Anvil Holding Corp., et al. v. Iron Acquisition Co., et al., C.A. No. 7975-VCP (Del. Ch. May 17, 2013) (Parsons), and Iron Acquisition Co., et al. v. Anvil Holding Corp., et al., C.A. No. N12C-11-053-DFP (Del. Super. Ct. May 17, 2013)

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This case involved the unusual situation of a dual proceeding in the Court of Chancery and the Superior Court. In the Chancery action, the Sellers of Iron Data Solutions, LLC (“Iron Data”) sought to compel disbursement of funds escrowed in connection with that sale. Meanwhile, in the Superior Court action, the Buyer of Iron Data asserted a right to indemnification and payment from those escrowed funds for breach of certain representations and warranties made by Iron Data. In this memorandum opinion, the Court of Chancery granted in part the Sellers’ motion to dismiss the Buyer’s complaint filed in the Superior Court (i) with prejudice to the extent that it claims a bad faith breach of contract and (ii) for breach of contract against the Sellers’ Representatives without prejudice to the Buyer’s ability to amend its complaint to name all Sellers as defendants. In all other respects, the Court denied the Sellers’ motion to dismiss.

On May 9, 2011, the plaintiffs in the Superior Court action, a Delaware corporation and its wholly-owned subsidiary (together, the “Buyer”), entered into an agreement to purchase all of the outstanding units of Iron Data (the “Purchase Agreement”). The Buyer named only as defendants those unitholders who were managers of Iron Data either at or before the time of the sale (the “Individual Defendants,” together with the unnamed additional selling unitholders, the “Sellers”). Among other things, the Purchase Agreement named defendants Anvil Holding Corporation and Thompson Street Partners II, L.P. as Sellers’ Representatives (the “Sellers’ Representatives”). It also provided for indemnification by the Sellers in certain circumstances, including for breach of Iron Data’s representations and warranties made in the Purchase Agreement.

In its complaint, the Buyer asserted claims based on representations made in the Purchase Agreement, or “on-contract” representations, and claims based on extra-contractual, or “off-contract,” representations. The Buyer alleged that Iron Data breached these representations because one of its most important contracts was set to change to a materially lower basis. Further, the Buyer alleged that the Individual Defendants deliberately withheld this information from the Buyer in order to induce it to purchase Iron Hill. As a result, the Buyer sought indemnification and asserted claims of fraud and bad faith breach of contract against the Individual Defendants, and breach of contract against the Sellers’ Representatives.

With respect to the Buyer’s fraud claims against the Individual Defendants generally, the Court found the Complaint pled with particularity a claim against each Individual Defendant for fraud. In addition, the Court found the Individual Defendants were sufficiently tied to the alleged fraud because, as sellers and managers of Iron Data, they possessed the knowledge that allegedly made the representations false. Regarding the claims based on “off-contract” representations, the Sellers argued that the parties disclaimed any reliance on extra-contractual representations in the Purchase Agreement, which provided that, except for certain representations and warranties made in the Purchase Agreement, neither Iron Data nor any Seller “makes any other express or implied representation or warranty with respect to [Iron Data] . . . or any Seller or the transactions contemplated by this Agreement.” In addition, the parties agreed that the Purchase Agreement “constitutes the entire Agreement among the Parties (and the Sellers’ Representatives) with respect to the subject matter of this Agreement and supersede[s] all other prior agreements and understandings, both written and oral, between the Parties with respect to the subject matter of this Agreement.”

The Court rejected the Sellers’ argument, finding that the language in the Purchase Agreement did not reflect a “clear promise” by the Buyer that it was not relying on statements made outside of the contract’s “four corners” to make its decision to enter into the agreement. In doing so, the Court acknowledged that while Delaware courts will honor clauses in which sophisticated parties disclaim reliance on extra-contractual representations, under the Delaware Supreme Court’s decision in Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1058 (Del. 2006), the Court will not do so unless a contract contains language that amounts to a “clear anti-reliance clause” by the party with respect to extra-contractual statements and its decision to sign the contract. The Court held that the relevant provisions contained in the Purchase Agreement indicated only that Iron Data represented that neither it nor any Seller was making any other express or implied representations or warranties and that the Purchase Agreement constituted the entire agreement of the parties. Accordingly, these provisions did not create the “double liar” problem where allowing the Buyer to prevail on its fraud claim would sanction the Buyer’s own fraudulent conduct in having falsely asserted that it would not rely on extra-contractual representations had it expressly stated such in the agreement.

Regarding the Buyer’s bad faith breach of contract claim against the Individual Defendants, the Court dismissed it as duplicative of the Buyer’s fraud claim and permitted the complaint to proceed as an ordinary breach of contract claim against the Individual Defendants subject to the requirements imposed by the Purchase Agreement’s indemnification procedures. The Court then found the allegations contained in the complaint were sufficient to conclude that the Buyer adequately followed those procedures. With respect to the Buyer’s breach of contract claim against the Sellers’ Representatives, however, the Court found that the Buyer’s failure to name all of the Sellers as defendants warranted dismissal of its claim against the Sellers’ Representatives but without prejudice to its ability to amend the complaint in this regard.

The full opinion is available here.