In this memorandum opinion, the Court of Chancery granted the plaintiff’s motion for partial summary judgment as to the withholding of escrowed funds, reasoning that the defendants did not have a pending claim that could justify refusal to release the funds and that, in any event, the defendants failed to give the contractually mandated notice for any such claim.
The parties’ dispute arose over funds that were placed in escrow in connection with defendants’ acquisition of plaintiff’s subsidiaries, certain employee health plan management companies. Under the parties’ Stock Purchase Agreement (the “SPA”), money being held in escrow was to be released to the plaintiff by a certain date (the “Survival Expiration Date”) unless the defendants, at that time, had a pending claim for indemnification. Breach of the plaintiff’s representations and warranties, including those related to material contracts, entitled the defendants to indemnification. On the Survival Expiration Date, the defendants refused to release the escrowed funds on the basis that they had a pending claim for indemnification because of an alleged breach of a material contract. A hospital that worked with one of the subsidiaries was alleging that the subsidiary was providing a certain third party unauthorized access to preferential treatment rates. Several months after the plaintiff initiated this lawsuit to secure the release of the escrowed funds, defendants purported to assert yet another pending claim based on the same hospital’s objection to the same subsidiary’s interactions with another third party.
The plaintiff moved for partial summary judgment on the issue of whether the later asserted “pending claim” provided a valid basis for the defendants to withhold the escrowed funds. The Court of Chancery granted the plaintiff’s motion on two separate and independent grounds: (1) the hospital’s later asserted objection did not constitute a “pending claim” and (2) the defendants did not furnish adequate notice of that “claim” to the plaintiff.
Regarding the first issue, the Court reasoned that mere notice of a problem, standing alone, did not trigger the defendants’ indemnification rights under the SPA. Rather, for the hospital to have threatened to commence an action, it must have also expressed an intention to engage a third-party neutral. Although the hospital informed the defendants of a problem, the hospital evinced a desire to resolve the issue cooperatively. Thus, there was no genuine issue of material fact as to whether the hospital had threatened to commence an action against the defendants.
Second, even if the defendants had an indemnification claim, the Court concluded that, as a matter of law, they failed to notify the plaintiff of their purported claim prior to the Survival Expiration Date. The defendants argued that the notice they provided regarding the hospital’s first objection to the unauthorized rates sufficed to give the plaintiff adequate notice of the second claim. The Court rejected this position, reasoning that (1) the first claim arose prior to the parties’ execution of the SPA, while the second claim arose several months later; (2) the notice made no specific mention of the other third party to whom preferential rates were allegedly given; and (3) though the defendants received a letter from the hospital about an issue with that third party specifically, they did not disclose that fact to the plaintiff until many months after the Survival Expiration Date. For these reasons, the Court held that no reasonable fact finder could conclude that the defendants provided adequate notice of the issue.
The full opinion is available here.