Universal Enter. Grp., L.P. v. Duncan Petroleum Corp., C.A. No. 4948-VCL (Del. Ch. July 1, 2013) (Laster, V.C.)

In this post-trial memorandum opinion, the Court of Chancery held that plaintiffs’ common law fraud claims failed because plaintiffs did not demonstrate that they justifiably relied on defendants’ misrepresentations in connection with an asset purchase agreement.  Instead, plaintiffs relied on the post-signing due diligence investigation of their environmental consultant and their outside environmental attorneys.

Duncan Petroleum Corporation (the “Company”), owned solely by Robert Duncan (collectively, “defendants”), operated gas stations in Delaware and Maryland.  The Company did not comply with state environmental regulations that govern operating gas stations and received numerous citations and adverse reports from state regulatory agencies.  The Company also violated federal regulations enforced by the U.S. Environmental Protection Agency (EPA).

Duncan decided to retire and sought to sell the Company’s properties.  Universal Enterprise Group, L.P. and related entities (collectively, “Universal”) offered to buy the Company’s properties.  Under the asset purchase agreement (the “Agreement”) for the sale, Universal had the right to a sixty-day, post-signing, comprehensive due diligence period with respect to the properties.  The Agreement also contained representations by defendants that the properties were not under investigation by regulatory agencies and that they had complied with all state and federal environmental laws, except as disclosed in the Agreement.  The Agreement stated those representations “were true and not materially misleading."

After signing, Universal conducted due diligence of the properties and hired an environmental consultant to perform site assessments.  The consultant, who was supervised by Universal’s outside environmental attorneys, discovered several potential environmental problems and realized that environmental regulatory records were missing.  Universal and defendants then renegotiated the Agreement to address the known and unknown risks associated with the missing records and the potential environmental issues.  After this renegotiation, the transaction closed.

After closing, several disputes arose from the Company’s non-compliance with environmental regulations.  Universal contended that defendants had breached the Agreement by failing to disclose these events of non-compliance before closing.  Defendants contended these events of non-compliance arose after closing.

Later, Universal filed for bankruptcy.  The bankruptcy trustee then filed this suit on behalf of plaintiffs’ bankruptcy estate, alleging common law fraud, equitable fraud, and breach of contract by defendants, among other claims.  The Court ruled in favor of defendants on the common law fraud claims, finding that Universal had failed to demonstrate justifiable reliance on defendants’ misrepresentations.  Instead, the Court found that Universal demonstrated that it had relied on its environmental consultant and its outside environmental attorneys.  The Court found that Universal treated defendants’ representations “with healthy skepticism,” such that plaintiffs relied on defendants’ representations only “in the sense that they contractually allocated to [defendants] the risk that the representations would be incorrect.

The Court then held that plaintiffs’ equitable fraud claim also failed.  The Court reasoned that plaintiffs again failed to demonstrate justifiable reliance and, in addition, failed to demonstrate the existence of a special relationship between the parties. 

The Court did, however, enter judgment in favor of plaintiffs on their breach of contract claim, finding that the elements of a breach of contract claim were satisfied.  The Court awarded plaintiffs their actual damages caused by the contractual breaches in the amount of $1,497,429.00.

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