Judge Carpenter Denies Various Motions to Dismiss Fraudulent Inducement Claims in Business Acquisition Dispute

October 24, 2017

Publication

In In re Bracket Holding Corp. Litigation, C.A. No. N15C-02-233 WCC CCLD, Judge Carpenter decided three motions to dismiss on various issues. The genesis of the instant dispute began in 2012, when Express Scripts, Inc. indicated its interest in acquiring United BioSource LLC. In 2013, Parthenon Capital Partners, a private equity fund, formed Bracket Holding Corp. to facilitate the acquisition. The transaction closed on August 15, 2013, and Jim Stewart, vice president of finance and controller of Bracket’s Scientific Services division, became Bracket’s vice president of finance and secretary. Thereafter, Bracket filed this litigation alleging that United BioSource, Express Scripts, and Stewart fraudulently induced Bracket to purchase the company by providing inflated financial information. United BioSource also filed a separate action in the Delaware Court of Chancery seeking to compel arbitration on a certain working capital claim. The Court of Chancery ordered the working capital claim to arbitration, but stated that the arbitrator should not consider the Superior Court fraud claims.

Following the Court of Chancery’s decision on arbitration, United BioSource’s remaining claims were transferred to Superior Court. United BioSource and Express Scripts moved to dismiss Bracket’s amended complaint on the grounds that: (1) collateral estoppel prevented Bracket from challenging facts decided in the working capital arbitration; (2) the fraud claims were merely bootstrapped breach of contract claims; (3) Bracket failed to state a claim for fraud with the requisite particularity; and (4) Bracket failed to state claims for aiding and abetting and/or conspiracy.

The Court denied the motion. First, the Court found that the doctrine of estoppel was inapplicable because the arbitrator’s decision did not decide the facts and issues essential to Bracket’s claims. Second, the Court found bootstrapping inapplicable because, “[g]enerally, allegations focused on inducement to contract qualify as ‘separate and distinct’ conduct for purposes of avoiding the bootstrapping doctrine.” The Court found that the complaint “sufficiently alleg[ed] fraudulent conduct prior to the SPA’s execution and Closing which was intended to induce Bracket to purchase the Company.” Third, the Court held that Bracket’s fraud claim had been pled with sufficient particularity. Bracket had identified documents containing the alleged fraud and provided the specific names of employees and agents allegedly involved in the scheme. Fourth, the aiding/abetting or conspiracy claims were not dismissed for lack of predicate tortious conduct because the fraud claim survived. While finding that these “add on” claims “may actually undermine the fraud claims,” the Court allowed them to survive.

The Court also considered Stewart’s separate motion to dismiss for lack of personal jurisdiction. In support of personal jurisdiction, Bracket argued that: (1) Stewart was subject to the Delaware long-arm statute because as a co-conspirator he caused tortious injury in the state; (2) the director consent statute established personal jurisdiction; and (3) the SPA forum selection clause conferred personal jurisdiction over Stewart. The Court did not find Bracket’s arguments persuasive, holding that: (i) conspiracy does not confer an independent basis for personal jurisdiction; (ii) the director consent statute was inapplicable because Stewart was not appointed as a director to Bracket until after the alleged tortious conduct occurred; and (iii) Stewart was not subject to personal jurisdiction under the forum selection clause because he was not closely related to the contract and received no direct benefit under the SPA. Accordingly, Stewart’s motion to dismiss was granted.

Finally, Bracket and Parthenon moved to dismiss Counts I, II, IV, and V of United BioSource’s separate amended complaint for failure to state a claim. Bracket argued that United BioSource’s claims for tortious interference should be barred under the affiliate exception. In response, United BioSource argued that the affiliate exception was inapplicable because Pennsylvania law rather than Delaware law should apply. Following a choice of law analysis, the Court held that Delaware had the most significant relationship to the tortious interference claims. The Court then held that Parthenon was protected by the affiliate privilege and could not be held liable for tortious interference.

Analysis: The CCLD has become a favored venue for litigating claims arising out of acquisition agreements. As a result, there is a significant and developing body of case law concerning fraud claims in such circumstances. For example, in JCM Innovation Corp. v. FL Acquisition Holdings, Inc., 2016 WL 5793192 (Del. Super. Ct. Sept. 30, 2016), Judge Davis allowed a fraud claim to stand that was not expressly precluded by contract. In EZlinks Gold, LLC v. PCMS Datafit, Inc., 2017 WL 1312209 (Del. Super. Ct. Mar. 21, 2017), however, Judge Wallace dismissed fraud claims under the bootstrapping doctrine because the fraud damages as pled were identical to the breach of contract damages. These cases highlight the rapidly developing case law controlling fraud and contract claims arising out of acquisition agreements.