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LLC v. En Pointe Technologies Sales, LLC

Superior Court of Delaware

September 17, 2019

COLLAB9, LLC, Plaintiff/ Counterclaim Defendant,
EN POINTE TECHNOLOGIES SALES, LLC and PCM, INC., Defendants/Counterclaim Plaintiffs/ Third-Party Plaintiffs. EN POINTE TECHNOLOGIES SALES, LLC and PCM, INC., Counterclaim Plaintiffs/Third-Party Plaintiffs,
COLLAB9, LLC and ATTIAZAZ MUNAWAR DIN, Counterclaim Defendant and Third-Party Defendant. COLLAB9, LLC, Plaintiff,
MICHAEL RAPP, an individual, and MLR CONSULTING, a California corporation Defendants.

          Submitted: June 19, 2019

         On Defendants' Motion to Dismiss Counts II and III of Plaintiff s Third Amended Complaint GRANTED

         On Plaintiff/Counterclaim Defendant Collab9, LLC and Third-Party Defendant Attiazaz Munawar Din's Motion to Dismiss Counts I and II of Counterclaims GRANTED IN PART, DENIED IN PART

         On Defendants Michael Rapp and MLR Consulting's Motion to Dismiss STAYED AT THIS TIME

          Karen A. Jacobs, Esquire (Argued), Susan W. Waesco, Esquire (Argued) and Alexandra M. Cummings, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Jason R. Scherr, Esquire (Argued), Joseph Bias, Esquire, Clara Kollm, Esquire, Morgan, Lewis & Bockius, LLP, David M. Stein, Esquire, Sarah Kelly-Kilgore, Esquire, Greenberg Gross LLP, Attorneys for Defendants En Pointe Technologies Sales, LLC, PCM Inc., Michael Rapp and MLR Consulting

          Joel Friedlander, Esquire, Jeffrey M. Gorris, Esquire, Christopher P. Quinn, Esquire, Friedlander & Gorris, P.A., Richard D. Robins, Esquire, Gary Ganchrow, Esquire (Argued), Parker, Milliken, Clark, O'Hara & Samualian, APC, Attorneys for Plaintiff/Counterclaim Defendant Collab9, LLC and Third-Party Defendant Attiazaz Munawar Din


          Honorable Mary M. Johnston Judge.


         This dispute concerns Earn Out payments. The underlying Asset Purchase Agreement ("APA") closed on April 1, 2015. Purchaser PCM bought substantially all of the assets of the En Pointe business from seller Collab9. In addition to the initial purchase price, PCM agreed to pay a 36-month Earn Out. The Earn Out is calculated as 22.5% of En Pointe's Adjusted Gross Profit.

         Collab9 filed Civil Action No. N16C-01-032 on December 5, 2016. The Third Amended Complaint was filed on September 10, 2018. Counts II and III are the subject of PCM and En Pointe's Motion to Dismiss.[1] Count II alleges that En Pointe breached the implied covenant of good faith and fair dealing by: maintaining financial records in a way that made it impracticable to accurately determine the correct amounts of Earn-Out payments; creating a sham entity to move revenue off En Pointe's books; and renewing certain contracts or transferring sales persons or accounts as a means of minimizing Adjusted Gross Profit. Count III claims fraud on the basis that En Pointe's quarterly Earn-Out certifications were inaccurate.

         PCM filed Counterclaim I for fraud and intentional misrepresentation; Counterclaim II for breach of contract; and Counterclaim III for tortious interference. The Counterclaims arise primarily from alleged misrepresentations by Collab9 and Third- Party Defendant Din during negotiations leading to the APA, as well as breaches of representations and warranties. Counterclaim Defendants Collab9 and Din have moved to dismiss Counterclaims I and II. Collab9 and Din assert that the fraud claims are time-barred, duplicative of contract claims, barred by an anti-reliance provision, and that the contract claims also are time-barred.

         Collab9 filed a second case in this Court on February 15, 2019, Civil Action No. N19C-02-141. This action is against Defendants Rapp and MLR Consulting, alleging that Defendants breached their commitment to maximize Earn-Out payments. Count I asserts breach of the Finder's Agreement, in which MLR agreed to advise Collab9 as to the "structuring of the go-forward business processes of the proposed Transaction" to maximize Earn Out. Count II claims breach of the Consulting Agreement by Rapp. Count III is for breach of the implied covenant of good faith and fair dealing. Defendants Rapp and MLR have moved to dismiss all Counts on the grounds of failure to state a claim.


         In 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."[2] The Court must accept as true all well-pleaded allegations.[3] Every reasonable factual inference will be drawn in the non-moving party's favor.[4] If the claimant may recover under that standard of review, the Court must deny the Motion to Dismiss.[5]


         En Pointe and PCM's Motion to Dismiss Count II Implied Covenant of Good Faith and Fair Dealing

         The implied covenant of good faith and fair dealing "requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain."[6] The implied covenant cannot be used to override the express terms of the contract. The covenant is not a free-floating duty, and can only be invoked conservatively to ensure that the parties' reasonable expectations are fulfilled. "General allegations of bad faith conduct are not sufficient. Rather, the plaintiff must allege a specific implied contractual obligation and allege how the violation of that obligation denied the plaintiff the fruits of the contract. Consistent with its narrow purpose, the implied covenant is only rarely invoked successfully."[7]

         If the conduct at issue is authorized by the agreement, the covenant will not be implied. Contract terms only will be added "when the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain...."[8] The parties' reasonable expectations at the time of contracting control the analysis. Agreements cannot be judicially revised to assist parties who later discover that they have made a disadvantageous deal.[9] "The implied covenant only applies to developments that could not be anticipated, not developments that the parties simply failed to consider...."[10]

         Collab9 alleges that when the parties entered into the transaction, all expected increased revenues and profits would result in additional Earn-Out payments. Collab9 claims that PCM and En Pointe thwarted this expectation in numerous ways, including: transferring En Pointe contracts to a sham entity, transferring sales persons and accounts not for legitimate business reasons, and providing knowingly false Earn-Out Certifications that concealed the inaccuracy of the Earn-Out Statements.

Section 2.2(e) of the APA provides:
Subsequent to the Closing, Purchaser shall have sole discretion with regard to all matters relating to the operation of the Business. Purchaser shall have no express or implied obligation to the Seller, the Primary Stockholder or Option Holder to take an action, or omit to take any action, to seek to maximize the Earn Out payment by seeking to maximize sales, pursuing particular business opportunities, engaging in advertising or marketing campaigns, or otherwise. Purchaser owes no duty, as a fiduciary or otherwise, to Seller, the Primary Stockholder or Option Holder in connection with its operation of the Business following the Closing. Section 2.2(e) is comprehensive and explicit. PCM was provided by contract with the sole discretion to operate the business post-closing. The parties specifically agreed that PCM had neither an express nor implied obligation to maximize the Earn Out.

         Section 12.8 of the APA states that the APA and Transaction Agreements "contain the complete agreement among the parties and supersede any prior understandings, agreements or representations by or among the parties, whether written or oral...Each party acknowledges that no other party has made any representations, warranties, agreements, undertakings or promises except for those expressly set forth in their Agreement or in the agreements referred to herein or therein that survive the execution and delivery of this Agreement."

         The implied covenant involves "inferring contractual terms to handle developments or contractual gaps that...neither party anticipated."[11] The express terms of the APA demonstrate that the parties contemplated that a dispute might arise concerning the operation of the business post-closing, specifically whether the purchaser was acting in a manner that maximized the Earn Out.

         Of course, every party's actions must be consistent with the terms of the contract. The Delaware Supreme Court consistently has held that a trial court only can imply terms when it is clear that the parties would have agreed to the omitted terms.[12] The unambiguous terms of the contract grant broad rights to the purchaser to operate the business as it sees fit. To grant additional unspecified rights "would be to grant the plaintiff], by judicial fiat, contractual protections that they failed to secure for themselves at the bargaining table."[13]

         The Court finds that Collab9's implied covenant of good faith and fair dealing claims are duplicative of the breach of contract claims. Additionally, Section 2.2(e) of the APA contemplated the dispute concerning post-closing Earn-Out maximization. Therefore, En Pointe and PCM's Motion to Dismiss Count II is hereby GRANTED.

         En Pointe and PCM's Motion to Dismiss Count III Fraud

         Collab9 challenges Defendants' calculation of the Earn Out on the basis that Defendants deliberately failing to include various income as defined by the APA. Collab9 also contends that Defendants provided Earn-Out certifications and statements that were not in accordance with the requirements of the APA. Collab9 alleges fraud and material misrepresentation on the grounds that Defendants breached their duty to ensure and certify that all of the reconciliations and calculations were full and complete. Additionally, Defendants knew that their alleged representations were false.

         The Court finds that on it face, the fraud and misrepresentation claim appears to be a repackaging of the breach of contract claim. Each of the failures alleged by Collab9 are based in duties under the APA. The fraud claims are not distinct from Collab9's contract claims.

         Breach of contract claims cannot be bootstrapped into fraud claims "merely by alleging that a contracting party never intended to perform its obligations."[14] Collab9 cannot obtain the same damages for both fraud and contract.[15] Fraud claims that duplicate contract claims, and seek essentially the same recovery, cannot survive.[16] Additionally, Collab9's fraud claim sounds in tort. There is no recovery in tort for purely economic loss.[17] The economic loss doctrine prohibits tort claims where overlapping contract claims adequately address the injury alleged.[18]

         Therefore, on the basis of claim duplication and the economic loss doctrine, En Pointe and PCM's Motion to Dismiss Count III Fraud is hereby GRANTED.

         Collab9's Motion to Dismiss Count I of the Amended Counterclaims ...

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