In Post Holdings, Inc., et al. v. NPE Seller Rep LLC, et al., Chancellor Andre G. Bouchard granted defendant NPE Seller Rep LLC’s (“Seller Representative”) motion for judgment on the pleadings on its counterclaim seeking payment of tax refunds and insurance proceeds allegedly owing under a stock purchase agreement (the “Agreement”). In rendering its decision, the Court concluded that once a party has made a contractual indemnification demand based on a counterparty’s alleged material breach, such party cannot rely on the same breach to excuse non-performance of its own obligations under the contract. The Court also found that unliquidated indemnification claims could not be the basis for an offset of amounts owed in the absence of contract language to the contrary.
The dispute arose out of an acquisition by the plaintiffs of shares owned by the defendants. In October 2016, Michael Foods of Delaware, Inc. (“Michael Foods”) acquired all the shares of National Pasteurized Eggs, Inc. (“NPE”) for $93.5 million. In October 2017, Michael Foods and its Parent company Post Holdings, Inc. (collectively, the “Buyers”) sued Seller Representative and NPE security holders (collectively, the “Sellers”) for fraud and alleged breaches of representations and warranties made in the Agreement. Buyers filed a claim for indemnification under procedures outlined in the Agreement, seeking the entirety of a $7.5 million escrow fund. Sellers rejected this demand.
Seller Representative responded with a counterclaim to enforce covenants in the Agreement requiring the Buyers to remit nearly $1 million in tax refunds and insurance proceeds pertaining to the pre-closing period. During the relevant period, Buyers received $522,395.86 in federal and state income tax refunds and $422,040.68 net of collection expenses in insurance proceeds covered by the relevant covenants in the Agreement. Sellers also submitted claims for indemnification requesting payment of these amounts, but Buyers refused to pay.
On these facts, the Court granted Seller Representative’s motion for judgment on the pleadings on its counterclaim and directed entry of final judgment against Buyers. Buyers unsuccessfully offered two arguments against their obligation to remit the tax refunds and insurance proceeds. First, Buyers argued Sellers had materially breached the Agreement, and that such breach excused any obligation to pay the funds in question. Second, with regards to the tax refunds only, Buyers argued that because the Agreement permitted offset of certain claims, including the tax refunds, and the amount the Buyers alleged was owed to them was greater than any tax refund owed to Sellers, there was no obligation to pay the tax refund to Seller Representative.
Dispensing with the first argument, the Court held that the Buyers had availed themselves of the Agreement’s benefits in such a manner that they could not now rely on the alleged breaches to excuse non-performance of their Agreement obligations. The Buyers had demonstrated “an intention to continue the contract” by pursuing claims under the indemnification process in the Agreement. After using the Agreement’s indemnification procedures in this manner, the Buyers were obligated to continue to perform under the Agreement, irrespective of whether Sellers had materially breached the contract. With this dispositive issue resolved, the Court declined to address whether any of the alleged breaches were material.
Next, the Court held that offset of the tax refunds was inappropriate in these circumstances because of the speculative nature of the Buyers’ claims. In assessing the offset argument, the Court distinguished between liquidated and unliquidated claims for indemnification. The Agreement permitted the tax refund to be offset against “the amount of any indemnification payment owed . . .” The Court interpreted this language to require for offset a “presently payable amount,” and not “some uncertain amount that is contingent in nature.” Acknowledging the power of parties to contract otherwise — to permit offset against mere claims of indemnification, rather than amounts owed — the Chancellor found nothing in the Agreement to justify departure from the common-law principle that “there is no right to set-off of a possible unliquidated liability against a claim that is due and payable.” Whereas the insurance proceeds and tax refunds sought by Seller were definitively owing, the Buyer’s claim was presently uncertain and subject to future adjudication.