Sparton Corporation v. Joseph F. O'Neil

COURT OF CHANCERY
OF THE
STATE OF DELAWARE

TAMIKA R. MONTGOMERY-REEVES Leonard Williams Justice Center
VICE CHANCELLOR 500 N. King Street, Suite 11400
Wilmington, Delaware 19801-3734

Date Decided: June 18, 2018

Richard M. Beck, Esquire William M. Lafferty, Esquire
Sean M. Brennecke, Esquire John P. DiTomo, Esquire
Klehr Harrison Harvey Branzburg LLP Zi-Xiang Shen, Esquire
919 Market Street, Suite 1000 Morris, Nichols, Arsht & Tunnell LLP
Wilmington, DE 19801 1201 North Market Street
Wilmington, DE 19899

RE: Sparton Corporation v. Joseph F. O’Neil et al.
C.A. No. 12403-VCMR

Dear Counsel:

This letter opinion addresses Defendants’ motion for partial judgment on the

pleadings and Defendants’ motion for interim attorneys’ fees. For the reasons stated

below, both motions are granted. This letter opinion assumes familiarity with the

facts outlined in the Court’s August 9, 2017 memorandum opinion. The current

dispute arises from Plaintiff’s refusal to release funds held in escrow pursuant to the

parties’ agreements.

I. BACKGROUND

Plaintiff Sparton Corporation (“Sparton”) acquired Hunter Technology

Corporation (“Hunter”) through a reverse triangular merger on April 14, 2015, with
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Hunter surviving as a wholly-owned subsidiary of Sparton. Defendants were

stockholders and optionholders of Hunter before the merger.

A. The prior opinion
Sparton alleged in its Complaint that Defendant Joseph F. O’Neil, Hunter’s

stockholder representative, and other Defendants fraudulently induced Sparton to

enter into the merger agreement through which Sparton acquired Hunter (the

“Merger Agreement”) by presenting false financial statements during negotiations.

Sparton also asserted breach of contract claims relating to the Merger Agreement for

(1) breach of warranties relating to Hunter’s calculation of its working capital (the

“Working Capital Claim”); (2) O’Neil’s alleged failure to use commercially

reasonable efforts to resolve certain liabilities that Hunter incurred before the merger

(the “O’Neil Claim”); and (3) Defendants’ purported failure to pay certain invoices

Hunter incurred before the merger (the “Expenses Claim”). As a result of the

purported fraud and contractual breaches, Sparton alleged it had suffered (1)

$1,829,455 in damages representing the difference between the inflated working

capital it paid for and the working capital that actually existed at closing; (2)

unliquidated damages in the amount of fees and costs necessary to resolve the

liabilities that O’Neil promised to resolve; and (3) $100,498.70 in damages for the

invoices incurred by Hunter for which Sparton now is responsible. Defendants
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moved to dismiss all claims except the Expenses Claim. On August 9, 2017, this

Court dismissed the Working Capital Claim, O’Neil Claim, and fraud claim for

failure to state a claim under Court of Chancery Rule 12(b)(6). 1

B. The current dispute
The current dispute arises from Sparton’s refusal to release $838,000 held in

escrow pursuant to the Merger Agreement and a contemporaneously executed

escrow agreement (the “Escrow Agreement”) between Sparton and Hunter. On

October 14, 2016, Defendants filed counterclaims alleging that the parties’

agreements require Sparton to release the escrow funds. 2 On November 7, 2016,

Sparton filed its answer to Defendants’ counterclaims denying Defendants’ claim

that the parties’ agreements entitle Defendants to release of the escrow funds. 3 On

September 22, 2017, Defendants moved for partial judgment on the pleadings under

Court of Chancery Rule 12(c) seeking release of the escrow funds and interim

attorneys’ fees and expenses in the amount of $447,564.03. The Court heard oral

arguments on the motion for partial judgment and motion for interim attorneys’ fees

on March 20, 2018.

1
Sparton Corp. v. O’Neil, 2017 WL 3421076 (Del. Ch. Aug. 9, 2017).
2
Defs.’ Am. Countercls. ¶¶ 5-7.
3
Pl.’s Answer 5.
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II. ANALYSIS

“This court will grant a motion for judgment on the pleadings pursuant to

Court of Chancery Rule 12(c) when there are no material issues of fact and the

movant is entitled to judgment as a matter of law.” 4 “When considering a Rule 12(c)

motion, the court must assume the truthfulness of all well-pled allegations of fact in

the complaint and draw all reasonable inferences in favor of the plaintiff.” 5 “The

Court must therefore accord plaintiffs opposing a Rule 12(c) motion the same

benefits as a plaintiff defending a motion under Rule 12(b)(6). As on a Rule 12(b)(6)

motion, however, a court considering a Rule 12(c) motion will not rely upon

conclusory allegations of wrongdoing or bad motive unsupported by pled facts.”6

“Although ‘all facts of the pleadings and reasonable inferences to be drawn

therefrom are accepted as true . . . neither inferences nor conclusions of fact

unsupported by allegations of specific facts . . . are accepted as true.’” 7 Thus, “[a]

4
McMillan v. Intercargo Corp., 768 A.2d 492, 499 (Del. Ch. 2000) (citing Desert
Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., 624 A.2d 1199,
1205 (Del. 1993)).
5
Id. (citing Desert Equities, 624 A.2d at 1205; Weiss v. Samsonite Corp., 741 A.2d
366, 371 (Del. Ch. June 14, 1999), aff’d, 746 A.2d 277 (Del. 1999)).
6
Id. (citing Kahn v. Roberts, 1994 WL 70118, at *5 (Del. Ch. Feb. 28, 1994)).
7
Id. (citing In re Lukens Inc. S’holders Litig., 757 A.2d 720, 727 (Del. Ch. 1999)).
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trial court need not blindly accept as true all allegations, nor must it draw all

inferences from them in plaintiffs’ favor unless they are reasonable inferences.’”8

“In analyzing a motion to dismiss, the court may consider, for carefully limited

purposes, documents integral to or incorporated into the complaint by reference.

This same standard logically applies on a Rule 12(c) motion as well.”9

The current dispute between the parties centers on the Court’s interpretation

of the Merger and Escrow Agreements. “Delaware law 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.” 10 “When interpreting a contract,

this Court ‘will give priority to the parties’ intentions as reflected in the four corners

of the agreement,’ construing the agreement as a whole and giving effect to all its

provisions.”11 The terms of the contract control “when they establish the parties’

common meaning so that a reasonable person in the position of either party would

8
Id.
9
Id. (citing In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69-70 (Del.
1995)).
10
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010).
11
Salamone v. Gorman, 106 A.3d 354, 367-68 (Del. 2014) (quoting GMG Capital
Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012)).
Sparton Corp. v. Joseph F. O’Neil et al.
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have no expectations inconsistent with the contract language.”12 Standard rules of

contract interpretation state that “a court must determine the intent of the parties

from the language of the contract.”13 “In giving sensible life to a real-world contract,

courts must read the specific provisions of the contract in light of the entire contract.

This is true in all commercial contexts, but especially so when the contract at issue

involves . . . [the] sale of an entire business.” 14

A. The Merger and Escrow Agreements do not allow Sparton to
withhold the escrow funds
Sparton is withholding $838,000 in escrow funds arguing that it is owed this

amount for the O’Neil Claim. 15 Defendants argue that the parties’ agreements

require Sparton to release the escrow funds because Sparton never had a contractual

basis to withhold the funds as Sparton admittedly did not incur any out-of-pocket

expenses by October 14, 2016 as required under the parties’ agreements. 16

12
Id. at 368 (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228,
1232 (Del. 1997)).
13
Id. (quoting Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 628 (Del.
2003)).
14
Chi. Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 913-14
(Del. 2017).
15
Defs.’ Opening Br. Mot. for Partial J. 1.
16
Id.
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The parties do not dispute the material terms of the Merger or Escrow

Agreements. As I stated in my prior opinion, the Merger Agreement provides that

Sparton is entitled to indemnification for claims related to fraud or “any of the

matters set forth on the Specific Indemnity Schedule” (“Specific Indemnity Escrow

Claims”), which includes the O’Neil Claim. 17 But Sparton’s right to indemnification

for Specific Indemnity Escrow Claims is limited to losses “that [were] actually

incurred prior to October 14, 2016.”18 Sparton had no contractual right to

indemnification for losses from Specific Indemnity Escrow Claims “that [were]

pending or otherwise [had] not been resolved prior to October 14, 2016.”19

Moreover, “the obligation to indemnify Sparton for [Specific Indemnity Escrow

Claims] terminate[d] on October 14, 2016 . . . regardless if any [Specific Indemnity

Escrow Claims] remain pending and have not been settled or otherwise resolved.’”20

The Merger Agreement also provides that “[t]he Specific Indemnity [Escrow]

Claims are Sparton’s sole and exclusive remedy for losses related to matters listed

17
Sparton, 2017 WL 3421076, at *4; Merger Agreement § 11.01.
18
Merger Agreement § 11.01(iii); Defs.’ Am. Countercls. ¶ 29; Pl.’s Answer ¶ 29;
Sparton, 2017 WL 3421076, at *9.
19
Id.
20
Merger Agreement § 11.04; Pl.’s Answer ¶ 29; Sparton, 2017 WL 3421076, at *9-
10.
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on the Specific Indemnity Schedule, except in the case of fraud.”21 The Escrow

Agreement provides that Sparton “may not submit a Specific Indemnity Escrow

Claim until it actually incurs out-of-pocket Losses indemnifiable under Section

11.01(iii) of the Merger Agreement or there is a judgment or settlement . . . of any

matter covered by Section 11.01(iii).”22 On October 14, 2016, the Escrow

Agreement required the escrow agent to release the remaining escrow funds “less

the aggregate amount, if any, of funds requested for distribution” in all pending

Specific Indemnity Escrow Claims. 23

These provisions of the Escrow and Merger Agreements are unambiguous.

To withhold the escrow funds for losses arising out of any Specific Indemnity

Escrow Claims, Sparton must have incurred out-of-pocket expenses related to such

claim or obtained a judgment or settlement of such claim prior to October 14, 2016.

Sparton does not seriously contend otherwise. Sparton has not alleged that it

incurred any such out-of-pocket expenses. To the contrary, Sparton stated in

response to Defendants’ motion to dismiss that “[n]o judgment or settlement has

21
Merger Agreement § 11.02; Sparton, 2017 WL 3421076, at *4.
22
Merger Agreement, Ex. C § 4(e)(vi); Sparton, 2017 WL 3421076, at *4.
23
Merger Agreement, Ex. C § 4(d)(i).
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been entered with respect to the Specific Indemnity Matters because Defendant

O’Neil has refused to do so.”24 And, in my prior opinion dismissing the O’Neil

Claim, I held that “[t]he conclusory allegation that O’Neil did not use commercially

reasonable efforts to resolve the matters because the matters remain unresolved is

not enough to state a claim under Rule 12(b)(6).” 25 Thus, because Sparton never

had any contractual right to withhold the escrow funds, Defendants are entitled to

release of the funds under the terms of the parties’ agreements.

24
Pl.’s Answering Br. Mot. to Dismiss 17-18.
25
Sparton, 2017 WL 3421076, at *5. Sparton has at various times asserted two
additional arguments. Sparton asserted in its answer to Defendants’ counterclaims
that a demand letter from the California State Board of Equalization constitutes a
“settlement” under the Merger Agreement, which occurred before October 14, 2016.
Pl.’s Answer ¶ 84. This argument is not credible, even taking all reasonable
inferences in Sparton’s favor. A “settlement” as defined in the Merger Agreement
must be in writing and signed by both parties. Merger Agreement § 11.04 (a
“settlement” must be “approved by [Sparton] and [Defendant O’Neil] . . . [and]
agreed to in writing by all parties thereto on or prior to October 14, 2016[.]”).
Sparton does not allege that this occurred. Sparton also argues that release of the
funds is premature because there has not been a “Final Determination” as defined
in the Escrow Agreement. Defendants do not dispute this fact. Instead, they argue
that the Escrow Agreement provides for release of the funds if there is a “Final
Determination” or “Joint Release Instruction.” Defendants seek a mandatory
injunction requiring Sparton to agree to send the escrow agent a “Joint Release
Instruction.”
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B. A mandatory injunction provides the appropriate form of relief for
the release counterclaim
Defendants seek a mandatory injunction ordering Sparton to instruct the

escrow agent to release the escrow funds.26 I find that a mandatory injunction is the

appropriate form of relief. “To issue a mandatory injunction requiring a party to

take affirmative action . . . the Court of Chancery must either hold a trial and make

findings of fact, or base an injunction solely on undisputed facts.” 27 In order for a

movant to be entitled to a mandatory injunction, the movant must show “(1) actual

success on the merits; (2) irreparable harm; and (3) the harm resulting from failure

to issue an injunction outweighs the harm befalling the opposing party if the

injunction is issued.”28

26
In the alternative, Defendants seek “$838,000 in damages for Sparton’s contractual
breach . . . and a declaratory judgment declaring that [Defendants] are entitled to
immediate release of all remaining [escrow] funds[.]” Defs.’ Reply Mot. for Partial
J. 20. If the Court grants either of these remedies, “to expedite payment to
[Defendants of any damages awarded], [Defendants] further request[] that, pursuant
to Court of Chancery Rule 54(b), the Court state that there is no just reason for delay
and enter final judgment on the [Defendants’ counterclaim].” Id. 20-21. I need not
address these forms of relief because I grant Defendants a mandatory injunction.
27
C&J Energy Servs., Inc. v. City of Miami Gen. Empls.’ Ret. Trust, 107 A.3d 1049,
1071 (Del. 2014).
28
ID Biomed. Corp. v. TM Techs., Inc., 1995 WL 130743, at *15 (Del. Ch. Mar. 16,
1995) (citing Draper Commc’ns, Inc. v. Del. Valley Broads., L.P., 505 A.2d 1283,
1288 (Del. Ch. 1985)).
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1. Success on the merits

As discussed above, Defendants have proven actual success on the merits

because it has shown that it is entitled to release of the escrow funds under the

parties’ agreements.

2. Irreparable harm

Section 13.17 of the Merger Agreement provides that “irreparable damage

would occur in the event that any of the provisions” of the Merger Agreement “were

not performed in accordance with their specific terms or were otherwise

breached[.]” 29 Further, “each party shall be entitled to enforce specifically the terms

and provisions of” the Merger Agreement, “and appropriate injunctive relief shall

be granted in connection therewith.” 30 “In Delaware, parties can agree contractually

on the existence of requisite elements of a compulsory remedy, such as the existence

of irreparable harm in the event of a party’s breach, and, in keeping with the

contractarian nature of Delaware corporate law this court has held that such a

stipulation is typically sufficient to demonstrate irreparable harm.” 31 Further,

29
Merger Agreement § 13.17.
30
Id.
31
Martin Marietta Mat’ls, Inc. v. Vulcan Mat’ls Co., 56 A.3d 1072, 1145 (Del. Ch.
2012), aff’d, 68 A.3d 1208 (Del. 2012) (“Our courts have long held that ‘contractual
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C.A. No. 12403-VCMR
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Delaware courts have held that an order requiring immediate release of escrow funds

is the most certain, prompt, complete, and efficient form of relief, such that any legal

remedies would be inadequate.32 The escrow funds belong to Defendants, and under

the circumstances, damages would not adequately compensate Defendants for their

losses.

3. Balance of the equities

The equities are in Defendants’ favor because Sparton never had the right to

withhold the escrow funds under the parties’ agreements. Allowing Sparton to

withhold assets that rightfully belong to Defendants will harm Defendants more than

taking those assets that were not Sparton’s away from Sparton.33 Thus, I find that

stipulations as to irreparable harm alone suffice to establish that element for the
purposes of issuing . . . injunctive relief.’”).
32
SecNet Hldgs., LLC v. Potash, C.A. No. 7781-VCP, at 29 (Del. Ch. Apr. 2, 2013)
(TRANSCRIPT); see also, e.g., East Balt LLC v. East Balt US, LLC, 2015 WL
3473384, at *2-4 (Del. Ch. May 28, 2015) (holding that this Court had jurisdiction
over an action for “an order requiring Defendants to provide joint written
instructions directing the Escrow Agent to release the remaining Escrow Amount”
because money judgment alone would not be an adequate remedy); Haney v.
Blackhawk Network Hldgs., Inc., 2017 WL 543347, at *4 (Del. Super. Feb. 8, 2017)
(holding that a claim for the release of escrow funds was equitable in nature because
any damage award would require plaintiff to seek specific performance or an
affirmative injunction in this Court).
33
FriendFinder Networks Inc. v. Penthouse Glob. Media, Inc., 2017 WL 2303982, at
*17 (Del. Ch. May 26, 2017) (recognizing that “allowing assets that are rightfully
FriendFinder’s to remain in the custody and control of Penthouse will harm
FriendFinder more than taking those domains that were not Penthouse’s at the
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Defendants are entitled to an injunction requiring the parties to enter into a “Joint

Release Instruction,” as defined in the Escrow Agreement, to provide for the

disbursement of all of the escrow funds to Defendants. 34

C. An interim attorneys’ fee award is warranted

Defendants also seek to recover an interim award for attorneys’ fees and

expenses incurred in connection with the O’Neil Claim and fraud claim that the

Court dismissed in its August 9, 2017 opinion.35 Delaware courts generally apply

the American Rule, under which “each party is obligated to pay its own attorneys’

fees regardless of the outcome.” 36 But “where the parties have determined the

allocation of fees by private ordering,” like in a merger agreement, “departure from

this general rule and deference to their agreement are warranted. Absent any

time of closing away from Penthouse”); see also SLC Beverages, Inc. v. Burnup &
Sims, Inc., 1987 WL 16035, at *3 (Del. Ch. Aug. 20, 1987) (finding that equities
favored issuance of a mandatory injunction where “plaintiff is suffering injury by
being prevented from obtaining the consideration which it bargained for”); True
North Commc’ns Inc. v. Publicis S.A., 711 A.2d 34 (Del. Ch. 1997) (“Publicis
cannot now assert that it will be harmed due to the Court’s enforcement of the
rights and obligations for which it specifically bargained, and which were reduced
to writing in the terms of the [parties’ agreement]”).
34
Escrow Agreement § 4(c)(i).
35
Sparton, 2017 WL 3421076.
36
W. Willow–Bay Ct., LLC v. Robino–Bay Ct. Plaza, LLC, 2009 WL 458779, at *8
(Del. Ch. Feb. 23, 2009).
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qualifying language that fees are to be awarded claim-by-claim or on some other

partial basis, a contractual provision entitling the prevailing party to fees will usually

be applied in an all-or-nothing manner.”37

This Court’s power to award interim fees “is part of the original authority of

the chancellor to do equity in a particular situation.”38 This Court “may grant interim

fees for a variety of reasons, including as a consequence for discovery abuse, as a

sanction for making frivolous legal arguments or engaging in bad-faith litigation

tactics, as a remedy for contempt of an interlocutory court order, or under specific

statutory authority.” 39 “[I]nterim fee awards may be appropriate where a plaintiff

has achieved the benefit sought by the claim that has been mooted or settled and that

benefit is not subject to reversal or alteration as the remaining portion of the litigation

proceeds.”40 “By contrast, if further litigation could alter the nature or scope of the

relief obtained, or if there are reasons why benefits cannot yet be evaluated, then an

37
Id.
38
Mills v. Elec. Auto–Lite Co., 396 U.S. 375, 393 (1970) (quoting Sprague v. Ticonic
Nat’l Bank, 307 U.S. 161, 166 (1939)).
39
In re Del Monte Foods Co. S’holders Litig., 2011 WL 2535256, at *6 (Del. Ch. June
27, 2011).
40
La. State Empls.’ Ret. Sys. v. Citrix Sys., Inc., 2001 WL 1131364 (Del. Ch. Sept. 17,
2001).
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interim award would be premature.”41 “Regardless of whether a party can satisfy

the requirements for an interim fee award, the decision to entertain the application

remains at the discretion of the trial court.”42

Defendants seek an award of interim attorneys’ fees under Section 13.09 of

the Merger Agreement, which states:

Prevailing Party. In the event of any litigation arising from
a claim for Fraud or the matters set forth on the Specific
Indemnity Schedule, the prevailing party shall be entitled
to recover from the non-prevailing party all reasonable
costs incurred including staff time, court costs, attorneys’
fees, and all other related expenses incurred in such
litigation. For avoidance of doubt, the Stockholders and
the Optionholders shall be third-party beneficiaries of this
Section 13.09 and shall have the benefit of this Section
13.09 in connection with any Fraud claim brought against
them in connection with the transactions contemplated
hereby. 43

Section 13.09 requires Sparton to pay Defendants’ attorneys’ fees related to

their defense against the Specific Indemnity Escrow Claims and fraud claims. 44

41
In re Del Monte, 2011 WL 2535256, at *7.
42
Id.
43
Merger Agreement § 13.09.
44
Sparton itself invoked this interpretation of Section 13.09 in a letter it sent to
Defendants stating that Sparton is “permitted under Section 13.09” to hold
Defendants “fully responsible for all attorneys’ fees and expenses that Sparton
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Sparton cites several cases for the proposition that interim attorneys’ fees are not

granted absent exigent circumstances,45 but those cases do not discuss a contractual

right to attorneys’ fees akin to Section 13.09 that carves out claims that the Court

has already dismissed and that are not subject to reversal or alteration by the

remaining litigation. This Court dismissed Sparton’s fraud claim and O’Neil Claim,

which are the only claims brought by Sparton arising from “Fraud” or the “Specific

Indemnity Escrow Schedule” as stated in Section 13.09. Sparton’s only remaining

claim is the Expenses Claim, which is unrelated to the indemnifiable matters set

forth in Section 13.09. Thus, because Defendants are the “prevailing party” under

Section 13.09 as to the fraud claim and O’Neil Claim, they are entitled to all

reasonable attorneys’ fees thereunder.

D. The requested fees are reasonable

Section 13.09 entitles the prevailing party to recover all “reasonable”

attorneys’ fees and expenses incurred.46 This Court has discretion in determining

incurs in connection with pursuing” its claims arising from the Specific Indemnity
Escrow Claims. Defs.’ Reply Mot. for Atty’s’ Fees, Ex. 1.
45
In re Emulex S’holder Litig., C.A. No. 4536-VCS (Del. Ch. Dec. 18, 2009)
(ORDER); Smollar v. Potarazu, 2016 WL 3635304 (Del. Ch. June 29, 2016); In re
Del Monte, 2011 WL 2535256; La. State Empls.’ Ret. Sys., 2001 WL 1131364;
Frazer v. Worldwide Energy Corp., 1991 WL 74041 (Del. Ch. May 2, 1991).
46
Merger Agreement § 13.09.
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the reasonableness of attorneys’ fees. 47 The party seeking the attorneys’ fees bears

the burden of establishing the reasonableness of the amount sought.48 “Determining

the reasonableness of amounts sought ‘does not require that this Court examine

individually each time entry and disbursement[.]’” 49 “If a party cannot be certain

that it will be able to shift expenses at the time the expenses are incurred, the prospect

that the party will bear its own expenses provides ‘sufficient incentive to monitor its

counsel’s work and ensure that counsel [does] not engage in excessive or

unnecessary efforts.’” 50

Defendants seek $447,565.03 in attorneys’ fees and expenses. 51 Sparton

challenges the reasonableness of Defendants’ fee request. First, Sparton argues that

Defendants’ requested fees are unreasonable because “the only activity in this

litigation” related to “one substantive motion[.]” 52 This argument ignores the

47
Mahani v. Edix Media Gp., Inc., 935 A.2d 242, 245 (Del. 2007).
48
Glob. Link Logistics, Inc. v. Olympus Growth Fund III, L.P., 2010 WL 692752, at
*1 (Del. Ch. Feb. 24, 2010) (quoting Korn v. New Castle Cty., 2007 WL 2981939,
at *2 (Del. Ch. Oct. 3, 2007)).
49
Danenberg v. Fitracks, Inc., 58 A.3d 991, 997 (Del. Ch. 2012) (citing Aveta Inc. v.
Bengoa, 2010 WL 3221823, at *6 (Del. Ch. Aug. 13, 2010)).
50
Id. (citing Aveta, 2010 WL 3221823, at *6).
51
Defs. Mot. for Atty’s’ Fees 7.
52
Pl.’s Answering Br. Mot. for Atty’s’ Fees 8.
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activity in this matter. Sparton “twice [] asserted multiple claims in lengthy

complaints against 26 individual defendants, asserted a fraudulent breach claim that

was barred by the merger agreement, and insufficiently pled fraud claims” and put

Defendants “in a position of having to move to dismiss, to prepare opening briefs in

support of two motions to dismiss, to complete briefing, and then to appear and

present that motion before this Court.”53 Sparton’s own conduct thus required

Defendants’ counsel to defend multiple claims in enforcing its rights under the

parties’ agreements. 54

Sparton next argues that Defendants only obtained a $838,000 benefit for the

O’Neil Claim; therefore, the fee request is unreasonable. 55 But this argument ignores

the fact that Defendants also prevailed on Sparton’s fraud claim and Working Capital

Claim. “In total, Sparton valued the [claims dismissed by the Court] at over $2.6

53
Oral Arg. at 46-47.
54
Auriga Capital Corp. v. Gatz Props., LLC, 40 A.3d 839, 882 (Del. Ch. 2012) (“In
objecting to the fee, [the objecting party] and [its] counsel should remember that it
is more time-consuming to clean up the pizza thrown at a wall than it is to throw
it.”).
55
Pl.’s Answering Br. Mot. for Atty’s’ Fees 8.
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million.”56 Moreover, Defendants incurred their fees before knowing the outcome

of the litigation. 57

Next, Sparton argues that Defendants unreasonably hired three law firms to

defend Sparton’s claims. But each of Defendants’ counsel performed important and

distinct functions in defending against Sparton’s claims. 58 Further, the hourly rates

56
Defs.’ Reply Mot. for Atty’s’ Fees 6.
57
Aveta, 2010 WL 3221823, at *6 (paying attorneys’ fees before prevailing on a claim
is a “further indication of reasonableness”).
58
Defendants hired deal counsel, lead litigation counsel, and Delaware counsel.

Relying on counsel from the jurisdiction where a proceeding
takes place does not suggest duplicative or excessive charges;
it rather suggests the efficient and prudent allocation of
resources. Because of their focus on our State’s law, Delaware
lawyers frequently can answer in a telephone call questions
about this jurisdiction that a forwarding law firm would spend
hours or days researching. Delaware counsel can readily point
to leading authorities, provide precedent filings, and help
forwarding counsel prepare the case (including developing the
discovery record) so that the matter can be presented most
effectively. Delaware counsel must be involved sufficiently to
fulfill their obligations to this Court.

Id. at *7. In addition, Defendants substantially reduced the cost of defending
Sparton’s claims by transitioning the matter to Butler Rubin Saltarelli & Boyd, LLP,
whose effective billing rate was less than half that of Defendants’ deal counsel,
Kirkland & Ellis LLP. Defs.’ Reply Mot. for Atty’s’ Fees 7-8.
Sparton Corp. v. Joseph F. O’Neil et al.
C.A. No. 12403-VCMR
June 18, 2018
Page 20 of 22

charged by Defendants’ counsel are not excessive, and the staffing of attorneys

appears appropriate.59

Sparton also argues that “[t]he time records attached to [Defendants’ motion

for interim attorneys’ fees] are so heavily redacted [that] neither Sparton nor the

Court can make any assessment of whether the fees are related to the litigation or

whether they are reasonable.” 60 But Defendants’ invoices only redact (1) limited

privileged information or (2) time spent on matters unrelated to the dismissed claims

for which Defendants do not seek attorneys’ fees. 61 Finally, Sparton argues that

Defendants cannot recover fees incurred during the four months before Sparton filed

the Complaint because such fees were not incurred “in this litigation” as required by

Section 13.09 of the Merger Agreement. 62 But Defendants incurred these fees after

Sparton declared its intent to “pursue all available remedies[,]” 63 and the work

59
Arbitrium (Cayman Islands) Handels AG v. Johnston, 1998 WL 155550, at *4 (Del.
Ch. March 30, 1998) (noting in ruling on fee application that “[f]or a Court to
second-guess, on a hindsight basis, and attorney’s judgment . . . is hazardous and
should whenever possible be avoided.”).
60
Pl.’s Answering Br. Mot. for Atty’s’ Fees 1.
61
Defs.’ Reply Mot. for Atty’s’ Fees 7, n.4.
62
Pl.’s Answering Br. Mot. for Atty’s’ Fees; Merger Agreement § 13.09.
63
Id. Ex. 1 (“If you do not coordinate and remit payment of $995,803 within 30 days
of this letter, Sparton will have no choice but to pursue all available remedies.”).
Sparton Corp. v. Joseph F. O’Neil et al.
C.A. No. 12403-VCMR
June 18, 2018
Page 21 of 22

performed “developed and framed the issues which were eventually litigated.”64

Absent a clear restriction to the contrary, a fee-shifting provision encompasses fees

incurred in anticipation of litigation. 65 There is no such restriction in Section 13.09.

The fees requested by Defendants were “actually paid or incurred” in the

“good faith professional judgment of competent counsel[,] and were charge[d] . . .

at rates, or on a basis, charged to other for the same or comparable services under

comparable circumstances.”66 Thus, the fees are recoverable under Section 13.09.

64
ReCor Med., Inc. v. Warnking, 2014 WL 5317768, at *1 (Del. Ch. Oct. 15, 2014)
(finding that plaintiffs were entitled to attorneys’ fees incurred before commencing
litigation that “attempted to resolve its dispute with Defendants through
negotiation” under a fee-shifting provision that did not limit recovery to fees
incurred during litigation).
65
Id.
66
White v. Curo Texas Hldgs., LLC, 2017 WL 1369332, at *5 (Del. Ch. Feb. 21,
2017).
Sparton Corp. v. Joseph F. O’Neil et al.
C.A. No. 12403-VCMR
June 18, 2018
Page 22 of 22

III. CONCLUSION

For the reasons discussed above, I grant Defendants’ motion for partial

judgment and motion for interim attorneys’ fees.

IT IS SO ORDERED.

Sincerely,

/s/Tamika Montgomery-Reeves

Vice Chancellor

TMR/jp