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Pregis Performance Products LLC v. Rex Performance Products LLC

Superior Court of Delaware

September 4, 2019

PREGIS PERFORMANCE PRODUCTS LLC, ET AL, Plaintiffs,
v.
REX PERFORMANCE PRODUCTS LLC, ET AL., Defendants.

          Submitted: July 11, 2019

         Plaintiffs' Motion to Dismiss Defendants' Counterclaims GRANTED IN PART, DENIED IN PART

         Plaintiffs' Motion for Partial Summary Judgment GRANTED IN PART, DENIED IN PART

         Defendants' Motion for Summary Judgment - DENIED

          Thomas W. Briggs, Jr., Esquire (Argued); William M. Lafferty, Esquire; Thomas P. Will, Esquire; Jarrett W. Horowitz, Esquire; Morris, Nichols, Arsht & Tunnell LLP, Attorneys for Plaintiffs.

          Patrick J. King, Esquire; Kirkland & Ellis LLP, Attorney for Plaintiffs.

          C. Scott Reese, Esquire; Blake A. Bennett, Esquire (Argued); Dean R. Roland, Esquire; Cooch and Taylor P.A., Attorneys for Defendants.

          MEMORANDUM OPINION

          William C. Carpenter, Jr Judge.

         Before the Court are Pregis Performance Products LLC ("PPP" or "Pregis"), Olympus Growth Fund V, L.P. ("Olympus"), and Manu Bettegowda's ("Bettegowda") (collectively, "Plaintiffs") Motion to Dismiss Rex Performance Products LLC ("RPP" or "Rex"), Rex Hansen ("Hansen"), John Ballinger ("Ballinger"), and Robert E. Story, Jr.'s ("Story") (collectively, "Defendants") Counterclaims, as well as Plaintiffs' Motion for Partial Summary Judgment and Defendants' Motion for Summary Judgment. This Opinion will address all outstanding Motions.

         I. FACTUAL & PROCEDURAL BACKGROUND

         A. The Parties

         PPP is a Delaware limited liability company and a subsidiary of Pregis LLC, which is not a party to this litigation.[1] Plaintiff Olympus is a Delaware limited partnership that "owns approximately 90% of the ownership interests in Pregis LLC and controls a majority of the governing body of Pregis LLC."[2] Bettegowda is a vice president of PPP, as well as a member of the governing body and an officer of Pregis LLC.[3] Defendant Rex is a Michigan limited liability company, while Hansen, Ballinger, and Story are "direct or indirect ultimate owners of RPP."[4] Although not a party to this action, James Donald Tate ("Tate") is the former President and CEO of RPP.[5]

         B. The Asset Purchase Agreement

         On February 23, 2018, Plaintiff PPP entered into an Asset Purchase Agreement (the "APA") with Defendants to acquire "all of RPP's assets except certain defined 'Excluded Assets,' and assumed from RPP only a narrow, limited set of liabilities" (the "Sale" or "Transaction).[6] At its beginning, the APA states that "Seller [RPP] and Buyer [PPP] are collectively referred to herein as the 'Parties' and individually as a 'Party.'"[7] However, Tate was the primary negotiator for RPP and is a signatory to the APA.[8]

         The final APA provided for a purchase price of $17 million.[9] In separate agreements, "Pregis negotiated a standard retention bonus of $1.5 million to be allocated among Tate and three members of RPP's management team, to be paid in installments beginning in June 2018, but only if those managers remained continuously employed through the payment of each installment, with the final installment due February 22, 2019."[10]

         As set forth in Section 2.1(b) of the APA, the defined Excluded Assets include RPP's organizational documents and all claims or causes of action "exclusively relating to Excluded Assets or Excluded Liabilities."[11] Section 2.2(b) further provides:

Except as expressly provided in Section 2.2(a) above, Buyer [PPP] will not assume or be liable for any Liabilities of Seller [RPP] or any other Liabilities whatsoever related to the Business and/or the Excluded Assets (all such Liabilities, other than the Assumed Liabilities, the "Excluded Liabilities").[12]

         In Section 6.1(b), the signatories to the APA agreed that, except for a few limited circumstances, they would waive and release "to the fullest extent permitted by applicable Law, any and all other rights, claims and causes of action (including rights of contributions, if any) known or unknown, foreseen or unforeseen, which exist or may arise in the future, that it may have against Seller or any of its Affiliates, or Buyer or any of its Affiliates ...[13] Claims for fraud or misrepresentation and claims for intentional breach of the APA are expressly excluded from this waiver and release.[14] Additionally, Section 8.15 contains a special rule for fraud and states that "in no event shall any limit or restriction on any rights or remedies set forth in this Agreement limit or restrict the rights or remedies of any Party for fraud by any other Party."[15]

         Finally, the APA contains a merger and integration clause, which states that "[t]his Agreement and the documents referred to herein (including the schedules and exhibits hereto) contain the entire agreement between the Parties and supersede any prior understandings, agreements or representations by or between the Parties, written or oral, which may have related to the subject matter hereof in any way, including the Letter of Intent."[16]

         C. Rex Files Lawsuits in Michigan and Texas

         Three days after the Transaction closed, on February 26, 2018, Rex filed an action against Plaintiffs in Texas (the "Texas Action"), alleging that Tate "violated his common law fiduciary duties to RPP by taking a corporate opportunity in connection with the APA, and that [Plaintiffs] knowingly participated in the purported breach ..."[17] On the same day, Rex also filed a complaint against Tate in Michigan for breach of its operating agreement (the "Michigan Action").[18] Rex's basic claim is that the $1.5 million retention agreement with senior management decreased the purchase price by the same amount.

         At oral argument for the instant Motion to Dismiss on January 4, 2019, Plaintiffs' counsel informed the Court that the Texas Action had been dismissed for lack of personal jurisdiction.[19] The Court has been subsequently advised that the Texas decision was affirmed by the Court of Appeals for the Second Appellate District of Texas on August 22, 2019. According to Plaintiffs' counsel, the Michigan Action was proceeding with document discovery at that time.[20]

         The briefs on these Motions also revealed that, approximately one month before the APA was to close, Defendants became aware of the $1.5 million retention agreement that their CEO had negotiated to retain senior management personnel. Despite learning about this agreement that forms the basis of its dispute with Pregis, Rex did not terminate the APA, raise the issue with Plaintiffs, or object in any manner to proceeding to settlement.

         D. The Instant Litigation

         On March 16, 2018, Plaintiffs filed their Complaint against Defendants, alleging fraud and breach of contract.[21] They also sought declaratory judgment regarding the Texas Action and indemnification pursuant to the terms of the APA.[22] In response, Defendants filed an Amended Answer and Counterclaims, alleging tortious interference with contract, unjust enrichment, and fraudulent concealment against all Plaintiffs.[23] Defendants' Counterclaims also set forth causes of action for breach of contract and fraudulent misrepresentation against Pregis.[24]

         On September 12, 2018, Plaintiffs filed a Motion to Dismiss Defendants' Counterclaims. Prior to the Court's hearing on the Motion, Defendants agreed to dismiss their fraudulent misrepresentation claim against Pregis.[25] The Court reserved decision on Plaintiffs' Motion to Dismiss the remaining Counterclaims. Plaintiffs and Defendants have also moved for summary judgment. This is the Court's Opinion regarding all outstanding Motions.

         II. PROCEDURAL CONTEXT

         Before addressing the specific motions, the Court feels compelled to attempt to put this litigation in proper context. There is really no dispute that this litigation was filed here in response to Defendants filing the Texas action. The majority of the claims relate to the allegations made in Texas, and the filing clearly was done in an attempt to use this Court to undermine the Texas litigation.

         However, once the Texas litigation was dismissed, Defendants then used the fact that Plaintiffs had filed litigation in this Court to bring counterclaims which raised in essence the same allegations which were asserted in Texas. As such, the filing of the counterclaims has caused this litigation to be procedurally upside down. Even though Pregis has made claims for breach of contract, there is no request or suggestion that they are attempting to renounce the contract or attempt to put aside the sale. In essence, Pregis seeks to enforce the indemnification provision of the contract, i.e. the costs associated with defending the Texas action and bringing about the litigation in Delaware. So while the Complaint asserts a breach of contract, it is far from what one would normally consider under such a claim.

         When one pulls back from all of the legal verbiage, the dispute here is that Rex believes they were defrauded out of $1.5 million that should have been part of the purchase price but instead was negotiated out by their CEO with the assistance of the Plaintiffs, thus reducing the purchase price. If any counts remain after the Court rules on the various motions, the litigation will have to be put into a logical procedural posture for it to make any sense. Since the parties have not requested a jury trial, this will not be as difficult once the trial begins.

         Having made these comments, the Court will now address the motions starting with Plaintiffs' Motion to Dismiss Defendants' Counterclaim and depending on those rulings, other motions may be moot.

         III. DISCUSSION

         A. Plaintiffs Motion to Dismiss Defendants' Counterclaims

         When considering a Rule 12(b)(6) motion to dismiss, the Court "must determine whether the claimant 'may recover under any reasonably conceivable set of circumstances susceptible of proof.'"[26] It must also accept all well-pleaded allegations as true, and draw every reasonable factual inference in favor of the non-moving party.[27] At this preliminary stage, dismissal will be granted only when the claimant would not be entitled to relief under "any set of facts that could be proven to support the claims asserted" in the pleading.[28]

         1. Counterclaim I: Tortious Interference With Contract

         Under Delaware law, a claim for tortious interference with contract requires: '"(1) a contract, (2) about which [Plaintiffs] knew, and (3) an intentional act that is a significant factor in causing the breach of such contract, (4) without justification, (5) which causes injury.'"[29]

         Plaintiffs first argue that Sections 2.2 and 6.1 of the APA preclude Defendants from pursuing Counterclaim I for tortious interference with contract.[30] According to Pregis, Defendants' Counterclaim I, which alleges that Plaintiffs induced Tate to breach RPP's operating agreement, is an Excluded Asset and the damages sought through it are Excluded Liabilities under Section 2.2(b) of the APA.[31] Furthermore, Plaintiffs contend that RPP agreed to waive a claim for tortious interference with contract in Section 6.1(b) of the APA.[32] Even if the APA itself does not bar Counterclaim I, Pregis argues that Rex cannot establish causation[33] or show "that the alleged actions by Plaintiffs were unjustified."[34]

         In response, Defendants contend that Delaware's "public policy precludes enforcement of [the APA] provisions intended to allow Pregis and its affiliates to avoid liability for their misconduct."[35] They further argue that the APA language cited by Plaintiffs was meant to shield PPP from liabilities that RPP might have created prior to the Transaction, rather than its "own actions in creating liabilities related to 'excluded assets.'"[36] Moreover, Section 8.15 of the APA "explicitly provides that RPP's rights and remedies are not limited" in the event of fraudulent conduct by another party, and Defendants assert that their tortious interference claim falls under this special rule because it is based on Plaintiffs' purported fraud.[37]

         First, the Court agrees with Plaintiffs that the RPP operating agreement is an organizational document, and therefore an Excluded Asset under Section 2.l(b)(ii) of the APA. Pregis specifically negotiated for Rex's organizational documents to be "expressly excluded from the purchase and sale," and attempting to hold them liable for Tate's alleged breach of the operating agreement through a tortious interference claim is simply not possible under the terms of the APA. Since Defendants' tortious interference with contract claim is based upon a breach of the RPP operating agreement, which is an Excluded Asset, it cannot proceed.

         Even if the Court did not believe the RPP operating agreement to be an Excluded Asset under the terms of the APA, a claim for tortious interference is also not part of the exclusions set forth in Section 6.1(b) of the APA. The Court finds that the conduct alleged in this counterclaim is not encompassed by Section 6.1(b) and believes this count should be dismissed. Tortious interference does not require the attempt to defraud an individual as an element nor is there some misrepresentation requirement. Plaintiffs complied with the terms of the APA, and Defendants received the purchase price set forth in the contract. This litigation is simply about Defendants believing they are now entitled to $1.5 million more due to the unscrupulous conduct of their CEO. While perhaps true, it is not covered under the only possible exception in Section 6.1(b) relating to fraud and misrepresentation, and as such, this count has been waived by Defendants and must be dismissed.

         2. Counterclaim II: Unjust Enrichment

         Unjust enrichment is '"the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience.'"[38] The elements of an unjust enrichment claim are: (1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and impoverishment, (4) the absence of justification, and (5) the absence of a remedy provided by law.[39] Delaware courts have consistently refused to permit a claim for unjust enrichment "if there is a contract that governs the relationship between parties that gives rise to the unjust enrichment claim."[40] Stated differently, '"[w]hen the [pleading] alleges an express, enforceable contract that controls the parties' relationship ... a claim for unjust enrichment will be dismissed."'[41]

         Plaintiffs also contend that Defendants waived and released their right to pursue Counterclaim II for unjust enrichment in Section 6.1(b) of the APA.[42] Again, even if the APA does not preclude Counterclaim II, Plaintiffs argue that Defendants cannot show an enrichment, the absence of justification, or the absence of a remedy at law.[43]

         Defendants respond by arguing that "the relation between Pregis's unjust enrichment and RPP's impoverishment arises from Pregis's fraud and misrepresentations," and they did not waive or release their ability to pursue such claims.[44] They also claim that Plaintiffs were enriched because, through "fraudulent conduct, Pregis was able to attain a $20, 000, 000 company for $18, 500, 000, paying $17, 000, 000 to RPP and $1, 500, 000 in bribes."[45] Defendants next argue that they are able to show Plaintiffs' alleged enrichment was unjust because it paid "RPP's sole negotiator to trade his loyalties and attain a lower price [for the company].. ."[46]Finally, according to Defendants, there is no other legal remedy for Plaintiffs' alleged enrichment because "RPP is not attempting to enforce its rights under the APA; [but] is seeking damages for Pregis's bribery scheme."[47]

         First, to characterize the conduct here as a "bribery" stretches one's imagination and at this juncture is not supported by the evidence disclosed to the Court. But even if it had some validity, Defendants are still bound by the limitations they agreed to in Section 6.1(b) of the APA. Unjust enrichment, under the facts here, is not a fraud or misrepresentation, but is simply an allegation that the conduct of Defendants' CEO and Plaintiffs depressed the sale price to Defendants' detriment. As such, even though Defendants claim they are not seeking to enforce their rights under the APA, the Court believes the APA governs the relationship between Plaintiffs and Defendants and ultimately gives rise to the unjust enrichment claim. Defendants are alleging that they suffered an impoverishment due to the depressed purchase price they received for RPP's assets. That purchase price, among other things, is set forth under the terms of the APA, which Defendants refer to as a "valid and enforceable contract"[48] in their pleadings. The Court consequently believes that Defendants' unjust enrichment claim arises from their contractual relationship with Plaintiffs, and it must be dismissed. It also appears they have an adequate remedy at law through the litigation that has been filed in Michigan. Therefore, Plaintiffs' Motion to Dismiss Defendants' Counterclaim II for unjust enrichment is granted.

         3. Counterclaim III: Breach of Contract

         In Delaware, a breach of contract action requires the claimant to show: (1) a contractual obligation, (2) a breach of that obligation, and (3) resulting damages.[49]

         "Defendants' [breach of contract] theory is predicated on the notion that Pregis entered into the retention agreements while representing in Section 8.7 of the APA 'that there were no agreements, other than the APA, concerning the sale of RPP's assets to Pregis.'"[50] However, according to Plaintiffs, no breach of the APA is possible because "even if Section 8.7 was a representation as to the existence of other agreements, it would only pertain to agreements amongst RPP and Pregis[, ]" and not with the four individuals who separately signed retention contracts.[51] Furthermore, Plaintiffs contend that "Section 8.7 implements the parol evidence rule and is not a representation that there 'were no other agreements or understandings relating to the sale' with employees of RPP who would be hired by Pregis."[52]

         Defendants claim they have adequately pled breach of contract because Section 8.7 of the APA "applies equally to 'prior understandings, agreements or representations b% or between the Parties.'"[53] So, according to Defendants, Pregis breached Section 8.7 by representing that the APA superseded their prior agreements with RPP employees for retention bonus payments, even though it later continued to fulfill those agreements and ultimately paid the bonuses.[54] Finally, they contend that Plaintiffs "provide no rationale for why they should not be bound by the actual language of the [integration] clause."[55]

         The Court finds that the retention bonus agreements Pregis allegedly had with Tate and three other former RPP employees do not constitute a breach of the APA's merger and integration clause set forth in Section 8.7. The APA does not supersede the retention bonus contracts because they are separate agreements between different actors. The Court believes Section 8.7 of the APA only applies to "prior understandings, agreements, or representations by or between"[56] PPP, as Buyer, and RPP, as Seller, who are collectively referred to as the "Parties" and individually as a "Party" in the contract itself.[57]

         This is nothing more than a standard integration clause meant to foreclose the "Parties" from later asserting their reliance on information outside the four corners of the APA. Defendants' position that it also serves to invalidate agreements by Pregis with individuals who are not "Parties" to the APA is unsupported. Moreover, the phrase "by ... the Parties," which Defendants rely on to support their interpretation, simply means that earlier agreements between or representations made by one Party to another during the Sale negotiations cannot later be used to rebut or undermine the terms set forth in the APA itself. It cannot reasonably be interpreted to replace or void prior agreements between or representations made by one Party of the APA to a non-Party.

         The integration clause does not apply to the retention bonus contracts between Pregis and the former members of RPP's management team, because those RPP employees were not "Parties" to the Transaction governed by the APA. Since it was not possible for the APA to supersede these separate retention agreements and, consequently, for Plaintiffs to make such representations, the Court believes that Defendants have based their breach of contract counterclaim on an untenable theory. Therefore, Plaintiffs' Motion to Dismiss Defendants' Counterclaim III for breach of contract against Pregis is granted.

         4. Counterclaim V: ...


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