Aveanna Healthcare, LLC v. Epic/Freedom, LLC
| Decision Date | 29 July 2021 |
| Docket Number | C.A. No. N20C-08-055 AML CCLD |
| Parties | AVEANNA HEALTHCARE, LLC (F/K/A BCPE EAGLE BUYER LLC), Plaintiff, v. EPIC/FREEDOM, LLC, and WEBSTER CAPITAL CORPORATION (A/K/A WEBSTER CAPITAL PARTNERS, and WEBSTER EQUITY PARTNERS), Defendants. |
| Court | Delaware Superior Court |
Upon Plaintiff's Motion for Judgment on the Pleadings: DENIED
Upon Plaintiff's Ch. Ct. R. 56(f) Motion for An Extension of Time: GRANTED
Upon Defendants' Motion for Judgment on the Pleadings: DENIED
Upon Epic/Freedom LLC's Motion for Summary Judgment: DENIED WITHOUT PREJUDICE Richard L. Renck, Esquire, Tracey E. Timlin, Esquire, of DUANE MORRIS LLP, Wilmington, Delaware, Robert M. Castle, III, Esquire, Randy D. Gordon, Esquire, of DUANE MORRIS LLP, Dallas, Texas, Attorneys for Plaintiff Aveanna Healthcare, LLC.
Kenneth J. Nachbar, Esquire, Miranda N. Gilbert, Esquire, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, R. Todd Cronan, Esquire, Joseph P. Rockers, Esquire, of GOODWIN PROCTER LLP, Boston, Massachusetts, Attorneys for Defendants Epic/Freedom, LLC and Webster Capital Corporation.
The buyer and the seller executed interrelated purchase agreements that memorialized the buyer's acquisition of two companies from the seller. To value the companies, the buyer used an accounting model that assumed the accuracy of certain financial statements prepared by the seller and its owner during the diligence phase of the parties' negotiations. The truth of those financial statements contractually was represented and warranted by the companies, but not by the seller or its owner. After the transaction closed, however, the buyer allegedly discovered the seller and its owner falsified the financial statements in a knowing, concerted effort to induce the buyer to agree to a purchase price higher than the seller and its owner otherwise could have achieved. The buyer filed this fraud action to recover damages from the seller and its owner for their knowledge of, and participation in, the companies' false contractual representations.
The seller responded with breach of contract counterclaims arising from the buyer's alleged failure to pay the entire agreed upon purchase price. Under the purchase agreements, the seller was entitled to receive an upfront payment, future payment of a federal tax refund, and distribution of escrowed funds. The buyer agreed to remit the tax refund to the seller no later than ten business days after the buyer received it. The seller was entitled to automatic distribution of the escrow funds unless the buyer properly lodged an indemnification claim against the seller within one year of the transaction's closing. The seller alleges the buyer wrongfullyrefused to remit the refund despite the seller's attempts to collect it. The seller also alleges the buyer sidestepped the parties' indemnification notice requirements, which enabled the buyer to withdraw the escrow funds without the seller's objection. The parties have denied all wrongdoing and now move for judgment on the pleadings as to their respective claims.
The parties' motions present three independent questions that are controlled by unambiguous contract language arrived at through sophisticated, arms-length negotiation. First, may the seller and its owner escape liability for contractual fraud by citing anti-reliance language inapplicable to fraud claims that challenge a seller's knowledge of a company's false contractual representations? Second, may the buyer withhold the tax refund by invoking self-styled "conditions" unrelated to the refund's release? Third, did the buyer validly extract escrow funds held for the seller by providing an indemnification notice solely to the parties' escrow agent despite the buyer's duty to deliver a single notice to the escrow agent and the seller concurrently?
The Court answers each of these questions in the negative and declines to resolve any embedded factual issues. Accordingly, and for the reasons discussed below, the parties' motions for judgment on the pleadings are DENIED. Because fact discovery is necessary for the buyer's tax dispute defenses, the buyer's motion for an extension of time to respond to the seller's summary judgment motion isGRANTED. Finally, because the seller's summary judgment motion presents equitable arguments, but also because this litigation's procedural history warrants granting the seller an opportunity to revise its arguments, that motion is DENIED WITHOUT PREJUDICE.
This case concerns Aveanna Healthcare, LLC's ("Aveanna" or "Buyer") acquisition of Epic Acquisition, LLC and FHH Holdings, Inc. (the "Companies") from Epic/Freedom, LLC ("Epic" or "Seller") through an all-cash-for-stock transaction that was memorialized in a stock purchase agreement (the "SPA") to which Aveanna, Epic, and the Companies are parties. Aveanna contends Epic and its owner, Webster Capital Corporation ("Webster" and together with Epic, "Defendants"), priced the deal based on false contractual representations of the Companies' financials, inducing Aveanna's acceptance of negative value assets.1
Seller responded with two breach of contract counterclaims. First, Epic claims Aveanna improperly is withholding a federal tax refund afforded Seller under the SPA despite Buyer's duty to remit that refund no later than ten business days after Buyer receives it. Second, Epic claims Aveanna wrongfully extracted escrow funds segregated under a companion purchase agreement (the "Escrow Agreement")to true up the sale price by circumventing that agreement's notice and objection procedures.
Aveanna develops and sells home healthcare technology and personalized therapeutic services.2 Aveanna operates primarily in the "enteral solution" space. Enteral solutions are food consumption products designed to assist patients who have difficulty ingesting nutrients without synthetic aids.3
Before the sale, Epic offered services and supplies similar to those offered by Aveanna.4 When Epic entered the enteral solution industry, it began targeting the populations from which Aveanna solicited its clients.5 Epic's expansion into Aveanna's market segment was pioneered by Webster, a private equity firm that owned a majority stake in Epic.6
During the fall of 2015, Webster directed Epic to purchase various home healthcare assets, including two lucrative enteral solution businesses.7 Epic's acquisition of those firms strengthened Epic's influence over what was acclaimedpublicly as a billion-dollar sector.8 Given that news, Webster decided to put Epic's enteral lines up for sale in April 2016.9
Defendants hired investment banks and private consultants who generated financial performance analyses and documentation through which prospective buyers independently could assess Epic's financial health.10 The reports purported to disclose the full extent of Epic's performance during its 2016 fiscal year.11
Around the fall of 2016, Aveanna expressed interest in purchasing Epic. A deal for Aveanna would include synergies, as managing Epic's enteral assets would allow Aveanna to control a wider share of the enteral solution market. Preliminary negotiations between Aveanna and Defendants concluded in December 2016, at which time Aveanna and Epic reached a purchase agreement in principle.12 Under that agreement, Aveanna would acquire the Companies through an all-cash-for-stock merger. Before the merger, Epic would convey all its enteral assets to the Companies.
To finalize the transaction, the SPA's parties conducted diligence. Aveanna priced the Companies based on the projections and analyses prepared byDefendants' advisors.13 The reports would survive closing as the contractually-defined and incorporated "Financial Statements." Using the Financial Statements, Aveanna developed an earnings before interest, taxes, depreciation, and amortization ("EBITDA") model. Based on that model, Aveanna agreed to purchase the Companies for $950 million.14 That figure aligned with price ranges produced by Defendants' third-party advisors, suggesting the Financial Statements were reliable. With that understanding, the transaction closed on March 16, 2017.15
In addition to the parties' material representations, the SPA contains language governing the scope of permissible reliance, the viability of fraud claims, and the procedures surrounding tax refunds and indemnification claims and notices.
Under SPA Section 3.4, the Companies—but not Defendants—represented the truth of the Financial Statements. Specifically, the Companies represented that the Financial Statements "present fairly in all material respects the consolidatedfinancial condition and results of operations of Seller" and that the Financial Statements "were prepared in accordance with GAAP applied on a consistent basis."16 The Companies also represented that they had no undisclosed liabilities.17
In the same Article, the SPA's parties drafted broad anti-reliance language that precluded Aveanna from relying on any representation not memorialized in the SPA. Specifically, the SPA's parties agreed:
NONE OF SELLER, THE COMPANIES OR ANY OF THEIR DIRECT OR INDIRECT SUBSIDIARIES OR OWNERS, INCLUDING, WITHOUT LIMITATION CAPITAL III, L.P., WEBSTER CAPITAL II, L.P., WEBSTER CAPITAL II-QP, L.P., WEBSTER OR ANY OF THE REPRESENTATIVES, MEMBERS, MANAGERS, EMPLOYEES, DIRECTORS, OFFICERS, STOCKHOLDERS OR AFFILIATES OF ANY OF THEM HAS MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF ANY NATURE WHATSOEVER . . . OTHER THAN THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS AGREEMENT, THE TRANSACTION DOCUMENTS AND THE CERTIFICATES CONTEMPLATED HEREBY AND THEREBY AND THE COMPANIES AND ALL SUCH PERSONS HEREBY DISCLAIM ANY SUCH OTHER REPRESENTATIONS AND WARRANTIES.18
To reinforce this intent, the SPA's parties further agreed:
[N]one of Seller, the Companies,...
To continue reading
Request your trial