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Post Holdings, Inc. v. NPE Seller Rep LLC

Court of Chancery of Delaware

October 29, 2018

POST HOLDINGS, INC. and MICHAEL FOODS OF DELAWARE, INC., Plaintiffs,
v.
NPE SELLER REP LLC, SAFE EGG LLC, THE MARVIN AND DONNA AARDEMA FAMILY PARTNERSHIP, LOST CREEK RANCH, LLC, BRIAN BOOMSMA, HOPEWELL VENTURES, L.P., R.W. DUFFY COX, GREGORY M. WEST, CHUCK LEIS, MICHAEL SMITH, JAY BERGLIND, HECTOR LARA, and D. WILLIAM TOONE, Defendants. NPE SELLER REP LLC, Counter-Plaintiff,
v.
POST HOLDINGS, INC. and MICHAEL FOODS OF DELAWARE, INC., Counter-Defendants.

          Submitted: Date September 12, 2018

          Rodger D. Smith II, Ryan D. Stottmann, and Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Richard B. Walsh, Jr. and Evan Z. Reid, LEWIS RICE LLC, St. Louis, Missouri, Attorneys for Plaintiffs and Counter-Defendants Post Holdings, Inc. and Michael Foods of Delaware, Inc.

          Kevin R. Shannon, Christopher N. Kelly, and Jay G. Stirling, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; William C. O'Neil, Jeffrey J. Huelskamp, and Michael A. Meneghini, WINSTON & STRAWN LLP, Chicago, Illinois, Attorneys for Defendants Safe Egg, LLC, The Marvin and Donna Aardema Family Limited Partnership, Lost Creek Ranch, LLC, Brian Boomsma, Hopewell Ventures, L.P., R.W. Duffy Cox, Gregory M. West, Chuck Leis, Michael Smith, Jay Berglind, Hector Lara, D. William Toone, and Defendant/Counter-Plaintiff NPE Seller Rep LLC.

          MEMORANDUM OPINION

          BOUCHARD, C.J.

         In October 2016, Michael Foods of Delaware, Inc. acquired all of the shares of National Pasteurized Eggs, Inc. for approximately $93.5 million pursuant to the terms of a Stock Purchase Agreement. About one year later, Michael Foods and its parent company, Post Holdings, Inc., filed this action against the sellers and their representative asserting claims for fraud and for breach of representations and warranties in the agreement that form the basis of a demand for indemnification they made under the agreement. The sellers' representative then filed counterclaims to enforce covenants in the agreement requiring the buyers to remit to the sellers' representative approximately $974, 000 in tax refunds and insurance proceeds pertaining to the pre-closing period.

         The sellers' representative has moved for judgment on the pleadings on its counterclaims. Michael Foods and Post Holdings oppose the motion on essentially two grounds. They argue that the obligation to remit the tax refunds and insurance proceeds in question should be excused by virtue of the sellers' prior material breach of representations and warranties in the agreement. Relying on a netting provision in the section of the agreement governing tax refunds, they also argue that the agreement permits them to refuse to remit the tax refunds at issue because the amount of their indemnification claim in this action exceeds the amount of those tax refunds.

         For the reasons discussed below, the court concludes that both of the buyers' arguments fail as a matter of law and that the sellers' representative is entitled to judgment on the pleadings on its counterclaims. The buyers' prior material breach argument fails because, even if the sellers did materially breach the agreement, buyers cannot continue to accept the benefits of the contract-as they seek to do in this action through their claim for indemnification-while disclaiming their contractual obligation to remit the tax refunds and insurance proceeds to the sellers promptly after they were received. The buyers' second argument fails because the agreement only permits indemnification payments that are "owed" to be netted against tax refunds and does not permit taking an offset for unliquidated claims for indemnification. Finally, entry of final judgment on the counterclaims under Court of Chancery Rule 54(b) is appropriate under the circumstances of this case.

         I. BACKGROUND

         The facts recited in this opinion come from the parties' pleadings[1] and documents incorporated therein.[2] Any additional facts are either not subject to reasonable dispute or are subject to judicial notice.

         A. The Parties

         Plaintiff Post Holdings, Inc., a Missouri corporation, is a consumer packaged goods holding company headquartered in St. Louis, Missouri. Plaintiff Michael Foods of Delaware, Inc. ("Michael Foods"), a wholly owned subsidiary of Post Holdings, is incorporated in Delaware and headquartered in Minnetonka, Minnesota. Post Holdings and Michael Foods are referred to together at times as the "Buyers."

         Non-party National Pasteurized Eggs, Inc. ("NPE") is a producer of pasteurized shell eggs based in Lansing, Illinois. Defendants Safe Egg LLC, The Marvin and Donna Aardema Family Partnership, Lost Creek Ranch, LLC, Brian Boomsma, Hopewell Ventures, L.P., R.W. Duffy Cox, Gregory M. West, Chuck Leis, Michael Smith, Jay Berglind, Hector Lara, and D. William Toone (collectively, the "Securityholders") were stockholders of NPE before the transaction at issue in this case. The Securityholders are each parties to the Stock Purchase Agreement, which designates defendant NPE Seller Rep LLC, a Delaware limited liability company, as their representative (the "Seller Representative").[3] The Securityholders and the Seller Representative are referred to collectively at times as the "Sellers."[4]

         B. The Stock Purchase Agreement

         On August 31, 2016, the Buyers and Sellers entered into a Stock Purchase Agreement (the "Agreement") in which Michael Foods agreed to purchase all of the Securityholders' shares of NPE stock for $93.5 million, subject to certain post-closing adjustments.[5] The transaction closed on October 3, 2016.[6] Post Holdings guaranteed "unconditionally the payment and performance of all of [Michael Foods'] obligations" in the Agreement.[7]

         The Agreement provides that the Securityholders would indemnify the Buyers after the closing for "all costs, losses, Taxes, Liabilities, obligations, damages, Actions, and expenses (whether or not arising out of third-party claims), including reasonable attorneys' fees" that arise from "any inaccuracy in or breach of any representation or warranty made by [NPE] in or pursuant to this Agreement, any Ancillary Agreement, or in any certificate or other closing document delivered pursuant to this Agreement."[8] Under the terms of the Agreement and an accompanying Escrow Agreement, a $7.5 million escrow fund was established, which set aside funds to pay for indemnification obligations.[9]

         The Agreement also obligates Michael Foods and NPE (as a subsidiary of Michael Foods after the closing) to remit to the Seller Representative certain tax refunds and insurance proceeds for the pre-closing period promptly after their receipt. Specifically, Section 6.7(e) of the Agreement, which deals with tax refunds, provides in relevant part that, subject to a netting provision discussed later in this opinion, Michael Foods shall pay to the Seller Representative any tax refund for the pre-closing period "within fifteen (15) days of receipt or entitlement thereto."[10]Section 6.8 of the Agreement, which deals with insurance proceeds, similarly provides in relevant part that NPE shall, "reasonably promptly after receipt thereof, pay to the Seller Representative . . . any net business interruption insurance proceeds . . . received by [NPE] after the Closing Date with respect to the matters described on Schedule 3.11(b)."[11]

         C. Buyers Discover Alleged Misrepresentations After the Closing

         After the transaction closed, Buyers allegedly discovered various misrepresentations Sellers made during due diligence and in the Agreement itself. These alleged misrepresentations generally concern three subjects: (1) NPE's compliance with immigration laws, (2) the condition of NPE's production equipment, and (3) the production capacity of its pasteurizers.[12] Buyers filed a claim notice asking for indemnification under the Agreement for the entire amount of the escrow fund based on these alleged misrepresentations.[13] Sellers rejected this demand.

         D. Tax Refunds and Insurance Proceeds for the Pre-Closing Period

         Since April 2017, Buyers have received various state and federal income tax refunds that are covered by Section 6.7 of the Agreement, totaling $552, 395.86.[14]Buyers also received during this period two payments of insurance proceeds covered by Section 6.8 of the Agreement, totaling $422, 040.68 net of collection expenses.[15]The combined total of the tax refunds and insurance proceeds at issue is $974, 436.54. After Buyers failed to remit these tax refunds and insurance proceeds to Sellers, Sellers submitted claim notices for indemnification to Buyers, requesting that these amounts be remitted to Sellers.[16] To date, Buyers have refused to do so.[17]

         II. PROCEDURAL HISTORY

         On October 27, 2017, Buyers filed this action. Their Complaint, as amended, asserts three claims: fraud (Count I), breach of representations and warranties in the Agreement that form the basis of a claim for indemnification (Count II), and specific performance for release of the escrow fund (Count III).[18]

         On January 24, 2018, Sellers filed their answer and the Seller Representative filed two counterclaims for (1) breach of the Agreement for failing to remit the tax refunds and insurance proceeds and (2) specific performance of Buyers' duty to remit the tax refunds and insurance proceeds.[19] That same day, Sellers moved to dismiss Buyers' fraud claim under Court of Chancery Rules 12(b) and 9(b) for failure to state a claim for relief and to plead fraud with particularity.[20]

         On May 18, 2018, the court granted in part and denied in part Sellers' motion to dismiss the fraud claim. Specifically, the motion was granted except insofar as Buyers' fraud claim was based on representations made in Sections 3.5, 3.14, and 3.18(c) of the Agreement and on certain extra-contractual representations made during due diligence concerning the production capacity of NPE's pasteurization systems.[21]

         On June 7, 2018, the Seller Representative moved under Court of Chancery Rule 12(c) for judgment on the pleadings on both of its counterclaims.[22] On September 12, 2018, after briefing on the motion had been completed, the parties asked the court to decide the motion without argument.[23]

         III. ANALYSIS

         The court will grant a motion for judgment on the pleadings under Court of Chancery Rule 12(c) when "no material issue of fact exists and the movant is entitled to judgment as a matter of law."[24] The court must view the facts pleaded in the light most favorable to the non-moving party, and draw reasonable inferences in the non-moving party's favor.[25] The court, however, is not "required to accept as true conclusory assertions unsupported by specific factual allegations, particularly when those assertions do no[t] comport with the terms of a clear and unambiguous contract."[26]

         "When analyzing a contract on a motion for judgment on the pleadings, this Court will grant such a motion only if the contract provisions at issue are unambiguous."[27] "Ambiguity does not exist simply because the parties disagree about what the contract means. . . . Rather, contracts are ambiguous when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings."[28] In short, "[j]udgment on the pleadings is a proper framework for enforcing unambiguous contracts because there is no need to resolve material disputes of fact."[29]

         It is undisputed that Michael Foods has not remitted to Sellers tax refunds and insurance proceeds relating to the pre-closing period in the amounts specified above, and that Post Holdings is obligated under the Agreement to guarantee Michael Foods' payment obligations. Buyers opposition to the motion for judgment on the pleadings instead turns on two arguments that, in the court's opinion, can be resolved as a matter of law and require entry of judgment in favor of the Seller Representative on both of its counterclaims.

         A. Buyers Are Not Excused from Performing Their Obligations Under the Agreement Based on an Alleged Prior Material Breach Because They Have Elected to Enforce the Agreement

         Buyers' primary argument for why they are not required to remit the tax refunds and insurance proceeds is based on a theory of prior material breach. Specifically, Buyers assert that because Sellers materially breached various representations and warranties in the Agreement, which were made "as of the date of [the] Agreement and as of the Closing, "[30] the Buyers are excused from any post-closing obligation to remit the tax refunds and insurance proceeds that otherwise might be owed under Sections 6.7 and 6.8 of the Agreement.

         Sellers make essentially two arguments in response.[31] Sellers first contend that Buyers cannot continue to retain the benefits of the Agreement while simultaneously failing to perform their obligations under it. Sellers next argue that the alleged breach of the Agreement was not material, so Buyers' performance would not be excused in any ...


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