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The HC Companies, Inc. v. Myers Industries, Inc.

Court of Chancery of Delaware

December 5, 2017

The HC Companies, Inc.
Myers Industries, Inc.

          Date Submitted: September 8, 2017

          R. Judson Scaggs, Jr., Esquire Ryan D. Stottmann, Esquire Morris, Nichols, Arsht & Tunnell LLP

          Michael J. Barrie, Esquire Stephen M. Ferguson, Esquire Benesch, Friedlander, Coplan & Aronoff, LLP

         Dear Counsel:

         This letter opinion addresses The HC Companies, Inc.'s ("HC") motion for partial summary judgment. For the reasons that follow, the motion is granted.

         HC purchased a lawn and garden business from Myers Industries, Inc. and MYE Canada Operations Inc. (together, "Myers") in February 2015. Among the assets acquired were equipment and machinery to manufacture plastic pots, flats, trays and other items used to grow and sell plants.[1] The condition of that equipment was material to the transaction. Meyers represented and warranted in the Amended and Restated Asset Purchase Agreement (the "Purchase Agreement") that the equipment was in "good condition."[2] This representation and warranty, in turn, was captured within Meyers' indemnification obligation as set forth in the Purchase Agreement. It was also captured, by extension, within the Escrow Agreement[3] that memorialized the $8.6 million in funds the parties set aside in escrow to address post-closing indemnification claims (the "Escrow Property").[4]

         The operative agreements set forth a detailed process by which indemnification claims were to be asserted and processed. Relevant here, HC was required to submit its indemnification claims to Myers by written notice. Myers, in turn, retained the right to object to indemnification claims raised by HC so long as it provided a written objection to HC within 10 days of receiving HC's claim notice. If Myers failed to provide a timely objection, Myers would be deemed to have "irrevocably waived" the right to contest HC's claim notice.[5]

         The transaction closed on February 17, 2015. Shortly thereafter, HC sent an indemnification claim notice to Myers asserting that Myers had breached the Purchase Agreement's representations and warranties because some of the tangible assets it acquired, primarily equipment and machinery, were not in good repair. HC's claim notice demanded almost $8 million of the Escrow Property. Myers timely objected on the ground that HC's claim lacked sufficient detail.

         HC sent a second indemnification claim notice in July 2016, this time seeking more than $10 million. Once again, HC claimed that specified pieces of equipment and machinery were not in good condition. Myers did not respond to this notice until several weeks later, outside the 10-day objection period imposed by the agreements. When HC demanded payment because the response was untimely, Myers disagreed and refused to authorize the release of the Escrow Property. This litigation followed.

         In its motion for partial summary judgment, HC contends that it is entitled to the Escrow Property based on the clear terms of the parties' contracts because Myers' objection to HC's second claim notice was not timely. Myers counters that the first and second claim notices contain the same claim, and thus its objection to HC's first claim notice suffices under the agreements to preserve its rights to contest the claim. Myers also raises other defenses based on the terms of the agreements and equitable estoppel.

         The core issue is whether Myers timely objected to HC's second indemnification claim notice. In resolving this issue, the Court need only consider the Purchase Agreement, the Escrow Agreement and the parties' written correspondence. Because I find that Myers did not timely object to HC's second claim notice, I must conclude that it has waived its right to contest HC's claim to the Escrow Property. Accordingly, HC's motion for partial summary judgment must be GRANTED.

         I. Factual Background

         I have drawn the facts from the admissions in the pleadings, uncontested facts presented in the parties' submissions and those matters of which the Court may take judicial notice. Unless otherwise indicated, I have determined that the following facts are undisputed.

         A. The Purchase Agreement

         The relevant representations and warranties provision within the Purchase Agreement is Section 4.08(c).[6] There, Myers represented and warranted that "[a]ll Tangible Personal Property that has a replacement value in excess of $50, 000 is in good condition and in [a] state of good maintenance and repair in all material respects."[7] Section 8.02(a) of the Purchase Agreement provides that Myers will indemnify HC for "any inaccuracy in or breach of any of the representations or warranties of [Myers] contained in this Agreement . . . ."[8]

         Section 8.05 governs "Indemnification Procedures, " and subsection (c) sets forth the process for making "Direct Claims" against an "Indemnifying Party."[9] A "Direct Claim" is any claim by an "Indemnified Party" (i.e., HC) against an "Indemnifying Party" (i.e., Myers) "on account of a Loss which does not result from a Third Party Claim."[10] Section 8.05(c) requires HC to give written notice to Myers within 10 days after HC receives a Direct Claim, but provides that failure to give prompt notice will not relieve Myers of its indemnification obligations:

Direct Claims. Any claim by an Indemnified Party on account of a Loss which does not result from a Third Party Claim (a "Direct Claim") shall be asserted by the Indemnified Party giving the Indemnifying Party prompt written notice thereof (but in any event, no later than ten (10) business days after the receipt by such Indemnified Party of such Direct Claim). The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party.[11]

         B. The Escrow Agreement

         According to Section 1.3(c)(i) of the Escrow Agreement, once Myers receives an indemnification claim notice from HC, it has 10 business days to send a written objection:

If any Buyer Indemnitee desires to make a claim for indemnification pursuant to the Purchase Agreement that is not addressed by a Joint Written Instruction pursuant to Section 1.3(a)(i) (an "Indemnification Claim"), such Buyer Indemnitee [HC] shall provide written notice of such Indemnification Claim to Sellers [Myers] and the Escrow Agent ("Claim Notice"), specifying in reasonable detail (to the extent known) the nature and dollar amount (estimated, as necessary and to the extent feasible) of the Indemnification Claim. Upon receipt of an Indemnification Claim, any Seller may contest the Indemnification Claim(s) specified in the Claim Notice (or any portion thereof) by giving the Escrow Agent, the applicable Buyer Indemnitee (to the extent necessary contact information for such Buyer Indemnitee is provided in the Claim Notice) and Buyer written notice of such contest (the "Objection Notice") on or before 5:00 p.m., Dallas, Texas time, on the tenth (10th) Business Day after receipt by the Sellers of such Claim Notice (such period, the "Dispute Period"), which Objection Notice shall include a statement of the reason or basis of such contest and shall state the amount, if any, of any such Claim that is not in dispute (any disputed Claim shall hereinafter be referred to as a "Disputed Claim").[12]

Section 1.3(c)(i) goes on to state that if Myers does not object within 10 days, then Myers is deemed to have "irrevocably waived the right to contest" HC's claim:

If the Escrow Agent has not received an Objection Notice prior to the expiration of the applicable Dispute Period, the Sellers shall have irrevocably waived the right to contest the distribution of that portion of the Escrow Property specified by the corresponding Claim Notice and the Escrow Agent shall pay to the Buyer Indemnitee specified in the corresponding Claim Notice the amount set forth in the Claim Notice on or before the fifth (5th) Business Day after the expiration of the Dispute Period.[13]

         C. The Indemnification Claims

         On April 13, 2015, just two months after the transaction closed, HC sent a Claim Notice to Myers (the "First Claim Notice") asserting that Myers had breached Section 4.08(c) of the Purchase Agreement because the equipment and other assets listed in the notice were not in "good condition."[14] The First Claim Notice identified almost $8 million of losses and expressly invoked the procedures set forth in Section 8.05(c) of the Purchase Agreement.[15] Myers sent out its objection on April 24, 2015, in which it stated its position that HC's First Claim Notice lacked sufficient detail.[16]HC responded by notifying the escrow agent of the dispute on May 28, 2015, and instructing the agent not to release the Escrow Property to either party until they resolved their dispute and submitted either a "Joint Written Instruction or Final Decree."[17]

          After Myers objected, the parties utilized the indemnification procedure as a dispute resolution mechanism of sorts. HC hired experts to inspect the equipment with an eye toward addressing Myers' objections regarding the lack of specificity in the First Claim Notice.[18] HC then sent Myers a letter in December 2015, in which it included a settlement demand along with a detailed breakdown of each alleged defective asset and the experts' opinions regarding why the asset was not in "good condition" as warranted.[19] The parties were unable to reach an agreement.

         HC sent a second claim notice on July 15, 2016, and Myers received it on July 18, 2016 (the "Second Claim Notice").[20] In the Second Claim Notice, HC identified a number of assets it alleged were not in "good condition" as warranted in Section 4.08 of the Purchase Agreement, and provided detailed charts that listed for each asset the amount of the alleged loss and an explanation of the deficiency.[21] This notice also included the experts' opinions on defects and damages.[22] In total, HC claimed over $10 million in losses, well in excess of the $8.6 million in escrow.[23]Myers did not deliver its written objection until August 12, 2016.[24] On August 17, 2016, HC advised the escrow agent that HC had not received a timely objection from Myers and stated its position that Myers, therefore, had "irrevocably waived the right to contest the distribution of the full amount of the Escrow Property . . . ."[25]

         D. Procedural History

         On August 17, 2016, HC filed its Verified Complaint in this Court for breach of contract seeking, inter alia, the full amount of Escrow Property based on the claims raised in its Second Claim Notice. On May 25, 2017, HC filed a motion for partial summary judgment in which it argues that Myers has waived its right to contest the Second Claim Notice, and the release of the Escrow Property, because its objection to the Second Claim Notice was not timely. Myers opposes the motion. This is the Court's decision.

         II. Analysis

         As noted, the core issue raised by the motion is whether Myers timely objected to HC's Second Claim Notice. In order to decide that issue, the Court must first determine whether the claim contained in the Second Claim Notice is the same as the claim contained in the First Claim Notice. If the claims are different, then the Escrow Agreement required Myers to send a written objection within 10 days of receiving the Second Claim Notice, which Myers did not do. If the claims are the same, then Myers' original objection to the First Claim Notice, timely provided, would perfect its objection and require HC to prove its breach of warranty claim on the merits. For reasons discussed below, I find that the two claim notices clearly and unambiguously contain different claims. Thus, Myers' objection to the Second Claim Notice was untimely, it has waived its objections and HC is entitled to the Escrow Property.

         A. Standard Of Review

         Under Court of Chancery Rule 56(c), summary judgment is appropriate where "there is no issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law."[26] This Court has often observed that "[w]hen the issue before the Court involves the interpretation of a contract, summary judgment is appropriate only if the contract in question is unambiguous."[27]

         Delaware "is more contractarian than . . . many other states."[28] With this in mind, our courts have recognized that "[p]arties have a right to enter into good and bad contracts, the law enforces both."[29] "The presumption that the parties are bound by the language of the agreement they negotiated applies with even greater force when the parties are sophisticated entities that have engaged in arms-length negotiations."[30]

         After carefully reviewing the operative provisions of the contracts at issue here, I am satisfied they are clear and unambiguous.[31] Thus, the Court's task is ...

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