In this memorandum opinion, the Court of Chancery denied defendants’ motion to dismiss plaintiff’s declaratory judgment action, which sought to preclude the release of escrow funds to indemnify defendants under the indemnification provisions of a stock purchase agreement. The defendants’ indemnification claims related to claims against one of plaintiff’s former subsidiaries, which defendants had acquired. The Court held that it was conceivable that plaintiff could show that the acquired subsidiary was not in material breach of a Material Contract and therefore that defendants were not entitled to indemnification or that defendants’ indemnification claim was otherwise moot.
In April 2011, defendants MultiPlan, Inc. (“MultiPlan”) and HMA Acquisition Corporation (“HMA”), acquired two of plaintiff’s former subsidiaries. One of the subsidiaries, HMN, Inc. (“HMN”), negotiates with hospitals to obtain preferred rates for its members. Under the Stock Purchase Agreement (“SPA”) governing the acquisition, plaintiff i/mx Information Management Solutions, Inc. (“IMX”) was to indemnify defendants for any damages arising out of actions regarding the operations of plaintiff or plaintiff’s subsidiaries. The SPA also required plaintiff to indemnify defendants for any breaches of representation or warranty that plaintiff made in the SPA. The parties executed an Escrow Agreement pursuant to which $1,800,000 of the purchase price was to be withheld and deposited with an escrow agent. The escrow agent was to release the money after fifteen months, less the “Disputed Amount,” which was the “aggregate amount of all damages alleged to be incurred by any Purchaser Indemnified Party pursuant to any Pending Claim” that was unpaid at the end of the fifteen months.
Shortly before the expiration of the fifteen-month period, MultiPlan submitted a notice of claim that stated Queens Medical Center (“QMC”) had alleged that HMN gave the Veteran’s Administration (“VA”) access to HMN’s preferred rates even though the VA’s contract with HMN did not provide those rates. Thereafter, plaintiff submitted a letter that proposed joint instructions that would require the escrow agent to disburse $1,683,491 of the funds to plaintiff and $116,509 in net working capital adjustment to HMA. HMA responded, suggesting that the escrow agent hold all of the funds except the $116,509, in light of QMC’s pending claim. Meanwhile, the VA’s Office of the Inspector General issued a report that recommended that the VA terminate its contracts with claims re-pricing providers, determine whether those providers gave access to prices lower than Medicare prices, and evaluate whether contracts with those providers were necessary. Plaintiff commenced an action seeking a declaration that defendants were not entitled to indemnification and also requesting an injunction requiring defendants to provide joint instructions to the escrow agent directing it to disburse $1,683,491 to plaintiff. Defendants moved to dismiss the case.
The SPA contained a representation and warranty provision stating that Seller, IMX, and its subsidiaries were not in material breach of a Material Contract. Within that provision were several instances in which the representation and warranty was qualified as being made “to the knowledge of Seller.” Plaintiff contended that this limitation applied to all representations and warranties, while defendants argued that it only applied to plaintiff’s representations and warranties regarding whether “any other party” was in material breach and did not refer to plaintiff’s own subsidiaries. The Court found for defendants on this issue because several clauses within the relevant provision each contained a knowledge requirement, and plaintiff’s interpretation would render the language unnecessary. Therefore, plaintiff did not have a claim for declaratory or injunctive relief based on the knowledge requirement.
Plaintiff also sought a declaration that defendants were not entitled to indemnification because none of the Target Companies was in material breach of a Material Contract. Relying on Delaware case law, plaintiffs claimed that QMC’s claim was not material in light of the small proportion of the services that QMC performed relative to the large number of HMN’s members who used HMN’s reduced rates at QMC. Defendants contended that QMC’s claim was material because the purported value of the claim exceeded a contractual “basket” amount of $100,000. The Court found that even if the basket established that breaches of more than $100,000 were material, it was possible that QMC’s claim did not reach the threshold amount because of the small fraction of HMN customers that the VA constituted. Furthermore, QMC was not seeking a monetary remedy. Therefore, the Court found that plaintiff had stated a claim upon which relief could be granted, and defendants’ motion to dismiss was denied.
Plaintiff also alleged that it was entitled to funds held in escrow because defendants had not provided the required Disputed Amount. The Court held that it was reasonable to infer that if a party proposed to withhold all the escrow funds, then the Disputed Amount was greater than the escrow funds. Because defendants requested that the escrow agent hold all the funds, the Court found that defendants provided a Disputed Amount. Therefore, plaintiff failed to state a claim for relief based on this contention.
Finally, plaintiff sought a declaration that any claim for indemnification based upon QMC’s claim against HMN was moot because the Inspector General’s report eliminated QMC’s claim. The Court found that Inspector General’s report was not conclusive evidence of mootness because it had not yet been implemented and would not affect QMC’s past claims. However, it was possible that defendants’ indemnification claim could be mooted for the reasons found in the Inspector General’s report or for other reasons, such as the running of the statute of limitations. Because the Court had already decided to deny defendants’ motion to dismiss, the Court denied this aspect of defendants’ motion as well, and allowed discovery to go forward.
The full opinion is available here.