JOSEPH R. SLIGHTS III VICE CHANCELLOR

R. Judson Scaggs, Jr., Esquire
Ryan D. Stottmann, Esquire
Morris, Nichols, Arsht & Tunnell LLP
1201 North Market Street
Wilmington, DE 19899 Michael J. Barrie, Esquire
Stephen M. Ferguson, Esquire
Benesch, Friedlander, Coplan

& Aronoff, LLP
222 Delaware Avenue, Suite 801
Wilmington, DE 19801 Dear counsel:

This letter opinion addresses The HC Companies, Inc.'s ("HC") motion for partial summary judgment. For the reasons that follow, the motion is granted.

HC purchased a lawn and garden business from Myers Industries, Inc. and MYE Canada Operations Inc. (together, "Myers") in February 2015. Among the assets acquired were equipment and machinery to manufacture plastic pots, flats, trays and other items used to grow and sell plants. The condition of that equipment was material to the transaction. Meyers represented and warranted in the Amended and Restated Asset Purchase Agreement (the "Purchase Agreement") that the equipment was in "good condition." This representation and warranty, in turn, was captured within Meyers' indemnification obligation as set forth in the Purchase Agreement. It was also captured, by extension, within the Escrow Agreement that memorialized the $8.6 million in funds the parties set aside in escrow to address post-closing indemnification claims (the "Escrow Property").

The operative agreements set forth a detailed process by which indemnification claims were to be asserted and processed. Relevant here, HC was required to submit its indemnification claims to Myers by written notice. Myers, in turn, retained the right to object to indemnification claims raised by HC so long as it provided a written objection to HC within 10 days of receiving HC's claim notice. If Myers failed to provide a timely objection, Myers would be deemed to have "irrevocably waived" the right to contest HC's claim notice.

The transaction closed on February 17, 2015. Shortly thereafter, HC sent an indemnification claim notice to Myers asserting that Myers had breached the Purchase Agreement's representations and warranties because some of the tangible assets it acquired, primarily equipment and machinery, were not in good repair. HC's claim notice demanded almost $8 million of the Escrow Property. Myers timely objected on the ground that HC's claim lacked sufficient detail.

HC sent a second indemnification claim notice in July 2016, this time seeking more than $10 million. Once again, HC claimed that specified pieces of equipment and machinery were not in good condition. Myers did not respond to this notice until several weeks later, outside the 10-day objection period imposed by the agreements. When HC demanded payment because the response was untimely, Myers disagreed and refused to authorize the release of the Escrow Property. This litigation followed.

In its motion for partial summary judgment, HC contends that it is entitled to the Escrow Property based on the clear terms of the parties' contracts because Myers' objection to HC's second claim notice was not timely. Myers counters that the first and second claim notices contain the same claim, and thus its objection to HC's first claim notice suffices under the agreements to preserve its rights to contest the claim. Myers also raises other defenses based on the terms of the agreements and equitable estoppel.

The core issue is whether Myers timely objected to HC's second indemnification claim notice. In resolving this issue, the Court need only consider the Purchase Agreement, the Escrow Agreement and the parties' written correspondence. Because I find that Myers did not timely object to HC's second claim notice, I must conclude that it has waived its right to contest HC's claim to the Escrow Property. Accordingly, HC's motion for partial summary judgment must be GRANTED.

I. Factual Background

I have drawn the facts from the admissions in the pleadings, uncontested facts presented in the parties' submissions and those matters of which the Court may take judicial notice. Unless otherwise indicated, I have determined that the following facts are undisputed.

A. The Purchase Agreement

The relevant representations and warranties provision within the Purchase Agreement is Section 4.08(c). There, Myers represented and warranted that "[a]ll Tangible Personal Property that has a replacement value in excess of $50,000 is in good condition and in [a] state of good maintenance and repair in all material respects." Section 8.02(a) of the Purchase Agreement provides that Myers will indemnify HC for "any inaccuracy in or breach of any of the representations or warranties of [Myers] contained in this Agreement . . . ."

Section 8.05 governs "Indemnification Procedures," and subsection (c) sets forth the process for making "Direct Claims" against an "Indemnifying Party." A "Direct Claim" is any claim by an "Indemnified Party" (i.e., HC) against an "Indemnifying Party" (i.e., Myers) "on account of a Loss which does not result from a Third Party Claim." Section 8.05(c) requires HC to give written notice to Myers within 10 days after HC receives a Direct Claim, but provides that failure to give prompt notice will not relieve Myers of its indemnification obligations:

Direct Claims. Any claim by an Indemnified Party on account of a Loss which does not result from a Third Party Claim (a "Direct Claim") shall be asserted by the Indemnified Party giving the Indemnifying Party prompt written notice thereof (but in any event, no later than ten (10) business days after the receipt by such Indemnified Party of such Direct Claim). The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party.

B. The Escrow Agreement

According to Section 1.3(c)(i) of the Escrow Agreement, once Myers receives an indemnification claim notice from HC, it has 10 business days to send a written objection:

If any Buyer Indemnitee desires to make a claim for indemnification pursuant to the Purchase Agreement that is not addressed by a Joint Written Instruction pursuant to Section 1.3(a)(i) (an "Indemnification Claim"), such Buyer Indemnitee [HC] shall provide written notice of
such Indemnification Claim to Sellers [Myers] and the Escrow Agent ("Claim Notice"), specifying in reasonable detail (to the extent known) the nature and dollar amount (estimated, as necessary and to the extent feasible) of the Indemnification Claim. Upon receipt of an Indemnification Claim, any Seller may contest the Indemnification Claim(s) specified in the Claim Notice (or any portion thereof) by giving the Escrow Agent, the applicable Buyer Indemnitee (to the extent necessary contact information for such Buyer Indemnitee is provided in the Claim Notice) and Buyer written notice of such contest (the "Objection Notice") on or before 5:00 p.m., Dallas, Texas time, on the tenth (10th) Business Day after receipt by the Sellers of such Claim Notice (such period, the "Dispute Period"), which Objection Notice shall include a statement of the reason or basis of such contest and shall state the amount, if any, of any such Claim that is not in dispute (any disputed Claim shall hereinafter be referred to as a "Disputed Claim").

If the Escrow Agent has not received an Objection Notice prior to the expiration of the applicable Dispute Period, the Sellers shall have irrevocably waived the right to contest the distribution of that portion of the Escrow Property specified by the corresponding Claim Notice and the Escrow Agent shall pay to the Buyer Indemnitee specified in the corresponding Claim Notice the amount set forth in the Claim Notice on or before the fifth (5th) Business Day after the expiration of the Dispute Period.

C. The Indemnification Claims

On April 13, 2015, just two months after the transaction closed, HC sent a Claim Notice to Myers (the "First Claim Notice") asserting that Myers had breached Section 4.08(c) of the Purchase Agreement because the equipment and other assets listed in the notice were not in "good condition." The First Claim Notice identified almost $8 million of losses and expressly invoked the procedures set forth in Section 8.05(c) of the Purchase Agreement. Myers sent out its objection on April 24, 2015, in which it stated its position that HC's First Claim Notice lacked sufficient detail. HC responded by notifying the escrow agent of the dispute on May 28, 2015, and instructing the agent not to release the Escrow Property to either party until they resolved their dispute and submitted either a "Joint Written Instruction or Final Decree."

After Myers objected, the parties utilized the indemnification procedure as a dispute resolution mechanism of sorts. HC hired experts to inspect the equipment with an eye toward addressing Myers' objections regarding the lack of specificity in the First Claim Notice. HC then sent Myers a letter in December 2015, in which it included a settlement demand along with a detailed breakdown of each alleged defective asset and the experts' opinions regarding why the asset was not in "good condition" as warranted. The parties were unable to reach an agreement.

HC sent a second claim notice on July 15, 2016, and Myers received it on July 18, 2016 (the "Second Claim Notice"). In the Second Claim Notice, HC identified a number of assets it alleged were not in "good condition" as warranted in Section 4.08 of the Purchase Agreement, and provided detailed charts that listed for each asset the amount of the alleged loss and an explanation of the deficiency. This notice also included the experts' opinions on defects and damages. In total, HC claimed over $10 million in losses, well in excess of the $8.6 million in escrow. Myers did not deliver its written objection until August 12, 2016. On August 17, 2016, HC advised the escrow agent that HC had not received a timely objection from Myers and stated its position that Myers, therefore, had "irrevocably waived the right to contest the distribution of the full amount of the Escrow Property . . . ."

D. Procedural History

On August 17, 2016, HC filed its Verified Complaint in this Court for breach of contract seeking, inter alia, the full amount of Escrow Property based on the claims raised in its Second Claim Notice. On May 25, 2017, HC filed a motion for partial summary judgment in which it argues that Myers has waived its right to contest the Second Claim Notice, and the release of the Escrow Property, because its objection to the Second Claim Notice was not timely. Myers opposes the motion. This is the Court's decision.

II. Analysis

As noted, the core issue raised by the motion is whether Myers timely objected to HC's Second Claim Notice. In order to decide that issue, the Court must first determine whether the claim contained in the Second Claim Notice is the same as the claim contained in the First Claim Notice. If the claims are different, then the Escrow Agreement required Myers to send a written objection within 10 days of receiving the Second Claim Notice, which Myers did not do. If the claims are the same, then Myers' original objection to the First Claim Notice, timely provided, would perfect its objection and require HC to prove its breach of warranty claim on the merits. For reasons discussed below, I find that the two claim notices clearly and unambiguously contain different claims. Thus, Myers' objection to the Second Claim Notice was untimely, it has waived its objections and HC is entitled to the Escrow Property.

A. Standard Of Review

Under Court of Chancery Rule 56(c), summary judgment is appropriate where "there is no issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." This Court has often observed that "[w]hen the issue before the Court involves the interpretation of a contract, summary judgment is appropriate only if the contract in question is unambiguous."

Delaware "is more contractarian than . . . many other states." With this in mind, our courts have recognized that "[p]arties have a right to enter into good and bad contracts, the law enforces both." "The presumption that the parties are bound by the language of the agreement they negotiated applies with even greater force when the parties are sophisticated entities that have engaged in arms-length negotiations."

After carefully reviewing the operative provisions of the contracts at issue here, I am satisfied they are clear and unambiguous. Thus, the Court's task is to construe and enforce the contracts as written.

B. Myers Failed To Object On Time

As noted, Myers argues that the First Claim Notice and the Second Claim Notice cover the same claim, and thus its objection to the First Claim Notice is sufficient for the Second Claim Notice. I disagree. Although many of the assets listed in the two notices overlap, the Second Claim Notice identified seventy new Losses as subjects of the claim. It also provided substantially more detail regarding the deficiencies of all the listed assets, along with supporting expert opinions, as the bases of HC's claim that the assets were not in "good condition" as warranted. In many instances, the stated Losses for the individual assets that are listed in both of HC's two Claim Notices differ in amount. For example, the Loss claimed for machine G9 is $27,000 in the First Claim Notice, but is revised to $27,542 for a "software" defect and $17,100 for "clamp end seals/screw" in the Second Claim Notice. The Loss for machine 103 is $8,000 in the First Claim Notice, but is revised to $10,611 for a "color head" repair.

No analytical or perceptual paradigm exists where one could read the First Claim Notice and the Second Claim Notice and then credibly declare that they are the "same notices." Myers' attempt to do just that—to argue that the notices are the same and, therefore, that its objection to the First Claim Notice carried over to the Second Claim Notice—is simply not credible. The differences are manifest on the face of the notices and they are substantive. I am satisfied, therefore, that HC's delivery of the Second Claims Notice triggered Myers' obligation timely to object to that notice under Section 1.3(c)(i) of the Escrow Agreement. It did not do so.

Myers' construction of the agreements as allowing its first and only timely objection to HC's indemnification claim to freeze the Escrow Property as to all future claims finds no support in the language of the contracts and, indeed, runs directly contrary to the clear terms of the Escrow Agreement. Section 1.3(c)(i) provides that Myers was obligated timely to "contest [the] Indemnification Claim(s)" and further provides that if it did not do so, it lost the right to "contest the distribution of that portion of the Escrow Property specified in the corresponding Claim Notice." This language unambiguously requires that Myers object to claims as made and makes clear that objections raised will be tied to "the corresponding Claim Notice." The language also reveals that the parties anticipated HC might make more than one claim. Thus, Myers' first objection (the only timely objection) was tied to the "corresponding" First Claim Notice and did not carry over to the Second Claim Notice.

Section 1.3(c)(i) of the Escrow Agreement requires Myers to object to HC's claim notices in writing within 10 days after it receives the notice. Myers received HC's Second Claim Notice no later than July 18, 2016, but Myers did not object until August 12, 2016—several days outside of the 10-day window. Thus, the objection was untimely and, absent some other viable legal defense to HC's indemnification claim, Myers has "irrevocably waived the right to contest the distribution of that portion of the Escrow Property specified by the [Second] Claim Notice."

C. HC's Claim Is Not Barred By Estoppel

Myers sees that other viable legal defense in the law of estoppel. Specifically, Myers argues that HC is estopped from arguing that Myers waived any objection to the Second Claim Notice because HC instructed the escrow agent on two occasions not to release any of the Escrow Property until the parties' dispute was resolved by "Joint Written Instruction or Final Decree." Specifically, HC's instruction to the escrow agent appeared in a letter dated May 28, 2015, following Myers' objection to the First Claim Notice, and again in the Second Claim Notice. According to Myers, by affirmatively stating to the escrow agent that the indemnification dispute was "subject to final resolution only through Joint Written Instruction or Final Decree," HC acknowledged that the Escrow Property was subject to a "Disputed Claim" and thereby relieved Myers of its obligation to object.

Myers bears the burden of proving equitable estoppel by demonstrating that it: "(i) lacked knowledge or the means of obtaining knowledge of the truth of the facts in question; (ii) reasonably relied on the conduct of the party against whom estoppel is claimed; and (iii) suffered a prejudicial change of position as a result of [its] reliance." Myers estoppel defense fails as a matter of law because the undisputed evidence in the summary judgment record reveals that Myers cannot demonstrate reasonable, detrimental reliance.

The analysis must begin with a complete picture of precisely what HC said in its directions to the escrow agent. Myers has cherry picked what it likes in the correspondence but there is more. Following the language Myers relies upon, HC stated in both the May 28 letter and the Second Claim Notice that it "reserves all of its rights and remedies against [Myers]. Nothing contained in this notice shall preclude [HC] from providing a subsequent notice of any additional indemnification claim under any section of the Purchase Agreement . . . ." The Second Claim Notice does not contain the words "Disputed Claim," but does state clearly that HC was seeking in that notice "payment of the full value of the Escrow Property."

Myers could not have reasonably relied on HC's correspondence to the escrow agent in deciding not to send an objection to the Second Claim Notice because HC made it clear that it "reserve[d] its right" to raise "additional indemnification claim[s]" against the Escrow Property in "subsequent notice[s]." When HC delivered its Second Claim Notice, it did just that. Moreover, Myers' conduct reveals that it did not rely on HC's letters in deciding not to send a written objection; it sent a written objection to the Second Claim Notice on August 12, 2016—after the 10-day window closed. In the absence of reasonable reliance, Myers' estoppel argument fails.

D. Myers' Untimeliness Argument Is Itself Untimely

Myers disputes that HC's Second Claim Notice was valid in the first place because HC sent the notice more than 10 days after it received notice of the alleged equipment defects that gave rise to its claim. According to Myers, this means the Second Claim Notice was untimely under Section 8.05(c) of the Purchase Agreement.

Myers' timing defense to the Second Claim Notice may have carried the day if only Myers had timely raised it. Unfortunately for Myers, any delay by HC under Section 8.05(c) of the Purchase Agreement (assuming there was a delay) did not relieve Myers of its obligation to send a written objection. Section 8.05(c) provides that "the failure to give such prompt written notice shall not, however, relieve the Indemnifying Party [Myers] of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure." Myers has not shown that it forfeited any rights or defenses as a result of HC's delay in submitting the Second Claim Notice, and I can think of no right or defense that Myers would have lost if it had made a timely objection. In fact, a timely objection would have preserved Myers' rights and defenses, including its defense that HC's Second Claim Notice was untimely.

Myers does claim that it was prejudiced by HC's delay because it could not make a prompt inspection of the allegedly defective assets listed in the Second Claim Notice. Assuming that is true, that does not amount to a "forfeit[ure]" of rights and defenses captured by the exception in Section 8.05(c). The only reasonable construction of Section 8.05(c) is that HC's delay in sending a claim notice must be the cause of Myers forfeiting rights and defenses. But Myers forfeited its defenses only as a result of its delay in objecting to HC's claim. As stated, Myers could have used HC's delay as part of its defense in arguing that HC was not entitled to indemnification, along with any other arguments it might muster in defense of the claim on the merits. According to the plain language of the Purchase Agreement and the Escrow Agreement, however, Myers is not entitled to raise its defenses unless it objects on time. Myers did not object on time, and thus it cannot challenge HC's Second Claim Notice.

III. Conclusion

For the reasons discussed above, HC is entitled to the Escrow Property. This may seem like a harsh result, but it is the result dictated by what these two sophisticated parties bargained for. To reiterate, Delaware courts enforce bad deals the same as good deals. The Court cannot rewrite the contracts, and it cannot ignore the plain terms of the contracts. HC's motion for partial summary judgment is GRANTED. HC shall submit an implementing order on notice to Myers within ten (10) days.

IT IS SO ORDERED.

Very truly yours,

/s/ Joseph R. Slights III