If a Contract Claim Walks and Talks like a Contract Claim, It is a Contract Claim
By Scott E. Waxman and Terrina G. LaVallee
In Transdev on Demand, Inc. v. Blackstreet Investment Holdings, LLC, C.A. No. 2019-0912-SG (Del. Ch. 2020), the Delaware Court of Chancery granted in part and denied in part the plaintiff’s motion to dismiss the defendant’s counterclaims. The court denied two counts of the plaintiff’s motion to dismiss because it held it was inappropriate at this pleading stage to determine whether the agreement compelled specific performance and whether a breach of contract claim should have been an indemnification claim. In contrast, the court granted the plaintiff’s motion to dismiss one counterclaim because the defendant attempted to “bootstrap” a claim seeking damages for breach of contract, which was contractually prohibited, to a tort claim for fraud.
As stated by the court, at issue was an “unusual contract.” Plaintiff and Counterclaim-Defendant, Transdev on Demand, Inc. (“Transdev”), looked to sell its subsidiary company, SuperShuttle International, Inc. (“SupperShuttle”), to Defendant and Counterclaim-Plaintiff, Blackstreet Investment Holdings, LLC (“Blackstreet”), a holding company designed to purchase SuperShuttle stock after the airport shuttle subsidiary lost nearly 13.1 million. As a result, Transdev and Blackstreet entered into a stock purchase agreement (“SPA”).
The SPA included a number of provisions designed to assist Blackstreet’s purchase of SuperShuttle. The SPA included an Initial Funding Amount provision where Transdev agreed to deposit approximately $18MM in SuperShuttle’s account at closing. Transdev also agreed to provide Blackstreet with SuperShuttle’s financial statements “in accordance with GAAP” standards and retain a number of “Excluded Assets” and “Excluded Liabilities” after closing. In return, Blackstreet agreed to purchase SuperShuttle’s shares amounting to $1.00. The underlying dispute, however, involved the process for adjusting and calculating the Initial Funding Amount.
Under the SPA, parties agreed that the Initial Funding Amount could be adjusted to ensure SuperShuttle’s working capital was sufficient after closing. To achieve this goal, the parties agreed to set SuperShuttle’s Target Working Capital to approximately negative $5.6MM. If at closing, however, a difference existed between SuperShuttle’s Closing Working Capital and its Target Working Capital, Transdev agreed to reconcile the difference. The SPA outlined the process to make Initial Funding Amount adjustments. The relevant provision required Transdev to provide Blackstreet with SuperShuttle’s Closing Working Capital financial statement with Transdev President’s certification that the statement “was prepared in accordance with GAAP.” Moreover, any unresolved objections to the Closing Working Capital amount that existed after a 30-day negotiating period would be submitted to an independent accountant. The SPA authorized the independent accountant to determine whether the Initial Funding Amount should be adjusted.
During the Working Capital Review Period, Transdev and Blackstreet disputed the Initial Funding Amount. Transdev provided Blackstreet a spreadsheet showing the Initial Funding Amount should be decreased by $7,000 because the difference between the Closing Working Capital and Target Working capital was excessive. In response, Blackstreet reviewed SuperShuttle’s books and records and concluded that Transdev materially erred by overstating SuperShuttle’s assets and understating its liabilities. To comply with the SPA, Blackstreet provided Transdev with a spreadsheet showing its audit revealed the Initial Funding Amount needed to be increased by approximately $7.5MM, rather than decreased by $7,000. The parties failed to resolve their dispute within the 30-day negotiating window. As a result, Blackstreet demanded an Independent Accountant resolve the dispute, but Transdev filed suit for declaratory relief.
Transdev filed three counts for declaratory relief against Blackstreet. In Count I, Transdev asked the court to declare that Blackstreet accepted, rather than rejected, Transdev’s Closing Working Capital estimate because the spreadsheet Blackstreet provided was not a Statement of Objections under the SPA. For Count II, Transdev plead in the alternative that, if the court found Blackstreet’s spreadsheet was a valid Statement of Objections, the court should nonetheless invalidate Blackstreet’s objections because it failed under the SPA. Lastly, in Count III, Transdev sought declaratory relief that the court–not an independent accountant–was the arbiter to determine legal issues, particularly the parties’ disputes related to the Closing Working Capital.
In its opinion, the Court of Chancery denied Transdev’s motion to dismiss Blackstreet’s Counts I and II. Regarding Count I, the court denied the motion to dismiss and rejected Transdev’s argument that Blackstreet’s claim was “merely redundant” of Transdev’s contract interpretation claim. The court reasoned that although Count I involved contract interpretation, it was not “merely redundant” because it also involved specific performance, which is an equitable remedy that requires a party to demonstrate both that a contractual right exists and that equity compels enforcement of that right. Moreover, Transdev alleged specific performance was unripe because a breach remains nonexistent where predicate legal issues remain unsettled. The court rejected this theory reasoning specific performance may be ripe when a party alleges a duty to perform is outstanding, which requires a robust factual record.
For similar reasons, the court denied Transdev’s motion to dismiss Count II. In Count II, Blackstreet alleged Transdev breached the SPA because Transdev’s Closing Working Capital Statement was inaccurate based on Transdev’s failure to manage its Aged Accounts Payable. Transdev argued, however, that the SPA required this issue to be an indemnification claim rather than a breach of contract claim, and with the facts pled, Blackstreet was not entitled to indemnification. Similar to the court’s reasoning in denying Count I, the court denied Transdev’s motion to dismiss Count II because it reasoned determining whether the working capital was properly calculated was the basis for the entire litigation, and resolving Count II would not alleviate further litigation.
In contrast, the court granted Transdev’s motion to dismiss Count III. The court reasoned that Count III’s allegations was based in contracts, rather than a tort claim for fraud, because Blackstreet simply alleged Transdev failed to maintain and provide records in accordance with the SPA. In its allegation, Blackstreet relied on precedent standing for the proposition that a party that knowingly makes false contractual representations may be in breach of both a contractual and tort duty. The court, however, distinguished that precedent because the buyer alleged the seller used improper methods to manipulate its financial statements. For example, the seller in the precedent hid company losses by extending reporting periods or by reporting revenues in one period to then delay reporting expenses to anther period. The Court stated that the precedent was distinguishable because the dispute between Transdev and Blackstreet allegedly involved inaccurate or misrepresented financial statements rather than allegations of known manipulation.