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Peterson Enterprises, Inc. v. Brace Industrial Contracting, Inc.

Supreme Court of Delaware

January 6, 2020

PETERSON ENTERPRISES, INC., RONALD A. PETERSON, ERIC PETERSON, KIRK PETERSON, RONALD A. PETERSON REVOCABLE TRUST, RONALD A. PETERSON 2010 IRREVOCABLE TRUST and VERNON L. GOEDECKE COMPANY, INC., Defendants Below, Appellants,
v.
BRACE INDUSTRIAL CONTRACTING, INC., and PETERSON INDUSTRIAL SCAFFOLDING, INC., Plaintiffs Below, Appellees and Cross-Appellants.

          Submitted: October 16, 2019

          Court Below: Court of Chancery of the State of Delaware C. A. No. 11189-VCG

          Before SEITZ, Chief Justice; VALIHURA and VAUGHN, Justices.

          ORDER

          James T. Vaughn, Jr. Justice.

         This 6th of January 2020, after careful consideration of the briefs, oral argument, and the record on appeal, it appears to the Court that:

         1. The appeal involves disputes arising from the sale of a scaffold subcontracting company, Peterson Industrial Scaffolding, Inc. (PIS). PIS was formerly a wholly owned subsidiary of Peterson Enterprises, Inc. (PEI). On August 10, 2014, PEI sold all of its stock in PIS to Brace Industrial Contracting, Inc. After settlement, disputes arose, and Brace Industrial Contracting, Inc., and PIS (Brace) filed suit in the Court of Chancery against PEI and the other defendants.

         2. Brace's amended complaint set forth three sets of claims, only two of which are raised and will be discussed in this appeal. In the first set, Brace alleged that asset disclosure schedules which were part of the Stock Purchase Agreement (SPA) overstated the amount of industrial and commercial scaffolding equipment owned by PIS at the time of sale (the inventory claims). Because PEI had misrepresented the amount of scaffolding equipment inventory owned by PIS, the amended complaint alleged, Brace had paid for inventory it never received. It sought indemnification under the SPA for the difference between the scaffolding inventory as represented on the asset disclosure schedules and the inventory actually owned by PIS at the time of sale. The amended complaint further alleged that Defendants Ronald Peterson, the Ronald A. Peterson Revocable Trust, and the Ronald A. Peterson 2010 Irrevocable Trust (the Guarantors) had guaranteed PEI's indemnification obligations. In a written opinion dated October 31, 2016, the Court of Chancery ruled in Brace's favor and awarded Brace $703, 975 on the inventory claims. In a separate order dated December 12, 2018, the Court of Chancery also awarded Brace $440, 149 in costs and $241, 686 in attorney's fees under the SPA's indemnification provision.

         3. In a second set of claims, Brace alleged that PEI had agreed on behalf of itself and all its affiliates to refrain from competing with Brace for five years except as permitted in a "carve-out" provision (the restrictive covenant claims). Brace alleged that PEI had done so through its subsidiary, Vernon I. Goedecke, Inc. (Goedecke). The complaint named Defendants Goedecke, Ronald Peterson, Eric Peterson, and Kirk Peterson as affiliates of PEI who were liable for the restrictive covenant claims. In its October 31, 2016 opinion, the Court of Chancery ruled in favor of PEI and the other defendants on the restrictive covenant claims.

         4. The Appellants set forth three claims of error on appeal. They first contend that the Court of Chancery erred with respect to the inventory claims by adopting a methodology for determining the volume of scaffolding at the time of closing which was not the product of an orderly and logical deductive process. In connection with this claim of error, the Appellants also contend that Brace did not follow the proper procedure set forth in the SPA for obtaining indemnification. The second claim is that the Court of Chancery committed error in awarding Brace costs of $440, 149. That sum represents the entire amount of costs incurred by Brace in the action. The Appellants argue that under the SPA Brace was entitled to recover costs only for claims upon which it prevailed, such as the inventory claims, not for claims upon which it did not prevail, such as the restrictive covenant claims. Awarding the entire $440, 149, the Appellants argue, improperly awards costs for unsuccessful claims. The third claim of error is that the Court of Chancery erred in entering judgment against Eric and Kirk Peterson in any amount and against the Guarantors for judgment amounts which exceed their liability for SPA indemnification. As part of this claim, the Appellants also contend that the Court of Chancery erred by ordering that the entire amount of the judgment be paid out of an escrow fund which was established by an Escrow Agreement as part of the transaction.

         5. Brace has cross-appealed, claiming that the Court of Chancery erred by awarding it only $241, 686 in attorneys' fees.

         6. We have carefully considered the arguments on appeal, and affirm the Court of Chancery's disposition of the inventory claims as legally correct and the product of an orderly and logical deductive process for the reasons stated in its October 31, 2016 opinion. We also affirm the Court of Chancery's award to Brace of $241, 686 for the reasons assigned by the Court of Chancery in its order dated January 11, 2019. We do, however, find merit in Appellant's claims of error related to the award to Brace of $440, 149 in costs, and the form of the judgment.

         7. The Appellants concede that Brace is entitled to $18, 663.88 of costs under Court of Chancery Rule 54(d) for its success on the inventory claims. Brace argues that it is entitled to all of the $440, 149, which, as mentioned, is its entire costs on all claims. Brace contends that Section 6.2 of the SPA entitles it to all costs not covered by Rule 54(d). Section 6.2 gave Brace a right of indemnification for any "[l]osses incurred or sustained by, or imposed upon, the Buyer Indemnitees based upon, arising out of, with respect to or by reason of . . . any inaccuracy in or breach of any of the representations or warranties of Seller."[1] The Appellants argue that Brace is not entitled to any costs associated with the restrictive covenant claims because PEI was found not to have breached its representations or warranties with respect to those claims. Brace argues that all of its costs flow from PEI's breach of its representations and warranties under the SPA.

         8. We agree with the Appellants that Brace is not entitled to costs associated with the restrictive covenant claims because the Court of Chancery found that PEI did not breach the SPA's restrictive covenants. Where a party asserts more than one claim and is entitled to recover costs for one or more but not others, the party must make a good faith effort to segregate costs between those claims for which it is entitled to recover costs and those it is not.[2] Brace made no effort to segregate its costs between the inventory claims and the restrictive covenant claims. Neither the Court of Chancery nor the Appellants were under any obligation to attempt to segregate Brace's costs. Since Brace made no effort to segregate its costs, it failed to meet its burden of establishing the amount of costs it is entitled to recover for those claims upon which it was successful. Therefore, the Court of Chancery's award of $440, 149 is reversed. On remand, the Court of Chancery should amend its judgment to reduce Brace's award of costs to $18, 663.88.

         9. The Court of Chancery also erred in the form of final judgment entered February 6, 2019. That order entered judgment in favor of the plaintiffs on Counts I, II, III and V of the amended complaint in the following amounts: $550, 743, less eight adjustments; $561, 975.82, comprising the sum awarded by an Independent Accountant in a post-closing adjustment proceeding, less an offset for $25, 000 for the cost of that proceeding; the above-discussed attorneys' fees and costs; and pre and post judgment interest. The judgment also recited that the $725, 059 awarded on Brace's inventory claims had ...


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