Deluxe Entertainment Services Inc. v. DLX Acquisition Corporation and Deluxe Media Inc.

D
                              COURT OF CHANCERY
                                    OF THE
                              STATE OF DELAWARE
MORGAN T. ZURN                                                    LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR                                                       500 N. KING STREET, SUITE 11400
                                                                     WILMINGTON, DELAWARE 19801-3734


                                     March 29, 2021

    Peter B. Ladig, Esquire                       Srinivas M. Raju, Esquire
    Brett M. McCartney, Esquire                   Angela Lam, Esquire
    Bayard, P.A.                                  Richards, Layton & Finger, P.A.
    600 N. King Street, Suite 400                 920 N. King Street
    Wilmington, DE 19801                          Wilmington, DE 19801

         RE:   Deluxe Entertainment Services Inc. v. DLX Acquisition Corporation
               and Deluxe Media Inc.,
               Civil Action No. 2020-0618-MTZ

Dear Counsel:

         This letter opinion addresses the issues raised by Defendants’ motion for

judgment on the pleadings (the “Motion”).1 For the following reasons, the Motion

is granted.

         I.    BACKGROUND

         This action arises from a stock transfer whereby plaintiff Deluxe

Entertainment Services, Inc. (“Plaintiff” or “Seller”) sold all the outstanding shares



1
  Docket Item (“D.I.”) 36. On this motion for judgment on the pleadings, I draw all facts
from the pleadings and documents integral to them. Citations in the form “Compl. ¶ ––”
refer to the plaintiff’s complaint, available at D.I. 1. Citations in the form “Answer ¶ ––”
refer to the defendants’ answer to the complaint, available at D.I. 30. Citations in the form
“Hr’g Tr.” refer to the transcript of the December 11 oral argument on the Motion, available
at D.I. 47.
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of its wholly owned subsidiary, defendant Deluxe Media Inc. (together, with its

subsidiaries, “Target”), to defendant DLX Acquisition Corporation (“Buyer,” and

together with Target, “Defendants”), an affiliate of the private equity firm Platinum

Equity (“Platinum”). I refer to the stock transfer as the “Transaction.” Before the

Transaction, Seller was a leading “video creation to distribution” company, and

Target was Seller’s distribution subsidiary.2 All of Target’s assets, except for those

excluded by the parties’ purchase agreement (the “Purchase Agreement”),3 were

transferred in the Transaction.

         The Transaction closed on June 30, 2020.4 At closing, several million dollars

in cash remained in Target’s bank accounts (the “Disputed Cash”).5 Seller alleges it

failed to sweep those funds from Target before closing “for various practical and




2
    See Compl. ¶¶ 1, 4, 6.
3
 Answer Ex. 1 [hereinafter “Purchase Agr.”]; see also Answer Ex. 2. The Purchase
Agreement’s schedules are attached as Exhibit 2; for clarity, I cite both using “Purchase
Agr.”
4
    See Compl. ¶ 1.
5
  See

id. The actual amount

of cash in question is unclear. Seller’s complaint suggests that
the Disputed Cash was “over $9.1 million,” which Defendants deny. Compare

id., with
Answer ¶

1. During briefing on the motion to expedite, Seller filed a declaration stating
that the correct amount was $9.8 million. See D.I. 23. Seller’s briefs on the Motion appear
to reference the $9.8 million figure. See, e.g., D.I. 41 at 1 (“almost $10 million”). The
amount of the Disputed Cash is irrelevant to my analysis.
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technical reasons,”6 and Buyer does not dispute Seller had the right to sweep those

funds before closing.7

         Seller’s controller first discovered the issue with the Disputed Cash on July

1.8 Later that day, on a phone call with Platinum and its liquidity expert, Seller asked

Buyer to return the Disputed Cash, citing “wrong pocket” provisions in the Purchase

Agreement and the “cash-free nature of the deal.”9 Buyer refused, insisting that the

Purchase Agreement did not compel it to return the Disputed Cash.10 Over the next

two weeks, Seller, its liquidity expert, and its financial advisor for the Transaction

contacted representatives from Platinum and former Seller employees (now

Buyer/Target employees), but could not secure the Disputed Cash’s return.11




6
    Compl. ¶ 26.
7
  Buyer’s counsel conceded at oral argument that Seller would have been within its rights
to sweep the Disputed Cash, or at least some of it, from Target’s bank account prior to
closing. See Hr’g Tr. 9:9–10:2.
8
    See Compl. ¶ 26.
9
 See

id. Around the same

time, the parties had an ancillary dispute over Buyer’s failure to
properly fund its payroll and rent after closing. See

id. ¶¶ 27–29.

The parties have not
otherwise referenced this dispute, and it does not appear to bear on Seller’s claims in this
action.
10
     See

id. ¶ 1;

Answer ¶ 1.
11
     See Comp. ¶¶ 29–31.
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Conversations between Seller’s general counsel and a Platinum representative on

July 13 and July 22 were similarly fruitless.12

         On July 24, Seller filed its verified complaint (the “Complaint”) seeking, in

effect, to claim or claw back the Disputed Cash.13 Seller presents three alternative

approaches. Count I alleges that Buyer’s failure to return the Disputed Cash amounts

to a breach of the Purchase Agreement.14 Count II claims that that this failure is a

breach of the implied covenant of good faith and fair dealing. 15 Count III asks the

Court to reform the Purchase Agreement to address this issue.16

         The Complaint was accompanied by a motion to expedite,17 which the Court

denied on August 10.18        On August 18, Defendants filed their answer to the

Complaint (the “Answer”), denying most of Seller’s substantive allegations and

attaching a copy of the Purchase Agreement.19 On October 2, Defendants filed the




12
     See

id. ¶¶ 32–33.
13

     See generally

id.
14

     See

id. ¶¶ 37–44.
15

     See

id. ¶¶ 45–49.
16

     See

id. ¶¶ 50–53.
17

     See D.I. 2.
18
     See D.I. 24.
19
     See generally Answer.
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pending Motion, seeking judgment on the pleadings in their favor.20 The parties

fully briefed the Motion, and the Court took it under advisement after oral argument

on December 11.21

         II.    ANALYSIS

         The standard for a motion for judgment on the pleadings is familiar.

         [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. The court must take the well-pleaded facts alleged in the
         complaint as admitted. A motion for judgment on the pleadings may
         be granted only when no material issue of fact exists and the movant is
         entitled to judgment as a matter of law.22

The proper interpretation of a contract is a question of law, and so judgment on the

pleadings is a proper framework to enforce unambiguous contracts.23




20
     D.I. 36.
21
     See D.I. 46; see generally Hr’g Tr.
22
  Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 

624 A.2d 1199

,
1205 (Del. 1993) (citations omitted).
23
  OSI Sys., Inc. v. Instrumentarium Corp., 

892 A.2d 1086

, 1090 (Del. Ch. 2006); accord
Lillis v. AT & T Corp., 

904 A.2d 325

, 329–30 (Del. Ch. 2006) (“[J]udgment on the
pleadings . . . is a proper framework for enforcing unambiguous contracts because there is
no need to resolve material disputes of fact. . . . If the contract’s meaning is unambiguous,
[and that meaning supports the movant’s claim or defense], the court must grant judgment
on the pleadings in favor of the moving party.” (internal quotation marks omitted) (quoting
NBC Universal v. Paxson Commc’ns Corp., 

2005 WL 1038997

, at *5 (Del. Ch.
Apr. 29, 2005))).
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         The Purchase Agreement, while “heavily negotiated,”24 is unremarkable in

that it presumes all Company Assets are included in the Transaction unless

specifically excluded. Seller makes no argument that the Purchase Agreement

specifically excluded the Disputed Cash or made it subject to being clawed back.

Rather, Seller argues the parties never intended to transfer the Disputed Cash to

Buyer as evidenced by (1) the Purchase Agreement’s definition of net working

capital for purposes of calculating the purchase price, and (2) extrinsic evidence

about the parties’ negotiations leading up to the Purchase Agreement, which Seller

contends reflects the parties’ otherwise undocumented agreement that the

Transaction would be “cash-free, debt-free.” These arguments fail to demonstrate a

breach of contract or the implied covenant, and fail to support a claim for

reformation.

               A.       Buyer Is Entitled To Judgment On Seller’s Breach Of
                        Contract Claim.

         Count I of the Complaint alleges that Buyer breached the Purchase Agreement

by either taking the Disputed Cash in the first instance, or by failing to remit it after

the Transaction closed. At the pleading stage, a plaintiff alleging a breach of contract

must plead (1) the existence of a contractual obligation, (2) a breach of that


24
     See Compl. ¶ 16.
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obligation, and (3) damages as a result.25 In interpreting contracts, Delaware courts

aim to “give priority to the parties’ intentions as reflected in the four corners of the

agreement, construing the agreement as a whole and giving effect to all its

provisions.”26 “Delaware adheres to the objective theory of contracts, [meaning that]

a contract’s construction should be that which would be understood by an objective,

reasonable third party.”27 In doing so, the Court will “give effect to the plain-

meaning of the contract’s terms and provisions,”28 “will read a contract as a whole

and . . . will give each provision and term effect, so as not to render any part of the

contract mere surplusage.”29 “Contract terms themselves will be controlling when




25
   See VLIW Tech., LLC v. Hewlett-Packard Co., 

840 A.2d 606

, 612 (Del. 2003); see also
Carlson v. Hallinan, 

925 A.2d 506

, 524 (Del. Ch. 2006) (“Three elements are necessary to
prove the existence of an enforceable contract: 1) the intent of the parties to be bound by
it, 2) sufficiently definite terms and 3) consideration.”).
26
  Salamone v. Gorman, 

106 A.3d 354

, 368 (Del. 2014) (internal quotation marks omitted)
(quoting GMG Cap. Inv., LLC. v. Athenian Venture P’rs I, L.P., 

36 A.3d 776

, 779
(Del. 2012)); see Sunline Com. Carriers, Inc. v. CITGO Petroleum Corp., 

206 A.3d 836

,
846 (Del. 2019) (“To determine what contractual parties intended, Delaware courts start
with the text.”).
27
 Osborn ex rel. Osborn v. Kemp, 

991 A.2d 1153

, 1159 (Del. 2010) (internal quotation
marks omitted) (quoting NBC Universal, 

2005 WL 1038997

, at *5).
28


Id. at 1159–60;

see also GRT, Inc. v. Marathon GTF Tech., Ltd., 

2012 WL 2356489

, at
*4 (Del. Ch. June 21, 2012) (“When interpreting a contract, a court must give effect to all
of the terms of the instrument and read it in a way that, if possible, reconciles all of its
provisions.”).
29
     Kuhn Constr., Inc. v. Diamond State Port Corp., 

990 A.2d 393

, 396–97 (Del. 2010).
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they establish the parties’ common meaning so that a reasonable person in the

position of either party would have no expectations inconsistent with the contract

language.”30

         “Unless there is ambiguity, Delaware courts interpret contract terms

according to their plain, ordinary meaning,” without resorting to extrinsic

evidence.31 Extrinsic evidence cannot itself create ambiguity: “[e]xtrinsic, parol

evidence cannot be used to manufacture an ambiguity in a contract that facially has

only one reasonable meaning.”32

         “Under basic principles of Delaware contract law, and consistent with

Delaware’s pro-contractarian policy, a party may not come to court to enforce a

contractual right that it did not obtain for itself at the negotiating table.”33 Delaware

law presumes parties are bound by the language of the agreement they negotiated,




30
     Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 

702 A.2d 1228

, 1232 (Del. 1997).
31
     Alta Berkeley VI C.V. v. Omneon, Inc., 

41 A.3d 381

, 385 (Del. 2012).
32
  United Rentals, Inc. v. RAM Hldgs., Inc., 

937 A.2d 810

, 830 (Del. Ch. 2007); see also
Eagle Indus., 

Inc., 702 A.2d at 1232

(“If a contract is unambiguous, extrinsic evidence may
not be used to interpret the intent of the parties, to vary the terms of the contract or to create
an ambiguity.”).
33
     GRT, Inc., 

2012 WL 2356489

, at *7.
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especially where, as here, the parties are sophisticated entities that have engaged in

arms-length negotiations.34

                       1.      The Purchase Agreement Transfers All Target
                               Assets Except Certain Excluded Assets, Which
                               Do Not Encompass The Disputed Cash.

          Under the Purchase Agreement’s terms, Seller agreed “to sell and assign to

Buyer, and for Buyer to purchase and pay for” all of Target’s shares (the “Target

Shares”) in exchange for a cash payment.35 In other words, Seller sold Target to

Buyer by transferring all Target Shares to Buyer.36 “[I]t is a general principle of

corporate law that all assets and liabilities are transferred in the sale of a company

effected by a sale of stock.”37 When Seller agreed to sell Buyer all the Target Shares,




34
  See W. Willow-Bay Ct., LLC v. Robino-Bay Ct. Plaza, LLC, 

2007 WL 3317551

, at *9
(Del. Ch. Nov. 2, 2007) (“The presumption that the parties are bound by the language of
the agreement they negotiated applies with even greater force when the parties are
sophisticated entities that have engaged in arms-length negotiations.”), aff’d, 

985 A.2d 391

(Del. 2009); see also

id. at *9

n.82 (noting that the parties were “sophisticated” because
they had “extensive experience” in the industry and “ample access to counsel”).
35
     See Purchase Agr. at 5.
36
     See

id. § 2.1.
37

   In re KB Toys Inc., 

340 B.R. 726

, 728 (D. Del. 2006); see US Ecology, Inc. v. Allstate
Power Vac, Inc., 

2018 WL 3025418

, at *6 (Del. Ch. June 18, 2018) (citing KB Toys 

Inc.,
340 B.R. at 728

), aff’d, 

202 A.3d 510

(Del. 2019); Viking Pump, Inc. v. Century Indem.
Co., 

2 A.3d 76

, 99 (Del. Ch. 2009) (“The familiar default rule in stock sales is that a change
in the ownership of a company does not affect the rights and liabilities of the company.”
(citing KB Toys 

Inc., 340 B.R. at 728

)).
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it agreed to sell all the Target’s assets.38 Thus, by default, Target’s pre-closing assets

and liabilities transferred with its shares.39

         In keeping with this default principle, the parties did not enumerate the assets

Buyer was purchasing, but rather negotiated provisions that carved certain assets and

liabilities out of the Transaction, and provided means for returning those assets if

they were inadvertently transferred. Section 1.2 of the Purchase Agreement defines




38
     The Purchase Agreement defined the Target’s “Company Assets”:
         “Company Assets” means all assets, properties or rights of any kind or
         nature of any member of the Company Group or solely or primarily used by
         the Company Group in the conduct of its business (i) including the Deluxe
         name and brand and all other company names and brands used by the
         Company Group, and (ii) excluding, for the avoidance of doubt, assets,
         properties or rights transferred out of the Company Group pursuant to the
         Restructuring.
Purchase Agr. § 1.2 (defining “Company Assets”). The Purchase Agreement refers to the
Target as the “Company,” and its subsidiaries as the “Company Group.” See

id. at 5;


id. §
1.2 (defining

“Company Group”). Thus, by its plain meaning, “all assets . . . of any kind
or nature of any member of the Company Group” includes the Disputed Cash, owned by
the Target. See

id. § 1.2 (defining

“Company Assets”).
39
  See KB Toys 

Inc., 340 B.R. at 728

; US Ecology, Inc., 

2018 WL 3025418

, at *6; Viking
Pump, 

Inc., 2 A.3d at 99

.
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“Excluded Assets” as those listed in Schedule 1.2.40 Seller does not advance any

argument that the Disputed Cash is an Excluded Asset.41

         The Purchase Agreement includes two “wrong pocket” provisions to correct

certain erroneous transfers after closing (the “Wrong Pocket Provision(s)”). While

Seller makes passing reference to the Wrong Pocket Provisions,42 it does not offer

any explanation as to why they would compel Buyer to return the Disputed Cash.

Neither Wrong Pocket Provision applies to the Disputed Cash.




40
     Purchase Agr. § 1.2 (defining “Excluded Assets”). That Schedule enumerates:
         1.     All assets, operations and Intellectual Property solely or primarily
                used to provide the Excluded Businesses.
         2.     Any amounts payable by the landlord of the Wardour Street Lease to
                Deluxe 142 Limited (“Deluxe 142”), as described further in Item 1 on
                Schedule 4.9(c).
         3.     All amounts payable by NASG to the Company or Parent in
                connection with the sale of the business unit known as “Deluxe
                Archive Solutions”, as described further in Item 6 on Schedule 4.7(b).
See

id. Sched. 1.2.
41

   See D.I. 41 at 22 (acknowledging “the Target’s pre-closing cash is not included in
Schedule 1.2 of the Purchase Agreement, which identifies the Excluded Assets in the
transaction (the ‘Excluded Asset Schedule’)”). Indeed, there appears to be no connection
between the Disputed Cash and any of the categories of Excluded Assets.
42
   See

id. at 13

(“Plaintiff’s controller promptly requested this cash from Platinum (as it
was entitled to do under the Purchase Agreement’s ‘wrong pocket’ provision) on and after
July 1, 2020, when Plaintiff’s controller first discovered that the Buyer and Target were
treating the cash that was in the Target at closing as if it belonged to Buyer.”). This
statement also appears in the Complaint. See Compl. ¶ 26; see also

id. ¶ 1.

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         One Wrong Pocket Provision applies to payments Target received from any

customer or other counterparty “to the extent that such payment constitutes an

Excluded Asset.”43 As explained, Seller does not allege and cannot argue that the

Disputed Cash is an Excluded Asset.

         The other Wrong Pocket Provision addresses assets “solely or primarily

related to the Designated Services, the Excluded Business or any obligation, liability

or commitment not forming part of the Company Liabilities.”44 If one of these assets

has been “transferred to a member of the Company Group [Target] in error,” Buyer

must remit it to the Seller.45 Seller does not allege or argue that the Disputed Cash

related to any of the Designated Services,46 the Excluded Business,47 or otherwise




43
     See Purchase Agr. § 6.14(c).
44
     See

id. § 6.14(b).
45

     See

id.
46

   See

id. § 1.2 (defining

“Designated Services” to include certain “services of Parent and
its Subsidiaries (excluding the Company Group [Target])”). There is no allegation that
Disputed Cash belonged to the Parent before closing and, in fact, allegedly was in the
Target’s accounts prior to closing. See Compl. ¶ 1 (“When the [Transaction] closed . . .
certain of the Target’s subsidiaries had cash in them that had not been swept from certain
accounts before closing.”).
47
   See Purchase Agr. § 1.2 (defining “Excluded Business” to include, inter alia, business
or operations within certain clauses in the definition of “Designated Services,” or those
related to the provision of certain creative services).
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was outside of the Company Liabilities,48 as those terms are defined. The Complaint

does not specify what the Disputed Cash relates to, and fails to connect it in any way

to a Wrong Pocket Provision.49

         Thus, the Purchase Agreement presumes all Company Assets are included in

the Transaction unless specifically excluded. Seller makes no argument that the

Disputed Cash was in any way excluded or subject to being clawed back. Seller

does not contend that any of these provisions of the Purchase Agreement were

breached.

                      2.    The Purchase Agreement’s Definition Of Net
                            Working Capital, As Negotiated, Pertains To
                            Calculating The Purchase Price, Not Identifying
                            Assets As Transferred Or Excluded.

         Against this unambiguous and essentially undisputed backdrop, Seller argues

the Purchase Agreement does not transfer Target’s cash to Buyer based on the

Purchase Agreement’s calculation of the purchase price, which directs a calculation




48
  See

id. (defining “Company Liabilities”

to include “all Liabilities of any member of the
Company Group [Target],” with certain exceptions).
49
     See Compl. ¶¶ 1, 26.
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of net working capital that excludes cash. The Purchase Agreement set the purchase

price according to the definition of “Closing Date Purchase Price.”50

         “Closing Date Purchase Price” means (a) one hundred ninety-five
         million dollars ($195,000,000); plus (b) the difference of (which
         amount may be a positive or negative number) (i) estimated Net
         Working Capital as set forth in the Purchase Price Certificate minus (ii)
         Target Net Working Capital; minus (c) the Closing Date Indebtedness;
         minus (d) the Adjustment Escrow Amount; minus (e) the Indemnity
         Escrow Amount; minus (f) an amount equal to all unpaid Transaction
         Bonuses; minus (g); the Indian Business Transfer Holdback Amount;
         minus (h) accrued but unpaid income Taxes which amount is deemed
         to be $500,000.51

In turn, the definition of “Net Working Capital” reflects the parties’ agreement that

cash would be excluded from that calculation:




50
  See Purchase Agr. § 2.1. Seller does not specify the actual final purchase price but does
not allege that Buyer did not satisfy its obligation to pay.
51
     See

id. § 1.2 (defining

“Closing Date Purchase Price”).
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         “Net Working Capital” means, as of 12:01 a.m. New York City time
         on the Closing Date, (a) the sum of the current assets of the Company
         Group set forth on the line items and subject to the adjustments set forth
         on Schedule 2.4; minus (b) the sum of the current liabilities of the
         Company Group set forth on the line items and subject to the
         adjustments set forth on Schedule 2.4 (which schedule shall not include
         any Transaction Bonuses), in each case, calculated in accordance with
         the Accounting Principles. An illustrative example of the calculation
         of Net Working Capital is set forth on Schedule 2.4. For purposes of
         the calculation of “New Working Capital”, current liabilities shall
         include all deferred rent (including the portion of any Security Deposit
         applied toward the payment of any rent or any other amount due under
         any applicable Real Property Lease which has not been replenished as
         of the Closing, including those set forth on Schedule 4.9(b)(ii)),
         deferred vendor payments, any other deferred payments, and related
         penalties, and all accrued and unpaid non-income taxes as of the
         Closing, including any accrued and unpaid non-income Taxes arising
         in connection with the Restructuring transactions.52

The “illustrative example of Net Working Capital . . . set forth on Schedule 2.4”

excludes cash as a “definitional adjustment.”53

         In the days before closing, as required by the Purchase Agreement,54 Seller

delivered its “Purchase Price Certificate” with a Net Working Capital worksheet

that, as agreed, excluded cash.55




52
     See

id. (defining “Net Working

Capital”).
53
     See

id. Sched. 2.4.
54

     See

id. § 1.2 (defining

“Purchase Price Certificate”); see also

id. § 2.3(a)(vi).
55

     See Compl. ¶ 24.
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       Seller argues that the Purchase Agreement’s exclusion of cash from Net

Working Capital, and thus from the Closing Date Purchase Price, indicates the

parties’ clear intent that the Transaction would be “cash-free, debt-free.”56 Seller

asks too much of these provisions: they simply exclude cash from the calculation of

the final purchase price. The definition of Net Working Capital excludes cash from

the calculation of Net Working Capital as a “definitional adjustment” for purposes

of calculating the Closing Date Purchase Price.57 The purchase price adjustments

are just that: adjustments to how much Buyer paid, not to what assets the Buyer

purchased. Nothing in these purchase price provisions indicate the parties’ intention

to exclude cash, or any of the other adjustments to Net Working Capital, from the

assets transferred by the Transaction.58




56
   See

id. ¶ 39

(“Under the plain language of the Purchase Agreement, cash was excluded
from the calculation of Net Working Capital which reflects the parties’ meeting of the
minds that cash was not an asset that was being transferred to Buyer under the Purchase
Agreement.”).
57
  See Purchase Agr. § 1.2 (defining “Net Working Capital” and “Closing Date Purchase
Price”);

id. Sched. 2.4.
58

   Other assets and liabilities excluded from the calculation of Net Working Capital include
“Short Term Debt,” “Accrued Interest,” “Earn Out Payable,” “Accrued Taxes,”
“Intercompany & Related Parties,” and “Deferred Rent.” See

id. None of these

assets or
liabilities are listed in the “Excluded Assets, Excluded Liabilities” schedule in the Purchase
Agreement. Compare

id., with id. Sched.

1.2.
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         Had the parties intended to do so, they could have easily drafted a provision

stating that assets excluded from the calculation of Net Working Capital are not

transferred. Indeed, the Excluded Assets provision makes clear the parties knew

how to exclude assets from the Transaction. In the face of the Purchase Agreement’s

plain terms, “an objective, reasonable third party” would not understand the example

Net Working Capital calculation in Schedule 2.4 to exclude cash from the

Transaction.59 Torturing this provision to alter the scope of the Transaction would

rewrite the parties’ “heavily negotiated”60 bargain and secure for Seller “a

contractual right that it did not obtain for itself at the negotiating table.”61

         Seller has contended that “at worst,” the Purchase Agreement is ambiguous in

its treatment of cash, so the Court may reach its proffered extrinsic evidence and

conclude the parties intended the Transaction to exclude cash.62 But the Purchase

Agreement is not ambiguous on this point, so I do not reach Seller’s arguments about

the parties’ negotiation history.     Nor can this negotiation history itself create

ambiguity, as “[e]xtrinsic, parol evidence cannot be used to manufacture an



59
     See 

Osborn, 991 A.2d at 1159

(quoting NBC Universal, 

2005 WL 1038997

, at *5).
60
     See Compl. ¶ 16.
61
     See GRT, Inc., 

2012 WL 2356489

, at *7.
62
     See Compl. ¶ 40.
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ambiguity in a contract that facially has only one reasonable meaning.”63 Extrinsic

evidence about the parties’ negotiations—over the definition of Net Working Capital

or otherwise—cannot alter the conclusion that the Purchase Agreement transferred

all of Target’s assets to Buyer.64

         The Motion is granted with respect to Count I.

                B.     Buyer Is Entitled To Judgment On Seller’s Claim For Breach
                       Of The Implied Covenant Of Good Faith And Fair Dealing.

         In Count II, Seller argues that the implied covenant of good faith and fair

dealing requires Buyer to return the Disputed Cash. Having failed to identify a gap

in which the implied covenant could operate, Seller’s claim fails.




63
     United Rentals, 

Inc., 937 A.2d at 830

; see also Eagle 

Indus., 702 A.2d at 1232

.
64
   Count I alleges a breach of the Purchase Agreement, not the breach of any other
agreement between the parties. See Compl. ¶¶ 37–44. To the extent Seller argues that
Buyer breached a separate agreement that the Transaction would be “cash-free, debt-free,”
this argument also fails. By its plain terms, the Purchase Agreement supersedes the parties’
prior agreements and understandings:
         This Agreement together with the Services Agreement, the Escrow
         Agreement, the Confidentiality Agreement and any annexes, exhibits and
         schedules to any of the foregoing constitute the entire agreement by and
         among the parties and their respective Affiliates relating to the Transactions
         and supersede any and all prior agreements, understandings, negotiations and
         communications, whether oral or written, that may have been made or
         entered into by or among any of the parties or any of their respective
         Affiliates relating to the Transactions.
Purchase Agr. § 11.5. Seller’s reformation arguments are addressed infra.
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         “The implied covenant of good faith and fair dealing inheres in every contract

and requires a party in a contractual relationship to refrain from arbitrary or

unreasonable conduct which has the effect of preventing the other party to the

contract from receiving the fruits of the bargain.”65 “[I]mposing an obligation on a

contracting party through the covenant of good faith and fair dealing is a cautious

enterprise and instances should be rare,”66 especially “when the contract easily could

have been drafted to expressly provide for it.”67 “It must be clear from what was

expressly agreed upon that the parties who negotiated the express terms of the

contract would have agreed to proscribe the act later complained of had they thought

to negotiate with respect to that matter.”68 The implied covenant “cannot be used to

circumvent the parties’ bargain, or to create a free-floating duty unattached to the

underlying legal documents.”69


65
     Kuroda v. SPJS Hldgs., LLC, 

971 A.2d 872

, 888 (internal quotation marks omitted).
66
 Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 

2006 WL 2521426

, at *6 (Del. Ch.
Aug. 25, 2006).
67
  Airborne Health, Inc. v. Squid Soap, LP, 

984 A.2d 126

, 146 (Del. Ch. 2009) (quoting
Allied Cap. Corp. v. GC–Sun Hldgs., L.P., 

910 A.2d 1020

, 1035 (Del. Ch. 2006)).
68
   Lonergan v. EPE Hldgs., LLC, 

5 A.3d 1008

, 1018 (Del. Ch. 2010) (alterations and
internal quotation marks omitted) (quoting Katz v. Oak Indus. Inc., 

508 A.2d 873

, 880 (Del.
Ch. 1986)).
69
   Dunlap v. State Farm Fire & Cas. Co., 

878 A.2d 434

, 441 (Del. 2005) (alterations and
internal quotation marks omitted) (quoting Glenfed Fin. Corp., Com. Fin. Div. v. Penick
Corp., 

647 A.2d 852

, 858 (N.J. Super. Ct. App. Div. 1994)).
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       “To state a claim for breach of the implied covenant, the [p]laintiff[] must

allege a specific implied contractual obligation, a breach of that obligation by the

defendant, and resulting damage to the plaintiff.”70 An essential predicate for the

application of the implied covenant is the existence of a “gap” in the relevant

agreement.71 There is no gap in which the implied covenant can operate “where the

subject at issue is expressly covered by the contract, or where the contract is

intentionally silent as to that subject.”72

       Such is the case here. The parties contemplated the possibility that an asset

could be inadvertently transferred at closing, and drafted the Wrong Pocket

Provisions to address that possibility. An unintended asset transfer is not an




70
   Wiggs v. Summit Midstream P’rs, LLC, 

2013 WL 1286180

, at *9 (Del. Ch.
Mar. 28, 2013) (internal quotation marks omitted) (quoting Fitzgerald v. Cantor, 

1998 WL
842316

, at *1 (Del. Ch. Nov. 10, 1998)).
71
  See Fortis Advisors LLC v. Dialog Semiconductor PLC, 

2015 WL 401371

, at *4 (Del.
Ch. Jan. 30, 2015); see also Gerber v. EPE Hldgs., LLC, 

2013 WL 209658

, at *10 (Del.
Ch. Jan. 18, 2013) (“The implied covenant provides a limited gap-filling tool that allows a
court to impose contractual terms to which the parties would have agreed had they
anticipated a situation they failed to [address].”); 

Dunlap, 878 A.2d at 441

(noting that the
implied covenant is “employed to analyze unanticipated developments or to fill gaps in [a]
contract’s provisions”).
72
  See Dave Greytak Enters., Inc. v. Mazda Motors of Am., Inc., 

622 A.2d 14

, 23 (Del. Ch.
1992), aff’d, 

609 A.2d 668

(Del. 1992).
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“unanticipated development,”73 but rather is “expressly covered by the contract.”74

As in US Ecology, Inc. v. Allstate Power Vac, Inc., “the parties to the Purchase

Agreement anticipated that there were circumstances under which [Buyer] would be

obliged to [return certain wrongfully transferred assets],”75 and “included an explicit

provision obligating”76 Buyer to do so.         “They chose not to [include such a

provision], however, with respect to the [Disputed Cash].”77 To use the implied

covenant to add the Disputed Cash to the list of Excluded Assets would be “to create

a free-floating duty unattached to the underlying legal documents.”78

          The Motion is granted with respect to Count II.

                 C.   Buyer Is Entitled To Judgment On Seller’s Reformation
                      Claim.

          In Count III, Seller contends that if the Purchase Agreement’s plain language

does not evidence the parties’ agreement that the Disputed Cash was to be excluded




73
     See 

Dunlap, 878 A.2d at 441

.
74
     See 

Mazda, 622 A.2d at 23

.
75
     See US Ecology, Inc., 

2018 WL 3025418

, at *7.
76
     See

id. at *6.
77

     See

id. at *7.
78

  See 

Dunlap, 878 A.2d at 441

(alterations and internal quotation marks omitted) (quoting
Glenfed Fin. 

Corp., 647 A.2d at 858

).
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from the Transaction, then the absence of such language is the result of a scrivener’s

error. Seller urges the Court to reform the Purchase Agreement.

      “Generally, reformation is appropriate when an agreement has been made . . .

but in reducing such agreement or transaction to writing . . . the written instrument

fails to express the real agreement or transaction.”79 As Chancellor Bouchard has

explained:

      Reformation is not an equitable license for the Court to write a new
      contract at the invitation of a party who is unsatisfied with his or her
      side of the bargain; rather, it permits the Court to reform a written
      contract that was intended to memorialize, but fails to comport with,
      the parties’ prior agreement.80

“[A] party seeking reformation by definition admits that had he read the document

more carefully, he would have noticed and corrected the mistake.”81

      There are two principal bases for a claim for reformation: mutual mistake and

unilateral mistake.82 “[S]uch mistake must be as to a fact which enters into, and




79
  Waggoner v. Laster, 

581 A.2d 1127

, 1135 (Del. 1990) (alterations omitted) (quoting
Douglas v. Thrasher, 

489 A.2d 422

, 426 (Del. 1985)).
80
  In re TIBCO Software Inc. S’holders Litig., 

2015 WL 6155894

, at *13 (Del. Ch.
Oct. 20, 2015).
81
  Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 

68
A.3d 665

, 681 (Del. 2013).
82
  See Great-W. Inv’rs LP v. Thomas H. Lee Pr’s, L.P., 

2011 WL 284992

, at *11 (Del. Ch.
Jan. 14, 2011).
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forms the very basis of, the contract; it must be of the essence of the agreement, the

sine qua non or, as it is sometimes expressed, the efficient cause of the agreement.”83

Critically here, the relevant mistake must be one of expression, that is, “one that

relates to the contents or effect of the writing that is intended to express [the parties’]

agreement.”84 Reformation based on mistake “must be applied narrowly so as to

ensure to contracting parties that in only limited circumstances will the court look

beyond the four corners of a negotiated contract.”85

       At the pleading stage, a claim for reformation based on a mutual mistake will

survive a motion to dismiss under Court of Chancery Rule 12(b)(6) only if it alleges:

“(i) that the parties reached a definite agreement before executing the final contract;

(ii) that the final contract failed to incorporate the terms of the agreement; (iii) that

the parties’ mutually mistaken belief reflected the true parties’ true agreement; and




83
  Liberto v. Bensinger, 

1999 WL 1313662

, at *12 (Del. Ch. Dec. 28, 1999) (quoting Fed.
Land Bank of Balt. v. Pusey, 

1986 WL 9041

, at *3 (Del. Super. Ct. July 21, 1986)).
84
  Restatement (Second) of Contracts § 155 cmt. a (1981); see

id. cmt. b (“If

. . . the parties
make a written agreement that they would not otherwise have made because of a mistake
other than one as to expression, the court will not reform a writing to reflect the agreement
that it thinks they would have made.”); see also Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P.,

794 A.2d 1141

, 1152 n.40 (Del. 2002) (citing Restatement (Second) of Contracts § 155
cmt. a).
85
  Interactive Corp. v. Vivendi Universal, S.A., 

2004 WL 1572932

, at *15 (Del. Ch.
June 30, 2004).
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(iv) the precise mistake the parties made.”86 Similarly, a claim for unilateral mistake

requires that a plaintiff “show that the parties had come to a definite agreement that

differed materially from the written agreement,”87 and “that despite the existing

written agreement one party maintains is accurate, that existing writing erroneously

expresses the parties’ true agreement.”88 In either instance, the plaintiff must allege

the parties reached a definite agreement that differed materially from the agreement

they ultimately put into writing.89

           A plaintiff must plead mistake with particularity: Court of Chancery Rule

9(b) requires that “[i]n all averments of fraud or mistake, the circumstances

constituting fraud or mistake shall be stated with particularity. Malice, intent,

knowledge and other condition of mind of a person may be averred generally.”90




86
     Great-W. Inv’rs LP, 

2011 WL 284992

, at *11.
87


Id.
88

     Scion 

Breckenridge, 68 A.3d at 680

.
89
     See Great-W. Inv’rs LP, 

2011 WL 284992

, at *11.
90
     Ct. Ch. R. 9(b).
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         Thus, a complaint for reformation based on mutual mistake will
         withstand a motion to dismiss for failure to comply with the
         requirements of Rule 9(b), if it alleges: “(i) the terms of an oral
         agreement between the parties; (ii) the execution of a written agreement
         that was intended, but failed, to incorporate those terms; and (iii) the
         parties’ mutual—but mistaken—belief that the writing reflected their
         true agreement and (iv) the precise mistake.”91

At the same time, the prior understanding “need not constitute a complete contract

in and of itself.”92

         Seller’s allegations about the parties’ negotiation history fail to plead the

terms of a definite agreement that is materially different from the Purchase

Agreement and that the parties intended to incorporate into the Purchase Agreement.

And the mistake that has led to the perhaps unintended transfer of the Disputed Cash

is not the sort of mistake that supports reformation; it is not a mistake in the

expression of the Purchase Agreement, but rather an operational mistake by Seller

in preparing to perform.




91
  Duff v. Innovative Discovery LLC, 

2012 WL 6096586

, at *10 (Del. Ch. Dec. 7, 2012)
(quoting Joyce v. RCN Corp., 

2003 WL 21517864

, at *4 (Del. Ch. July 1, 2003)).
92
     

Cerberus, 794 A.2d at 1152

.
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                        1.       The Parties’ Negotiation History

         In November 2019, after emerging from bankruptcy, Seller began the process

of selling Target.93 Seller retained Moelis & Company LLC (“Moelis”) to run the

sale process.94 Moelis prepared an informational memorandum and an earnings

report, and sent potential buyers who expressed an interest a letter dated February

10, 2020 (the “Initial Process Letter”).95 The Initial Process Letter invited potential

buyers to submit an indication of interest by March 5, and requested that it

“indic[ate] the cash purchase price in U.S. dollars you are proposing to pay for 100%

of [Target] on a cash-free, debt-free basis (the ‘Enterprise Value’).”96 On March 5,

Platinum submitted such an indication (the “Initial IOI”).97 The Initial IOI included

an estimate of Target’s “enterprise value” between $120 and $150 million.98

         On May 1, Moelis sent a second process letter (the “Second Round Process

Letter”), which similarly solicited proposals to acquire Target “on a cash-free, debt-




93
     See Compl. ¶ 9.
94
     See

id.
95

     See

id.
96

     Id.; see also Answer ¶ 9.
97
     See Compl. ¶ 10.
98
  See

id. The Complaint indicates

that “enterprise value” was set forth in lower case in
the Initial IOI. See

id.
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free basis (the ‘Enterprise Value’).”99 The Second Round Process Letter also invited

potential buyers to review an online data room.100 Buyer and Seller then proceeded

to trade various due diligence documents in a due diligence tracker.101 The May 13

version of that tracker showed that Seller rejected certain due diligence requests

regarding Target’s “borrowing base certificates” “because the transaction was a

‘cash free/debt free deal.’”102 Platinum did not object to Seller’s response.103

          On May 22, Platinum submitted a second indication of interest (the “Second

IOI”) that estimated Target’s enterprise value as $175 million.104 In response, Seller

informed Platinum that it needed to receive “net value” of no less than $175 million,

after giving effect to a net working capital adjustment at closing.105 The parties

discussed a $30 million net working capital goal, with the expectation that, at

closing, net working capital would be around $10 million.106 The parties ultimately




99


Id. ¶ 11.
100

      See

id. ¶ 12.
101

      See

id. ¶¶ 12–13.
102


Id. ¶ 13.
103

      See

id.
104

      See

id. ¶ 14.
105

      See

id. ¶ 15.
106

      See

id.
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settled on a $195 million enterprise value, anticipating that net working capital

adjustments would lead to a cash purchase price of $175 million.107

            Throughout their negotiations, the parties consistently agreed to exclude the

Target’s cash from calculations of Target’s net working capital. On May 12, Moelis

added an example of a net working capital calculation to the virtual data room.108

Around this time, Moelis and Platinum held a three-hour phone call to discuss net

working capital, during which “Platinum agreed with excluding cash from the Net

Working Capital calculation.”109 The parties also exchanged several documents

addressing net working capital in advance of closing. On June 9, a Platinum

representative sent Moelis a spreadsheet Platinum prepared entitled “AM – Project

Rocket – Supporting Schedules_6.4.20.xlsx.”110 This spreadsheet deducted cash

from the “Reported Net Working Capital” as a “Definitional Adjustment” to

calculate “Definitional Net Working Capital.”111




107
      See

id.
108

      See

id. ¶ 12.
109


Id.
110


Id. ¶ 16.
111


Id.
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          On June 25, Moelis emailed Platinum’s counsel a projected closing balance

sheet for Target and a projected net working capital calculation.112 The projected

net working capital calculation continued to exclude cash as a Definitional

Adjustment.113 The balance sheet also indicated Target would have no cash at

closing.114 Platinum sent Moelis another net working capital spreadsheet on June

28, which continued to exclude cash from that calculation.115

          The parties continued to communicate in the days leading up to the closing.

Around June 26 or 27, Platinum requested certain “must-have” information from

Seller regarding its funding needs post-closing, including a cash flow forecast.116 In

response, on June 28, Seller’s liquidity consultant sent Platinum and its liquidity

consultant several documents showing Target’s starting cash balance as zero.117 The

Transaction closed on June 30.118




112
      See

id. ¶ 17.
113

      See

id.
114

      See

id.
115

      See

id. ¶ 21.
116

      See

id. ¶ 18.
117

      See

id. ¶ 19.
118

      See

id. ¶ 1.

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                       2.    Seller Has Not Pled A Mistake For Which Reformation
                             Is Available.

         Seller’s allegations fall well short of pleading an actionable mistake for the

purposes of a reformation claim.

         Seller principally contends the parties had an agreement that cash would be

excluded from the calculation of net working capital.119 But this agreement is

reflected in the Purchase Agreement: it does not “differ[] materially” from the terms

of the Purchase Agreement, as required for reformation.120 And as explained, I have

considered and rejected Seller’s argument that the agreement to exclude cash from

the price calculation evidences an agreement to exclude the Disputed Cash as a

transferred asset. The fact that the parties agreed to exclude cash from the net

working capital calculations early on in their negotiations does not change that

conclusion.

         Seller also contends that pre-close negotiations reveal the parties intended for

the transaction to be “cash-free, debt free,” such that they did not intend to transfer

cash to Buyer. These negotiations fail to amount to a definite agreement. The back-


119
    See D.I. 41 at 31 (“The Complaint pleads with particularity the negotiation process
whereby the parties agreed to the ‘cash-free, debt-free’ transaction structure, specifically
the calculation of Net Working Capital, which excludes the Target’s pre-closing cash from
its calculus.” (citing Compl. ¶¶ 15–17, 21)).
120
      See Scion 

Breckenridge, 68 A.3d at 680

.
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and-forth about Target’s “Enterprise Value” in the Initial Process Letter, the Initial

IOI, and the Second Round Process Letter does not evidence an agreement that the

Disputed Cash was excluded from the assets sold in the Transaction. Seller’s use of

the phrase “cash-free, debt-free” in those communications is specifically about the

Target’s valuation.121 Any agreement the parties reached via those communications

concerned how to value Target, not what assets would ultimately transfer at closing.

          Seller also alleges that it indicated Target would not hold any cash via the

June 25 projected balance sheet and June 28 projected cash flow it shared with

Platinum.122 Seller’s unilateral documents cannot stand in for a definite agreement

between the parties. The Complaint merely alleges that Seller sent documents and

that Buyer did not object to them.123 It would be unreasonable to infer from Buyer’s

silence in response to Seller’s documents that the parties struck a “definite

agreement” that cash was not to be transferred in the Transaction.124 Seller fails to


121
      See, e.g., Compl. ¶ 9.
122
      See

id. ¶¶ 17, 19.
123

      See

id. ¶¶ 17, 19–20.
124

   Compare

id., with Great-W. Inv’rs

LP, 

2011 WL 284992

, at *11 (recounting allegations
in which one party informed the counterparty of the first party’s belief of what the contract
meant, and the counterparty agreed to that meaning and that the “wording should be
modified to convey that meaning expressly”), and Duff, 

2012 WL 6096586

, at *10
(recounting allegations of conversations between both parties that could support a
reasonable inference of a common understanding). See also Envo, Inc. v. Walters, 

2009
WL 5173807

, at *5 (Del. Ch. Dec. 30, 2009) (“This is not the type of error one would
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allege the parties struck an agreement that cash would be excluded from the

Transaction. Without such an allegation, there can be no claim for reformation.125

         More fundamentally, Seller offers no evidence of a scrivener’s error in the

Purchase Agreement. Seller “does not identify what error was made when reducing

[the Purchase Agreement] to writing,”126 nor any mistake as to the “contents or effect

of a writing that expresses the agreement.”127 Nor does Seller identify an erroneous

belief “relat[ing] to the facts as they exist[ed] at the time of the making of the

contract.” 128

         Rather, the “mistake” at issue was Seller’s failure to sweep the Disputed Cash

from Target’s bank account, separate and apart from the terms of the Purchase




expect business parties to miss. Indeed, to credit [plaintiff’s] claim, the Court would have
to draw unreasonable inferences from the facts alleged, which is not permitted on a motion
to dismiss.”), aff’d, 

2013 WL 1283533

(Del. Mar. 28, 2013) (TABLE).
125
      See Great-W. Inv’rs LP, 

2011 WL 284992

, at *11; Scion 

Breckenridge, 68 A.3d at 680

.
126
    See Richard B. Gamberg 2007 Family Tr. v. United Rest. Gp., L.P., 

2018 WL 566417

,
at *6 (Del. Ch. Jan. 26, 2018) (alterations and internal quotation marks omitted) (quoting
Lions Gate Ent. Corp. v. Image Ent. Inc., 

2006 WL 1668051

, at *8 (Del. Ch. June 5, 2006)).
127
      Restatement (Second) of Contracts § 151 cmt. a.
128


Id. (“In this Restatement

the word ‘mistake’ is used to refer to an erroneous belief. A
party’s erroneous belief is therefore said to be a “mistake” of that party . . . . [T]he erroneous
belief must relate to the facts as they exist at the time of the making of the contract. A
party’s prediction or judgment as to events to occur in the future, even if erroneous, is not
a ‘mistake’ as that word is defined here. An erroneous belief as to the contents or effect of
a writing that expresses the agreement is, however, a mistake.”).
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Agreement. Seller’s failure to sweep Target’s cash is an operations or accounting

mistake, which is crucially distinguishable from a scrivener’s error in the underlying

agreement itself that can be remedied by reformation.129 Seller’s mistake in its own

preparation to perform the parties’ accurate agreement cannot justify reforming that

agreement.130 Seller bears the risk of that mistake.131 The Court will not change the

terms of the parties’ bargain to accommodate Seller’s error in preparing to perform

under the agreement that reflects that bargain.

         The Motion is granted with respect to Count III.




129
   Cf. In re Estate & Tr. of Kalil, 

2018 WL 793718

, at *8–10 (Del. Ch. Feb. 7, 2018)
(MASTER’S REPORT) (declining to reform a trust on the basis of a mistake, when the
mistake in question was Settlor’s mistake in titling assets in an account, not in drafting the
terms of the trust; and noting, “Settlor’s mistake was in titling the Account, and that
because that mistake did not affect the expression, inclusion or omission of specific terms
in the [] Trust—but rather, affects only the title of the Account—reformation is not
appropriate . . . . There was no scrivener’s error—the Trusts’ language expresses the
Settlor’s intent. Settlor’s failure to retitle the Account is not a mistake in expression for
which reformation is available.”), exceptions overruled and report adopted by 

2018 WL
11028294

(Del. Ch. June 11, 2018), aff’d sub nom. Kalil v. Kalil, 

2021 WL 252837

(Del.
Jan. 22, 2021) (TABLE).
130
      See Restatement (Second) of Contracts § 155 cmt. b & illus. 4–5.
131
    See

id. § 154 cmt.

a (“For example, it is commonly understood that the seller of farm
land generally cannot avoid the contract of sale upon later discovery by both parties that
the land contains valuable mineral deposits, even though the price was negotiated on the
basic assumption that the land was suitable only for farming and the effect on the agreed
exchange of performances is material. In such a case a court will ordinarily allocate the
risk of the mistake to the seller, so that he is under a duty to perform regardless of the
mistake.”).
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      III.   CONCLUSION

      For the foregoing reasons, the Motion is GRANTED. To the extent an order

is required to implement this conclusion, IT IS SO ORDERED.



                                          Sincerely,

                                          /s/ Morgan T. Zurn

                                          Vice Chancellor



MTZ/ms

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