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Eorhb, Inc. v. Hoa Holdings LLC

Court of Chancery of Delaware

October 17, 2012

EORHB, INC., a Georgia corporation, and COBY G. BROOKS, EDWARD J. GREENE, JAMES P. CREEL, CARTER B. WRENN and GLENN G. BROOKS, each as personal representatives and trustees of the estate of Robert H. Brooks, Plaintiffs,
HOA HOLDINGS LLC, a Delaware limited liability company, and HOA RESTAURANT GROUP, LLC, a Delaware limited liability company, Defendants and Counterclaim Plaintiffs,
EORHB, INC., a Georgia corporation, and COBY G. BROOKS, EDWARD J. GREENE, JAMES P. CREEL, CARTER B. WRENN and GLENN G. BROOKS, each as personal representatives and trustees of the estate of Robert H. Brooks, Counterclaim Defendants.

          RICHARD P. ROLLO, ESQ. JOHN MARK ZEBERKIEWICZ, ESQ. Richards, Layton & Finger, P.A. for Plaintiffs/Counterclaim Defendants

          A. THOMPSON BAYLISS, ESQ. Abrams & Bayliss LLP -and-DOUGLAS H. HALLWARD-DRIEMEIER, ESQ. CHRISTOPHER G. GREEN, ESQ. AMY D. ROY, ESQ. of the Massachusetts bar Ropes & Gray LLP for Defendants/Counterclaim Plaintiffs



          THE COURT: Welcome, everyone. Mr. Bayliss, how are you?

         MR. BAYLISS: Good afternoon, Your Honor. Tom Bayliss on behalf of HOA Restaurant Group. I rise to introduce Mr. Douglas Driemeier, Chris Green and Amy Roy from Ropes & Gray.

         THE COURT: Great. Welcome to all of you. Mr. Rollo, how are you doing?

         MR. ROLLO: I'm doing well, Your Honor. Yourself?

         THE COURT: Great.

         MR. ROLLO: For the record, this is Rich Rollo of Richards, Layton & Finger, and I represent the plaintiffs in this action. With me at counsel table is my colleague, John Mark Zeberkiewicz.

         THE COURT: Mr. Zeberkiewicz, how are you. Mr. Zeberkiewicz has not often darkened the doors of the courtroom.

         MR. ZEBERKIEWICZ: Absolutely correct.

         THE COURT: It's good to see you, a transactional lawyer learning how to make his way down to 500 King Street. You're always welcome here, Mr. Zeberkiewicz.

         MR. ZEBERKIEWICZ: Thank you, Your


         MR. ROLLO: Your Honor, we're before the Court today on our motion for partial summary judgment and also a motion to dismiss. I know Your Honor is familiar with the papers, so I'll briefly summarize our position and then address any questions Your Honor may have.

         We believe this case is relatively simple. Sophisticated parties negotiated a settlement that included the exchange of a specific release. Neither side claims they were tricked or defrauded or some mistake occurred that resulted in the release.

         Rather, we simply disagree over what the words on the page mean. The release was executed in May 2011 which was about four months after the parties engaged in a merger transaction pursuant to which the buyers purchased the Hooters restaurant chain from the sellers.

         A release was exchanged as part of a global settlement of a prior litigation before Your Honor involving, among other things, who had the right to purchase the restaurant chain.

         At the time in May of 2011, the transaction had closed, but the parties had continuing obligations under the merger agreement which we wanted to preserve. So we included a carveout. It's the scope and operation of that carveout that is the dispute before the Court today.

         Now, the release is attached as Exhibit G to our opening brief. On the third page is the language that's disputed, the beginning of it. It starts, and it's a single sentence that begins with, I'll say, your typical laundry list identifying the types of claims and rights released, including the conflicting adjectives to include everything under the sun and make clear that there are no limitations.

         Now, because this is a specific release, toward the bottom of the page, about five lines from the bottom, there is a limitation on that laundry list, and I'm paraphrasing, arising from or related to indirectly or directly any of nine enumerated categories. In clause five, it says the sale of Hooters. Now, I'm paraphrasing that as well, but it's the sale of Hooters pursuant to the merger transaction.

         Those rights and any obligations under the merger agreement would have been eliminated without a carveout. So following the list of nine categories, there are two provisos separated by semicolons. The first, about halfway down the page on the third page, begins "provided however, " and it creates a specific carveout for enforcement of the settlement agreement. It doesn't purport to modify the definition of released claims. It says "provided however, nothing in this release."

         Now, the second proviso begins four lines later and starts after the second semicolon with "provided further, however, " and it creates a carveout for the merger and related transactions. That's followed by a carveback where it says "except that" and the carveback says released claims cannot be the basis for a breach of the merger agreement and won't result in a purchase price adjustment pursuant to the operative contract.

         We think that the only reasonable read -- in fact, the only read of this language -- is that the parties agreed that they could, on a forward-looking basis, enforce the merger agreement and that any breach of contract claims that existed from that date back in time were released.

         Now, the indemnifications we're here today about are predicated upon purported breaches of the merger agreement that occurred before the release date; in fact, in or around January 2011 when the reps and warranties were supposed to have been true, and there's also one claim with respect to a pre-closing operation of the company, the pre-closing operations covenant. All of those were released, we say, under the operative agreement.

         My friends make several arguments, and I'll respond to most of them on rebuttal, but there is one I'd like to address briefly. That's the argument that some temporal ambiguity exists in the document that precludes summary judgment. Briefly, and they'll state it for themselves, in the beginning part of the contract, there is a phrase that says "which now exists or heretofore after existed or may hereafter exist." I think I mangled that. I could say it again, but Your Honor understands the concept. Seven lines later, there's another phrase that says "in existence from the beginning of time to the date of this agreement."

         Now, that alleged conflict -- and we, in our reply brief, say we don't believe it's a conflict, but let's assume that is a conflict. It doesn't matter in this case. We're not arguing about breaches that supposedly occurred after execution of the release. We're arguing about breaches that existed on the date of the release under either definition. Under either temporal phrase, they fall within the definition of released claims. Because they fall within the definition of released claims, they were barred under the second part of the second proviso.

         Now, I'm happy to address any of the arguments or questions Your Honor may have. I think it may be more efficient if my friends, since they have several arguments, would state the arguments and I can reply on rebuttal.

         THE COURT: Let me ask you one thing before you sit down.

         MR. ROLLO: Yes, Your Honor.

         THE COURT: How do you pronounce the entity that is now successor to the estate, EORHB?

         MR. ROLLO: EORHB is how I say it. It's the Estate of Robert H. Brooks.

         THE COURT: The estate, as the predecessor to EORHB, signed a comparable release that is one of the ones that you collected, that is collected behind Exhibit E; true?

          MR. ROLLO: Yes, Your Honor.

         THE COURT: EORHB's claim to additional monies from the indemnification agreement arose at closing, right?

         MR. ROLLO: I don't believe I agree with that, Your Honor. A certain amount of the consideration payable to us was set aside in an escrow account. And if valid claims were not presented under that, we received it when the escrow expired. That is a contractual obligation under the merger agreement and separately under the escrow agreement. And under the releases, there is a carveout for future enforcement of the merger agreement.

         THE COURT: You think that claim for the access of the indemnification agreement falls under the enforcement of the merger agreement proviso?

         MR. ROLLO: Yes, Your Honor.

         THE COURT: You don't think that a right against the escrow agreement is a right that would fall under the definition of released claims?

         MR. ROLLO: I don't, Your Honor, for two reasons. First, it is a contractual obligation under the escrow, and that if valid claims are not made against the escrow, the escrow agent is directed to tender the rest of that money to us last summer. So if, at that point in time, $11 million remained, it's either given to us or it stays there presumably in perpetuity because the buyers wouldn't have a claim against it.

         THE COURT: I hear you. Released claims means any and all claims. It means rights, blah, blah, blah, of any kind whatsoever, whether known or unknown. Well, this one was known. Fixed or contingent. Well, this is a little bit of both. As you say, it's a fixed contractual right of which the amount the contingent.

         The definition of released claims, if one were to read it broadly to include everything related to the sale of HOA, it seems to me is sufficiently capacious to cover, in the first instance, EORHB's claim against the escrow fund.

         MR. ROLLO: Perhaps I misunderstood Your Honor's earlier question. I believe the initial definition does. I think then it is saved by the second proviso that says "provided further, however, the foregoing shall not include any claims to enforce the terms and conditions of the merger agreement or directly related to the transaction contemplated thereby."

         THE COURT: Why doesn't it then founder again on the idea that receipt of that money would result in an adjustment to the merger consideration?

         MR. ROLLO: Because receipt of that money, by definition on the bottom of the second proviso, does not result in a modification of the merger agreement. There is a --

         THE COURT: It doesn't fall under the modification of the merger agreement, but --

         MR. ROLLO: Purchase price adjustment. We expressly excluded that in the bottom of the second proviso. No release claim and no liability or payment under the accompanying settlement agreement --

         THE COURT: The problem with that is Section 9.7 which says, "All payments made pursuant to this Article 9 shall be treated as adjustments to the merger consideration for tax purposes." I agree that's for tax purposes, but it would seem to say that the release of funds from the escrow would be an adjustment to the merger consideration.

         MR. ROLLO: It would be an adjustment to the merger consideration and --

          THE COURT: That would take it into the second "except" clause which would mean you'd be back to the idea that really what I ought to be doing is granting summary judgment for the other side saying that they released their claims to everything in the escrow fund.

         MR. ROLLO: I disagree, because I think the second portion, Your Honor, is predicated on breaches of the merger agreement. The first is "obligations under, " and the second is "breaches under." Future enforcement of contractual provisions is not a breach of the merger. If tomorrow we breached, it would fall within that provision, so I think there's a distinction in the first part between "obligations under" and "breaches under."

         THE COURT: Walk me through that again.

         MR. ROLLO: The indemnification obligation that my friends are seeking to pursue is predicated upon purported breaches of the merger agreement.

         THE COURT: That's a problem for them under Romanette "i".

         MR. ROLLO: Correct. But, for example, I'll use an example --

         THE COURT: I'm focused on Romanette "ii". I think your problem is the breadth of your argument as to released claims is so powerful that it seems to me that it runs into exception two. I agree with you your issue isn't that it's a breach under exception one.

         What seems to me to be your problem is that you agree contractually that any additional money you got was going to be an adjustment to the merger consideration, and you're now telling me that you released anything that fit within the definition of released claims that could result in an adjustment to the merger consideration, and so by the force of your powerful interpretation of released claims, hasn't your fellow given up his adjustment to the merger consideration?

         MR. ROLLO: I don't believe so, because as I read the second Romanette, it says "no released claims shall result in adjustment to the merger consideration."

         Now, the merger consideration is a defined term under the merger agreement. The escrow didn't result in a lower amount. It was simply an amount of money that was set aside and the merger consideration itself remained constant. That payment was just delayed. Had it resulted in a reduction, which I believe Your Honor is positing, that escrow amount would then be deducted from the overall merger consideration. That would then be barred by Romanette "ii". I believe Romanette "ii" operates to prevent the exact issue that Your Honor is raising.

         There's a provision, I believe, at Section 9.3 that talks about how purchase price adjustments are made under the merger agreement. It's Section 2.3 of the merger agreement. Basically, it provides a process post-closing where either side can identify certain issues that would result in a change in the merger consideration.

         Those adjustments aren't based upon a claim that we breached the merger agreement or that the other side breached the merger agreement. It was simply the accounting process in place. Romanette "ii" in the release is focused on that process.

         In order for I believe what Your Honor is positing that the escrow functionally is waived, that would presuppose that by putting the escrow funds in escrow, it somehow impacts the merger consideration, and I would submit to Your Honor it does not. The consideration is the consideration. 11.5 of that consideration was simply held for a period of time subject to the rights under 9.3 for indemnification.

         THE COURT: It does create an interesting interpretive question because 2.1(b) says that your company membership interests that EORHB owned were converted into the right to receive Romanette "i", net merger consideration plus various other amounts which include amounts released from the escrow agreement, and it defines those latter amounts as contingent merger payments.

         So, again, I look at that, and I think, okay, well, are contingent merger payments part of the merger consideration such that they represent an adjustment? They seem to be something other than net merger consideration. Then I get back here to 9.7, treatment of indemnity payments, and it says, "All payments pursuant to this Article 9 shall be treated as adjustments to the merger consideration for tax purposes."

         I guess what you're telling me is that Section 9.7 is only intended to be payments to HOA and folks, not releases from the escrow agreement.

         MR. ROLLO: I think functionally that's correct, Your Honor, because the escrow agreement itself is a separate document that says if you don't have indemnification claims validly made against it, then, at the end of its term, those funds are released, and that in terms of merger consideration, whether that consideration is contingent or absolute, it's still merger consideration.

         So that Your Honor's definition of 2.1(b), contingent merger payments, those are still part of the merger consideration. Then if you go back to the release Romanette "ii" it says that the settlement agreement and whatnot will not result in a modification of the merger consideration, paraphrasing, of course.

         THE COURT: You obviously resist any broad construction of the release that gave up the escrow.

         MR. ROLLO: Absolutely, Your Honor. THE COURT: All right. Let me ...

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