COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
June 19, 2017
Michael P. Kelly, Esquire Robert A. Penza, Esquire
Andrew S. Dupre, Esquire Christopher M. Coggins, Esquire
Benjamin A. Smyth, Esquire Polsinelli PC
McCarter & English, LLP 222 Delaware Avenue, Suite 1101
405 North King Street, 8th Floor Wilmington, DE 19801
Wilmington, DE 19801
Re: Brace Industrial Contracting, Inc., et al., v. Peterson
Enterprises, Inc., et al., Civil Action No. 11189-VCG
Dear Counsel:
This Letter Order resolves what I believe to be the legal issues remaining
before the matter is referred to a Special Master for resolution of certain issues of
fact. It has been a long road to get to this point, and the inordinate lapse of time is
an evil for which I, and not the parties or their counsel, must take responsibility.
Below, I state my rationale for my decision on these remaining legal issues.
I. BACKGROUND
This matter involves the purchase by one of the Plaintiffs, Brace Industrial
Contracting, Inc., of the business unit Peterson Industrial Scaffolding (“PIS”) from
one of the Defendants, Peterson Enterprises, Inc. (the “Acquisition”).1 Brace
Industrial Contracting, Inc. (“Brace”) “is a Delaware corporation that provides
diversified and integrated industrial services within the power generation,
agriculture, maritime, commercial, petrochemical, and oil and gas markets.” 2 PIS
“sells scaffold, rents scaffold, erects and dismantles (“E&D”) scaffold, designs
scaffold layouts, and manages the deployment and use of scaffold assets.”3 Peterson
Enterprises, Inc. (“PEI”) is a holding company that owns a subsidiary, Vernon L.
Goedecke, Inc. (“Goedecke”), and that previously owned PIS. 4 To consummate the
Acquisition, the parties executed a series of contracts, including, as relevant for this
Letter Order, a stock purchase agreement (the “SPA”), 5 a transition services
agreement (the “TSA”), 6 and an escrow agreement (the “Escrow Agreement”)
pursuant to which $1.87 million of the purchase price was placed into escrow. 7 This
$1.87 million was to be released to PEI in equal halves at two different points in
time, absent outstanding indemnification claims. 8
1
The “Plaintiffs” are Brace Industrial Contracting, Inc. and Peterson Industrial Scaffolding, Inc.
The “Defendants” are Peterson Enterprises, Inc., Ronald A. Peterson, Eric Peterson, Kirk Peterson,
Ronald A. Peterson Revocable Trust, Ronald A. Peterson 2010 Irrevocable Trust, and Vernon L.
Goedecke, Inc.
2
Pretrial Stipulation (“Pretrial Stip.”) at 4 (Mar. 18, 2016).
3
Id. at 5. I note that PIS now operates under the name “Platinum.” Id. at 1.
4
Id. at 4–5.
5
JX 70 (the “SPA”).
6
JX 68 (the “TSA”).
7
Pretrial Stip. 9–10.
8
Id. at 10.
2
The Plaintiffs filed their Amended Verified Complaint (the “Complaint”) on
August 20, 2015 alleging nine different counts regarding claims over restrictive
covenants, the transfer of inventory under the SPA, and the usurpation of customer
payments pursuant to the TSA.9 The Defendants answered the Complaint and filed
three counterclaims against the Plaintiffs on October 19, 2015 arguing primarily for
indemnification under the “Further Assurances” provision of Section 5.7 of the
SPA.10 According to the Defendants, the Plaintiffs “fail[ed] to take such further
actions as may be reasonably required to carry out the provisions of the SPA and
give effect to the Transactions”11 essentially because, in the Defendants’ view, the
Plaintiffs failed to make certain cash payments owed to the Defendants.12 The matter
was tried for two days and I resolved the majority of the claims over the restrictive
covenants and the inventory in a Memorandum Opinion on October 31, 2016. 13 That
decision found that Brace was entitled, on the claims resolved there, to $725,059.
Before submitting the remainder of the issues to a Special Master, the parties
9
Am. Verified Compl. (Aug. 20, 2015).
10
Defs’ Answer to Am. Verified Compl. with Countercl. ¶¶ 43–65 (Oct. 19, 2015). The
Defendants also sought a declaratory judgment that Brace was not entitled to indemnification. See
id.
11
Id. at ¶ 62.
12
See Defs’ Post-Trial Opening Br. 48–55 (listing Cobra payments paid by Peterson, commissions
due to Peterson employees, post-closing payroll payments, allegedly incorrectly remitted
receivables, forklift payments, general ledger entries, weekly hourly billings, monthly software
charges, equipment rentals, commissions, and flight invoices, among other things).
13
Brace Indus. Contracting, Inc. v. Peterson Enterprises, Inc., 2016 WL 6426398 (Del. Ch. Oct.
31, 2016).
3
submitted supplemental letters on, in their view, outstanding issues of law remaining
to be decided. I held an in-court conference on these issues on February 24, 2017.
On March 3, 2017, I issued a Letter Order declaring that no interest should accrue
on the $725,059 indemnification award and directing the Plaintiffs to submit a form
of order to immediately release the $725,059 from escrow. This Letter Order
addresses the remaining primary issues of law I find necessary to decide before
submitting the matter to the Special Master, namely, the ownership of certain
equipment and the Defendants’ “set-off counterclaim.”
II. ANALYSIS
A. Equipment
The Defendants argue that at the time that the Acquisition closed, Brace was
in possession of Goedecke equipment that was not on any of the disclosure schedules
or any of the balance sheets. According to the Defendants, “the understanding was
that Brace was to return this equipment to Goedecke.” 14 The Defendants also argue
that, after closing, Brace rented certain pieces of equipment from Goedecke and
allege that Brace has not returned this equipment to the Defendants. The Defendants
claim they are owed the value of these alleged unpaid rental payments, which they
claim amounts to $442,657.24, as well as the underlying equipment. The Plaintiffs
simply counter that the equipment belongs to them, because it was property of the
14
Defs’ Letter on Remaining Issues at C-1 (Jan. 6, 2017) (Dkt. No. 186).
4
PIS business which they acquired.15 In light of the evidence presented at trial, I find
the Plaintiffs’ position the more persuasive.
At trial, Eric Peterson, COO of PEI, conceded that he had converted the PEI
inventory system, post-Acquisition, in a way purporting to show that items at PIS
sites belonged to Goedecke, and that he had created back invoices for these items
more than ten months after the initial sale to Brace. 16 Eric Peterson explained that
he “took an accounting of all the Goedecke equipment that wasn’t on the SPA in all
the [scaffolding] branches and moved it into rental contracts” for tracking
purposes.17 Eric Peterson justified this post-acquisition accounting by contending
that the parties’ intention was that this equipment would be returned or paid for
separately; he conceded that, to demonstrate that intention, he relied on “a verbal
agreement on a lot of this.” 18 The SPA contains an entireties clause recognizing that
the SPA “constitutes the sole and entire agreement” and “supersedes all prior” oral
understandings and agreements.19 To the extent that the Defendants offer a prior
oral agreement to vary the terms of the contract, I may not consider it. 20
15
See Oral Arg. Tr. 38:23–39:2 (Feb. 24, 2017).
16
Trial Tr. 607:9–19 (Eric Peterson).
17
Id. at 606:12–22 (Eric Peterson).
18
Id. at 612:11–15 (Eric Peterson).
19
SPA § 7.4.
20
See, e.g., Carlson v. Hallinan, 925 A.2d 506, 522 (Del. Ch. 2006) (“The parol evidence rule bars
the admission of preliminary negotiations, conversations and verbal agreements when the parties'
written contract represents the entire contract between the parties.”) (internal quotation marks
omitted).
5
The Defendants had the burden of proof at trial to demonstrate that its
equipment—equipment not covered by the contract and that the parties intended
should not be transferred—was nonetheless in the possession of Brace. Peterson’s
evidence and testimony was, to my mind, litigation driven and unpersuasive. I find
that the Defendants have not met their burden of proof on this issue based on the
evidence at trial.
B. The so called “Set-Off Counterclaim”
I now address several legal defenses raise by Brace to the so-called “Set-Off
Counterclaim” of the Defendants. Under the contracts between the parties, the
Defendants received payment from customers of PIS that belonged to Brace; in light
of the Plaintiffs’ disputed claims against the amount in escrow, the Defendants
retained certain of these payments, which they must ultimately remit to Brace (the
“Customer Payments Claim”). When the Defendants answered the Complaint, they
also filed three counterclaims against the Plaintiffs, alleging payments due them
from Brace under the contracts between the parties. In accordance with those
counterclaims, the Defendants provided a Notice of Direct Claims and a Set-Off
Notice to the Plaintiffs, pursuant to which the Defendants set aside customer
payments made to the Defendants as agents for Brace, as described above. In other
words, the Defendants are holding a sum of money that they received on behalf of
Brace; they wish to “set-off” the value of their various counterclaims from this
6
amount, and remit only the net amount—if any—owed Brace. The parties refer to
what is essentially a defense to the Customer Payments Claim as the “Set-Off
Counterclaim.” If the Set-Off Counterclaim survives as a matter of law, it will be
submitted to the Special Master along with the other remaining matters for a
computation of the net amount owed by the Defendants to Brace.
The Plaintiffs have presented several legal defenses to the Set-Off
Counterclaim. They ask that I find that these defenses bar the Set-Off Counterclaim,
with the result that judgment must be entered in Plaintiffs’ favor on their Customer
Payments Claim, without further reference to the Special Master.21 The Defendants
argue that Brace’s defenses fail as a matter of law, and that the Special Master must
first determine what value, if any, inheres in their counterclaims, and reduce the
Customer Payments Claim accordingly.
According to the Plaintiffs, the Set-Off Counterclaim must be dismissed
because set off of a “contingent unliquidated sum” is impermissible under our law,
and because set-off is not permitted under the SPA. 22 The Plaintiffs also argue that
the Defendants have unclean hands 23 and that the Defendants’ expert testimony on
21
Pls’ Memorandum of Law Regarding Outstanding Issues at 6 (Jan. 6, 2017) (Dkt. No. 184).
22
Id. at 2.
23
I do not find unclean hands a viable defense in this matter for the reasons explained at the In
Court Office Conference held on February 24, 2017. See Oral Arg. Tr. 19:4–20:10 (Feb. 24, 2017).
7
the Set-Off Counterclaim should be excluded.24 I address each in turn below, and
find that the Defendants have the best of each issue.
1. The SPA does not bar the Set-Off Counterclaim
Section 6.7 of the SPA provides that at a party’s sole discretion, such party
may “set off all or any portion of the claimed amount of any . . . Direct Claim against
any amount otherwise payable under this Agreement.”25 The Plaintiffs point to
Section 6.7’s restriction to “this Agreement” and argue that the Set-Off
Counterclaim does not attempt to set off an amount payable under the SPA because
it sets off customer payments owed to them under the TSA. 26 Therefore, according
to the Plaintiffs, the Set-Off Counterclaim is not authorized by Section 6.7 of the
SPA.
It seems to me, however, that the Set-Off Counterclaims does set off an
amount payable under the SPA, because the SPA incorporates the TSA. The SPA
defines “Agreement” as “this Stock Purchase Agreement,” that is, the Agreement is
the SPA. 27 Section 5.7 of the SPA requires each party to “execute and deliver such
additional documents, instruments, conveyances, and assurances and take such
further actions as may be reasonably required to carry out the provisions hereof and
24
Pls’ Memorandum of Law Regarding Outstanding Issues at 2, 5–6.
25
SPA § 6.7 (emphasis added).
26
Pls’ Memorandum of Law Regarding Outstanding Issues at 4.
27
SPA Preamble.
8
give effect to the Transactions.”28 The SPA then defines “Transactions” as “the
transactions contemplated by this Agreement and the other Transaction
Documents,”29 which are defined as “this Agreement, the Escrow Agreement, and
other agreements, instruments and documents required to be delivered at Closing.”30
SPA Section 2.3 in turn provides the “Transactions to be Effected at Closing” and
requires the Plaintiffs to deliver the TSA signed by them to the Defendants and the
Defendants to also deliver the TSA signed by them to the Plaintiffs. 31 Accordingly,
under the terms of the SPA, the TSA—pursuant to which the Plaintiffs are owed
customer payments—must be created, executed and delivered. The SPA cannot be
consummated without the incorporation of the TSA. I find under these
circumstances that the TSA is incorporated into the SPA, such that “amounts payable
under this Agreement,” under the facts here, includes the remittance of amounts
collected by the Defendants pursuant to the TSA. Thus, the Set-Off Counterclaim
is authorized under the contractual relationship among the parties.
2. The Set-Off Counterclaim is contractual, and therefore not an
impermissible set-off of a contingent, unliquidated claim
The Plaintiffs quote CanCan Development, LLC v. Manno32 for the
proposition that contingent, unliquidated claims cannot support a set-off
28
Id. at § 5.7 (emphasis added).
29
Id. at § 3.2 (emphasis added).
30
Id. at Ex. A.
31
Id. at § 2.3. I note that the TSA also references the SPA in its opening recitals. See TSA Recitals.
32
2011 WL 4379064, at *5 (Del. Ch. Sept. 21, 2011).
9
counterclaim.33 Vice Chancellor Laster explained in CanCan that “[t]here is no right
to set-off of a possible unliquidated liability against a liquidated claim that is due
and payable.”34 In other words, a debtor may not at her discretion set against the
amount owed what she claims to be an unrelated liability running from her creditor
to her. My decision above makes this rationale inapplicable here, however.
The plaintiff in CanCan was not attempting to vindicate a contractual right to
a set-off counterclaim, as are the Defendants here. While no right to set-off
unliquidated sums may exist at common law or in equity, our law encourages parties
to contract freely to create those contractual rights they see fit.35 As discussed above,
Section 6.7 of the SPA provides that, at its sole discretion, a party may “set off all
or any portion of the claimed amount of any . . . Direct Claim against any amount
otherwise payable under this Agreement.”36 Accordingly, I find that the Set-Off
Counterclaim is contractual, and the rationale of CanCan does not apply.
3. The Plaintiffs’ Motion in Limine
The Plaintiffs make a final attempt to invalidate the Set-Off Counterclaim by
arguing under Daubert v. Merrell Dow Pharmaceuticals, Inc.37 to exclude the
33
Pls’ Memorandum of Law Regarding Outstanding Issues at 3.
34
CanCan, 2011 WL 4379064, at *5 (quoting 80 C.J.S. Set–Off and Counterclaim § 58 (2011))
(emphasis added).
35
See, e.g., NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 35 (Del. Ch. 2009) (“Delaware
upholds the freedom of contract and enforces as a matter of fundamental public policy the
voluntary agreements of sophisticated parties.”).
36
SPA § 6.7.
37
509 U.S. 579 (1993).
10
Defendants’ expert testimony on the Set-Off Counterclaim because the Defendants’
expert did not perform any expert analysis, and to exclude it in any event as a
sanction for non-compliance with the scheduling order. As an initial matter, it seems
to me that expert testimony here is useful, but not required, for vindication of the
Set-Off Counterclaim. Therefore, to the extent the Plaintiffs are correct that the
Defendants’ expert testimony should be excluded, this is not dispositive of the Set-
Off Counterclaim.
Regardless, the Plaintiffs contend that the parties’ dispute on this issue centers
around “thousands of accounting transactions flowing through the Customer
Payment lockbox that Peterson managed for Brace pursuant to the TSA.” 38 The
Plaintiffs then allege that the Defendants refused to produce the bank statements for
this Customer Payments lockbox, which, according to the Plaintiffs, constitute the
best evidence for these claims and which were relied on by the Defendants’ expert.39
The Plaintiffs, however, fail to mention in their supplemental letter that they
conceded in their pre-trial Motion in Limine that they did receive these bank
statements before trial.40 That is, in their Motion in Limine, the Plaintiffs argued
that Defendants’ expert evidence should be excluded because these bank statements
were provided, but not timely; they were allegedly due on January 22, 2016 but were
38
Pls’ Memorandum of Law Regarding Outstanding Issues at 5.
39
Id. at 5–6.
40
See Pls’ Reply in Support of their Motion in Limine 3–4 (Mar. 17, 2016) (Dkt. No. 141).
11
not received until February 22, 2016. 41 According to the First Amended Order
Governing Case Schedule, however, the parties were required to “substantially
complete document production” by January 22, 2016 but they were not required to
exchange expert rebuttal reports and all material relied upon therein until February
26, 2016.42 Thus, it is not even clear to me that the Defendants provided the bank
statements out of the agreed-to time.
Under the circumstances here, I find that justice requires consideration of the
statements, even if they were provided late. The Plaintiffs had sufficient time to
respond to the Defendants’ expert. In their Motion in Limine, the Plaintiffs cite a
Letter Opinion on a plaintiff’s motion to amend a scheduling order in Encite LLC v.
Soni43 for the proposition that this Court should disallow an expert’s report when it
is filed after the deadline in a scheduling order, and when no justification exists to
amend the order. 44 However, here, the Plaintiffs ask me to exclude an expert’s
testimony based on tardily filed documents relied on in an expert’s report, not the
expert’s report itself. It seems to me that, especially in light of the current disposition
of this litigation,45 the Plaintiffs have had sufficient opportunities to prepare, present,
41
Id.
42
First Amended Order Governing Case Schedule at 2 (Dkt. No. 101).
43
2011 WL 1565181, at *1 (Del. Ch. Apr. 15, 2011).
44
Pls’ Reply in Support of their Motion in Limine at 4 (Mar. 17, 2016) (Dkt. No. 141).
45
The Plaintiffs concede that they received the documents at issue on February 22, 2016. Id. Over
one year has since passed, in which occurred a trial, post-trial briefing, supplemental letters, and
an in-court office conference.
12
and oppose any argument based on the bank statements. In the interests of justice, I
decline the Plaintiffs’ motion to exclude the expert report on this ground.
As to excluding Defendants’ expert under Daubert, the expert testified to,
among other things, not using an accounting methodology, and conceded he had
based at least some of his conclusions on “ask[s] from Eric [Peterson].” 46 This may
be relevant in examining the sufficiency of the evidence offered by the Defendants’
expert, but it is not enough to exclude his testimony in the entirety. In any event, as
I have found above, expert testimony is not necessary to the calculations that the
Master must make with regard to the Set-Off Counterclaim. The Defendants have
submitted sufficient evidence to put the question of set-off to the Special Master.
For all the reasons above, I find that the Set-Off Counterclaim, so called, is
not invalid as a matter of law, and the amount of set-off applicable to the Plaintiffs’
Customer Payments Claim, if any, under the rubric of the Defendants’
counterclaims, must be referred to the Special Master for further resolution.
For the foregoing reasons, any remaining issues pertaining to the leftover
equipment and Set-Off Counterclaim are referred to the Special Master.
To the extent the foregoing requires an Order to take effect, IT IS SO
ORDERED.
46
Trial Tr. 679:13–682:14 (Placht).
13
The parties should confer and provide me with a form of order referring
remaining issues to the Special Master, and inform me of any remaining issues
requiring my attention.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
14