A legal dispute has arisen between AmeriMark Interactive, LLC (Plaintiff) and AmeriMark Holdings, LLC, along with several individuals and entities (Defendants), following a $322.5 million transaction for the purchase of three direct mail marketing companies. The transaction, memorialized in an Equity Purchase Agreement (EPA) dated October 15, 2021, involved negotiations where Prudential Capital Partners II, L.P. was the former majority shareholder of the Seller, and Marcus Bradshaw and Mark Ethier held key executive positions within the Seller.
The Plaintiff alleges that the Defendants engaged in fraudulent conduct and breached representations and warranties outlined in the EPA. A critical issue in the case involves LSC Communications US, LLC, a key vendor for the Acquired Companies, which notified them of a "force majeure" event due to a labor shortage, potentially impacting catalog circulation for the crucial fourth quarter holiday sales period. The Plaintiff claims that the Defendants concealed this information until after the transaction closed, arguing that had they been aware of the situation, they would have either refrained from closing or paid a reduced price.
The original complaint was filed on December 22, 2021, and motions to dismiss by Defendants were submitted on February 24, 2022. The court has granted and denied parts of the motions to dismiss for both groups of Defendants.
Buyer filed a First Amended Complaint on April 7, 2022, instead of responding to motions to dismiss. On May 10, 2022, Prudential, Szejner, Seller, Bradshaw, and Ethier all filed motions to dismiss this complaint. A court hearing took place on August 11, 2022. Under Rule 12(b)(6), the court assesses if the claimant can recover under any conceivable set of circumstances, accepting all well-pleaded allegations as true and favoring the non-moving party with reasonable factual inferences. If recovery is plausible, the motion must be denied.
Buyer alleges four causes of action:
1. Count I claims all Defendants fraudulently induced Buyer through contractual fraud relating to specific sections of the Equity Purchase Agreement (EPA).
2. Count II, pleaded in the alternative to Count I, accuses Prudential, Szejner, Ethier, and Bradshaw of aiding and abetting Seller's fraudulent conduct.
3. Count III claims all Defendants conspired to fraudulently induce Buyer into purchasing the Acquired Companies.
4. Count IV, also an alternative to Count I, seeks indemnification for breach of representations and warranties due to contractual fraud in the EPA.
Counts II and III require an underlying tort to proceed, meaning if Count I is dismissed, Counts II and III must also be dismissed.
The EPA includes a broad Non-Recourse provision stating that, except as specified in the Confidentiality Agreement, no individuals related to the Acquired Companies or Seller, nor those affiliated with Buyer, can be held liable for any claims or obligations under the Agreement. All claims must be directed solely against the parties to the Agreement, and any officer certifications are made in their official capacity only, preventing personal liability.
Claims under the EPA are exclusively permitted against contracting parties, namely the Buyer and Seller, including tort and fraud claims, which governs Counts I, II, and III directed at non-seller defendants. "Affiliate" is defined as any entity controlling, controlled by, or under common control with another, as per the Securities Exchange Act of 1934; Prudential qualifies as an Affiliate. Section 8.11 excludes representations made by Affiliates, while Section 6.1(b) outlines indemnification where the Seller must indemnify the Buyer and its Affiliates for any losses from inaccuracies or breaches of Seller’s representations in Articles III and IV, subject to a $3,225,000 threshold for indemnification, barring losses from fraud or breaches of fundamental representations. Section 6.3(a) mandates recovery from the Warranty Insurance Policy prior to seeking indemnity from the Seller, although claims based on fraud may bypass this requirement. Section 2.6(b) clarifies that the Buyer cannot rely on representations outside the contract, acknowledging that it is relying on its own investigation and analysis. It explicitly states that, aside from certain agreed representations, the Buyer is not relying on any other representations or warranties regarding the Seller or Acquired Companies, including the accuracy of information provided or financial projections. Any materials not expressly represented in the aforementioned sections cannot form the basis for claims against the Seller or Acquired Companies.
Section 2.6(d) of the EPA clarifies that the Agreement does not limit or provide defenses against claims of Fraud. Section 4.25 emphasizes that the Purchased Equity is acquired "as is," with no expressed or implied warranties from the Seller or any associated parties regarding the accuracy or completeness of information provided, the financial condition of the Acquired Companies, or future business performance. All other representations and warranties are explicitly disclaimed. Section 8.13 includes an integration clause, stating that the Agreement, along with any attached documents, constitutes the entire agreement between the parties and supersedes all prior agreements, with no additional promises or representations beyond what is outlined in the Agreement.
The context of secondary liability is informed by Delaware case law, particularly ABRY Partners V, L.P. v. F. W Acquisition LLC, which examines the balance between contractual freedom and fraud prevention. Delaware courts allow sophisticated parties to manage risks associated with post-closing fraud through contractual means, notably using anti-reliance and non-recourse provisions. An anti-reliance provision specifies the representations parties are relying on, preventing extra-contractual fraud claims while allowing intra-contractual claims. A non-recourse provision limits the parties against whom claims can be made. The EPA employs similar structures, defining the representations and warranties relied upon and establishing that only the Buyer and Seller made representations, thus excluding non-seller defendants like Prudential, Szejner, Ethier, and Bradshaw from liability for misrepresentations.
The non-recourse provision limits claims to the Seller, with non-seller defendants asserting that anti-reliance and non-recourse clauses bar any claims against them. The court must evaluate if public policy against fraud can override these contractual terms in the context of the Buyer's fraud claims. Delaware law generally disregards non-recourse clauses when parties protected by them are involved in fraudulent activities, allowing claims for knowingly false representations regardless of disclaimers in contracts. A corporate officer may be personally liable for torts committed, even when acting on behalf of the corporation, and cannot evade responsibility for fraud. The core issue is whether the non-recourse provision can shield non-seller defendants from liability for fraud. Previous cases, such as ABRY and River Valley Ingredients, suggest that while sellers cannot insulate themselves from fraud, it remains unclear if other transaction participants can do so under non-recourse clauses. In Prairie Capital, liability for fraudulent representations was deemed plausible against corporate officers involved in fraud. Aveanna Healthcare highlighted that fraud claims can proceed if based on intra-contractual representations, with the non-recourse provision allowing claims against Affiliates. However, the current non-recourse provision does not explicitly permit fraud claims against Affiliates, which may limit the scope of liability for non-seller defendants in the present case.
The non-recourse provision in the current case exempts Affiliates from liability, distinguishing it from Aveanna. In Harland Clarke Holdings Corporation v. Milken, the Delaware District Court ruled that a non-recourse clause barred a fraud claim against a non-recourse party since the clause allowed claims only against the Guarantor or Seller. Milken, not being either, was immune from fraud claims, leading the Court to grant summary judgment. However, the fraud claim in Harland was based on extra-contractual representations, whereas the current case involves intra-contractual representations. The Harland Court emphasized the distinction between extra- and intra-contractual fraud, noting that sophisticated parties' contracts might include terms that protect them from fraud claims based on external representations, which can be negated by non-reliance clauses. The Harland decision is not directly applicable here due to its reliance on extra-contractual representations and the nature of its summary judgment, as opposed to a motion to dismiss.
Moreover, the Harland case predates more recent Delaware rulings, such as Online HealthNow, Inc. v. CIP OCL Investments, LLC, which aligns more closely with the current case. In Online HealthNow, the Court examined the interplay of anti-reliance and non-recourse provisions concerning intra-contractual fraud claims. The non-recourse provision in that case stipulated that claims could only be asserted against identified parties, excluding liability for officers and Affiliates. Plaintiffs claimed reliance on fraudulent misrepresentations by CIP OCL, while defendants argued CIP Capital, a private equity fund, was shielded by the non-recourse and anti-reliance clauses. Delaware law holds that non-recourse clauses may be disregarded if those protected were complicit in contractual fraud. The Court in Online HealthNow ruled that the non-recourse provision did not prevent fraud claims against a non-signatory party if they were aware of and facilitated the fraudulent misrepresentations, allowing the plaintiffs to adequately plead their case against CIP Capital.
CIP Capital, a private equity fund, is not shielded from the plaintiff’s fraud claim due to its control over the seller, CIP OCL. A fraud claim can be pursued against non-signatory parties if they are found to be knowingly complicit in fraudulent activities, despite contract provisions that usually limit such claims. The Court references the Online HealthNow case, establishing that parties cannot evade liability for fraud and that non-signatories can also be held accountable. Public policy against fraud may render anti-reliance and non-recourse clauses ineffective if the plaintiff adequately alleges complicit behavior in fraudulent representations made in a contract.
The plaintiff has alleged multiple fraud-related claims, including fraudulent inducement against all defendants, aiding and abetting fraud against non-seller defendants, and civil conspiracy. Under Superior Court Civil Rule 9(b), fraud claims must meet heightened pleading standards, detailing the specifics of the fraudulent circumstances, including the time, place, and content of misrepresentations, the individuals involved, and the benefits gained from the fraud. While knowledge can be generally averred, sufficient facts must be presented to imply that the defendant was aware of the relevant information.
For a fraudulent inducement claim, the following elements must be adequately pled: a false representation by the defendant, the defendant's knowledge of its falsity or recklessness, intent to induce action or inaction by the plaintiff, the plaintiff's justifiable reliance on the representation, and resultant damages. The plaintiff claims that certain sections of the EPA contained false representations intended to induce its execution. Specifically, Section 4.23 claims no material vendor has canceled or diminished its relationship with the Acquired Company; Section 4.5(b)(ii) asserts no material adverse changes occurred between December 31, 2020, and the Closing; and Section 3.7(iii) states that no other party to Seller Business Contracts is in material breach or default.
Buyer asserts several claims regarding the LSC Letter as it pertains to the Acquired Companies:
1. The LSC Letter serves as notice from a Material Vendor indicating an intention to cancel or significantly reduce its business relationship with the Acquired Companies, as outlined in Section 4.23.
2. The operational and financial consequences of this alteration represent a Company Material Adverse Change under Section 4.5(b)(ii).
3. The invocation of the Force Majeure provision and proposed circulation reductions, referenced in the LSC Letter, qualifies as a modification of a Seller Business Contract under Section 3.7.
The LSC Letter highlights labor shortages leading to reduced circulation, scheduling delays, and additional costs estimated at $225,672.12. Given that approximately 88% of the Acquired Companies' revenue is derived from catalog sales, any decrease in printing services is a critical issue for Buyer. Buyer claims that failure to disclose the LSC Letter would amount to intentional misrepresentation and nondisclosure.
Buyer alleges that Ethier and Bradshaw, and consequently the Seller, received the LSC Letter via email on September 24, 2021. Buyer also contends that Prudential and Szejner could have reasonably been expected to be aware of the LSC Letter. Non-seller defendants argue that the claims of fraudulent reliance are precluded by non-recourse and anti-reliance provisions and that the fraudulent inducement claim fails due to lack of separate fraud damages from the indemnification claim.
The Court has previously determined that these provisions do not bar Buyer’s claims against non-seller defendants. The First Amended Complaint alleges that Seller, Ethier, Bradshaw, Szejner, and Prudential made false representations regarding the LSC Letter and establishes that Ethier and Bradshaw had received the letter prior to the transaction closing, thereby meeting the knowledge pleading standard for these parties. However, there are no claims of actual knowledge against Prudential and Szejner, as the Buyer did not allege they were copied on the email or had knowledge of the LSC Letter through other means.
While the Buyer may plead knowledge generally, specific factual allegations are necessary for fraud claims. Buyer asserts that Szejner, acting as Managing Director, was a key figure in the transaction and negotiations. However, the complaint lacks sufficient allegations to infer that Prudential and Szejner had knowable awareness of the LSC Letter.
A corporate officer is personally liable for torts they commit and cannot evade liability through the corporation if they participated in the tort. The Buyer claims that officers Ethier and Bradshaw provided a letter (LSC Letter) to Szejner, indicating its potential to disrupt a transaction. The Court infers that Szejner and Prudential were aware of the LSC Letter due to their roles in the Project Dispatch Working Group, fulfilling the knowledge requirement for pleading against them. The representations regarding material vendors, contained in the EPA, were intended to induce the Buyer to close the sale, and the Buyer relied on these representations for the transaction's closure, thus meeting the particularity standard for fraudulent inducement claims.
The fraudulent inducement claim overlaps with breach of contract allegations, as both arise from similar circumstances. Under Delaware law, claims based solely on contract breaches must be pursued as contract claims, but can co-exist with tort claims if an independent legal duty is violated. A fraud claim must demonstrate distinct damages from those claimed in the breach of contract. To resolve potential duplicative damages, claims can be pled in the alternative, which the court finds acceptable. The Buyer’s claims for fraudulent inducement and breach of contract are not dismissed as duplicative, since they are presented as alternative claims.
The Court determines that both the fraudulent inducement claim and the aiding and abetting fraud claim can coexist at this stage of litigation. The fraudulent inducement claim against Seller and several individuals was sufficiently detailed under Superior Court Civil Rule 9(b). For aiding and abetting fraud, the plaintiff must demonstrate: (i) an underlying tort, (ii) knowledge, and (iii) substantial assistance. Under Delaware law, the knowledge element can be generally alleged, requiring facts that suggest the defendants were aware or should have been aware of the underlying wrongful conduct. Substantial assistance involves the secondary actor's participation in the primary actor's unlawful acts.
Bradshaw and Ethier contend that the aiding and abetting claims should be dismissed due to a non-recourse provision and because there is no actionable underlying tort. However, the Court previously ruled that the non-recourse provision does not preclude fraud claims in these circumstances, and the fraudulent inducement was adequately pleaded. Additionally, Bradshaw and Ethier argue that the intra-corporate conspiracy doctrine bars their aiding and abetting claim, as corporate officers cannot aid their principal in committing a tort. This doctrine applies to Bradshaw and Ethier as officers of Seller but not to Prudential and Szejner, who are not.
Buyer asserts that Szejner, acting as Managing Director, was pivotal in the transaction, leading negotiations and drafting documents. Allegations suggest that Ethier and/or Bradshaw provided a crucial letter (the LSC Letter) to Szejner and discussed its potential impact on the deal. The Court finds it reasonable to infer that Szejner and Prudential could have known about the LSC Letter, indicating their involvement and assistance in the alleged fraudulent inducement.
The Court dismissed the aiding and abetting claim against Bradshaw and Ethier based on the intra-corporate conspiracy doctrine. However, the motion to dismiss the aiding and abetting fraud claim against Prudential and Szejner was denied. Under Delaware law, civil conspiracy requires: (i) a combination of two or more persons, (ii) an unlawful act in furtherance of the conspiracy, and (iii) resulting damages. An explicit agreement is not necessary to prove conspiracy; it can be inferred from the actions of the parties involved.
The defendants argued that the civil conspiracy claim should be dismissed due to an inadequately pled underlying tort, but the Court previously determined that the Buyer had properly alleged such a tort. Prudential and Szejner contended that there was no evidence of their agreement to cooperate in the conspiracy. Nonetheless, the Court found reasonable inferences from the facts presented, suggesting that Szejner and Prudential were part of the conspiracy, largely due to Szejner's role as the primary negotiator. Additionally, it was alleged that Ethier and/or Bradshaw provided a letter to Szejner that could jeopardize the transaction. Szejner's instructions to other executives further indicated a concerted effort to misrepresent the situation. Therefore, the Court concluded that these elements satisfied the pleading requirements for civil conspiracy based on the underlying tort of fraudulent inducement.
Buyers must establish damages for civil conspiracy, but they have not specified separate damages for this claim, leading the Court to find the allegations impermissibly duplicative of those for fraudulent inducement and breach of contract. The intra-corporate conspiracy doctrine does not bar the civil conspiracy claim, allowing Prudential and Szejner, who are not protected by this doctrine, to conspire with Seller, Ethier, and Bradshaw, even though the latter two cannot conspire with Seller. The Court concludes that the civil conspiracy claim must be dismissed due to failure to plead distinct damages.
Regarding indemnification, Section 6.3(a) of the EPA requires Buyers to seek recovery from the Warranty Insurance Policy before pursuing indemnity from the seller, except for fraud claims as outlined in Section 6.3(g). Since the indemnification claim for breach of representations and warranties is based on fraudulent inducement and is pled alternatively, the Court allows this claim to proceed without first seeking recovery from the Warranty Insurance Policy.
Public policy against fraud may override anti-reliance and non-recourse language in contracts if the plaintiff can show a non-signatory party was complicit in fraudulent representations. Therefore, fraud claims against non-seller defendants are not barred by the EPA's provisions. The Court finds that Buyers’ claims for fraudulent inducement and breach of contract can coexist at this stage, and the fraudulent inducement claim was pled with sufficient particularity. The aiding and abetting claim against Bradshaw and Ethier is dismissed under the intra-corporate conspiracy doctrine, while the motion to dismiss against Prudential and Szejner is denied. The Court ultimately grants in part and denies in part the motions to dismiss filed by Amerimark Holdings, LLC, Marcus Bradshaw, Mark Ethier, Prudential Capital Partners II, L.P., and Stephen Szejner.
