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Ray Beyond Corp. v. Trimaran Fund Management, L.L.C.

Court of Chancery of Delaware

January 29, 2019

RAY BEYOND CORP., Plaintiff,
v.
TRIMARAN FUND MANAGEMENT, L.L.C., Defendant and Counterclaim and Third-Party Plaintiff, and THE HALIFAX GROUP, LLC, Third-Party Defendant.

          Submitted: November 29, 2018

          Kenneth J. Nachbar and Sabrina M. Hendershot of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, and Phillip A. Geraci, Aaron F. Miner, and Harry K. Fidler of Arnold & Porter Kaye Scholer LLP, New York, New York, Attorneys for Plaintiff/Counterclaim Defendant Ray Beyond Corp. and Third-Party Defendant The Halifax Group, LLC

          Robert S. Saunders, Jenness E. Parker, Lauren N. Rosenello, and Jessica M. Jones of SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP, Wilmington, Delaware, Attorneys for Defendant and Counterclaim and Third-Party Plaintiff Trimaran Fund Management, L.L.C.

          MEMORANDUM OPINION

          McCORMICK, V.C.

         This decision on the plaintiff's motion for judgment on the pleadings addresses the scope of authority conferred under a contractual dispute resolution provision upon an independent accountant designated "an expert, not an arbitrator."

         The dispute resolution provision at issue is found in an Agreement and Plan of Merger (the "Merger Agreement") executed on April 13, 2018. Pursuant to the Merger Agreement, Plaintiff Ray Beyond Corp. ("Ray Beyond") acquired ChanceLight, Inc. ("ChanceLight") from its selling security holders, including Defendant Trimaran Fund Management, L.L.C. ("Trimaran"). Ray Beyond paid a base price of $125 million, $23.1 million of which was placed in escrow at closing. Release of the escrowed funds depends on a ChanceLight subsidiary, Ombudsman Educational Services, Ltd. ("Ombudsman"), entering post-closing into a qualifying contract with the Chicago Public Schools ("CPS"). The section of the Merger Agreement governing the release of the escrowed funds delegates certain matters to an independent accountant for resolution. The parties dispute whether a qualifying contract was ever executed. They further dispute whether their disagreement concerning a qualifying contract must be referred to the independent accountant.

         This decision denies Ray Beyond's motion for judgment on the pleadings seeking to specifically enforce the dispute resolution provision. The Merger Agreement designates the independent accountant "an expert, not an arbitrator."[1] Under settled Delaware case law, such language calls for an expert determination, not an arbitration.[2] Expert determination provisions are fundamentally different from arbitration provisions. The former limit the scope of the third-party decision maker's authority to factual disputes within the decision maker's expertise. The latter typically confers upon the third-party decision maker broad authority similar to that of judicial officers. By invoking language calling for an expert determination, the Merger Agreement narrows the third-party decision maker's scope of authority to factual disputes within an independent accountant's expertise.

         The parties' escrow dispute does not fit within the independent accountant's narrow authority. To determine who is entitled to the escrow funds, one must determine whether CPS and Ombudsman entered into a qualifying contract. This issue raises the primarily legal question of whether a certain contract meets the definition of a qualifying contract. That question is not within the scope of the independent accountant's expertise. Accordingly, Ray Beyond is not contractually entitled to require Trimaran to submit this dispute to the independent accountant, and the motion for judgment on the pleadings as to Ray Beyond's claim for specific performance must be denied.

         This decision also denies Ray Beyond's motion for judgment on the pleadings on Trimaran's counterclaims. Ray Beyond predicates these arguments on its entitlement to specific performance of the expert determination provision, and the arguments thus fail for the same reasons.

         Ray Beyond's parent affiliate, The Halifax Group, Inc. ("Halifax"), has moved for judgment on the pleadings on Trimaran's third-party claim for tortious interference. A contracting party's parent entity may be held liable for tortious interference in limited circumstances. To state such a claim, a plaintiff must allege facts that, if true, demonstrate that the parent sought maliciously or in bad faith to injure the plaintiff. The few facts Trimaran alleges specific to Halifax fall far short of this standard. This decision therefore grants Halifax's motion for judgment on the pleadings on Trimaran's third-party complaint.

         The reasoning for these conclusions follows.

         I. BACKGROUND

         The facts are drawn from the operative pleadings and the documents they incorporate by reference.[3] All reasonable inferences are drawn in a light most favorable to Trimaran, the non-moving party.[4]

          A. Merger Agreement

         On April 13, 2018, Ray Beyond, an affiliate of The Halifax Group, LLC ("Halifax"), entered into the Merger Agreement to acquire ChanceLight.[5]ChanceLight is a Delaware corporation that provides behavioral health, therapy, and educational solutions for children and young adults.[6] Pursuant to the Merger Agreement, Ray Beyond acquired all of the equity interests in ChanceLight from its selling securityholders, including Trimaran.[7] Trimaran was designated the Securityholders Representative.[8] The parties structured the acquisition as a merger between Ray Beyond's wholly-owned subsidiary, Ray Beyond Acquisition Corp., and ChanceLight.[9] The merger closed on April 27, 2018.[10] The Merger Agreement set a base purchase price of $125 million, subject to post-closing adjustments.[11]

          1. CPS Contract

         Ombudsman provides alternative learning opportunity programs to CPS students.[12] Prior to the merger, Ombudsman's contract with CPS (the "CPS Contract") was a key source of earnings for ChanceLight and was set to expire on June 30, 2018.[13] In February 2018, ChanceLight responded to the CPS Board's request for proposals for a new contract.[14]

         2. CPS Escrow Amount

         At the time the merger closed, the CPS Board was considering ChanceLight's RFP response.[15] The parties could not know whether CPS would continue contracting with Ombudsman for services.[16] To compensate the sellers for any continued business post-closing between Ombudsman and CPS that met certain value thresholds, the Merger Agreement established an escrow account into which $23.1 million of the $125 merger consideration was deposited (the "CPS Escrow Amount").[17]

         3. New CPS Contract

         The parties' respective entitlement to all or a portion of the CPS Escrow Amount depended on whether Ombudsman received, before a date certain, a "New CPS Contract."[18]

         Section 1.1 of the Merger Agreement defines what constitutes a "New CPS Contract" as:

[A] contract Ombudsman seeks to enter into with the B of Ed. [of Chicago Public Schools] in connection with the proposal submitted by the Ombudsman on February 8, 2018 to the B of Ed. (the "CPS RFP").[19]

         "CPS Contract," in turn, is defined as:

[T]he Alternative Learning Opportunities Program Agreement, dated July 1, 2013, by and between Ombudsman . . . and the B of Ed.[20]

         And relevant to these definitions, Section 1.1 of the Merger Agreement defines "Contract" as:

[A]ny binding agreement, license, contract, lease, deed, note instrument or indemnity agreement including any amendment, extension, renewal, guarantee or other supplement with respect thereto.[21]

4. Entitlement to CPS Escrow Amount

         Section 6.17 of the Merger Agreement governs the parties' entitlement to the CPS Escrow Amount.[22]

         Under Section 6.17, if Ombudsman received no New CPS Contract, then Ray Beyond would be entitled to the CPS Escrow Amount in its entirety, [23] and if Ombudsman received a New CPS Contract, then Trimaran would be entitled to some or all of the CPS Escrow Amount.[24]

         If Ombudsman received a New CPS Contract meeting one or more of five agreed-upon "CPS Tests" in Section 6.17(b), Trimaran was entitled to the full escrow amount.[25] The first four CPS Tests evaluated the value of the new contract based on objective criteria (the contract's substantial similarity to the prior CPS Contract or the RFP response, [26] or capacity of students served and the payment modifier based on percentage of attendance[27]). The fifth CPS Test adopted a more flexible concept, calling for an evaluation of, and the parties' agreement on, the "financial impact" of the New CPS Contract on ChanceLight.[28]

         If the New CPS Contract did not meet the CPS Tests, but exceeded a ceiling of economic value defined by objective criteria set forth in Section 6.17(c)(i), Section 6.17(d) provided a "middle ground" scenario, whereby the parties would discuss in good faith whether and how to split the CPS Escrow Amount.[29]

         5. Settlement Accountant Provisions

         Section 6.17 provides that certain disputes regarding the distribution of the CPS Escrow Amount would be resolved by a third-party independent accounting firm called the "Settlement Accountant, "[30] which would be "an expert, not an arbitrator."[31]

         Section 6.17 specifically invokes the Settlement Accountant procedure in three places. The first appears in the flexible fifth CPS Test (Section 6.17(b)(v)) and the second appears in the "middle ground" scenario (Section 6.17(d)). In either situation, if the parties negotiating in good faith were unable to reach an agreement concerning an appropriate distribution of the CPS Escrow Amount, within ten days of receipt of the New CPS Contract, the parties stipulated that "the matter shall be referred to the Settlement Accountant and the determination of the Settlement Accountant shall be binding . . . ."[32]

         The third invocation of the Settlement Accountant in Section 6.17 is found in Section 6.17(g), which states that "[i]n the event that the CPS Escrow Amount is not fully distributed prior to July 1, 2018 . . . and [Ray Beyond] and [Trimaran] are not able in good faith to agree upon an appropriate distribution of the CPS Escrow Amount, the matter shall be referred to the Settlement Accountant . . . ."[33]

         In addition to Section 6.17, the Merger Agreement invokes the Settlement Accountant procedure in one other section-Section 2.12, which sets forth the procedure for preparing a post-closing price adjustment of initial merger consideration based on the closing date balance sheet. [34]

         B. Events Leading to Litigation

         On May 7, 2018, the CPS Board of Education notified Ombudsman that it would not be making an award to Ombudsman.[35] Ray Beyond describes this letter as an unambiguous notice that the CPS Board of Education determined not to award a New CPS Contract.[36]

         Two days later, the CPS Board of Education informed Ombudsman that CPS would be extending the CPS Contract by one year (the "Extension").[37] The Extension was later memorialized in writing and publicly disclosed on June 27, 2018.[38] Trimaran did not become aware of the Extension until it was publicly disclosed.[39] Trimaran argues that the Extension qualifies as a New CPS Contract.[40]

         The parties exchanged letters from May 14, 2018 to July 1, 2018, disputing whether the Extension qualifies as a New CPS Contract.[41] As of July 1, 2018, Ray Beyond believed itself entitled to the full escrow amount and that Section 6.17 required that the dispute be submitted to the Settlement Accountant for resolution.[42]Trimaran believed itself entitled to the full escrow amount and that the dispute over a New CPS contract was not within the scope of the Settlement Accountant's authority.[43]

         C. Procedural Posture

         On July 9, 2018, Ray Beyond filed this action seeking specific performance of Section 6.17(g) of the Merger Agreement, [44] which Ray Beyond describes as the "exclusive mechanism through which the Parties are required to settle the distribution of the CPS Escrow Amount."[45] On August 1, 2018, Trimaran answered the Complaint asserting four counterclaims against Ray Beyond.[46] Counterclaim I seeks a declaration that the Extension is a New CPS Contract.[47] Counterclaim II claims that Ray Beyond breached the Merger Agreement by refusing to release the CPS Escrow Amount to Trimaran and by failing to inform Trimaran of its communications with the CPS Board of Education.[48] Counterclaim III claims that Ray Beyond breached the implied covenant of good faith and fair dealing by refusing to release the CPS Escrow Amount.[49] Counterclaim IV claims that Ray Beyond has been unjustly enriched by the benefits of the Extension.[50] Trimaran also asserted a fifth claim against third-party defendant Halifax, claiming that Halifax tortiously interfered with Trimaran's contractual rights by refusing to execute a joint instruction to release the escrowed funds.[51]

         Ray Beyond filed its Reply, Answer, and Affirmative Defenses on August 15, 2018, [52] and moved for judgment on the pleadings on September 4, 2018.[53] The motion seeks a judgment on (i) Ray Beyond's claim for specific performance, (ii) all of Trimaran's counterclaims against Ray Beyond, and (iii) Trimaran's third-party claim against Halifax.

         II. ANALYSIS

         A party is entitled to judgment on the pleadings only where "no material issue of fact exists and the movant is entitled to judgment as a matter of law."[54] The Court must "'view the facts pleaded and the inferences to be drawn from such facts in a light most favorable to the non-moving party.'"[55]

         Viewing the facts in the light most favorable to Trimaran, this decision denies Ray Beyond's motion as to the claims for specific performance and Trimaran's four counterclaims, and grants Halifax's motion on Trimaran's third-party claim for tortious interference.

          A. Specific Performance

         Ray Beyond seeks specific performance of Section 6.17(g) of the Merger Agreement, which it contends delegates resolution of all disputes concerning the CPS Escrow Amount to the Settlement Accountant. Ray Beyond argues that Section 6.17(g) requires Trimaran to submit the legal question concerning what constitutes a New CPS Contract, as well as all other disputes affecting distribution of the CPS Escrow Amount, to the Settlement Accountant.

         The specific sentence of Section 6.17(g) that Ray Beyond seeks to enforce provides: "in the event that the CPS Escrow Amount is not fully distributed prior to July 1, 2018 . . . and [Ray Beyond] and [Trimaran] are not able in good faith to agree upon an appropriate distribution of the CPS Escrow Amount, the matter shall be referred to the Settlement Accountant."[56] Applying basic rules of grammar to the preceding quote, the pronominal "the matter" refers to "appropriate distribution of the CPS Escrow Amount." Thus, according to Ray Beyond, the language of Section 6.17(g) requires that all issues affecting the "appropriate distribution of the CPS Escrow Amount" be referred to the Settlement Accountant.[57]

         Nothing on the face of Section 6.17(g) expressly indicates whether the Settlement Accountant's authority to determine "appropriate distribution" should be broadly construed to include the authority to resolve all questions, including legal questions, affecting distributions. To argue that it should be interpreted as such, Ray Beyond points to the litigation bar of Section 6.17(e), which provides that the parties "shall not, institute any action of any kind . . . with respect to the matters that are the subject of . . . Section 6.17."[58] This litigation bar, Ray Beyond argues, forecloses the parties from submitting legal disputes concerning Section 6.17 to a court of law.[59] If Section 6.17(e) forbids the parties from instituting litigation concerning the subject matter of Section 6.17, Ray Beyond reasons that the Settlement Accountant's authority under Section 6.17(g) must delegate to the Settlement Accountant the authority to resolve issues traditionally relegated to a court of law.[60]

         In addressing Ray Beyond's contractual interpretation, "[t]he critical issue for the Court to decide . . . is what the shared intentions of the contracting parties were when they entered the Agreement."[61] In determining the intention of the parties entering into an agreement, "courts must read the specific provisions of the contract in light of the entire contract."[62] This principle of construction, known as the "whole-text canon," stems from the theory that "[c]ontext is a primary determinant of meaning."[63] The Delaware Supreme Court views a contextual analysis as critical where, as here, "the contract at issue involves a definitive acquisition agreement addressing the sale of an entire business."[64] As part of a whole-text analysis, the court must avoid interpreting a legal text in a manner that renders provisions superfluous[65] or creates discord or tension between the parts of the text.[66]

         Viewed in the context of the entire contract, Ray Beyond's interpretation of Section 6.17(g) does not support its claim for specific performance.

         Broadly interpreting "the matter" of the "appropriate distribution" to include legal questions is inconsistent with the parties' intent to narrow the Settlement Accountant's role to that of "an expert, not an arbitrator."[67] Delaware courts have interpreted similar expert-not-arbitrator stipulations as calling for an expert determination, not an arbitration.[68] Expert determination and arbitration provisions confer fundamentally different scopes of authority to third-party decision makers.[69]A typical expert determination provision limits the decision maker's authority to deciding a specific factual dispute within the decision maker's expertise.[70] In contrast, the scope of authority conferred on an arbitrator is analogous to the authority conferred on a judicial officer.[71] The Merger Agreement's expert-not-arbitrator provision, therefore, signals the parties' intent to limit the scope of the Settlement Accountant's authority to discrete factual issues within an independent accountant's expertise.

         Delaware cases on this issue are all in accord. In Chicago Bridge, [72] the Delaware Supreme Court considered a third-party dispute resolution provision concerning a post-closing purchase price adjustment.[73] The Court concluded that a third-party expert-not-arbitrator lacked the authority to consider legal issues- breaches of representations and warranties regarding the target's historical accounting practice-when calculating the price adjustment.[74] Chief Justice Strine, writing for the panel, observed that as a result of the expert-not-arbitrator provision, the third-party decision maker did not have wide-ranging authority to adjudicate all disputes that arose under the merger agreement, but rather, authority "confined to a discrete set of narrow disputes."[75]

         The Court of Chancery reached similar conclusions in Penton[76] and AQSR.[77]Penton involved an agreement and plan of merger under which the buyer acquired a corporate subsidiary from its LLC parent.[78] The merger agreement provided for a referee procedure provision, pursuant to which an independent auditor would allocate post-merger transaction-related tax benefits.[79] The agreement described the referee as an expert-not-arbitrator, which Vice Chancellor Laster held limited the referee's authority to narrow questions and foreclosed analogies to arbitration doctrines.[80] The Vice Chancellor explained that when parties call for an expert determination, they are generally not "'grant[ing] the expert the authority to make binding decisions on general issues of law or legal disputes, '" and an "'expert is neither expected nor authorized to make final and binding rulings on issues of law.'"[81]

         AQSR involved an asset purchase agreement, under which the buyer was to purchase all contracts that met certain specified criteria.[82] The purchase agreement included a referee provision appointing an industrial board representative to determine which customer contracts fell within the scope of the agreement.[83] The agreement described the referee as an expert-not-arbitrator, [84] which then-Vice Chancellor Strine held limited the representative's "scope of authority . . . to specific, technical questions."[85] The Court described the referee procedure as "a narrow dispute resolution mechanism" that was "designed to take advantage of the technical expertise, rather than the ...


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