LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, C.A. No. 12067-VCG (Del. Ch. Dec. 31, 2019) (Glasscock, V.C.)
In this memorandum opinion, the Delaware Court of Chancery considered four motions for summary judgment in a post-closing dispute concerning the merger of two demolition contractors. The parties, including former investors and executives, accused each other of fraudulently making certain financial representations. The Court denied the parties summary judgment on most of the issues they presented.
In April 2014, NCM Group Holdings, LLC (“NCM”) and LVI Group Investments LLC (“LVI”), formed NorthStar Group Holdings, LLC (“NorthStar”) by contributing assets and subsidiaries pursuant to a contribution agreement (the “Contribution Agreement”). “LVI Parent” negotiated the deal with NCM, but before the transaction closed, LVI Parent merged with an LVI subsidiary and was one of the subsidiaries contributed into NorthStar. EPP was a private equity holder of NCM, and Subhas Khara (“Khara”) was NCM’s former President and CEO.
First, the Court granted in part and denied in part LVI’s motion for summary judgment as it related to NCM’s claims for fraud and fraudulent inducement. The claims concerned the value of six demolition projects LVI described in financial statements with respect to which LVI made certain representations and warranties in the Contribution Agreement. The Court denied the motion with respect to five of the projects, finding a genuine issue of material fact as to whether LVI made certain financial misstatements about the projects in good faith or knowing they were false with an intent to induce NCM’s participation in the merger. As to the sixth project, NCM argued that LVI fraudulently indicated the project was profitable in its financial statements, while LVI’s internal records showed the project was operating at a loss. But LVI’s financial statements included amounts related to outstanding legal claims LVI had on the project, which resulted in an additional $10.1 million value attributed to the project in the Contribution Agreement. The Court granted LVI’s motion for summary judgment as to the project, ruling that LVI did not fraudulently misrepresent its value because evidence showed LVI genuinely believed it would recover on its legal claims. By failing to put forward evidence that LVI made intentional or reckless misrepresentations about the project, NCM could not sustain its fraud claims.
Second, the Court granted in part and denied in part EPP and NCM’s motion for summary judgment related to LVI’s claims for fraud, fraudulent inducement, conspiracy to commit or aiding and abetting fraud, and unjust enrichment. NCM did not move for summary judgment on the underlying fraud allegations and only joined in EPP’s argument that the fraud claims were time-barred. The Court held that the claims were not time-barred because the Contribution Agreement provided that the representations and warranties in respect of which indemnity was timely sought survived the contractual limitations period; because the warranties had not expired, if the warranties are fraudulent, a fraud action remains contractually viable. Moreover, the remedies clause in the Contribution Agreement expressly permitted the parties to bring claims for fraud against the person committing such fraud. But the Court did grant summary judgement with respect to the fraud claims because LVI offered no evidence to support the allegation that EPP—a separate entity from NCM—made or caused NCM to make false representations. Similarly, the Court granted the motion as to the unjust enrichment claim, finding that LVI did not present evidence showing EPP realized any enrichment from the merger, unjust or otherwise. But as to the conspiracy or aiding and abetting claim, the Court denied the motion, finding that LVI presented sufficient evidence that EPP was involved in NCM’s allegedly fraudulent accounting practices to support pursuit of those allegations at trial.
Third, the Court denied Khara’s motion related to LVI’s claims for fraud and fraudulent inducement. Khara’s motion was premised on two arguments: 1) LVI did not show that NCM’s alleged fraud caused damages; and 2) even if NCM committed fraud, LVI did not show Khara facilitated it. The Court rejected both, noting that if NCM did make financial misrepresentations, those misstatements could be causally linked to LVI’s losses. Furthermore, as Khara allegedly had involvement in four of the projects at issue, the Court found sufficient circumstantial evidence to create a dispute of material fact regarding Khara’s involvement in the alleged fraud.
Finally, the Court addressed LVI Parent’s motion for summary judgment related to NCM’s claims for fraud and fraudulent inducement. As noted above, prior to the closing of the transaction, LVI Parent was contributed to NorthStar. Therefore, NCM’s claims raised an issue of first impression: where two parties contribute subsidiaries to form a new company, and they maintain an equity stake in that new company, can they sue the contributed entities for fraud? The Court declined to decide the issue without a full trial record and denied the motion without prejudice.