sellers’ customers alerted

Brody to unpaid tax obligations. Instead, Brody credibly testified that he lacked

firsthand knowledge of the sales and use taxes due at the time the Purchase

Agreements were signed. Contrary to the Buyers’ contentions, there is also no

indication that Brody directed Jett to “massag[e] the numbers” before closing.123

The Buyers contend that Brody was reckless for four reasons. First, Brody

confirmed that he signed the Purchase Agreements, affirmed the representations and

warranties, and stood behind them.124 Second, Brody understood the gravity of

making representations and warranties in the Purchase Agreements and that the

Buyers would be relying on them.125 Third, despite these understandings, Brody

took no affirmative steps to confirm that these representations and warranties were

122 Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *14 (Del. Ch. Nov. 19, 2013) (citation omitted). 123 Buyers’ Answering Br. 11. 124 See Brody Tr. 81, 85-89. 125 See id. at 89-90. 22 true.126 And fourth, Brody later acknowledged the shortcomings in the

representations and warranties, stating that he would be more careful in the future.127

Taken together, these facts are insufficient to prove recklessness. As CEO,

Brody was not expected to personally review the Sellers’ tax bills and compare them

to the Sellers’ financial statements to make a representation and warranty on those

issues. Brody instead relied in good faith on Jett, who ran the business; and on

professional controllers and accounting personnel, who were charged with ensuring

the accuracy and completeness of the Sellers’ financial records.128 Brody’s reliance

on his management team and accounting professionals is what one would expect of

a CEO and part owner of a company. His reliance cuts against a finding of fraudulent

intent.129

126 See id. at 18, 77-78, 94-96. 127 See id. at 96-97. 128 See id. at 25-27 (Brody testifying that Jett and/or the Sellers’ controllers would provide financial information to outside accountants for review); id. at 24-26, 30-33, 48-49 (Brody explaining that he relied on professionals to handle the Sellers’ finances, including hiring an outside accounting firm to deal with USAC invoices). 129 See, e.g., S.E.C. v. Johnson, 174 Fed. Appx. 111, 115 (3d Cir. 2006) (“Good faith reliance on the advice of an accountant or another professional has been recognized as a viable defense to scienter in securities fraud cases.”); In re REMEC Inc. Sec. Litig., 702 F. Supp. 2d 1202, 1243 (S.D. Cal. 2010) (concluding that a CEO lacked intent to defraud regarding statements about the truthfulness of financial statements where he had “no accounting education” and swore “that he relied in good faith on inside and outside professionals to produce accurate financial reports”); Steed Fin. LDC v. Nomura Secs. Intern., Inc., 2004 WL 2072536, at *9 (S.D.N.Y. 2004) (explaining that a defendants’ good faith reliance on professional experts cut against any finding of scienter to commit fraud). 23 A comparison to NetApp v. Cinelli, where a CEO was found liable for reckless

misstatements about his company’s finances in a merger agreement, reveals the

weakness in the Buyers’ case against Brody. In NetApp, the company had a practice

of recording internal use of the company’s own software as revenue in its financial

statements.130 The CEO was not only aware of the practice but also had personally

mandated it.131 The artificially inflated financial statements were later given to the

acquirer in due diligence, and the target represented that the statements were accurate

and GAAP compliant.132 The CEO acknowledged that the internal billing practice

was “artificial” and “lacked an accounting basis.”133

Here, Brody was involved in the diligence process and occasionally oversaw

high-level strategy for managing payables.134 But there were no “warning signs.” 135

Unlike in NetApp, no facts suggest that Brody was involved in the Sellers’ tax

practices or that he had reason to suspect the Sellers had outstanding tax liabilities.

130 NetApp, 2023 WL 4925910, at *2-3. 131 Id. at *14 (finding that the “[i]nternal [b]illing practice was implemented at [the CEO’s] request”). 132 Id. at *6-7. 133 Id. at *14 (cleaned up). 134 E.g., JX 206 (Brody telling Jett to “clean up” old USAC invoices); Jett Day 1 Dep. 152-55. 135 Metro Commc’n, 854 A.2d at 147 (holding that a plaintiff failed to plead facts supporting an inference of recklessness because “there [wa]s no factual allegation indicating that [the] defendants consciously ignored specific warning signs”). 24 Perhaps Brody could have asked more questions about the Sellers’ financial

practices and tax compliance.136 But that is negligent conduct at most.137

“Recklessness is more than ‘inexcusable negligence.’”138

Because the Buyers have not proven that Brody recklessly made false

statements in the Purchase Agreements, judgment is in Brody’s favor on the Buyers’

fraud counterclaim.

2. Breach of Tax Indemnification

The Buyers originally sought indemnification under Article VII of the

Purchase Agreements for breaches of representations and warranties, in the

alternative to their fraud counterclaim.139 They voluntarily dismissed those breach

of contract counterclaims after they were ordered to escrow the disputed funds as a

136 See Brody Tr. 39 (“I was in the role of an investor. And if [Jett] said we had done the things that we needed to do and I didn’t have any reason to question it – maybe I should have, but I didn’t – then I would have signed it . . . .”); id. at 77-78 (testifying that he did not confirm whether USAC invoices were paid before closing); supra note 127 and accompanying text. 137 To be clear, the Buyers have not proven that Brody was negligent. 138 NetApp, 2023 WL 4925910, at *14 (quoting In re Wayport, Inc. Litig., 76 A.3d 296, 326 (Del. Ch. 2013)). 139 Those counterclaims involved the representations and warranties in Sections 4.6 and 4.8 of the Purchase Agreements discussed above. See DCiM Countercls. ¶¶ 75-80; iGEM Countercls. ¶¶ 102-07. 25 prerequisite to pursuing them. Now, they seek relief under a tax indemnification

provision in Section 6.5 of the Purchase Agreements.140

To prevail on a breach of contract claim, a party must prove the existence of

a contractual obligation, the breach of that obligation, and resulting damages.141

“When interpreting a contract, the role of a court is to effectuate the parties’ intent.

In doing so, [the court is] constrained by a combination of the parties’ words and the

plain meaning of those words where no special meaning is intended.” 142 Of

“paramount importance” is what “a reasonable person in the position of the parties

would have thought the language of a contract means.”143 The court will “give

priority to the parties’ intentions as reflected in the four corners of the agreement”

by construing the agreement as a whole and giving effect to all included

provisions.144

140 Buyers’ Opening Br. 45-47; see also DCiM Countercls. ¶¶ 102-07; iGEM Countercls. ¶¶ 75-80. 141 See VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003). 142 Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006). 143 Id. (citation omitted). 144 GMG Cap. Invs., LLC v. Athenian Venture P’rs I, 36 A.3d 776, 779 (Del. 2012). 26 a. The Scope of Section 6.5(e)

The Buyers contend that Brody breached a duty in Section 6.5(e) of the

Purchase Agreements to indemnify, defend, and hold them harmless for unpaid

pre-closing tax liabilities.145 Section 6.5(e) states:

The [Selling Shareholders or Selling Members] will, severally and not jointly, indemnify and defend the [Sellers], the [Buyers], and each Affiliate of the [Buyers], and hold them harmless from and against any loss, claim, liability, expense, penalty or other damage attributable to [] all Taxes (or the non-payment thereof) of each [Seller] for all Pre-Closing Tax Periods . . . .146

The Buyers believe that this provision imposes on Brody a broad duty to satisfy the

Sellers’ pre-closing tax liabilities, including IIS’s unpaid sales taxes and Velocity’s

unpaid FUSF fees. Section 6.5(e) was breached, they argue, because Brody has

refused to satisfy this duty.

Brody does not dispute that he refused to indemnify the Buyers for the Sellers’

pre-closing tax liabilities. Instead, he insists that the Buyers are only entitled to seek

indemnification for claims that tax authorities have formally pursued. He points to

Section 6.5(d) of the Purchase Agreements, which outlines a process to handle

“notice of a claim by any Taxing authority that, if successful, could reasonably be

expected to result in an indemnity payment . . . .”147 Applying that narrow limit to

145 Buyers’ Opening Br. 45-46. 146 MIPA § 6.5(e); SPA § 6.5(e). 147 MIPA § 6.5(d); SPA § 6.5(d) (emphasis added). 27 Section 6.5(e), Brody asserts that the Buyers have identified just one indemnifiable

claim.148

Yet nothing in the Purchase Agreements suggests that the process to respond

to tax “claims” in Section 6.5(d) limits the tax indemnification remedy in

Section 6.5(e). Nor does Section 6.5(e) state that a “claim” is necessary to trigger

the Sellers’ duty to “indemnify,” “defend,” and “hold . . . harmless.”149 To limit

Section 6.5(e)’s reach to “claims” would render the other terms in the phrase “any

loss, claim, liability, expense, penalty, or other damage” superfluous.150

For example, Section 6.5(e) applies to a “liability,” which does not require a

formal claim. Black’s Law Dictionary defines “liability” as “[t]he quality, state, or

condition of being legally obligated or accountable” or “[a] financial or pecuniary

obligation in a specified amount.”151 A tax liability exists when taxes are owed to

the government.152 Brody’s narrow reading is thus unsupported by the terms of

Section 6.5(e).

148 Brody’s Opening Br. 40-41. 149 MIPA § 6.5(e); SPA § 6.5(e). 150 Id.; see Sunline Com. Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 847 (Del. 2019) (“The contract must . . . be read as a whole, giving meaning to each term and avoiding an interpretation that would render any term ‘mere surplusage.’” (quoting Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010))). 151 “Liability,” Black’s Law Dictionary (12th ed. 2024). 152 See Understanding Taxes: Glossary, Internal Revenue Service, https://apps.irs.gov/app/understandingTaxes/teacher/glossary.jsp (last visited June 29, 2025) (defining “tax liability” as “[t]he amount of tax that must be paid”); Tax Liability: 28 Brody next argues that Velocity’s past-due FUSF fees are not taxes for

purposes of Section 6.5(e).153 Once again, this argument is inconsistent with the

terms of the Purchase Agreements. Section 6.5(e) uses the term “Taxes,” which is

defined in the Purchase Agreements as:

any and all U.S. federal, state, local and non-US. taxes, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, social security (or similar), unemployment, disability, excise and property taxes, assessments and other governmental charges, duties, impositions and liabilities in the nature of a tax, together with all interest, penalties and additions imposed with respect to such amounts . . . .”154

This unambiguous definition encompasses FUSF fees, which constitute

“government charges . . . in the nature of a tax” along with “penalties.”155

Definition, Calculation, and Example, Investopedia, https://www.investopedia.com/terms/t/taxliability.asp (last updated May 26, 2025) (describing a tax liability as an amount “owed to the government in taxes” and explaining that one has a liability when income is earned or profits are generated). 153 Brody’s Opening Br. 45 n.18. 154 MIPA § 4.8(a); SPA § 4.8(a) (emphasis added). 155 See Rindahl v. Oliver, 2020 WL 5901693, at *2 (E.D. Va. Mar. 20, 2020) (describing FUSF fees as a “‘FUSF’ tax”). In July 2024, the United States Court of Appeals for the Fifth Circuit ruled that the FCC’s FUSF scheme violates the nondelegation doctrine by assigning its taxing power to private entities. See Consumers’ Rsch. v. Fed. Commc’ns Comm’n, 109 F.4th 743, 748 (5th Cir. 2024), cert. granted sub nom. Sch., Health & Librs. Broadband Coal. v. Consumers’ Rsch., 45 S. Ct. 587 (2024). The Supreme Court granted certiorari on the matter and oral argument was presented on March 26, 2025. Consumers’ Rsch., 145 S. Ct. 587. It seems unlikely that the Supreme Court’s pending decision on whether FUSF fees 29 b. Damages

Although Section 6.5(e) is broad enough to encompass tax liabilities and

outstanding FUSF fees, the Buyers cannot presently recover damages for much of

what they seek. “[I]ndemnity is an obligation by one party to make another whole

for a loss that the other party has incurred.”156 The point of indemnification is

“repaying a loss to make the indemnitee whole.”157 The “paradigmatic example” of

an indemnity obligation is to reimburse an indemnitee who has paid a third party “a

sum certain.”158

There is only one sum certain here: the $49,289.52 in taxes, interest, and

penalties that DCiM paid to the State of Washington.159 Had the Buyers paid other

tax obligations that the Sellers owed pre-closing, Section 6.5(e) would have provided

them recourse. They chose not to pay the tax bills for the companies they had

are an extension of the FCC’s taxing power will bear on the issues in this case, which concern the payment of FUSF fees previously owed. 156 Christiana Care Health Servs. Inc. v. Carter, 223 A.3d 428, 431 n.7 (Del. 2019) (quoting 41 Am. Jur. 2d Indemnity § 1 (2025)). 157 Hill v. LW Buyer, LLC, 2019 WL 3492165, at *10 (Del. Ch. July 31, 2019). 158 Levy v. Hayes Lemmerz Int’l, Inc., 2006 WL 985361, at *11 (Del. Ch. Apr. 5, 2006). 159 McClain Tr. 363-64; JX 419 (letter to IIS dated June 4, 2020); JX 435. Brody does not refute that DCiM paid the State of Washington approximately $50,000. See Brody’s Opening Br. 39-40. 30 purchased, but to wait for a damages award years later after interest and penalties

accrued.160

The Buyers insist they are entitled to more because Section 6.5(e) imposes a

duty to “defend” and “hold harmless.”161 Neither term supports what the Buyers

seek, which is essentially advancement of tax liabilities.

Delaware courts decline to give separate meanings to “indemnify” and “hold

harmless,” viewing them as “an example of the law’s hoary tradition of deploying

joint terms . . . where technically one term would suffice.”162 “‘[H]old harmless’

does not mean advancement,” because when one is indemnified for “all out of pocket

expenses,” she is “left free from harm” and “made whole.”163 As to “defend,” it is

understood in this context to create a right to advancement of litigation expenses.164

160 Brody argues that the Buyers failed to mitigate their damages by refusing to pay the outstanding tax balances. See Brody’s Opening Br. 49-50. Because I find that the Buyers are not entitled to indemnification for the unpaid balances that they may well never pay, I need not address Brody’s mitigation argument. 161 See Buyers’ Opening Br. 46 (“The duty to defend has been found by Delaware courts to be independent of and broader than the duty to indemnify.”). 162 Quadrant Structured Prods. Co., Ltd. v. Vertin, 106 A.3d 992, 1024-25 (Del. 2013); see also Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 588 (Del. Ch. 2006) (noting that “[t]he terms ‘indemnify’ and ‘hold harmless’ have a long history of joint use throughout the lexicon of Anglo–American legal practice”). 163 Majkowski, 913 A.2d at 591. 164 Fillip v. Centerstone Linen Servs., LLC, 2013 WL 6671663, at *6 (Del. Ch. Dec. 3, 2013) (“[T]he reference to [the] duty to ‘defend’ managers and officers created a mandatory right to advancement of litigation expenses.”); see also Majkowski, 913 A.2d at 589 n.39 (“[T]he obligation to ‘defend’ comes closer to suggesting the active employment of attorneys and continual payment as the attorneys’ fees are incurred.”).

31 The Buyers are not embroiled in any active dispute for which they ask Brody to

defend them. They are asking Brody to front the payment of liabilities that are now

many years stale.

Even if Section 6.5(e) contemplated the sort of tax advancement right that the

Buyers envision (it does not), they have failed to prove their damages with any

“reasonable certainty.”165 To show their losses, the Buyers rely on their proffered

expert, Joseph W. Thompson.166 Thompson prepared calculations designed to

estimate the tax burdens that could be borne by the Buyers. But he lacked the

documentary invoices necessary to determine the principal, interest, and penalties

assessed by the relevant tax authorities.167 Without that data, he could only speculate

about the sums past due.168

165 Siga Techs., Inc. v. PharmAthene, Inc., 132 A.3d 1108, 1111 (Del. 2015); see id. at 1151 n.87 (“The law requires that this evidence shall not be so meager or uncertain as to afford no reasonable basis for inference.” (citing 5 Corbin on Contracts § 1022 (rev. ed. 1964))). See JX 433 (“Thompson Rep.”). Thompson is a Certified Financial Analyst and an 166

Accredited Senior Appraiser who is currently a Principal at The Griffing Group. Id. at App’x B. 167 Thompson Tr. 408-09, 421-22. 168 Id. at 422 (Thompson: “I’m speculating, but the math makes sense.”); id. at 404-06 (describing his approach to determining the Sellers’ valuations and the debt owed); see also Pina Tr. 458 (Brody’s rebuttal expert: “I believe a component of their damages related to taking . . . was essentially a forecast or speculation on what actual data was available for analysis.”); id. at 498-99 (“They’re asking for a damage [sic] of 150 round dollars, but there’s nothing that you can tick and tie back to . . . support those numbers.”). 32 For the FUSF fees owed by Velocity, Thompson approximated the total by

calling the U.S. Treasury Department.169 According to Thompson, a Treasury

representative referred to only as “Kevin” relayed over the phone that Velocity owed

over $408,000.170 Kevin purportedly declined to provide documentation of that

figure.171 As an evidentiary matter, this hearsay is poor support for a nearly half-a-

million dollar liability. I give it no weight.172

The documentary evidence is also problematic. Three weeks before trial—

and three years after the deadline for document production—the Buyers produced

documents purportedly showing Velocity’s FUSF-related liabilities.173 Four sets of

documents contain account statements sent by the U.S. Treasury to Velocity for

overdue FUSF charges.174 The statements are all dated September 30, 2024 and list

169 Thompson Tr. 406-07. 170 Thompson Rep. 24-25; id. at 25 n.70 (citing a “nearly two-hour call with ‘Kevin’ from the U.S. Treasury, conducted on April 25, 2024” as the sole source for this figure); see Thompson Tr. 420. Thompson believes that Kevin is an account representative. Thompson Dep. 27. 171 Thompson Tr. 407. 172 Before trial, Brody filed a motion in limine to exclude evidence from the call with Kevin. Dkt. 246; Dkt. 273 at 35. After hearing the testimony from Tipton and Thompson about the call, I conclude that it is not entitled to evidentiary weight. 173 See Dkt. 265; see also Dkts. 272-73. 174 JXs 461-64. 33 liabilities totaling approximately $420,179.42.175 The other set of documents

contains correspondence from a third-party debt collector dated September 10 and

27, 2024, seeking payment of $2,115.70.176

The documents provide few answers but raise additional questions. The U.S.

Treasury account statements concern “different debts” and cannot be tied to specific

USAC invoices.177 Some of the statements use “agency debt numbers” and case

numbers that follow no consistent format, making it impossible to determine when

certain debts originated or whether they concern an actual obligation of Velocity.178

Without invoice-level documentation, I have no reliable way to reconcile or verify

what Velocity owed pre-closing.179 Neither party’s expert had occasion to review

these documents or incorporate them into their reports.

At trial, Thompson ballparked that, based on the $408,079.23 figure from

Kevin in April 2024, Velocity was responsible for between $200,000 and $300,000

in FUSF liabilities at the time of closing—inclusive of interest, penalties, and

175 Tipton testified that the documents have the same date because the U.S. Treasury representative he spoke to “regenerated” the documents while he was on hold during a phone call. Tipton Tr. 187. 176 JX 465. 177 Thompson Tr. 424; see id. at 421. 178 See Tipton 272-74; see, e.g., JX 464 at ‘5267. 179 See Thompson Tr. 421-22; Tipton Tr. 192-93. 34 third-party fees.180 He acknowledges, though, that he lacks the records to confirm

these amounts.181

Regarding IIS, Thompson identified $520,420 of principal owed for sales and

use taxes.182 He explained that the sums were identified through a “bottom-up

approach” by looking at IIS’s general ledger and certain invoices.183 He estimated

another $150,000 in fees and additional costs but acknowledged that he lacked the

documentation to confirm that figure.184

Even if there were responsible evidentiary bases from which to estimate IIS

and Velocity’s tax and FUSF liabilities before closing (there is not), the record

suggests that an award of all outstanding tax liabilities is unwarranted. The Buyers

have suffered no actual loss—save the $49,289.52 paid to Washington.185 Critically,

the record suggests that the other liabilities will never be paid. The U.S. Treasury

statements concern an account held by Velocity that iGEM no longer uses.186 And

180 Thompson Tr. 402, 408; Thompson Rep. 24-25. 181 Thompson. Tr. 408. 182 Thompson Rep. 3, 29-30; see Thompson Tr. 412. 183 Thompson Tr. 412-13. 184 Thompson Rep. 30-31; see Thompson Tr. 415 (explaining that he used the State of Washington’s approach as a proxy). 185 JX 419; JX 435. 186 Tipton Tr. 179-80. 35 as for IIS’s state taxes, DCiM has no intention of paying them; it is defunct.187

Indemnification is meant to make the indemnitee whole, not to provide a windfall to

the indemnitee or serve as a penalty to the indemnitor.188

3. Brody’s Affirmative Defenses

Brody asserts that the Buyers are entitled to no recovery for two reasons. First,

he accuses the Buyers of material breaches of the audit process outlined in the

Purchase Agreements.189 I address that argument below in the context of Brody’s

affirmative breach of contract claim.190 Second, he argues that the doctrine of

unclean hands applies—also due to the Buyers’ abandonment of the contractual

audit process. Both defenses fail.

The doctrine of unclean hands “protect[s] the public and the court against

misuse by one who, because of his conduct, has forfeited his right to have the court

consider his claims, regardless of their merit.”191 “[I]n order for the doctrine to apply

187 McClain Tr. 373-74; McClain Dep. 106-07; see supra note 28. 188 See Hill, 2019 WL 3492165, at *10 (“[The] [b]uyer could seek indemnification—and reap a windfall—for speculative [l]osses that it never actually suffered. Such a payment would be antithetical to the concept of indemnification . . . .”); see also Horton v. Organogenesis Inc., 2019 WL 3284737, at *4 (Del. Ch. July 22, 2019) (“[T]he purpose of the [m]erger [a]greement’s indemnification provisions” is “to indemnify and hold harmless the indemnitee from and against [l]osses incurred”); supra notes 156-158 and accompanying text. 189 Brody’s Opening Br. 53-54. 190 See infra note 222. 191 Skoglund v. Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976). 36 in the first place, the improper conduct must relate directly to the underlying

litigation.”192 The relation must be “‘immediate and necessary’ . . . to the claims for

which the plaintiff seeks relief.”193

Brody cites no direct relationship between his refusal to provide tax

indemnification and the Buyers’ failure to complete the contractual audit process.

He argues only that the Buyers “should not be permitted to reject certain portions of

the SPA and MIPA, while wielding others.”194 This link is too tenuous. I decline to

apply the doctrine to bar the Buyers from recovering for the limited damages they

proved.195

B. Brody’s Claims and the Buyers’ Affirmative Defense

Brody seeks a declaratory judgment that the Buyers failed to cooperate in the

audit process mandated by the Purchase Agreements. He asserts that the Purchase

Agreements were breached when the Buyers interfered with the audit and refused to

sign a new engagement letter with the Auditor.196 In the alternative, Brody claims

192 Nakahara v. NS 1991 Am. Tr., 718 A.2d 518, 523 (Del. Ch. 1998). 193 Macrophage Therapeutics, Inc. v. Goldberg, 2021 WL 2582967, at *16 (Del. Ch. June 23, 2021) (citation omitted). 194 Brody’s Opening Br. 55. 195 See RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 876 (Del. 2015) (explaining that “whether to apply the doctrine of unclean hands” is a matter of the court’s discretion) (citation omitted). 196 Brody’s Opening Br. 51-52. 37 that the Buyers breached the implied covenant of good faith and fair dealing by

“threatening the Audit with malpractice and then refusing to sign” a revised

engagement letter.197 Brody also insists that the Buyers are in default on the Note,

which is “immediately due and payable.”198 In response to these claims, the Buyers

advance an equitable estoppel defense.

Brody prevails on his breach of contract claim because the Buyers breached

their obligations regarding the audit process. They also are in breach of their

obligation to pay Brody the principal and balance due on the Note. The Buyers’

equitable estoppel defense gives them no recourse.

1. Breach of the Audit Process199

Under the Purchase Agreements, if the parties could not resolve a

disagreement over the closing working capital calculation, the Auditor would

“resolve any remaining disagreements.”200 The parties were to “use their respective

commercially reasonable efforts to cause the Auditor to determine as promptly as

practicable” any working capital adjustments.201 They were also required to

197 Id. at 52-53. 198 Id. at 55. 199 See supra note 144 and accompanying text (listing the elements for a breach of contract claim and applicable principles of contract interpretation). 200 MIPA § 2.5(c); SPA § 2.5(c). 201 Id. 38 “cooperate with the Auditor in its determination of such disputed amounts . . . .”202

The parties agreed to treat the Auditor’s determination of closing working capital as

“final, conclusive, and binding.”203

The Auditor’s November 28, 2017 “final report” for Velocity was improper

because its “decision for each disputed amount” was not “within the range of values

ascribed to each item” by the parties, as the Purchase Agreements required.204 When

Tipton raised questions, the Auditor explained that, after adjusting certain disputed

items within the limits of values the parties ascribed, “[t]he financial outcome to

both parties remain[ed] the same . . . .”205 Tipton then sent more information to the

Auditor that he believed was needed to make the report “accurate.”206

202 Id. The full text of this term states: The Parties shall cooperate with the Auditor in its determination of such disputed amounts or changes and shall be entitled to address the Auditor in order to present any facts and arguments that such Party deems relevant to the Auditor’s determinations and conclusions regarding the disputed amounts subject to review . . . . Id. SPA § 2.7(b) (stating that “the determination of the Auditor . . . shall be final, conclusive 203

and binding on the Parties.”); MIPA § 2.6(b) (same). 204 MIPA § 2.5(c); SPA § 2.5(c) (“The Auditor shall only decide the specific items under dispute by the Parties and its decision for each disputed amount must be within the range of values ascribed to each such item by the Purchaser and the Selling Shareholder Representative.”); see Tipton Tr. 218-21; JX 359 at ‘0201-02. 205 JX 359 at ‘0201 (providing revised calculations for adjusted EBITDA); see also JX 361 at ‘0297; Tipton Dep. 84-89. 206 JX 359 at ‘0199. 39 The next day, Tipton berated the Auditor, insisting that its “report [wa]s

WRONG.”207 He told the Auditor that he “suspect[ed] its professional liability

carrier would [not] appreciate [the Auditor] insisting an obvious and admitted

inaccurate work product [wa]s final.”208 Internally, Tipton told McClain and

Cunningham that they were “at [a] point where EBITDA goes from being in [the]

[S]ellers[’] favor to being in [the Buyers’] favor,” giving them a potential

“recovery.”209 He said that if the Auditor was “thinking [the Buyers] [we]re less

likely to make a claim on their professional liability coverage than [Brody,] [t]hey

[we]re wrong. ”210 In response, Cunningham suggested that they “try to get

ahead of what [the Auditor] may render for [McClain] on the IIS side.”211

The Auditor expressed its willingness to consider other arguments from

iGEM, so long as the parties signed revised engagement letters with indemnification

207 JX 371 at ‘0214; see also Tipton Dep. 88-93; McClain Dep. 137-38. 208 JX 368; see also Brody Tr. 51-52. 209 JX 287. 210 Id. 211 Id. 40 provisions and additional retainers.212 Brody consented;213 the Buyers refused.214

The Buyers insisted that the Auditor commit to certain “definitions, language and

processes” upfront, which the Auditor viewed as a “full scale re[-]write of the

agreement” that risked imposing “undue influence” on it.215

McClain suggested to Cunningham and Tipton that the Buyers “push to

terminate [the Auditor] and move forward against [the] Seller[s].”216 McClain and

Tipton considered letting the Auditor “keep [its] fees” and “hold [a] liability claim

over their head” to maintain “leverage” against Brody.217 Tipton agreed, writing that

“nothing would make [him] happier than to hand deliver the professional liability

claim to [the Auditor]. ”218 By March 2018, the audit process had ceased.

These actions by the principals of the Buyers breached Section 2.5(c) of the

Purchase Agreements.219 First, iGEM refused to treat the Auditor’s report for

212 JX 371 (“We are happy to revisit any of your points, but not without written consent by both parties. If you wish us to re-open, you will need Richard Brody to agree as well. If both parties are in agreement, we will draft a separate engagement letter.”); see also Brody Tr. 54; JX 460 at ‘6741-42; JX 384 at ‘6409-11. 213 Brody Tr. 54; see JX 384 at ‘6407. 214 See JXs 404-05; JX 460 at ‘6739; JX 384; JX 380. 215 JX 384 at ‘6404, ‘6408; see JX 380. 216 JX 405 at ‘6900. 217 JX 404 at ‘6887. 218 Id. 219 Brody advances an implied covenant claim, in the alternative, for DCiM’s and iGEM’s misconduct regarding the audit process. Because I conclude that express terms of the Purchase Agreements were breached, there are no grounds to consider this alternate theory. 41 Velocity as final. When the Auditor tried to work with iGEM, iGEM threatened a

professional liability claim rather than cooperate with the Auditor. As for DCIM, it

did not employ commercially reasonable efforts for the Auditor to reach a

determination for IIS. The Buyers were more concerned with positioning

themselves for litigation. Both seemed determined to reject any result that did not

support a post-closing adjustment in their favors.

The Buyers contend that the audit process “failed” when new tax liabilities

were discovered because the Purchase Agreements did not address later-discovered

discrepancies.220 They argue that the audit process provided only a narrow

mechanism, unrelated to the fraud and contractual breaches they insist were

suffered.221 But the Buyers could have pursued their fraud and indemnification

claims irrespective of the audit’s outcome. The Purchase Agreements mandated that

they complete the audit process through cooperation and commercially reasonable

efforts.222 They failed to uphold that promise.

See Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1032 (Del. Ch. 2006) (explaining that an “implied covenant analysis will only be applied when the contract is truly silent with respect to the matter at hand”). Brody is entitled to one recovery. See Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251, 1277 (Del. 2021) (describing the double recovery rule). 220 Buyers’ Opening Br. 51. 221 Id. at 50-51. 222 Brody argues that the Buyers should not obtain any recovery under the tax indemnification provision in Section 6.5(e) because they breached the audit process. See Brody’s Opening Br. 53-54. But unless the breach “go[es] to the substance of the contract,” 42 2. Failure to Pay the Note

Brody also claims that the Buyers forfeited any right to obtain an adjustment

on the Note due to their refusal to cooperate in the audit process. 223 He seeks a

declaration that the Note is due and payable to him immediately.224

The original value of the Note was $2 million, which formed part of the total

purchase price for the Sellers’ businesses.225 The Note was promised by DCiM for

it will not permit the nonbreaching party to evade performance. Preferred Inv. Servs., Inc. v. T & H Bail Bonds, Inc., 2013 WL 3934992, at *10 (Del. Ch. July 24, 2013) (“A slight breach of contract by one party, while giving rise to an action for damages, will not necessarily terminate the obligations of the injured party to perform under the contract.”), aff’d sub nom. Preferred Inv. Servs., Inc. v. T & H Bail Bond, Inc., 108 A.3d 1225 (Del. 2015); see also BioLife Sols., Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003) (“The question whether the breach is of sufficient importance to justify non-performance by the non-breaching party is one of degree.” (citation omitted)). The Buyers’ noncompliance with the audit process is distinct from their tax indemnification right. Brody cites several cases where the failure to follow contractually-mandated dispute resolution procedures constituted a material breach. But those cases concern disputes or claims that were never submitted to the applicable mandatory pre-suit dispute resolution procedures in the first place. See Lennox Indus. Inc. v. All. Compressors LLC, 2020 WL 4596840, at *4 (Del. Super. Aug. 10, 2020); Fernstrom v. Trunzo, 2017 WL 6028871, at *4 (Del. Ch. Dec. 5, 2017), aff’d sub nom. Fernstrom v. Ellis Point Condo. Ass’n, Inc., 198 A.3d 178 (Del. 2018); Millsboro Fire Co. v. Constr. Mgmt. Serv., Inc., 2009 WL 846614, at *4 (Del. Super. Mar. 31, 2009); Commonwealth Const. Co. v. Cornerstone Fellowship Baptist Church, Inc., 2006 WL 2567916, at *15 (Del. Super. Aug. 31, 2006). 223 Brody’s Opening Br. 55-56. 224 Id.; see Compl. ¶ 50. 225 See MIPA 3 (defining “Aggregate Purchase Price”); SPA 2 (same); SPA § 2.2. 43 its purchase of IIS and guaranteed by iGEM under a Guarantee Agreement.226 The

Note was to be:

paid in up to ten (10) equal payments of principal in the amount of Two Hundred Thousand Dollars ($200,000) each, plus accrued but unpaid interest, commencing on March 31, 2017 and continuing thereafter on the last day of each succeeding calendar quarter thereafter with the final installment to be made on June 30, 2019, at which time this Note shall mature and all unpaid principal and interest hereunder shall be due and payable in full.227

Schedule 1.1(ii) to the SPA outlined the payment schedule for the Note:228

Subordinated Note Payment Date Payment* Principal Balance After Payment* 10/1/16 $2,000,000 3/31/17 $(200,000) $1,800,000 6/30/17 $(200,000) $1,600,000 9/30/17 $(200,000) $1,400,000 12/31/17 $(200,000) $1,200,000 3/31/18 $(200,000) $1,000,000 6/30/18 $(200,000) $800,000 9/30/18 $(200,000) $600,000 12/31/18 $(200,000) $400,000 3/31/19 $(200,000) $200,000 6/30/19 $(200,000) $0.00 * plus interest

226 See MIPA 5 (defining “Guaranty Agreement”); id. at 7 (defining “Promissory Note”). 227 Note § 1(a). The Note is governed by Delaware law. Id. § 11. 228 SPA sched. 1.1(ii) at ‘5281; MIPA sched. 1.1(ii) at ‘5551; see also MIPA 8 (defining “Scheduled Note Balance” as “the scheduled principal and accrued but unpaid interest expected to be outstanding under the Promissory Note set forth on Schedule 1.l(ii) prior to giving effect to any payments or reductions made thereunder in accordance with Article VII”). 44 Under the Note, the unpaid principal would accrue interest at the “prime rate

of U.S. commercial banks as published in The Wall Street Journal . . . calculated on

each payment date with respect [to] the portion of the [p]rincipal [b]alance being

repaid.”229 If there were an “Event of Default,” that interest rate would be “increased

by five percent.”230

The Purchase Agreements and Note’s terms contemplated certain setoffs and

adjustments to the Note balance. If the Sellers were entitled to indemnification under

Article VII of the Purchase Agreements, the Buyers would “have a right of off-set

against the [] Note for any amounts payable to them.”231 The Note was also subject

to “adjustments required pursuant to Section 2.5 of the [] Purchase Agreements”

upon the completion of the audit process.232 DCiM would be in default if it failed to

229 Note § 1(c). 230 Id. § 1(d). 231 SPA § 7.4(c); see id. § 7.6(a); MIPA § 7.6(a); Note § 2 (“Subject to the limitations set forth in the [] Purchase Agreements, [DCiM] shall be entitled to (i) set-off and reduce any amount due and/or payable hereunder in the event of an indemnification claim under the [] Purchase Agreements (a ‘Liability Claim’) by DCiM or iGEM . . . .”). DCiM could also make payments to iGEM if iGEM claimed indemnification under Article VII of the Purchase Agreements. Note § 2. Section 6.5(f) of the Purchase Agreements also contemplate that payments under Article VI could reduce any payments owed to the Selling Members/Selling Shareholders. SPA § 6.5(f); MIPA § 6.5(f); see infra note 234 (discussing these provisions). 232 Note § 2; see MIPA § 2.5(c) (stating that upon the “Determination Date”—i.e., the “date on which Final Closing Working Capital” was “finally determined” under Section 2.5(c) by the Auditor—certain shortfalls could be deducted “directly from the Note Balance”). 45 make a payment to Brody subject to these provisions within 15 business days of

receiving a “receipt of written notice of such failure to pay.”233

Neither DCiM (the borrower) nor iGEM (the guarantor) has ever made a

payment to Brody under the Note. The two issues that arguably gave them latitude

to withhold payment—post-closing working capital adjustments by the Auditor and

indemnification claims under Article VII of the Purchase Agreements—fell away.

The potential for a reduction under Section 2.5(c) of the Purchase Agreements ended

when the Buyers refused to cooperate in completing the audit process. And the

possibility of a set-off for indemnification was eliminated when, in August 2023, the

Buyers voluntarily dismissed their claims for breaches of representations and

warranties in Article VII rather than put the disputed funds in escrow.234

Brody never sent a formal written notice of the Buyers’ failure to pay, which

would have triggered an “Event of Default” under the Note.235 But the pre-trial

233 Note § 3(a). 234 See Dkt. 206; PTO ¶ I.A.7; see also Dkt. 172 (granting partial summary judgment in Brody’s favor on his argument that the Buyers were obligated under Section 7.6(b)(iii) of the Purchase Agreements to put the disputed funds in escrow). The tax indemnification provision in Section 6.5(e) discussed above is not in Article VII. By the Purchase Agreements’ terms, Section 6.5(e) is not included in the “adjustments” contemplated by the definition of “Purchase Price.” MIPA § 2.2; SPA § 2.2 (stating that the purchase price is “subject to the adjustments provided for in this ARTICLE II and ARTICLE VII”). Although Section 6.5 also confers a right to reduce payments, it applies only to “any and all payments payable to the Selling Shareholders[/Members].” MIPA § 6.5(f); SPA § 6.5(f). The Note is only payable to Brody in his capacity as “Noteholder.” Note ‘5567. 235 Note §§ 3(a), 4; see also JX 266 (closing binder) Tab B.6 (iGEM Guaranty Agreement) ‘5585 (“Guaranty Agreement”) § 1. 46 stipulation and Brody’s pre-trial brief no doubt serve that purpose. In those

documents, which were served on the Buyers,236 Brody wrote that the Note was due

in full and payable immediately due to an event of default.237 The Buyers were

therefore on notice of DCiM’s default by October 4, 2024—at the latest.238 At that

point in time, DCiM’s debt to Brody became due.239

Brody’s opening post-trial brief also informed the Buyers that DCiM had

failed to make good on its debt, which served as written notice to iGEM of DCiM’s

non-payment under the Guaranty Agreement.240 The Buyers lacked grounds to

withhold that portion of the purchase price at that point. By failing to pay Brody the

outstanding principal and interest on the Note, the Sellers breached obligations under

the Purchase Agreements, Note, and Guaranty Agreement.

236 See Note § 7. 237 PTO ¶ IV.A.i; Pl. and Countercl. Def. Richard Brody’s Pre-trial Br. (Dkt. 260) 32-33. 238 See Dkt. 260. 239 Note § 3(a). 240 Guaranty Agreement § 1 (“Guarantor shall not be required to pay the Guaranteed Indebtedness unless and until it receives written notice from the Noteholder . . . of DCiM's failure to pay prior to the expiration of the Grace Period the principal and interest amount that has become due and payable by DCiM to the Noteholder under the Note. Guarantor shall pay such due and owing Guaranteed Indebtedness within five (5) Business Days of receiving the [n]otice.”). The Guaranty Agreement states that “delivery of the notice to [iGEM] by [Brody] pursuant to Section 3(a) of the Note shall not constitute delivery of the Payment Notice under . . . Section 1” of the Guaranty Agreement. Guaranty Agreement § 1. 47 3. Equitable Estoppel

The Buyers argue that “[b]ecause Brody engaged in fraudulent or similar

conduct that caused [the Buyers] to overpay for the [c]ompanies by millions of

dollars prior to the entry of the Purchase Agreements, he is equitably estopped from

recovering on the Note.”241 To succeed on this affirmative defense,242 the Buyers

must prove:

(1) conduct by the party to be estopped that amounts to a false representation, concealment of material facts, or that is calculated to convey an impression different from, and inconsistent with that which the party subsequently attempts to assert, (2) knowledge, actual or constructive, of the real facts and the other party’s lack of knowledge and the means of discovering the truth, (3) the intention or expectation that the conduct shall be acted upon by, or influence, the other party and good faith reliance by the other, and (4) action or forbearance by the other party amounting to a change of status to his detriment.243

“[T]he standards for establishing the elements of equitable estoppel are stringent;

the doctrine is applied cautiously and only to prevent manifest injustice.”244

241 Buyers’ Opening Br. 47. 242 During post-trial arguments, the Buyers conceded that equitable estoppel is an affirmative defense, not a claim (as it was pleaded). Post-trial Tr. 85-86. Equitable estoppel is instead a defense under Court of Chancery Rule 8. Ct. Ch. R. 8(c)(2) (“If a party mistakenly designates a defense as a counterclaim, or a counterclaim as a defense, the Court must, if justice requires, treat the pleading as though it were correctly designated, and may impose terms for doing so.”). 243 Olson v. Halvorsen, 2009 WL 1317148, at *11 (Del. Ch. May 13, 2009) (quoting Cornerstone Brands, Inc. v. O’Steen, 2006 WL 2788414, at *3 n.12 (Del. Ch. Sept. 20, 2006)), aff’d, 986 A.2d 1150 (Del. 2009). 244 Pilot Point Owners Ass’n v. Bonk, 2008 WL 401127, at *2 (Del. Ch. Feb. 13, 2008). 48 The Buyers cannot prevail on this defense for many of the same reasons that

their fraud claim failed. Brody knew that the Buyers were relying on his

representations and warranties, and some of those representations proved false. But

the record lacks credible evidence suggesting that Brody had actual or constructive

knowledge that there were significant unpaid sales and use taxes.245 The Buyers

have also not shown that they lacked means to learn the truth while they had access

to the Sellers’ books and records during due diligence.246 The Sellers are not

estopped from recovering on the Note.

III. REMEDIES

On the one hand, the Note is owed to Brody and remains unpaid. On the other

hand, the Buyers purchased companies with greater tax liabilities than they

anticipated. A balanced resolution of these competing interests would seem

equitable. Yet the trial record on the remaining claims leaves no measure to offset

the Note, making the remedy one of the more challenging aspects of this case.

Because the audit process was never completed, I cannot say with any

certainty that no working capital adjustments to the Note are technically called for.

245 See supra Section II.A.1.b. 246 Despite finding discrepancies in the Sellers’ disclosures, the Buyers chose not to question the Sellers’ tax liabilities until after closing. See JX 247; McClain Tr. 362; cf. NetApp, Inc., 2023 WL 4925910, at *14 (“[A] party who gains actual knowledge of the falsity of a representation, structures a contract to address the risk of loss associated with the false representation, and proceeds to closing cannot claim justifiable reliance.” (citing Metro Commc’n, 854 A.2d at 147)). 49 The only audit report completed for iGEM was inconsistent with the Purchase

Agreements, and no report was ever produced for DCiM. Ideally, I would order the

parties to complete the audit process to determine whether any adjustments to the

Note are warranted. But the audit process was abandoned years ago, after the Buyers

threatened the Auditor and refused to engage the Auditor to complete its work.247

Because the Sellers also had undisclosed tax liabilities upon closing, it would

be ideal to offset the Note by the balance of any proven breaches of representations

and warranties. But the Buyers foreclosed that path as well when chose to drop those

claims to avoid placing the disputed funds in escrow. That left them with fraud

claims that they failed to prove at trial.

As to Brody, payments on the Note were to begin in 2017. Over eight years

later, he has yet to see a penny of the $2 million balance. He proffered a rebuttal

expert report calculating that with accrued interest, he is entitled to $3,422,094.48.248

I cannot accept that sum for two reasons. First, these calculations reflect

affirmative—not rebuttal—expert work.249 Second, until service of Brody’s pre-trial

247 One would expect that the Auditor has no interest in resuming this engagement under any terms. 248 JX 441 (Pina Rep.) 37. This amount is less the $50,000 paid to the State of Washington. 249 The Buyers previously filed a motion in limine seeking to exclude Pina’s testimony for this reason. JX 247. In denying the motion in limine, I noted that I would not give it weight if it was found to constitute improper rebuttal testimony. See JX 273 at 26-27, 40-41. 50 brief and the pre-trial order, I have no record that DCiM received a written notice of

default on the Note.

This leads to a somewhat unsatisfying result, with neither party obtaining

what they feel they are entitled to.

The Buyers proved tax indemnification damages of only $49,289.52—the

amount paid to the State of Washington for IIS’s past due fees. DCiM is entitled to

that sum plus prejudgment interest at the legal rate beginning on the date of its

payment to the State of Washington.250 The Buyers never paid the other outstanding

liabilities they claim, leaving further indemnification under Section 6.5(e) of the

Purchase Agreements unavailable.

The Note is due and payable to Brody, but only with (1) interest at the rate set

by the Note accruing as of August 2013 when the Buyers dropped their Article VII

claims, and (2) the default interest rate of 5% above the floor beginning on October

19, 2024 (i.e., 15 days after written notice of default).251

250 Washington’s invoice has a due date of July 6, 2020. JX 435. But I lack evidence of the date of payment by DCiM. 251 See supra notes 229-230. The parties did not brief these specifics on pre-judgment interest. As noted at the conclusion of this decision, I ask that they confer on the appropriate interest figure in preparing a proposed order to implement this decision. See infra Section IV. 51 IV. CONCLUSION

Judgment on Brody’s Counts I and III is entered in his favor, as set forth

above. Judgment on the Buyers’ Counts I, III, and IV is also in Brody’s favor.

Judgment on the Buyers’ Count II is entered in their favor, as set forth above.

The parties are to confer on a form of order to implement this decision. That

includes discussing the amounts of applicable prejudgment interest for the Buyers’

tax indemnification damages and the interest owed to Brody under the Note.