CHANCERY COURT RULES ON AGRIBUSINESS SALE FRAUD SUIT
By: Scott E. Waxman and Marissa Leon
In Agspring Holdco, LLC, et al. v. NGP X US Holdings, L.P., et al. (C.A. No. 2019-0567-AGB), the Delaware Court of Chancery (the “Court”) tolled the statute of limitations on claims by the purchaser of an agricultural commodities company and refused to dismiss the majority of fraud and related claims against officers of the company.
In 2015, private equity firm American Infrastructure MLP Funds (“AIM”) purchased Agspring LLC, a company that owned and operated agricultural commodity businesses (the “Company”) for $300 million (the “Transaction”) pursuant to a Membership Interest Purchase and Contribution Agreement (the “Purchase Agreement”). The Transaction was financed by HVS V LLC (“HVS”) and TOBI XXI LLC (“TOBI”) with $45 million in preferred equity in Agspring Holdco, LLC, the sole member of the Company (“Holdco”), an $80 million term loan from HVS and LVS II SPE XVIII LLC (“LVS” and, together with the Company, AIM, Holdco, LVS, HVS and TOBI, the “Plaintiffs”) pursuant to an agreement with the Company (the “Term Loan Agreement”), and an asset-based working capital loan between the Company and Macquarie Bank (the “ABL Agreement”).
After the Transaction closed, Bradley Clark and Randal Linville (collectively, the “Defendants”), served as the Company’s President and Chief Executive Officer, respectively, and as two of the five members of the board of managers of the Company. At the end of the Company’s fiscal year in 2016, the Company reported its total earnings to be approximately $43 million less than the Defendants representation before the Transaction closed wherein they also stated that the Company’s future financial outlook was strong. After the financial results were reported, the Defendants resigned from their positions and returned their computers to the Company with deleted and unrecoverable documents and data.
In 2019, the Plaintiffs filed an initial complaint and two amended complaints thereafter (the “Complaint”) asserting claims for (i) fraud, (ii) aiding and abetting fraud, (iii) civil conspiracy, (iv) breach of fiduciary duties, (v) unjust enrichment, and (vi) indemnification under the Purchase Agreement. The Plaintiffs argued that the Defendants deceptively induced them to enter into the Purchase Agreement and related agreements by providing them with an artificially inflated financial model containing a forecast that was millions of dollars higher than the Company’s actual internal model to justify the price that was demanded in the Transaction. The statute of limitations for each of the claims was three years and the Defendants argued that the first five counts should be dismissed as untimely because they were filed more than three years after the Transaction closed in 2015.
As an initial matter, the Court analyzed Plaintiffs’ theories regarding the tolling of the statute of limitations: fraudulent concealment and equitable tolling. With respect to the fraudulent concealment theory, the Court found that the Defendants made affirmative efforts to conceal the fraud they allegedly committed in connection with the sale of the Company after the Transaction closed while they were in charge of the Company’s operations. In particular, the Defendants made statements about an artificially inflated forecast when they knew otherwise. The Court concluded that the Defendant’s actions after the Transaction closed tolled the limitations period when the Company learned that the Defendants deleted the records from their computers. Furthermore, the Court concluded that the statute of limitations also tolled under the doctrine of equitable tolling because all of the acts occurred while the Defendants continued to serve as fiduciaries of the Company.
Next, the Court addressed the fraud claims. The Court found that two of the three representations in the Purchase Agreement were false when made. First, the material violation or breach of a “material contract” representation in the Purchase Agreement was false because events occurred that made it unmanageable for the Company to service its debt and resulted in a material breach of their existing notes. Therefore, the Court concluded that the Plaintiffs sufficiently alleged that the express representation to which the parties agreed was false when made. Second, the Court found that the Complaint sufficiently plead facts concerning the circumstances that gave rise to the Company’s failure to meet its forecast to support a reasonably conceivable claim that the “material adverse effect” representation in the Purchase Agreement was false when made. However, the Court found that the representation regarding sufficiency of assets was not false because according to the Court the Complaint did not allege that any of the assets of the Company necessary to operate its business before the Transaction closed were omitted or missing after the closing. Therefore, the Court held that the fraud claim regarding such representation failed.
The Court also found that the Defendants made fraudulent representations in two provisions of the Term Loan Agreement in connection with the Transaction. In particular, the Court found that the projections provided by the Company were not prepared in good faith, and the Company was not truthful regarding its solvency. However, the Court found that the Plaintiffs failed to state a claim with respect to the representations in the ABL Credit Agreement because the Plaintiffs did not name a counterparty to the agreement as a party to the action that could have relied on the alleged false representations. With respect to the remaining claims, the Court found that the Complaint stated a claim for aiding and abetting fraud, civil conspiracy, and breach of fiduciary duty against the Defendants and the claims survived. However, the Court found that the Complaint failed to state a claim for unjust enrichment.
Agspring Holdco, LLC, et al. v. NGP X US Holdings, L.P., et al.