Black Horse Capital, LP

IN THE COURT OF CHANCERY IN THE STATE OF DELAWARE

BLACK HORSE CAPITAL, LP, )
BLACK HORSE CAPITAL )
MASTER FUND LTD., OURAY )
HOLDINGS I AG, and CHEVAL )
HOLDINGS, LTD., )
) C.A. No. 8642-VCP
Plaintiffs, )
)
v. )
)
XSTELOS HOLDINGS, INC., )
(F/K/A FOOTSTAR, INC.) a )
Delaware Corporation, XSTELOS )
CORP., (F/K/A FOOTSTAR )
CORP.), a Texas Corporation, )
FCB I HOLDINGS, INC., a )
Delaware Corporation, and )
JONATHAN M. COUCHMAN )
)
Defendants. )

MEMORANDUM OPINION

Submitted: February 10, 2014
Decided: September 30, 2014

Elena C. Norman, Esq., James M. Yoch, Jr., Esq., Paul J. Loughman, Esq., YOUNG
CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Jonathan Sherman,
Esq., Everett Collis, Esq., BOIES, SCHILLER & FLEXNER LLP, Washington, D.C.;
Attorneys for Plaintiffs.

Paul J. Lockwood, Esq., Amy C. Huffman, Esq., Lori W. Will, Esq., SKADDEN, ARPS,
SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Lauren E. Aguiar, Esq.,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, New York, New York;
Attorneys for Defendants.

PARSONS, Vice Chancellor.
 This is essentially an action for breach of contract. The plaintiffs and the

defendants joined together to acquire a pharmaceutical company, and this dispute arose

out of that acquisition. The plaintiffs allege that in the days and weeks leading up to the

execution of the acquisition agreement, the defendants made an oral promise that they

would transfer to the plaintiffs certain assets of the target company at some unspecified

time post-closing. The plaintiffs allege that this oral promise was a central precondition

to their willingness to make a short-term bridge loan that was necessary to finance the

acquisition. On the day the acquisition agreement was executed, a series of written

agreements were signed by the parties pertaining to various aspects of the transaction,

including financing and the post-closing operation and management of the holding

company through which the plaintiffs and the defendants took ownership of the target.

Those written agreements, however, make no reference to any prior promise or

agreement like the one alleged by the plaintiffs. Furthermore, the written agreements

contain integration clauses in which the parties to them agreed that the documents

evidenced the entirety of their agreement and understanding with respect to the subject

matter of those agreements.

The plaintiffs charge the defendants with breach of contract for failing to make the

asset transfer according to the prior oral agreement. They also assert claims for

fraudulent inducement, promissory estoppel, and unjust enrichment. The defendants

have moved to dismiss, arguing that, taking all alleged facts as true, the complaint fails to

state a claim under any of these theories. The defendants primarily contend that the

written agreements preclude this action for alleged breach of the prior oral promise.

1
 The plaintiffs also allege breaches of the written acquisition agreements

themselves. In that regard, the plaintiffs assert claims for breach of contract and of the

implied covenant of good faith and fair dealing independent of the oral promise they seek

to enforce in the principal counts of the complaint. The defendants seek dismissal of

those claims as well.

This Memorandum Opinion constitutes my ruling of the defendants‘ motion to

dismiss pursuant to Rule 12(b)(6). Having considered the record before me on that

motion and the parties‘ arguments, I conclude that, as to the alleged prior oral agreement,

the plaintiffs have failed to state a claim upon which relief can be granted, and I dismiss

the plaintiffs‘ claims for breach of contract as well as those for fraudulent inducement,

promissory estoppel, and unjust enrichment. As to the allegations concerning certain of

the written acquisition agreements, the plaintiffs adequately have pled claims for breach

of contract, but not for breach of the implied covenant of good faith and fair dealing, with

one limited exception. The defendants‘ motion to dismiss, therefore, is granted in part

and denied in part.

I. BACKGROUND1

A. The Parties

Plaintiff Cheval Holdings, Ltd. (―Cheval Holdings‖) is a Cayman Islands

corporation, the ultimate and sole owners of which are non-parties Dale and Mary

1
Unless otherwise noted, the facts recited herein are drawn from the well-pled
allegations of the Verified Amended Complaint (―the Complaint‖), together with
its attached exhibits.

2
Chappell. Plaintiffs Black Horse Capital, LP and Black Horse Capital Master Fund Ltd.

(together, ―Black Horse‖) are private investment funds owned by the Chappells and other

third party investors. Plaintiff Ouray Holdings I AG (―Ouray‖ and, collectively with

Cheval Holdings and Black Horse, ―Plaintiffs‖) is a Swiss corporation and is the

successor in interest to Cheval Holdings‘s interest in several of the entities relevant to this

action.

Defendant Jonathan M. Couchman is the majority stockholder, CEO, CFO, and

Chairman of the board of directors of Defendant Xstelos Holdings, Inc. (―Xstelos

Holdings‖), a Delaware corporation. Defendant Xstelos Corp., a Texas corporation

(―Xstelos,‖ and together with Xstelos Holdings, the ―Xstelos Entities‖), is a wholly

owned subsidiary of Xstelos Holdings. Xstelos Holdings and Xstelos were formerly

known as Footstar, Inc. and Footstar Corp., respectively. Couchman was previously the

Chairman and CEO of Footstar Corp. (―Footstar,‖ and together with Footstar, Inc., the

―Footstar Entities‖), a Texas corporation.

Nonparty CPEX Pharmaceuticals, Inc. (―CPEX‖) is a Delaware corporation

engaged in the development of drug absorption and delivery technology. CPEX is

wholly owned by Defendant FCB I Holdings, Inc. (―FCB Holdings‖), also a Delaware

corporation. FCB Holdings, in turn, is owned by Xstelos Corp. (80.5 percent) and Ouray,

formerly held by Cheval (19.5 percent). CPEX and FCB Holdings have the same three-

member boards of directors, consisting of Couchman, nonparty Adam Finerman, and

Dale Chappell. Couchman, the principal executive officer of CPEX, manages both

CPEX and FCB Holdings.

3
 B. Facts

1. CPEX, Cheval Holdings, and Footstar

CPEX is a biotechnology company that manufactures a patented drug delivery

technology known as CPE-215, which enhances the absorption of drugs through the nasal

mucosa, skin, and eyes. Since 2003, CPEX has received royalties from Auxilium

Pharmaceuticals, Inc.‘s marketing of Testim, a testosterone replacement therapy that

utilizes the CPE-215 delivery technology. In February 2008, CPEX entered into a license

agreement with Allergan, Inc. (―Allergan‖) for the development and commercialization

of another application of CPE-215, to be used in conjunction with Allergan‘s patented

low-dose desmopressin, a synthetic hormone that assists in regulating kidney function for

the treatment of nocturia and related conditions. One drug product created by the

combination of Allergan‘s synthetic hormone and CPEX‘s drug delivery technology is

known as ―SER-120.‖ It is at the heart of this dispute.

CPEX formerly was the drug delivery business segment of Bentley

Pharmaceuticals, Inc. After being spun off in June 2008, CPEX traded on NASDAQ

under the ticker ―CPEX.‖ As of mid-2009, Cheval Holdings was one of the largest

stockholders of CPEX, which had a market capitalization of approximately $25.3 million.

The Complaint alleges that Cheval Holdings was interested in expanding its investment

in CPEX, and sought an opportunity to acquire its royalty-producing assets.2 In response

2
Compl. ¶¶ 31-32.

4
to a solicitation of bids, Cheval Holdings unsuccessfully bid $75 million for CPEX in

June 2010.

The Complaint states repeatedly that Cheval Holdings had the financial resources,

pharmaceutical industry expertise, and willingness to acquire and manage 100 percent of

CPEX in its own right.3 In that regard, I note that Dale Chappell holds both an M.D. and

M.B.A., and Mary Chappell holds an M.D. and is a surgeon. Black Horse, managed by

the Chappells, has a ―particular interest in acquiring or investing in biotechnology and

related companies and assets.‖4 In evaluating its strategic options vis-à-vis CPEX,

however, Cheval Holdings concluded that ―the acquisition would be much more efficient

if Cheval could bring in a co-investor with a substantial NOL.‖5

A $100 million ―NOL,‖ or net operating loss, was found when Chappell was put in

touch with Couchman, then the Chairman and CEO of Footstar. Footstar had operated

shoe stores within Kmart locations and had emerged from a Chapter 11 bankruptcy

reorganization in 2006. Footstar, which the Complaint describes as ―a financial failure,‖6

lost its Kmart contract in 2008. It ultimately filed for liquidation in 2010, having ―no

3
Id. ¶ 38; see also id. ¶¶ 5, 34, 41.
4
Id. ¶ 22.
5
Id. ¶ 35. In their Complaint and briefing, Plaintiffs use the name ―Cheval‖ to refer
to Cheval Holdings and Black Horse, collectively. This Memorandum Opinion
does not use ―Cheval‖ except, as here, when quoting from the Complaint.
6
Id. ¶ 2.

5
prospects for turn around‖ 7 and having been unable, up to that point, to put its substantial

NOL to use.

In mid-2010, Cheval Holdings solicited Footstar‘s interest in participating in an

acquisition of CPEX. At the time, Footstar faced the possibility of losing the value of its

NOL, if the liquidation proceeded and Footstar was dissolved. It had ―little cash, and no

borrowing capacity or other capital, sufficient to invest in or purchase CPEX on its

own.‖8 According to the Complaint, Footstar recognized that its ―main contribution to

the potential acquisition was not technical, scientific, or intellectual property investing

expertise. Its principal contribution was the putative tax benefit of its NOL.‖ 9 ―In a very

real sense, then,‖ the Complaint alleges, ―the Chappells and the Cheval Plaintiffs rescued

Couchman and Footstar from his prior business failures by harnessing those very failures

to what appeared to be everyone‘s advantage.‖10

2. The CPEX acquisition

a. Structure of the acquisition

Thus, Cheval Holdings and Footstar jointly pursued CPEX in the hope that a joint

acquisition would yield a better return on investment if Footstar‘s NOL were available to

offset CPEX‘s future income from royalty streams. To realize these tax benefits, Footstar

would have to own more than 80 percent of CPEX in the post-merger entity structure.

7
Id. ¶ 7.
8
Id. ¶ 39.
9
Id. ¶ 8.
10
Id. ¶ 13.

6
FCB Holdings was created for these purposes. Footstar contributed $3,220,000 in cash to

FCB Holdings in exchange for an 80.5 percent equity stake; Cheval Holdings contributed

$780,000 for its 19.5 percent stake.11 According to the Complaint, Cheval Holdings‘s

and Chappell‘s economic rationale for the transaction was that, although Cheval Holdings

would receive less income as a minority owner, the reduction would be ―more than offset

by the tax benefits of the NOL structure and other aspects of the deal ultimately reached

with Couchman. (These included a consulting and advisory fee . . . and a shareholder

agreement with minority protections for Cheval Holdings.)‖12

On August 24, 2010, Cheval Holdings and Footstar submitted to CPEX an

indication of interest in acquiring all outstanding shares of CPEX common stock in a

merger for $29.00 per share in cash. After nearly five months of negotiations with

CPEX, on January 3, 2011, a definitive Agreement and Plan of Merger (―the Merger

Agreement‖) was executed whereby FCB Holdings‘s subsidiary, FCB I Acquisition

Corp., acquired 100 percent of CPEX‘s common stock in exchange for $27.25 per

share.13

Also executed on January 3, 2011 were four other agreements concerning the

CPEX acquisition and the parties‘ subsequent relationship: (1) a consulting and advisory

services agreement between Footstar and Cheval Holdings (the ―Consulting

11
Compl. Ex. C (―the Stockholders‘ Agreement‖), at 1.
12
Compl. ¶ 43.
13
Compl. Ex. A (the ―Merger Agreement‖), at 4.

7
Agreement‖);14 (2) a stockholders‘ agreement between Footstar, Cheval Holdings, and

FCB Holdings (the ―Stockholders‘ Agreement‖);15 (3) a written commitment by Black

Horse to provide FCB Holdings with bridge financing (the ―Commitment Letter‖);16 and

(4) a $64 million secured loan to a subsidiary of FCB Holdings, funded by a consortium

of lenders with Bank of New York Mellon as administrative agent (the ―BNYM Loan‖).17

Because the first three of these writings are integral to this dispute, and they were

executed on the same day as the Merger Agreement, I briefly identify them here. To the

extent relevant, their terms and import will be discussed in greater depth below.

b. Financing the acquisition—and the “Serenity Agreement”

During initial discussions concerning the CPEX acquisition, the parties

contemplated financing the transaction through FCB Holdings‘s $4 million in equity, plus

acquisition financing of $64 million from the BNYM Loan. The BNYM Loan was to be

14
Compl. Ex. B (the ―Consulting Agreement‖).
15
Compl. Ex. C (the ―Stockholders‘ Agreement‖).
16
Huffman Transmittal (―Trans.‖) Aff. Ex. A (the ―Commitment Letter‖). Although
the Commitment Letter is not attached to the Complaint, it and its subject, the $10
million Bridge Loan, are integral to Plaintiffs‘ claims and are referenced
repeatedly in the Complaint. Thus, I may consider it at the motion to dismiss
stage. See In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69-70 (Del.
1995).
17
The BNYM Loan is not included in any of the parties‘ submissions to the Court.
It is referenced, however, in the Complaint (¶¶ 51, 52, 65), the Merger Agreement
(Recitals; §§ 3.7, 6.13, 9.6), the Stockholders‘ Agreement (―Background‖), and
the Bridge Loan Agreement (§ 3). It may be debatable whether the BNYM Loan
is ―integral‖ to the Complaint and, therefore, appropriate for consideration at this
stage. I need not decide that issue, however, because I refer to the BNYM Loan
only by way of background and do not rely upon it for purposes of any decision I
reach.

8
funded into escrow before the closing to alleviate CPEX‘s concerns about transaction

closing uncertainty. In December 2010, however, the lead lender in the BNYM Loan

consortium, Athyrium Capital, balked at the pre-closing escrow condition. CPEX,

however, resisted proceeding without it. CPEX insisted that, in the absence of funding

into the escrow, the Merger Agreement include a specific performance remedy. In

addition, CPEX sought financial security for the specific performance remedy, in case the

merger failed to close and CPEX had to invoke it.

Chappell and Couchman, on behalf of their respective companies, discussed ways

to salvage the deal.18 Their solution was to scrap the escrow and loan $13 million in

bridge financing directly to FCB Holdings to secure the specific performance remedy.

According to the Complaint, the most Footstar could contribute toward such a bridge loan

was $3 million. The Complaint repeatedly suggests, however, that Footstar ―should

have‖19 funded $10,465,000 (or 80.5 percent) of the $13 million bridge loan, based on the

equity ownership ratio. As a result, Plaintiffs allege that: ―Cheval and Chappell had a

choice. They could walk away from the deal, return to their plan to attempt to purchase

the equity of CPEX outright; or they could salvage the transaction with Footstar by

pledging vastly more in bridge loans than was consistent‖ with the FCB Holdings‘s

18
Compl. ¶ 54.
19
Id. ¶ 56. See also id. ¶¶ 9, 54, 55, 57, 58, 61, 62, 64.

9
equity ownership ratios, thereby placing Cheval and Chappell at ―a disproportionate risk‖

of losing the bridge loan funds if the transaction did not close.20

This brings us to the gravamen of this case. Plaintiffs allege that in a December

2010 phone conversation, Chappell offered to have Black Horse put up $10 million of the

$13 million needed for bridge financing, if Couchman would give ―100% of Serenity‖ to

―Cheval‖ after the merger‘s closing.21 ―Serenity‖ is an asset not defined directly in the

Complaint or any of the relevant written agreements, but which apparently includes the

CPE-215 application mentioned at the outset of this Memorandum Opinion known as

SER-120. ―Serenity‖ and SER-120 are discussed in more detail below.

It is sufficient here to note that, during the December 2010 discussions concerning

the bridge financing arrangement for the CPEX acquisition, Chappell asked for ―100% of

Serenity‖ in exchange for making what Plaintiffs suggest was a disproportionately large

bridge loan commitment. During a mid-December phone conversation, Couchman

declined this offer, but proposed an 80 percent to 20 percent split of ―Serenity‖ in favor

of ―Cheval‖ in a ―mirror image‖ of FCB Holdings.22 Chappell, ―on behalf of Cheval,‖

agreed to the 80/20 Serenity split. According to the Complaint, Black Horse then

20
Id. ¶ 56.
21
Compl. ¶ 57. As noted and discussed more fully infra at Section I.B.3.b, the
precise persons and entities to be involved in this part of the transaction are
described differently at different paragraphs in the Complaint.
22
Id. ¶ 58.

10
promised to fund $10 million of the bridge loans ―in consideration for, and in reliance

on,‖ this alleged oral ―Serenity Agreement.‖23

On January 3, 2011, when the Merger Agreement was executed, Black Horse and

Footstar entered into separate commitment letters with FCB Holdings and CPEX.

Pursuant to those letters, the bridge financing was pledged to FCB Holdings in two parts

of $10 million and $3 million by Black Horse and Footstar, respectively.24 The

acquisition closed on or about April 4, 2011, after being approved by a vote of CPEX‘s

stockholders. Based on an agreement dated April 5, 2011 (the ―Bridge Loan

Agreement‖), Black Horse made good on its commitment and loaned $10 million to FCB

Holdings.25 Presumably, Footstar similarly made its bridge loan, and the main financing

consortium funded the primary loan to FCB Holdings, because the Merger was

effectuated and FCB Holdings took 100 percent control of CPEX in early April 2011.

3. SER-120, “Serenity,” and the “Serenity Agreement”

Before continuing to chronicle the material facts in this case, I pause to delineate

the Complaint‘s allegations concerning SER-120 and the alleged Serenity Agreement.

The parties‘ principal dispute centers on these facts. Broadly, it is alleged that Couchman

orally promised Chappell that, in exchange for Chappell‘s putting up the $10 million

23
Id. ¶ 62.
24
Commitment Letter 1.
25
Huffman Trans. Aff. Ex. D (―the Bridge Loan Agreement‖). As with the
Commitment Letter, I may consider the Bridge Loan Agreement at the motion to
dismiss stage because it and its subject, the $10 million Bridge Loan, are integral
to Plaintiffs‘ claims and are referenced repeatedly in the Complaint. See Santa Fe
Pac. Corp., 669 A.2d at 69-70.

11
Bridge Loan, Chappell would be given a greater interest in ―Serenity‖ post-merger. To

facilitate my analysis of the legal arguments raised for and against Defendants‘ motion to

dismiss, I begin by reviewing certain of the Complaint‘s allegations regarding ―Serenity‖

in more detail.

a. The assets to be transferred under the Serenity Agreement

As noted supra, SER-120 is ―one particular use‖26 of the CPE-215 technology,

which involves combining it with a synthetic hormone called low-dose desmopressin.

This synthetic hormone is a separately patented technology owned by Allergan. In 2008,

the predecessors-in-interest to CPEX and Allergan with respect to SER-120 (Bentley

Pharmaceuticals, Inc. and Serenity Pharmaceuticals Corp., respectively) entered into a

license agreement (the ―Allergan License‖) pursuant to which Allergan, ultimately,

would develop and commercialize SER-120.27 The Allergan License requires Allergan to

pay CPEX royalties at a set rate and certain ―milestone‖ lump sum payments based on the

commercial sales, if any, resulting from the SER-120 venture.

Immediately before the events in question, the value of SER-120 was ―difficult to

ascertain‖ because it was in the early stages of U.S. Food & Drug Administration

26
Compl. ¶¶ 2, 9.
27
Huffman Trans. Aff. Ex. C (the ―Allergan License‖). As discussed more fully
infra, the Allergan License is the most tangible and concrete aspect of ―Serenity‖
insofar as Plaintiffs use that term to denote the consideration owed to them under
the alleged agreement at the core of this dispute. The Allergan License, which is
referenced explicitly or implicitly in the Complaint at ¶¶ 9-11, 15-17, 32, 33, 41,
63-68, 76-79, 81, and 84, is therefore appropriately part of the record before me at
the motion to dismiss stage. See Santa Fe Pac. Corp., 669 A.2d at 69-70.

12
(―FDA‖) testing.28 At least once, SER-120 failed to pass the FDA‘s ―Phase III‖ testing

level, a key regulatory hurdle.29 But in the fall of 2012, well over a year after CPEX was

acquired by the parties, SER-120 passed the Phase III test. In addition, Allergan decided

in February 2013 to fund a confirmatory trial of the drug. Thus, it appeared that SER-120

had become very valuable.30

The Complaint describes ―Serenity‖ as ―that one particular use of‖ CPEX‘s

patented CPE-215 drug delivery technology ―as combined with Allergan Inc.‘s (or its

assignees‘ or successors‘) patented-low dose desmopressin technology for the treatment

or prevention of nocturia. . . . Included in this was the then-developed combination,

known as SER-120.‖31 Plaintiffs apparently intend for ―Serenity‖ to mean more than

merely the licensing or royalty rights between CPEX and Allergan related to SER-120.

The oral ―Serenity Agreement,‖ according to the Complaint, ―contemplated a transfer to

Cheval of an additional 60.5% interest of all CPEX’s rights in Serenity, not a mere

assignment of the Allergan License,‖32 which would have put the balance of ownership as

to Serenity at approximately 80 percent to 20 percent, in favor of ―Cheval.‖ The

Complaint differentiates between ―(i) the license rights to Serenity through a separate

license agreement with CPEX and (ii) subject to Allergan‘s consent, the Allergan

28
Compl. ¶ 33.
29
Id. ¶¶ 15, 33.
30
Id. ¶ 15; see also id. ¶¶ 17, 33.
31
Id. ¶¶ 9-10; see also id. ¶¶ 43.
32
Id. ¶ 78 (emphasis added).

13
License, pursuant to which one potential combination, SER-120, was already being

developed, through a separate assignment and assumption agreement with CPEX.‖33

Regardless of precisely how ―Serenity‖ is defined, it is undisputed that before the

Merger, all of the assets in question were owned by CPEX—i.e., any relevant rights

CPEX held to CPE-215, ―Serenity,‖ SER-120, and the Allergan License. If that structure

were left untouched, Cheval Holdings indirectly would hold a 19.5 percent interest in

those assets and Footstar an 80.5 percent interest. According to the Complaint, the

Serenity Agreement called for the parties to create a new entity, FCB Serenity LLC, the

equity of which would be flipped: 80 percent for ―Cheval‖ and 20 percent for Footstar.34

FCB Serenity would be ―assigned‖ the Serenity assets, thus giving ―Cheval‖ control of an

additional 60.5 percent interest in those assets.35 In the mid-December 2010 time frame,

when the alleged conversations took place between Chappell and Couchman about

financing the acquisition and the Serenity Agreement, they allegedly agreed that FCB

Serenity would be subject to a stockholders‘ agreement giving protection to the minority

stockholder that effectively would be a ―mirror-image‖ of the FCB Holdings

Stockholders‘ Agreement. Because the Serenity assets were held by CPEX, it is

reasonable to infer from the allegations in the Complaint that Plaintiffs believed CPEX

33
Id. ¶ 63 (emphasis added); see also id. ¶¶ 64, 67, 76-79.
34
Compl. ¶¶ 59, 63, 64.
35
Id.

14
would transfer those assets to FCB Serenity at some future time, to give effect to the

intended structure.

The Complaint alleges that ―Cheval‘s receipt of an additional 60.5% interest in

Serenity‖ was ―a central precondition to Black Horse‘s willingness to contribute the

additional [Bridge Loan] funds,‖ and that without the extra Serenity interest, there was

―no economic incentive for Black Horse‖ to risk $10 million in bridge financing.36 While

the Complaint‘s description or use of the term ―Serenity‖ sometimes varies in relation to

what Plaintiffs expected to receive, there is no question that the consideration to be

provided by Plaintiffs in the oral bargain consisted of the Bridge Loan, and that alone.37

b. Written agreements concerning the Serenity Agreement

The formation of the Serenity Agreement allegedly took place in December 2010,

when the CPEX merger was being negotiated. All communications concerning the

alleged Serenity Agreement were oral. The parties allegedly ―did not attempt to

document the Serenity Agreement prior to closing‖ of the merger for several reasons,

including that ―it would not have made sense‖ to do so until after CPEX was acquired

and FCB Holdings thereby owned the Serenity assets.38 That is, the parties ―did not

believe it was necessary or appropriate to expend the legal resources‖ to document the

36
Id. ¶ 64; see also id. ¶¶ 9, 56, 57.
37
See Compl. ¶¶ 3, 9, 13, 43, 56, 57, 58, 61, 62, 64, 66.
38
Id. ¶ 65.

15
Serenity Agreement until closing of the Merger was more assured and the ―final

implementation structure‖ could be determined.39

At least six written agreements pertaining to different aspects of the CPEX

acquisition, however, were executed: the Merger Agreement, the Consulting Agreement,

the Stockholders‘ Agreement, the Commitment Letter, the BNYM Loan, and the Bridge

Loan Agreement (collectively, ―the Acquisition Agreements‖). The combined effect of

the Acquisition Agreements is to form a network of contractual rights and obligations

variously binding the entities involved in the CPEX acquisition. The Merger Agreement

was signed by Couchman on behalf of FCB Holdings and FCB I Acquisition Corp., and

by CPEX through its President and CEO, John Sedor. The Commitment Letter is signed

by Chappell on behalf of Black Horse, Couchman on behalf of FCB Holdings and FCB I

Acquisition Corp., and Sedor on behalf of CPEX. Chappell‘s and Couchman‘s signatures

also appear on the Stockholders‘ Agreement, the Consulting Agreement, and the Bridge

Loan Agreement.40 The Merger Agreement, which incorporates by reference the

Commitment Letter and the BNYM Loan, names and refers to Black Horse and Footstar

as ―Financing Parties‖ in several sections.41 In turn, the Commitment Letter,

39
Id.
40
The entities on behalf of which Couchman and Chappell signed each agreement
are as follows: for the Stockholders‘ Agreement: Footstar, FCB Holdings, and
Cheval Holdings; for the Consulting Agreement: Footstar and Cheval Holdings;
and for the Bridge Loan Agreement: Black Horse and FCB Holdings.
41
See Merger Agreement at ―Recitals,‖ §§ 3.7, 6.13, 9.6. I note also that, pursuant
to § 9.3(a), any ―notices or other communications‖ under the Merger Agreement
16
Stockholders‘ Agreement, Consulting Agreement, and Bridge Loan each refer to the

Merger Agreement.42

These agreements are critical to the disposition of Defendants‘ motion to dismiss.

Where relevant, the material terms and language from these agreements will be excerpted

and discussed in the legal Analysis section, infra. At this point, I note only that there is

no allegation that any of the written agreements pertaining to the CPEX acquisition

contains the term ―Serenity‖ or makes any reference to the ―Serenity Agreement.‖

c. Parties to the alleged Serenity Agreement

The Complaint varies in its identification of the entities or persons that allegedly

made promises with respect to the Serenity Agreement. Nevertheless, a few points are

relatively clear. First, it was Black Horse alone that made the Bridge Loan commitment

and that actually expended the $10 million to fund Plaintiffs‘ part of the Bridge Loan.

Second, it was Couchman and Footstar, or Couchman on behalf of Footstar, that made

the alleged promises on Defendants‘ side. Third, CPEX is not alleged to be a promisor or

promisee with respect to the Serenity Agreement, although the assets in question are

were to be sent to FCB Holdings (―Attn: Jonathan M. Couchman‖) and to Black
Horse (―Attn: Dale B. Chappell‖) with copies to designated law firms.
42
See, e.g., Commitment Letter ¶ 1 (―This Commitment Letter shall become
effective only upon the execution and delivery of the Merger Agreement by the
parties thereto. . .‖); id. ¶ 10 (―This Commitment Letter, together with the Merger
Agreement, reflects the entire understanding of the parties with respect to the
subject matter hereof, and shall not be contradicted or qualified by any other
agreement, oral or written, before the date hereof.‖); see also Stockholders‘
Agreement at ―Background A‖ (―The Company was formed for the purpose of
becoming a party to [the Merger Agreement].‖); Consulting Agreement 1; Bridge
Loan Agreement at ―Recitals,‖ §§ 4, 6, 7, 8, 11.

17
CPEX‘s (or FCB Holdings‘s insofar as it owned 100 percent of CPEX‘s common stock

post-Merger).

As to who was to receive the Serenity assets under the alleged Serenity

Agreement, the Complaint is less clear. In several paragraphs, Plaintiffs identify

―Cheval,‖ defined to include both Cheval Holdings and the two Black Horse funds, as the

recipient;43 elsewhere, they suggest it was Cheval Holdings specifically;44 and still

elsewhere, Plaintiffs specify the Black Horse funds alone.45 In some other paragraphs,

the Complaint simply lumps all Defendants and all Plaintiffs together when discussing

the Serenity Agreement, without regard for the separate corporate identities of the various

parties.46

43
Id. ¶ 9 (―In consideration for Blackhorse providing more capital . . . . Cheval
would receive . . . .‖); Id. ¶ 15 (―[Couchman] and Footstar had agreed to grant
80% of CPEX‘s interest in Serenity to Cheval Holdings and Blackhorse. . . .‖);
Id. ¶ 43 (―Blackhorse, Cheval Holdings, and Defendants agreed that Cheval would
receive . . . in exchange for Blackhorse taking a last minute risk of $10 million on
a bridge loan.‖); see also ¶¶ 61, 64. All emphases are added in this and the
succeeding three notes.
44
Id. ¶ 3 (―Couchman and Footstar . . . promis[ed] the Cheval Plaintiffs that in
exchange for receiving millions of additional financing support from Blackhorse,
Cheval Holdings would receive . . . .‖).
45
Id. ¶ 64 (―There was no economic incentive for Black Horse to risk [the Bridge
Loan] unless it received additional consideration . . . .‖); Id. ¶ 13 (―In exchange for
the 80% interest in Serenity, Blackhorse provided more than $20 million in loans
. . . .‖).
46
Id. ¶ 9 (―[T]he Cheval Plaintiffs and Chappell on the one hand and Footstar and
Couchman on the other agreed that . . . .‖); Id. ¶ 66 (―Believing Couchman,
Chappell funded millions of dollars of additional capital . . . .‖).

18
 4. Events after the CPEX acquisition

The CPEX acquisition was consummated on or about April 4, 2011. At various

points thereafter, Chappell attempted to persuade Couchman to document the Serenity

Agreement, but Couchman allegedly demurred, each time with a different excuse.47

Apparently, Couchman‘s reluctance was due in part to the fact that Footstar, then a

publicly traded company, had ―never publicly disclosed the Serenity Agreement to its

shareholders.‖48 The Footstar Entities underwent a restructuring in which they merged

into the newly formed Xstelos Entities, and the former stockholders of Footstar, Inc.,

including Couchman, became stockholders of Xstelos Holdings.

In February 2012, Couchman and Xstelos proposed an asset swap transaction ―to

justify the transfer‖ of the Serenity assets from CPEX to ―Cheval.‖49 Pursuant to this

proposal, Xstelos would acquire Cheval Holdings‘s 19.5 percent interest in a CPEX

subsidiary that owned a New Hampshire office building valued at $1.5 million, in

consideration for CPEX transferring to Plaintiffs 60.5 percent of ―Serenity‖ plus

$150,996 in cash. When Xstelos sent draft documentation for this transfer to Chappell in

47
Compl. ¶¶ 69-72.
48
Id. ¶ 72. In this regard, I take judicial notice of the fact during the process of
creating the new Xstelos Entities, effectuating the Footstar Plan of Reorganization,
registering Xstelos Holdings‘s shares with the SEC for listing on the OTC Bulletin
Board system, and ultimately taking Xstelos Holdings private via a reverse stock
split, no word of the Serenity Agreement was disclosed in public filings to the
Footstar/Xstelos stockholders, even though Xstelos Holdings‘s registration
statement and final prospectus mentions SER-120 and the Allergan License in
discussing CPEX‘s business. See, e.g., Xstelos Holdings, Inc., Prospectus (Apr.
25, 2012).
49
Id. ¶¶ 72-73.

19
May 2012, however, Chappell balked. Plaintiffs allege that the structure contemplated by

the draft agreements ―was not what the parties had agreed to in the Serenity Agreement,‖

because Xstelos‘s draft paperwork only purported to transfer the Allergan License, while

Plaintiffs were seeking to document their ownership of a ―broader license‖ to the Serenity

assets as described in the Complaint.50

The parties unsuccessfully continued to discuss their differences. In June 2012,

Xstelos filed a certificate of formation creating FCB Serenity LLC, a wholly owned

CPEX subsidiary that was supposed to be the vehicle for effectuating the Serenity

transfer. Xstelos also secured Allergan‘s consent to the assignment of the Allergan

License from CPEX to FCB Serenity. The parties‘ attorneys, including Finerman,

discussed a draft of the operating agreement for FCB Serenity and the contemplated asset

swap transactions. Those draft agreements would have removed FCB Serenity from FCB

Holdings and CPEX, and given it to Plaintiffs and Xstelos in the form of their anticipated

respective 80 and 20 percent ownership interests.

In September 2012, Couchman emailed Chappell requesting Cheval Holdings‘s

approval of a consent dividend for the 2011 CPEX income to enable Couchman to deal

with a tax issue that had arisen after the Merger.51 Chappell responded that he would

consent to the dividend if ―XTLS and Cheval will document the ownership rights to

50
Id. ¶¶ 78, 81.
51
Compl. ¶¶ 46-49, 88-91.

20
Serenity in the next five business days.‖52 When asked what that had to do with the

consent dividend, Chappell answered that he was ―not asking for anything new. It is

simply documenting the agreement that we have already reached almost two years ago

which was to split Serenity 80/20 in favor of Cheval.‖53 Couchman replied that, ―We

agree in principle to split Serenity 80/20 in favor of Cheval, with the New Hampshire

building to go to Xstelos, subject to reaching agreements as to mechanics of distribution,

governance, escrow provisions . . . all to be finalized in definitive documentation.‖54

After further back-and-forth, Couchman ultimately stated, ―if you accept a consent

dividend, I will endeavor to document the Serenity transaction we have been discussing

for quite some time.‖55 Cheval Holdings then approved the consent dividend.

In addition, Chappell proposed entering into a ―simple term sheet outlining some

basic terms of the Serenity Agreement‖ and provided a draft to Xstelos in late September

2012. Xstelos attached this term sheet to the latest drafts of the operating agreement for

FCB Serenity, even though, according to Plaintiffs, ―Cheval had previously rejected

certain of the terms of these drafts because they did not accurately reflect the Serenity

52
Id. ¶ 92.
53
Id. ¶¶ 93-94.
54
Id. ¶ 95.
55
Id. ¶ 100.

21
Agreement.‖56 This exchange of drafts and negotiations about ―documenting‖ the

―Serenity Agreement‖ continued from October into December 2012.57

The Complaint further alleges that on December 19, 2012, Couchman suddenly

changed position after more than two years. Referring to Chappell‘s request for a license

from CPEX as well as an assignment of the Allergan License, Couchman wrote to

Chappell: ―Dale, you and I never discussed a license agreement. This is something new

you are asking for and we are not inclined to provide. We thought we were discussing a

transaction to sell 60% of the Serenity interest only. We won‘t provide a license

agreement.‖58

5. Relations sour

The tax issue that prompted Xstelos to obtain Cheval Holdings‘s approval of a

consent dividend also caused Xstelos to distribute in late 2012 all of CPEX and FCB

Holdings‘s income through the payment of cash dividends.59 The Complaint alleges that

―[i]n retaliation for Cheval‘s requests to perform the Serenity Agreement,‖ Xstelos

determined to accelerate the payment of the FCB Holdings dividends.60 More

56
Id. ¶ 103.
57
During the same time frame, SER-120 successfully passed FDA Phase III testing.
See supra I.B.3.a.
58
Id. ¶ 106.
59
The mechanics of the personal holding company tax, the parties‘ initial
misunderstanding of it, and their subsequent attempts to avoid paying it are not
material to the pending motion to dismiss.
60
Id. ¶ 108.

22
specifically, Cheval Holdings wanted the dividend to be deferred for three months, until

it could redomicile its ownership of FCB Holdings to Ouray, the Swiss entity owned by

Cheval Holdings, and thereby reduce its tax burden. The Complaint alleges that there

also would have been no cost to Xstelos to wait until after the completion of the

redomiciliation, and that there was no benefit to Xstelos from paying the dividend earlier.

Yet, over Chappell‘s objection, Couchman and Finerman (as directors of FCB Holdings)

voted to declare cash dividends of $9 million in September 2012 and another $1 million

in October 2012.

On June 11, 2013, Couchman recommended to Chappell that the equity holders of

FCB Holdings make a pro rata equity contribution to the company, which would be

followed by an immediate cash dividend of approximately the same amount. Cheval

Holdings ―reluctantly‖ agreed, because it feared being diluted if it did not participate in

the equity raise.61 The Complaint alleges that, through these actions, Couchman sought

to inflict economic harm on Cheval Holdings, because it was paying tax on the dividends

while Xstelos was not. Defendants allegedly threatened the issuance of dividends ―solely

as a mechanism to threaten Cheval and to cause Cheval to walk away from the Serenity

Agreement and to otherwise exert economic pressure on Cheval.‖62

Plaintiffs also complain that Xstelos has harmed them by breaching the

Stockholders‘ Agreement and the Consulting Agreement. The Stockholders‘ Agreement,

61
Id. ¶ 119.
62
Id. ¶ 121.

23
to which Footstar, Cheval Holdings, and FCB Holdings are parties, was to govern the

parties‘ post-Merger relationship and protect Cheval Holdings‘s interest in CPEX. As a

19.5 percent owner, Cheval Holdings otherwise would have been at the mercy of Footstar

and Xstelos in this regard. In terms of the Stockholders‘ Agreement, Plaintiffs allege the

following litany of breaches: Xstelos violated Section 2.2(a) by entering into related party

transactions without Cheval Holdings‘s consent; it violated Section 2.6 by failing to

timely present annual budgets for CPEX and FCB Holdings; it violated Section 2.2(c) by

causing FCB Holdings and its subsidiaries to make capital expenditures exceeding

$100,000 without Cheval Holdings‘s consent; and it violated Section 5.4(c) by failing to

provide management, personnel, and administrative services to CPEX at Xstelos‘s

expense.

The Consulting Agreement required Footstar to pay Cheval Holdings a consulting

fee ―relating to the performance of services on CPEX‘s patent technologies and their use,

application, monetization and relicensing, to the extent funds are available . . . .‖63 An

attached schedule provided for payments of consulting fees of $1 million, $750,000,

$750,000, and $500,000 for the years 2011, 2012, 2013, and 2014, respectively.

Thereafter, an annual consulting fee of $250,000 would be owed to Cheval Holdings until

the arrangement was terminated.64 The Complaint alleges that Cheval Holdings has

63
Consulting Agreement 1.
64
Id. at 3.

24
performed all of its obligations under the Agreement, but that it currently is due

$2,062,500 in fees.

C. Procedural History

Plaintiffs filed this action on June 13, 2013. After Defendants moved to dismiss,

Plaintiffs amended the Complaint on October 29, 2013.65 The Complaint as amended

asserts causes of action for breach of contract, breach of the implied covenant of good

faith and fair dealing, fraudulent inducement, promissory estoppel, and unjust

enrichment. In particular, Plaintiffs accuse Xstelos and Couchman of breach of the

alleged Serenity Agreement, and, by way of relief, seek monetary damages (Count I) or

specific performance (Count II). In Counts VI – VIII, Plaintiffs assert alternative causes

of action against Xstelos and Couchman relating to the Serenity Agreement for fraudulent

inducement, promissory estoppel, and unjust enrichment. Count III consists of a claim

against Xstelos for breach of the Consulting Agreement. In addition, Plaintiffs assert

claims against Xstelos and FCB Holdings for breaches of the Stockholders‘ Agreement

(Count IV) and the implied covenant of good faith and fair dealing associated with the

Stockholders‘ Agreement (Count V).

Defendants again moved to dismiss the Complaint in its entirety on November 18,

2013. After full briefing, I heard oral argument on that motion on February 10, 2014.

This Memorandum Opinion constitutes my ruling on the motion. In the analysis below, I

65
Plaintiffs filed a corrected version of the Amended Verified Complaint on
November 1, 2013. This corrected Amended Verified Complaint is the operative
―Complaint‖ for purposes of this Memorandum Opinion.

25
address first the claims that concern the Serenity Agreement (Counts I, II, VI, VII, and

VIII), then Count III relating to the Consulting Agreement, and finally Counts IV and V,

which arise from the Stockholders‘ Agreement.

D. Parties’ Contentions

Defendants seek dismissal of the Complaint under Court of Chancery Rule

12(b)(6) for failure to state a claim upon which relief can be granted. With regard to the

Serenity Agreement, Defendants contend that, even accepting all of the Complaint‘s

allegations as true, the breach of contract counts fail for two reasons. First, the oral

promise at the core of the alleged agreement is too vague to be enforceable, because the

alleged facts do not manifest a mutual assent between the parties as to the essential terms,

including what was to be transferred under the agreement, how, and to whom. Second,

Defendants argue that even if there were an enforceable oral promise concerning

Serenity, it would conflict with the terms of the subsequent written agreements. Because

those agreements are completely integrated, Defendants contend, the parol evidence rule

operates as a complete bar to Plaintiffs‘ claims for breach of the Serenity Agreement.

Defendants further assert that Plaintiffs‘ alternative theories of liability arising from the

alleged Serenity Agreement—fraud, promissory estoppel, and unjust enrichment—also

fail because the subsequent written agreements render it impossible for Plaintiffs to have

―reasonably relied‖ on any prior oral promises or agreements. They assert further that the

fraudulent inducement claim is defective for the separate reason that the alleged promises

are statements of future intent rather than misrepresentations of present fact.

26
 Plaintiffs respond that the Complaint alleges a simple, clear, oral contract and that

Delaware law allows for such agreements to be enforceable even where the parties leave

the act of documenting the terms for a later time. In that regard, Plaintiffs argue that the

Complaint consistently described the Serenity Agreement, and uniformly identified the

assets to be transferred, the core economic terms, and the parties to the Agreement.

Plaintiffs counter Defendants‘ parol evidence rule argument on two fronts. First, they

assert that, even if fully integrated, none of the subsequent written agreements bind all of

the alleged parties to the Serenity Agreement, thereby rendering that Agreement

enforceable by either Cheval Holdings or Black Horse, if not both. Second, Plaintiffs

contend that because the fraudulent inducement claim is well-pled, the fraud exception to

the parol evidence rule applies here in any event. As to the promissory estoppel and

unjust enrichment claims, Plaintiffs aver that they were brought as alternatives to the

Serenity breach of contract claim, and that they are well-pled and supported by the

factual allegations in the Complaint.

With respect to Plaintiffs‘ claim for the unpaid consulting fees under the

Consulting Agreement, Defendants assert that claim is moot, because 100 percent of the

outstanding amount was funded into an escrow account for the benefit of Cheval

Holdings on September 6, 2013. Plaintiffs, however, deny that the fees were paid in

accordance with the Agreement, and dismiss Defendants‘ mootness argument, in any

event, as being based on facts not contained in the Complaint.

Lastly, Defendants move to dismiss the claim for breach of the Stockholders‘

Agreement based on Plaintiffs‘ failure to plead cognizable damages, and on mootness

27
grounds. Defendants also maintain that the implied covenant of good faith and fair

dealing claim fails because the contract is not silent on the issue of FCB Holdings‘s

ability to pay dividends, and therefore limits Plaintiffs‘ rights in that regard. They argue

further that there is no basis for an allegation of bad faith where, as here, Defendants

acted in accordance with the applicable contract provision.

In response, Plaintiffs emphasize that the Complaint identifies the provisions of

the Stockholders‘ Agreement and the actions of Defendants that constitute the alleged

breaches. Further, they deny that their breach of contract claim is moot, or that the

damages allegations are deficient. On the implied covenant issue, Plaintiffs counter that

the allegations in the Complaint support an inference of bad faith under Delaware law,

because Defendants accelerated the dividends in a deliberate effort to harm Cheval

Holdings, and thereby abused the discretion afforded them by the contract.

II. ANALYSIS

A. Standard for dismissal under Rule 12(b)(6)

The governing pleading standard in Delaware to survive a motion to dismiss is

reasonable conceivability.66 The Court‘s inquiry in this regard is to determine ―whether

[Plaintiffs‘] well-pleaded Complaint stated a claim that is provable under any reasonably

conceivable set of circumstances.‖67 In so doing, the Court must

accept all well-pleaded factual allegations in the Complaint as
true, accept even vague allegations in the Complaint as ―well-

66
Cent. Mort. Co. v. Morgan Stanley Mort. Capital Hldgs. LLC, 27 A.3d 531, 536
(Del. 2011).
67
Id. at 538.

28
 pleaded‖ if they provide the defendant notice of the claim,
draw all reasonable inferences in favor of the plaintiff, and
deny the motion unless the plaintiff could not recover under
any reasonably conceivable set of circumstances susceptible
of proof.68

The court, however, need not ―accept conclusory allegations unsupported by specific

facts‖ or ―draw unreasonable inferences in favor of the non-moving party.‖69 Failure to

plead an element of a claim precludes entitlement to relief and, therefore, is grounds to

dismiss that claim.70

B. Counts I and II

Defendants move to dismiss Counts I and II, which assert breach of the alleged

Serenity Agreement, arguing that the Complaint fails adequately to plead the elements of

an enforceable contract. They also contend that, taking Plaintiffs‘ allegations as true, the

Serenity Agreement necessarily would conflict with the terms of the multiple written

agreements that the parties executed shortly after the alleged Serenity promise was made.

After considering the parties‘ extensive briefing and arguments, I conclude that, based on

the allegations in the Complaint, it is not reasonably conceivable that the Serenity

Agreement is an enforceable contract between the parties. I also am convinced,

therefore, that it is not reasonably conceivable that Plaintiffs could show that the specific

performance remedy sought in Count II would be appropriate.

68
Id. at 535 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
69
Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing
Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
70
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 972 (Del. Ch. 2000) (Steele,
V.C., by designation).

29
1. The Complaint does not support a reasonable inference that an enforceable
contract existed with respect to the Serenity Agreement.

A ―valid contract exists when (1) the parties intended that the contract would bind

them, (2) the terms of the contract are sufficiently definite, and (3) the parties exchange

legal consideration.‖71 Under Delaware law, ―overt manifestation of assent—not

subjective intent—controls the formation of a contract.‖72 Whether both of the parties

manifested an intent to be bound ―is to be determined objectively based upon their

expressed words and deeds as manifested at the time rather than by their after-the-fact

professed subjective intent.‖73 The Court‘s determination ―must be premised on the

totality of all such expressions and deeds given the attendant circumstances and the

objectives that the parties are attempting to attain.‖74 To determine whether a binding

contract exists, therefore, courts in Delaware look for ―objective, contemporaneous

evidence indicat[ing] that the parties have reached an agreement,‖ whether that be in the

parties‘ spoken words or writings.75

a. Intent to be bound

Applying these principles at the motion to dismiss stage, I first look to the factual

allegations of the Complaint to determine whether Plaintiffs could prove under any

71
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1158 (Del. 2010); see also Otto v.
Gore, 45 A.3d 120, 138 (Del. 2012).
72
Indus. Am., Inc. v. Fulton Indus., Inc., 285 A.2d 412, 415 (Del. 1971).
73
Debbs v. Berman, 1986 WL 1243, at *7 (Del. Ch. Jan. 29, 1986).
74
Id.
75
Id.

30
reasonably conceivable set of facts that the parties made objective manifestations of an

intent to be bound by the alleged Serenity Agreement. Taking all well-pled facts alleged

as true, and drawing all reasonable inferences in Plaintiffs‘ favor, as I must, I

nevertheless conclude that it is not reasonably conceivable that Plaintiffs could prove that

the parties shared an intent to be bound by the Serenity Agreement.

Counts I and II of the Complaint allege the following:

Pursuant to the Serenity Agreement, the Cheval Plaintiffs
agreed to provide $10,000,000 ($7,465,000 more than its pro
rata amount) towards the bridge loans in exchange for the
Xstelos Entities‘ and Couchman‘s express agreement to
effectuate the transfer of an additional 60.5% of Serenity to
the Cheval Plaintiffs following consummation of the merger
resulting in a total ownership of 80%. The Xstelos Entities
and Couchman promised the Cheval Plaintiffs that they
would memorialize the agreement shortly after consummation
of the CPEX transaction.76

So, according to Plaintiffs, the quid pro quo of the Serenity Agreement is that: (1) the

Cheval Plaintiffs—defined by them to include Cheval Holdings and both Black Horse

funds—would make the $10 million Bridge Loan; and (2) in return, Xstelos and

Couchman would effectuate a transfer of a 60.5% interest in ―Serenity‖ to the Cheval

Plaintiffs following the consummation of the CPEX merger.77

76
Compl. ¶¶ 135-36, 142-43.
77
This Section focuses narrowly on the parties‘ intent to be bound by the Serenity
Agreement. The parties vigorously dispute the parameters of the Serenity
Agreement in terms of what precisely ―Serenity‖ is or who precisely was supposed
to give and receive ―Serenity‖ under the alleged Agreement. Those issues are
discussed infra in Section II.B.1.b.

31
 As recited supra, the alleged Serenity Agreement was reached during a phone call

―in or about December 2010,‖ a time period during which Chappell and Couchman spoke

by telephone multiple times each business day regarding the CPEX merger.78 On January

3, 2011, the parties executed at least five sophisticated legal agreements to accomplish

the CPEX acquisition: the Merger Agreement, the Commitment Letter, the Consulting

Agreement, the Stockholders‘ Agreement, and the BNYM Loan. Taking the terms of the

Serenity Agreement as alleged in the Complaint, it is not reasonably conceivable that

Plaintiffs could prove under Delaware law that the parties intended to be bound by the

Serenity Agreement, in light of their execution only days or weeks later of these written

agreements.

The Complaint avers that Plaintiffs‘ side of the alleged Serenity bargain was that

―the Cheval Plaintiffs‖ would ―provide $10,000,000 ($7,465,000 more than its pro rata

amount) towards the bridge loans.‖79 Indeed, the Serenity transfer is alleged to have been

―a central precondition‖ to Plaintiffs‘ making the $10 million Bridge Loan and rescuing

the CPEX deal.80 Section 3.7 of the Merger Agreement, entitled ―Financing,‖ states that

the Merger financing ―will consist of an aggregate of not less than $80,000,000 of

financing, comprised of $16,000,000 of financing from the FB Financing Parties [defined

as Footstar and the Black Horse funds] (of which $3,000,000 has already been funded

78
Compl. ¶ 57.
79
Compl. ¶¶ 135-36, 142-43.
80
Id. ¶ 64.

32
into Merger Sub and NewCo and $13,000,000 of which is committed pursuant to the FB

Commitment Letters). . . .‖81 Section 3.7 further states that the FB Commitment Letters

together with the BNYM Loan ―shall, collectively, be referred to as the ‗Financing

Agreements,‘‖ and that, ―There are no conditions precedent or contingencies related to

the funding of the full amount of the Financing, other than as expressly set forth in the

Financing Agreements, and there are no side letters or other contracts or arrangements

related to the Financing other than the Financing Agreements.‖82

The Complaint makes clear that Plaintiffs considered the Serenity Agreement a

―central precondition‖ to their willingness to put up the $10 million, and that the $10

million Bridge Loan was the only consideration on Plaintiffs‘ side of the Serenity

bargain. Given these allegations, the only reasonable inference from the language of

Section 3.7 of the Merger Agreement is that the Serenity Agreement would have been set

forth or at least referenced specifically in the ―Financing Agreements‖—i.e., in the

Commitment Letter. But, the Commitment Letter, which was signed on the same day as

the Merger Agreement by Chappell on behalf of the Black Horse funds and Couchman on

behalf of FCB Holdings, makes no reference to the Serenity Agreement.

In the Commitment Letter, Chappell and Black Horse agreed that, ―Subject to

Paragraph 2 hereof, the Sponsor [Black Horse] hereby commits to provide, or cause an

assignee permitted by Paragraph 4 of this Commitment Letter to provide, a loan (―the

81
Merger Agreement § 3.7.
82
Id.

33
Loan‖) to Buyer [FCB Holdings]‖ in the amount of $10 million. ―The Loan,‖ it

continues, ―shall generally be on the terms set forth in Exhibit A attached hereto.‖

Paragraph 2 of the Commitment Letter states conditions ―subject to‖ which Black Horse

was committing the Loan. Plaintiffs do not contend, however, that anything in the

Commitment Letter, Paragraph 2, or Exhibit A thereto made reference to the Serenity

Agreement, either by name or in substance.

The ―Summary of Terms‖ attached as Exhibit A to the Commitment Letter is just

over two pages long. It refers to terms such as the borrower and lender, the loan amount,

closing date, interest rate, maturity, repayment and security terms, events of default,

covenants, and a three-percent loan fee. Plaintiffs do not assert, nor could they, that

Serenity is mentioned anywhere in this term sheet. Chappell and Couchman, on behalf of

Black Horse and FCB Holdings, explicitly agreed, however, that, ―This Commitment

Letter, together with the Merger Agreement, reflects the entire understanding of the

parties with respect to the subject matter hereof and shall not be contradicted or qualified

by any other agreement, oral or written, before the date hereof.‖83

According to the attached Summary of Terms, the ―Purpose‖ of the Commitment

Letter, as described in the Letter itself, was to reflect Black Horse‘s commitment to loan

$10 million in bridge financing to FCB Holdings. The $10 million Bridge Loan is the

reason the Commitment Letter exists; it, and it alone, is the ―subject matter‖ of the Letter.

The only reasonable inference from the Commitment Letter is that there was no other

83
Commitment Letter ¶ 10.

34
―understanding of the parties‖ with respect to the $10 million Bridge Loan. I conclude,

therefore, that is not reasonably conceivable that Chappell and Couchman could have

signed the Commitment Letter while also intending to manifest assent to another,

undisclosed, side agreement concerning the Bridge Loan.84

This conclusion is buttressed by the plain language of the other Acquisition

Agreements as well. According to the Complaint, the consideration to be provided by

Defendants‘ side of the alleged Serenity bargain was that the Xstelos Entities and

Couchman would ―effectuate the transfer of an additional 60.5% of Serenity to the

Cheval Plaintiffs following consummation of the merger resulting in a total ownership of

80%.‖85 The Complaint also alleges that all parties understood that, post-closing, CPEX

and all of its assets would be held 100 percent by FCB Holdings, which in turn was held

80.5 percent and 19.5 percent, respectively, by Footstar and Cheval Holdings. The

parties carefully designed this structure to accomplish their tax avoidance goals. The

only reasonable inference, therefore, is that at some time after closing, the Serenity assets

would have to be transferred from FCB Holdings to one or more of the Cheval Plaintiffs.

84
I also note in this regard that the actual Bridge Loan Agreement, signed by
Chappell for Black Horse and Couchman for FCB Holdings at the April 5, 2011
closing of the CPEX Merger, is similarly devoid of any reference to ―Serenity‖ or
the alleged Serenity Agreement. As with the Commitment Letter, the parties to
the Bridge Loan Agreement agreed that: ―This Agreement, including the exhibits
attached thereto, constitutes the entire agreement of the parties relative to the
subject matter hereof and supersedes any and all other agreements or
understandings, whether written or oral, relative to the matters discussed herein.‖
Bridge Loan Agreement § 11(b).
85
Compl. ¶¶ 135-36, 142-43.

35
 Here again, the plain language of the parties‘ January 3, 2011 agreements is in

conflict. According to the Stockholders‘ Agreement, Footstar and Cheval Holdings

―deem[ed] it to be in their best interests to provide for certain provisions governing [1]

the control and operation of [FCB Holdings] . . . [2] restrictions on the transfer of the

Shares [of FCB Holdings] and [3] for various other matters as set forth herein.‖ 86 Article

II of the Stockholders‘ Agreement, addressing Corporate Governance, includes a number

of Negative Covenants in which the parties agreed, among other things, that FCB

Holdings would not enter into any ―declaration or payment of any dividends or

distributions that are not paid pro rata to [FCB Holdings‘] stockholders.‖ 87 To the extent

the parties were planning to distribute Serenity assets, or the stock of a new subsidiary

created to hold the Serenity assets, as Plaintiffs allege, such a distribution would not have

been pro rata according to Footstar‘s and Cheval Holdings‘s 80.5 percent and 19.5

percent respective ownership of FCB Holdings.

Moreover, in Article V of the Stockholders‘ Agreement, in which the parties

addressed several ―Miscellaneous‖ issues, the parties agreed that ―Footstar and Cheval

[Holdings] shall in good faith negotiate, execute and deliver a tax sharing agreement on

or prior to the closing of the Merger.‖88 They also agreed that, ―As the parent of the

Group, Footstar, Inc. agrees that it shall, and shall cause the subsidiaries in the Group to,

86
Stockholders‘ Agreement, Background ¶ E.
87
Id. § 2.2(o).
88
Id. § 5.2.

36
use commercially reasonable efforts to preserve and maximize the utilization of the

[NOLs] for the benefit of the Group. . . .‖89 Notably, in the case of both of these issues,

the Stockholders‘ Agreement reflects the parties‘ shared intent to execute a tax-sharing

agreement, and to hold Footstar to its promise that it would make proper use of the NOLs

in the future. Thus, if a dispute were to arise with respect to either of those topics, this

Court or any court would have contemporaneous evidence that an agreement existed, and

perhaps would entertain extrinsic evidence, if necessary, to determine whether and how

to enforce the terms of the parties‘ agreements.

Identifying such ancillary agreements, if only in a summary manner, was

presumably necessary because the parties further agreed that, ―This [Stockholders‘]

Agreement constitutes the entire agreement among the parties hereto in respect of the

subject matter hereof and supersedes all other prior agreements and understandings, both

written and oral, among the parties in respect of the subject matter hereof.‖ Again, as

stated in the recitals, the subject matter and purpose of the Stockholders‘ Agreement was

for Footstar and Cheval Holdings to provide for the future ―control and operation of‖

FCB Holdings and its subsidiaries. To my mind, it is not reasonably conceivable that the

parties could have executed such an agreement detailing the future control and operation

of FCB Holdings while also intending to be bound by an ill-defined, prior oral agreement

that would require FCB Holdings to effectuate the transfer of valuable corporate assets to

Cheval Holdings or Plaintiffs generally. As demonstrated by the Stockholders‘

89
Id. § 5.3. ―Group‖ is a term defined there as meaning the Xstelos Entities and
FCB Holdings.

37
Agreement itself, the parties knew how to manifest their shared intent to ―in good faith

negotiate, execute and deliver a tax sharing agreement,‖ and to ―use commercially

reasonable efforts to preserve and maximize‖ the NOLs for their mutual benefit. It is

unreasonable to infer, therefore, that the parties had a shared intention to transfer the

Serenity assets away from FCB Holdings on a non-pro rata basis at a later date for no

additional consideration, when there is no mention of any such agreement or

understanding in the Stockholders‘ Agreement or any of the other Acquisition

Agreements.

In arguing for a contrary conclusion, Plaintiffs rely heavily on PharmAthene, Inc.

v. SIGA Technologies, Inc.90 In that case, SIGA Technologies negotiated with

PharmAthene to collaborate in the development of an unproven drug technology (―SIGA-

246‖) owned by SIGA. The parties first discussed a licensing agreement and

memorialized their agreement to collaborate in a two-page document referred to as a

―License Agreement Term Sheet‖ or ―LATS,‖ which described the parties‘ objective in

the collaboration and laid out a framework of economic terms relating to patent matters,

licenses, license fees, and royalties. The LATS itself bore a legend that said ―Non

Binding Terms.‖ The parties later explored a possible merger and entered into a merger

agreement and a bridge loan agreement in which they undertook, if the merger did not go

90
PharmAthene, Inc. v. SIGA Techs., Inc. (PharmAthene I), 2008 WL 151855 (Del.
Ch. Jan. 16, 2008), aff’d in part, rev’d in part, 67 A.3d 330, 346 (Del. 2013). As
noted in the Supreme Court‘s opinion in Pharmathene, this Court issued at least
six separate opinions or orders in that case. In the interest of brevity, I use the
same short form names (PharmAthene I-VI) for those opinions as the Supreme
Court did. 67 A.3d at 340-41 nn.21-26.

38
forward, to negotiate in good faith a license agreement to SIGA-246 in accordance with

the LATS.

PharmAthene expended funds and provided information and technological support

to SIGA in connection with the continued development of SIGA-246. Less than three

months after the LATS was created, SIGA and PharmAthene signed a Letter of Intent to

merge the companies, and attached a ―Merger Term Sheet.‖ The Merger Term Sheet laid

out terms for tax treatment, consideration, and financing. It also stated that the parties

agreed to negotiate in good faith the terms of a definitive License Agreement for SIGA-

246, ―in accordance with the terms set forth in the [LATS],‖91 if the merger did not take

place.

Several weeks later, the parties entered into a Bridge Loan Agreement whereby

PharmAthene loaned $3 million to SIGA for expenses related to the Merger, the

continued development of SIGA-246, and overhead. The Bridge Loan Agreement

provided that, upon termination of the Merger Term Sheet or a failure to execute a

definitive Merger Agreement, the parties ―will negotiate in good faith with the intention

of executing a definitive License Agreement in accordance with the terms set forth in the

License Agreement Term Sheet.‖92 Shortly thereafter, a Merger Agreement was

executed, in which the parties agreed that, ―Upon any termination of this Agreement,

SIGA and Pharmathene will negotiate in good faith with the intention of executing a

91
PharmAthene I, 2008 WL 151855, at *10.
92
Id.

39
definitive License Agreement in accordance with the terms set forth in the License

Agreement Term Sheet.‖93 The LATS was attached as an exhibit to the Merger

Agreement, as it was with the Bridge Loan Agreement.

By the time the merger was supposed to close, SIGA-246 achieved some success

related to its clinical testing, and its value, previously uncertain, now had a greater

prospect of being very large. Ultimately, the Merger did not close, and the parties‘

subsequent discussions failed to produce a license agreement. PharmAthene sued for

breach of contract and for non-contractual relief, arguing that the LATS evidenced a

binding agreement by SIGA to enter into a license agreement for SIGA-246 according to

its terms.

In deciding SIGA‘s motion to dismiss, this Court observed that: ―Neither the

LATS alone nor the LATS together with PharmAthene‘s partial performance are likely to

be sufficient to show the parties intended to be bound by the LATS as an agreement to

agree.‖94 Based on the subsequent written agreements signed by the parties, however, the

Court concluded that PharmAthene ―conceivably could adduce facts that support the

allegations in its Complaint that the parties intended to bind themselves to enter into a

license agreement consistent with the LATS.‖95 The Court found ―the cumulative effect

of the LATS, the Bridge Loan Agreement, the Merger Agreement, and the parties‘

93
Id. at *11.
94
Id. at *9.
95
Id. at *12.

40
conduct‖96 made it reasonably conceivable the parties had an enforceable agreement that

they would enter into a contract in accordance with the material terms of the LATS, and

that those material terms were sufficiently well-pled to withstand a motion to dismiss

under Delaware law.97

The Cheval Plaintiffs argue that their allegations are ―virtually identical‖ to those

alleged by the plaintiff in PharmAthene.98 I note initially that, even if this were true, it

would not support Plaintiffs‘ argument that the Serenity Agreement, in itself, was a fully

developed and enforceable contract. An important premise of Plaintiffs‘ argument is that

the oral Serenity Agreement is analogous to the LATS in the PharmAthene case, and that,

as this Court in PharmAthene found it reasonably conceivable that the parties there

intended to be bound by the LATS, so should it find here with respect to the Serenity

Agreement. This Court noted at the motion to dismiss stage in PharmAthene, however,

that ―Not even PharmAthene contends the unsigned LATS alone, with the ‗Non Binding

Terms‘ legend, creates an enforceable contract.‖99 As this Court indicated in

PharmAthene, had the plaintiff relied on the LATS alone, or the LATS in combination
96
Id. at *9.
97
In reviewing this Court‘s post-trial Opinion, PharmAthene III, 2011 WL 4390726
(Del. Ch. Sept. 22, 2011), the Delaware Supreme Court held that, ―the record
supports the Vice Chancellor‘s factual conclusion that ‗incorporation of the LATS
into the Bridge Loan and Merger Agreements reflects an intent on the part of both
parties to negotiate toward a license agreement with economic terms substantially
similar to the terms of the LATS if the merger was not consummated.‘‖ SIGA
Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 346 (Del. 2013).
98
Pls.‘ Answering Br. (―PAB‖) 5.
99
PharmAthene I, 2008 WL 151855, at *9.

41
with the parties‘ alleged partial performance, its claim likely would not have survived a

motion to dismiss.100 For PharmAthene to support Plaintiffs‘ argument that it is

reasonably conceivable that the oral Serenity Agreement alone created an enforceable

contract, that case would have to be read as finding that it was reasonably conceivable

that the LATS alone conceivably could have constituted an enforceable contract between

PharmAthene and SIGA. None of the Court‘s rulings in PharmAthene support that

proposition.101

Whether or not PharmAthene stands for the legal propositions Plaintiffs suggest it

does, the dispositive facts in that case are simply not present here. Where the plaintiff in

PharmAthene pointed to the written LATS document as evidence of an agreement as to

certain material terms, Plaintiffs here point to no contemporaneous memorialization of

the alleged Serenity Agreement. More problematic for Plaintiffs, however, is the fact that

the subsequent written agreements in PharmAthene explicitly referenced, reaffirmed, and

incorporated the LATS—not just once, but three times. That fact was highly material to

100
See id.
101
See id.; see also PharmAthene II, 2010 WL 4813553, at *7 (stating that for
purposes of the defendant‘s summary judgment motion, ―I assume the parties
intended the LATS to be binding,‖ and proceeding to analyze the main question of
―whether the alleged agreement nonetheless is unenforceable because it lacks
essential terms‖); and PharmAthene III, 2011 WL 4390726, at *15 (concluding in
post-trial opinion that the plaintiff PharmAthene ―either has conceded that the
LATS standing alone is nonbinding or has failed to prove by even a
preponderance of the evidence that when the parties negotiated the LATS in
January 2006 they intended it to constitute a binding license agreement‖).

42
the Court‘s denial of the motion to dismiss in PharmAthene. In contrast, the subsequent

written agreements executed by the parties in this case do not contain a single word upon

which Plaintiffs could base a reasonably conceivable claim that a collateral oral

agreement existed with respect to either the Bridge Loan or FCB Holdings‘s assets post-

merger. Indeed, taking as true Plaintiffs‘ factual allegations as to what the Serenity

Agreement required each party to do, the alleged terms of the Serenity Agreement would

conflict directly with the plain language of the Acquisition Agreements.

Delaware adheres to the objective theory of contract law precisely because of

situations like this one. This Court cannot know what was in the minds of the parties

three years ago when the Serenity Agreement allegedly came into being. The relevant

inquiry, however, is not what the parties‘ subjective intent was then or is currently. This

Court, and all Delaware courts, look to the parties‘ outward manifestations of intent and

construe them according to the meaning they would have in the eyes of a reasonable

person in like circumstances—i.e., their objective meaning.102 The parties in

PharmAthene documented the principal terms of their agreement in the LATS and then

reaffirmed and re-incorporated those terms in their subsequent written agreements. Thus,

an important reason why it was reasonably conceivable at the motion to dismiss stage that

PharmAthene might be able to prove a breach of contract claim was that the parties‘

102
See Osborn, 991 A.2d at 1159 (―Delaware adheres to the ‗objective‘ theory of
contracts, i.e. a contract‘s construction should be that which would be understood
by an objective, reasonable third party.‖).

43
contemporaneous words and writings objectively evidenced a shared intent to be

bound.103

The facts alleged in the Complaint here indicate that Plaintiffs subjectively

believed in December 2010, and believe still, that they were promised an asset or set of

assets then owned by CPEX and now owned by FCB Holdings. The facts as alleged,

however, do not support a reasonable inference of an objective manifestation of the

parties‘ shared intent to be bound by the Serenity Agreement at the time of its alleged

formation. Indeed, the behavior of the parties in the days and weeks surrounding the

alleged oral Serenity Agreement undermines the possibility that the Court could find it

reasonably conceivable that they had such a shared intent. Further, the Complaint‘s non-

conclusory factual allegations concerning the parties‘ actions after the time of the

Serenity Agreement‘s formation do not support a reasonable inference that the parties

intended to be bound, either. As recited supra, from February 2012 until December

2012, the parties had discussions about and drafted documents for a transaction in which

certain CPEX real estate would be given to Xstelos and ―Serenity‖ assets would be given

to Plaintiffs. As discussed more fully in the next section, the parties failed to reach

agreement in 2012 as to the meaning of certain essential terms, like ―Serenity.‖ Such

ultimately fruitless negotiations, beginning in earnest a year after the CPEX Merger and

well over a year after the December 2010 Serenity Agreement, cannot support a

103
See PharmAthene I, 2008 WL 151855, at *9.

44
reasonable inference of an intent to be bound by that oral agreement in the face of the

contemporaneous evidence to the contrary in the form of the Acquisition Agreements.

Plaintiffs attempt to escape the plain language of the Acquisition Agreements by

arguing that none of the integration clauses ―binds all of the parties to the Serenity

Agreement.‖104 In particular, they assert that, as alleged, the Serenity Agreement is a

contract among Xstelos, Couchman, Cheval Holdings, and both Black Horse Funds.

Thus, Plaintiffs contend, even if Black Horse is bound by the integration clauses in the

Commitment Letter and the Bridge Loan Agreement, Cheval Holdings is not; and while

Cheval Holdings may be bound by the integration clause in the Stockholders‘ Agreement,

Black Horse is not.

Plaintiffs‘ argument is unpersuasive from at least two perspectives. On the one

hand, artfully pleading the entities and persons to the Serenity Agreement so that either

Black Horse or Cheval Holdings will be able to avoid the integration clauses of the

Acquisition Agreements ignores the rule that ―related contemporaneous documents

should be read together.‖105 The wisdom of that rule carries particular force where, as

here, the multiple written agreements make reference to and incorporate one another in

104
PAB 20-23 (emphasis added).
105
Ashall Homes Ltd. v. ROK Entm’t Gp. Inc., 992 A.2d 1239, 1250 (Del. Ch. 2010)
(citing Crown Books Corp. v. Bookstop Inc., 1990 WL 26166, at *1 (Del. Ch. Feb.
28, 1990); 17A C.J.S. Contracts § 315, at 337 (1999); 11 Richard A. Lord,
WILLISTON ON CONTRACTS § 30:26, at 239-42 (4th ed. 1999); RESTATEMENT
(SECOND) OF CONTRACTS § 202(2) (1981)).

45
various ways, accomplish different aspects of the same takeover transaction, and are

signed by the same two persons, even if on behalf of various separate entities.106

On the other hand, accepting Plaintiff‘s erroneous premise only creates a different,

fatal problem for their breach of contract claim: if the parties to the Serenity Agreement

are sufficiently amorphous to evade the integrated Acquisition Agreements, that fact

would render the Serenity Agreement itself too indefinite to enforce. As noted

previously, the allegations about which parties are alleged to have rights under the

Serenity Agreement are different in various paragraphs of the Complaint. By identifying

the promisee under the Serenity Agreement as ―Cheval,‖ which the Complaint defines as

including three separate entities, Cheval Holdings and the two Black Horse funds,

Plaintiffs may have sought to avoid the combined effect of the Commitment Letter, the

Bridge Loan Agreement, and the Stockholders‘ Agreement. But accepting that definition

would place this Court in the untenable position of having to choose which entity or

entities should receive the remedy (be it specific performance or monetary damages) for

breach of the Serenity Agreement, if that Agreement is to be enforced. Delaware courts

―will not supply essential terms to the contract,‖107 and in this case, I conclude that

Plaintiffs‘ argument regarding the parties of the Serenity Agreement would require the

Court to do just that, or, alternatively, to accept a tortured construction of the Acquisition

Agreements. I decline to do either.

106
See supra Section I.B.3.b.
107
Mehiel v. Solo Cup Co., 2005 WL 1252348, at *8 (Del. Ch. May 13, 2005).

46
 For the foregoing reasons, I conclude that it is not reasonably conceivable that the

parties intended to be bound by the Serenity Agreement as alleged. I therefore dismiss

Counts I and II of the Complaint.

b. Material terms of the alleged contract

As previously stated, one requirement to prove the existence of a contract is to

demonstrate that the terms of the contract are sufficiently definite.108 Plaintiffs failed to

show that, based on the allegations in the Complaint and the reasonable inferences drawn

from them, they conceivably could meet that requirement. Specifically, I find, as a

separate and independent basis for dismissing Counts I and II, that the Complaint does

not contain sufficient factual allegations to support a reasonable inference that the parties

reached an agreement as to the meaning of ―Serenity‖ insofar as that term is used to

denote the asset(s) to be transferred under the Serenity Agreement.

Defendants argue that the Complaint never squarely defines ―Serenity,‖ assigning

it different meanings in different paragraphs, and that Plaintiffs therefore have not alleged

that there was an agreement as to this material term of the alleged contract. Plaintiffs

counter that Serenity is identified as ―an interest in one particular use of CPEX

technology: CPEX‘s patented CPE-215 drug delivery technology as combined with

Allergan Inc.‘s (or its assignees‘ or successors‘) patented low-dose desmopressin

technology for the treatment of nocturia, a urological disorder characterized by frequent

nighttime urination, and other related conditions.‖109 Plaintiffs asserted in both the

108
Osborn, 991 A.2d at 1158; see also Otto v. Gore, 45 A.3d 120, 138 (Del. 2012).

47
Complaint and their arguments that this interest ―included the then-developed

combination, known as SER-120,110 but is ―not limited to SER-120.‖111

Elsewhere, the Complaint describes Serenity as being more than ―merely‖ the

royalty rights owed to CPEX under the Allergan License. Rather, Plaintiffs contend that

the parties understood Serenity to include a ―separate license‖ that would be created in

order to give Plaintiffs whatever residual proprietary interest CPEX held with respect to

CPE-215 (as used with desmopressin) that enabled CPEX to enter into the Allergan

License in the first instance.112 Setting aside that a necessary predicate to the existence of

SER-120 is the ability to use low-dose desmopressin, which is separately patented and

owned by Allergan, Plaintiffs appear to allege that if SER-120 and the Allergan License

somehow ceased to exist, ―Serenity‖ as an asset or bundle of rights still would exist and

would confer upon its owner the rights to use the CPE-215 delivery technology, in

conjunction with desmopressin, for the treatment of nocturia and related disorders.113

109
PAB 12 (quoting Compl. ¶ 9).
110
Id. (quoting Compl. ¶ 10).
111
Id. at 15 (citing Compl. ¶¶ 57-59).
112
See Compl. ¶¶ 64, 76-81; see also id. ¶ 63 (alleging that the Serenity Agreement
contemplated a transfer of ―(i) the license rights to Serenity through a separate
license agreement with CPEX and (ii) subject to Allergan‘s consent, the Allergan
License . . . .‖).
113
Those elements (CPE-215, used with desmopressin, for the treatment of nocturia)
seem to be necessary to the definition of ―Serenity‖ as Plaintiffs have pled it. See
Arg. Tr. 62-70.

48
 Although Plaintiffs clarified their position somewhat in their briefing and at

argument, the Complaint still fails to allege facts from which a fact-finder reasonably

could infer the existence of a shared understanding of the parties as to the meaning of

―Serenity‖ sufficient to support an enforceable contract under Delaware law. I reach this

conclusion for two reasons. First, Plaintiffs‘ own articulation of what constitutes

―Serenity‖ lacks internal coherence. And second, setting the internal incoherence aside,

it is highly questionable whether Plaintiffs‘ definition of the term can be squared with the

reality of CPEX‘s limited rights under the Allergan License with respect to SER-120 and

any related drug technology.

Plaintiffs‘ own descriptions of ―Serenity‖ vary throughout the Complaint in ways

that make it inconceivable for this Court to find that the term is sufficiently definite to be

enforceable. In some paragraphs, Plaintiffs seem to equate Serenity with SER-120.114 As

discussed above, however, Plaintiffs also allege that they and Defendants understood

―Serenity‖ to be something more than just SER-120 or the rights CPEX has pursuant to

the Allergan License. Plaintiffs suggest that ―Serenity‖ is something more than CPEX‘s

rights under the Allergan License to receive royalty payments as to SER-120, but they

have not alleged exactly what more it is. As Plaintiffs claim to have understood it,

114
See, e.g., PAB 16 (quoting Compl. ¶ 66) (―Each time he was asked, Couchman
reaffirmed that he would stand by the agreement and that the parties would work
out the specific governance and control provisions over SER-120 by using a
mirror image of the terms set forth in the contemplated FCB Holdings
Stockholders‘ Agreement.‖)

49
―Serenity‖ may require an entire set of new licensing agreements as between Allergan,

CPEX, and Plaintiffs. The Complaint alleges, for example, that:

Xstelos acknowledged the need for a separate license solely
for the limited purpose of performing under the Allergan
License while Cheval was seeking to document the
previously agreed to broader license that encompassed
CPEX‘s patented drug delivery system combined with
Allergan‘s patented low-dose desmopressin technology for
the treatment of nocturia and other related conditions.115

Plaintiffs attempt to downplay the differences between a ―mere‖ assignment of the

Allergan License or the right to royalties under that License on the one hand and the

―broader license‖ they claim to have been promised on the other. But this is a gap they

cannot conceivably bridge by way of some ill-defined communications in December

2010, given the complicated nature of these types of licensing agreements.

These differing descriptions point to a vagueness that this Court or any court

would be ill-equipped to resolve. In this regard, the LATS in the PharmAthene case

provides a helpful contrast. At the motion to dismiss stage, this Court ruled that the

LATS conceivably could contain all the material and essential terms of the license

agreement contemplated by the parties.116 This conclusion was based on the fact that the

two-page LATS contained evidence of, among other things: (1) the parties‘ objective for

their partnership, and the territorial and technological scope of the venture; (2) the nature

115
Compl. ¶ 81. I note here that the ―and other related conditions‖ language appears
in other paragraphs of the Complaint as well. See, e.g., id. ¶ 9. The Complaint is
otherwise silent, however, as to what ―other conditions‖ beyond nocturia might
come under the ambit of ―Serenity.‖
116
PharmAthene I, 2008 WL 151855, at *13-14.

50
of the licenses each party would be granting and receiving, including the right to grant

sublicenses; (3) the licensing fees agreed to; and (4) the structure for milestone and

royalty payments.117 In this case, there is no analogous contemporaneous evidence of

several material terms of the Serenity Agreement.118

Moreover, where this Court in PharmAthene found that the parties‘ after-the-fact

conduct supported the conclusion that the LATS may have included all the material terms

of the contemplated licensing agreement,119 the available after-the-fact evidence in this

case is muddled at best. From June to November 2012, Xstelos discussed with Plaintiffs

the transfer of ―Serenity‖ in exchange for the CPEX office building located in New

Hampshire and circulated draft documentation related to such a transfer. When Chappell

attempted to reduce this discussed agreement to a term sheet, the parties reached an

impasse, culminating in the December 19, 2012 email in which Couchman told Chappell,

―Dale, you and I never discussed a license agreement. This is something new you are

asking for and we are not inclined to provide. We thought we were discussing a

transaction to sell 60% of the Serenity interest only. We won‘t provide a license

117
Id.
118
In many paragraphs of the Complaint, Plaintiffs allege that Defendants agreed to
split or transfer ―Serenity.‖ By using their own term, Serenity, Plaintiffs imply in
a conclusory manner that it was a defined term, without pointing to words or deeds
of Defendants that manifested any shared understanding in that regard. See
Compl. ¶¶ 3, 9-11, 43, 57, 59, 61, 62, 67, 72, 73, 86, 95, 96.
119
Id. at *14.

51
agreement.‖120 Plaintiffs characterize Couchman‘s statement as a ―sudden‖ repudiation

of the agreement Plaintiffs thought they had made.121 Based on the entirety of the factual

allegations in the Complaint and the documents integral to it, however, the only

reasonable inference this Court can draw from these facts is that while Plaintiffs may

have had a subjective understanding of what ―Serenity‖ meant that comports with the

allegations in their Complaint, when the parties finally attempted to reduce the agreement

to writing, it became clear that Defendants did not share Plaintiffs‘ understanding and

apparently never had.

Even if Plaintiffs‘ description of ―Serenity‖ were not vague in this particular

respect, however, there is a more fundamental inconsistency here. In particular, it

appears that ―Serenity,‖ as Plaintiffs sometimes describe it, presupposes that CPEX has

greater rights vis-à-vis Allergan than are provided for under the Allergan License. The

Allergan License gives CPEX the right to receive milestone payments and a fixed-rate

royalty stream from Allergan based on sales resulting from its collaborative effort with

CPEX, and CPEX has the ability to use Allergan‘s drug technology for purposes of

research related to the project.122 In terms of who actually has the ability to sell or market

120
Compl. ¶ 106.
121
Id.
122
The Allergan License is a lengthy and complicated document, but it is integral to
understanding the allegations of the Complaint and, therefore, may be considered
on Defendants‘ motion to dismiss. See note 27 supra. I focus here only on some
of its most relevant terms. See, e.g., Allergan License §§ 7.1-7.6 (concerning the
mutual granting of licenses between CPEX and Allergan) and §§ 6.1-6.6
(concerning payment rights under the License).

52
any resulting ―Product‖ under the Allergan License, however, the License makes clear

that only Allergan, not CPEX, has that right as to SER-120 and any other drug

formulation containing Allergan‘s synthetic hormone molecule as the active ingredient.

In this regard, I note the requirement in Section 8.4.1 that CPEX assign ―its right,

title, and interest in and to all Product Technology to [Allergan].‖ The Allergan License

defines ―Product Technology‖ to mean all inventions, trade secrets, information, etc. that

is: (1) developed in the conduct of the activities under the Research Plan; and (2) relates

―solely to the Active Molecule.‖ The Active Molecule is defined as the patented drug

technology Allergan brought to the table when the joint venture embodied in the Allergan

License began. The only reasonable inference that can be drawn from this contractual

structure is that CPEX does not ―own‖ SER-120 or any other drug Product containing

desmopressin. Nor does it appear reasonable to infer that CPEX had the ability to

transfer any ownership rights therein, other than the right to receive a portion of the

anticipated royalty payments on any such Product, without extensively rewriting its

License with Allergan.

It is possible, therefore, that FCB Holdings or CPEX would not even be capable of

transferring to Plaintiffs something more than merely the rights to the milestone

payments and royalties provided by the Allergan License. But, such a circumstance

would conflict with the allegations in the Complaint and Plaintiffs‘ arguments as to what

the parties were to exchange under the Serenity Agreement. For these reasons, I

conclude that, unlike in the PharmAthene case, it is not reasonably conceivable based on

the Complaint here and the reasonable inferences drawn from it that the material terms of

53
the alleged Serenity Agreement could be proven to have been sufficiently definite to

comprise an enforceable contract.123

Because the essential terms of the Serenity Agreement have not been alleged with

sufficient definiteness to render that agreement enforceable, it is not reasonably

conceivable that the remedy of specific performance will be available in this case. To

123
Other cases cited by Plaintiffs to support their argument that the terms of the
Serenity Agreement are sufficiently definite are similarly unhelpful. In Walton v.
Beale, for example, this Court specifically enforced an oral contract for sale of real
estate between neighbors. 2006 WL 265489 (Del. Ch. Jan. 30, 2006), aff’d, 913
A.2d 569 (Del. 2006). In reaching its conclusion, this Court rejected the seller‘s
argument that the contract lacked an essential term because it was clear ―both
parties understood that the configuration of the property would be as drawn in the
record plan,‖ which was signed by the parties and filed with the county
contemporaneously with the sale. Id. at *5. Similarly, this Court enforced an oral
contract to sell half of the stock of a Delaware corporation in Hazen v. Miller,
1991 WL 244240, at *2 (Del. Ch. Nov. 18, 1991). There, as to the assets to be
transferred, the Court found that ―the terms (1,135 shares and $50 per share)
appear repeatedly and noncontroversially in the documents,‖ (id.) and the
defendant, ―by his objective manifestations, gave [plaintiff] every reason to
believe that [plaintiff] would become a 50% stockholder.‖ Id. at *4. Then-Vice
Chancellor Jacobs distinguished that factual situation from ―a case such as Raffles
v. Wichelhaus[,] where the disputed contract involved a ship named ‗Peerless,‘ but
in fact two ships had that same name and each contracting party reasonably
intended a different ship.‖ Id. (internal citation omitted).

The case at hand, with the ambiguity surrounding ―Serenity,‖ is readily
distinguishable from both Hazen and Walton. Both of those cases centered on the
transfer of an asset where the contemporaneous, shared understanding of the
parties was clear. Plaintiffs here have not alleged non-conclusory facts that would
bring this case in line with those as far as having sufficiently definite terms in the
contract. See also Hindes v. Wilm. Poetry Soc’y, 138 A.2d 501, 503-04 (Del. Ch.
1958) (holding that ―the provision for the amount of royalty payments was an
essential term of the contract‖ between an author and publisher, and finding the
alleged contract an unenforceable ―agreement to agree‖ where the parties‘ conduct
had ―not progressed to the point where the indefiniteness in the royalty provision
has been cured.‖).

54
obtain specific performance, a plaintiff must adduce clear and convincing evidence as to

the essential terms of the contract.124 Having concluded that Plaintiffs could not

conceivably prove the existence of an enforceable Serenity Agreement based on the

allegations in the Complaint and all reasonable inferences drawn from them, it follows

ineluctably that Count II for specific performance must be dismissed, as well.

C. Counts VI, VII, and VIII

In Counts VI, VII, and VIII of the Complaint, which Plaintiffs plead in the

alternative to Counts I and II, they seek relief for Defendants‘ alleged breach of the

Serenity promise based on the non-contractual theories of fraud, promissory estoppel, and

unjust enrichment. Based on the record currently before me, I conclude that it is not

reasonably conceivable that Plaintiffs could prove the elements of any of these claims.

1. Neither fraud nor promissory estoppel is applicable here because Plaintiffs
cannot conceivably prove reasonable reliance on the Serenity promise.

a. Relevant legal principles

The elements necessary to plead a fraud claim under Delaware law are well

established.

To state a claim, the plaintiff must plead facts supporting an
inference that: (1) the defendant falsely represented or
omitted facts that the defendant had a duty to disclose; (2) the
defendant knew or believed that the representation was false
or made the representation with a reckless indifference to the
truth; (3) the defendant intended to induce the plaintiff to act
or refrain from acting; (4) the plaintiff acted in justifiable

124
Pharmathene I, 2008 WL 151855, at *15 (citing Williams v. White Oak Builders,
Inc., 2006 WL 1668348, at *4 (Del. Ch. June 6, 2006)).

55
 reliance on the representation; and (5) the plaintiff was
injured by its reliance.125

According to Court of Chancery Rule 9(b), ―the circumstances constituting fraud or

mistake shall be stated with particularity,‖ though ―[m]alice, intent, knowledge and other

condition of mind of a person may be averred generally.‖ To satisfy Rule 9(b) at the

pleadings stage, Plaintiffs must allege: ―(1) the time, place, and contents of the false

representation; (2) the identity of the person making the representation; and (3) what the

person intended to gain by making the representations.‖126

Under the doctrine of promissory estoppel, a plaintiff must show by clear and

convincing evidence that: ―(i) a promise was made; (ii) it was the reasonable expectation

of the promisor to induce action or forbearance on the part of the promisee; (iii) the

promisee reasonably relied on the promise and took action to his detriment; and (iv) such

promise is binding because injustice can be avoided only by enforcement of the

promise.‖127 The alleged promise must be ―a real promise, not just mere expressions of

expectation, opinion, or assumption,‖ and ―reasonably definite and certain.‖128

Accordingly, at the motion to dismiss stage, the Court‘s inquiry is whether

Plaintiffs could prove the elements of fraudulent inducement or promissory estoppel

125
ABRY P’rs V, L.P. v. F&W Acq. LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
126
ABRY P’rs, 891 A.2d at 1050.
127
Chrysler Corp. (Del.) v. Chaplake Hldgs., Ltd., 822 A.2d 1024, 1032 (Del. 2003).
128
Addy v. Piedmonte, 2009 WL 707641, at *22 (Del. Ch. Mar. 18, 2009) (citations
omitted).

56
under any reasonably conceivable set of facts, taking all non-conclusory allegations in the

Complaint as true and drawing all reasonable inferences in favor of Plaintiffs.

b. It is not reasonably conceivable that Plaintiffs could prove a claim for
fraudulent inducement or promissory estoppel.

Applying the relevant law to the facts alleged in this case, I conclude that

Plaintiffs have not stated a claim for fraud or promissory estoppel. Based on the record

before me, it is not reasonably conceivable that Plaintiffs could prove the existence of a

critical element of the applicable tests—namely, justifiable or reasonable reliance.

With respect to their fraudulent inducement claim, Plaintiffs argue, among other

things, that they justifiably relied on Defendants‘ representations as to Serenity, because

―Chappell was careful during these frantic times [in December 2010] to seek Couchman‘s

repeated reassurance that he would stand by the Serenity Agreement even in the absence

of pre-closing documentation.‖129 Plaintiffs also contend that the Court should find

promissory estoppel here because the Complaint ―alleges that the receipt of the additional

right to Serenity was ‗a central precondition‘ to Black Horse‘s willingness to loan

additional amounts above Plaintiffs‘ pro rata share.‖130

Neither of these allegations suffice in the circumstances of this case to meet the

requirement for adequately pleading reasonable or justifiable reliance as a matter of

Delaware law. In support of their arguments as to justifiable reliance, Plaintiffs cited no

case in which a Delaware court, or any court, found the justifiable reliance element of

129
PAB 34 (citing Compl. ¶¶ 50-68).
130
PAB 36-37 (citing Compl. ¶ 64).

57
fraud or promissory estoppel to have been satisfied where an oral promise was made that

directly conflicted with the plain language of a subsequent written agreement covering

the same subject matter. In H-M Wexford LLC v. Encorp, Inc.,131 this Court dismissed

claims for fraud and breach of contract brought by an investor against the company from

which he had purchased securities in a private placement.132 The plaintiff investor had

received a private placement memorandum (―PPM‖) before executing a formal purchase

agreement that contained an integration clause in which the parties agreed that the

purchase agreement was the entire understanding of the parties and no promises or

representations existed other than those in the purchase agreement.133 Granting a motion

to dismiss under Rule 12(b)(6), this Court concluded that, ―if [plaintiff] wanted to be able

to rely upon the PPM or particular facts represented therein, it had an obligation to

negotiate to have those matters included within the scope of the integration clause of the

contract.‖134

131
832 A.2d 129 (Del. Ch. 2003).
132
The Court in H-M Wexford denied motions to dismiss, however, for breach of
contract and fraud claims that arose not from the PPM but from alleged
misrepresentations within the operative contract itself. Id. at 144-47. If anything,
the distinction drawn by the Court in H-M Wexford (between reliance on prior
representations later superseded by written agreements and representations within
an agreement itself) supports my conclusion here. Cf. ABRY P’rs, 891 A.2d at
1055 n.46 (citing H-M Wexford as ―allowing a claim for fraud based on alleged
false representations made in a Purchase Agreement.‖)
133
H-M Wexford, 832 A.2d at 141.
134
Id. at 142.

58
 As alleged in the Complaint here, the promise at the core of the Serenity

Agreement was that, if Plaintiffs would make the $10 million Bridge Loan, Defendants

would give an additional 60.5 percent interest in ―Serenity,‖ as that term was understood

by Plaintiffs. It is not reasonably conceivable that Plaintiffs justifiably could have relied

on that December 2010 promise as being enforceable while executing multiple written

agreements on January 3, 2011 in which Plaintiffs disclaimed any and all prior promises,

agreements, or understandings with respect to both the Bridge Loan and the post-merger

operation and control of FCB Holdings, the contemplated owner of the ―Serenity‖ assets.

As with the plaintiff in H-M Wexford, it is not enough for Plaintiffs here to argue and

allege that they, in fact, did rely on Defendants‘ promises. Plaintiffs must allege non-

conclusory facts that enable this Court to find it reasonably conceivable that such reliance

was justifiable in the face of clear contractual language in which Plaintiffs agreed there

were no prior agreements or understandings. I conclude that Plaintiffs have not met that

pleading burden.

As part of their answer to Defendants‘ argument that the plain language of the

integration clauses in the Acquisition Agreements bars the breach of contract claims with

respect to the Serenity Agreement, Plaintiffs contend that those clauses are not

dispositive because they do not include specific and clear ―anti-reliance provisions.‖135

In particular, Plaintiffs argue that Delaware law holds that, ―to bar a fraud claim, an

integration clause must state that a party is not relying on any extra-contractual

135
PAB 27-31.

59
representations.‖136 There may be support for that proposition, but the cases in which our

courts invoke it are inapplicable here.

For example, in Kronenberg v. Katz,137 this Court recognized that, ―The presence

of a standard integration clause alone, which does not contain explicit anti-reliance

representations and which is not accompanied by other contractual provisions

demonstrating with clarity that the plaintiff had agreed that it was not relying on facts

outside the contract, will not suffice to bar fraud claims.‖138 In that case, Chief Justice

Strine, then a Vice Chancellor, addressed the question of whether ―standard‖ integration

clauses in an LLC agreement precluded the plaintiffs from reasonably relying on prior

material misrepresentations by a defendant that were not incorporated into the

agreement.139 Discussing H-M Wexford and other cases, the Court in Kronenberg

granted summary judgment in favor of plaintiffs on their fraudulent inducement claims,

concluding that the integration clause there ―does not speak in any direct way to the

reliance by the plaintiffs on factual statements of‖ the defendants.140

136
PAB 27.
137
872 A.2d 568 (Del. Ch. 2004).
138
Id. at 593.
139
The integration clause at issue in Kronenberg closely parallels the integration
clauses of the relevant Acquisition Agreements here. Id. at 587 (―This Agreement,
which includes the Exhibits and shall include any Joinders upon execution thereof,
constitutes the entire agreement and understanding of the parties hereto with
respect to the subject matter hereof and supersedes all prior or contemporaneous
agreements, understandings, inducements, or conditions, oral or written, express or
implied.‖)
140
Id. at 593.
60
 The Court construed the integration clause ―as simply indicating that there were no

separate oral contracts and that there was no separate consideration (i.e., inducements) for

entering the Agreement, other than as provided in the LLC Agreement.‖ 141 In

Kronenberg, the plaintiffs allegedly relied on prior statements of fact that were clearly

material.142 Moreover, because ―Delaware‘s public policy is intolerant of fraud,‖ the

Court held that ―the intent to preclude reliance on extra-contractual statements must

emerge clearly and unambiguously from the contract.‖143 The Court concluded that the

integration clause there did not evince such an agreement to bar reliance on factual

misstatements, but rather ―simply operate[d] to police the variance of the agreement by

parol evidence.‖144

This balance between competing public policy objectives—intolerance of fraud on

one hand, and freedom of contract on the other—also was implicated in this Court‘s

ABRY Partners decision.145 ABRY Partners is factually less analogous to the present case

141
Id.
142
Id. at 587 (―[I]t is clear that Katz made material misrepresentations of facts that
would have been important to a reasonable investor considering committing funds
. . . . That is the only rational conclusion one can draw from the record.‖).
143
Id. at 593.
144
Id. at 592.
145
ABRY P’rs, 891 A.2d at 1055 (―I must now consider the Buyer‘s argument that
public policy intervenes to trump contractual freedom and to prevent that
preclusion. That public policy argument continues a longstanding debate within
American jurisprudence about society‘s relative interest in contractual freedom
versus establishing universal minimum standards of truthful conduct for
contracting parties.‖).

61
than Kronenberg, but its reasoning is important. In ABRY, the stock purchase agreement

at issue contained the type of ―anti-reliance‖ language lacking in Kronenberg (and this

case), and further, the plaintiff buyers in ABRY conceded that the anti-reliance clause was

valid and that they had not relied on any extra-contractual representations. The rub was

that the plaintiffs had agreed to a provision limiting the defendant seller‘s liability for

material misstatements of fact made within the contract itself. That provision required

the parties to arbitrate such disputes and capped damages with respect to them.

Confronted with a material misstatement of fact by the seller defendants that fell

within the scope of their contractual representations, Chief Justice Strine, then a Vice

Chancellor, had to decide whether to dismiss a claim for rescission, based on the

defendants‘ argument that the unambiguous language of the contract limited the available

remedy to arbitration with a damages cap. Weighing the public policy of promoting

efficient commerce by honoring agreements freely made by sophisticated

businesspersons against the venerable principle that ―fraud vitiates every contract,‖ the

Court in ABRY distinguished between intentional misrepresentations of fact—i.e., lies—

on the one hand and factual misrepresentations that flowed from reasonable error,

negligence, or recklessness on the other.146 The Court held that when a seller charged

with fraud ―intentionally misrepresents a fact embodied in a contract—that is, when a

146
ABRY P’rs, 891 A.2d at 1061-63.

62
seller lies—public policy will not permit a contractual provision to limit the remedy of

the buyer to a capped damage claim.‖147

Consistent with the teachings of Kronenberg and ABRY Partners, I construe the

integration clauses of the Commitment Letter, Merger Agreement, Stockholders‘

Agreement, and Bridge Loan Agreement to indicate that there were no separate oral

contracts regarding the subject matter of those Agreements, and that there was no

separate consideration or inducement for entering into those Agreements. Like the

integration clause in Kronenberg, the language agreed to by the parties in the Acquisition

Agreements does not contain sufficient anti-reliance language to bar a claim based on

―material misstatements of fact.‖148 ―The teaching of this court,‖ however, ―is that a

party cannot promise, in a clear integration clause of a negotiated agreement, that it will

not rely on promises and representations outside of the agreement and then shirk its own

bargain in favor of a ‗but we did rely on those other representations‘ fraudulent

inducement claim.‖149

147
Id. at 1036. The misstatement at issue in ABRY pertained to the financial
statements of the target company. In particular, the seller defendants influenced
the company management to overstate certain numbers to show an EBITDA
multiple that would make the company appear more attractive to the buyer. See
id. at 1051. The Court there stated that allowing the defendant to immunize itself
from a claim arising out of that misrepresentation ―would be to sanction unethical
business practices of an abhorrent kind and to create an unwise incentive system
for contracting parties.‖ Id. at 1035.
148
Kronenberg, 872 A.2d at 594 (emphasis added).
149
ABRY P’rs, 891 A.2d at 1057.

63
 The problem for Plaintiffs in this case is that the Complaint and related documents

make clear that they promised, in several clear integration clauses of negotiated

agreements, that they would not rely on promises and agreements outside of those

writings. The statements the Cheval Plaintiffs rely on were not misrepresentations of

material fact akin to those in Kronenberg, but rather prior parol evidence that would vary

the extant terms in the subsequent integrated writings.150 By attempting to plead around

the plain language of their written agreements with allegations of ―fraud,‖ Plaintiffs seek

to shirk the bargain evidenced by the written agreement in favor of a ―but we did rely on

those other representations‖ claim.

To avoid this conclusion, Plaintiffs argue that this case fits within the reasoning of

cases like Kronenberg because their fraud claim is about Defendants‘ ―present state of

mind‖ rather than ―future intent.‖151 This contention is not supported by the case law. As

alleged in the Complaint, the Serenity Agreement calls for Black Horse to provide the

$10 million Bridge Loan in exchange for the Xstelos Entities‘ and Couchman‘s ―express

agreement to effectuate the transfer of an additional 60.5% of Serenity‖152 to Plaintiffs.

150
See Kronenberg, 872 A.2d at 592 (stating that a standard integration clause
―simply operates to police the variance of the agreement by parol evidence‖ but
does ―not operate to bar fraud claims based on factual statements not made in the
written agreement,‖ where the ―factual statement‖ at issue was an independent
feasibility study the defendants represented was produced by third-party experts
but was in fact fabricated by the defendants to induce the plaintiffs to invest)
(emphasis added).
151
PAB 28-29.
152
Compl. ¶ 135.

64
As alleged, those are ―promises.‖153 In the context of the often ―frantic times‖ leading up

to the signing of a merger agreement by sophisticated businesspersons, such

representations—both oral and written—are so numerous and varied that when the parties

are coalescing around a final written expression, there is great utility in having all prior

promises, agreements, and understandings wiped away and merged into the final written

agreement.154

The alleged misrepresentations at issue here are not the sort of prior

―representations‖ that animated the rulings in cases like ABRY Partners, which dealt with

materially incorrect financial statements, reliance on which caused the plaintiff buyers to

overestimate how much the target company was worth. This Court aptly reasoned that

―there is little support for the notion that it is efficient to exculpate parties when they lie

153
See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 2 (―A promise is a
manifestation of intention to act or refrain from acting in a specified way, so made
as to justify a promisee in believing that a commitment has been made.‖); see also
Carrow v. Arnold, 2006 WL 3289582 (Del. Ch. Oct. 31, 2006) (―Prior oral
promises usually do not constitute false representations of fact that would satisfy
the first element of fraudulent misrepresentation. A viable claim of fraud
concerning a contract must allege misrepresentations of present facts (rather than
merely of future intent) that were collateral to the contract and which induced the
allegedly defrauded party to enter into the contract.‖) (internal quotations omitted),
aff’d, 933 A.2d 1249 (Del. 2007).
154
See, e.g., 11 WILLISTON ON CONTRACTS § 33:1 (4th ed.) (―The [parol evidence]
rule is founded on experience and public policy, created by necessity, and
designed to give certainty to a transaction that has been reduced to writing by
protecting the parties against the doubtful veracity and uncertain memory of
interested witnesses. . . . By prohibiting evidence of parol agreements, the rule
seeks to ensure the stability, predictability, and enforceability of finalized written
instruments.‖) (internal quotation marks omitted).

65
about the material facts on which a contract is premised.‖155 There is, however,

considerable support in logic and the law for the notion that it is efficient to hold parties

to the promises they make in an integrated writing, and only those promises. If Plaintiffs‘

argument on this point were followed to its natural conclusion, this Court would be

unable to bar a claim that, as consideration for making the Bridge Loan, Defendants had

promised in December 2010 to effectuate a transfer of $1 million cash from FCB

Holdings to Cheval Holdings or Black Horse at some point after the Merger, even though

the parties did not mention that promise in the written and integrated Commitment Letter

and Bridge Loan Agreement. Entertaining a claim that so plainly conflicts with the

language of those two agreements and the Stockholders‘ Agreement would render the

integration clauses contained in them mere surplusage—a result that our canons of

contractual interpretation strongly discourage.156

This Court‘s decision in Narrowstep, Inc. v. Onstream Media Corp.,157 relied on

by Plaintiffs for the proposition that they have pled a material misrepresentation of fact,

supports my conclusion. In Narrowstep, this Court refused to dismiss claims for breach

of contract and fraudulent inducement where defendants allegedly had signed a merger

agreement to acquire the plaintiff company and then, under the guise of preparing to

155
ABRY P’rs, 891 A.2d at 1062 (emphasis added).
156
Kuhn Const., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396-97 (Del. 2010)
(―We will read a contract as a whole and we will give each provision and term
effect, so as not to render any part of the contract mere surplusage.‖).
157
2010 WL 5422405 (Del. Ch. Dec. 22, 2010).

66
close on the merger, took operational control of and stripped the company of its valuable

assets before backing out of the signed merger agreement.158

Noting that under Delaware law ―a plaintiff cannot ‗bootstrap‘ a claim of breach

of contract into a claim of fraud merely by alleging that a contracting party never

intended to perform its obligations,‖159 this Court reasoned that, ―If the Complaint merely

alleged that the parties had a contract and Onstream intended not to follow through with

its obligations under the Agreement and nothing more, Narrowstep‘s fraud claim would

be an impermissible bootstrap of its breach of contract claim.‖160 The conduct alleged in

Narrowstep, however, went ―beyond a mere intention not to comply with the terms of the

Agreement.‖ The gravamen of the fraud complaint there was not about the future

performance or non-performance of the merger agreement; it was about the fact that the

defendants were misrepresenting facts about their management of the plaintiff‘s business

during the period leading up to the contemplated closing.161 Taking the allegations in the

Complaint as true, Plaintiffs here merely allege that the Serenity Agreement was a

contract and that Defendants never intended to follow through with their alleged
158
Id. at *15.
159
Id. (internal quotation marks omitted) (quoting Iotex Commc’ns, Inc. v. Defries,
1998 WL 914265, at *4 (Del. Ch. Dec. 21, 1998)).
160
Id.
161
Id. (―This conduct, if true, goes beyond a mere intention not to comply with the
terms of the Agreement; it alleges that Onstream intended to plunder Narrowstep
and bought time to do so by stringing it along under the guise of working toward
an expeditious closing pursuant to the Agreement. That is, the Agreement is not
the source of Narrowstep‘s fraud claim, but rather the instrument by which
Onstream perpetrated its broader scheme to loot Narrowstep.‖)

67
obligations under it from the very outset in December 2010.162 Thus, the Narrowstep

case affords no support for Plaintiffs‘ argument.163

Taking Plaintiffs‘ allegations as true and drawing all inferences in their favor, I

cannot conclude, consistent with cases like Kronenberg, that they could prove a

fraudulent inducement claim under any reasonably conceivable set of facts, given how

directly and completely the terms of the alleged Serenity Agreement conflict with the

plain language of the Acquisition Agreements. I therefore dismiss Counts VI and VII of

the Complaint.

2. Unjust enrichment is inapplicable because the Commitment Letter and
Bridge Loan Agreement are the measure of Plaintiffs’ rights with respect to
the $10 million Bridge Loan.

―Unjust enrichment is defined as the unjust retention of a benefit to the loss of

another, or the retention of money or property of another against the fundamental

162
See Compl. ¶¶ 14-16 (―After the deal closed, however, Couchman and Footstar
began to demonstrate that they had no intention of performing the Serenity
Agreement. . . . Couchman never had any intention on following through on the
promise. . . .‖); ¶ 67 (―Footstar and Couchman never intended to honor their
agreement with Cheval and the Chappells.‖).
163
Other cases cited by Plaintiffs for the same proposition are similarly unavailing.
See MicroStrategy Inc. v. Acacia Research Corp., 2010 WL 5550455, at *13-17
(Del. Ch. Dec. 30, 2010) (distinguishing between two fraud claims, finding that
one was legally insufficient because it merely alleged statements constituting a
promise without specific facts supporting an inference of present intent to break
that promise, while the other was well-pled because it had such specific factual
allegations); Carrow v. Arnold, 2006 WL 3289582, at *5-11 (Del. Ch. Oct. 31,
2006) (finding a written agreement of real property sale to be integrated, and
refusing to admit prior oral statements to modify its terms, rejecting a fraudulent
inducement claim), aff’d, 933 A.2d 1249 (Del. 2007).

68
principles of justice or equity and good conscience.‖164 To state a claim for unjust

enrichment, a plaintiff must plead ―(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.‖165 If a contract governs the relationship

between a complainant and the party who allegedly unjustly enriched himself, the

contract is ―the measure of the plaintiff‘s right.‖166

In Count VIII, Plaintiffs charge Defendants with unjust enrichment as an

alternative to their breach of contract theory pertaining to the Serenity Agreement.

Defendants seek dismissal of this claim, arguing that Plaintiffs‘ rights under the Bridge

Loan agreement preclude them from stating a claim for unjust enrichment, and that, in

any event, Plaintiffs have not been impoverished. Plaintiffs disagree. They assert that,

―The Bridge Loan Agreement is only a manifestation of the consideration Plaintiffs

provided to Defendants as part of the Serenity bargain,‖ and the Bridge Loan Agreement

―neither represents an agreement between the parties nor governs the transfer of interest

in Serenity—the matter in dispute.‖167

Plaintiffs‘ argument elides the proper inquiry under the law of unjust enrichment.

Their claim is that by making the $10 million Bridge Loan, which was the only

consideration Plaintiffs are alleged to have provided in connection with the Serenity

164
Schock v. Nash, 732 A.2d 217, 232 (Del. 1999).
165
Addy v. Piedmonte, 2009 WL 707641, at *22 (Del. Ch. Mar. 18, 2009).
166
Id.
167
PAB 41.

69
Agreement, they enriched Defendants in that Plaintiffs‘ loan ―permitt[ed] the merger to

be finalized,‖ thereby allowing Footstar to ―avoid dissolution (and salvage its

business).‖168 Plaintiffs further aver that they were impoverished, because Defendants

unjustly retained the 60.5 percent of ―Serenity‖ that Plaintiffs believe they should have

received.

To survive a motion to dismiss, each element of an asserted claim must be pled.169

The central fact Plaintiffs allege in support of their claim for unjust enrichment, however,

is that they made the $10 million Bridge Loan. But, as discussed in several parts of this

Memorandum Opinion, the terms governing the Bridge Loan are set forth in the

Commitment Letter, the Bridge Loan Agreement, or both, which Plaintiffs expressly

agreed embodied the entire understanding of the parties with respect to the subject matter

thereof. The subject matter of those integrated agreements was the $10 million Bridge

Loan. By their terms, the Commitment Letter and the Bridge Loan Agreement contain

the entire understanding, and the measure of Plaintiffs‘ rights, concerning the Bridge

Loan. These rights included, among other things: (1) the right to receive interest at a rate

of twenty percent per annum; (2) repayment of principal within four days after the

closing date of the Merger; (3) a fee of three percent of the Loan amount ($300,000); and

(4) pari passu treatment with respect to the $3 million bridge loan made by Footstar.170

168
Id.
169
Crescent/Mach I P’rs, L.P., 846 A.2d at 972.
170
Commitment Letter, Ex. A, ―Summary of Terms.‖

70
There is no allegation in the Complaint that Plaintiffs did not receive these elements of

consideration. Therefore, Plaintiffs cannot state a claim for unjust enrichment based on

the fact that they made the Bridge Loan.

D. Count III

In Count III, Plaintiffs seek damages for Xstelos‘s alleged breach of the

Consulting Agreement. To state a claim for breach of contract under Delaware law, a

plaintiff must allege the existence of a contract, the breach of an obligation imposed by

that contract, and resultant damage to the plaintiff.171 The existence of the Consulting

Agreement is not disputed. Plaintiffs allege that Cheval Holdings has performed all of its

obligations under the Consulting Agreement, that Cheval Holdings has made repeated

demands to be paid in accordance with the terms of that Agreement, and that Xstelos has

failed to make such payment. Cheval Holdings alleges that it has suffered damages of

$2,062,500 as a result of Xstelos‘s failure to make proper payment.

Defendants seek dismissal of this Count as moot. They submit that the Consulting

Agreement only requires payment to be remitted to an escrow account, that such an

account was created on September 6, 2013, and that 100 percent of the requisite funds

have been transferred to that account.172 Plaintiffs dispute whether this purported

payment was made in accordance with the terms of the Consulting Agreement.

171
Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 883 (Del. Ch. 2009).
172
Defs.‘ Opening Br. 49.

71
 At this motion to dismiss stage, the Complaint‘s non-conclusory factual

allegations ―generally defin[e] the universe of facts that the trial court may consider.‖173

The Court, therefore, may not take into consideration facts adduced only in Defendants‘

briefing on the pending motion. Based on the facts that may be considered on

Defendants‘ motion to dismiss, I conclude that it is reasonably conceivable that Plaintiffs

will be able to prove a breach of the Consulting Agreement. Accordingly, I decline to

dismiss Count III under Rule 12(b)(6).

Plaintiffs also plead, in Count VIII, unjust enrichment with regard to the

consulting services they provided, as an alternative to their claim in Count III for breach

of the Consulting Agreement. Because Plaintiffs have stated a claim for breach of

contract as to the Consulting Agreement, I dismiss Count VIII, insofar as it pertains to the

Consulting Agreement, on the same grounds that I dismissed Plaintiffs‘ unjust

enrichment claim pertaining to the Commitment Letter and the Bridge Loan Agreement.

E. Counts IV and V

1. The Complaint states a claim for breach of contract with respect to the
Stockholders’ Agreement.

In Count IV, Plaintiffs seek damages for Xstelos‘s and FCB Holdings‘ alleged

breach of the Stockholders Agreement. In that respect, Plaintiffs must allege the

existence of a contract, the breach of an obligation imposed by that contract, and resultant

damage.174 Plaintiffs accuse Xstelos of breaching the Stockholders‘ Agreement in

173
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006).
174
Kuroda, 971 A.2d at 883.

72
various ways, as recited in Section I.B.5 supra. They also allege that Cheval Holdings

―has suffered and continues to suffer damages in an amount to be proven at trial‖ for

these breaches.175 Defendants argue that Count IV should be dismissed because: (1) the

Complaint‘s allegation as to damages is conclusory; and (2) the claim for breaching

Section 2.6 is moot in that Plaintiffs received the 2011 and 2012 budgets in the third

quarter of 2012. Neither of these arguments is persuasive.

Contract damages are well-pled where, ―based on the facts that [plaintiff] has

alleged, it can reasonably be inferred that, if those facts are true, [plaintiff] suffered

damages.‖176 Plaintiffs aver that Xstelos: (1) entered into related party transactions

without Cheval Holdings‘ consent; (2) failed to present annual budgets for CPEX and

FCB Holdings; (3) caused FCB Holdings and its subsidiaries to make large capital

expenditures without consent of Cheval Holdings; and (4) failed to provide

administrative services to CPEX at Xstelos‘s expense. Assuming those allegations are

true, as I must, it is at least reasonably conceivable that Cheval Holdings suffered injury

and could prove damages.

The argument that the 2011 and 2012 budgets were supplied in late 2012 is

insufficient to support a reasonable inference that there was no breach of Section 2.6,

which requires that ―[b]efore the commencement of each fiscal year,‖ the budget must be

175
Compl. ¶ 158.
176
H-M Wexford, 832 A.2d at 144 n.28.

73
adopted.177 Plaintiffs, therefore, conceivably could prove that they were harmed by the

delayed adoption of the budgets. The extent of the injury and whether it may be

redressed by money damages cannot be established conclusively at this stage of the

proceeding, but it need not be. It is sufficient that it is reasonably conceivable Plaintiffs

could prove they suffered damages as a result of the alleged breach. Accordingly, I

decline to dismiss Count IV.

2. The Complaint states only a narrow claim for breach of the implied covenant
of good faith and fair dealing with respect to the Stockholders’ Agreement.

Plaintiffs purport to plead a second claim, Count V, arising out of the

Stockholders‘ Agreement. Specifically, they charge Xstelos and FCB Holdings with

breach of the implied covenant of good faith and fair dealing for the manner in which

FCB Holdings declared and paid dividends in September and October 2012.

The Delaware Supreme Court has held that the implied covenant ―seeks to enforce

the parties‘ contractual bargain by implying only those terms that the parties would have

agreed to during their original negotiations if they had thought to address them.‖178

Nevertheless, the implied covenant ―cannot be employed to impose new contract terms

177
Stockholders‘ Agreement § 2.6.
178
Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418 (Del. 2013) (quoting with
approval ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing
Member, LLC, 50 A.3d 434, 440-42 (Del. Ch. 2012), rev’d in part on other
grounds, 68 A.3d 665 (Del. 2013)); see also Winshall v. Viacom Int’l, Inc., 76
A.3d 808, 816 (Del. 2013) (―[A] party may only invoke the protections of the
covenant when it is clear from the underlying contract that the contracting parties
would have agreed to proscribe the act later complained of had they thought to
negotiate with respect to that matter.‖) (internal quotation omitted).

74
that could have been bargained for but were not.‖179 Delaware courts do not apply the

implied covenant ―to give the plaintiffs contractual protections that ‗they failed to secure

for themselves at the bargaining table.‘‖180

Under Delaware law, one deciding an implied covenant claim must ask ―whether

it is clear from what was expressly agreed upon that the parties who negotiated the

express terms of the contract would have agreed to proscribe the act later complained of

as a breach of the implied covenant of good faith—had they thought to negotiate with

respect to that matter.‖181 The inquiry is temporally constrained in the sense that the

court ―does not ask what duty the law should impose on the parties given their

relationship at the time of the wrong, but rather what the parties would have agreed to

themselves had they considered the issue in their original bargaining positions at the time

of contracting.‖182 At the motion to dismiss stage, I consider whether it is reasonably

conceivable based on the record before me that Plaintiffs could prove a claim for breach

of the implied covenant. Generally, ―to plead successfully a breach of an implied

covenant of good faith and fair dealing, the plaintiff must allege a specific implied

179
Blaustein v. Lord Baltimore Capital Corp., 84 A.3d 954, 959 (Del. 2014).
180
Winshall, 76 A.3d at 816 (Del. 2013) (quoting Aspen Advisors LLC v. United
Artists Theatre Co., 861 A.2d 1251, 1260 (Del. 2004)).
181
Id.
182
Gerber, 67 A.3d at 418-19; see also Winshall, 76 A.3d at 816 (―[T]he implied
covenant is not a license to rewrite contractual language just because the plaintiff
failed to negotiate for protections that, in hindsight, would have made the contract
a better deal.‖).

75
contractual obligation, a breach of that obligation by the defendant, and resulting damage

to the plaintiff.‖183

Plaintiffs allege that Defendants caused FCB Holdings to declare and pay the

September and October 2012 cash dividends before Cheval Holdings could redomicile its

ownership of FCB Holdings into Ouray. As a result, Cheval Holdings incurred $487,500

more in taxes than it would have if the dividends were delayed as Plaintiffs requested.

According to Plaintiffs, there is an implied term in the Stockholders‘ Agreement

obligating FCB Holdings to declare or pay dividends ―in good faith to protect the

reasonable expectations of the stockholders, including Cheval.‖184 They assert that

Defendants violated that term by designing the dividend ―to harm Cheval,‖ and that they

thereby acted in bad faith under Delaware law.185

As noted supra, one of the ―Negative Covenants‖ in the Stockholders‘ Agreement

for which Cheval Holdings bargained with Footstar or Xstelos was that FCB Holdings

would not cause ―the declaration or payment of any dividends or distributions that are not

paid pro rata to [FCB Holdings‘] stockholders.‖186 A separate section of the Agreement,

entitled ―Distributions,‖ states that, ―[t]o the extent proceeds are available, the Company

shall cause the Surviving Corporation [defined as CPEX] to make payments as follows:

183
Blaustein v. Lord Baltimore Capital Corp., 2012 WL 2126111, at *5 (Del. Ch.
May 31, 2012).
184
Compl. ¶ 162.
185
PAB 43-44 (citing Compl. ¶¶ 162-63).
186
Stockholders‘ Agreement § 2.2(o).

76
(i) expenses and taxes and (ii) distributions to the Company [FCB Holdings] to the extent

permitted by the Loan Agreement.‖187 In the next sentence, the parties agreed that FCB

Holdings‘s Board of Directors ―shall make distributions from time to time to its

stockholders to the extent proceeds are available and deemed advisable by the

Company‘s Board; provided that any such distributions shall be apportioned among the

stockholders pro rata in accordance with their respective percentage interests of the

Common Stock.‖188

In attempting to plead that Defendants violated the Stockholders‘ Agreement by

causing the dividends to be paid in September and October 2012, Plaintiffs ask this Court

to impose new contract terms that could have been bargained for but were not. The plain

language of Section 5.5 shows that, at the time of contracting, the parties did consider the

issues of: (1) when distributions should be made; and (2) whether there were any limits to

the board‘s discretion in deciding to make distributions. They agreed that distributions

should be made ―from time to time‖ when such distributions are ―deemed advisable‖ by

the board. Knowing that the board was split 2-1 between Xstelos appointees and Cheval

Holdings appointees, and reasonably foreseeing that they may not always agree, the

parties limited the board‘s discretion in two ways: (1) distributions could only be made

―to the extent proceeds are available,‖; and (2) absent consent of the stockholders,

distributions had to be made ―pro rata.‖

187
Stockholders‘ Agreement § 5.5.
188
Id.

77
 Under Delaware law, at this procedural stage, I must ask whether it is reasonably

conceivable that Plaintiffs could show from the relevant contract language that, at the

time of contracting, the parties clearly would have agreed that if the board wished to

make a distribution in the future, Cheval Holdings would have the right to compel the

board to delay the distribution in order to accommodate Cheval Holdings‘s preferences or

to best suit its idiosyncratic needs. I conclude that the answer to this question is no. The

parties agreed that dividends could be paid when it was deemed advisable by the board,

but that, in any event, they had to be paid pro rata and only to the extent proceeds were

available. If the parties had wanted to give more protection to Cheval Holdings with

respect to the timing of future dividends, or the resolution of a disagreement as to when a

dividend should be paid, they easily could have included appropriate limiting language in

Section 5.5.

Plaintiffs point to no Delaware case that supports their application of the implied

covenant on the facts alleged here. To the contrary, in cases as recent as Blaustein v.

Lord Baltimore Capital Corp., similar implied covenant claims have been dismissed.

There, the plaintiff raised an implied covenant claim based on a shareholders‘ agreement

that contained a provision dealing with the repurchase of stock, in which it was agreed

such a repurchase would be on terms ―agreeable to the Company and the Shareholder,‖

provided that all repurchases must be approved either by a majority of the board or

consent of holders of at least 70 percent of the stock. 189

189
Blaustein, 2012 WL 2126111, at *2.

78
 At the motion to dismiss stage, this Court dismissed the implied covenant claim

insofar as the plaintiff attempted to supplement the contract provision with a term that

required the board to repurchase at a particular price, because the contract provided that

the terms of repurchases would be at the discretion of the parties.190 The Court declined

to dismiss the implied covenant claim, however, insofar as it attempted to read into the

applicable contract language a term that required the Board to ―consider‖ repurchases,

given that the contract gave the directors power to approve repurchases at duly called

board meetings. It was reasonably conceivable that the board was in breach of the

implied covenant because it allegedly failed even to present or put up for consideration

Blaustein‘s proposed repurchase. The Court found that it was possible such

consideration impliedly was required by the contract‘s allocation of approval power to

the directors.191

190
Id. at *5.
191
Id. Thus, the Court granted in part the defendants‘ motion to dismiss the
plaintiffs‘ implied covenant claims, and later granted summary judgment as to the
remainder of the implied covenant claim. The Supreme Court later concluded that
both of Blaustein‘s implied covenant arguments (the ―particular price‖ term and
the ―good faith consideration‖ term) were legally insufficient. The Supreme Court
stated, ―Here, the parties did consider whether, and on what terms, minority
stockholders would be able to have their stock repurchased. Paragraph 7(d) does
not contain any promise of a ‗full value‘ price or independent negotiators.
Because the implied covenant does not give parties the right to renegotiate their
contracts, the trial court correctly denied Blaustein‘s proposed new claim.‖)
Blaustein, 84 A.3d at 959. I follow the Supreme Court‘s reasoning in this regard.

79
 Plaintiffs‘ argument here is that the Stockholders‘ Agreement should be read as

containing an implicit term that in declaring and paying dividends FCB Holdings should

accommodate the interests of specific stockholders, like Cheval Holdings, to the

maximum extent feasible. Just as the contract provision in Blaustein could not be read to

implicitly require a specific repurchase price, the Stockholders‘ Agreement here cannot

conceivably be read to require the specific timing of dividends sought by Plaintiffs,

where the parties explicitly provided the Board discretion as to this issue, and did not

reserve any further rights to Cheval Holdings. Accordingly, Count V should be

dismissed, to the extent that it seeks to impose a specific timing constraint on the Board‘s

discretion to declare and pay dividends, or a requirement that the interests of specific

stockholders must be accommodated.

I decline, however, to dismiss Count V to the limited extent that it includes an

allegation of bad faith exercise of discretion on the part of Defendants. Plaintiffs allege

that Defendants had no corporate purpose or valid business reason to declare FCB

Holdings‘s dividends in September and October 2012, and that the timing was chosen out

of a desire to harm Cheval Holdings. While the implied covenant of good faith and fair

dealing cannot be invoked to provide contract terms that the parties failed to negotiate

for, it is nevertheless the rule that, in situations where discretion is allocated to a contract

party, ―The implied covenant requires that a party refrain from arbitrary or unreasonable

conduct which has the effect of preventing the other party to the contract from receiving

the fruits of its bargain. When exercising a discretionary right, a party to the contract

80
must exercise its discretion reasonably.‖192 At the motion to dismiss stage, I must draw

all reasonable inferences in favor of Plaintiffs. While Plaintiffs ultimately may fail to

meet their burden of proving that Defendants‘ motivation in declaring the 2012 dividends

was to cause harm to Cheval Holdings, it is not inconceivable based on the facts as

alleged. I therefore decline to dismiss Count V insofar as it pleads a breach of the

implied covenant based on Defendants‘ allegedly bad faith conduct with respect to the

2012 dividends.

III. CONCLUSION

Plaintiffs have failed to state a claim upon which relief can be granted for breach

of contract, fraudulent inducement, promissory estoppel, or unjust enrichment concerning

the alleged Serenity Agreement. I therefore dismiss with prejudice Counts I, II, VI, VII,

and VIII of the Complaint. Plaintiffs also have failed to state a claim upon which relief

can be granted for breach of the implied covenant of good faith and fair dealing with

respect to the Stockholders‘ Agreement with the limited exception stated in Section II.E.2

supra, regarding Defendants‘ allegedly bad faith exercise of their discretion to declare a

dividend. Subject to that exception, therefore, I dismiss Count V with prejudice. Finally,

Plaintiffs have adequately pled breaches of the Consulting Agreement and the

Stockholders‘ Agreement. Thus, I deny Defendants‘ motion to dismiss Counts III and

IV.

IT IS SO ORDERED.

192
Gerber, 67 A.3d at 419 (quoting ASB Allegiance Real Estate Fund, 50 A.3d at
441) (emphasis in original).

81