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Utilipath LLC v. Hayes

Court of Chancery of Delaware

April 15, 2015


Submitted: January 20, 2015

Edmond D. Johnson, Esq., James G. McMillan, Esq., James H.S. Levine, Esq., PEPPER HAMILTON LLP, Wilmington, Delaware; Matthew V. DelDuca, Esq., Angelo A. Stio, III, Esq., PEPPER HAMILTON LLP, Princeton, New Jersey; Attorneys for Plaintiff.

Timothy M. Holly, Esq., Ryan P. Newell, Esq., CONNOLLY GALLAGHER LLP, Wilmington, Delaware; Oliver D. Griffin, Esq., Peter N. Kessler, Esq., Julie B. Negovan, Esq., KUTAK ROCK LLP, Philadelphia, Pennsylvania; Edward T. Kang, Esq., Gregory H. Mathews, Esq., KANG HAGGERTY & FETBROYT LLC, Philadelphia, Pennsylvania; Attorneys for Defendants.


PARSONS, Vice Chancellor.

The plaintiff in this action is a Delaware limited liability company ("LLC") that purchased certain of its own membership units from the defendants, pursuant to a "redemption agreement." The redemption agreement provided that the purchase price could be adjusted after the transaction closed depending on the calculation of the plaintiff LLC's net working capital. The redemption agreement correctly anticipated that the parties might dispute that calculation, and provided for an alternative dispute resolution process to adjudicate such a disagreement. The plaintiff's complaint seeks to compel the defendants to comply with that alternative dispute resolution process.

The defendants have moved to dismiss the complaint, contending that this action should be dismissed or stayed in favor of a case pending in federal court in Pennsylvania that involves similar parties and the same overall set of transactions. The defendants also contend that the filing of this action was in violation of Court of Chancery Rule 15(aaa). Lastly, they argue that the complaint should be dismissed because it seeks enforcement of an unenforceable "agreement to agree." For the following reasons, I reject each of those contentions, and deny the motion to dismiss.


A. Facts and Procedural History

Plaintiff is Utilipath, LLC ("Utilipath" or "Plaintiff"), a Delaware LLC. Defendants in this action are: (1) Utilipath Holdings, Inc. ("Holdings"), a North Carolina corporation; (2) Baxter McLindon Hayes, Jr.; (3) Baxter McLindon Hayes, III; and (4) Jarrod Tyson Hayes (the latter three being the "Hayes Defendants, " and together with Holdings, "Defendants").

This case concerns a transaction between Utilipath and Defendants that closed on August 19, 2013. Until that date, the Hayes Defendants were the sole members of a North Carolina LLC named Utilipath, LLC ("Old Utilipath"). Defendants transferred all of their membership interests in Old Utilipath to Defendant Holdings. Old Utilipath then merged with Utilipath, making the latter a wholly owned subsidiary of Holdings.

Through the agreement relevant to this action, the "Redemption Agreement, "[2]Defendants caused Holdings to sell all of its Class A membership units to Utilipath. Defendants, through Holdings, apparently continued to hold all of Utilipath's Class B membership units. Utilipath paid $15, 750, 000 for the Class A units. As relevant to this case, however, that purchase price could be adjusted post-closing according to the Redemption Agreement if Utilipath's actual net working capital as of the closing date turned out to be below $6 million.

In November 2013, Utilipath provided Defendants with its calculation of the Closing Net Working Capital amount[3] for purposes of this price adjustment mechanism. Thereafter, Defendants served a Dispute Notice pursuant to Section 1.3.1 of the Redemption Agreement, in which it objected to Utilipath's calculations. Notwithstanding several months of back-and-forth attempting to resolve their dispute over the net working capital adjustment, the parties failed to agree on this issue.

Section 1.3.4 of the Redemption Agreement provides for an alternative dispute resolution process whereby, if the parties could not agree about whether a net working capital adjustment payment was due, or the proper amount of such a payment, an Independent Accounting Firm would be chosen to settle the issue. On April 18, 2014, Utilipath invoked Section 1.3.4 and demanded that the parties submit their dispute to such an independent accounting firm. Defendants refused to comply. Utilipath, by this action, seeks to compel enforcement of the alternative dispute resolution ("ADR") provision of the Redemption Agreement as it relates to the adjustment of Net Working Capital.[4]

This action is not the first litigation involving these parties and concerning the August 2013 transaction of which the Redemption Agreement was a part. On December 31, 2013, Utilipath filed suit in this Court against the same parties that are Defendants in this action. That first ...

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