Tygon Peak Capital Mgmt. v. Mobile Invs. Investco
| Docket Number | 2019-0847-MTZ |
| Decision Date | 31 July 2023 |
| Parties | Tygon Peak Capital Management, LLC v. Mobile Investments Investco, LLC, et al. |
| Court | Court of Chancery of Delaware |
Kevin M. Gallagher, Esquire Richards, Layton & Finger, P.A.
Dear Counsel:
I write to resolve plaintiff Tygon Peak Capital Management's Motion for Partial Judgment on the Pleadings with Respect to the Annual Management Fee and Defendants' Exchange Act Affirmative Defense (the "Motion").[1] For the following reasons, the Motion is granted. I write for the parties.
Plaintiff Tygon Peak Capital Management, LLC ("Plaintiff" or "Tygon Peak")[3] is a private equity firm. Plaintiff's Verified Second Amended Complaint (the "Second Amended Complaint") stems from the 2018 acquisition (the ") of Voice Comm, LLC and ensuing disputes among Tygon Peak and its coinvestors. As of the Acquisition, all of Voice Comm's equity was owned by defendant Mobile Investors LLC ("MidCo"); eighty percent of MidCo was owned by defendant Mobile Investments Investco, LLC ("TopCo," and together with MidCo, "Defendants").
After the Acquisition closed, the parties entered into two relevant agreements. The first was TopCo's LLC agreement (the "TopCo LLC Agreement").[4] The second was a Management Services Agreement ("MSA") between Tygon Peak and MidCo.[5] The MSA provided that MidCo would pay, or cause Voice Comm to pay, Plaintiff a $300,000 annual management fee (the "Fee") in exchange for its services advising MidCo, its board, and its subsidiaries.[6]The Fee was to be paid in quarterly installments, and "is a fixed retainer, neither conditioned on nor varying with [MidCo]'s requests for services."[7]
Within a year of the Acquisition's closing, the parties' relationship began to sour. By July 1, 2019, MidCo stopped paying Plaintiff its Fee and sent Plaintiff a letter to that effect (the "July 1 Letter").[8] On July 4, Plaintiff responded (the "July 4 Letter"):
We respectfully disagree that [MidCo] is permitted to stop paying Tygon [Peak] the Annual Management Fee (as defined in the MSA) without violating [MidCo]'s covenant to pay under the MSA. However, we are willing to waive our right to receive payment in exchange for not being required to provide any services under the MSA until such time and upon such terms and conditions as are mutually agreed to by [MidCo] and Tygon [Peak]. Further, we acknowledge that neither [MidCo] nor Tygon is waiving any other rights under the MSA by virtue of this letter or by virtue of any other oral or written communication between [MidCo] and Tygon [Peak].[9]
On August 22, Tygon Peak's managing partner emailed a member of Defendants' boards about, among other things, the parties' dispute over the Fee (the "August 22 Email").[10] He wrote:
As we previously stated, we disagree with the Board's (which you control) and your decision to stop paying management fees owed to us under the management services agreement, and do not agree with your assertion that payment of those fees can be turned on and off at your leisure. Yet, instead of declaring you and the Board to be in default of that agreement, we have honored your request to stand down for the time being and not receive payment in exchange for not providing any services under that agreement. We have only done so in the spirit of trying to be a good partner to you, the company, the board and [nonparty] Derek [Weiss].[11]
Plaintiff filed its first complaint on October 24, 2019.[12] Plaintiff filed the operative Second Amended Complaint on February 19, 2021, alleging nine counts.[13] On Defendants' motion to dismiss, Count III survived in full and Count IV survived in part. Count III alleges MidCo breached the MSA by failing to pay Tygon Peak the Fee.[14] Count IV alleges TopCo breached Sections 5.10 and 5.12 of the TopCo LLC Agreement.[15] The reasons for those counts' survival, and a more detailed history of this litigation, are set forth in my January 4, 2022, opinion (the "Motion to Dismiss Opinion").[16]
On April 21, 2022, Plaintiff moved for partial judgment on the pleadings as to Count III.[17] With Plaintiff's agreement, Defendants filed their amended answer to the Second Amended Complaint (the "Amended Answer") on July 21.[18]Plaintiff renewed its motion for partial judgment on the pleadings on October 4 (the "Motion"), and the parties briefed the Motion.[19] On December 12, I requested supplemental briefing on whether Defendants' affirmative defenses under the Securities Exchange Act of 1934 (the "Exchange Act") were time barred.[20] The parties filed supplemental submissions and I held a hearing on April 6, 2023.[21]
The Court will grant a motion for judgment on the pleadings under Court of Chancery Rule 12(c) only when there are no material issues of fact, and the movant is entitled to judgment as a matter of law.[22] A motion for judgment on the pleadings requires the Court to consider not only the complaint or counterclaims, but also the answer, affirmative defenses, and any documents integral thereto.[23]"In determining a motion under Court of Chancery Rule 12(c) for judgment on the pleadings, a trial court is required to view the facts pleaded and the inferences to be drawn from such facts in a light most favorable to the non-moving party."[24] "As on a Rule 12(b)(6) motion, however, a court considering a Rule 12(c) motion will not rely upon conclusory allegations of wrongdoing or bad motive unsupported by pled facts."[25]
The Motion seeks a final partial judgment that Plaintiff is entitled to the Fee.[26] Plaintiff relies on the Motion to Dismiss Opinion's interpretation of the MSA: the "Annual Management Fee is a fixed retainer, neither conditioned on nor varying with [MidCo's] requests for services."[27] Indeed, there is no room to relitigate that legal interpretation: it is the law of the case.[28] The Motion to Dismiss Opinion explained that under that interpretation, Plaintiff had stated a claim for breach of the MSA.[29]
But Plaintiff's entitlement to judgment on that claim is subject to any valid subsequently lodged affirmative defenses. Defendants "asserted a kitchen sink of [sixteen] affirmative defenses"[30] and press that six of them preclude judgment in Plaintiff's favor on Count III.
"An affirmative defense 'must be supported by pled facts' and a defendant cannot survive a motion pursuant to Court of Chancery Rule 12(c) based on "mere naked legal conclusions that do not plead facts supporting the viability of its affirmative defense."[31] "Generally speaking, affirmative defenses that amount to 'rhythmic incantation[s]' of the menu options of defenses set forth in Court of Chancery Rule 12 will not suffice to defeat a motion for judgment on the pleadings."[32]
A. Prior Material Breach: Defendants' Third Affirmative Defense Fails.
Defendants' third affirmative defense asserts "Plaintiff's claims are barred, in whole or in part, because of Plaintiff's prior material breach of the [MSA]."[33]Defendants plead that "Tygon Peak failed to provide services in accordance with the [MSA]," and that the July 1 Letter was sent because of disputed "deficiencies with Tygon Peak's services."[34] Defendants assert that "[b]ecause there is a dispute of fact regarding whether Tygon Peak was in prior material breach, judgment on the pleadings should be denied."[35]
"Under Delaware law, the elements of a breach of contract claim are: 1) a contractual obligation; 2) a breach of that obligation by the defendant; and 3) a resulting damage to the plaintiff."[36] [37]
Under the Motion to Dismiss Opinion's interpretation of the MSA, Defendants were obligated to pay the Fee regardless of whether they requested services from Tygon Peak.[38] For its part, [39] Defendants failed to plead that Tygon Peak's failure to provide services was material under either Section 1(A) or any request for services.[40] Their allegations are conclusory and therefore inadequate to preclude judgment in Plaintiffs' favor.[41]
B. Waiver: Defendants' Fourth Affirmative Defense Fails.
As their fourth affirmative defense, Defendants state, "Plaintiff's claims are barred, in whole or in part, due to the doctrine of waiver."[42] A party asserting waiver must demonstrate three elements: "(1) that there is a requirement or condition to be waived, (2) that the waiving party must know of the requirement or condition, and (3) that the waiving party must intend to waive that requirement or condition."[43] Defendants' waiver affirmative defense fails as a matter of law.
Here, the requirement subject to waiver is the requirement to pay Plaintiff the Fee.[44] The parties dispute the third element: whether Plaintiff intended to waive its right to receive the Fee. Defendants argue Plaintiff's statements in the July 4 Letter and the August 22 Email evince Plaintiff's intent to waive the Fee.[45]They do not.
In the July 4 Letter, Plaintiff wrote it was "willing to waive [its] right to receive payment in exchange for not being required to provide any services under the MSA until such time and upon such terms and conditions as are mutually agreed to by [MidCo] and Tygon [Peak]."[46] Plaintiff went on:
We also acknowledge that neither [MidCo] nor Tygon [Peak] is or...
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