United States District Court, D. Delaware
A. Sensing, POTTER ANDERSON & CORROON LLP, Wilmington,
DE; Dylan P. Kletter & Kelsey D. Bond, BROWN RUDNICK LLP,
Hartford, CT. Attorneys for Plaintiff.
Dominick T. Gattuso & Aaron M. Nelson, HEYMAN ENERIO
GATTUSO & HIRZEL LLP, Wilmington, DE; Marc J. Kurzman
& Peter M. Nolin, CARMODY TORRANCE SANDAK & HENNESSEY
LLP, Stamford, CT; Damian K. Gunningsmith, CARMODY TORRANCE
SANDAK & HENNESSEY LLP, New Haven, CT. Attorneys for
ANDREWS, U.S DISTRICT JUDGE
issue in this case is the July 31, 2015 sale of Rex Forge
("Rex") from Ronald Fontanella to Heritage Handoff
Holdings, LLC ("Heritage"). Rex manufactures forged
steel parts, primarily for the automotive industry. Prior to
the sale, Mr. Fontanella served as CFO, CEO, and owner of
Rex. (D.I. 157-60 ("Tr.") at 14:4-15). CounterPoint
Capital Partners ("CounterPoint") and Carlin
Capital ("Carlin") formed Heritage, a Delaware LLC,
for the purpose of purchasing Rex. (Tr. 420:7-15). The Stock
Purchase Agreement ("SPA") embodies the
Parties' final deal regarding the sale. (PX 4).
brought this action on August 10, 2016 alleging breach of
contract, securities fraud under Section 10(b) of the
Exchange Act, common law fraud, and violation of the
Connecticut Unfair Trade Practices Act. (D.I. 1 at
¶¶ 66-94). Mr. Fontanella counterclaimed seeking
reformation of the SPA and alleging breach of contract. (D.I.
135 at CC ¶¶ 48-69). I held a four-day bench trial
on August 13-16, 2018. The Parties have since fully briefed
the issues addressed at trial and provided me with joint
proposed post-trial findings of fact. (D.I. 168, 169, 170,
172, 173, 174, 175).
manufactures forged steel components for automotive industry
customers. It is considered a "Tier 2" parts
supplier. (Tr. 55:15-25). Rex ships its forgings to Tier 1
suppliers such as Dana and Hendrickson for additional
processing. (Tr. 54:7-12). Tier 1 suppliers provide parts to
Original Equipment Manufacturers ("OEMs") such as
Ford or Toyota. (Tr. 54:18-55:10). OEMs monitor Tier 1 and
Tier 2 suppliers. (Tr. 395:24-396:7).
the signing of the SPA on July 31, 2015
("Closing"), Rex did not have a diverse customer
base-80 percent of Rex's business was concentrated in
four Dana locations. (Tr. 15:14-18, 48:22-49:9). Rex's
second largest customer was Hendrickson. (Tr. 135:15-20).
Heritage recognized the high customer concentration as a
potential risk. (Tr. 709:7-21). During diligence, it made
repeated inquiries to Mr. Fontanella about Rex's
relationship with Dana. (Tr. 433:14-17). Heritage wanted to
know "everything" Mr. Fontanella knew about
Rex's customer relationships before Closing. (PX 89).
Fontanella consistently represented to Heritage that
Rex's relationship with Dana was good. (Tr. 423:9-13,
708:8-15). It was not. During the relevant period, Rex
received scorecards from Dana which consistently ranked
Rex's quality as "poor" or "bad."
(Tr. 290:8-17, 373:1-374:18, 399:9-15; PX 193). The
scorecards were not available to the general public. (Tr.
522:3-8). Rex was also receiving daily phone calls from Dana,
receiving urgent complaint emails from Dana, and undergoing
regular onsite visits from Dana. (Tr. 60:7-16; PX 32; PX 33;
PX 40). In May 2015, two senior Dana executives visited Rex
to tell Mr. Fontanella in person that Dana was cancelling
parts and sending them to a competitor. (Tr. 81:13-20,
350:25-351:17). A customer moving parts to a competitor was
an exceedingly uncommon occurrence with only one other
identified instance in nineteen years. (Tr. 87:16-25,
297:10-12). Mr. Fontanella did not disclose any of these
issues to Heritage.
diligence, Heritage sought to speak with someone from Dana to
verify the stability of its relationship with Rex. (Tr.
436:15-18). Mr. Fontanella was not helpful and initially
claimed he did not know to whom Heritage could talk. (Tr.
436:19-437:13). Mr. Fontanella eventually arranged a call
with Dana employee Philip Alber during which Heritage
presented itself as a consultant. (Tr. 437:23-24, 438:13-21).
Mr. Alber had a high regard for Rex and had a good
relationship with the company. (Tr. 1025:23-1026:22).
However, Mr. Alber was a lower level employee and was not
involved in Dana's purchasing decisions or quality
issues. (Tr. 437:25-438:9, 931:23-932:3).
the same period, Hendrickson was decreasing its volume of
purchases of part number D-2700 ("the Spider").
(Tr. 123:9-13; 300:25-301:9). The Spider was Rex's
highest revenue part. (Tr. 136:17-23; PX 196). Mr. Fontanella
did not disclose any issues with Hendrickson to Heritage
prior to Closing. (Tr. 115:4-9; PX 9).
cells are Rex's primary equipment. They have designations
ranging from Press 42 to Press 52. (Tr. 151:15-17,
427:13-21). The press cells consist of a main press, a trim
press, an induction heater, a conveyor, and cooling towers.
(Tr. 151:18-152:13, 633:6-9). If any part of the press cell
breaks down, the entire press cell is inoperable. (Tr.
633:11-15). At Closing, much of Rex's equipment was at
least half a century old and had encountered "hard
use." (DX 71 at HERITAGE4771-88). Heritage was aware
that two of the presses were out of service at Closing. (PX5
to Closing, Rex handled most maintenance in-house. (Tr.
158:2-6). It employed a full-time maintenance manager who
managed six or seven employees. (Tr. 187:8-13). Rex's
capital expenditures ranged from $650, 000 to $700, 000 per
year between 2008 and 2013. (PX 7 at HERITAGE50). Pursuant to
SPA § 2.24(a)(iv), Rex disclosed to Heritage each
capital expenditure incurred during the diligence period that
was greater than $25, 000. (PX 5 at REX24317-18).
diligence, Heritage had access to Rex's maintenance
records, had access to Rex's employees, and toured
Rex's facilities on numerous occasions. (Tr. 608:8-11,
688:25-689:6, 743:25-744:21, 745:9-20). Heritage also
obtained an appraisal report from Great American. (DX 71).
The report disclosed the equipment was in "fair"
condition, which meant that the equipment "may require
repair or refurbishment soon; appears to have seen extensive
service; may be aged, have suffered hard use or may be
visually unattractive to potential buyers."
(Id. at HERITAGE4771-88). Heritage recognized that,
due to the age and condition of the equipment,
"unexpected significant capital expenditures could be
required to maintain or repair the forging press and
hammers." (DX 95 at HERITAGE655).
Closing, Heritage agreed to pay $12 million for Rex. (PX 4).
Heritage paid Mr. Fontanella $8, 393, 065 in cash, which was
reduced in March 2016 to $7, 886, 065 by certain net working
capital adjustments, and a $2, 500, 000 Note, which was
payable to Mr. Fontanella over the next five years. (PX 107;
DX 137). Under the Note, Heritage and Rex agreed to pay Mr.
Fontanella $79, 538 quarterly, for twenty quarters, with the
remaining balance due on July 31, 2020. (PX 4 at REX24364).
These payments are subject to certain set-off rights under
Section 6.6 of the SPA and certain environmental funding
provisions under Exhibit B to the SPA. (Id.).
Rex's maintenance department changed dramatically. The
long-term maintenance director and the electrician left the
company. (Tr. 248:14-249:22, 511:19-512:1). Between Closing
and June 2016, the Director of Manufacturing and Engineering,
another long-term Rex employee who ultimately left the
company, supervised maintenance. (Tr. 306:25-307:1). In June
2016, Rex promoted a recently hired employee to handle
maintenance. (Tr. 627:19-628:2). Moreover, Rex did not have a
preventive maintenance plan. (Tr. 938:20-24, 944:3-7).
Rather, Heritage ran the equipment until it needed to be
repaired. (Tr. 685:4-17). Indeed, even with known mechanical
problems and no skilled in-house maintenance department,
Heritage ran some equipment until it failed. (Tr.
October 2015, Plaintiff defaulted on its loan agreement with
Wells Fargo. (Tr. 729:18-730:1; PX 105).
Plaintiff's Fraud Claims
Delaware, to establish a common law fraud claim a plaintiff
must prove: (1) a false representation by the defendant; (2)
the defendant's knowledge of or reckless indifference to
the falsity of the representation; (3) the defendant's
intent to induce the plaintiff to act; (4) the plaintiffs
actions taken in justifiable reliance on the false
representation; and (5) damages stemming from the plaintiffs
reliance. Stephenson v. Capano Dev., Inc., 462 A.2d
1069, 1074 (Del. 1983). A finding of fraud does not require
finding an overt misrepresentation. Fraud can occur
"through deliberate concealment of material facts, or by
silence in the face of a duty to speak." Id.
securities fraud is similar to Delaware common law fraud. To
establish a claim of federal securities fraud a plaintiff
must prove: (1) the sale of a security from the defendant to
the plaintiff; (2) a false representation or omission of
material fact by the defendant; (3) the defendant's
intent to deceive, manipulate, or defraud (often referred to
as scienter); (4) the plaintiffs actions were taken in
justifiable reliance on the defendant's representation or
omission; and (5) damages stemming from the plaintiffs
reliance. Institutional Inv 'rs Grp. v. Avaya,
Inc., 564 F.3d 242, 251 (3d Cir. 2009).
Relevant Factual Findings
was Rex's largest customer at Closing, accounting for 80%
of Rex's business. (Tr. 49:7-9).
May 2015, Dana representatives Vyas Harsh and Phil Molyet
informed Mr. Fontanella that Dana was moving parts from Rex.
(Tr. 81:13-23, 350:25-351:17).
Sometime prior to July 8, Hendrickson informed Mr. Fontanella
that it was delaying orders of the Spider from Rex. (Tr.
Fontanella learned on June 8, 2015 that Rex was losing
Dana's Toyota Tacoma program, Part #5002961. (Tr. 99:2-6;
Fontanella did not inform Heritage of lost parts prior to
Closing. (Tr. 124:10-125:25, 1068:6-25).
Heritage knew it was purchasing an old business with 1950s
era equipment. (Tr. 516:9-16; PX 7 at HERITAGE25).
Heritage was aware that older equipment may unexpectedly
require large capital expenditures for repairs. (DX 71 at
Heritage was on notice that the equipment was in "fair
working order." (Id.). This meant that it
"[m]ay require repair or refurbishment soon" and
may have "suffered hard use." GW. atHERITAGE4771).
Heritage changed the maintenance regime immediately after
Closing. (Tr. 247:18-248:22).
argues that Mr. Fontanella committed fraud via
representations or material omissions he made related to (1)
Rex's customers and (2) Rex's equipment. I will
consider each set of representations in turn. First, however,
I will address Mr. Fontanella's defenses to the fraud
Mr. Fontanella's Affirmative Defenses
argues that Plaintiff contractually waived its right to rely
on any extra-contractual representation made by Mr.
Fontanella. It bases its argument on
"anti-reliance" provisions of the Parties'
pre-negotiation Confidentiality Agreement and of the SPA.
relevant provision of the Confidentiality Agreement precludes
Heritage from bringing a claim based on the Evaluation
Material provided to it by the investment banking firm
Sperry, Mitchell & Company, LLC:
You understand that none of the Company's directors,
officers, employees, agents, or representatives have made or
make any representation or warranty, express or implied, as
to the accuracy or completeness of the Evaluation Material.
You agree that none of the Company's directors, officers,
employees, agents, or representatives shall have any
liability to you or any other person resulting from the use
or content of the Evaluation Material.
(DX 4 at SPM3583). The SPA's integration clause, Section
7.5, preserves the obligations imposed by the Confidentiality
This Agreement and the Related Agreements constitute the
entire agreement between and among the parties hereto and
thereto with respect to their collective subject matter and
supersede all other prior agreements and understandings, both
written and oral, among or between any of such parties with
respect to the collective subject matter hereof and thereof;
provided, this Agreement shall not supersede any
existing confidentiality agreements between or among the
parties, all of which continue in effect in accordance with
The SPA also contains a provision, Section 2.28, which
expressly disclaims extra-contractual statements made by
Defendant. (Id.). That section provides:
Except for the representations and warranties contained in
Section 2 of this Agreement (including the related portions
of the Shareholder Disclosure Schedule), the Shareholder, the
Company and/or any other Person has not made or does not make
any other express or implied representation, either written
or oral, on behalf of the Shareholder or the Company
(including any representation or warranty as to the accuracy
or completeness of any information regarding the Company
furnished or made available to Purchaser and its
representatives, or in any form in expectation of the
transactions contemplated thereby), or as to the future
revenue, profitability or success of the Company, or any
representation arising from statute or otherwise in law.
courts enforce clear anti-reliance provisions. See
Prairie Capital III, L.P. v. Double E Holding Corp., 132
A.3d 35, 50 (Del. Ch. 2015); Abry Partners V, L.P. v. F
& WAcq. LLC, 891 A.2d 1032, 1057 (Del. Ch. 2006).
However, an enforceable anti-reliance provision must contain
a promise by the plaintiff that it did not rely on
extra-contractual statements. Abry Partners, 891
A.2d at 1059. "If parties fail to include unambiguous
anti-reliance language, they will not be able to escape
responsibility for their own fraudulent representations made
outside of the agreement's four corners."
does not contain unambiguous anti-reliance language. Though
Defendant disclaimed extra-contractual representations,
Plaintiff did not affirmatively promise not to rely on such
representations. Thus, under Delaware law, SPA§ 2.28 is
not an anti-reliance provision. Therefore, it does not
prevent Heritage from successfully asserting a fraud claim
based on extra-contractual representations.
the Confidentiality Agreement bars Plaintiff from bringing a
claim based on the content of the Evaluation Material, it
does not bar Plaintiffs fraud claim based on representations
made during diligence. Defendant cites RAA Management,
LLC v. Savage Sports Holdings, Inc. for the proposition
that "[n]on-reliance clauses in a confidentiality
agreement are intended to limit or eliminate liability for
misrepresentations during the due diligence process." 45
A.3d 107, 119 (Del. 2012). However, Defendant omits the next
sentence of that opinion, which states, "The breadth and
scope of the non-reliance clauses in a confidentiality
agreement are defined by the parties to such preliminary
contracts themselves." Id. In RAA
Management, the confidentiality agreement provided:
You [RAA] understand and acknowledge that neither the Company
[Savage] nor any Company Representative is making
any representation or warranty, express or
implied, as to the accuracy or completeness of the Evaluation
Material or of any other information
concerning the Company provided or prepared by or for the
Company, and none of the Company nor the Company
Representatives, will have any liability to
you or any other person resulting from your use of the
Evaluation Material or any such other information.
Only those representations or warranties
that are made to a purchaser in the Sale Agreement when, as
and if it is executed, and subject to such limitations and
restrictions as may be specified [in] such a Sale Agreement,
shall have any legal effect.
Id. at 110 (alterations and emphasis in original).
That agreement is distinguishable from the Parties'
Confidentiality Agreement in that it bound the plaintiff to
rely only on representations made in an eventual contract. It
expressly excluded representations made in the materials and
during diligence. Here, the Confidentiality Agreement
precludes reliance on the Evaluation Materials, but is silent
on representations made during due diligence. Thus, the
Confidentiality Agreement does not bar Plaintiff from
pursuing a Delaware common law fraud claim based on
statements and representations made during
next argues that Plaintiffs fraud claim is duplicative of its
breach of contract claim and, therefore, improper
bootstrapping. Plaintiff addresses this claim in a single
footnote. (D.I. 175 at 2 n.2). It argues that every case
Defendant cites establishes that a post-Closing lawsuit may
assert fraud claims. Its confidence is misplaced. Delaware
courts routinely dismiss fraud claims that seek damages which
are identical to the damages alleged for a breach of contract
claim. EZLinks Golf, LLC v. PCMS Datafit, Inc., 2017
WL 1312209, at *6 n.70 (Del. Super. Ct. Mar. 13, 2017)
(collecting cases). Moreover, a plaintiffs request for
punitive damages does not sufficiently distinguish the
damages claims to allow a fraud claim to stand. Id.
at *6. Other than its request for punitive damages, Plaintiff
does not distinguish the damages it seeks for each of the
claims in this case. (See D.I. 168 at 14-25).
Therefore, Defendant is correct that Plaintiff is barred from
asserting a fraud claim under Delaware law.
I will only assess Defendant's liability for federal
has established by a preponderance of the evidence that Mr.
Fontanella made false representations and omitted material
facts regarding Rex's customers. During the diligence
period, Mr. Fontanella failed to disclose complaints and
cancellations which he was receiving from customers. (Tr.
61:15-19, 63:24-64:2, 78:20-79:8, 81:13-20, 350:25-351:17).
Mr. Fontanella also omitted from the SPA material information
regarding the status of Rex's relationship with key
customers. At Closing, Dana had removed four parts from Rex,
the Toyota Tacoma project was ending, Ford was concerned with
Rex, and Hendrickson had indicated it would reduce business.
(Tr. 138:10-139:2). Of particular concern, Dana was moving
some of its business to Rex's competitor Welland Forge-a
lengthy, difficult and expensive process. (Id. at
these issues with key customers, Defendant omitted this
information during negotiations and represented that all was
well. Mr. Fontanella also falsely represented in Schedule
2.13(a) that any disputes were minor and "have been or
will be favorably resolved." (PX 5 at REX24299).
looks to Schedule 2.13(a) to relieve him of liability for the
inaccurate customer representations he made in the SPA.
Schedule 2.13(a) provides:
From time to time in the normal course of business, customers
[sic] disputes arise regarding the quality of products sold
by the Company and have been or will be favorably resolved.
To the Shareholder's knowledge, there are currently no
such disputes that could reasonably be anticipated to have a
Material Adverse Effect on the Company.
Defendant argues that the "material adverse effect"
language renders the representations made in Schedule 2.13(a)
accurate. (D.I. 173 at 19-21). The contract defines
"material adverse effect" (MAE) as:
any state of facts, change, event, effect, occurrence or
circumstance that, individually, or in the aggregate . . .
has, has had or could reasonably be expected to have or give
rise to, a material adverse effect on (a) the business,
financial condition, or operations of the Company ....
at REX24360). Defendant argues that none of the lost parts,
individually or in ...