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ENI Holdings, LLC v. KBR Group Holdings, LLC

Court of Chancery of Delaware

November 27, 2013

ENI HOLDINGS, LLC, Plaintiff and Counterclaim Defendant
v.
KBR GROUP HOLDINGS, LLC, Defendant and Counterclaimant

Date Submitted: August 5, 2013

William M. Lafferty, John P. DiTomo, and Matthew R. Clark, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Robert Boldt and Michael Shipley, of KIRKLAND & ELLIS LLP, Los Angeles, California, Attorneys for Plaintiff and Counterclaim Defendant.

Kevin R. Shannon, Berton W. Ashman, Jr., and Matthew D. Stachel, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Vineet Bhatia, Robert S. Safi, and Brian M. Gillett, of SUSMAN GODFREY LLP, Houston, Texas, Attorneys for Defendant and Counterclaimant.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor.

In enacting the statute of limitations applicable to contracts, [1] the General Assembly has determined that justice requires that actions sounding in contract be brought, if at all, within three years of accrual. This determination necessarily represents a balancing of the interests of justice, which include seeing parties to contracts made whole for their breach, as well as preventing allegedly-breaching parties from being unfairly made to address stale claims for which proof becomes progressively less trustworthy over time. The same interests have caused the legislature to erect a barrier of two years after which certain tort claims—even more reliant on circumstantial proof and fallible recollection—may not be brought.[2] In enacting these provisions, the legislature has set an outer limit. Parties to contracts, however, may weigh the interests addressed by statute differently when it comes to the particular circumstances of their agreement. Those parties, it is clear, are in a better position than legislators to know what result is called for by those circumstances peculiar to their relationship. For that reason, and because this jurisdiction respects the right to contract in general, Delaware recognizes the right of contracting parties to impose a shorter period of limitation than that provided for by statute. When parties do so, that determination will be respected as a wholesome determination of the interests of the parties, entirely in keeping with the purposes of the statute: to promote prompt resolution of issues and eliminate stale claims. This particular case involves such a choice by the parties. Having contractually bound itself to a fifteen-month period within which certain actions must be brought, the counterclaimant must be held to that bargained-for choice. Where, however, the parties have chosen not to impose a more stringent limitation period, the statute must control.

In December 2010, Plaintiff and Counterclaim Defendant, ENI Holdings, LLC ("ENI") sold Roberts & Shaefer Co. ("R&S") to Defendant and Counterclaimant, KBR Group Holdings, LLC ("KBR") pursuant to a Stock Purchase Agreement ("SPA"). The purchase price of R&S was partially based on its working capital at closing.[3] Unable to agree on that amount, the parties sought arbitration, in accordance with the SPA, to determine R&S's working capital at closing.[4] The parties also sued one another in this Court to settle additional disputes arising from KBR's acquisition of R&S. This Memorandum Opinion explains my decision regarding ENI's Motion to Dismiss KBR's First Amended Verified Counterclaim ("Amended Counterclaim"). For reasons I explain below, ENI's Motion to Dismiss is granted in part and denied in part.

I. Background

Prior to the December 2010 acquisition, ENI, a Delaware limited liability company, directly owned 100% of the stock of ENI Holdings, Inc. ("Holdings"), the holding company for R&S.[5] In 2007, ENI and R&S were acquired by OCM/GFI Power Opportunities Fund II ("OCM/GFI"), a joint venture between Oaktree Capital Management, L.P. ("Oaktree") and GFI Energy Ventures, LLC ("GFI Energy"), both private equity firms.[6] As a result of this acquisition, Oaktree and GFI Energy indirectly owned R&S through ENI, while GFI Energy managed OCM/GFI's portfolio.[7]

In mid-2010, KBR, an engineering, procurement, and construction company organized under Delaware law, [8] began discussions with GFI Energy and ENI about acquiring R&S, a contractor that installs material handling systems for industries like mining and power.[9] On October 1, 2010, KBR presented an indicative offer for R&S, and on October 27, 2010, the parties signed a letter of intent.[10] Nearly two months later, on December 21, 2010, KBR purchased 100% of Holdings pursuant to the SPA.[11] The purchase price for R&S was $280 million, but this amount was subject to certain working capital and indemnification adjustments.[12]

Under the terms of the SPA, two escrow accounts were established, each with funds from the $280 million purchase price. In one escrow account, the parties set aside an amount to account for any adjustment to R&S working capital.[13] The parties placed $25 million into a second escrow fund (the "Indemnity Escrow Fund") to satisfy any indemnification claims brought pursuant to the SPA.[14] Section 6.13 governs the release of this escrow amount, stating:

On the Termination Date [of March 23, 2012], [KBR] shall, and [ENI] shall be entitled to, instruct the Escrow Agent to release to [ENI] an amount equal to the positive difference between (x) the then remaining balance of the Indemnity Escrow Account, including any earnings thereon, minus (y) the amount of Damages for which [KBR] has timely made a claim for indemnification pursuant to Section 6.03 and which claim has not then been finally determined in accordance with this Article VI. . . .[15]

Section 6.03 provides that:

Subject to the limitations set forth in this Article VI, [ENI] shall indemnify and hold harmless [KBR] and [KBR's] Affiliates, officers, directors and representatives . . . against and in respect of any and all claims, costs, expenses, losses and damages ("Damages") to the extent resulting from (i) any inaccuracy in any representation or the breach of any warranty made by [ENI] in this Agreement or in any certificate required to be delivered pursuant hereto, (ii) the breach by [ENI] of any covenant or agreement to be performed by it hereunder . . . .[16]

The SPA's indemnification provisions constitute the "sole and exclusive remedy" for all claims relating to KBR's acquisition of R&S, with two narrow exceptions.[17]First, fraud claims are excepted from this provision, and second, the parties may seek equitable relief if remedies at law are inadequate to "enforce or prevent any violations by" the parties.[18]

The parties also agreed to a survival provision in Article VI of the SPA. Specifically, the SPA provides for three categories of seller representations and warranties, each surviving the closing and terminating on a specified date. First, representations and warranties deemed fundamental, including tax matters and the organization and capitalization of R&S and its subsidiaries (the "Fundamental Representations"), terminate seven years from the closing or thirty days after the applicable statute of limitations expires, whichever occurs first.[19] Second, representations and warranties pertaining to environmental matters terminate three years after the closing.[20] Third, all other representations and warranties (the "Non-Fundamental Representations") terminate on a specified termination date; both parties agree that this Termination Date was March 23, 2012.[21] Additionally, covenants and agreements of the parties to be performed post-closing "survive in accordance with their respective terms."[22]

Further, the parties agreed that there would be a $2.5 million deductible and $25 million cap for indemnification claims against ENI except for the "Excluded Matters, " which include claims arising from the Fundamental Representations, covenants, and fraud.[23]

The SPA outlines a dispute resolution procedure for inter-party indemnification claims in Section 6.08. Pursuant to this section:

In the event that an Indemnified Party determines that it has a claim for Damages against an Indemnifying Party . . . the Indemnified Party shall promptly, but in any event within five (5) Business Days of becoming aware of any facts or circumstances that would reasonably be expected to give rise to a claim for indemnification hereunder, give written notice thereof to the Indemnifying Party, specifying, to the extent then known by the Indemnified Party, the amount of such claim, the nature and basis of the alleged breach giving rise to such claim and all relevant facts and circumstances relating thereto; provided, however, that the failure to provide such notice shall not relieve the Indemnifying Party of any obligation it may have under this Article VI except to the extent that it has been prejudiced by such failure.[24]

After notice has been provided, the Indemnified Party must provide the Indemnifying Party with "full access to its books and records, " including those of R&S and its subsidiaries if ENI is the Indemnifying Party, in order to "allow[] the Indemnifying Party a reasonable opportunity to verify any such claim for Damages."[25] Also, within forty-five days of receiving notice, the Indemnifying Party may dispute its liability.[26] If the Indemnifying Party does not dispute liability, then "such notice shall be conclusively deemed to be a liability of the Indemnifying Party."[27] If, on the other hand, the Indemnifying Party timely disputes liability, the parties must engage in good faith negotiations aimed at resolution of the dispute.[28] SPA Section 6.08 then provides that "[p]romptly following the final determination of the amount of Damages to which the Indemnified Party is entitled (whether determined in accordance with this Section 6.08 or by a court of competent jurisdiction), the Indemnifying Party shall pay such Damages to the Indemnified Party by wire transfer or certified check made payable to the order of the Indemnified Party."[29] KBR provided ENI with notice of claims (now the subject of Counterclaims A, C, D and E)[30] prior to the March 23, 2012 Termination Date.[31] KBR provided notice to ENI of additional claims (including those now the subject of Counterclaim G) after this date.[32] ENI did not receive notice of Counterclaims B, F, H, I, or J prior to KBR's filing its counterclaims.

On December 3, 2012, ENI filed a Verified Complaint alleging that KBR breached several provisions of the SPA, as well as the implied covenant of good faith and fair dealing.[33] KBR responded with a Verified Counterclaim, amended on May 17, 2013, alleging that ENI had engaged in fraudulent misconduct and breached the SPA by, inter alia, manipulating R&S's financial condition to inflate the purchase price; continuing to provide or promise payments to employees from an ENI long-term incentive plan after the closing; and leaving certain Indonesian tax matters unresolved before closing.[34] KBR seeks to rescind the transaction and recover the purchase price, or alternatively, to recoup the $25 million in the Indemnity Escrow Fund, as well as damages for ENI's fraud and attorney fees.[35]ENI moved to dismiss KBR's Amended Counterclaim on June 17, 2013.[36] On June 19, 2013, KBR filed a Motion for Preliminary Injunction to enjoin arbitration pending the outcome of this matter. Oral argument for both motions was held on August 5, 2013. In a September 13 Letter Opinion, I denied KBR's Motion for Preliminary Injunction.[37] For the reasons below, ENI's Motion to Dismiss is granted in part and denied in part.

II. Standard

Under Court of Chancery Rule 12(b)(6), a motion to dismiss will be granted if there are no reasonably conceivable circumstances that would entitle the counterclaimant to recover.[38] Consequently, a counterclaim will only be dismissed if it clearly lacks merit as a matter of law or fact.[39] In considering the motion before me, I must "draw all reasonable inferences in favor of the [counterclaimant], and accept all well pled factual allegations as true."[40] While "[v]agueness or lack of detail, standing alone, is insufficient to dismiss a claim, "[41]this Court "is not required to accept every strained interpretation of the allegations proposed" or "conclusory allegations without specific supporting factual allegations."[42]

Consistent with this standard, I consider those facts alleged in KBR's Amended Counterclaim, as well as the Stock Purchase Agreement, which is incorporated by reference therein. At this stage of the proceedings, I decline ENI's invitation to take judicial notice of KBR's SEC filings.[43]

III. Analysis

KBR has based its counterclaims on the indemnification provisions of the SPA and fraud. Specifically, KBR alleges the following: that ENI breached SPA Section 3.07 by knowingly underestimating costs in connection with the contract for the Melawan Crushing Plant & Western Overland Conveyor ("KPC1") project, and by unjustifiably releasing millions of dollars in cost and contingency to margin in October 2010, which inflated R&S's working capital, and ultimately, its purchase price (Counterclaim A); breached Sections 3.06 and 3.07 by understating cost and contingency on the OLC and TBCT Duplication ("KPC2") and KPC1 projects (Counterclaim B) and by making improper cost adjustments on the KPC2 project (Counterclaim C); breached Sections 3.11(a), 3.11(e), and 5.14(a) by mishandling certain Indonesian tax issues (Counterclaim D); breached Sections 3.17(n), 3.26, 5.04, and 5.09(b) because R&S employees had a continuing interest in ENI's Long Term Incentive Plan ("LTIP") that was not disclosed (Counterclaim E); breached Sections 3.04(b) and 3.26 because a Polish subsidiary had certain preemptive rights that were not disclosed (Counterclaim F); breached Sections 3.01, 3.08, and 3.26 because R&S Canada lacked a certificate of authorization to practice professional engineering (Counterclaim G); and breached Section 3.13(b) in connection with a rock slide (Counterclaim H) and alleged design deficiency (Counterclaim I) relating to R&S Canada's Elkview project, as well as in connection with mechanical failures on the KPC1 and KPC2 projects (Counterclaim J). Additionally, KBR alleges that ENI committed fraud in connection with the misrepresentations alleged in Counterclaims A, B, C, and E. The counterclaims and the contractual provisions on which they are dependant are represented graphically in Figure I. Below, I discuss, and reject, alleged procedural defects in connection with the Amended Counterclaim. I then address each of KBR's specific counterclaims in turn.

A. Alleged Procedural Deficiencies

Preliminarily, ENI contends that "Section 6.08 places various conditions precedent regarding notice, information sharing, and good faith negotiation on a party seeking indemnification under the SPA, " which KBR has failed to satisfy.[44]

First, ENI asserts that KBR did not provide sufficient "pre-litigation notice" for some of its claims, as called for in Section 6.08 of the SPA.[45] Specifically, the notice that KBR provided in March 2012 did not claim breaches of Sections 3.01, 3.04, 3.08, 3.13, 5.04, or 5.14, or reference Counterclaims B, F, G, H, I or J; thus, according to ENI, these counterclaims are barred.[46] Section 6.08, which sets out the inter-party dispute resolution procedure, provides that a party seeking indemnification "promptly . . . give written notice" to the other party.[47] Notably, "failure to provide such notice shall not relieve the Indemnifying Party of any obligation it may have" under the indemnification provisions of the SPA "except to the extent that it has been prejudiced by such failure."[48] ENI does not contend that it was prejudiced by KBR's failure to provide notice.[49] Furthermore, because the notice provision in Section 6.08 corresponds to the "inter-party" dispute procedure, it is not clear from the language of the contract that notice was a pre-litigation requirement. Thus, I do not find that KBR's failure to give notice of each of its counterclaims before bringing this lawsuit provides a basis to dismiss.

Second, ENI argues that Counterclaims A through J should be dismissed because KBR failed to negotiate in good faith in accordance with Section 6.08.[50]ENI notes that, although KBR "allege[s] that it met with ENI and 'attempted in good faith to resolve the dispute, as contemplated by the SPA, '" this meeting took place on April 8, 2013, whereas KBR filed its counterclaims on January 25, 2013 and ENI filed its first motion to dismiss on March 18, 2013.[51] KBR claims, on the other hand, that once ENI filed suit, KBR was no longer required to comply with the procedures delineated in Section 6.08.[52] I find that KBR's supposed failure to comply with the dispute resolution procedures is an insufficient basis to grant ENI's Motion to Dismiss in light of the fact that KBR alleges that the parties communicated in good faith prior to KBR filing its counterclaims in this Court;[53]the SPA does not explicitly require that the parties meet in person in order to satisfy the requirement that they negotiate in good faith; and ENI itself filed the initial Complaint in this matter, on December 3, 2012, an act that invoked the jurisdiction of this Court and limited the opportunity for extra-judicial negotiations between the parties.

I note that ENI's only basis to dismiss Counterclaim D rests on allegations of KBR's failure to provide "pre-litigation notice" and negotiate in good faith with respect to Counterclaim D, before filing its counterclaims in this Court. Because I have found that both of these contentions are insufficient bases upon which to dismiss KBR's counterclaims, ENI's Motion to Dismiss Counterclaim D is denied.

I turn now to the breach of representation claims themselves, and whether they were timely filed. As described above, the SPA provides for the post-closing survival of three categories of seller representations and warranties, each category with its own termination date. The Fundamental Representations terminate the earlier of seven years from the closing or thirty days after the applicable statute of limitations expires; representations and warranties pertaining to environmental matters—not pertinent here—terminate three years after the closing; and the Non-Fundamental Representations terminated on March 23, 2012.[54] In addition, covenants to be performed after the closing "survive in accordance with their respective terms."[55] Only claims arising from the Non-Fundamental Representations are arguably untimely; I address those directly below.

B. The Non-Fundamental Representations

Under the terms of the SPA, the Non-Fundamental Representations survive until March 23, 2012. None of KBR's counts to redress allegedly false Non-Fundamental Representations was filed before that date.

1. The Survival Clause

The parties dispute the effect of the SPA's survival provision on the Non-Fundamental Representations. ENI asserts that counterclaims based on the Non-Fundamental Representations are time-barred because KBR did not file these causes of action before the March 23, 2012 Termination Date.[56] KBR counters that this Court cannot conclude that the language of SPA Section 6.01 unambiguously and clearly evinces the contractual equivalent of a statute of limitations; therefore, ENI's motion as to these counterclaims should be denied.[57]Additionally, KBR counters that the Survival Clause requires only notice, rather than a court filing, during the survival period; thus, its notice to ENI before the termination date was sufficient to preserve these counterclaims.[58]

Faced with a question of contract interpretation on a motion to dismiss, I must determine whether the contractual language at issue is unambiguous.[59] If so, I must give full effect to its meaning.[60] If, however, the contractual language is "reasonably or fairly susceptible of different interpretations, "[61] I must resolve this ambiguity in favor of KBR as the nonmoving party.[62] Having reviewed Chancellor Strine's decision in GRT, Inc. v. Marathon GFT Technology, Ltd., upon which ENI principally relies, and the survival provision of the SPA in conjunction with the SPA as a whole, [63] I find that the parties unambiguously created a contractual period of limitation for breaches of Non-Fundamental Representations, which period expired on March 23, 2012, before KBR brought these claims.

a. Contracting parties can limit the applicable limitations period.

In Delaware, parties may contractually agree to a period of limitations shorter than that provided for by statute, so long as this shortened period is reasonable.[64] In fact,

Delaware law does not have any bias against contractual clauses that shorten statutes of limitations because they do not violate the legislatively established statute of limitations, there are sound business reasons for such clauses, and our case law has long ...

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