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ClubCorp, Inc. v. Pinehurst, LLC, C.A. No. 5120-VCP (Del. Ch. Nov. 15, 2011) (Parsons, V.C.)

November 15, 2011

In this memorandum opinion involving an indemnification agreement entered into in connection with a spin-off and merger, the Court of Chancery addressed plaintiffs’ motions for summary judgment and substitution of parties. In addition, the Court addressed the timeliness of plaintiffs’ notice of a claim. The Court held that the anti-assignment clause was ambiguous, that notice of the claim was timely, and that summary judgment was inappropriate.
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In 2006 and in connection with a spinoff and merger, the plaintiffs, ClubCorp, Inc. and Fillmore CCA Holdings, Inc., and the defendants, Putterboy, Inc. and Pinehurst, LLC, entered into an indemnification agreement. That agreement covered certain delineated tax and insurance liabilities. Two years later, in 2008, ClubCorp sent Putterboy and Pinehurst two notices seeking indemnification pursuant to the indemnification agreement. ClubCorp sent the first in February, which sought $1,167,380, stemming from taxes related to the transaction. Later, in November, ClubCorp sent a second claims notice seeking indemnification for $108,242, representing insurance liabilities.

In December, 2009, with no settlement reached, plaintiffs filed a complaint seeking specific performance of the indemnification agreement for both claims. In their answer, the defendants denied liability on both counts. In November, 2010, both plaintiffs merged with other entities, with neither plaintiff the survivor entity. Plaintiffs moved for summary judgment and substitution of parties pursuant to Court of Chancery Rule 25(c). Defendants opposed both motions. As to the motion for substitution, defendants relied on the anti-assignment clause. Defendants opposed summary judgment on the tax claim alleging it was untimely and not covered by the agreement. Defendants opposed summary judgment on the insurance claim arguing that the indemnification agreement did not cover the costs claimed.

The Court first addressed plaintiffs’ motion to substitute. The Court observed that the two provisions at issue mirrored those in Tenneco Automotive, Inc. v. El Paso, Corp., 2002 WL 453930 (Del. Ch.). The first provision prevented assignment “by operation of Law or otherwise.” The second provided that the right of indemnification “shall extend to such indemnified parties’ successors.” Under Tenneco, the first provision proscribed indemnification after a merger, and, under the same precedent, the second provision allowed indemnification after a merger. Thus, although the Court found the language of each clear in isolation, the two provisions taken together created an ambiguity in the contract as a whole.

The Court explained that, where such an ambiguity exists, the Court ordinarily would resort to extrinsic evidence to resolve that ambiguity. As the parties submitted no extrinsic evidence, the Court declined to determine whether the anti-assignment clause prevented or allowed substitution. Rather, the Court exercised its discretion under Rule 25(c) to allow the action to proceed and the record to develop accordingly. However, in order to avoid prejudicing either party, the Court granted the motion to join the successor entities but denied the motion to substitute those entities.

The Court next turned to the plaintiffs’ motion for summary judgment on the tax claim. This claim raised two issues. First, whether notice of the claim was timely, and second, whether the indemnification agreement covered the taxes claimed. Regarding the timeliness of the notice, the indemnification agreement required a party seeking indemnification to submit a notice of a claim within thirty days of determining that a matter might give rise to a claim. Failure to comply with this provision only resulted in a release of the indemnifying party if the delay materially prejudiced that party.

The defendants did not address whether notice occurred within thirty days or whether they were materially prejudiced by any delay. Rather, the defendants contended that a determination of prejudice“await[ed] discovery.” Although the Court observed that the defendants were in a unique position to determine whether they were prejudiced even without discovery, the Court did not rest its ruling upon this observation. Rather, the Court pointed to the fact that a year had elapsed between the filing of the complaint and the motion for summary judgment, during which discovery was not stayed. The Court thus concluded the parties had ample time to gather evidence to show that a genuine issue of material fact existed. Having rejected the “awaits discovery” argument, which was the only argument defendants presented, the Court held the defendants had not shown prejudice and therefore held the notice was timely.

Although ruling the tax claim timely, the Court denied the plaintiffs’ motion for summary judgment on that claim. Plaintiffs pointed to three separate provisions under the  indemnification agreement, arguing that summary judgment was warranted under all three. The Court held that the first provision, by its unambiguous terms, did not appear to indemnify the tax claim and that the second and third provisions were either ambiguous or raised issues of fact. The Court, therefore, denied plaintiffs’ motion for summary judgment on the tax claim.

Lastly, the Court addressed the plaintiffs’ motion for summary judgment on the insurance claim. The Court found, however, that the insurance claim raised several factual issues  precluding summary judgment.  Specifically, the relevant inquires were the following: “(1) whether the claimed losses arose solely out of the operations, management, or activities of Pinehurst before it was purchased; (2) whether the total of those losses exceeded $1.4 million; and (3) if so, by how much.”

The full opinion is available here