PR Acquisitions v. Midland Funding LLC, C.A. No. 2017-0465-TMR (Del. Ch. Apr. 30, 2018) (Montgomery-Reeves, V.C.)

In this memorandum opinion, the Court of Chancery granted Plaintiff PR Acquisitions, LLC’s (“PRA”) motion for summary judgment to release escrow funds, finding that Defendant Midland Funding, LLC (“Midland”) had failed to give proper notice of any claims against the escrow account under the terms of the applicable purchase agreement (the “Purchase Agreement”) and escrow agreement (the “Escrow Agreement”). The Court also granted PRA’s motion to dismiss Midland’s counterclaims and third party claims against PRA alleging, among other things, fraud.

The lawsuit arose from the sale to Midland of PRA’s consumer debt accounts, consisting of auto loans, charged-off consumer receivables, and charged-off credit card accounts, pursuant to the Purchase Agreement and the Escrow Agreement. The Purchase Agreement provided that PRA’s total liability and Midland’s exclusive remedy for satisfying any claims under the Purchase Agreement was limited to the $6 million held in escrow pursuant to the Escrow Agreement. To establish a timely claim, the Escrow Agreement required that notice be sent to PRA either by a nationally recognized courier service or by certified mail to a specified PRA address, or by facsimile to a specified location followed by a telephone call to confirm receipt thereof. Midland, however, did not strictly comply with the terms of this provision and instead sent notice of a claim to the escrow agent who in turn informed PRA of such notice.

Despite its noncompliance with the terms of the Escrow Agreement, Midland argued that, because PRA had received actual notice, case law allowed the Court to ignore the applicable notice requirements. The Court rejected Midland’s argument that it had “substantially complied” with the notice provision in the Escrow Agreement. Distinguishing each of the cases Midland presented in support of its position, the Court held that “strict compliance” with the notice provision in the Escrow Agreement was necessary absent a reason other than Midland’s own error in failing to comply with terms it negotiated as a sophisticated party. The Court granted PRA’s motion for summary judgment on this issue.

With respect to its fraud claims, Midland argued that the limitation of liability provision in the Purchase Agreement could not bar Midland’s claims under the rule espoused by the Court of Chancery in Abry Partners V, L.P. v. F&W Acquisitions LLC, pursuant to which a seller cannot “insulate itself from the possibility that the sale would be rescinded if the buyer can show either: 1) that the seller knew that the company’s contractual representations and warranties were false; or 2) that the seller itself lied to the buyer about a contractual representation and warranty.” 891 A.2d 1030, 1064 (Del. Ch. Feb. 14, 2006).  The Court noted that to make such a showing under Abry, a buyer must “prove that the seller acted with an illicit state of mind, in the sense that the seller knew that the representation was false and communicated it to the buyer. The buyer may not escape the contractual limitations on liability by attempting to show that the seller acted in a reckless, grossly negligent, or negligent manner.” Id. The Court then held that Midland had not sufficiently alleged fraud with the appropriate level of particularity to meet the applicable pleading standard. The Court granted PRA’s motion to dismiss all of Midland’s counterclaims and third-party claims, including the fraud claims.

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