Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., C.A. No. 8642-VCP (September 30, 2014) (Parsons, V.C.)

By David Edgar and Joshua Haft

In Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., the plaintiffs, including Cheval Holdings, Ltd. (“Cheval Holdings”), Black Horse Capital, LP, Black Horse Capital Master Fund Ltd. (together with Black Horse Capital, LP, “Black Horse”), and Ouray Holdings I AG, filed a breach of contract action arising out of a transaction in which the plaintiffs and defendants, Jonathan M. Couchman, Xstelos Holdings, Inc., and Xstelos Corp. (formerly known as Footstar Inc. and Footstar Corp. (“Footstar”)) jointly acquired a pharmaceuticals company, CPEX Pharmaceuticals, Inc. (“CPEX”), which is now wholly owned by defendant FCB I Holdings, Inc. (“FCB Holdings”), an entity jointly owned by Footstar and Cheval Holdings. Immediately following the closing of the acquisition, FCB Holdings was owned 80.5% by Footstar and 19.5% by Cheval Holdings.

The plaintiffs’ claims arose out of an alleged oral promise in December 2010 by the defendants to transfer to the plaintiffs certain assets of CPEX, specifically an additional 60% ownership interest in the drug product known as SER-120 and referred to as “Serenity” by the court. The transfer was to occur after the closing of the CPEX acquisition in exchange for the plaintiffs funding a disproportionately large bridge loan to FCB Holdings (the “Serenity Agreement”). On January 3, 2011, each of Black Horse and Footstar entered into separate bridge loan commitment letters with FCB Holdings and CPEX in the amounts of $10 million and $3 million, respectively. In April 2011, the bridge loans were made to FCB Holdings and the CPEX acquisition closed. In connection with the CPEX acquisition, the bridge loans, and the other related transactions, the parties entered into customary transaction documents. Although the alleged oral promise of the Serenity Agreement was made prior to the parties entering into the transaction documents, none of the transaction documents executed in connection with the loan or the merger referenced the Serenity Agreement. Furthermore, the transaction documents also contained customary integration clauses. By December 2012, the transfer of assets contemplated by the Serenity Agreement had not occurred and relations between the parties deteriorated to the point where the plaintiffs filed this action in June 2013.

In addition to the plaintiffs’ breach of contract claims, the plaintiffs asserted claims for fraudulent inducement, promissory estoppel, unjust enrichment, breach of certain other agreements, and breach of the implied covenant of good faith and fair dealing. In this Memorandum Opinion, the Delaware Chancery Court ruled on the defendants’ motion to dismiss pursuant to Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted.

In order to survive a Rule 12(b)(6) motion, the court must determine whether the plaintiffs’ claims are “provable under any reasonably conceivable set of circumstances.” Based on the court’s review of the parties’ claims, the court found that it was not reasonably conceivable that the Serenity Agreement was an enforceable contract between the parties. The court explained that a valid contract requires three elements: (1) intent to be bound; (2) sufficiently definite terms; and (3) exchange of legal consideration.

With regard to the first element of intent to be bound, the court concluded that it was not reasonably conceivable that the parties would have executed the transaction documents and the Black Horse commitment letter, none of which referenced the Serenity Agreement, while also intending to manifest intent to the Serenity Agreement. Thus, there was no reasonable inference of an objective manifestation that the parties intended to be bound by the Serenity Agreement.

With regard to the second element of sufficiently definite terms of the contract, the court also found that the plaintiffs failed to allege facts from which the court could infer a shared understanding of the meaning of what constituted the rights of “Serenity.” The court noted that the plaintiffs’ own descriptions of “Serenity” varied throughout its complaint such that there could be no sufficiently definite term. For example, the complaint suggested that rights for Serenity may not be limited to SER-120 and elsewhere suggested that rights for Serenity may only include rights to a profitable license agreement relating to SER-120. The court explained that although the plaintiffs may have had some subjective understanding of the meaning of “Serenity,” that understanding was never shared with the defendants.

Therefore, because the terms were not definite enough to render the contract enforceable and there was no intent to be bound, the court dismissed the plaintiffs’ breach of contract claims.

With regard to the plaintiffs’ fraudulent inducement and promissory estoppel claims, the court explained that reasonable reliance is a requisite element of both fraud and promissory estoppel. Based on the clear integration clauses in the negotiated transaction documents, the plaintiffs agreed not to rely on promises and agreements outside of those documents. Thus, the court concluded that the parties must be held to the promises made in the integrated documents. With regard to the plaintiffs’ unjust enrichment claim, the court dismissed that claim because the integrated transaction documents provided consideration to the plaintiffs in exchange for the $10 million bridge loan to FCB Holdings. Accordingly, the defendants were not unjustly enriched.

Alternatively, the court did not dismiss the plaintiffs’ claims for breach of a consulting agreement, for breach of a stockholders’ agreement, or the plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing with respect to the stockholders’ agreement. The plaintiffs stated a narrow claim for breach of the implied covenant of good faith and fair dealing because they alleged that the defendants declared a dividend for FCB Holdings with no corporate purpose other than a desire to harm Cheval Holdings.


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