09923-00001/12384753.2 

UNITED STATES BANKRUPTCY COURT 

SOUTHERN DISTRICT OF FLORIDA 

MIAMI DIVISION 

www.flsb.uscourts.gov

In re: 

 

CINEMEX USA REAL ESTATE Chapter 11 

HOLDINGS, INC., CINEMEX 

HOLDINGS USA, INC., and CB THEATER 

EXPERIENCE LLC,1

 

 Case No. 20-14695-LMI 

 

Debtors. (Jointly Administered) 

 / 

AMENDED OBJECTION TO AMENDED CLAIM NOS. 28 AND 85 OF 

OMAR KHAN, AMENDED CLAIM NOS. 29 AND 87 OF S.C.G.C. INC., AMENDED 

CLAIM NOS. 30 AND 89 OF S.C.G.M. INC., AMENDED CLAIM NOS. 31 AND 91 OF 

SCG-B INC., CLAIM NOS. 39 AND 94 OF SCG-VP INC., CLAIM NOS. 50 AND 109 OF 

DISTRICT THEATERS INC., CLAIM NOS. 49 AND 110 OF SCG-WR LLC, CLAIM 

NOS. 51 AND 108 OF SCG-CS INC., CLAIM NOS. 45 AND 102 OF SCGK INC., CLAIM 

NOS. 46 AND 103 OF SCG-SW INC., CLAIM NOS. 47 AND 104 OF SCG-WL INC., AND 

CLAIM NOS. 48 AND 105 OF SCG-N INC.2

 

 

1

 The Debtors in these cases and the last four digits of each Debtor’s federal tax identification number are as 

follows: (1) Cinemex USA Real Estate Holdings, Inc. (2194); (2) Cinemex Holdings USA, Inc. (5502); and (3) 

CB Theater Experience, LLC (0563). The address for the Debtors is 175 South West 7th Street, Suite 1108, 

Miami, Florida 33130. 2

 Debtors seek a waiver to the requirement in Local Rule 3007-1(c) that “up to five objections to claim may be 

included in one pleading.” As set forth in detail in the Objection, Debtors submit that the claims that are the 

subject of this Objection are nearly identical to each other, and are in essence the same claim. 

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IMPORTANT NOTICE TO CREDITOR: 

THIS IS AN OBJECTION TO YOUR CLAIM 

This objection seeks either to disallow or reduce the 

amount or change the priority status of the claim filed by you 

or on your behalf. Please read this objection carefully to 

identify which claim is objected to and what disposition of your 

claim is recommended. 

If you disagree with the objection or the recommended 

treatment, you must file a written response WITHIN 30 DAYS 

from the date of service of this objection, explaining why your 

claim should be allowed as presently filed, and you must serve 

a copy to the undersigned attorney OR YOUR CLAIM MAY 

BE DISPOSED OF IN ACCORDANCE WITH THE 

RECOMMENDATION IN THIS OBJECTION. 

If your entire claim is objected to and this is a chapter 

11 case, you will not have the right to vote to accept or reject 

any proposed plan of reorganization until the objection is 

resolved, unless you request an order pursuant to Bankruptcy 

Rule 3018(a) temporarily allowing your claim for voting 

purposes. The written response must contain the case name, 

case number, and must be filed with the Clerk of the United 

States Bankruptcy Court, 301 North Miami Avenue, Room 

150, Miami, Florida 33128. 

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 Cinemex USA Real Estate Holdings, Inc. (“Cinemex USA”), Cinemex Holdings USA, 

Inc. (“Cinemex Holdings”), and CB Theater Experience LLC (“CB Theater,” and collectively, 

the Debtors” or “Cinemex”), all of which are Debtors in the above-captioned jointly 

administered chapter 11 cases (the “Chapter 11 Cases”), through undersigned counsel and 

pursuant to Section 502(b) of title 11, United States Code (the “Bankruptcy Code”), rule 3007 of 

the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), and rule 3007-1 of the 

Local Bankruptcy Rules for the Southern District of Florida (the “Local Bankruptcy Rules”), 

hereby object to the following claims filed in these cases, for the reasons set forth in the table 

below and discussed in further detail in the Amended3

 Objection: 

Claim 

No. 

Name of Claimant Amount of 

Claim 

Basis for Objection Recommended 

Disposition 

28-2 Omar Khan $82,970,000.00 Debtors not liable Disallow 

85-2 Omar Khan $82,970,000.00 Duplicative; CB Theater 

not liable 

Disallow 

29-2 S.C.G.C. Inc. $26,079,214.65 Duplicative Disallow 

87-2 S.C.G.C. Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

30-2 S.C.G.M. Inc. $26,079,214.65 Duplicative Disallow 

89-2 S.C.G.M. Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

31-2 SCG-B Inc. $26,079,214.65 Duplicative Disallow 

91-2 SCG-B Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

39 SCG-VP, Inc. $26,079,214.65 Duplicative Disallow 

94 SCG-VP, Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

50 District Theaters, Inc. $26,079,214.65 Duplicative Disallow 

109 District Theaters, Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

49 SCG-WR LLC $26,079,214.65 Duplicative Disallow 

110 SCG-WR LLC $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

51 SCG-CS Inc. $26,079,214.65 Duplicative Disallow 

 

3

 The Objection was amended to remove the objection to Proofs of Claim Nos. 33 and 34 in Case No. 20-14696, 

which were withdrawn, and to add an objection to Proofs of Claim Nos. 85-2, 87-2, 89-2, 91-2, 94, 109, 110, 

108, 102, 103, 104, and 105 to the extent they assert claims against Debtor CB Theater. 

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108 SCG-CS Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

45 SCGK Inc. $26,079,214.65 Duplicative Disallow 

102 SCGK Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

46 SCG-SW Inc. $26,079,214.65 Duplicative Disallow 

103 SCG-SW Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

47 SCG-WL Inc. $26,079,214.65 Duplicative Disallow 

104 SCG-WL Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

48 SCG-N Inc. $26,079,214.65 Duplicative Disallow 

105 SCG-N Inc. $26,079,214.65 Duplicative; CB Theater 

not liable 

Disallow 

I. RELIEF REQUESTED 

1. The Debtors request entry of an order, substantially in the form attached hereto as 

Exhibit A, pursuant to Bankruptcy Code Section 502(b), rule 3007 of the Bankruptcy Rules, and 

rule 3007-1 of the Local Bankruptcy Rules, (a) disallowing and expunging Amended Claim No. 

85 of Khan, Amended Claim No. 87 of SCGC, Amended Claim No. 89 of SCGM, Amended 

Claim No. 91 of SCG-B, Claim No. 94 of SCG-VP, Claim No. 109 of District Theaters, Claim 

No. 110 of SCG-WR, Claim No. 108 of SCG-CS, Claim No. 102 of SCGK, Claim No. 103 of 

SCG-SW, Claim No. 104 of SCG-WL, and Claim No. 105 of SCG-N for which Debtor CB 

Theater is not liable; (b) furthermore, disallowing and expunging Amended Claim No. 85 of 

Khan, Amended Claim Nos. 29 and 87 of SCGC, Amended Claim Nos. 30 and 89 of SCGM, 

Amended Claim Nos. 31 and 91 of SCG-B, Claim Nos. 39 and 94 of SCG-VP, Claim Nos. 50 

and 109 of District Theaters, Claim Nos. 49 and 110 of SCG-WR, Claim Nos. 51 and 108 of 

SCG-CS, Claim Nos. 45 and 102 of SCGK, Claim Nos. 46 and 103 of SCG-SW, Claim Nos. 47 

and 104 of SCG-WL, and Claim Nos. 48 and 105 of SCG-N as duplicative; and (c) disallowing 

and expunging Amended Claim No. 28 Khan for which Debtors Cinemex USA and Cinemex 

Holdings are not liable for the amount claimed. 

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II. JURISDICTION AND VENUE 

2. The United States Bankruptcy Court for the Southern District of Florida (the 

“Bankruptcy Court”) has jurisdiction over this matter pursuant to 28 U.S.C. Sections 157 and 

1334. This matter is a core proceeding within the meaning of 28 U.S.C. Section 157(b)(2). 

3. Venue is proper pursuant to 28 U.S.C. Sections 1408 and 1409. 

4. The bases for the relief requested in this Amended Objection are Sections 105(a) 

and 502(b) of the Bankruptcy Code, Bankruptcy Rule 3007, and Local Bankruptcy Rule 3007-1. 

III. FACTUAL HISTORY 

A. The Bankruptcy 

5. On April 25, 2020, Cinemex USA and Cinemex Holdings filed for bankruptcy 

under chapter 11 of title 11 of the Bankruptcy Code in this Court. On April 26, 2020 (together 

with April 25, 2020, the “Petition Dates”), CB Theater also filed for bankruptcy under chapter 11 

in this Court. 

6. The deadline to file proofs of claim was set as July 6, 2020. 

7. The Debtors are authorized to continue to operate their businesses and manage 

their properties as debtors-in-possession. No examiner or trustee has been appointed in the 

Chapter 11 Cases. 

8. Cinemex is in the movie theater business and is based in Miami, Florida. At the 

time of the bankruptcy filing, Cinemex operated 41 movie theaters in dozens of cities in 12 

states, including Florida. The theaters operate under the brand name “CMX Cinemas.” 

B. The Transaction and Resulting Litigation 

9. On March 10, 2020, Debtors Cinemex USA and Cinemex Holdings entered into 

two equity purchase agreements (the “Agreement”) with Khan, as well as with SCGC, SCGM, 

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SCG-B, SCG-VP, District Theaters, SCG-WR, SCG-CS, SCGK, SCG-SW, SCG-WL, and SCGN, companies wholly owned by Khan (collectively, the “Companies”) to purchase Star Cinema 

Grill (the “Transaction”). See Agreement, attached hereto as Exhibit B. CB Theater was not a 

party, signatory, or guarantor to the Agreement. 

10. Because of the looming coronavirus outbreak and Khan’s and the Companies’ 

inability as a result to meet the required closing conditions and to comply with the necessary 

representations and warranties, the parties never closed on the Transaction. See Mot. Dismiss, 

Khan v. Cinemex USA, No. 4:20-cv-01178 (S.D. Tex. Apr. 23, 2020), ECF No. 37, attached 

hereto as Exhibit C. 

11. Specifically, one of the conditions to closing required that Khan and the 

Companies provide reasonable access to the properties underlying the Transaction and the 

employees of Star Cinema Grill. However, on account of governmental orders that went into 

effect in order to curtail the coronavirus pandemic, access to the properties and employees was 

made impossible. See id. 9-12. 

12. In addition, one of the representations and warranties of Khan and the Companies 

in the Agreement was that the employees were authorized to operate the Star Cinema Grill. 

However, because of governmental shut-down orders relating to the coronavirus pandemic, the 

employees have been unable to operate the business. See id. 12-15. 

13. On March 24, 2020, Cinemex informed Khan that it is not obligated to close the 

Transaction because “Cinemex’s operations and finance teams lack pre-Closing access to Star 

Cinema theaters and the Corporate Employees managing those theaters. Attempting to close 

under these circumstances would imperil Cinemex personnel. Moreover, key personnel are 

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located in Mexico City and cannot get to Houston regardless because the US/Mexico border is 

closed.” See Proof of Claim No. 85-2, Exhibit A2 (Complaint) ¶ 45. 

14. On April 1, 2020, Khan and the Companies filed a complaint against Debtors 

Cinemex USA and Cinemex Holdings in the United States District Court for the Southern 

District of Texas, Case No. 4:20-cv-01178, seeking specific performance for Cinemex USA and 

Cinemex Holdings to close on the Transaction (the “Complaint”). See Proof of Claim No. 85-2, 

Exhibit A2 (Complaint). Khan and the Companies did not name CB Theater as a defendant in 

the Complaint. 

15. On April 23, 2020, Cinemex USA and Cinemex Holdings filed a Motion to 

Dismiss. See Exhibit C (Mot. Dismiss, Khan v. Cinemex USA).

16. The litigation has been stayed by the Debtors’ bankruptcy cases. 

C. The Claims 

17. On July 6, 2020, Khan filed Proof of Claim No. 28 in Case No. 20-14696. That 

same day, Khan filed Amended Proof of Claim No. 28 in Case No. 20-14696, alleging an 

unsecured claim against Debtor Cinemex Holdings in the amount of $82,970,000.00. 

18. On July 6, 2020, Khan also filed Proof of Claim No. 85 in Case No. 20-14695. 

That same day, Khan filed Amended Proof of Claim No. 85 in Case No. 20-14695, alleging an 

unsecured claim against Debtor Cinemex USA in the amount of $82,970,000.00. Khan listed CB 

Theater as “Debtor 2” on Amended Proof of Claim No. 85. 

19. On July 6, 2020, SCGC filed Proof of Claim No. 29 in Case No. 20-14696. That 

same day, SCGC filed Amended Proof of Claim No. 29 in Case No. 20-14696, alleging an 

unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

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20. On July 6, 2020, SCGC also filed Proof of Claim No. 87 in Case No. 20-14695. 

That same day, SCGC filed Amended Proof of Claim No. 87 in Case No. 20-14695, alleging an 

unsecured claim against Debtor Cinemex USA in the amount of $26,079,214.65. SCGC listed 

CB Theater as “Debtor 2” on Amended Proof of Claim No. 87. 

21. On July 6, 2020, SCGM filed Proof of Claim No. 30 in Case No. 20-14696. That 

same day, SCGM filed Amended Proof of Claim No. 30 in Case No. 20-14696, alleging an 

unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

22. On July 6, 2020, SCGM also filed Proof of Claim No. 89 in Case No. 20-14695. 

That same day, SCGC filed Amended Proof of Claim No. 89 in Case No. 20-14695, alleging an 

unsecured claim against Debtor Cinemex USA in the amount of $26,079,214.65. SCGM listed 

CB Theater as “Debtor 2” on Amended Proof of Claim No. 89. 

23. On July 6, 2020, SCG-B filed Proof of Claim No. 31 in Case No. 20-14696. That 

same day, SCG-B filed Amended Proof of Claim No. 31 in Case No. 20-14696, alleging an 

unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

24. On July 6, 2020, SCG-B also filed Proof of Claim No. 91 in Case No. 20-14695. 

That same day, SCG-B filed Amended Proof of Claim No. 91 in Case No. 20-14695, alleging an 

unsecured claim against Debtor Cinemex USA in the amount of $26,079,214.65. SCG-B listed 

CB Theater as “Debtor 2” on Amended Proof of Claim No. 91. 

25. On July 6, 2020, SCG-VP filed Proof of Claim No. 39 in Case No. 20-14696, 

alleging an unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

26. On July 6, 2020, SCG-VP also filed Proof of Claim No. 94 in Case No. 20-14695, 

alleging an unsecured claim against Debtor Cinemex USA in the amount of $26,079,214.65. 

SCG-VP listed CB Theater as “Debtor 2” on Proof of Claim No. 94. 

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27. On July 6, 2020, District Theaters filed Proof of Claim No. 50 in Case No. 20-

14696, alleging an unsecured claim against Debtor Cinemex Holdings in the amount of 

$26,079,214.65. 

28. On July 6, 2020, District Theaters also filed Proof of Claim No. 109 in Case No. 

20-14695, alleging an unsecured claim against Debtor Cinemex USA in the amount of 

$26,079,214.65. District Theaters listed CB Theater as “Debtor 2” on Proof of Claim No. 109. 

29. On July 6, 2020, SCG-WR filed Proof of Claim No. 49 in Case No. 20-14696, 

alleging an unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

30. On July 6, 2020, SCG-WR also filed Proof of Claim No. 110 in Case No. 20-

14695, alleging an unsecured claim against Debtor Cinemex USA in the amount of 

$26,079,214.65. SCG-WR listed CB Theater as “Debtor 2” on Proof of Claim No. 110. 

31. On July 6, 2020, SCG-CS filed Proof of Claim No. 51 in Case No. 20-14696, 

alleging an unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

32. On July 6, 2020, SCG-CS also filed Proof of Claim No. 108 in Case No. 20-

14695, alleging an unsecured claim against Debtor Cinemex USA in the amount of 

$26,079,214.65. SCG-CS listed CB Theater as “Debtor 2” on Proof of Claim No. 108. 

33. On July 6, 2020, SCGK filed Proof of Claim No. 45 in Case No. 20-14696, 

alleging an unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

34. On July 6, 2020, SCGK also filed Proof of Claim No. 102 in Case No. 20-14695, 

alleging an unsecured claim against Debtor Cinemex USA in the amount of $26,079,214.65. 

SCGK listed CB Theater as “Debtor 2” on Proof of Claim No. 102. 

35. On July 6, 2020, SCG-SW filed Proof of Claim No. 46 in Case No. 20-14696, 

alleging an unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

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36. On July 6, 2020, SCG-SW also filed Proof of Claim No. 103 in Case No. 20-

14695, alleging an unsecured claim against Debtor Cinemex USA in the amount of 

$26,079,214.65. SCG-SW listed CB Theater as “Debtor 2” on Proof of Claim No. 103. 

37. On July 6, 2020, SCG-WL filed Proof of Claim No. 47 in Case No. 20-14696, 

alleging an unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

38. On July 6, 2020, SCG-WL also filed Proof of Claim No. 104 in Case No. 20-

14695, alleging an unsecured claim against Debtor Cinemex USA in the amount of 

$26,079,214.65. SCG-WL listed CB Theater as “Debtor 2” on Proof of Claim No. 104. 

39. On July 6, 2020, SCG-N filed Proof of Claim No. 48 in Case No. 20-14696, 

alleging an unsecured claim against Debtor Cinemex Holdings in the amount of $26,079,214.65. 

40. On July 6, 2020, SCG-N also filed Proof of Claim No. 105 in Case No. 20-14695, 

alleging an unsecured claim against Debtor Cinemex USA in the amount of $26,079,214.65. 

SCG-N listed CB Theater as “Debtor 2” on Proof of Claim No. 105. 

41. Khan’s Claims and the Companies’ Claims are collectively referred to herein as 

the “Claims.” 

IV. OBJECTION 

42. By this Amended Objection, the Debtors seek to (a) disallow and expunge 

Amended Claim No. 85 of Khan, Amended Claim No. 87 of SCGC, Amended Claim No. 89 of 

SCGM, Amended Claim No. 91 of SCG-B, Claim No. 94 of SCG-VP, Claim No. 109 of District 

Theaters, Claim No. 110 of SCG-WR, Claim No. 108 of SCG-CS, Claim No. 102 of SCGK, 

Claim No. 103 of SCG-SW, Claim No. 104 of SCG-WL, and Claim No. 105 of SCG-N for 

which Debtor CB Theater is not liable; (b) furthermore, disallow and expunge Amended Claim 

No. 85 of Khan, Amended Claim Nos. 29 and 87 of SCGC, Amended Claim Nos. 30 and 89 of 

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SCGM, Amended Claim Nos. 31 and 91 of SCG-B, Claim Nos. 39 and 94 of SCG-VP, Claim 

Nos. 50 and 109 of District Theaters, Claim Nos. 49 and 110 of SCG-WR, Claim Nos. 51 and 

108 of SCG-CS, Claim Nos. 45 and 102 of SCGK, Claim Nos. 46 and 103 of SCG-SW, Claim 

Nos. 47 and 104 of SCG-WL, and Claim Nos. 48 and 105 of SCG-N as duplicative; and (c) 

disallow and expunge Amended Claim No. 28 Khan for which Debtors Cinemex USA and 

Cinemex Holdings are not liable for the amount claimed. 

43. Simply put, none of the claims are supported by competent evidence of damages 

and fail to meet the claimants’ burden of initial proof. Given the outsized, overlapping and 

overstated claims, resolution is necessary at this juncture to facilitate the Debtors’ restructuring. 

44. Section 502(a) of the Bankruptcy Code provides that “[a] claim or interest, proof 

of which is filed under Section 501 of this title, is deemed allowed, unless a party in interest ... 

objects.” 11 U.S.C. § 502(a). As set forth in Bankruptcy Rule 3001(f), a properly executed and 

filed proof of claim constitutes prima facie evidence of the validity and amount of the claim 

under Section 502(a) of the Bankruptcy Code. However, a claimant’s proof of claim is entitled 

to the presumption of prima facie validity only until the debtor effectively rebuts the 

presumption of validity. In re Santiago, 404 B.R. 564, 570 (Bankr. S.D. Fla. 2009). The burden 

of proof then shifts to the creditor. Id. 

A. CB Theater Is Not Liable for Khan and the Companies’ Claims 

45. Amended Claim No. 85 of Khan, Amended Claim No. 87 of SCGC, Amended 

Claim No. 89 of SCGM, Amended Claim No. 91 of SCG-B, Claim No. 94 of SCG-VP, Claim 

No. 109 of District Theaters, Claim No. 110 of SCG-WR, Claim No. 108 of SCG-CS, Claim No. 

102 of SCGK, Claim No. 103 of SCG-SW, Claim No. 104 of SCG-WL, and Claim No. 105 of 

SCG-N list CB Theater as “Debtor 2” on their respective Proofs of Claim. 

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46. CB Theater is not liable to Khan or the Companies for the amounts they assert in 

their Proofs of Claim. CB Theater was not a party or a signatory to the Agreement. 

47. Section 12.12 of the Agreement states: 

All claims or causes of action (whether in contract or in tort, in law or in equity) 

that may be based upon, arise out of or relate to this Agreement or the other 

Transaction Documents, or the negotiation, execution or performance of this 

Agreement or the other Transaction Documents (including any representation or 

warranty made in or in connection with this Agreement or the other Transaction 

Documents or as an inducement to enter into this Agreement or the other 

Transaction Documents), may be made only against the entities that are expressly 

identified as parties hereto and thereto. No Person who is not a named party to 

this Agreement or the other Transaction Documents, including any past, present 

or future director, officer, employee, incorporator, member, partner, stockholder, 

Affiliate, agent, attorney or Representative of any named party to this Agreement 

or the other Transaction Documents (“Non-Party Affiliates”), shall have any 

liability (whether in contract or in tort, in law or in equity, or based upon any 

theory that seeks to impose liability of an entity party against its owners or 

affiliates) for any obligations or liabilities arising under, in connection with or 

related to this Agreement or such other Transaction Document (as the case may 

be) or for any claim based on, in respect of, or by reason of this Agreement or 

such other Transaction Document (as the case may be) or the negotiation or 

execution hereof or thereof; and each party hereto waives and releases all such 

liabilities, claims and obligations against any such Non-Party Affiliates. NonParty Affiliates are expressly intended as third party beneficiaries of this 

provision of this Agreement. 

Ex. B at § 12.12. 

48. The Agreement unequivocally exempts CB Theater from any liability for the 

amounts allegedly owed to Khan and the Companies in connection with the Transaction. As 

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such, it was wrongly named as an additional debtor on the Proofs of Claim, and the Court should 

disallow these Claims.4

 

B. Companies’ Claims and Amended Claim No. 85 Are Duplicative of Claim No. 28 

49. First, Amended Claim No. 85 of Khan should be disallowed as it is entirely 

duplicative of Amended Claim No. 28 of Khan. Both Claims seek damages for alleged breach 

for the same amount in connection with the Transaction. The only difference between the 

Claims is that Amended Claim No. 28 seeks damages against Cinemex Holdings while Amended 

Claim No. 85 seeks damages against Cinemex USA and CB Theater. However, one claim does 

not allege different conduct by one of the Debtors as opposed to others in connection therewith, 

and they are for the same underlying alleged breach. 

50. Moreover, the Companies’ Claims—i.e., Amended Claim Nos. 29 and 87 of 

SCGC, Amended Claim Nos. 30 and 89 of SCGM, Amended Claim Nos. 31 and 91 of SCG-B, 

Claim Nos. 39 and 94 of SCG-VP, Claim Nos. 50 and 109 of District Theaters, Claim Nos. 49 

and 110 of SCG-WR, Claim Nos. 51 and 108 of SCG-CS, Claim Nos. 45 and 102 of SCGK, 

Claim Nos. 46 and 103 of SCG-SW, Claim Nos. 47 and 104 of SCG-WL, and Claim Nos. 48 and 

105 of SCG-N—should also be disallowed as they are duplicative of each other. They are also 

all duplicative of Amended Claim No. 28 of Khan, because they are for the same alleged 

underlying breach, and they do not allege differing injuries. Furthermore, all of the Companies 

 

4

 Section 9.2 provides that the entirety of Article 12 of the Agreement survives termination: “In the event of the 

termination of this Agreement pursuant to Section 9.1, written notice thereof shall be given to the other Parties, 

specifying the provisions hereof pursuant to which such termination is made and the basis therefor, and this 

entire Agreement shall forthwith become void (and there shall be no liability or obligation on the part of any of 

the Parties or their respective officers, directors or equity holders); provided that, no such termination shall 

relieve any Party hereto of any liability or damages resulting from any willful breach of this Agreement prior to 

such termination, in which case, the aggrieved Party shall be entitled to all remedies available at law or in 

equity; and provided further that the provisions of this Section 9.2, Section 10.2, Section 10.4, Section 10.5 and 

ARTICLE 12 shall survive any termination of this Agreement and remain valid and binding obligations of the 

Parties.” 

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are owned by Khan. There is no separate harm that the Companies allegedly suffered in 

connection with the Transaction, nor do they so allege. 

51. The failure to disallow the aforementioned claims as duplicative would result in a 

windfall against the Debtors’ estates, to the detriment of other similarly situated creditors. 

Moreover, elimination of the duplicative claims will enable the Debtors to maintain a more 

accurate claims register. As a result of these claims, the claims register is currently inflated in an 

amount in excess of $656 million. As such, the Court should disallow Amended Claim No. 85 of 

Khan and the Companies’ Claims as duplicative. 

C. The Claims Should Be Disallowed as Debtors Did Not Breach the Agreement 

52. The Claims should be disallowed in their entirety because Cinemex USA and 

Cinemex Holdings are not liable for damages to Khan or the Companies in connection with the 

Transaction. First, contrary to the statements in the Complaint, Khan and the Companies did not 

fulfill the conditions required to close the Transaction, precluding Cinemex USA and Cinemex 

Holdings from being able to close and permitting termination of the Agreement. They also did 

not comply with the required representations and warranties under the Agreement. 

53. Section 9.1(D) of the Agreement permits Cinemex USA to terminate the 

Transaction if “any of the covenants or agreements of [Khan] or the Companies set forth in this 

Agreement shall have been breached such that the condition to Closing set forth in Section 

8.1[B] would not be satisfied...” See Exhibit B (Agreement), Section 9.1(D). Section 8.1(B), in 

turn, states that one of the “Closing Conditions” is that the “Companies and [Khan] will have 

performed and complied in all material respects... with all of the covenants and agreements 

required to be performed by the Companies and [Khan], as the case may be, hereunder or under 

any of the Transaction Documents at or prior to the Closing.” Id. § 8.1(B). 

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54. Among those covenants are in Sections 7.2 and 7.9 of the Agreement, which, as 

Khan admits in the Complaint, require Khan and the Companies to provide Cinemex with 

“reasonable access to and the right to inspect all of the properties, assets, premises, books and 

records, contracts, agreements and other documents and data related to the Company Group,” see 

id. § 7.2, and with “reasonable access to each Corporate Employee.” See Proof of Claim No. 85-

2, Exhibit A2 (Complaint) ¶ 52. 

55. As such, Khan and the Companies were required to provide reasonable access to 

the properties underlying the Transaction, as well as to the employees, as a condition to closing. 

However, because of governmental orders that went into effect to curtail the spread of the 

coronavirus, access to the properties and employees was made impossible. See Exhibit C (Mot. 

Dismiss, Khan v. Cinemex USA) 9-12. 

56. In addition, Section 5.16(B) of the Agreement states that “the Company Group is 

in possession of, and at all times has possession of, and immediately following the Closing will 

hold, all material franchises, grants, authorizations, licenses, permits, registrations, 

qualifications, easements, variances, exemptions, consents, certificates, approvals and orders 

necessary to own, lease and operate its properties, to carry on its Business” and that “no member 

of the Company Group has received any written notice to the contrary.” See Exhibit B

(Agreement), § 5.16(B). 

57. However, due to the governmental shut-down orders, the Companies’ employees 

did not have the authorization to operate the business. See Exhibit C (Mot. Dismiss, Khan v. 

Cinemex USA) 12-15. As such, Khan and the Companies breached that representation and 

warranty in the Agreement. 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 15 of 221
09923-00001/12384753.2 16 

58. Cinemex validly exercised its rights under the Agreement to terminate the 

Agreement for Khan’s and the Companies’ failure to satisfy closing conditions. Pursuant to the 

Agreement, the effect of termination is that the “entire Agreement shall forthwith become void 

(and there shall be no liability or obligation on the part of any of the Parties or their respective 

officers, directors or equity holders).” Exhibit B (Agreement), § 9.2. For this reason, the 

Claims should be disallowed and expunged in their entirety. 

59. The Claims should be disallowed and expunged for the additional reasons that 

Cinemex USA and Cinemex Holdings did not breach the Agreement due to the principles of 

frustration of purpose and impossibility. The principal purpose of the Agreement was for 

Cinemex to become the owner of operating movie theaters. However, because of the 

governmental shut-down orders that would have prevented Cinemex from being able to operate 

the move theaters had it closed on the Transaction, the purpose of the Transaction was frustrated. 

See, e.g., Unihealth v. U.S. Healthcare, Inc., 14 F. Supp. 2d 623, 635 (D.N.J. 1998) (excusing 

performance where government ended hospital billing system and parties should have assumed 

billing rates under the system would fluctuate but not that the system itself would end); Texas 

Co. v. Hogarth Shipping Corp., 256 U.S. 619, 629-30 (1921) (excusing ship owner’s 

performance where its ships were requisitioned for use in the British navy); Sch. Dist. No. 16 of 

Sherman Cty. V. Howard, 98 N.W. 666, 666-67 (Neb. 1904) (school district was released from 

paying teachers’ wages where school was shut down due to smallpox outbreak). While the 

parties, while negotiating the Transaction, foresaw the possibility of a coronavirus pandemic, 

they did not foresee the extreme and unprecedented events that the pandemic ultimately led to, 

including a governmental-imposed shut-down of entertainment venues for the foreseeable future. 

Indeed, the Agreement itself demonstrates the parties’ lack of foreseeability as to such measures, 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 16 of 221
09923-00001/12384753.2 17 

as the parties had contemplated in the Agreement access to properties and employees, as 

discussed supra. 

60. Moreover, Cinemex had no obligation to close on the Transaction because 

performance of the Agreement was rendered impossible due to travel restrictions and stay-athome requirements imposed by the governmental shut-down orders. See, e.g., Mueller v. 

Marvel, No. 03-07-110, 2004 WL 7325622, at *3 (Del. Com. Pl. Dec. 8, 2004) (finding 

impossibility where chicken house which was subject of lease collapsed because of age, thereby 

rendering use of building by defendant for storage and retrieval of products impossible). Here, it 

was impossible for Khan and the Companies to satisfy their pre-closing obligation to provide 

Cinemex with reasonable access to the property and employees, as discussed supra. It was also 

impossible for key personnel from Cinemex to travel to Houston to inspect the premises. As 

such, the Debtors did not breach the Agreement, and Khan’s and the Companies’ claims alleging 

same should therefore be disallowed and expunged in their entirety. 

V. RESERVATION OF RIGHTS 

61. This Amended Objection is limited to the grounds stated herein. Accordingly, it 

is without prejudice to the rights of the Debtors or any other party in interest to object to any 

claim on any grounds whatsoever, and the Debtors expressly reserve all further substantive or 

procedural objections they may have. The Debtors expressly reserve the right to further amend, 

modify, or supplement this Amended Objection and to file additional substantive or nonsubstantive objections to the Claims. Should one or more grounds of objection set forth in this 

Amended Objection be overruled, the Debtors reserve the right to object to the Claims on any 

other applicable ground. The Debtors also expressly reserve the right to raise further objections, 

including objections under Section 502(d) of the Bankruptcy Code. 

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09923-00001/12384753.2 18 

62. Nothing contained herein or any actions taken pursuant to such relief is intended 

or should be construed as (a) an admission as to the validity of any prepetition claim against a 

Debtor entity; (b) a waiver of any party’s right to dispute any prepetition claim on any grounds; 

(c) a promise or requirement to pay any prepetition claim; (d) an implication or admission that 

any particular claim is of a type specified or defined in this Amended Objection or any order 

granting the relief requested by this Amended Objection; (e) a request or authorization to assume 

any prepetition agreement, contract, or lease pursuant to Section 365 of the Bankruptcy Code; or 

(f) a waiver of the Debtors’ rights under the Bankruptcy Code or any other applicable law. 

VI. NOTICE

63. The Debtors will provide notice of this Amended Objection to: (a) the Office of 

the United States Trustee for the Southern District of Florida; (b) Khan, the Companies, and their 

counsel; and (b) any party that has requested notice pursuant to Bankruptcy Rule 2002. The 

Debtors submit that, in light of the nature of the relief requested, no other or further notice need 

be given. 

VII. CONCLUSION 

 WHEREFORE, the Debtors respectfully request entry of an Order substantially in the 

form attached hereto as Exhibit A, (a) granting the instant Motion; (b) disallowing and 

expunging Amended Claim No. 85 of Khan, Amended Claim No. 87 of SCGC, Amended Claim 

No. 89 of SCGM, Amended Claim No. 91 of SCG-B, Claim No. 94 of SCG-VP, Claim No. 109 

of District Theaters, Claim No. 110 of SCG-WR, Claim No. 108 of SCG-CS, Claim No. 102 of 

SCGK, Claim No. 103 of SCG-SW, Claim No. 104 of SCG-WL, and Claim No. 105 of SCG-N 

for which Debtor CB Theater is not liable; (c) furthermore, disallowing and expunging Amended 

Claim No. 85 of Khan, Amended Claim Nos. 29 and 87 of SCGC, Amended Claim Nos. 30 and 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 18 of 221
09923-00001/12384753.2 19 

89 of SCGM, Amended Claim Nos. 31 and 91 of SCG-B, Claim Nos. 39 and 94 of SCG-VP, 

Claim Nos. 50 and 109 of District Theaters, Claim Nos. 49 and 110 of SCG-WR, Claim Nos. 51 

and 108 of SCG-CS, Claim Nos. 45 and 102 of SCGK, Claim Nos. 46 and 103 of SCG-SW, 

Claim Nos. 47 and 104 of SCG-WL, and Claim Nos. 48 and 105 of SCG-N as duplicative; (d) 

disallowing and expunging Amended Claim No. 28 Khan for which Debtors Cinemex USA and 

Cinemex Holdings are not liable for the amount claimed; and (e) granting any and further relief 

as the Court deems just and proper. 

 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 19 of 221
09923-00001/12384753.2 20 

 Respectfully submitted this 22nd day of October, 2020. 

 QUINN EMANUEL URQUHART & 

 SULLIVAN, LLP 

 

 Patricia B. Tomasco (admitted pro hac vice) 

 711 Louisiana Street, Suite 500 

 Houston, Texas 77002 

 Telephone: 713-221-7000 

 Facsimile: 713-221-7100 

 Email: pattytomasco@quinnemanuel.com

 

 By: /s/ Patricia B. Tomasco

 Patricia B. Tomasco (admitted pro hac 

 vice) 

 -and- 

 

 Juan P. Morillo (FBN 135933) 

 1300 I Street, NW, Suite 900 

 Washington, D.C. 20005 

 Telephone: 202-538-8000 

 Facsimile: 202-538-8100 

 Email: juanmorillo@quinnemanuel.com

 

 -andBAST AMRON LLP 

 Jeffrey P. Bast (FBN 996343) 

 Brett M. Amron (FBN 148342) 

 One Southeast Third Avenue, Suite 1400 

 Sun Trust International Center 

 Miami, Florida 33131 

 Telephone: 305-379-7904 

 Facsimile: 305-379-7905 

 Email: jbast@bastamron.com

 Email: bamron@bastamron.com

 

 COUNSEL FOR CINEMEX USA REAL 

ESTATE HOLDINGS, INC., CINEMEX 

HOLDINGS USA, INC., and CB THEATER 

EXPERIENCE LLC 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 20 of 221
EXHIBIT A 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 21 of 221
09923-00001/12389046.1 

UNITED STATES BANKRUPTCY COURT 

SOUTHERN DISTRICT OF FLORIDA 

MIAMI DIVISION 

www.flsb.uscourts.gov

In re: 

 

CINEMEX USA REAL ESTATE Chapter 11 

HOLDINGS, INC., CINEMEX 

HOLDINGS USA, INC., and CB 

THEATER EXPERIENCE LLC,1 

 Case No. 20-14695-LMI 

 

Debtors. (Jointly Administered) 

 / 

ORDER GRANTING DEBTORS’ AMENDED OBJECTION TO AMENDED CLAIM 

NOS. 28 AND 85 OF OMAR KHAN, AMENDED CLAIM NOS. 29 AND 87 OF S.C.G.C. 

INC., AMENDED CLAIM NOS. 30 AND 89 OF S.C.G.M. INC., AMENDED CLAIM 

NOS. 31 AND 91 OF SCG-B INC., CLAIM NOS. 39 AND 94 OF SCG-VP INC., CLAIM 

NOS. 50 AND 109 OF DISTRICT THEATERS INC., CLAIM NOS. 49 AND 110 OF SCGWR LLC, CLAIM NOS. 51 AND 108 OF SCG-CS INC., CLAIM NOS. 45 AND 102 OF 

SCGK INC., CLAIM NOS. 46 AND 103 OF SCG-SW INC., CLAIM NOS. 47 AND 104 OF 

SCG-WL INC., AND CLAIM NOS. 48 AND 105 OF SCG-N INC. 

 

1 The Debtors in these cases and the last four digits of each Debtor’s federal tax identification number are as 

follows: (1) Cinemex USA Real Estate Holdings, Inc. (2194); (2) Cinemex Holdings USA, Inc. (5502); and (3) 

CB Theater Experience, LLC (0563). The address for the Debtors is 175 South West 7th Street, Suite 1108, 

Miami, Florida 33130. 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 22 of 221
09923-00001/12389046.1 2 

 Upon the amended objection (the “Amended Objection”) of the Debtors to Amended Claim 

Nos. 28 and 85 of Omar Khan (“Khan”), Amended Claim Nos. 29 and 87 of S.C.G.C. Inc. 

(“SCGC”), Amended Claim Nos. 30 and 89 of S.C.G.M. Inc. (“SCGM”), Amended Claim Nos. 

31 and 91 of SCG-B Inc. (“SCG-B”), Claim Nos. 39 and 94 of SCG-VP Inc. (“SCG-VP”), Claim 

Nos. 50 and 109 of District Theaters Inc. (“District Theaters”), Claim Nos. 49 and 110 of SCGWR LLC (“SCG-WR”), Claim Nos. 51 and 108 of SCG-CS Inc. (“SCG-CS”), Claim Nos. 45 and 

102 of SCGK Inc. (“SCGK”), Claim Nos. 46 and 103 of SCG-SW Inc. (“SCG-SW”), Claim Nos. 

47 and 104 of SCG-WL Inc. (“SCG-WL”), and Claim Nos. 48 and 105 of SCG-N Inc. (“SCGN”), and request for entry of an order (a) disallowing and expunging Amended Claim No. 85 of 

Khan, Amended Claim No. 87 of SCGC, Amended Claim No. 89 of SCGM, Amended Claim No. 

91 of SCG-B, Claim No. 94 of SCG-VP, Claim No. 109 of District Theaters, Claim No. 110 of 

SCG-WR, Claim No. 108 of SCG-CS, Claim No. 102 of SCGK, Claim No. 103 of SCG-SW, 

Claim No. 104 of SCG-WL, and Claim No. 105 of SCG-N for which Debtor CB Theater is not 

liable; (b) furthermore, disallowing and expunging Amended Claim No. 85 of Khan, Amended 

Claim Nos. 29 and 87 of SCGC, Amended Claim Nos. 30 and 89 of SCGM, Amended Claim Nos. 

31 and 91 of SCG-B, Claim Nos. 39 and 94 of SCG-VP, Claim Nos. 50 and 109 of District 

Theaters, Claim Nos. 49 and 110 of SCG-WR, Claim Nos. 51 and 108 of SCG-CS, Claim Nos. 45 

and 102 of SCGK, Claim Nos. 46 and 103 of SCG-SW, Claim Nos. 47 and 104 of SCG-WL, and 

Claim Nos. 48 and 105 of SCG-N as duplicative; and (c) disallowing and expunging Amended 

Claim No. 28 Khan for which Debtors Cinemex USA and Cinemex Holdings are not liable for the 

amount claimed, as more fully set forth in the Amended Objection; and the Court having found 

that the Debtors provided appropriate notice of the Amended Objection and the opportunity for a 

hearing on the Amended Objection under the circumstances; and the Court having reviewed the 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 23 of 221
09923-00001/12389046.1 3 

Amended Objection and having heard statements in support of the relief requested therein at a 

hearing before the Court (the “Hearing”); and the Court having determined that the legal and 

factual bases set forth in the Amended Objection and at the Hearing establish just cause for the 

relief granted herein; and upon all of the proceedings had before the Court; and after due 

deliberation, 

 IT IS HEREBY ORDERED THAT: 

1. The Amended Objection is sustained as set forth herein. 

2. Any response to the Amended Objection not otherwise withdrawn, resolved, or 

adjourned is hereby overruled on the merits. 

3. Amended Claim No. 85 of Khan, Amended Claim No. 87 of SCGC, Amended 

Claim No. 89 of SCGM, Amended Claim No. 91 of SCG-B, Claim No. 94 of SCG-VP, Claim No. 

109 of District Theaters, Claim No. 110 of SCG-WR, Claim No. 108 of SCG-CS, Claim No. 102 

of SCGK, Claim No. 103 of SCG-SW, Claim No. 104 of SCG-WL, and Claim No. 105 of SCGN are disallowed and expunged in their entirety because CB Theater is not liable for the amount 

of the Claims for the reasons set forth in the Amended Objection. 

4. Amended Claim No. 85 of Khan, Amended Claim Nos. 29 and 87 of SCGC, 

Amended Claim Nos. 30 and 89 of SCGM, Amended Claim Nos. 31 and 91 of SCG-B, Claim 

Nos. 39 and 94 of SCG-VP, Claim Nos. 50 and 109 of District Theaters, Claim Nos. 49 and 110 

of SCG-WR, Claim Nos. 51 and 108 of SCG-CS, Claim Nos. 45 and 102 of SCGK, Claim Nos. 

46 and 103 of SCG-SW, Claim Nos. 47 and 104 of SCG-WL, and Claim Nos. 48 and 105 of SCGN are disallowed and expunged as duplicative of Amended Claim No. 28 of Khan. 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 24 of 221
09923-00001/12389046.1 4 

5. Amended Claim No. 28 of Khan is disallowed and expunged in its entirety because 

Cinemex USA and Cinemex Holdings are not liable for the amount of the Claim for the reasons 

set forth in the Amended Objection. 

6. The Clerk of the Court is authorized and directed to update the claims register 

maintained in these chapter 11 cases to reflect the relief granted in this Order. 

7. The Debtors are authorized to take all actions necessary to effectuate the relief 

granted pursuant to this Order in accordance with the Amended Objection. 

8. The terms and conditions of this Order will be immediately effective and 

enforceable upon its entry. 

9. This Court shall retain exclusive jurisdiction to resolve any dispute arising from or 

related to this Order. 

# # # 

Submitted By: 

Patricia B. Tomasco 

Quinn Emanuel Urquhart & Sullivan, LLP 

711 Louisiana, Suite 500 

Houston, Texas 77002 

Telephone: 713-221-7100 

Email: pattytomasco@quinnemanuel.com

-andJeffrey P. Bast 

Bast Amron LLP 

One Southwest Third Avenue 

Suite 1400 

Miami, Florida 33131 

Telephone: 305-379-7904 

Email: jbast@bastamron.com 

Copies to: 

Attorney Patty Tomasco, who shall serve a copy of this order on all interested parties and file a 

certificate of service reflecting same. 

Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 25 of 221
EXHIBIT B

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33439967.16 

EQUITY PURCHASE AGREEMENT 

by and among 

S.C.G.C. INC., 

S.C.G.M. INC., 

SCG-B INC., 

SCG-VP INC., 

DISTRICT THEATERS INC., 

SCG-WR LLC, 

SCG-CS INC., 

SCGK INC., 

SCG-SW INC., 

SCG-WL INC., 

OMAR KHAN, 

CINEMEX USA REAL ESTATE HOLDINGS, INC. 

and 

CINEMEX HOLDINGS USA, INC. 

dated as of March 10, 2020 

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i 

33439967.16 

TABLE OF CONTENTS 

ARTICLE 1. DEFINITIONS ...........................................................................................................1

1.1. Defined Terms .........................................................................................................1

ARTICLE 2. ACQUISITION OF EQUITY INTERESTS ............................................................14

2.1. Acquisition of Equity Interests by Buyer...............................................................14

2.2. Closing Estimates, and Closing Payments .............................................................14

2.3. Post-Closing Adjustment to Preliminary Purchase Price.......................................15

2.4. Withholding ...........................................................................................................18

2.5. Escrow....................................................................................................................18

ARTICLE 3. CLOSING ................................................................................................................19

3.1. Closing Date...........................................................................................................19

3.2. Closing Transaction ...............................................................................................19

ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE EQUITYHOLDER .........19

4.1. Authorization of Closing Transactions ..................................................................19

4.2. Absence of Conflicts ..............................................................................................19

4.3. Brokers’ Fees .........................................................................................................20

4.4. Securities; Title ......................................................................................................20

ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANIES .................20

5.1. Organization and Power .........................................................................................20

5.2. Authorization of Closing Transactions ..................................................................20

5.3. Capitalization; Subsidiaries ...................................................................................21

5.4. Absence of Conflicts ..............................................................................................22

5.5. Financial Statements ..............................................................................................22

5.6. Title to Tangible Assets .........................................................................................23

5.7. Certain Developments ............................................................................................23

5.8. Real Property .........................................................................................................24

5.9. Tax Matters ............................................................................................................26

5.10. Material Contracts ..................................................................................................27

5.11. Proprietary Rights; Privacy ....................................................................................29

5.12. Company Group’s Broker ......................................................................................29

5.13. Labor Matters .........................................................................................................30

5.14. Employee Benefit Plans .........................................................................................31

5.15. Affiliate Transactions.............................................................................................32

5.16. Compliance with Laws; Permits ............................................................................32

5.17. Environmental Matters...........................................................................................33

5.18. Insurance ................................................................................................................34

5.19. Litigation ................................................................................................................34

5.20. Inventory ................................................................................................................34

5.21. Material Suppliers ..................................................................................................35

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ii 

33439967.16 

5.22. Anti-Bribery; Anti-Corruption; Anti-Money Laundering; Anti-Terrorism; 

Sanctions ................................................................................................................35

5.23. Film Studio Contracts ............................................................................................35

5.24. NO OTHER REPRESENTATIONS .....................................................................36

ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF BUYER ...................................36

6.1. Organization and Power .........................................................................................36

6.2. Authorization of Closing Transactions ..................................................................36

6.3. Absence of Conflicts ..............................................................................................37

6.4. Litigation ................................................................................................................37

6.5. Independent Auditor ..............................................................................................37

6.6. Investment Intent; Restricted Securities ................................................................37

6.7. Due Diligence Review ...........................................................................................38

6.8. Availability of Funds; Solvency ............................................................................39

6.9. Closings and Mass Layoffs ....................................................................................40

6.10. Brokers’ Fees .........................................................................................................40

6.11. Exceptions to GAAP ..............................................................................................40

ARTICLE 7. COVENANTS .........................................................................................................40

7.1. Operation and Maintenance of the Business ..........................................................40

7.2. Access ....................................................................................................................41

7.3. Exclusive Dealing ..................................................................................................42

7.4. Further Assurances.................................................................................................42

7.5. Updating Disclosure Schedules .............................................................................42

7.6. Regulatory Filings ..................................................................................................43

7.7. 280G Matters .........................................................................................................43

7.8. Non-Compete .........................................................................................................44

7.9. Access to Corporate Employees; Transition Services Agreement ........................44

7.10. Domain Names.......................................................................................................45

7.11. Right of First Offer ................................................................................................45

ARTICLE 8. CONDITIONS TO OBLIGATIONS .......................................................................45

8.1. Buyer’s Closing Conditions ...................................................................................45

8.2. Equityholder’s Closing Conditions ........................................................................47

8.3. Frustration of Closing Conditions ..........................................................................48

ARTICLE 9. TERMINATION ......................................................................................................48

9.1. Termination ............................................................................................................48

9.2. Effect of Termination .............................................................................................49

ARTICLE 10. OTHER COVENANTS .........................................................................................49

10.1. Notice of Breach ....................................................................................................49

10.2. Press Releases and Announcements ......................................................................49

10.3. Further Transfers ....................................................................................................50

10.4. Confidentiality. ......................................................................................................50

10.5. WARN Act Notice .................................................................................................51

10.6. Director and Officer Indemnification ....................................................................51

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33439967.16 

10.7. Documents and Information ..................................................................................51

10.8. Release of Personal Guarantees .............................................................................51

10.9. Gift Certificates ......................................................................................................52

10.10. Third Party Agreements .........................................................................................52

10.11. Woodlands Construction ........................................................................................52

10.12. Screen Advertising Payments ................................................................................53

10.13. Sony Master Lease Payments ................................................................................54

ARTICLE 11. INDEMNIFICATION AND TAX MATTERS .....................................................54

11.1. Survival ..................................................................................................................54

11.2. Indemnification ......................................................................................................55

11.3. Indemnification Procedures ...................................................................................58

11.4. Treatment of Indemnification Payments ................................................................59

11.5. Reserved .................................................................................................................60

11.6. Tax Matters ............................................................................................................60

ARTICLE 12. MISCELLANEOUS ..............................................................................................63

12.1. Amendment and Waiver ........................................................................................63

12.2. Notices ...................................................................................................................64

12.3. Construction; Interpretation ...................................................................................65

12.4. Severability ............................................................................................................65

12.5. Entire Agreement; Assignment ..............................................................................66

12.6. Counterparts; Electronic Signatures ......................................................................66

12.7. Governing Law; Jurisdiction..................................................................................66

12.8. Expenses ................................................................................................................67

12.9. Parties in Interest....................................................................................................67

12.10. Schedules and Exhibits ..........................................................................................67

12.11. Remedies ................................................................................................................67

12.12. Non-Recourse ........................................................................................................68

12.13. Waiver of Conflicts and Privileged Information ...................................................69

12.14. Parent Guarantee. ...................................................................................................70

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33439967.16 

EXHIBITS 

Exhibit A - Accounting Principles 

Exhibit B - Current Assets 

Exhibit C - Current Liabilities 

Exhibit D - Escrow Agreement 

Exhibit E-1 - Example Statement of Net Working Capital 

Exhibit E-2 - Example Statement of Indebtedness 

SCHEDULES 

Schedule P-1 - Permitted Indebtedness 

Schedule P-2 - Permitted Liens 

Schedule W-1 - Woodlands Construction Reimbursement 

Schedule 2.2(B)(1) - Estimated Closing Company Group Indebtedness 

Schedule 4.2 - Absence of Conflicts 

Schedule 4.4 - Securities; Title 

Schedule 5.3(A) - Capitalization 

Schedule 5.3(B) - Subsidiaries 

Schedule 5.4 - Absence of Conflicts 

Schedule 5.5(A) - Financial Statements 

Schedule 5.5(C) - Undisclosed Liabilities 

Schedule 5.6 - Title to Tangible Assets 

Schedule 5.7 - Certain Developments 

Schedule 5.8(B) - Leased Real Property 

Schedule 5.8(C) - Schedule of Lease Information 

Schedule 5.9 - Tax Matters 

Schedule 5.10(A) - Material Contracts 

Schedule 5.10(B) - Material Contract; Exceptions 

Schedule 5.11(A) - Proprietary Rights; Privacy 

Schedule 5.11(B) - Ownership; Infringement 

Schedule 5.13(A) - Labor Matters 

Schedule 5.13(B) - Labor; Legal Compliance 

Schedule 5.13(C) - Immigration Matters 

Schedule 5.13(D) - Employees 

Schedule 5.14(A) - Employee Benefit Plans 

Schedule 5.14(D) - Benefit Plans: Reports 

Schedule 5.14(H) - Benefit Plans; Payments 

Schedule 5.15 - Affiliate Transactions 

Schedule 5.16(A) - Compliance with Laws 

Schedule 5.16(B) - Permits 

Schedule 5.17 - Environmental Matters 

Schedule 5.18 - Insurance 

Schedule 5.19 - Litigation 

Schedule 5.20 - Inventory 

Schedule 5.21(A) - Material Suppliers 

Schedule 5.21(B) - Change in Material Suppliers 

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33439967.16 

Schedule 7.1(A) - Operation and Maintenance of the Business 

Schedule 7.8 - Non-Compete 

Schedule 7.10 - Domain Names 

Schedule 8.1(D)(4) - Third Party Consents and Approvals (Condition Precedent) 

Schedule 10.8(A) - Release of Personal Guarantees 

Schedule 10.8(B) - Third Party Consents and Approvals (Covenant) 

Schedule 11.6(I) - Purchase Price Allocation 

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33439967.14 

33439967.16 

EQUITY PURCHASE AGREEMENT 

The following parties (the “Parties”) enter into this EQUITY PURCHASE AGREEMENT 

(this “Agreement”) as of March 10, 2020: (i) S.C.G.C. Inc., a Texas corporation (“SCGC”); (ii) 

S.C.G.M. Inc., a Texas corporation (“SCGM”); (iii) SCG-B Inc., a Texas corporation (“SCG-B”); 

(iv) SCG-VP Inc., a Texas corporation (“SCG-VP”); (v) District Theaters Inc., a Texas 

corporation (“District Theaters”); (vi) SCG-WR LLC., a Texas limited liability company (“SCGWR”); (vii) SCG-CS Inc., a Texas corporation (“SCG-CS”); (viii) SCGK Inc., a Texas 

corporation (“SCGK”); (ix) SCG-SW Inc., a Texas corporation (“SCG-SW”); (x) SCGWL Inc., 

a Texas corporation (“SCGWL” and with SCGC, SCGM, SCG-B, SCG-VP, District Theaters, 

SCG-WR, SCG-CS, SCGK and SCG-SW, collectively, the “Companies” and each a 

“Company”); (xi) Omar Khan, an individual resident of the State of Texas (the “Equityholder”); 

(xii) Cinemex USA Real Estate Holdings, Inc., a Delaware corporation (“Buyer”); and (xiii) 

Cinemex Holdings USA, Inc., a Delaware corporation (“Parent”). 

WHEREAS, the Equityholder owns all of the issued and outstanding equity interests of 

each Company (the “Equity Interests”); and 

WHEREAS, the Equityholder desires to transfer to Buyer, and Buyer desires to acquire 

from the Equityholder, all of the Equity Interests as set forth in, and subject to the provisions of, 

this Agreement and the other applicable Transaction Documents; 

NOW THEREFORE, in consideration of the premises and the mutual covenants herein 

contained and for other good and valuable consideration, the receipt and sufficiency of which are 

hereby acknowledged, the Parties agree as follows: 

ARTICLE 1. 

DEFINITIONS 

1.1. Defined Terms. In this Agreement, the following terms will have the following 

meanings: 

“Accounting Principles” means, GAAP, and, if any deviations or exceptions 

therefrom, those accounting policies, principles and practices set forth on Exhibit A. 

“Actual Value” is defined in Section 2.3(C)(3). 

“Adjustment Statement” is defined in Section 2.3(C)(1). 

“Affiliate” means, with respect to any specified Person, any other Person that, 

directly or indirectly, controls, is controlled by or is under common control with such specified 

Person. 

“Affiliated Group” means an affiliated group as defined in Section 1504 of the 

Code (or any analogous combined, consolidated or unitary group defined under state, local or 

foreign income Tax law) of which any member of the Company Group is or has been a member. 

“Agreement” is defined in the preamble to this Agreement. 

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“AML Laws” means all Legal Requirements from time to time concerning or 

relating to anti-money laundering and related guidelines, financial recordkeeping or reporting 

requirements, issued, administered or enforced by any Governmental Entity. 

“Anti-Corruption Laws” means all U.S. and non-U.S. Legal Requirements 

relating to the prevention of fraud, money laundering, corruption and bribery, including, without 

limitation, the U.S. Foreign Corrupt Practices Act of 1977, as amended, and any rules and 

regulations promulgated thereunder, and the U.K. Bribery Act and any other applicable anticorruption related rules or regulations. 

“Anti-Terrorism Laws” means all Legal Requirements relating to terrorism or 

money laundering, including, without limitation, Executive Order No. 13224, the PATRIOT Act, 

the Bank Secrecy Act, the Money Laundering Control Act of 1986 (i.e., 18 USC. §§ 1956 and 

1957), the Legal Requirements administered by the U.S. Department of Treasury Office of Foreign 

Assets Control, or any successor thereto, and all Legal Requirements comprising or implementing 

these Legal Requirements. 

“Attorney-Client Communications” means any communication occurring on or 

prior to the Closing between Law Firm, on the one hand, and any member of the Company Group, 

any Equityholder or any of their respective Affiliates or representatives, on the other hand, that in 

any way relates to the transactions contemplated by this Agreement (including the negotiation, 

preparation, execution and delivery of this Agreement and related agreements, and the 

consummation of the transactions contemplated hereby or thereby), including any representation, 

warranty or covenant of any party under this Agreement or any related agreement. 

“Basket” is defined in Section 11.2(C)(1). 

“Benefit Plan” means any “employee benefit plan” (as such term is defined in 

ERISA Section 3(3)) and any other employee benefit or compensation plan, program, policy, 

agreement or arrangement, including any equity-based, employment, retirement, profit sharing, 

bonus, incentive, severance, separation, change in control, retention, deferred compensation, fringe 

benefit, vacation, paid time off, medical, dental, life or disability plan, program, policy, agreement 

or arrangement, in each case, whether or not subject to ERISA, and whether written or oral, formal 

or informal, that a member of the Company Group sponsors, maintains, contributes to or has any 

obligation to contribute to for the benefit of any present or former employees, consultants, directors 

or service providers of any member of the Company Group, or with respect to which a member of 

the Company Group has any material liability (whether actual, contingent, with respect to any of 

its assets or otherwise). 

“Business” means the business of leasing, owning, managing or operating motion 

picture theaters. 

“Business Day” means any day, other than a Saturday or Sunday, on which 

commercial banks in Houston, Texas are authorized or required to be open for the general 

transaction of business. 

“Buyer” is defined in the preamble to this Agreement. 

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“Buyer Exclusions” is defined in Section 11.2(C)(2). 

“Buyer Fundamental Representations” is defined in Section 11.1(B). 

“Buyer Indemnitee” is defined in Section 11.2(A). 

“Cap” is defined in Section 11.2(C)(2). 

“Charter Documents” means, as applicable, the certificates or articles of 

incorporation, certificates or articles of organization, limited liability company agreement or 

operating agreement, bylaws or similar governing documents of a Person. 

“Claim Notice” is defined in Section 11.3(A). 

“Closing” is defined in Section 3.1. 

“Closing Company Group Cash” means, as of 11:59 p.m. Houston time on the 

date that is immediately prior to the Closing Date, the sum, immediately prior to Closing, of the 

fair market value of all cash and cash equivalents of the Company Group (including, without 

limitation, marketable securities (with maturities of 90 days or less), short-term investments, cash 

on hand, security deposits or prepaid rental amounts with respect to any of the Leased Real 

Property, checks issued to the Company Group (if cleared), and bank deposits (if cleared), in each 

case calculated in accordance with the Accounting Principles; provided, however, checks issued 

by the Company Group but uncleared shall be deducted from Cash unless such amounts are 

otherwise reflected in the calculation of Closing Company Group Indebtedness, Closing Net 

Working Capital or Transaction Expenses used to calculate the Final Purchase Price. 

Notwithstanding the foregoing, the sum of (i) all cash received by the Company Group in 

connection with the sale of Gift Certificates following the date hereof through 11:59 p.m. Houston 

time on the date that is immediately prior to April 1, 2020; minus (ii) , shall be excluded 

from the calculation of the Closing Company Group Cash for purposes hereunder. 

“Closing Company Group Indebtedness” means, as of 11:59 p.m. Houston time 

on the date that is immediately prior to the Closing Date, the aggregate amount of Indebtedness of 

the Company Group, calculated in accordance with the Accounting Principles. 

“Closing Date” is defined in Section 3.1. 

“Closing Net Working Capital” means, as of 11:59 p.m. Houston time on the date 

that is immediately prior to the Closing Date, the Net Working Capital of the Company Group, 

calculated in accordance with the Accounting Principles. 

“COBRA” means the requirements of Part 6 of Subtitle B of Title I of ERISA and 

Code Section 4980B and of any similar state Legal Requirement.

“Code” means the United States Internal Revenue Code of 1986, as amended. 

“Company” and “Companies” is defined in the preamble to this Agreement. 

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“Company / Equityholder Fundamental Representations” is defined in Section 

11.1(A). 

“Company Group” means the collective reference to each Company and its 

respective Subsidiaries. 

“Company Group Employee” means an employee of any member of the 

Company Group as of the date hereof. 

“Company Group Permits” is defined in Section 5.16(B). 

“Competing Proposal” means, other than the transactions contemplated by this 

Agreement, any inquiry, proposal or offer, relating to, whether in one or a series of related 

transactions, (a) the acquisition (directly or indirectly) by any Person of all or substantially all, or 

more than a majority of, the consolidated assets of the Company Group, taken as a whole; (b) the 

acquisition in any manner (including directly or indirectly and whether by way of merger, sale of 

Equity Securities, consolidation, recapitalization or other similar business combination) by any 

Person of Equity Securities representing 50% or more of the Company Group’s issued and 

outstanding Equity Securities; or (c) any public announcement of a proposal, plan or intention to 

do any of the foregoing or any Contract to engage in any of the foregoing. 

“Company Tax Representation” is defined in Section 11.1(A). 

“Confidential Information” is defined in Section 10.4(A). 

“Consent” means any consent, order, approval, waiver, authorization, agreement 

or license with respect to any Governmental Entity or any other Person. 

“Contract” means any binding written contract, agreement, instrument, license or 

lease (in each case, including any extension, renewal, amendment or other modification thereof). 

“Corporate Employee” means each employee of SCG-AH, Inc. as of the date 

hereof. 

“Current Assets” means, as of any date or time of determination, without 

duplication, those current assets of the Company Group that are included in the line item categories 

of assets specifically identified on Exhibit B determined on a consolidated basis and calculated in 

accordance with the Accounting Principles with the use of the same principles, practices, 

methodologies, procedures and manner for establishing levels of reserves and materiality as such 

levels were used in preparing the Example Statement of Net Working Capital. The parties hereto 

acknowledge and agree that this Exhibit B (i) represents the “Current Assets” of the Company 

Group and SCG-N Inc.; and (ii) shall apply to both this Agreement and the Naperville Purchase 

Agreement. 

“Current Liabilities” means, as of any date or time of determination, without 

duplication, those current liabilities of the Company Group that are included in the line item 

categories of liabilities specifically identified on Exhibit C, determined on a consolidated basis 

and calculated in accordance with the Accounting Principles with the use of the same principles, 

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practices, methodologies, procedures and manner for establishing levels of reserves and materiality 

as such levels were used in preparing the Example Statement of Net Working Capital; provided 

that notwithstanding the foregoing, Current Liabilities will not include any changes to liabilities 

as a result of the transactions associated with this Agreement (including any purchase accounting 

adjustment), the Closing Company Group Indebtedness, any income Tax liabilities or Transaction 

Expenses. Furthermore, no fact, event or occurrence on or after the Closing shall be taken into 

account when calculating the Current Liabilities. The parties hereto acknowledge and agree that 

this Exhibit C (i) represents the “Current Liabilities” of the Company Group and SCG-N Inc.; and 

(ii) shall apply to both this Agreement and the Naperville Purchase Agreement.

“Employee Pension Benefit Plan” means any “employee pension benefit plan” as 

such term is defined in ERISA Section 3(2) subject to Title IV of ERISA, Code Sections 412 or 

4971 or Section 302 of ERISA (but excluding any “multiemployer plan” within the meaning of 

Section (3)(37) of ERISA). 

“Enterprise Value” means $

. 

“Environmental Law” means all Legal Requirements relating to pollutants, 

contaminants, wastes, chemicals, or protection of the environment, including but not limited to the 

Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 

9601 et seq., the Hazardous Substances Transportation Act, 49 U.S.C. Section 5101 et seq., the 

Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., the Clean Water Act, 

33 U.S.C. Section 1251 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Emergency 

Planning Community Right-to-Know Act, 42 U.S.C. Section 11001 et seq., the Toxic Substances 

Control Act, 15 U.S.C. Section 2601 et seq., and the Oil Pollution Act of 1990, 33 U.S.C. Section 

2701 et seq., all as now amended, and all regulations promulgated pursuant thereto, each as now 

in effect. 

“Equity Interests” is defined in the recitals to this Agreement. 

“Equity Security” means (a) any capital stock, membership interests or other 

equity security, (b) any security directly or indirectly convertible into or exchangeable for any 

capital stock, membership interests or other equity security or security containing any profit 

participation features, (c) any warrants, options or other rights, directly or indirectly, to subscribe 

for or to purchase any capital stock, membership interests, other equity security or security 

containing any profit participation features or directly or indirectly to subscribe for or to purchase 

any security directly or indirectly convertible into or exchangeable for any capital stock, 

membership interests or other equity security or security containing profit participation features, 

or (d) any stock appreciation rights, phantom stock or equity rights or other similar rights. 

“Equityholder” is defined in the preamble to this Agreement. 

“Equityholder Returns” is defined in Section 11.6(C). 

“Equityholder Tax Claim” is defined in Section 11.6(F).

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“ERISA” means the Employee Retirement Income Security Act of 1974, as 

amended. 

“ERISA Affiliate” means, with respect to any Person, any trade or business, 

whether or not incorporated, that together with such Person would be deemed a “single employer” 

within the meaning of Section 414(b), (c), (m) or (o) of the Code or to be a member of the same 

“controlled group” with such Person within the meaning of Section 4001(a)(14) of ERISA. 

“Escrow Account” means the account established by the Escrow Agent to hold the 

Escrow Amount pursuant to the terms of the Escrow Agreement. 

“Escrow Agent” means Wells Fargo Bank, N.A. 

“Escrow Agreement” means the escrow agreement dated as of the Closing Date 

by and among the Equityholder, Buyer and the Escrow Agent substantially in the form attached to 

this Agreement as Exhibit D. 

“Escrow Amount” means an amount equal to the sum of $ . 

“Estimated Closing Company Group Cash” is defined in Section 2.2(A)(1). 

“Estimated Closing Company Group Indebtedness” is defined in Section 

2.2(A)(2). 

“Estimated Closing Net Working Capital” is defined in Section 2.2(A)(3).

“Estimated Transaction Expenses” is defined in Section 2.2(A)(4). 

“Example Statement of Net Working Capital” means the statement of Net 

Working Capital as of 11:59 p.m. Houston time on December 31, 2019 and attached as Exhibit E1 hereto. The parties hereto acknowledge and agree that this Exhibit E-1 (i) represents the 

calculation of “Net Working Capital” of the of the Company Group and SCG-N Inc.; and (ii) shall 

apply to both this Agreement and the Naperville Purchase Agreement. 

“Final Adjustment Amount” means the amount, which may be a positive or 

negative number, equal to the Final Purchase Price minus the Preliminary Purchase Price. 

“Final Purchase Price” is defined in Section 2.3(D). 

“Financial Statements” is defined in Section 5.5(A). 

“Flow of Funds” means a written flow of funds statement prepared by the 

Equityholder and delivered to Buyer, with a draft of the Funds Flow (including all requisite wiring 

instructions and reasonable estimates of the final payoff amounts) to be delivered at least five (5) 

Business Days prior to the Closing (or such other time as mutually agreed upon by Buyer and 

Equityholder), and subject to finalization by the parties prior to Closing. 

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“GAAP” means generally accepted accounting principles as in effect as of the date 

of this Agreement in the United States. 

“General Survival Period Expiration Date” is defined in Section 11.1(A). 

“Gift Certificates” means any gift certificates, gift cards, guest passes, 

complimentary passes, re-admission passes, private event certificates, food or beverage credits and 

any other cards, passes and certificates which entitle a ticketholder to admission, food, beverage 

or other goods without any further consideration or at a discount, in respect of the Company Group 

or the Business, that are issued by the Company and required to be honored by the Company in 

the Ordinary Course. 

“Governmental Entity” means any government, agency, governmental 

department, commission, court, arbitration panel or instrumentality of the United States of 

America or any state, municipality or other political subdivision in or of any of the foregoing and 

any court, agency, instrumentality, regulatory commission or other entity exercising executive, 

legislative, judicial, regulatory or administrative functions of or pertaining to government. 

“Hazardous Substances” means any hazardous materials, substances or wastes, 

chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum 

products or byproducts, asbestos, polychlorinated biphenyls, radioactive materials or any other 

substances exposure, in each case, to which is regulated, limited or prohibited under any 

Environmental Law. 

“High Value” is defined in Section 2.3(C)(2). 

“Holdback Amount” means $ . 

“Indebtedness” means, with respect to any Person as of any time, without 

duplication, the outstanding principal amount of, accrued but unpaid interest on, and other payment 

obligations (including any prepayment premiums or termination costs payable as a result of the 

consummation of the transactions contemplated hereunder) arising under, any obligations of such 

Person consisting of (i) indebtedness for borrowed money or indebtedness issued in substitution 

or exchange for borrowed money, (ii) accounts payable with maturities of 90 days or more, (iii) 

liabilities for the deferred purchase price of property or services, including with respect to any 

conditional sale, title retention, consignment or similar arrangements (other than accounts payable 

and accrued expenses), (iv) indebtedness evidenced by any note, bond, debenture or other debt 

security, (v) indebtedness related to any letter of credit, any banker’s acceptance, or any payment, 

performance, customs, insurance or surety bond or other type of surety agreement, in each case 

solely to the extent drawn, (vi) capital leases (which, for the avoidance of doubt, shall exclude all 

Leases of Leased Real Property), (vii) any unsettled payables related to the Business between or 

among the Company Group, on the one hand, and the Equityholder (and Affiliates of the 

Equityholder (other than the Company Group)), on the other hand, (viii) deferred compensation 

and (ix) accrued but unpaid severance obligations (including the employer portion of any 

employment Taxes thereon, if any). Notwithstanding the foregoing, with respect to the Company 

Group, “Indebtedness” shall not include any obligations consisting of (A) liabilities under 

operating leases, (B) indebtedness related to any letter of credit, any banker’s acceptance, or any 

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payment, performance, customs, insurance or surety bond or other type of surety agreement, in 

each case to the extent not drawn (including any that are outstanding under any credit facilities of 

the Company Group), (C) debt financing incurred by Buyer and/or any member of the Company 

Group in connection with the consummation of the transactions contemplated by this Agreement, 

(D) amounts included as Transaction Expenses or any amounts otherwise included in the 

calculation of Closing Net Working Capital, or (E) any Permitted Indebtedness. The parties agree 

that an example statement of Indebtedness of the Company Group as of 11:59 p.m. Houston time 

on December 31, 2019 is set forth on Exhibit E-2 attached hereto. The parties hereto acknowledge 

and agree that this Exhibit E-2 (i) represents the “Indebtedness” of the Company Group and SCGN Inc.; and (ii) shall apply to both this Agreement and the Naperville Purchase Agreement. 

“Indemnified Party” is defined in Section 11.3(A). 

“Indemnified Tax” means (i) any Tax of the Company Group for any Pre-Closing 

Tax Period, (ii) any Tax of any member of an Affiliated Group (other than any such group that 

includes the Buyer and/or its Affiliates) of which the Company Group is or was a member on or 

prior to the Closing Date (including pursuant to Treasury Regulation § 1.1502-6 or any analogous 

or similar state, local, or foreign law or regulation), (iii) any Taxes of any person imposed on the 

Company Group for any period as a transferee or successor in respect of a transaction occurring 

on or before the Closing Date, by law, contract, or otherwise (for Taxes imposed by contract, only 

Taxes for a Pre-Closing Tax Period), (iv) any payments required to be made after the Closing Date 

under any Tax sharing, Tax indemnity, Tax allocation or similar contracts (other than any 

customary commercial contract entered into in the ordinary course of business the principal subject 

of which is not Taxes) to which the Company Group was obligated, or was a party, on or prior to 

the Closing Date; provided that, Indemnified Taxes shall not include any Taxes (A) that result 

from the manner in which the Buyer finances its obligations under this Agreement, (B) that are 

attributable to any transactions outside the ordinary course of business occurring on the Closing 

Date but after the Closing and not contemplated by this Agreement, (C) to the extent such Taxes 

are included in Current Liabilities, Indebtedness, and/or Transaction Expenses, as finally 

determined under this Agreement, or (D) that are attributable to a breach of Section 11.6(D). 

“Indemnifying Party” is defined in Section 11.3(A). 

“Independent Auditor” means KPMG LLP. 

“Law Firm” is defined in Section 12.13(A). 

“Leased Real Property” or “Real Property” means the parcels of real property 

leased by any member of the Company Group and listed on Schedule 5.8(B). 

“Leases” means all leases, subleases, licenses, and other Contracts pursuant to 

which any member of the Company Group has the right to occupy any Leased Real Property. 

“Legal Requirement” means, with respect to any Person, all federal, state and local 

laws, statutes, codes and ordinances of any Governmental Entity applicable to such Person or to 

the Business. 

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“Lien” means any mortgage, pledge, security interest, encumbrance, lien, claim, 

agreement, right of first refusal, option, limitation on transfer or use or assignment, licensing 

restricting ownership, easement, charge or other similar encumbrance or restriction, excluding the 

Permitted Liens. For the avoidance of doubt, the term “Lien” shall not be deemed to include any 

license of Proprietary Rights or any lease. 

“Loss” means any loss, liability, cost, damage, causes of action, royalty, deficiency, 

penalty, Tax, judgment, fine, fees, penalties, cost or expense, but shall exclude punitive or 

exemplary damages (except to the extent such damages are awarded to a third party), and shall 

also exclude special, consequential, indirect, speculative, remote damages, lost profits, diminution 

in value and damages based on any multiple of “EBITDA,” earnings, profit or similar financial 

metric (except to the extent such damages are awarded to a third party). 

“Low Value” is defined in Section 2.3(C)(1). 

“Material Adverse Effect” means any change, development, event, occurrence, 

fact, circumstance or condition, that, individually or taken as a whole, has or is reasonably likely 

to have (a) a material adverse effect upon the financial condition, business or results of operations 

of the Company Group, including by substantially reducing the value of the Company Group or 

(b) a material adverse effect on the ability of the Equityholder or any member of the Company 

Group to consummate the transactions contemplated hereby; provided, however, that none of the 

following (or results thereof) shall be taken into account, either alone or in combination, in 

determining whether a Material Adverse Effect has occurred or would reasonably be expected to 

occur: (i) conditions generally affecting the United States economy, the regulatory environment or 

credit, securities, currency, financial, banking or capital markets (including any disruption thereof 

and any decline in the price of any security or any market index or any changes in interest rates or 

exchange rates) in the United States or elsewhere in the world, (ii) any national, international or 

supranational political, geopolitical or social conditions, including the engagement in or escalation 

of hostilities or war, whether or not pursuant to the declaration of a national emergency or war, or 

the occurrence of any military or terrorist attack, or any epidemics, pandemics, outbreaks, 

earthquakes, hurricanes, tornadoes or any other natural disasters (whether or not caused by any 

Person or any force majeure event) or any other national or international calamity or crisis, (iii) 

changes in GAAP accounting standards or in the interpretation or enforcement thereof, (iv) 

changes in any Legal Requirement or any action required to be taken under any Legal Requirement 

or existing contract by which any member of the Company Group (or any of their respective assets 

or properties) is bound, (v) any change that is generally applicable to the industries or markets in 

which any member of the Company Group operates or in which products or services of any 

member of the Company Group are produced, distributed or sold, (vi) the execution, 

announcement or existence of this Agreement or the consummation of the transactions 

contemplated by this Agreement, (vii) any failure in and of itself by any member of the Company 

Group to meet any internal or published projections, forecasts, estimates or predictions of revenue, 

earnings, cash flow or cash position and any seasonal changes in the results of operations of any 

member of the Company Group for any period ending on or after the date of this Agreement, (viii) 

the taking of any action contemplated, permitted or required by this Agreement and/or the 

Transaction Documents, or any failure to take any action by any member of the Company Group 

that is prohibited by this Agreement (whether with or without consent of Buyer), including the 

completion of the transactions contemplated hereby and thereby (including the obtaining of 

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approval or consent from any Governmental Entity or other third party in connection with the 

consummation of transactions contemplated hereby and thereby), or (ix) any action taken with 

Buyer’s consent; except in the case of clauses (i), (ii), (iii) or (v) above, to the extent that such 

conditions, events, changes, crisis and disasters, as applicable, have a material and disproportionate 

impact on the Company Group, taken as a whole, as compared to other industry participants. 

“Material Contracts” is defined in Section 5.10(A). 

“Multiemployer Welfare Plan” means any employee benefit plan of the type 

described in Section 3(37) of ERISA and that provides health and welfare benefits that any member 

of the Company Group maintains, contributes to, is obligated to contribute to, or with respect to 

which any member of the Company Group has any liability or potential liability. 

“Naperville Purchase Agreement” means that certain Equity Purchase 

Agreement, dated as of the date hereof, between SCG-N Inc., a Texas corporation, Buyer and 

Equityholder. 

“Net Working Capital” means, as of any applicable date or time, the aggregate 

value of the Current Assets minus Current Liabilities. 

“Non-Party Affiliates” is defined in Section 12.12. 

“Ordinary Course” means, with respect to any Person, in the ordinary course of 

that Person’s business consistent with past practice. 

“Parties” is defined in the preamble to this Agreement. 

“Permitted Indebtedness” means such Indebtedness described on Schedule P-1. 

“Permitted Liens” means (i) mechanic’s, materialmen’s, carriers’, repairers’ and 

other Liens arising or incurred in the Ordinary Course for amounts that are not yet delinquent, are 

being contested in good faith or for which adequate reserves have been established, (ii) Liens for 

Taxes, assessments or other governmental charges that are not yet due and payable as of the 

Closing Date, or are being contested in good faith by appropriate proceedings and for which 

adequate reserves have been provided on the Financial Statements in accordance with the 

Accounting Principles, (iii) encumbrances, restrictions on real property and other matters of title 

(including easements, covenants, conditions, rights of way and similar matters affecting title to the 

real property and other title defects) that do not materially interfere with the value, or the Company 

Group’s present uses or occupancy, of such real property, (iv) Liens of the Company Group that 

will be released at Closing that are securing the obligations of the Company Group under its 

existing credit facilities being repaid at Closing, (v) Liens which would not have had or would not 

reasonably be expected to have a Material Adverse Effect, (vi) Liens granted to any lender at the 

Closing in connection with any financing by Buyer of the transactions contemplated hereby, (vii) 

zoning, building codes and other land use laws regulating the use or occupancy of real property or 

the activities conducted thereon which are imposed by any Governmental Entity having 

jurisdiction over such real property and which are not violated by the current use or occupancy of 

such real property or the operation of the businesses of the Company Group or any violation of 

which would not have had or would not reasonably be expected to have a Material Adverse Effect, 

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(viii) any right, interest, Lien or title of a lessor or sublessor under any Lease of Leased Real 

property, and (ix) Liens described on Schedule P-2. 

“Person” means an individual, a partnership, a limited liability company, a 

corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated 

organization, any Governmental Entity or any similar entity. 

“Position Statement” is defined in Section 2.3(B). 

“Post-Closing Tax Period” means any taxable period or portion thereof which is 

not a Pre-Closing Tax Period. 

“Pre-Closing Tax Period” means any taxable period ending on or before the 

Closing Date and the portion of the taxable period through the end of the Closing Date for a taxable 

period that begins on or before the Closing Date and ends after the Closing Date. 

“Preliminary Purchase Price” is defined in Section 2.2(A). 

“Proceeding” means any action, arbitration, suit, summons, citations or subpoena 

of any kind or nature whatsoever, civil, criminal, regulatory or otherwise, at law or in equity, in 

each case, involving or before a Governmental Entity or arbitrator. 

“Proprietary Rights” means, to the extent protectable by law, all patents, patent 

applications, trademarks and service marks (including all goodwill associated therewith and all 

registrations and applications therefor), trade names, social media identifiers and other source 

indicators, copyrights (and all registrations and applications therefor), domain names, trade secrets, 

know-how and other proprietary information. 

“Purchase Price” means, without duplication, an amount equal to (i) the Enterprise 

Value, plus (ii) the Closing Company Group Cash, minus (iii) the Closing Company Group 

Indebtedness, plus (iv) the amount, if any, by which the Closing Net Working Capital is greater 

than the Target Net Working Capital, minus (v) the amount, if any, by which the Closing Net 

Working Capital is less than the Target Net Working Capital, minus (vi) the amount of unpaid 

Transaction Expenses, plus (vii) the Woodlands Construction Reimbursement, minus (viii) the 

Sony Holdback Amount. 

“Representatives” is defined in Section 7.2. 

“Review Period” is defined in Section 2.3(A)(2). 

“Schedules” is defined in Section 7.5. 

“Screen Advertising Payments” means any receipts, proceeds, checks, securities 

or other property of any kind comprising, arising out of or derived from the sale of any theatre 

screen advertisements by the Company Group prior to the Closing. 

“Securities Act” means the U.S. Securities Act of 1933, as amended, and the rules 

and regulations promulgated thereunder. 

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“Seller Indemnitee” is defined in Section 11.2(B). 

“Solvent” is defined in Section 6.8. 

“Sony Holdback Amount” means $ ; provided, that, such amount is not 

otherwise reflected in the calculation of Closing Company Group Indebtedness or Closing Net 

Working Capital. 

“Sony Lease Agreements” means each such Master Lease Agreement set forth as 

items 1-6 on Schedule P-1 of the Schedules. 

“Statement of Objections” is defined in Section 2.3(A)(2). 

“Straddle Period” is defined in Section 11.6(J). 

“Subsidiary” means, with respect to any Person, any corporation, partnership, 

limited liability company, association or other business entity of which (i) if a corporation, a 

majority of the total voting power of shares of stock entitled (without regard to whether, at the 

time, stock of any other class or classes of such corporation shall have or might have voting power 

by reason of the happening of any contingency) to vote in the election of directors, managers, or 

trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or 

more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, 

limited liability company, association or other business entity, a majority of the partnership or 

other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, 

by that Person or one or more Subsidiaries of that Person or a combination thereof. 

“Target Net Working Capital” means $ . 

“Tax” (and, with correlative meaning, “Taxes,” “Taxable” and “Taxing”) means 

any federal, state, local or foreign income, gross receipts, franchise, estimated, alternative 

minimum, add-on minimum, sales, use, transfer, registration, value added, excise, natural 

resources, severance, stamp, occupation, premium, windfall profits, environmental (including 

under Section 59A of the Code), customs, duty, real property, real property gains, personal 

property, capital stock, equity, social security, unemployment, disability, payroll, license, 

employment, withholding, or other tax of any kind whatsoever, including any interest, penalties or 

additions to tax in respect of the foregoing. 

“Tax Claim” is defined in Section 11.6(F). 

“Tax Return” means any return, declaration, claim for refund, information return, 

or report filed or required to be filed with any Taxing Authority in connection with the 

determination, assessment or collection of Taxes (including any schedule or attachment thereto, 

and including any amendment thereof). 

“Taxing Authority” means any Governmental Entity having or purporting to 

exercise jurisdiction with respect to any Tax. 

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“Transaction Documents” means this Agreement, the Escrow Agreement and 

each other agreement, document, certificate or instrument delivered pursuant to, or in connection 

with, this Agreement. 

“Transaction Expenses” means, without duplication, (i) the aggregate amount of 

all out-of-pocket costs and expenses incurred by any member of the Company Group or by or on 

behalf of the Equityholder (to the extent such amounts are a liability of any member of the 

Company Group) prior to and as a direct result of the consummation of the transfer of the Equity 

Interests to Buyer, including fees and disbursements of lawyers, accountants, investment bankers 

and other advisors and service providers and (ii) any transaction, incentive or stay bonus or 

termination or change of control payment payable to any Person by any member of the Company 

Group as a result of the Closing and the employer portion of any employment Taxes with respect 

thereto, provided that such arrangement was agreed to by the Company Group (rather than the 

Buyer) prior to Closing. Notwithstanding anything to the contrary contained herein, in no event 

shall “Transaction Expenses” include any amounts with respect to (a) Transfer Taxes, (b) Current 

Liabilities, or (c) any amounts included in Closing Company Group Indebtedness. 

“Transaction Tax Deductions” means, without duplication, to the extent 

deductible for U.S. federal income Tax purposes by any member of the Company Group, the sum 

of (i) Transaction Expenses, (ii) the fees, expenses and interest incurred by any member of the 

Company Group with respect to the payment of the Indebtedness (including, for the avoidance of 

doubt, amounts treated as interest for U.S. federal income Tax purposes, any breakage fees or 

accelerated deferred financing fees, whether paid before, at or after the Closing), and (iii) all fees, 

costs and expenses incurred by any member of the Company Group in connection with or incident 

to this Agreement and the consummation of the transactions contemplated hereby, including any 

such legal, accounting, transaction, closing and investment banking fees, costs and expenses, in 

each case, in connection with the transactions contemplated hereby, and in each case, solely to the 

extent such costs or expenses are economically borne by the Equityholder. 

“Transfer Taxes” is defined in Section 11.6(B) 

“Treasury Regulations” means the regulations promulgated or proposed by the 

United States Treasury Department under the Code. 

“Update” is defined in Section 7.5. 

“Upper Cap” is defined in Section 11.2(C). 

“WARN Act” means the Worker Adjustment Retraining and Notification Act of 

1988, as amended, or any similar foreign, state or local law, regulation or ordnance. 

“Woodlands Construction Reimbursement” means, as of 11:59 p.m. Houston 

time on the date that is immediately prior to the Closing Date, the aggregate amount of the 

reasonable and documented costs (each of which are in-line with market rates) described on 

Schedule W-1, solely to the extent previously paid by the Equityholder or the Company Group 

and which have not been reimbursed by the Woodlands Landlord, with respect to the construction 

of the theatre at the Woodlands Location in accordance with the Woodlands Lease. 

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“Woodlands Lease” means the Lease Agreement, dated as of June 20, 2019, 

between BRIXMOR HOLDINGS 12 SPE, LLC, as landlord (the “Woodlands Landlord”), and 

SCG-WL INC., as Tenant. 

“Woodlands Location” means the Leased Real Property location in Woodlands, 

Texas under the Woodlands Lease. 

ARTICLE 2. 

ACQUISITION OF EQUITY INTERESTS 

2.1. Acquisition of Equity Interests by Buyer. 

(A) At the Closing, Buyer shall acquire from the Equityholder, and the 

Equityholder shall assign, transfer and deliver to Buyer, all of the Equity Interests held by the 

Equityholder (free and clear of any Liens). 

(B) In consideration for the transfer of the Equity Interests, Buyer shall pay the 

Purchase Price as set forth in this Agreement. 

2.2. Closing Estimates, and Closing Payments. 

(A) Estimated Adjustments. Three (3) Business Days prior to the Closing 

Date (or such other time as mutually agreed upon by Buyer and Equityholder), the Equityholder 

will prepare and submit to Buyer a written statement prepared in good faith and in accordance with 

the Accounting Principles setting forth in reasonable detail Equityholder’s calculation of the 

Purchase Price which shall include calculations of the following (the sum resulting from such 

calculation, the “Preliminary Purchase Price”): 

(1) the estimated Closing Company Group Cash (the “Estimated 

Closing Company Group Cash”); 

(2) the estimated Closing Company Group Indebtedness (the 

“Estimated Closing Company Group Indebtedness”); 

(3) the estimated Closing Net Working Capital determined as of 

December 31, 2019 (the “Estimated Closing Net Working Capital”); 

(4) the estimated unpaid Transaction Expenses (the “Estimated 

Transaction Expenses”); 

(5) the estimated Woodlands Construction Reimbursement (the 

“Woodlands Construction Reimbursement”); and 

(6) the Sony Holdback Amount. 

(B) Payment of Preliminary Purchase Price. On the Closing Date, Buyer shall 

pay, or cause to be paid, the amounts described below, as follows: 

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(1) Buyer, on behalf of the Company Group, shall pay, or cause to be 

paid, the Estimated Closing Company Group Indebtedness as set forth on 

Schedule 2.2(B)(1) to such payees and in such amounts as set forth in Flow of 

Funds and payoff letters provided three (3) Business Days prior to the Closing (or 

such other time as mutually agreed upon by Buyer and Equityholder) by the 

Equityholder to Buyer, by wire transfer of immediately available funds to such 

accounts designated in the Flow of Funds. 

(2) Buyer, on behalf of the Company Group, shall pay, or cause to be 

paid, the Estimated Transaction Expenses to such payees and in such amounts as 

set forth in the Flow of Funds, by wire transfer of immediately available funds to 

such accounts designated in the Flow of Funds. 

(3) Buyer shall pay the Escrow Amount by wire transfer of immediately 

available funds to the Escrow Account in accordance with the wire instructions 

designated in writing by the Escrow Agent. 

(4) Buyer shall pay to the Equityholder, by wire transfer of immediately 

available funds to an account designated in the Flow of Funds, an amount equal to 

the sum of (A) the Preliminary Purchase Price, minus (B) the Escrow Amount. 

(5) At Closing, Buyer shall retain the Holdback Amount. Following the 

determination of the Final Purchase Price in accordance with Section 2.3, Buyer 

shall distribute and release from the Holdback Amount any Final Adjustment 

Amount payable to Equityholder (in accordance with the terms of Section 2.3) and 

retain any remainder of the Holdback Amount. 

2.3. Post-Closing Adjustment to Preliminary Purchase Price. 

(A) Within sixty (60) days after the Closing Date, Buyer shall prepare and 

deliver to the Equityholder, the following: 

(1) A written statement (the “Adjustment Statement”) setting forth in 

reasonable detail its good faith calculation of the Purchase Price which shall include 

calculations of (i) the Closing Company Group Cash, (ii) the Closing Company 

Group Indebtedness, (iii) the Closing Net Working Capital, (iv) the Transaction 

Expenses, (v) the Woodlands Construction Reimbursement, and (vi) the Final 

Adjustment Amount. Following the date on which the Adjustment Statement is 

delivered, Buyer shall not be entitled to propose any adjustment to any of the items 

or amounts contained in the Adjustment Statement. The Adjustment Statement 

shall be prepared in accordance with the Accounting Principles. The Adjustment 

Statement will include, as supplemental information, a detailed list of the elements 

that comprise the items required by Section 2.3(A) and a brief explanation thereof. 

(2) The Equityholder shall have sixty (60) days from his receipt of the 

Adjustment Statement to review the Adjustment Statement (the “Review Period”). 

Following the Equityholder’s receipt of the Adjustment Statement, the 

Equityholder and other Representatives of the Equityholder will have reasonable 

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access to the working papers relating to the Adjustment Statement and such other 

books and records and reasonable access to the personnel of Buyer and the 

Company Group. On or prior to the last day of the Review Period, the Equityholder 

may object to the Adjustment Statement by giving Buyer written notice of the 

Equityholder’s objection (a “Statement of Objections”). Any Statement of 

Objections shall (x) specify the nature and amount of any objection so asserted (and 

an alternative amount for each such disputed item to the extent known by the 

Equityholder) and (y) include a calculation by the Equityholder of the Final 

Adjustment Amount and each of the items set forth in the Adjustment Statement 

(to the extent possible based on information in the possession of the Equityholder 

as of the date such Statement of Objections is delivered); provided, however, in the 

event Buyer, the Company Group or any of their Representatives do not provide 

Equityholder or his Representatives with any of the books, records or other 

information that Equityholder may reasonably request in accordance with this 

Section 2.3(A)(2), such Statement of Objections shall not require any such 

specifications or calculations. 

(3) If a Statement of Objections is received by Buyer, then the 

applicable Adjustment Statement (as revised in accordance with clause (i) or (ii) 

below) will become final and binding upon the Parties on the earlier of (i) the date 

Buyer and the Equityholder resolve in writing any differences they have with 

respect to any matter specified in the Statement of Objections or (ii) the date any 

matters in dispute are finally resolved in writing by the Independent Auditor in 

accordance with Section 2.3(B). During the thirty (30) days immediately following 

the delivery of a Statement of Objections, Buyer and the Equityholder will consult 

in good faith to resolve in writing any differences that they may have with respect 

to any matter specified in the Statement of Objections. 

(B) At the end of the thirty (30)-day consultation period described in Section 

2.3(A)(3), if Buyer and the Equityholder have not agreed upon the Final Adjustment Amount, the 

Equityholder and Buyer shall submit any and all matters that remain in dispute to the Independent 

Auditor. The Independent Auditor’s services and authority to make a determination shall be 

limited in scope to the disputed issues identified in the Statement of Objections and shall be (i) 

based solely on presentations by Buyer and the Equityholder (each, a “Position Statement”) 

submitted to the Independent Auditor with a copy simultaneously delivered to the other Party, and 

not independent review and (ii) made in strict accordance with the terms of this Agreement 

(including, but not limited to, the Accounting Principles). The Independent Auditor shall (x) act 

as an expert and not as an arbitrator, (y) apply the provisions of this Section 2.3 to the disputed 

issues only, and (z) have no authority or power to alter, modify, amend, add to or subtract from 

any term or provision of this Agreement. None of Buyer, the Equityholder or any of their respective 

Representatives or Affiliates shall have any ex parte communications or meetings with the 

Independent Auditor regarding the subject matter hereof without the other Party’s prior written 

consent. The Independent Auditor will work to resolve such dispute promptly and, in any event, 

within thirty (30) days from the date the dispute is submitted to the Independent Auditor. Any item 

not specifically referred to the Independent Auditor for evaluation in a Position Statement shall be 

deemed final and binding on the Parties. The Independent Auditor will determine the Final 

Adjustment Amount by selecting with respect to each item in dispute an amount between or equal 

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to Buyer’s position as set forth in its Position Statement or the Equityholder’s position as set forth 

in his Position Statement. Buyer and the Equityholder agree to execute, if requested by the 

Independent Auditor, a reasonable engagement letter in customary form consistent with the terms 

and conditions applicable to the Independent Auditor and dispute resolution process described in 

this Section 2.3(B) and reasonably cooperate with the Independent Auditor so as to enable it to 

make a determination as quickly and as accurately as practicable. 

(C) Buyer, on the one hand, and the Equityholder, on the other hand, shall pay 

their own costs and expenses incurred in connection with the dispute resolution procedure set forth 

in this Section 2.3; provided, that in the event Buyer and the Equityholder submit any unresolved 

disputes to an Independent Auditor for resolution as provided in Section 2.3(B), Buyer, on the one 

hand, and the Equityholder, on the other hand, will share responsibility for the fees and expenses 

of the Independent Auditor as follows: 

(1) if the Independent Auditor resolves all of the remaining disputes in 

favor of Buyer (the applicable Final Adjustment Amount so determined is referred 

to herein as the “Low Value”), the Equityholder will be responsible for all of the 

fees and expenses of the Independent Auditor; 

(2) if the Independent Auditor resolves all of the remaining disputes in 

favor of the Equityholder (the applicable Final Adjustment Amount so determined 

is referred to herein as the “High Value”), Buyer will be responsible for all of the 

fees and expenses of the Independent Auditor; and 

(3) if the Independent Auditor resolves some of the remaining disputes 

in favor of Buyer and some disputes in favor of the Equityholder (the applicable 

amounts so determined are referred to herein as the “Actual Value”), the 

Equityholder will be responsible for that fraction of the fees and expenses of the 

Independent Auditor equal to (x) the difference between the High Value and the 

Actual Value over (y) the difference between the High Value and the Low Value, 

and Buyer will be responsible for the remainder of the fees and expenses of the 

Independent Auditor. 

(D) The determination of the final Purchase Price as determined by agreement 

of the Parties or by the Independent Auditor (the “Final Purchase Price”) and the Final 

Adjustment Amount, in each case, pursuant to the terms of this Section 2.3, will be final, nonappealable and binding on the Parties and the procedures set forth in this Section 2.3 for resolving 

disputes with respect to the Adjustment Statement will be the sole and exclusive method for 

resolving such disputes; provided, that Buyer and the Equityholder shall not be prohibited from 

instituting a Proceeding to enforce any final determination of the Final Purchase Price and Final 

Adjustment Amount as determined in accordance with this Section 2.3. 

(E) (i) If the Preliminary Purchase Price is greater than the Final Purchase Price, 

the Final Adjustment Amount (expressed as a positive number) shall be paid to Buyer by the 

Equityholder within five (5) Business Days of the final determination of the Final Adjustment 

Amount pursuant to this Section 2.3; provided, that, Buyer shall first seek recovery for such Final 

Adjustment Amount from the remaining funds then held in the Escrow Account (and in the event 

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such amount is in excess of the amount of funds then remaining in the Escrow Account, Buyer 

may seek recovery directly from the Equityholder for such excess amount); and (ii) if the 

Preliminary Purchase Price is less than the Final Purchase Price, Buyer shall pay, or cause to be 

paid, the Final Adjustment Amount to the Equityholder within five (5) Business Days of the final 

determination of the Final Adjustment Amount pursuant to this Section 2.3. 

(F) Buyer agrees that following the Closing it will not take any actions with 

respect to the accounting books, records, policies and procedures of any member of the Company 

Group that would obstruct or prevent the preparation of the Adjustment Statement as provided in 

this Section 2.3. Buyer will cooperate in the preparation of the Adjustment Statement, including 

providing customary certifications to the Equityholder or, if requested, to the Equityholder’s 

auditors or the Independent Auditor. 

2.4. Withholding. 

Buyer shall be entitled to deduct and withhold from any payments made pursuant 

to this Agreement such amounts as it is required to deduct and withhold with respect to the making 

of any such payment under any applicable Tax law; provided that, Buyer shall provide the 

respective payee with reasonable notice prior to withholding any amount pursuant to this Section 

2.4 and shall work in good faith with the respective payee to minimize any such withheld amounts 

(provided such actions do not adversely impact the Buyer); provided further that, no such notice 

or actions shall be required with respect to U.S. federal withholding Taxes required under Section 

1445 to the extent the Equityholder does not deliver to the Buyer the certificate required under 

Section 8.1(D)(7). To the extent that amounts are so withheld, and paid to the proper Taxing 

Authority pursuant to any applicable Tax law, such withheld amounts shall be treated for all 

purposes of this Agreement as having been paid to such holder in respect of which such deduction 

and withholding was made. 

2.5. Escrow. 

(A) The Escrow Amount shall be held by the Escrow Agent pursuant to the 

terms of the Escrow Agreement; provided that if there is a conflict between the Escrow Agreement 

and this Agreement, the terms of this Agreement shall govern. 

(B) Consistent with the provisions of the Escrow Agreement, (i) one-third (1/3) 

of the Escrow Amount remaining on deposit in the Escrow Account shall be disbursed to the 

Equityholder on the 6-month anniversary of the Closing Date; (ii) one-half (1/2) of the Escrow 

Amount remaining on deposit in the Escrow Account shall be disbursed to the Equityholder on the 

12-month anniversary of the Closing Date and (iii) any remaining funds on deposit in the Escrow 

Account shall be disbursed to the Equityholder on the date that is the 18-month anniversary of the 

Closing Date; in each case of clauses (i) through (iii), less any amounts required to remain in the 

Escrow Account in connection with a pending or unresolved claim for indemnification that was 

delivered to the Escrow Agent on or prior to the applicable date (until such pending or unresolved 

claim for indemnification is resolved in accordance with the terms of this Agreement and the 

Escrow Agreement). 

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ARTICLE 3. 

CLOSING 

3.1. Closing Date. 

The closing of the transfer of the Equity Interests to Buyer (the “Closing”) shall take place 

at 10:00 a.m., Central time, on a date to be specified by the Parties, which shall be no later than 

the second Business Day after satisfaction (or waiver) of the conditions set forth in ARTICLE 8 

(not including conditions which are to be satisfied by actions taken at the Closing), in Houston, 

Texas, unless another time, date or place is agreed to in writing by the Parties. The date upon 

which the Closing actually occurs is referred to herein as the “Closing Date.” 

3.2. Closing Transaction. 

At the Closing, the Equityholder and Buyer will consummate the following transactions: 

(i) the Equityholder will deliver (or cause to be delivered) to Buyer the various certificates, 

instruments, and documents referred to in Section 8.1 below, and (ii) Buyer will deliver the 

payments described in Section 2.2(B) above, and deliver and the various certificates, instruments, 

and documents referred to in Section 8.2 below. 

ARTICLE 4. 

REPRESENTATIONS AND WARRANTIES OF THE EQUITYHOLDER 

As a material inducement to Buyer to enter into this Agreement, Equityholder makes the 

representations and warranties set forth in this ARTICLE 4 as of the date of this Agreement. 

4.1. Authorization of Closing Transactions. 

The Equityholder has the legal capacity (including any required consents of his spouse) to 

execute and deliver this Agreement and to perform Equityholder’s obligations hereunder. The 

execution, delivery and performance of this Agreement have been duly authorized by all corporate 

or equivalent action on behalf of the Equityholder. This Agreement constitutes a valid and legally 

binding obligation of the Equityholder enforceable in accordance with its terms and conditions, 

except as enforceability hereof may be limited by bankruptcy, insolvency or other laws affecting 

creditor’s rights generally and limitations on availability of equitable remedies. No other 

proceeding or action on the part of the Equityholder is necessary to approve and authorize the 

Equityholder’s execution and delivery of this Agreement or the performance of the Equityholder’s 

obligations hereunder. 

4.2. Absence of Conflicts. 

Except as set forth on Schedule 4.2, none of the execution, delivery or performance by 

Equityholder of this Agreement: 

(A) does or will (i) result in any breach of any of the provisions of, (ii) constitute 

a default under, (iii) result in a violation of, (iv) give any third party the right to terminate or to 

accelerate any obligation under or (v) result in the creation of any Lien upon any assets of the 

Equityholder or any Material Contract or any permits to which the Equityholder is party or by 

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which the Business is bound or any Legal Requirement by which the Equityholder or any of the 

Equityholder’s assets is bound, or 

(B) without limiting clause (A) above, requires any Consent of or filing with 

any Governmental Entity or any Person under any Material Contract, or any Company Group 

Permits to which the Company is a party or by which the Business is bound, or any Legal 

Requirement of any Governmental Entity or any other Person which has not been obtained or made 

by the Equityholder. 

4.3. Brokers’ Fees. 

Except for PJ Solomon, L.P. (whose fees shall be deemed a Transaction Expense for 

purposes hereunder), the Equityholder has not incurred any liability or obligation to pay any fees 

or commissions to any broker, finder or agent or employed any investment banker, broker or finder, 

in connection with the transactions contemplated by this Agreement. 

4.4. Securities; Title. 

The Equityholder holds of record and owns beneficially the Equity Interests set forth on 

Schedule 5.3, free and clear of any restrictions on transfer (other than any restrictions under the 

Securities Act and state securities laws) or Liens (other than Liens that will be discharged at the 

Closing). The delivery of the Equity Interests as set forth in this Agreement shall transfer lawful, 

valid, marketable and indefeasible title thereto to the Buyer, free of any Liens. Except as set forth 

on Schedule 4.4, the Equityholder is not a party to any option, warrant, purchase right, or other 

contract or commitment that could require the Equityholder to sell, transfer, or otherwise dispose 

of any of the Equity Interests (other than this Agreement). 

ARTICLE 5. 

REPRESENTATIONS AND WARRANTIES OF THE COMPANIES 

As a material inducement to Buyer to enter into this Agreement, the Companies and 

Equityholder, on a joint and several basis, make the representations and warranties set forth in this 

ARTICLE 5 as of the date of this Agreement. 

5.1. Organization and Power. 

Each member of the Company Group is validly existing and in good standing (or 

comparable status) under the laws of its jurisdiction of organization and is qualified to do business 

in every jurisdiction in which the nature of its business or its ownership of property requires it to 

be qualified, except where the failure to be so qualified would not reasonably be expected to have 

a Material Adverse Effect. Each member of the Company Group has the requisite corporate or 

limited liability company (as applicable) power and authority necessary to carry on its business as 

presently conducted. 

5.2. Authorization of Closing Transactions. 

Each Company has the requisite corporate or limited liability company power and authority 

(as applicable) to execute and deliver this Agreement and all other Transaction Documents to 

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which it is a party and to perform its obligations hereunder and thereunder. Each Company has 

duly authorized its execution, delivery and performance of this Agreement and all other 

Transaction Documents to which it is a party. No other proceeding or action on the part of any 

member of the Company Group is necessary to approve and authorize each Company’s execution 

and delivery of this Agreement or any other Transaction Document to which it is a party or the 

performance of its obligations hereunder or thereunder. This Agreement constitutes, and each of 

the other Transaction Documents to which a Company is a party will when executed constitute, a 

valid and binding obligation of such Company, enforceable in accordance with its terms, except 

as enforceability hereof may be limited by bankruptcy, insolvency or other laws affecting 

creditor’s rights generally and limitations on the availability of equitable remedies. 

5.3. Capitalization; Subsidiaries. 

(A) The authorized Equity Securities of each Company are as described on 

Schedule 5.3(A). The Equity Securities have been validly authorized and issued, are fully paid and 

non-assessable. There are issued and outstanding Equity Securities of each Company held of 

record as indicated on Schedule 5.3(A). Except as set forth on Schedule 5.3(A), there are no 

outstanding Equity Securities of any Company, preemptive or other outstanding rights, options, 

warrants, conversion rights, stock appreciation rights, repurchase rights, redemption rights, 

registration rights, agreements or Contracts, commitments, understandings, arrangements or 

obligations, by which a Company is or may become bound to issue, sell, purchase or exchange any 

Equity Securities of such Company or any securities or obligations convertible or exchangeable 

into or exercisable for, or giving any Person a right to subscribe for or acquire any securities or 

Equity Securities, and no securities or obligations evidencing such rights are authorized, issued or 

outstanding. Except as set forth on Schedule 5.3(A), there are no voting trusts, proxies, or other 

Contracts or understandings with a Company with respect to the voting of any Equity Securities 

of such Company. 

(B) Except as set forth on Schedule 5.3(B), no Company has any Subsidiaries, 

controls, directly or indirectly, or has any direct or indirect equity participation in any corporation, 

partnership, trust, or other business association or entity. The authorized Equity Securities of each 

member of the Company Group (other than the Companies) are as described on Schedule 5.3(B). 

There are issued and outstanding Equity Securities of the Company Group (other than the 

Companies) held of record as indicated on Schedule 5.3(B). Except as set forth on Schedule 

5.3(B), there are no outstanding Equity Securities of any member of the Company Group (other 

than the Companies), or Contracts, commitments, understandings or arrangements, by which any 

member of the Company Group (other than the Companies) is or may become bound to issue any 

Equity Securities of any member of the Company Group (other than the Companies). Except as 

set forth on Schedule 5.3(B), there are no voting trusts, proxies, or other Contracts or 

understandings with respect to the voting of any Equity Securities of any member of the Company 

Group (other than the Companies) to which may member of the Company Group is a party. Except 

as set forth on Schedule 5.3(B), no member of the Company Group (other than the Companies) 

has any Subsidiaries, controls, directly or indirectly, or has any direct or indirect equity 

participation in any corporation, partnership, trust, or other business association or entity. 

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5.4. Absence of Conflicts. 

Except as set forth on Schedule 5.4, none of the execution, delivery or performance by a 

Company of this Agreement or any other Transaction Document to which it is a party: 

(A) does or will (i) result in any breach of any of the provisions of, (ii) constitute 

a default under, (iii) result in a violation of, (iv) give any third party the right to terminate or to 

accelerate any obligation under or (v) result in the creation of any Lien upon any assets of the 

Company Group, in each case under the provisions of the Charter Documents of any member of 

the Company Group or any Material Contract, or any Company Group Permits to which any 

Company is a party or by which the Business is bound, or any Legal Requirement by which any 

member of the Company Group or any of its respective assets are bound, or 

(B) without limiting clause (A) above, requires any Consent of or filing with 

any Governmental Entity or any other Person under any Material Contract, or any Company Group 

Permits to which the Company is a party or by which the Business is bound, or any Legal 

Requirement which has not been obtained or made by the Companies. 

5.5. Financial Statements. 

(A) Attached as Schedule 5.5(A) are the following (collectively, the “Financial 

Statements”):

(1) the unaudited balance sheets of the Companies, as of December 31, 

2018, and the related statements of income and members’ equity for the fiscal year 

then ended; and 

(2) the unaudited consolidated balance sheet of the Companies dated as 

of, and the related statements of income and members’ equity for the fiscal year 

ended December 31, 2019. 

(B) The Financial Statements (in each case including the notes thereto, if any) 

have been prepared in accordance with the Companies’ normal accounting practices, in accordance 

with the Accounting Principles, on a consistent basis throughout the period involved, subject, in 

the case of the Financial Statements described in Section 5.5(A), to (i) a lack of footnote 

disclosures and other presentation items and (ii) changes resulting from year-end adjustments. The 

Financial Statements, taken as a whole, present fairly in all respects the financial condition and 

results of operations of the Companies and Business as of such dates and for the applicable periods 

then ended, in all material respects. 

(C) Except as set forth on Schedule 5.5(C), there are no undisclosed liabilities 

or obligations of a material nature relating to any Company of the nature required to be disclosed 

in accordance with the Accounting Principles since the date of the most recent Financial 

Statements other than (i) those incurred in the Ordinary Course consistent with past practices (none 

of which liabilities is a liability for breach of Contract, breach of warranty, tort, infringement or a 

violation of a Legal Requirement), (ii) Transaction Expenses or Closing Company Group 

Indebtedness that will be paid off in full at Closing and which actually reduce the Purchase Price, 

(iii) obligations of the Companies expressly contemplated under this Agreement or any of the 

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Transaction Documents or (iv) such obligations and liabilities expressly disclosed on the 

Schedules. 

5.6. Title to Tangible Assets. 

The Company Group has good and valid title or valid leases to all the material tangible 

assets necessary for the conduct of its business as presently conducted, free and clear of all Liens 

(other than Permitted Liens). Except as set forth on Schedule 5.6, to the knowledge of the 

Companies, the material tangible assets of the Company Group are in good operating condition 

and repair, reasonable wear and tear excepted. This representation does not apply to the Leased 

Real Property, Proprietary Rights or intangibles, which are covered elsewhere. 

5.7. Certain Developments. 

Except as set forth on Schedule 5.7, as contemplated by this Agreement or as otherwise set 

forth in the Schedules, during the period beginning on January 1, 2019 through the date of this 

Agreement, each member of the Company Group has conducted its business in all material respects 

in the Ordinary Course, and there has not been, with respect to the Business or the Company Group, 

any of the following: 

(A) any change, development, event, occurrence, fact, circumstance or 

condition that, individually or in the aggregate, has had, or could reasonably be expected to have, 

a Material Adverse Effect; 

(B) split, combination or reclassification of any of the Equity Interests or Equity 

Securities of the Company Group 

(C) amendment of the articles of organization, bylaws, operating agreement or 

other organizational documents of any member of the Company Group; 

(D) material change in any method of accounting or accounting practice for the 

Business, except as required by GAAP or as disclosed in the notes to the Financial Statements; 

(E) transfer, assignment, sale, license, abandonment, expiration, lapse or other 

disposition of any material assets, rights or properties shown or reflected on the Financial 

Statements, except for the sale of inventory in the Ordinary Course and the disposal or replace of 

any such asset in the Ordinary Course; 

(F) material damage, destruction or loss, or any material interruption of use, 

with respect to any material assets of the Company Group; 

(G) incurrence, assumption, guarantee or cancellation of any Indebtedness or 

other obligations for borrowed money, in an outstanding principal amount in excess of $ , 

individually or in the aggregate; 

(H) capital expenditures in an aggregate amount in excess of $ , 

individually or in the aggregate; 

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(I) acquisition by merger or consolidation with, or by purchase of a substantial 

portion of the assets or securities of, or by any other manner, any business or any Person or any 

division thereof; 

(J) commencement, waiver, cancellation, settlement, or offer to settle, any 

litigation, investigation, arbitration, proceeding or other claim involving any member of the 

Company Group, in excess of , individually or in the aggregate; or 

(K) termination of, or receipt of written notice of termination of, any Material 

Contract, which could reasonably be expected to result in a Material Adverse Effect. 

5.8. Real Property. 

(A) No member of the Company Group owns any parcels of real property. 

(B) Schedule 5.8(B) sets forth the address of each parcel of Leased Real 

Property, and a true and complete list of all Leases for each such Leased Real Property. The 

applicable member of the Company Group named therein has a good and valid leasehold interest 

in and to the applicable Leased Real Property free and clear of all Liens, other than Permitted 

Liens. The Companies have delivered to Buyer a true, complete and correct copy of each such 

Lease (including all amendments, extensions, renewals and guaranties) and the Companies have 

delivered to Buyer a true, complete and correct copy of any other agreements affecting the Leases 

in its possession. Except as set forth in Schedule 5.8(B), with respect to each of the Leases (and 

the Leased Real Property, as applicable): 

(1) such Lease is legal, valid and binding on the applicable member of 

the Company Group named therein, and in full force and effect, except as 

enforceability may be limited by bankruptcy, insolvency or other laws affecting 

creditor’s rights generally and limitations on the availability of equitable remedies; 

(2) to the Companies’ knowledge, the Company Group’s possession 

and quiet enjoyment of the rights and benefits granted to the Company Group under 

such Lease have not been disturbed in any material respect, and there are no 

pending disputes between the Company, on the one hand, or other Person, on the 

other hand, with respect to any Lease; 

(3) no member of the Company Group, nor to the Companies’ 

knowledge, any other party to any Lease is in material breach or default under such 

Lease and the Company Group has not received any notice of any breach or default 

under any Lease; 

(4) to the Companies’ knowledge, no security deposit or portion thereof 

deposited with respect to such Lease has been applied in respect of a breach or 

default under such Lease that has not been redeposited in full; 

(5) the Companies are in material compliance with all applicable rental 

payments and other payments due or contemplated under each Lease, including the 

timely submission of all statements required under any Lease; 

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(6) the Companies have not made any advance rental or lease payments; 

(7) no member of the Company Group has subleased, licensed or 

otherwise granted any Person the right to use or occupy such Leased Real Property 

or any portion thereof; 

(8) no member of the Company Group has received any written notice, 

and to the knowledge of the Company Group, is not aware of any existing, pending 

or threatened condemnation proceedings or zoning, building code or other 

moratorium proceedings, in each case, with respect to any Leased Real Property 

which would reasonably be expected to adversely affect the ability to operate the 

Leased Real Property as currently operated; 

(9) neither the whole nor any material portion of any Leased Real 

Property has been damaged or destroyed by fire or other casualty, nor suffers from 

any material latent defect which would reasonably be expected to materially and 

adversely affect the ability to operate the Leased Real Property as currently 

operated; 

(10) except for the Woodlands Location, all work required to be 

performed under any Lease by the applicable member of the Company Group 

named therein as of the date hereof has been performed and paid for, all work to be 

performed under any Lease by the landlord thereto has been completed to the 

Companies’ satisfaction, and any construction allowances required to be paid by 

the landlord under such Lease have been paid in full; 

(11) no profit sharing, recapture or other obligation, restriction or 

cancellation of any option under, or termination of any Lease will arise as a result 

of the transactions contemplated by this Agreement; 

(12) no member of the Company Group has received any notification 

within the last three years of any material violation of any applicable health, fire, 

safety, zoning and building laws or ordinances related to any Leased Real Property 

and all improvements and fixtures on any Leased Real Property conform to all 

applicable health, fire, safety, environmental, zoning and building laws and 

ordinances, in all material respects; 

(13) except for the Woodlands Location, to the extent required by 

applicable laws, the Company Group holds current and valid certificates of 

occupancy for each building located on each Leased Real Property and there have 

been no renovations to any such buildings or any other change in circumstances 

that would reasonably be expected to require the issuance of a new certificate of 

occupancy for any such buildings, except where the failure to obtain such certificate 

would not have a Material Adverse Effect; and 

(14) with respect to the Woodlands Location, the Possession Date (as 

such term is defined in the Woodlands Lease) has occurred, no portion of the 

construction allowance under the Woodlands Lease has been paid to the applicable 

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member of the Company Group, and all the construction currently being performed 

on behalf of the applicable member of the Company Group at the Woodlands 

Location is in full compliance with the Woodlands Lease. 

(C) Schedule 5.8(C) sets forth, for each Lease of any Leased Real Property, the 

commencement date and expiration date, the square footage of the premises, the current annual 

rent (including current additional rent, operating expenses, taxes and insurance, utilities and any 

percentage rent paid), any security deposit, whether the Leased Real Property has been separately 

assessed, and any renewal and right of first offer options. 

5.9. Tax Matters. 

Except as set forth on Schedule 5.9: 

(A) All material Tax Returns required to be filed by the Company Group have 

been timely filed. All such Tax Returns are true, correct and complete in all material respects. All 

Taxes due and payable with respect to such Tax Returns (whether or not shown on any Tax Return) 

have been timely paid in full. 

(B) No federal, state, local or foreign Tax audits or other administrative or 

judicial proceedings are presently pending with respect to any Tax Returns of any member of the 

Company Group, and no member of the Company Group has received written notice of any such 

audit or other proceeding. No written claim has been made by a taxing authority in a jurisdiction 

where any member of the Company Group does not file Tax Returns such that the member of the 

Company Group is or may be subject to taxation by, or required to file any Tax Return in, that 

jurisdiction, in each case, that has not been resolved in full. 

(C) Each member of the Company Group has withheld and paid all material 

Taxes required to have been withheld and paid by it in connection with amounts paid or owing to 

any employee, former employee, partner, independent contractor, creditor, stockholder, member, 

Affiliate, customer, supplier or other third party or other Person. 

(D) No member of the Company Group (1) is or has been a member of an 

Affiliated Group (other than a group of which such entity is or was the parent), (2) has current 

liability for Taxes of any other Person (except for another member of the Company Group) under 

Treasury Regulation §1.1502-6, or as a successor or transferee, by Contract or otherwise 

(excluding any customary or commercial contract entered into in the ordinary course of business 

and not primarily related to Taxes). 

(E) No member of the Company Group (1) has waived any statute of limitations 

in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or 

deficiency, in each case, which is still in effect and no written power of attorney with respect to 

any such Taxes has been filed or entered into with any taxing authority, which is still in effect, (2) 

is a party to or bound by any Tax allocation, Tax indemnification or Tax sharing agreement or 

similar contract or arrangement (other than any agreement entered into in the ordinary course of 

business the primary focus of which is not Taxes), or (3) is or has been a party to any “reportable 

transaction,” as defined in Section 6706A(c)(1) of the Code. 

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(F) There are no Liens for Taxes (other than Taxes not yet due and payable) 

upon any of the assets of the Company Group. 

(G) No member of the Company Group will be required to include any material 

item of income in, or exclude any material item of deduction from, taxable income for any taxable 

period (or portion thereof) ending after the Closing Date, as a result of any (i) change in method 

of accounting occurring prior to the Closing Date, (ii) use of an incorrect method of accounting 

for a taxable period ending on or prior to the Closing Date, (iii) installment sale or open transaction 

disposition made on or prior to the Closing Date, (iv) prepaid amount received on or prior to the 

Closing Date, (v) Tax ruling or “closing agreement” as described in Section 7121 of the Code (or 

any corresponding or similar provision of state or local income or foreign Tax law) executed on or 

prior to the Closing Date, or (vi) any intercompany transactions or any excess loss account 

described in Treasury Regulations under Section 1502 of the Code (or any corresponding or similar 

provision of state or local income or foreign Tax law). 

(H) Each member of the Company Group has (i) collected all material sales, 

use, value added, goods and services, and similar Taxes required to be collected and (ii) timely 

remitted all such Taxes collected to the appropriate taxing authority in accordance with applicable 

laws. 

(I) In the last two (2) years, no member of the Company Group has distributed 

stock of another Person or had its stock distributed by another Person in a transaction that was 

purported or intended to be governed in whole or in part by Sections 355 or 361 of the Code. 

(J) Notwithstanding anything to the contrary contained in this Agreement, 

nothing in this Agreement (including this Section 5.9) shall be construed as providing a 

representation or warranty with respect to the existence, amount, expiration date or limitations on 

(or availability of) in a Post-Closing Tax Period of any tax attribute of any member of the Company 

Group that was generated or created in a Pre-Closing Tax Period. 

5.10. Material Contracts. 

(A) Schedule 5.10(A) lists the following Contracts to which any member of the 

Company Group is a party (in each instance, excluding purchase orders, this Agreement, the 

Charter Documents and the Leases) (collectively, the “Material Contracts”): 

(1) Each Contract for the employment of any officer, individual 

employee or other person on a full-time, part-time, consulting or other basis 

providing annual base salary in excess of $ (other than any “at will” contract 

that may be terminated by any member of the Company Group upon 30 days or less 

advance notice); 

(2) each Contract under which any member of the Company Group has 

made advances or loans to any other Person (other than any such Contract involving 

advances made to an employee of any member of the Company Group in the 

Ordinary Course); 

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(3) each Contract containing a covenant not to compete granted by any 

member of the Company Group in favor of a third party that materially impairs the 

business as currently conducted of the Company Group taken as a whole; 

(4) each Contract relating to Indebtedness except for Indebtedness for 

an amount less than $ ; 

(5) lease or agreement under which any member of the Company Group 

is lessee of or holds or operates any tangible property (other than real property), 

owned by any other Person, except for any lease or agreement under which the 

aggregate annual rental payments do not exceed $ ; 

(6) lease or agreement under which any member of the Company Group 

is lessor of or permits any third party to hold or operate any tangible property (other 

than real property), owned or controlled by a Company, except for any lease or 

agreement under which the aggregate annual rental payments do not exceed 

$ ; 

(7) each Contract pursuant to which any member of the Company 

Group is granted a license or other right to use any Proprietary Rights that are 

material to the operation of the business of a Company, or grants any other Person 

a right to use any Proprietary Rights that are material to the operation of the 

business of a Company (excluding non-exclusive licenses for shrink-wrap, clickwrap or off-the-shelf software, or other commercially available software); 

(8) material partnership agreements and material joint venture 

agreements relating to the Company Group; 

(9) any Contract with a vendor of the Company Group pursuant to 

which such vendor was paid by the Company Group in excess of $ during 

the twelve-month period ending December 31, 2019 (other than any Contract that 

may be terminated by any member of the Company Group upon 30 days’ or less 

advance notice and purchase orders entered into in the Ordinary Course); 

(10) any “take or pay” Contract; 

(11) any Contract that requires any member of the Company Group to 

use any supplier or third party for all or substantially all of such member of the 

Company Group’s requirements or needs or requires such member of the Company 

Group to provide other parties “most favored nation” pricing; 

(12) each Contract for the design, construction, completion, furnishing 

and equipping of the Woodlands Location; and 

(13) each collective bargaining agreement. 

(B) Except as set forth on Schedule 5.10(B), each Material Contract is a valid, 

legal and binding agreement of the applicable member of the Company Group, and is in full force 

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and effect and (assuming that such Material Contract was duly and validly authorized, executed 

and delivered by the other Persons party thereto) enforceable against the applicable member of the 

Company Group and, to the Companies’ knowledge, each other party thereto, in accordance with 

its terms, except (i) to the extent that enforceability may be limited by applicable bankruptcy, 

insolvency, reorganization, moratorium or other Legal Requirements affecting the enforcement of 

creditors’ rights generally and (ii) that the availability of equitable remedies, including specific 

performance, is subject to the discretion of the court before which any proceeding thereof may be 

brought. 

5.11. Proprietary Rights; Privacy. 

(A) Schedule 5.11(A) sets forth a complete and correct list of (i) all registered 

trademarks of the Company Group (that have not expired or otherwise been abandoned or 

canceled) and all pending applications for registration of trademarks of the Company Group, (ii) 

all registered copyrights of the Company Group, including all pending applications for registration 

of copyrights of the Company Group and (iii) all other material licenses, sublicenses, agreements, 

permissions, consents, covenants, or similar agreements or arrangements, whether written or oral, 

granted by a member of the Company Group to any other party or naming a member of the 

Company Group as licensee or licensor for material Proprietary Rights (excluding non-exclusive 

licenses for shrink-wrap, click-wrap or off-the-shelf software, or other commercially available 

software). The Proprietary Rights identified on Schedule 5.11(A) constitute all of the Proprietary 

Rights that are material to and used in or required to conduct the business of the Company Group 

as presently conducted. 

(B) Except as set forth on Schedule 5.11(B), (i) the members of the Company 

Group own and possess all right, title and interest in and to, or have a valid right to use the 

Proprietary Rights described or required to be described on Schedule 5.11(A), free and clear of all 

Liens (other than Permitted Liens); (ii) the Proprietary Rights described or required to be described 

on Schedule 5.11(A) as currently used by the Company Group, and the conduct of the business of 

the Company Group, does not infringe upon, misappropriate, or otherwise violate any Proprietary 

Rights of any third party; (iii) no third party is infringing upon, misappropriating or otherwise 

violating the Proprietary Rights of the Company Group. 

(C) The Company Group is in compliance in all material respects with all 

applicable laws and with its own policies and procedures with respect to the integrity, operation, 

redundancy, disaster recovery and security of all material software, websites, applications, 

networks, systems and other information technology infrastructure used in the Business (and all 

data, including personal data, stored therein or processed thereby), and, there have been no material 

(actual or attempted) breaches, outages, corruptions, interruptions or violations of (or deletions of 

or damages to) same, other than those that were resolved without material cost, material liability 

or the duty to notify any Person. 

5.12. Company Group’s Broker. 

Except for PJ Solomon, L.P. (whose fees shall be deemed a Transaction Expense for 

purposes hereunder), no member of the Company Group has incurred any liability or obligation to 

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pay any fees or commissions to any broker, finder or agent or employed any investment banker, 

broker or finder, in connection with the transactions contemplated by this Agreement. 

5.13. Labor Matters. 

(A) Except as set forth on Schedule 5.13(A), (i) no member of the Company 

Group is party to any collective bargaining agreement or similar agreement with any labor 

organization setting forth the terms and conditions of employment for Company Group employees, 

(ii) there is no strike, walk out, work stoppage, lockout or other material labor dispute pending or, 

to the Companies’ knowledge, threatened in writing against any member of the Company Group, 

(iii) to the Companies’ knowledge, as of the date of this Agreement, no union organization 

campaign is in progress with respect to any employees of any member of the Company Group; 

and (iv) there are no unfair labor practice charges or complaints, material labor arbitrations or 

material labor grievances pending, or, to the Companies’ knowledge, threatened, against any 

member of the Company Group. 

(B) Each Company is in compliance in all material respects with all applicable 

Legal Requirements pertaining to employment and employment practices to the extent they relate 

to employees of such Company. Except as set forth in Schedule 5.13(B), there are no Proceedings 

against any member of the Company Group pending, or to the Companies’ knowledge, threatened 

to be brought or filed, by or with any Governmental Entity or arbitral tribunal in connection with 

the employment or termination of employment of any current or former employee of the Company 

Group, including, without limitation, any claim relating to unfair labor practices, employment 

discrimination, harassment, retaliation, equal pay or any other employment related matter arising 

under applicable Legal Requirements. No member of the Company Group has implemented any 

location closing or employee layoffs during the one-year period prior to the date hereof which 

would trigger the notification Legal Requirements of the WARN Act without complying with such 

Legal Requirements. Each member of the Company Group maintains adequate insurance as 

required by applicable Legal Requirements with respect to workers’ compensation claims and 

unemployment benefits claims. 

(C) Except as set forth on Schedule 5.13(C): (i) each member of the Company 

Group has properly utilized Form I-9 to verify the identity and work authorization status of each 

of its employees in compliance with the Immigration and Nationality Act, as amended, the 

Immigration Reform and Control Act of 1986, as amended, and related promulgating regulations; 

(ii) no employee of any member of the Company Group presented any temporary work 

authorization document at the time of hire that is presently or at any future date will be subject to 

I-9 re-verification; (iii) no employee of any member of the Company Group is employed under 

an H-1B, L-1A or L-1B visa, or any other employer-petitioned non-immigrant U.S. work 

authorization; and (iv) no member of the Company Group is petitioning for employment-based 

lawful permanent residence status on behalf of any employee of such member of the Company 

Group and no member of the Company Group has filed any Application for Alien Employment 

Certification (ETA Form 750), Application for Permanent Employment Certification (ETA Form 

9089), or any Form I-140 (Immigrant Petition for Alien Workers) that remains pending. 

Schedule 5.13(C) contains a list and description of any correspondence received by any member 

of the Company Group from any Person or Governmental Entity in the last three years questioning 

the validity of the social security number of any employee of such member of the Company Group. 

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(D) Set forth on Schedule 5.13(D) is a correct and complete list of each 

Company Group Employee and each Corporate Employee as of the date hereof and, to the extent 

applicable, his or her respective (i) title, (ii) location, (iii) current base salary or hourly wage rate, 

(iv) date of hire or engagement, (v) employment classification (full-time or part-time and exempt 

or non-exempt), (vi) average hours worked per week in the preceding twelve (12) month period 

for each part-time employee, (vii) 2020 bonus target (to the extent a bonus target is established 

and/or communicated to a Company Group Employee or Corporate Employee in the ordinary 

course of business), (viii) commission or fee arrangement and commissions, and (ix) annual 

vacation, sick leave and other paid time off allowance. 

5.14. Employee Benefit Plans. 

(A) Schedule 5.14(A) contains a correct and complete list of each Benefit Plan. 

The Company Group has made available to Buyer complete and correct copies of the following 

documents with respect to each Benefit Plan, to the extent applicable: (i) all plan documents, and 

written descriptions of all material non-written agreements relating to any such plan or 

arrangement; (ii) the most recent Form 5500, including all schedules thereto, annual report, 

financial statements and any related actuarial reports; (iii) the most recent summary plan 

description and summaries of material modifications thereto; (iv) all material notices or other 

communications received from the IRS, Department of Labor, or any other Governmental Entity 

on or after January 1, 2018; and (v) employee manuals or handbooks containing personnel or 

employee relations policies. 

(B) Each Benefit Plan has been operated in accordance with the terms of such 

Benefit Plan and complies in form and in operation with the applicable requirements of ERISA, 

the Code and other applicable Legal Requirements, in each case, in all material respects. 

(C) No member of the Company Group or any of their ERISA Affiliates 

currently contributes to, or within the past six years has contributed to, or has any liability in 

respect of a Multiemployer Welfare Plan or an Employee Pension Benefit Plan or a 

“multiemployer plan” as defined in Section 3(37) of ERISA. 

(D) Except as set forth on Schedule 5.14(D), all required reports and 

descriptions (including Form 5500 annual reports, summary annual reports, and summary plan 

descriptions) with respect to each Benefit Plan have been properly and timely filed or distributed 

to participants and other applicable individuals in accordance with the applicable requirements of 

ERISA and the Code, in each case, in all material respects. 

(E) No Benefit Plan provides health or life insurance or other welfare-type 

benefits for current or future retired or terminated employees (or any spouse or other dependent 

thereof) other than in accordance with COBRA. 

(F) All contributions (including all employer contributions and employee salary 

reduction contributions) and premiums that are due have been made within the time periods 

prescribed by ERISA and the Code to each Benefit Plan or with respect to each Benefit Plan, as 

applicable, in each case, in all material respects. 

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(G) Each Benefit Plan that is intended to meet the requirements of a “qualified 

plan” under Code Section 401(a) has received a current favorable determination letter from the 

Internal Revenue Service or is the subject of a current favorable opinion or advisory letter issued 

by the Internal Revenue Service with respect to such Benefit Plan. 

(H) Except as set forth on Schedule 5.14(H), (i) neither the execution and 

delivery of this Agreement nor the consummation of the transactions contemplated by this 

Agreement (either alone or in connection with any other event) will not give rise to any liability 

under any Benefit Plan, including liability for severance pay or accelerate the time of payment or 

vesting or increase the amount of compensation or benefits due to any employee, officer, director, 

stockholder or other service provider of any member of the Company Group (whether current, 

former or retired) or their beneficiaries, (ii) no amount received (whether in cash or property or the 

vesting of property), as a result of the consummation of the transactions contemplated by this 

Agreement either alone or in connection with any other event, by any employee, officer, director, 

stockholder or other service provider of any member of the Company Group under any Benefit 

Plan or otherwise would not be deductible by reason of Code Section 280G or would be subject to 

an excise tax under Code Section 4999, and (iii) no Benefit Plan promises or provides for any tax 

gross ups or tax indemnification including under Sections 280G, 4999 or 409A of the Code. 

5.15. Affiliate Transactions. 

Other than as set forth on Schedule 5.15, (i) no Affiliate (other than members of the 

Company Group) (A) is a party to any Contract or transaction with any member of the Company 

Group (other than in such Affiliate’s capacity as an employee of such member of the Company 

Group), or (B) has any interest in or owns any asset, tangible or intangible, of the Company Group 

that is used in the Business, and (ii) no material relationship exists or during the last three (3) years 

has existed, between the Equityholder or any of its Affiliates with respect to the Business, on the 

one hand, and any equity holder, officer, director or Affiliate of the Equityholder, or any Person 

controlled by or controlling of, any of them, or their respective family members, on the other hand, 

involving payment for goods or services (other than an employment agreement or arrangement 

with a member of the Company Group disclosed in Schedule 5.15)or the providing or guaranteeing 

of any Indebtedness. 

5.16. Compliance with Laws; Permits. 

(A) Except as set forth on Schedule 5.16(A), each member of the Company 

Group during the past three (3) years has complied in all material respects with, and currently is 

in compliance with, all material applicable Legal Requirements to which such member of the 

Company Group is subject. 

(B) To the Companies knowledge, the Company Group is in possession of, and 

at all times has possession of, and immediately following the Closing will hold, all material 

franchises, grants, authorizations, licenses, permits, registrations, qualifications, easements, 

variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and 

operate its properties, to carry on its Business (collectively, the “Company Group Permits”). All 

fees and charges with respect to such Company Group Permits that are due and payable as of the 

date hereof have been paid in full. Except as set forth on Schedule 5.16(B), (i) the Company Group 

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is, and during the past three (3) years has been, in material compliance with such Company Group 

Permits, all of which are in full force and effect, (ii) to the Companies’ knowledge, no event has 

occurred that, with or without notice or lapse of time or both, would reasonably be expected to 

result in the revocation, suspension, lapse or limitation of any Company Group Permit, and (iii) to 

the Company’s knowledge, no member of the Company Group has received any written notice to 

the contrary. 

5.17. Environmental Matters. 

Except as set forth on Schedule 5.17 or disclosed in any environmental reports, documents 

or assessment provided or made available to Buyer: 

(A) Each member of the Company Group is, and has been for the past three (3) 

years, in compliance in all material respects with all applicable Environmental Laws relating to its 

business as presently conducted. 

(B) Within the past three (3) years, no member of the Company Group has (i) 

received written notice under the citizen suit provisions of any Environmental Law; (ii) received 

any written notice of violation, demand letter, or complaint or claim under any Environmental 

Law; or (iii) been subject to or, to the Companies’ knowledge, threatened with, any judicial or 

administrative proceeding alleging violation by any member of the Company Group of any 

applicable Environmental Laws. 

(C) There is no Hazardous Substance at the Leased Real Property except in 

compliance in all material respects with applicable Environmental Laws, and no member of the 

Company Group has released Hazardous Substances on any Leased Real Property in material 

violation of, and no member of the Company Group has received any written notice that any 

Leased Real Property has been contaminated with Hazardous Substances which could reasonably 

be expected to give rise to a material liability under, applicable Environmental Laws. 

(D) No member of the Company Group has (i) treated, stored, or disposed of, 

(ii) arranged for the treatment, storage or disposal of, (iii) transported or arranged for the 

transportation of, (iv) handled, (v) exposed any Person to, any Hazardous Substances in a manner 

that would reasonably be expected to give rise to material liability under applicable Environmental 

Laws. 

(E) (i) The Company Group has obtained all permits, licenses and other 

approvals required under applicable Environmental Laws that are necessary for the Company 

Group’s activities and operations at the Leased Real Property; (ii) all such permits licenses and 

other approvals are valid and in full force and effect; (iii) no event has occurred that, with or 

without notice or lapse of time or both, would reasonably be expected to result in the revocation, 

suspension, lapse or limitation of any permit, licenses other approvals required under applicable 

Environmental Laws; (iv) no written notice has been received by the Company Group alleging the 

failure to hold any such permit, license or other approval; (v) all applications for renewal of such 

permits, licenses and other approvals have been timely filed; and (vi) all of such permits, licenses 

and other approvals will be available for use on the same terms by the Company Group 

immediately after the Closing. 

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(F) No member of the Company Group has assumed or undertaken any liability 

(including any investigatory, corrective or remedial obligation) of any other Person relating to any 

applicable Environmental Laws. 

(G) Neither this Agreement nor the consummation of the transaction that is the 

subject of this Agreement will result in any obligations for site investigation or cleanup, or 

notification to or consent of Governmental Entity or third parties, pursuant to any applicable 

Environmental Laws. 

(H) The Company Group has provided or otherwise made available to Buyer 

any and all material environmental reports, studies, audits, sampling data and site assessments with 

respect to the business of the Company Group as presently conducted, the Leased Real Property 

or any formerly owned or leased real property which are in the possession or control of any 

member of the Company Group and have been obtained within the last five (5) years. 

5.18. Insurance. 

Schedule 5.18 contains a list of all policies of fire, liability, workers’ compensation, 

property, casualty and other forms of insurance owned or held by any member of the Company 

Group as of the date of this Agreement. To the Companies’ knowledge, all such policies are in 

full force and effect, all premiums with respect thereto covering all periods up to and including the 

Closing Date will have been paid, and no notice of cancellation or termination has been received 

by any member of the Company Group with respect to any such policy. The insurance policies 

maintained by the Company covering operations at each Leased Real Property are on such terms 

and in such coverage amounts as are required by Leases. All premiums due and payable by the 

members of the Company Group or their respective Affiliates under any insurance policies prior 

to the date hereof have been duly paid. There are no claims related to the Business or the 

Companies Group pending under any such insurance policies as to which coverage has been 

questioned, denied or disputed or in respect of which there is an outstanding reservation of right 

5.19. Litigation. 

Except as set forth on Schedule 5.19, there is no Proceeding pending or, to the Companies’ 

knowledge, threatened in writing, against any member of the Company Group before any 

Governmental Entity (i) for an amount in dispute in excess, individually or in the aggregate, of 

, or (ii) which has had or would reasonably be expected to have a Material Adverse Effect. 

Except as set forth on Schedule 5.19, no member of the Company Group is subject to any 

outstanding order, writ, injunction or decree that has had or would reasonably be expected to have 

a Material Adverse Effect. 

5.20. Inventory. 

Except as set forth in Schedule 5.20, the inventory of the Company Group, net of applicable 

reserves, (i) was acquired or produced in the Ordinary Course, (ii) is good and merchantable and 

is of a quality and quantity presently useable and salable in the Ordinary Course, and (iii) has 

maintained by the Company Group in the Ordinary Course. All such inventory is owned by the 

Company Group free and clear of all Liens (other than Permitted Liens), and no such inventory is 

held on a consignment basis. 

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5.21. Material Suppliers. 

(A) Schedule 5.21(A) sets forth a correct and complete list for the twelve month 

period ended December 31, 2019, each of the top ten (10) suppliers to the Company Group (on a 

consolidated basis) in terms of total cost of goods supplied to the Company Group for that period. 

(B) Except as set forth on Schedule 5.21(B), no supplier listed in Schedule 

5.21(A) has stopped or materially decreased or has threatened in writing to stop or materially 

decrease the rate of supplying materials or products to the Company Group. 

5.22. Anti-Bribery; Anti-Corruption; Anti-Money Laundering; Anti-Terrorism; 

Sanctions. 

Since December 31, 2013, neither any member of the Company Group, nor, to the 

Companies’ knowledge, any of their respective representatives (acting for or on behalf of the 

Company Group) nor any other Person acting for or on behalf of any member of the Company 

Group has, directly or, knowingly indirectly, in furtherance of or in connection with the business 

of any member of the Company Group (i) offered, promised or given any financial or other 

advantage or inducement to any Person with the intention of influencing (A) any representative of 

any foreign, federal, state or local Governmental Entity in the performance of his or her public 

functions or (B) any other Person (whether or not such Person is the recipient of the advantage or 

inducement) to perform his, her or its function improperly, or where the acceptance of such 

advantage or inducement would itself be unlawful, (ii) requested, agreed to receive or accepted 

any financial or other advantage or inducement where such request, agreement to receive or 

acceptance would be unlawful, (iii) used any corporate funds for any unlawful contribution, gift, 

entertainment or other unlawful expenses relating to political activity, (iv) made any unlawful 

bribe, rebate, payoff, influence payment, kickback or other payment to any foreign or domestic 

government official or employee or (v) otherwise taken any action that would constitute a violation 

of any Anti-Corruption Laws, AML Laws or Anti-Terrorism Laws. Since December 31, 2013, no 

member of the Company Group is or has been the subject of any Proceeding regarding any actual 

or alleged violation of any Anti-Corruption Laws, AML Laws or Anti-Terrorism Laws. No such 

Proceeding has been threatened in writing (or, to the Companies’ knowledge, other than in 

writing), and no Equityholder nor any member of the Company Group has (x) received any notice 

or allegation from any Person alleging any actual or potential violation of any Anti-Corruption 

Laws, AML Laws or Anti-Terrorism Laws or (y) made a voluntary disclosure to any Governmental 

Entity or similar agency with respect to any alleged act or omission arising under or relating to any 

noncompliance with any Anti-Corruption Laws, AML Laws or Anti-Terrorism Laws. Each 

member of the Company Group represents that it has not engaged in nor intends to engage in any 

dealings or transactions with, or for the benefit of, any sanctioned person or with or in any 

sanctioned country. 

5.23. Film Studio Contracts. To the knowledge of the Company Group, no member of 

the Company Group is in default in the performance of any obligation under any Contract relating 

to any film rental, motion picture or master studio licensing agreement or any similar Contract, 

and each Company Group has reported all fees (including, without limitation, internet fees and 

premium seat surcharges) to such film or motion picture studios as required to be reported under 

such respective Contract. Since January 1, 2019, no third party has made any claim or threat to 

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collect amounts due or pending under any film rental, motion picture or master studio licensing 

agreement. 

5.24. NO OTHER REPRESENTATIONS. 

EXCEPT AS EXPRESSLY SET FORTH IN ARTICLE 4 OR THIS ARTICLE 5, NO 

MEMBER OF THE COMPANY GROUP, AND NONE OF THE EQUITYHOLDER OR ANY 

OF HIS AFFILIATES, MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR 

IMPLIED, AT LAW OR IN EQUITY AND ANY SUCH OTHER REPRESENTATIONS OR 

WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED. NOTWITHSTANDING 

ANYTHING TO THE CONTRARY, (A) NO MEMBER OF THE COMPANY GROUP, AND 

NONE OF THE EQUITYHOLDER OR ANY OF HIS AFFILIATES, WILL BE DEEMED TO 

MAKE TO BUYER OR ITS AFFILIATES ANY REPRESENTATION OR WARRANTY 

OTHER THAN AS EXPRESSLY MADE BY SUCH PERSON IN THIS AGREEMENT, AND 

(B) NO MEMBER OF THE COMPANY GROUP, AND NONE OF THE EQUITYHOLDER OR 

ANY OF HIS AFFILIATES, MAKES ANY REPRESENTATION OR WARRANTY TO 

BUYER OR ITS AFFILIATES WITH RESPECT TO (I) ANY PROJECTIONS, ESTIMATES 

OR BUDGETS HERETOFORE DELIVERED TO OR MADE AVAILABLE TO BUYER OR 

ITS AFFILIATES, COUNSEL, ACCOUNTANTS OR ADVISORS OF FUTURE REVENUES, 

EXPENSES OR EXPENDITURES OR FUTURE RESULTS OF OPERATIONS OF ANY 

MEMBER OF THE COMPANY GROUP AND/OR THE BUSINESS, OR (II) EXCEPT AS 

EXPRESSLY COVERED BY A REPRESENTATION AND WARRANTY CONTAINED IN 

ARTICLE 4 OR THIS ARTICLE 5, ANY OTHER INFORMATION OR DOCUMENTS 

(FINANCIAL OR OTHERWISE) MADE AVAILABLE TO BUYER OR ITS AFFILIATES, 

COUNSEL, ACCOUNTANTS OR ADVISORS WITH RESPECT TO ANY MEMBER OF THE 

COMPANY GROUP, ANY EQUITYHOLDER OR ANY OF THEIR RESPECTIVE 

AFFILIATES. 

ARTICLE 6. 

REPRESENTATIONS AND WARRANTIES OF BUYER 

As a material inducement to the Companies and the Equityholder to enter into this 

Agreement, Buyer hereby makes the representations and warranties set forth in this ARTICLE 6 

as of the date of this Agreement. 

6.1. Organization and Power. 

Buyer is a corporation that is duly organized, validly existing and in good standing under 

the laws of the State of Delaware. Buyer is qualified to do business in every jurisdiction in which 

the execution, delivery and performance of its obligations under this Agreement requires it to be 

so qualified. Buyer has the requisite company power and authority to execute, deliver and perform 

its obligations under this Agreement and the other Transaction Documents. 

6.2. Authorization of Closing Transactions. 

The execution, delivery and performance of this Agreement and the Transaction 

Documents to which Buyer is a party have been duly authorized by all necessary company action 

on behalf of Buyer. No other proceedings or actions on the part of Buyer are necessary to approve 

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and authorize Buyer’s execution and delivery of this Agreement or any other Transaction 

Document to which Buyer is a party or the performance of Buyer’s obligations hereunder or 

thereunder. This Agreement constitutes, and each of the other Transaction Documents to which 

Buyer is a party will when executed constitute, a valid and binding obligation of Buyer, 

enforceable in accordance with their terms, except as enforceability hereof may be limited by 

bankruptcy, insolvency or other Legal Requirements affecting creditor’s rights generally and 

limitations on the availability of equitable remedies. 

6.3. Absence of Conflicts. 

None of the execution, delivery or performance by Buyer of this Agreement or any other 

Transaction Document to which Buyer is a party: 

(A) does or will (i) result in any breach of any of the provisions of, (ii) constitute 

a default under, (iii) result in a violation of, (iv) give any third party the right to terminate or to 

accelerate any obligation under or (v) result in the creation of any Lien upon any assets of such 

Person, in each case under the provisions of the Charter Documents of such Person or any 

indenture, mortgage or other contract or agreement or any Legal Requirement by which such 

Person or any of its assets is bound, or 

(B) without limiting clause (A) above, requires any Consent of any 

Governmental Entity or any other Person under any contract or agreement or Legal Requirement. 

6.4. Litigation. 

There are no Proceedings, orders or investigations pending or, to the best of Buyer’s 

knowledge, threatened against or affecting Buyer, at law or in equity, or before or by any 

Governmental Entity which would adversely affect Buyer’s performance under this Agreement, 

the other Transaction Documents to which Buyer is a party, or the consummation of the 

transactions contemplated hereby or thereby. 

6.5. Independent Auditor. 

Neither Buyer nor any of Buyer’s Affiliates have been a client of the Independent Auditor 

nor has Buyer (or any of Buyer’s Affiliates) had any material relationship with the Independent 

Auditor during the last year. 

6.6. Investment Intent; Restricted Securities. 

Buyer is acquiring the Equity Interests solely for Buyer’s own account, for investment 

purposes only, and not with a view to, or with any present intention of, reselling or otherwise 

distributing such Equity Securities or dividing its participation herein with others. Buyer 

understands and acknowledges that (A) none of the Equity Interests have been registered or 

qualified under the Securities Act, or under any securities laws of any state of the United States or 

other jurisdiction, in reliance upon specific exemptions thereunder for transactions not involving 

any public offering; (B) all of such Equity Securities constitute “restricted securities” as defined 

in Rule 144 under the Securities Act; (C) none of such Equity Securities are traded or tradable on 

any securities exchange or over the counter; and (D) none of such Equity Securities may be sold, 

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transferred or otherwise disposed of unless a registration statement under the Securities Act with 

respect to such Equity Securities and qualification in accordance with any applicable state 

securities laws becomes effective or unless such registration and qualification is inapplicable, or 

an exemption therefrom is available. Buyer will not transfer or otherwise dispose of any such 

Equity Securities acquired hereunder or any interest therein in any manner that may cause any 

Equityholder to be in violation of the Securities Act or any applicable state securities laws. Buyer 

is an “accredited investor” as defined in Rule 501(a) of the Securities Act. 

6.7. Due Diligence Review. 

(A) Buyer is an informed and sophisticated Person, and has engaged expert 

advisors experienced in the evaluation and acquisition of companies such as the members of the 

Company Group as contemplated hereunder. Buyer and its respective representatives have 

undertaken such investigation and have been provided with and has evaluated such documents and 

information as each of them have deemed necessary to enable them to make an informed decision 

with respect to the execution, delivery and performance of this Agreement and the Transaction 

Documents and the consummation of the transactions contemplated hereunder. Buyer and its 

representatives have received materials relating to the business of the Company Group and have 

been afforded the opportunity to obtain any additional information, in each case, that they deem 

necessary to make an informed decision with respect to the merits of the acquisition of the Equity 

Interests. Buyer and its representatives have reviewed all of the documents, records, reports and 

other materials made available by (or on behalf of) the Company Group in the online data room 

created for the transaction or identified in the Schedules and is familiar with the content thereof. 

In making a determination to proceed with the transactions contemplated herein, Buyer has relied 

solely on the results of its and its representatives’ own investigation and the representations and 

warranties expressly set forth in ARTICLE 4 or ARTICLE 5 as qualified by the Schedules. 

(B) In connection with the investigation by Buyer of the Company Group, 

Buyer and its representatives may have received and, after the date hereof but prior to the Closing, 

may receive from the Company Group or any of their representatives certain projections, budgets, 

forward looking statements and other forecasts. Buyer acknowledges that there are uncertainties 

inherent in attempting to make such projections, budgets, forward looking statements and other 

forecasts, that Buyer and its representatives are familiar with such uncertainties, that Buyer and its 

representatives are taking full responsibility for making their own evaluation of the adequacy and 

accuracy of all projections, budgets, forward looking statements and other forecasts so furnished 

to them (including the reasonableness of the assumptions underlying such projections, budgets, 

forward looking statements and other forecasts), and that, except to the extent such information is 

included in the representations and warranties expressly set forth in ARTICLE 4 or ARTICLE 5 

as qualified by the Schedules, Buyer has not relied upon, is not relying upon and will not rely upon 

any such projections, budgets, forward looking statements or other forecasts or any other materials, 

documents or information (including those provided in certain “data rooms,” confidential 

information memoranda or similar materials, or management presentations in connection with the 

transactions contemplated hereunder) made available to Buyer or its representatives and Affiliates 

by the Company Group or any of their representatives, and Buyer shall have no claim against any 

Person with respect thereto. 

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(C) Buyer (on behalf of itself and its Affiliates) acknowledges that, other than 

as expressly set forth in ARTICLE 4 or ARTICLE 5, no member of the Company Group or any of 

their respective directors, officers, employees, Affiliates, stockholders, equity holders (including 

the Equityholder), agents or representatives or any other Person makes or has made any 

representation or warranty, contractual or legal, either express or implied, as to the accuracy or 

completeness of any of the information provided or made available to Buyer or any of its respective 

agents, representatives, lenders or Affiliates or any other Person acting on their behalf prior to the 

execution of this Agreement. 

(D) EXCEPT FOR THE SPECIFIC REPRESENTATIONS AND 

WARRANTIES EXPRESSLY SET FORTH IN ARTICLE 4 OR ARTICLE 5, BUYER (ON 

BEHALF OF ITSELF AND ITS AFFILIATES) SPECIFICALLY DISCLAIMS THAT IT IS 

RELYING UPON OR HAS RELIED UPON ANY OTHER REPRESENTATIONS OR 

WARRANTIES THAT MAY HAVE BEEN MADE BY ANY MEMBER OF THE COMPANY 

GROUP, THE EQUITYHOLDER OR THEIR RESPECTIVE AFFILIATES OR ANY OTHER 

PERSON, AND ACKNOWLEDGES AND AGREES THAT THE EQUITYHOLDER AND HIS 

AFFILIATES, AND EACH MEMBER OF THE COMPANY GROUP HAVE SPECIFICALLY 

DISCLAIMED AND DO HEREBY SPECIFICALLY DISCLAIM ANY SUCH OTHER 

REPRESENTATION OR WARRANTY MADE BY ANY MEMBER OF THE COMPANY 

GROUP, THE EQUITYHOLDER OR THEIR RESPECTIVE AFFILIATES OR ANY OTHER 

PERSON. THE BUYER (ON BEHALF OF ITSELF AND ITS AFFILIATES) FURTHER 

ACKNOWLEDGES AND AGREES THAT, EXCEPT FOR THE SPECIFIC 

REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN ARTICLE 4 OR 

ARTICLE 5, NONE OF THE COMPANY GROUP MEMBERS, THE EQUITYHOLDER OR 

THEIR RESPECTIVE AFFILIATES, OR ANY OF THEIR RESPECTIVE DIRECTORS, 

OFFICERS, MANAGERS, PRINCIPALS, PARTNERS, MEMBERS, EMPLOYEES, AGENTS, 

CONSULTANTS, LENDERS, FINANCING SOURCES, ADVISORS, ACCOUNTANTS OR 

OTHER REPRESENTATIVES (I) HAVE MADE OR MAKE ANY REPRESENTATION OR 

WARRANTY, EXPRESSED OR IMPLIED, AS TO THE ACCURACY OR COMPLETENESS 

OF THE DILIGENCE MATERIALS PROVIDED OR (II) SHALL HAVE ANY LIABILITY 

WHATSOEVER TO BUYER, ITS AFFILIATES OR THEIR RESPECTIVE 

REPRESENTATIVES RELATING TO OR RESULTING FROM THE USE OF SUCH 

DILIGENCE MATERIALS OR ANY ERRORS THEREIN OR OMISSIONS THEREFROM..

6.8. Availability of Funds; Solvency. 

Buyer is not entering into this Agreement or the Transaction Documents to which it is, or 

is specified to be, a party, with the intent to hinder, delay or defraud either present or future 

creditors. As of the Closing and immediately after giving effect to the transactions contemplated 

hereunder, including the making of the payments contemplated under this Agreement, including 

any related fees and expenses, Buyer and its Subsidiaries (which at such time will include the 

Company Group), taken as a whole, will be Solvent. For purposes of this Section 6.8, “Solvent” 

means that, with respect to any Person and as of any date of determination, (A) the amount of the 

“present fair saleable value” of the assets of such Person, will, as of such date, exceed the amount 

of all “liabilities of such Person, contingent or otherwise,” as of such date, as such quoted terms 

are generally determined in accordance with applicable federal laws governing determinations of 

the insolvency of debtors, (B) the present fair saleable value of the assets of such Person will, as 

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of such date, be greater than the amount that will be required to pay the liability of such Person on 

its Indebtedness as its Indebtedness becomes absolute and matured, (C) such Person will not have, 

as of such date, an unreasonably small amount of capital with which to conduct its business, and 

(D) such Person will be able to pay its Indebtedness as it matures. 

6.9. Closings and Mass Layoffs. 

Buyer agrees not to conduct any closings, reductions in force, or terminations of employees 

of any member of the Company Group in the 90-day period following the Closing that would 

trigger the notification requirements of the WARN Act. 

6.10. Brokers’ Fees. 

Buyer has not incurred any liability or obligation to pay any fees or commissions to any 

broker, finder or agent or employed any investment banker, broker or finder, in connection with 

the transactions contemplated by this Agreement. 

6.11. Exceptions to GAAP. To the best of its knowledge, neither Buyer nor any of its 

representatives or advisors is aware of (or has any reason to believe there exist) any deviations or 

exceptions to GAAP utilized by the Companies or the Business, other than those deviations or 

exceptions set forth in Exhibit A hereto. 

ARTICLE 7. 

COVENANTS 

7.1. Operation and Maintenance of the Business. 

(A) From the date hereof until the Closing or termination of this Agreement by 

its terms, except (i) as otherwise expressly provided in this Agreement or (ii) as described on 

Schedule 7.1(A), the Companies shall use commercially reasonable efforts to (and shall cause each 

member of the Company Group to use commercially reasonable efforts to): (a) conduct the 

Business in the Ordinary Course; (b) maintain and preserve intact the organization, operations and 

franchise of the Business as in effect on the date hereof; (c) maintain in effect all Company Group 

Permits and valid policies of insurance as in effect on the date hereof; (d) keep available the 

services of their respective directors, officers and employees (excluding terminations in 

accordance with the terms of Section 7.1(B)(g)(III) or resignations in the Ordinary Course); (e) 

preserve the rights, franchises, goodwill and relationships with its employees, customers, lenders, 

suppliers, regulators and others having relationships with the Company Group; and (f) refrain from 

taking any action that could reasonably be expected to cause a default under any Material Contract 

or any Lease. 

(B) Without limiting Section 7.1(A), from and after the date hereof until the 

earlier of the Closing or the termination of this Agreement in accordance with its terms, except as 

(i) consented to in writing by Buyer, (ii) required by Legal Requirement, (iii) expressly permitted 

by this Agreement, or (iv) listed on Schedule 7.1(A), the Companies shall not, and shall cause each 

member of the Company Group not to: (a) settle any litigation that would result in or create liability 

to any Company Group after the Closing; (b) take, or commit to take, any action from the close of 

business on the day immediately preceding the Closing Date to the time when the Closing occurs 

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that would not be accounted or adjusted for in connection with the Purchase Price adjustment 

contemplated by Section 2.3; (c) issue, sell or deliver any Equity Securities of any member of the 

Company Group or issue or sell any securities convertible into, or options with respect to, or 

warrants to purchase or rights to subscribe for (including upon conversion, exchange or exercise), 

any Equity Securities of any member of the Company Group to any third party, including pursuant 

to any Benefit Plan that is an equity or equity-based incentive plan; (d) make any material change 

in any method of accounting or accounting practice or policy other than those required by GAAP; 

(e) make, change or revoke any material Tax election, change any accounting period with respect 

to Taxes, file any amended material Tax Return, enter into any closing agreement, settle or 

compromise any proceeding with respect to any material Tax claim or assessment relating to the 

Company Group, surrender any right to claim a refund of a material amount of Taxes; (f) acquire 

by merging or consolidating with, or by purchasing substantially all of the assets of, or by any 

other manner, any third party Person or division thereof; (g) except as required by a Benefit Plan: 

(I) increase the compensation (including bonuses or commission) payable or to become payable 

after the date hereof to any employee, officer, director or consultant of any member of the 

Company Group; (II) adopt, enter into, amend or modify any Benefit Plan or policy, plan, 

arrangement or agreement that would be a Benefit Plan if it were in existence on the date hereof 

(except as required by any Legal Requirement); or (III) hire or terminate (other than for cause or 

by reason of permanent disability) any employee, officer, director or consultant of the Company 

Group whose total annual compensation is in excess of $ per year; (IV) loan or advance any 

money or other property to any employee, officer, director or consultant of the Company Group 

or any Corporate Employee, excluding expense advances in the ordinary course of business 

consistent with past practice; or (V) grant any severance, termination pay or retention or change 

in control entitlements to any employee, officer, director or consultant of the Company Group or 

any Corporate Employee; (h) engage in any mass layoff that would trigger notification 

requirements pursuant to the WARN Act; (i) except as required by Legal Requirement, voluntarily 

recognize a labor union or similar organization or enter into a collective bargaining agreement or 

similar agreement; (j) sell, lease, license, allow the expiration or lapse of, or otherwise dispose of 

its properties, rights or assets, other than in the Ordinary Course; (k) amend any privacy policies 

or the operation or security of any material IT assets used in the Business of the Company and its 

Subsidiaries, except in each case, in the Ordinary Course; or (l) agree or otherwise commit, 

whether in writing or otherwise, to do, or take any action or omit to take any action that would 

result in, any of the foregoing or which would result in any of the changes or events listed in 

Section 5.4 to be reasonably likely to occur. 

7.2. Access. 

From the date hereof until the Closing and subject to the terms of any applicable 

confidentiality agreements, the Companies shall (and shall cause each member of the Company 

Group to): (A) afford Buyer and its counsel, accountants and other authorized agents and 

representatives (collectively, “Representatives”) reasonable access to and the right to inspect all 

of the properties, assets, premises, books and records, contracts, agreements and other documents 

and data related to the Company Group; and (B) make available to Buyer and its Representatives 

with such financial, operating and other data and information related to the Company Group as 

Buyer or any of its Representatives may reasonably request; provided that any such investigation 

shall be conducted during normal business hours upon reasonable advance notice to the Company 

Group, under the supervision of the Company Group’s personnel and in such a manner as (i) not 

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to interfere with the normal operations of the Company Group, and (ii) to prevent the unauthorized 

disclosure of the transactions contemplated hereby or any confidential or legally privileged 

information; and provided further that the Company Group shall not be required to permit, and 

Buyer and its representatives shall not be permitted to, perform any environmental sampling at any 

Leased Real Property, including sampling of soil, groundwater, surface water, building materials, 

or air or wastewater emissions without the prior written consent of the Equityholder (in which case 

a separate access and indemnity agreement, in a form reasonably acceptable to the Equityholder 

will be required). Notwithstanding the foregoing, during such period until the earlier of the Closing 

Date or the termination of this Agreement in accordance with its terms, except as contemplated by 

Section 7.9 of this Agreement, Buyer hereby agrees that it is not authorized to and shall not (and 

shall not permit any of its employees, agents, representatives or Affiliates to) contact any 

employee, customer, supplier, distributor or other material business relation of any member of the 

Company Group regarding any member of the Company Group’s business or the transactions 

contemplated by this Agreement without the prior consent of the Equityholder. All of such 

information obtained by Buyer or any of its Affiliates and any of their respective directors, officers, 

managers, employees, agents or representatives shall be treated as confidential information. 

7.3. Exclusive Dealing. 

During the period from the date of this Agreement until the earlier of the Closing or the 

termination of this Agreement in accordance with its terms, the Equityholder and the Companies, 

and each of their respective officers, directors or representatives: (i) will immediately cease any 

solicitations, discussions, negotiations or communications with any Person (other than Buyer and 

its Affiliates) that may be ongoing with respect to any Competing Proposal; and (ii) will not (x) 

initiate, solicit, knowingly encourage or facilitate (including by way of furnishing non-public 

information) the submission of a Competing Proposal, (y) execute or enter into, or legally commit 

to execute or enter into, any agreement with respect to a Competing Proposal, or (z) enter into or 

participate in any negotiations or discussions with any potential third party acquirer or its 

representatives regarding a Competing Proposal (other than Buyer and its Affiliates). 

7.4. Further Assurances. Each Party will use reasonable best efforts to cause the 

conditions to Buyer, the Companies’ and the Equityholder’s respective obligations to consummate 

the Closing to be satisfied (including, without limitation, the preparation, execution and delivery 

of all agreements, instruments, and filings (including pursuant to Section 7.6) contemplated 

hereunder to be executed, delivered, and/or filed by such party in connection with or prior to the 

Closing). 

7.5. Updating Disclosure Schedules. 

Concurrently with the execution and delivery of this Agreement, the Equityholder and the 

Companies have delivered to Buyer the schedules to this Agreement (the “Schedules”). From and 

after the date of this Agreement until no later than two (2) Business Days before the Closing Date, 

the Companies and the Equityholder may prepare and deliver to Buyer supplements and/or 

amendments to the Schedules (that may contain additional Schedules that are not in existence as 

of the date hereof relating to any of the provisions contained in this Agreement, in each case, such 

supplement, amendment or new Schedule being referred to as an “Update”), and each such Update 

shall be deemed to be an amendment to this Agreement for all purposes hereof; provided that, any 

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such Update shall be given effect solely for the purposes of determining whether there has been a 

breach of a representation or warranty for purposes of determining the fulfilment of the condition 

set forth in Section 8.1(A) but shall have no effect for purposes of determining whether there has 

been a breach of representation and warranty for purposes of the indemnification provisions under 

Article 11. Notwithstanding the foregoing, the Equityholder agrees to update Schedule 5.13(D) as 

fully as possible as soon as possible following the date hereof; provided, that, for the avoidance of 

doubt, the failure to deliver all information required by the terms of Section 5.13(D) as of the date 

hereof shall not be deemed a breach for the purposes hereunder. 

7.6. Regulatory Filings. 

(A) In the event any claim, action, suit, investigation or other proceeding by any 

Governmental Entity or other Person is commenced that questions the validity or legality of the 

transactions contemplated hereby or seeks damages in connection therewith, the Parties hereto 

agree to cooperate and use commercially reasonable efforts to defend against such claim, action, 

suit, investigation or other proceeding and, if an injunction or other order is issued in any such 

action, suit or other proceeding, to use commercially reasonable efforts to have such injunction or 

other order lifted, and to cooperate reasonably regarding any other impediment to the 

consummation of the transactions contemplated hereby. 

(B) Each Party hereto shall promptly notify the other Parties hereto of any 

communication it or its Affiliates receives from any Governmental Entity relating to the matters 

that are the subject of this Agreement and permit the other Parties hereto to review in advance any 

proposed communication by it to any Governmental Entity. No Party hereto shall agree to 

participate in any meeting with any Governmental Entity in respect of any filings, investigation or 

other inquiry relating to this Agreement or the transactions contemplated hereunder, unless it 

consults with the other Parties hereto in advance and, to the extent permitted by such Governmental 

Entity, gives the other Parties hereto the opportunity to attend and participate at such meeting. 

Each Party hereto will provide the other Parties hereto with copies of all correspondence, filings 

or communications between it or any of its representatives, on the one hand, and any Governmental 

Entity or members of its staff, on the other hand, with respect to this Agreement and the 

transactions contemplated by this Agreement. 

7.7. 280G Matters. To the extent applicable, if required to avoid the imposition of Taxes 

under Section 4999 of the Code or loss of a deduction under Section 280G of the Code with respect 

to any payment or benefit in connection with this Agreement or the transactions contemplated by 

this Agreement, the Equityholder and the applicable member(s) of the Company Group shall: (i) 

use best efforts to obtain a waiver from each “disqualified individual” (within the meaning of 

Section 280G(c) of the Code) entitled to receive a payment that is reasonably expected to be a 

“parachute payment” (within the meaning of Section 280G(b)(2) of the Code) in connection with 

the transactions contemplated by this Agreement of his or her right to receive such payment or 

benefit; and (ii) take all actions necessary to, reasonably in advance of the Closing Date, deliver 

to its equityholders a disclosure statement which is reasonably intended to satisfy its disclosure 

obligations under Section 280G(b)(5)(B) of the Code and the regulations thereunder, and which 

solicits and recommends that its equityholders vote in favor of the parachute payments disclosed 

therein through a vote reasonably intended to meet the requirements of Section 280G(b)(5)(B) of 

the Code and the regulations thereunder. To the extent applicable, the Company shall provide 

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Buyer and its representatives with a copy of such waivers, disclosure statement and underlying 

calculations of potential “parachute payments” within at least five Business Days prior to delivery 

to the Company’s equityholders and shall consider in good faith (and shall not unreasonably omit) 

any reasonable comments timely made by Buyer or its representatives regarding the content of 

such disclosure statement. 

7.8. Non-Compete. From the date hereof until the two (2) year anniversary of the 

Closing Date (the “Restricted Period”), the Equityholder agrees that he shall not, without the 

prior written consent of Buyer, directly or indirectly, whether on Equityholder’s own behalf or in 

conjunction with any Person, including, but not limited to SCCG Inc. (or any successor entity 

thereof), (i) own, invest or engage in, assist others in owning, investing or engaging in, or have an 

interest in, or encourage or facilitate another Person to engage or have an interest in, any 

Competing Business within the Restricted Territory (as defined below); or (ii) interfere with, or 

attempt to interfere with, business relationships (whether formed before, on or after the date of this 

Agreement) between the members of the Company Group and any of their clients, customers, 

suppliers, partners, employees, members or investors within the Restricted Territory. For purposes 

of this Section 7.8, (x) “Competing Business” means any business that provides products or 

services which are competitive with the products or services provided by the Business or the 

Company Group and any other line of business that the Business or the Company Group is engaged 

in or has plans to be engaged in; and (y) “Restricted Territory” means each and every area located 

within a ten (10) mile radius of (1) each Leased Real Property location set forth on Schedule 5.8; 

and (2) each location in which Buyer (or one of its Affiliates) is currently operating or anticipates 

operating a motion picture theater, in each case, to the extent set forth on Schedule 7.8.

7.9. Access to Corporate Employees; Transition Services Agreement. 

(A) From and after the date hereof until Closing Date, the Equityholder shall 

provide Buyer and its Affiliates with reasonable access to each Corporate Employee (including 

but not limited to by providing contact information for each such Corporate Employee) and to the 

personnel record of each Corporate Employee, and Buyer and its Affiliates may conduct interviews 

and discussions with such Corporate Employees regarding employment with Buyer and its 

Affiliates, and Buyer and its Affiliates in their sole discretion may extend offers of employment to 

such Corporate Employees. 

(B) To enable the Buyer to manage an orderly transition in its operation of the 

Company Group, following the Closing, Buyer and Equityholder agree that each shall use their 

reasonable best efforts to enter into a transition services agreement (the “TSA”) in such form 

reasonably acceptable to each of Buyer and Equityholder, pursuant to which (i) certain Corporate 

Employees shall provide transition services that may reasonably be required by the Buyer, at-cost 

to Buyer (which shall mean an hourly rate set forth in the TSA based on the applicable Corporate 

Employee’s salary, incentive compensation, benefits and, in each case, the Equityholder’s portion 

of any employment Taxes thereon), including but not limited to financial services, accounting 

support, marketing, human resources and training to support the operations of the Company Group, 

for a period not to exceed three (3) months from the Closing Date; and (ii) the Subject Employees 

are made available to Equityholder (or any of its Affiliates) in accordance with the terms of Section 

10.11(B). 

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7.10. Domain Names. Equityholder shall, within thirty (30) days of the date hereof, file 

all assignments necessary to reflect the Company as the record and beneficial owner of the domain 

names set forth on Schedule 7.10 hereof. 

7.11. Right of First Offer. 

(A) Equityholder hereby grants to Buyer, for a period of three (3) years from 

the date hereof, a right of first offer (the “ROFO”) to lease, manage or operate any motion picture 

theaters to be constructed by Equityholder (or an agent thereof) in any shopping center or similar 

center to be developed by Equityholder (or an agent thereof) (the “Opportunity”), under the terms 

and conditions set out below. For the avoidance of doubt, the Opportunity shall not apply in the 

event Equityholder (or any of its Affiliates) is the intended lessee, manager or operator of any such 

motion picture theatre. 

(B) Prior to offering a third-party the Opportunity, Equityholder shall in good 

faith send to Buyer a written notice (the “ROFO Notice”) identifying the Opportunity and Buyer 

shall have an irrevocable option to enter into, or cause its Affiliate to enter into, the Opportunity. 

The option of the Buyer will be exercisable by written notice to Equityholder within (30) days 

from the receipt of such ROFO Notice (the “ROFO Period”). If Buyer does not exercise such 

option before the expiration of the ROFO Period, Buyer shall be deemed to have elected not to 

exercise its option to enter into the Opportunity and Equityholder shall be free to offer the 

Opportunity to any third-party on such terms and conditions determined by Equityholder in his 

sole discretion. 

(C) If Buyer exercises its right to enter into the Opportunity, Equityholder and 

Buyer shall, as soon as possible, and no later than sixty (60) days (or such other period agreed in 

writing by Buyer and Equityholder) enter into an agreement in respect of the Opportunity. Upon 

exercise by the Buyer of its right to enter into the Opportunity, Buyer and Equityholder shall be 

legally obligated to execute the agreement contemplated hereby and shall use their reasonable best 

efforts to secure any approvals required, to comply as soon as reasonably practicable with all Legal 

Requirements, and to take all such other actions and to execute such additional documents as are 

necessary or appropriate in connection therewith. 

ARTICLE 8. 

CONDITIONS TO OBLIGATIONS 

8.1. Buyer’s Closing Conditions. 

The obligation of Buyer to consummate the purchase of the Equity Interests is subject to 

the satisfaction (or waiver by Buyer) of the following conditions as of the time of the Closing: 

(A) (i) Each of the Company / Equityholder Fundamental Representations shall 

be true and correct in all respects as of the Closing as though made on the Closing, and (ii) each 

of the other representations and warranties set forth in ARTICLE 4 and ARTICLE 5 will be true 

and correct (in each case disregarding any limitations as to materiality or “Material Adverse 

Effect” therein) as of the time of the Closing as though then made (except those representations 

and warranties that address matters only as of a specified date, the accuracy of which shall be 

determined only as of such date), except, in the case of this clause (ii), where the failure of such 

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representations and warranties to be true and correct would not, in the aggregate, have a Material 

Adverse Effect; 

(B) The Companies and the Equityholder will have performed and complied (or 

shall have cured any non-performance or non-compliance) with all of the covenants and 

agreements required to be performed by the Companies and the Equityholder, as the case may be, 

hereunder or under any of the Transaction Documents at or prior to the Closing; 

(C) There will be no action or Proceeding before any Governmental Entity 

pending wherein an unfavorable judgment, decree, injunction or order would prevent the 

consummation of the sale of the Equity Interests or result in the sale of the Equity Interests being 

declared unlawful or rescinded, and no such judgment, decree, injunction or order will be in effect; 

(D) On or prior to the Closing Date, the Equityholder will have delivered (or 

cause to be delivered) to Buyer all of the following (dated as of the Closing Date, except as 

otherwise indicated):

(1) (a) Original stock certificates representing the Equity Interests, duly 

endorsed in blank or accompanied by stock powers or other instruments of transfer, 

duly executed in blank and (b) evidence of the conveyance to the Buyer of all of 

the issued and outstanding shares in the Company Group reflecting the Buyer as 

the owner thereof. 

(2) Each Company’s resolutions of the board and equityholders 

authorizing the execution, delivery and performance of this Agreement and the 

Transaction Documents to which it is a party; and 

(3) Payoff letters from the holders of the Closing Company Group 

Indebtedness to the payees contemplated in the Flow of Funds. 

(4) Executed third party consents and approvals as set forth on Schedule 

8.1(D)(4). 

(5) The Escrow Agreement, duly executed by the Equityholder and the 

Escrow Agent. 

(6) The Naperville Purchase Agreement, duly executed by the 

Equityholder and SCG-N Inc., a Texas corporation. 

(7) A certification by the Equityholder (in such form as may be 

reasonably requested by counsel to Buyer) conforming to the requirements of 

Treas. Reg. § 1.1445-2(b)(2). 

(E) Since (and including) the date of this Agreement, there shall not have 

occurred a Material Adverse Effect. 

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8.2. Equityholder’s Closing Conditions. 

The obligation of the Equityholder to consummate the sale of the Equity Interests is subject 

to the satisfaction (or waiver by the Equityholder) of the following conditions as of the Closing 

Date: 

(A) (i) Each of the Buyer Fundamental Representations shall be true and correct 

in all respects as of the Closing as though made on the Closing, and (ii) each of the other 

representations and warranties set forth in ARTICLE 6 will be true and correct (in each case 

disregarding any limitations as to materiality or “Material Adverse Effect” therein) as of the time 

of the Closing as though then made (except those representations and warranties that address 

matters only as of a specified date, the accuracy of which shall be determined only as of such date), 

except, in the case of this clause (ii), where the failure of such representations and warranties to be 

true and correct would not, in the aggregate, have a Material Adverse Effect; 

(B) Buyer will have performed and complied (or shall have cured any nonperformance or non-compliance) with all of the covenants and agreements required to be 

performed by Buyer hereunder or under any of the Transaction Documents at or prior to the 

Closing; 

(C) No action or proceeding before any Governmental Entity will be pending 

against Buyer wherein an unfavorable judgment, decree, injunction or order would prevent the 

consummation of the transfer of the Equity Interests or result in the transactions contemplated 

under this Agreement being declared unlawful or rescinded, no such judgment, injunction, decree 

or order will be in effect; 

(D) On or prior to the Closing Date, Buyer will have delivered to the 

Equityholder all of the following (dated as of the Closing Date, except as otherwise indicated): 

(1) Resolutions of Buyer’s board of directors authorizing the execution, 

delivery and performance of this Agreement and each Transaction Document to 

which Buyer is a party, and certifying as to the incumbency of the officer(s) of 

Buyer executing this Agreement and the Transaction Documents on behalf of 

Buyer. 

(2) The Escrow Agreement, duly executed by the Buyer and the Escrow 

Agent. 

(3) The Naperville Purchase Agreement, duly executed by the Buyer. 

(E) Buyer shall have delivered to the appropriate parties all cash amounts that 

are required to be delivered on or before the Closing, including, without limitation, all amounts 

described in Section 2.2(B). 

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8.3. Frustration of Closing Conditions. No Party may rely on the failure of any condition 

set forth in this ARTICLE 8 to be satisfied if such failure was caused by such Party’s failure to use 

commercially reasonable efforts to cause the Closing to occur, as required by Section 7.4(A). 

ARTICLE 9. 

TERMINATION 

9.1. Termination. 

This Agreement may be terminated at any time prior to the Closing as follows: 

(A) at any time, by mutual written agreement of the Equityholder and Buyer; 

(B) by the Equityholder, if any of the representations or warranties of Buyer set 

forth in ARTICLE 6 shall not be true and correct such that the condition to Closing set forth in 

Section 8.2(A) would not be satisfied or if any of the covenants or agreements of Buyer set forth 

in this Agreement shall have been breached such that the condition to closing set forth in 

Section 8.2(B) would not be satisfied and, in each case, such breach (or breaches) is not cured 

within 30 days after written notice thereof is delivered to Buyer (provided, that the failure of Buyer 

to deliver the consideration required pursuant to Section 2.2 at the Closing as required hereunder 

will not be subject to cure); provided that Buyer does not also then have the right to terminate this 

Agreement pursuant to Section 9.1(D); 

(C) by the Equityholder, if (i) all the conditions set forth in ARTICLE 8 have 

been satisfied, or, with respect to the Equityholder’s conditions, waived (in each case, other than 

those conditions that by their terms are to be satisfied by actions taken at the Closing, provided 

that such conditions are then capable of being satisfied), (ii) Buyer shall have failed to consummate 

the Closing that should have occurred pursuant to Section 3.1 and (iii) the Equityholder has notified 

Buyer in writing that all of the conditions set forth in ARTICLE 8 have been satisfied or, with 

respect to the Equityholder’s conditions, waived (or would be satisfied or waived if the Closing 

were to occur on the date of such notice) and it stands and will stand ready, willing and able to 

consummate the Closing at such time; 

(D) by Buyer, if any of the representations or warranties set forth in ARTICLE 

4 or ARTICLE 5 shall not be true and correct such that the condition to Closing set forth in Section 

8.1(A) would not be satisfied or if any of the covenants or agreements of the Equityholder or the 

Companies set forth in this Agreement shall have been breached such that the condition to Closing 

set forth in Section 8.1(B) would not be satisfied and, in each case, such breach (or breaches) is 

not cured within 30 days after written notice thereof is delivered to the Equityholder and the 

Companies; provided that the Equityholder does not also then have the right to terminate this 

Agreement pursuant to Section 9.1(B); 

(E) by Buyer, if (i) all the conditions set forth in ARTICLE 8 have been 

satisfied, or, with respect to the Buyer’s conditions, waived (in each case, other than those 

conditions that by their terms are to be satisfied by actions taken at the Closing, provided that such 

conditions are then capable of being satisfied), (ii) Equityholder shall have failed to consummate 

the Closing that should have occurred pursuant to Section 3.1 and (iii) Buyer has notified 

Equityholder in writing that all of the conditions set forth in ARTICLE 8 have been satisfied or, 

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with respect to Buyer’s conditions, waived (or would be satisfied or waived if the Closing were to 

occur on the date of such notice) and it stands and will stand ready, willing and able to consummate 

the Closing at such time; and 

(F) by Buyer or the Equityholder, if on or after 5:00 p.m. Eastern Time on April 

30, 2020; provided that the right to terminate this Agreement pursuant to this Section 9.1(F) shall 

not be available to any Party if the failure of such Party to perform or comply with any of its 

obligations under this Agreement has been the principal cause of or resulted in the failure of the 

Closing to have occurred on or before such date. 

9.2. Effect of Termination. 

In the event of the termination of this Agreement pursuant to Section 9.1, written notice 

thereof shall be given to the other Parties, specifying the provisions hereof pursuant to which such 

termination is made and the basis therefor, and this entire Agreement shall forthwith become void 

(and there shall be no liability or obligation on the part of any of the Parties or their respective 

officers, directors or equity holders); provided that, no such termination shall relieve any Party 

hereto of any liability or damages resulting from any willful breach of this Agreement prior to such 

termination, in which case, the aggrieved Party shall be entitled to all remedies available at law or 

in equity; and provided further that the provisions of this Section 9.2, Section 10.2, Section 10.4, 

Section 10.5 and ARTICLE 12 shall survive any termination of this Agreement and remain valid 

and binding obligations of the Parties. 

ARTICLE 10. 

OTHER COVENANTS 

10.1. Notice of Breach. Promptly after it obtains knowledge thereof, but in all events 

prior to the Closing, Buyer will inform the Companies and the Equityholder of any fact or 

circumstance that, if it existed on the Closing Date, would constitute a breach of any representation 

or warranty of Buyer set forth in this Agreement or any breach of any of its covenants or 

agreements set forth in this Agreement. Promptly after the Companies obtain knowledge thereof, 

but in all events prior to the Closing, the Companies will inform Buyer of any fact or circumstance 

that, if it existed on the Closing Date, would constitute a breach of any representation or warranty 

of the Companies set forth in this Agreement or any breach of any covenant or agreement of the 

Companies set forth in this Agreement. 

10.2. Press Releases and Announcements. 

None of the Parties nor any of their respective representatives shall issue any press releases 

or make any public announcements with respect to this Agreement or the transactions 

contemplated hereby without the prior written consent of Buyer and the Equityholder, as the case 

may be. Notwithstanding the foregoing, any such press release or public announcement may be 

made if required by any Legal Requirement or a securities exchange rule; provided that the Party 

required to make such press release or public announcement shall, to the extent possible, confer 

with the other parties concerning the timing and content of such press release or public 

announcement before the same is made; provided, that nothing herein shall prevent any Party from 

referencing the transactions contemplated hereby (including financial returns and other matters 

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related thereto) in confidential materials provided to investors of such Party; provided, however, 

in no event shall the Preliminary Purchase Price, Purchase Price or Final Purchase Price be 

disclosed without the prior written consent of Equityholder. 

10.3. Further Transfers. 

Each Party will execute and deliver such further instruments of transfer and take such 

additional actions as any other party may reasonably request to effect, consummate, confirm or 

evidence the transfer of the Equity Interests and the other transactions described in this Agreement 

and in the other Transaction Documents. 

10.4. Confidentiality. 

(A) Confidentiality by Buyer. (x) Prior to the Closing and (y) solely to the 

extent this Agreement is terminated in accordance with Article 9, for a period of two (2) years 

following any such termination, in each case, Buyer will treat and hold as confidential all nonpublic information concerning the business and affairs of any member of the Company Group and 

its Business (“Confidential Information”) and refrain from using any such Confidential 

Information, in each case except as necessary to consummate the transfer of the Equity Interests 

or otherwise in connection with this Agreement, and, after any termination of this Agreement 

pursuant to Section 9.1, deliver promptly to the Companies or destroy, at the request and option of 

the Companies, all tangible embodiments (and all copies) of any such Confidential Information 

that are in Buyer’s possession or under Buyer’s control; provided, that Buyer will not have any 

such obligations with respect to (i) information which is or becomes generally available to the 

public other than as a result of disclosure by Buyer or its Affiliates, or (ii) information that becomes 

available to Buyer or any of Buyer’s representatives from a source that is not known by Buyer to 

be bound by a confidentiality agreement to any member of the Company Group. If Buyer is 

requested or required prior to the Closing (by oral question or request for information or documents 

in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) 

to disclose any such Confidential Information, Buyer will notify the Companies promptly of the 

request or requirement so that the Companies may seek an appropriate protective order or waive 

compliance with the provisions of this Section 10.4(A). If, in the absence of a protective order or 

the receipt of a waiver hereunder, Buyer is compelled to disclose any such Confidential 

Information in connection with any legal proceeding, interrogatory, subpoena, civil investigative 

demand, or similar process, then Buyer may disclose such Confidential Information in connection 

therewith; provided, that Buyer will use its commercially reasonable efforts to assist the 

Companies in obtaining, at the request and expense of the Companies, an order or other assurance 

that confidential treatment will be accorded to such portion of such Confidential Information as 

the Companies may designate 

(B) Remedy for Buyer’s Breach. Buyer acknowledges and agrees that in the 

event of a breach by Buyer of any of the provisions of this Section 10.4, monetary damages may 

be inadequate, and the Companies may have no adequate remedy at law. Accordingly, in the event 

of any such breach, the Companies, the Equityholder or their respective successors or assigns, as 

the case may be, may, in addition to any other rights and remedies existing in its favor, enforce its 

rights and Buyer’s obligations hereunder by an action or actions for specific performance, 

injunctive or other relief, without any requirement of posting a bond or proving actual damages. 

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10.5. WARN Act Notice. 

Buyer shall, to the extent applicable, be solely responsible for providing any notice required 

under the WARN Act in respect of the termination after the Closing of the employment of any 

employee of any member of the Company Group, and shall indemnify and hold the Equityholder 

harmless from any liability arising from any failure of Buyer to comply fully with the foregoing 

covenant with respect to any such terminations following the Closing. 

10.6. Director and Officer Indemnification. 

(A) On or before the Closing Date, the Company Group, at the Equityholder’s 

sole cost and expense, shall have the option to, maintain and fully pay for irrevocable “tail” 

insurance policies naming the Company Group and all managers, directors, officers, employees, 

equityholders and agents of each member of the Company Group (“D&O Indemnitees”) as direct 

beneficiaries with a claims period of at least six (6) years from the Closing Date, upon such terms 

and conditions which shall be on customary market terms for a business comparable to the 

Company Group, with respect to matters existing or occurring at or prior to the Closing Date (the 

“D&O Policy”). In the event the D&O Policy is purchased, the Buyer (or any of its Affiliates) shall 

not, and shall cause the Company Group not to, cancel or change such insurance policies in any 

respect so long as such D&O policy is continued to be covered at the sole cost and expense of the 

Equityholder. 

(B) The managers, directors, officers, employees, equityholders and agents of 

each member of the Company Group entitled to the indemnification, liability limitation, 

exculpation and insurance set forth in this Section 10.6 are intended to be third party beneficiaries 

of this Section 10.6. This Section 10.6 shall survive the consummation of the transactions 

contemplated by the Closing. If the Equityholder does purchase and obtain such D&O Policy 

pursuant to the terms of this Section 10.6, the Company Group agrees to utilize the D&O Policy 

in order provide coverage to the D&O Indemnitees for any claims covered by the D&O Policy, in 

accordance with and subject to its terms. 

10.7. Documents and Information. 

After the Closing Date, Buyer shall (and shall cause each member of the Company Group 

to), until the seventh anniversary of the Closing Date, retain all books, records and other documents 

pertaining to the business of any member of the Company Group in existence on the Closing Date 

and make the same reasonably available for inspection and copying by the Equityholder during 

normal business hours of the Company Group, as applicable, upon reasonable written request and 

upon reasonable notice. No such books, records or documents shall be destroyed after the seventh 

anniversary of the Closing Date by Buyer or any member of the Company Group without first 

advising the Equityholder in writing and giving the Equityholder a reasonable opportunity to 

obtain possession thereof. 

10.8. Release of Personal Guarantees. 

Buyer shall arrange for the release of any personal guarantees by Equityholder or any 

Affiliates or family members of Equityholder set forth in Schedule 10.8, made in relation to the 

Company Group. Buyer shall indemnify and hold harmless (in accordance with the provisions of 

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ARTICLE 11 of this Agreement) Equityholder and any Affiliates and family members of 

Equityholder, against and in respect to any claims relating to or arising from Buyer’s failure to 

arrange for releases all personal guarantees in accordance with this Section 10.8. 

10.9. Gift Certificates. 

Buyer hereby acknowledges and agrees that it shall assume all responsibilities, obligations 

and liabilities with respect to any and all Gift Certificates issued by the Company Group as of the 

Closing and that such liabilities will not be included for purposes of (or used as a basis for) any 

purchase price adjustments or indemnification claims. Notwithstanding the foregoing, in the event 

the unredeemed gift certificate liability for gift certificates sold by the Companies and/or their 

respective Affiliates (which, for the avoidance of doubt, shall exclude any liability or obligation 

with respect to guest passes, complimentary passes, re-admission passes, private event certificates, 

food or beverage credits and any other cards, passes and certificates which entitle a ticketholder to 

admission, food, beverage or other goods without any further consideration or at a discount) 

through the Closing Date exceeds (the “Gift Certificate Threshold”), Equityholder 

shall reimburse Buyer for any such liability in excess of the Gift Certificate Threshold. For the 

avoidance of doubt, any such amount for which Buyer is reimbursed pursuant to the terms of the 

Naperville Purchase Agreement shall not require any additional reimbursement pursuant to the 

terms of this Agreement (or vice versa). 

10.10. Third Party Agreements. 

(A) Equityholder shall use reasonable best efforts to obtain, prior to the Closing 

Date, an estoppel certification for each Leased Real Property location set forth on Schedule 5.8, 

which certification shall cite the commencement date and expiration date, the square footage of 

the premises, the current annual rent (including current additional rent, operating expenses, taxes 

and insurance, utilities and any percentage rent paid), any security deposit, any renewal and right 

of first offer options, and whether there are monetary or non-monetary defaults under the Lease, 

and any other matter reasonably requested by Buyer (in each case, to the extent acceptable to the 

applicable landlord), duly executed by the Equityholder and each landlord that is party to such 

Lease. 

(B) Equityholder shall use reasonable best efforts to obtain, prior to the Closing 

Date, such third party consents and approvals as set forth on Schedule 10.10(B). 

10.11. Woodlands Construction. 

(A) Following the Closing, the Parties agree that Buyer and SCCG Inc. (i.e. 

Equityholder’s construction company) will use their reasonable best efforts to enter into an 

agreement with Buyer to complete Infrastructure Construction of the theatre at the Woodlands 

Location upon such terms as mutually agreed upon and consistent with the terms of this paragraph 

and the Woodlands Lease (the “Secondary Agreement”). For the purposes of this Agreement 

“Infrastructure Construction” shall mean the structural build-out of the Woodlands Location, 

including demolition, backfill, building framing, foundation, roof, exterior and interior walls, 

insulation, windows, doors, HVAC, electrical, plumbing, mechanical, concrete flooring, finishes, 

painting, interior and exterior signage and any related design and architectural fees; and shall 

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include any and all fixtures, equipment, furniture, trim, landscaping, and other furnishings and 

finishes. In addition, Infrastructure Construction shall also include raising the ceiling and structure 

to the standard-quality theater height of at least 32” feet (the “Ceiling Construction”). The labor, 

materials, design, and specifications of the Infrastructure Construction at the Woodlands Location 

will be similar to the labor, materials, design and specifications utilized at the Companies’ existing 

theatres located in Richmond, TX and Spring, TX, including such specifications set forth on 

Schedule 10.11(A) (which specifications will be subject to appropriate zoning approval). The 

price for the Infrastructure Construction will not exceed (which includes $ 

from which the construction company shall be permitted to make draws from the Woodlands 

Landlord in accordance with the terms of the Woodlands Lease, and the Woodlands Construction 

Reimbursement paid at Closing). In addition, Equityholder shall also be responsible for any costoverruns in connection with completing the foregoing Infrastructure Construction (subject to 

appropriate zoning approval for the Ceiling Construction), except to the extent that such overage 

is due to any requests of Buyer out of scope or outside of the foregoing specifications, in which 

case, Buyer will be responsible for such additional costs, unless otherwise agreed to by the parties. 

The parties agree that if the zoning authorities do not provide zoning approval for solely the eleven 

screens contemplated in Schedule 10.11(A) and the Woodlands Location is built with a greater 

number of screens, Equityholder shall continue to be responsible for the cost (including any costoverruns, subject to the preceding exception in relation to out-of-scope requests) in connection 

with Ceiling Construction of such eleven screens, and Buyer shall only be responsible for the costs 

of any screens in excess of such eleven screens. 

(B) Buyer (and its Affiliates, which, following the Closing shall include the 

Company Group) acknowledges and agrees that it shall make available to Equityholder (and any 

of his Affiliates) any Corporate Employee who receives and accepts an offer of employment and 

becomes an employee of Buyer or its Affiliate pursuant to Section 7.9 (collectively, the “Subject 

Employees”) for such period of time as reasonably necessary to complete Equityholder’s 

obligations with respect to the Infrastructure Construction at the Woodlands Location, in 

accordance with the terms of the TSA. For so long as a Subject Employee remains employed by 

Buyer (or one of its Affiliates), the services provided by such Subject Employee to Equityholder 

(or one of its Affiliates) shall be billed to Equityholder at-cost (which shall mean an hourly rate 

set forth in the TSA based on the applicable Subject Employee’s salary, incentive compensation, 

benefits and, in each case, the employer’s portion of any employment Taxes thereon). In the event 

the employment of a Subject Employee is terminated by Buyer (or one of its Affiliates) following 

the Closing and Equityholder has not previously breached its obligations under Section 7.8, 

Equityholder (and its Affiliates) shall be entitled to solicit, engage and hire such terminated Subject 

Employee in relation to the Infrastructure Construction at the Woodlands Location (which, for the 

avoidance of doubt, shall be deemed an exclusion from the restrictions set forth in Section 7.8 

hereunder). 

10.12. Screen Advertising Payments. 

If at any time following the Closing, the Buyer or any its Affiliates (which shall include 

the Company Group) receives, or comes into possession of, any Screen Advertising Payments for 

a period of six (6) months following the Closing, Buyer shall (or shall cause its Affiliates to), 

within three (3) Business Days, deliver such Screen Advertising Payments to Equityholder, with 

such endorsements, transfers or assignments as may be necessary or useful to ensure that Purchaser 

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receives the full benefit thereof; provided that, any payment or reimbursement for a Screen 

Advertising Payment that may be owed to an advertiser shall be borne solely by the Equityholder. 

10.13. Sony Master Lease Payments. 

(A) Upon the expiration of the term set forth in each of the Sony Lease 

Agreements, in the event Buyer (or one of its Affiliates) exercises the equipment purchase option 

set forth in Section 2.5.1 of such Sony Lease Agreement (i.e. purchase upon the expiration of the 

term of such Master Lease Agreement and not in respect of an early termination), Equityholder 

shall reimburse the Buyer for such amounts paid by Buyer with respect to the purchase of the 

subject equipment in excess of $ (in the aggregate); however, in the event the price paid 

by Buyer (or its Affiliates) for such equipment is less than $ (in the aggregate), Buyer shall 

pay such difference to Equityholder. 

(B) Notwithstanding the foregoing, in the event Sony Electronics Inc. withholds 

its consent as it relates to the transactions contemplated hereunder in connection with any of the 

Sony Lease Agreements and subsequently terminates such agreement prior to the expiration of the 

term set forth therein, in the event Buyer (or one of its Affiliates) exercises the related equipment 

purchase option, Equityholder shall reimburse the Buyer for such amounts paid by Buyer with 

respect to the purchase of such subject equipment in excess of $ (in the aggregate). 

ARTICLE 11. 

INDEMNIFICATION AND TAX MATTERS 

11.1. Survival. 

(A) The representations and warranties of the Equityholder and the Companies 

contained herein will survive until the eighteen (18) month anniversary of the Closing Date (the 

“General Survival Period Expiration Date”), and will terminate on such date except to the extent 

that any written claims for indemnification in respect of a breach of any such representation or 

warranty is made on or before the General Survival Period Expiration Date, in which case such 

representation or warranty will survive until the resolution of such claim; provided, however, that 

(i) the representations and warranties contained in Sections 4.1 (Authorization of Closing 

Transactions), 4.3 (Brokers’ Fees), 4.4 (Securities; Title), 5.1 (Organization and Power), 5.2 

(Authorization of Closing Transactions), 5.3 (Capitalization (Company)) and 5.12 (Company 

Group’s Broker) (collectively, the “Company / Equityholder Fundamental Representations”) 

will survive indefinitely and (ii) the representations and warranties contained in Section 5.9 (Tax 

Matters) (the “Company Tax Representation”) and Section 5.17 (Environmental Matters) (the 

“Company Environmental Representation”) shall survive until the date that is 60 days after 

expiration of the applicable statute of limitations (after giving effect to any extension thereof).

(B) The representations and warranties of Buyer contained herein will survive 

until the General Survival Period Expiration Date and will terminate on such date except to the 

extent that any written claims for indemnification in respect of a breach of any such representation 

or warranty is made on or before the General Survival Period Expiration Date, in which case such 

representation or warranty will survive until the resolution of such claim; provided however, that 

the representations and warranties contained in Sections 6.1 (Organization and Power), 6.2 

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(Authorization of Closing Transactions), 6.7 (Due Diligence Review) and 6.10 (Brokers’ Fees) 

(collectively, the “Buyer Fundamental Representations”) will survive indefinitely. 

(C) The covenants and agreements of the Equityholder, the Companies and 

Buyer contained herein will survive until one hundred twenty (120) days after the date performance 

is due and any claims for indemnification in respect of a breach of such covenants must be made 

on or before such date. 

(D) The survival periods set forth in Sections 11.1(A) through (C) are in lieu of, 

and the parties expressly waive, any other applicable statute of limitation, whether arising in law 

or equity. 

11.2. Indemnification. 

(A) By the Equityholder. Subject to the limitations set forth in this 

ARTICLE 11, from and after the Closing, the Equityholder will indemnify and hold harmless 

Buyer and each of its Affiliates (including, following the Closing, the Companies), officers, 

directors, members, shareholders, partners, members, managers, representatives and agents and 

each of the successors and assigns of the foregoing (each, a “Buyer Indemnitee”) from and against 

any and all Losses that any Buyer Indemnitee may suffer, sustain or become subject to, as a result 

of, in connection with, or relating to: 

(1) any inaccuracy or breach of any Equityholder representation set 

forth in ARTICLE 4 or any representation of the Companies set forth in ARTICLE 

5; 

(2) any failure by the Equityholder to perform any covenant or 

obligation of the Equityholder hereunder; 

(3) any failure by a Company to perform any covenant or obligation of 

such Company set forth herein that, pursuant to its terms, is to be performed before 

the Closing; and 

(4) the Indemnified Taxes. 

(B) By Buyer. Subject to the limitations set forth in this ARTICLE 11, from 

and after the Closing, Buyer will indemnify and hold harmless the Equityholder and each of his 

Affiliates, officers, directors, members, shareholders, partners, members, managers, 

representatives and agents and each of the successors, heirs and assigns of the foregoing (each a 

“Seller Indemnitee”) from and against any and all Losses that any Seller Indemnitee may suffer, 

sustain or become subject to, as a result of, in connection with, or relating to: 

(1) any inaccuracy or breach of any representation or warranty of Buyer 

set forth in this Agreement; 

(2) any failure by Buyer to perform any covenant or obligation of Buyer 

set forth in this Agreement; or 

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(3) any failure by a Company to perform any covenant or obligation of 

such Company set forth in this Agreement that, pursuant to its terms, is to be 

performed after the Closing. 

(C) Limits on Indemnification. 

(1) The Equityholder will have no liability for any Loss under Section 

11.2(A)(1) (other than a Loss arising in respect of a breach of a (x) Company / 

Equityholder Fundamental Representation or (y) Company Tax Representation), in 

each case, until the aggregate amount of such Losses exceeds an amount equal to 

 (the “Basket”), in which case the Equityholder shall be liable for all 

Losses and not solely the amount in excess of the Basket; provided that the 

Equityholder will not have any liability for any Loss under Section 11.2(A)(1) 

(other than a Loss arising in respect of a breach of a (x) Company / Equityholder 

Fundamental Representation or (y) Company Tax Representation), in each case, to 

the extent that the aggregate amount of Losses resulting from such single claim or 

aggregated related claims arising out of the same facts, events or circumstances 

exceeds $ . Notwithstanding the foregoing, any Losses pursuant to Section 

11.2(A)(1) of the Naperville Purchase Agreement (other than a Loss arising in 

respect of a breach of a “Company / Equityholder Fundamental Representation” or 

a “Company Tax Representation” (each as defined therein)), shall be applied 

towards the Basket for purposes hereunder (assuming the closing of the Naperville 

Purchase Agreement). 

(2) Notwithstanding anything in this Agreement to the contrary, (i) the 

aggregate amount of all Losses for which the Equityholder shall be liable pursuant 

to this ARTICLE 11 (other than a Loss arising in respect of (x) Section 11.2(A)(4) 

or a breach of a (y) Company / Equityholder Fundamental Representation or (z) 

Company Tax Representation (collectively, the “Buyer Exclusions”)) shall not 

exceed the balance of the Escrow Amount (the “Cap”); provided that, any Claim 

for indemnification pursuant to this ARTICLE 11 (other than the Buyer Exclusions) 

shall be paid from the Escrow Amount; and (ii) the aggregate amount of all Losses 

for which the Equityholder shall be liable pursuant to this ARTICLE 11 or 

otherwise with respect to the Buyer Exclusions shall not exceed the Final Purchase 

Price actually received by Equityholder (the “Upper Cap”) (it being understood 

that, for the purposes of this ARTICLE 11, “Final Purchase Price” shall include 

both the Transaction Expenses and the Closing Company Group Indebtedness paid 

by Buyer in accordance with the terms hereof). Furthermore, upon the closing of 

the Naperville Purchase Agreement (if applicable), the parties acknowledge and 

agree that (i) the Cap (for purposes hereunder) shall be increased by an amount 

equal to the “Escrow Amount” (as defined in the Naperville Purchase Agreement); 

and (ii) the Upper Cap (for purposes hereunder) shall be increased by an amount 

equal to the “Final Purchase Price” (as defined in the Naperville Purchase 

Agreement). 

(3) With respect to any claim seeking recovery of any Loss with respect 

to a Buyer Exclusion, the Buyer Indemnitees shall recover such Loss directly from 

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the Equityholder in accordance with the limitations set forth in this Agreement, 

including those in this Section 11.2 (including the Upper Cap). 

(4) No Buyer Indemnitee shall be entitled to recover any Losses under 

this ARTICLE 11 to the extent (i) the applicable Buyer Indemnitee has made 

recovery from a Person other than another Party to this Agreement (to the extent of 

such recovery), (ii) the applicable Buyer Indemnitee could have mitigated or 

prevented such Loss (including seeking indemnification or other redress pursuant 

to the terms of any Contract to which any member of the Company Group is a party 

and by which such member has the right to seek indemnification from any third 

party), (iii) such Loss relates to any breach or inaccuracy of any representation or 

warranty disclosed on the Schedules to this Agreement, or (iv) such Loss is 

attributable to any inaccuracy or breach of any representation or warranty in Section 

5.9 (other than the representations and warranties set forth in Section 5.9(D), (E) 

and (G)) to the extent such Loss or Taxes are with respect to a Post-Closing Tax 

Period. 

(5) The Buyer Indemnitees’ right to indemnification pursuant to 

ARTICLE 11 on account of any Losses will be reduced by the amount of any 

reserve reflected on the Company Group’s books and records as of the Closing Date 

established for the general category of items or matters similar in nature to the 

specific items or matters giving rise to such Loss. 

(6) No Indemnified Party shall be entitled to recover Losses in respect 

of any claim or otherwise obtain reimbursement or restitution more than once with 

respect to any claim hereunder. Without limiting the foregoing, notwithstanding 

anything to the contrary in this Agreement, the Buyer Indemnitees shall not be 

entitled to indemnification with respect to any Losses as a result of, or based upon 

or arising from, any claim or liability to the extent such claim or liability is taken 

into account in determining the amount of any adjustment to the Final Purchase 

Price. 

(7) If any Indemnifying Party makes any indemnification payment 

pursuant to this ARTICLE 11 or otherwise by reason of the transactions 

contemplated hereby under any theory of recovery, such Indemnifying Party shall 

be subrogated, to the extent of such payment and to the extent permitted by law, to 

any rights and remedies of the Indemnified Party to recoup amounts paid from third 

parties with respect to the matters giving rise to indemnification hereunder. 

(8) The amount of any and all Losses under this ARTICLE 11 shall be 

determined net of any amounts recovered or recoverable by the Indemnified Party 

under the insurance policies, indemnities or other reimbursement arrangements of 

the Company Group with respect to such Losses and the Buyer Indemnitees shall, 

to the extent applicable, use reasonable efforts to pursue recovery pursuant to the 

insurance policies of the Company Group. 

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(9) Any claims for indemnification under ARTICLE 11 shall be made 

on an after Tax basis. Accordingly, in determining the amount of any 

indemnification payment for a Loss suffered or incurred by a Buyer Indemnitee 

hereunder, the amount of such Loss shall be decreased to take into account any 

deduction, credit or other Tax benefit actually realized by the Buyer Indemnitee in 

connection with the Losses that form the basis of the Buyer Indemnitee’s claim for 

indemnification, in each case, in the year the Loss is incurred or the indemnity 

payment is made, in any prior year, or in the immediately following year. The 

Indemnified Party shall be deemed to realize, with respect to any taxable year 

described in the immediately preceding sentence, a Tax benefit in connection with 

a Loss if, and to the extent that, the Indemnified Party’s cumulative liability for 

Taxes through the end of such taxable year, calculated by excluding any Tax items 

attributable to the Loss from such taxable year, exceeds the Indemnified Party’s 

cumulative liability for Taxes through the end of such taxable year, calculated by 

taking into account any Tax items attributable to the Loss for such taxable year. For 

the avoidance of doubt, notwithstanding anything to the contrary contained herein, 

this Section 11.2(C)(9) shall not be construed to require the Buyer or any of its 

Affiliates to make available its Tax Returns (or any other information relating to its 

Taxes that it deems confidential) to the Equityholders or any other person. 

11.3. Indemnification Procedures. 

(A) Notice of Claim. Any Party making a claim for indemnification under 

Section 11.2 (the “Indemnified Party”) will notify the Party from whom indemnification is 

claimed (the “Indemnifying Party”) of the claim in writing (a “Claim Notice”) promptly after 

receiving written notice of any Proceeding against it (if by a third party) or discovering the Loss 

giving rise to such claim for indemnification. The Claim Notice will describe the claim, the 

amount thereof (to the extent then known and quantifiable), and the basis therefor, in each case to 

the extent known to the Indemnified Party. The failure to so notify the Indemnifying Party will 

not relieve the Indemnifying Party of its obligations under Section 11.2, except to the extent that 

such failure actually prejudices the Indemnifying Party. Thereafter, the Indemnified Party shall 

deliver to the Indemnifying Party within five (5) Business Days after the Indemnified Party’s 

receipt thereof, copies of all notices and documents (including court papers) received by the 

Indemnified Party relating to such claim. 

(B) Assumption of Defense. With respect to any third party claim (other than a 

claim in respect of Taxes, which is governed by Section 11.6(F)) that gives rise or is alleged to 

give rise to a claim for indemnity under Section 11.2, the Indemnifying Party, at its option and 

own expense, will be entitled (subject to the limitations set forth herein) to assume responsibility 

for and control the defense of such claim by (i) giving written notice to the Indemnified Party of 

its election hereunder and (ii) appointing competent and reputable counsel reasonably acceptable 

to the Indemnified Party to act as lead counsel of such defense, each within thirty (30) days after 

delivery of the Claim Notice by the Indemnified Party. The Indemnifying Party shall thereafter 

consult with the Indemnified Party upon the Indemnified Party’s reasonable request for such 

consultation, from time to time, with respect to such claim or Proceeding. 

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(C) Limits of Assumption of Defense. An Indemnifying Party’s rights under 

Section 11.3(B) will be subject to the following additional limitations: 

(1) with respect to any claim the defense of which the Indemnifying 

Party has assumed, the Indemnified Party will be entitled to participate in the 

defense of such claim and to employ counsel of its choice for such purpose, and the 

fees and expenses of such separate counsel will be borne by the Indemnified Party; 

(2) if the Indemnifying Party assumes control of the defense of any such 

claim, then the Indemnified Party shall cooperate in the defense of such claim (such 

cooperation will include, at the request of the Indemnifying Party, using 

commercially reasonable efforts to retain and provide to the Indemnifying Party all 

records and information reasonably relevant to such claim and to make employees 

available (during normal business hours and without interrupting the operation of 

the Indemnified Party’s business) to provide information and explanation on the 

materials provided); 

(3) if the Indemnifying Party assumes control of the defense of any such 

claim, then the Indemnifying Party will obtain the prior written consent of the 

Indemnified Party before entering into any settlement of such claim, if (i) such 

settlement does not expressly and unconditionally release the Indemnified Party 

from all liabilities and obligations with respect to such claim, without prejudice, or 

(ii) such settlement imposes any injunctive or equitable relief on the Indemnified 

Party or imposes any restrictions on the operation of the business of any member 

of the Company Group or their Affiliates; and 

(4) if the Indemnifying Party assumes control of the defense of any such 

claim, then the Indemnifying Party and its counsel will proceed diligently and in 

good faith with respect thereto. If the Indemnifying Party has the right to, but does 

not, assume control of the defense of any claim in accordance with this 

Section 11.3, then the Indemnifying Party may engage competent and reputable 

counsel to nonetheless participate (at the Indemnifying Party’s own expense) in the 

defense of such claim and the Indemnified Party will use commercially reasonable 

efforts to consult with the Indemnifying Party, upon the reasonable request of the 

Indemnifying Party, in respect of such defense. 

(D) Control by Indemnified Party. If the Indemnifying Party does not assume 

the defense of any such Proceeding, investigation or other claim, the Indemnified Party may defend 

against such matter as it deems appropriate; provided that the Indemnified Party may not settle any 

such matter without the written consent of the Indemnifying Party (which consent shall not be 

unreasonably withheld) if the Indemnified Party is seeking or will seek indemnification hereunder 

with respect to such matter. 

11.4. Treatment of Indemnification Payments. 

Each Party will treat all payments made pursuant to Section 11.2 as adjustments of the 

Final Purchase Price for all purposes, unless otherwise required by applicable law. 

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11.5. Reserved. 

11.6. Tax Matters. 

(A) The Parties shall provide each other such cooperation and information as 

any of them reasonably may request in filing any Tax Return, amended Tax Return or claim for 

refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit 

or other proceeding in respect of Taxes. Such cooperation shall include the retention and, upon 

any other Party’s request, the provision of records and information which are reasonably relevant 

to any such audit or other proceeding and making employees available on a mutually convenient 

basis to provide additional information and explanation of any material provided hereunder. From 

and after the Closing Date, Buyer shall, and agrees to cause each member of the Company Group 

to (i) retain all books and records of the Companies relating to any period beginning on or before 

the Closing until the expiration of the applicable statute of limitations, and to abide by all record 

retention agreements entered into with any Taxing Authority, and (ii) give the Equityholder 

reasonable written notice prior to transferring, destroying or discarding any such books and records 

and, if the Equityholder so requests, shall allow the Equityholder to take possession of such books 

and records. 

(B) All federal, state, local, foreign transfer, documentary stamp, registration, 

sales, use or similar Taxes, fees or expenses (“Transfer Taxes”) applicable to, imposed upon or 

arising out of the purchase and sale of the Equity Interests or any other transaction contemplated 

by this Agreement shall be paid by Buyer. The party required by Law to do so shall file all 

necessary Tax Returns and other documentation with respect to all such Transfer Taxes and, if 

required by applicable Law, the other parties shall, and shall cause their respective Affiliates to, 

join in the execution of any such Tax Returns and other documentation, and pay over their share 

of any such Transfer Taxes to the filing party. 

(C) The Equityholder shall prepare and file or cause to be prepared and filed, 

all Tax Returns of the Company Group for all taxable periods ending on or prior to the Closing 

Date (in each case, to the extent not already filed prior thereto) (“Equityholder Returns”). All 

Equityholder Returns shall be prepared in a manner that is consistent with the past custom and 

practice of the Company Group, except as otherwise required by applicable Law; provided that, 

such Equityholder Returns shall include the safe harbor election to any success-based fees pursuant 

to Revenue Procedure 2011-29, 2011-18 IRB 746 for the taxable period that includes the Closing 

Date. At least thirty (30) days prior to the date on which each such income Equityholder Return 

is due and at least fifteen (15) days prior to the date on which any other Equityholder Return for is 

due, the Equityholder shall submit such Equityholder Return (and all relevant work papers and 

other items required to understand such Equityholder Return or other items as reasonably requested 

by the Buyer) to Buyer for Buyer’s review and comment, and the Equityholder shall not file such 

Equityholder Return without Buyer’s consent, which shall not be unreasonably withheld, 

conditioned, or delayed. Buyer shall prepare and file all Tax Returns of the Company Group for 

Straddle Periods (“Buyer Returns”); provided, however, that not later than thirty (30) days prior 

to the due date for filing of a Buyer Return (or as soon as reasonably practicable if the due date for 

filing such Buyer Return is within thirty (30) days of Closing), Buyer shall provide Equityholder 

with a copy of such Buyer Return (and all relevant work papers and other items required to 

understand such Equityholder Return or other items as reasonably requested by the Equityholder), 

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shall make such changes to the portions of the Buyer Return that relate to the Taxes for which the 

Equityholder is responsible as Equityholder may reasonably request, and shall not file such Tax 

Return without Equityholder’s consent, which shall not be unreasonably withheld, conditioned, or 

delayed. Equityholder shall pay to Buyer the Equityholder’s share of any Taxes due with respect 

to Buyer Returns and Equityholder Returns no later than seven (7) days prior to the due date for 

filing such Buyer Returns or Equity Holder Returns; provided that for this purpose, the 

Equityholder’s share of such Taxes shall be limited to those that the Equityholder is responsible 

for under Section 11.2. If the Buyer and Equityholder cannot, through good-faith negotiation, 

resolve any disagreement over any Equityholder Return or Buyer Return, then their disagreement 

shall be resolved by the Independent Auditor in accordance with Section 2.3, mutatis mutandis. 

The resolution of any such dispute shall not delay the filing of any such Tax Return beyond its due 

date as prepared by the party who is responsible for preparing such Tax Return under this Section 

11.6(C) and, following resolution of such disagreement, such Tax Return shall be amended if and 

as necessary to conform to the resolution of such disagreement. 

(D) Except as otherwise required by applicable law (as determined pursuant to 

the next sentence), without the prior written consent of the Equityholder (which consent shall not 

be unreasonably withheld, conditioned or delayed), the Buyer nor any member of the Company 

Group shall (A) amend any Tax Return relating to a Pre-Closing Tax Period, (B) agree to waive 

or extend the statute of limitations relating to any Taxes of any member of the Company Group 

for any Pre-Closing Tax Period, (C) make or change any election with respect to, or that has any 

retroactive effect on, any Pre-Closing Tax Period of any member of the Company Group or (D) 

voluntarily approach (including initiating a voluntary disclosure process) any Taxing Authority 

with respect to any Pre-Closing Tax Period of any member of the Company Group or Taxes of any 

member of the Company Group for any Pre-Closing Tax Period, in each case, only to the extent 

such actions listed in (A) – (D) above would reasonably be expected to materially change any Tax 

rights or obligations, including increase any indemnification obligation of the Equityholder 

pursuant to Section 11.2(A)(4). For the purposes of determining whether any of the actions 

described in the preceding sentence are required by applicable law, the parties shall negotiate in 

good faith prior to taking any such action; provided that if the parties are unable to agree on 

whether an action is required by law, the dispute shall be submitted for resolution to the 

Independent Auditor, whose determination shall be final and binding, and the costs and expenses 

of the Independent Auditor shall be borne by the non-prevailing party. The Buyer shall not make 

any election under Section 338 of the Code (or any similar provision under state, local or non-U.S. 

Law) with respect to the transactions contemplated under this Agreement. Except as otherwise 

required by applicable law, the Buyer shall not (nor should it cause any member of the Company 

Group) to enter into any transactions outside the ordinary course of business and not contemplated 

by this Agreement occurring on the Closing Date but after the Closing. The Buyer shall not take 

any action with respect to any Company Group that would cause the transactions contemplated by 

this Agreement to constitute part of a transaction that is the same as, or substantially similar to, the 

“Intermediary Transaction Tax Shelter” described in Internal Revenue Service Notices 2001-16 

and 2008-111. Except as otherwise required by applicable law, Buyer and the Company Group 

shall (1) apply the “next day” rule under Treasury Regulation Section 1.1502-76(b)(1)(ii)(B) and 

any analogous provision for state and local income Tax purposes and (2) not make any ratable 

allocation election under Treasury Regulation Section 1.1502-76(b)(2)(ii) and any analogous 

provision for state or local income Tax purposes. 

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(E) All Tax sharing agreements or similar agreements (excluding any 

agreement entered into in the ordinary course of business the primary focus of which is not Taxes) 

and all powers of attorney relating to Taxes, in each case, with respect to or involving the Company 

Group shall be terminated prior to the Closing and, after the Closing, the Company Group shall 

not be bound thereby or have any liability thereunder. 

(F) (1) If any Taxing Authority issues to any member of the Company Group, 

Buyer or any of their respective Affiliates a written notice of its intent to audit, examine or conduct 

a Proceeding, a written notice of its determination of an objection to an assessment with respect to 

Pre-Closing Tax Period (a “Tax Claim”), Buyer will give prompt notice to the Equityholder of 

such Tax Claim following receipt; provided, however, that no delay on the part of Buyer in 

notifying Equityholder will relieve Equityholder from any obligation under this Section 11, except 

to the extent such delay actually and materially prejudices the Equityholder. (2) The Equityholder 

has the option to control, at its sole cost and expense, any Tax Claim relating a Pre-Closing Tax 

Period for which it is solely responsible pursuant to this Agreement (“Equityholder Tax Claim”), 

but Buyer shall have the right to participate in Equityholder Tax Claim at its own expense, and the 

Equityholder shall not settle, compromise and/or concede any portion of Equityholder Tax Claim 

that is reasonably likely to materially affect the Tax liability of any member of the Company Group 

for a Post-Closing Tax Period without the consent of Buyer, which consent shall not be 

unreasonably withheld, delayed or conditioned; provided, that, if the Equityholder declines the 

option to assume control of the conduct of any Equityholder Tax Claim within a reasonable period 

following the receipt by the Equityholder of notice of Equityholder Tax Claim, Buyer shall have 

the right to assume control of Equityholder Tax Claim (at the cost and expense of the 

Equityholder), but the Equityholder shall have the right to participate at its own expense in 

Equityholder Tax Claim at its own expense. Buyer will not enter into any settlement of, or 

otherwise compromise, any Equityholder Tax Claim, without the prior written consent of 

Equityholder, which consent will not be unreasonably withheld, delayed or conditioned. (3) 

Equityholder and Buyer shall jointly control and participate in all proceedings taken in connection 

with any Tax Claim relating to Taxes for which both would be responsible pursuant to this 

Agreement and shall each bear their own respective costs and expenses. Neither Equityholder nor 

Buyer shall settle any such Tax Claim without the prior written consent of the other, which consent 

will not be unreasonably withheld, delayed or conditioned. (4) Buyer shall control all other 

proceedings in respect of Taxes of the Company Group and Equityholder shall have no right to 

participate in any such proceedings. 

(G) The Equityholder shall be entitled to (i) any Tax refunds that are actually 

received by the Buyer or any member of the Company Group, and (ii) any amounts credited in lieu 

of a refund against any Tax to which the Buyer or any member of the Company Group becomes 

actually entitled to, in each case, that are attributable to Taxes of a member of the Company Group 

for a Pre-Closing Tax Period for which the Company Group economically borne such Taxes prior 

to the Closing and for which Equityholder would be responsible for under this Agreement 

(including any Taxes that result in a deduct to the Purchase Price), or for which Equityholder has 

indemnified the Buyer pursuant to Section 11.2(A)(4) (net of any Tax cost of the Buyer arising as 

a result thereof and any reasonable “out-of-pocket” cost incurred in preparing any claim for such 

refund). The Buyer shall pay over to the Equityholder any such refund or credit, within five (5) 

days after receipt of such refund or within five (5) days of filing of the Tax Return reflecting such 

credit, except to the extent that such refund was reflected as an asset in Current Assets, as finally 

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determined under this Agreement. For avoidance of doubt, any refund of Transfer Taxes shall be 

allocated between Equityholder and Buyer in accordance with how the parties borne such Taxes 

under Section 11.6(B). 

(H) The Buyer, Equityholder, and each member of the Company Group agree 

that (i) the Transaction Tax Deductions shall be reported in a Pre-Closing Tax Period and shall be 

for the benefit of the Equityholder to the maximum extent allowable under applicable Law and (ii) 

the taxable period of each Company shall end at the end of the day on the Closing Date for U.S. 

federal income Tax purposes (and the Buyer shall make any election to include each Company in 

an affiliated group filing a consolidated U.S. federal income Tax Return as may be necessary to 

cause such taxable period to end at the end of the day on the Closing Date) and, to the extent 

permissible under applicable Laws, state and local income Tax purposes. 

(I) The Parties agree to allocate the Aggregate Purchase Price (and all other 

items required under the Code) among the Equity Interests of each of the Companies and the 

“Company” (as defined in the Naperville Purchase Agreement) in accordance with 

Schedule 11.6(I). Neither Buyer, the Equityholder nor any of their Affiliates shall take any 

position (whether in Tax audits, or on Tax Returns, if required) that is inconsistent with such 

allocation. For the purposes of this Agreement, “Aggregate Purchase Price” shall mean the sum of 

(i) the Purchase Price (as defined herein) and (ii) the “Purchase Price” (as defined in the Naperville 

Purchase Agreement). 

(J) In the case of any taxable period that includes (but does not end on) the 

Closing Date (a “Straddle Period”), the amount of any Taxes based on or measured by income, 

withholding, sales, receipts, or payroll of the Company Group for the Pre-Closing Tax Period shall 

be determined based on an interim closing of the books as of the close of business' on the Closing 

Date and the amount of other Taxes of the Company Group for a Straddle Period that relates to the 

Pre-Closing Tax Period shall be deemed to be the amount of such Tax for the entire taxable period 

multiplied by a fraction the numerator of which is the number of days in the taxable period ending 

on the Closing Date and the denominator of which is the number of days in such Straddle Period. 

ARTICLE 12. 

MISCELLANEOUS 

12.1. Amendment and Waiver. 

This Agreement may be amended and any provision of this Agreement may be waived; 

provided, that any such amendment or waiver (a) will be binding upon the Equityholder only if 

such amendment or waiver is set forth in a writing executed by the Equityholder, (b) will be 

binding upon the Companies only if such amendment or waiver is set forth in a writing executed 

by the Companies (which will also require the written approval of the Equityholder if such 

amendment or waiver relates to any post-closing obligations), and (c) will be binding upon Buyer 

only if such amendment or waiver is set forth in a writing executed by Buyer. No course of dealing 

between or among any Persons having any interest in this Agreement will be deemed effective to 

modify, amend or discharge any part of this Agreement or any rights or obligations of any Party 

under or by reason of this Agreement. 

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12.2. Notices. 

All notices, demands and other communications given or delivered under this Agreement 

shall be given in writing to the address indicated below (or such other address as the recipient 

specifies in writing) and will be deemed to have been given when delivered personally, three (3) 

Business Days after mailed by certified or registered mail, return receipt requested and postage 

prepaid, or when delivery is guaranteed if sent via a nationally recognized overnight carrier, or 

when receipt is confirmed if sent via facsimile of email to the recipient with telephonic or email 

confirmation by the sending party. 

To the Equityholder (or, prior to the Closing, to the Companies): 

Omar Khan 

1650 Highway 6 (# 170) 

Sugar Land, Texas 77478 

Email: omarkhan9095@yahoo.com 

with a copy to (that will not constitute notice): 

Honigman LLP 

2290 First National Building 

660 Woodward Avenue 

Detroit, Michigan 48226 

Attention: Evan Leibhan; Alexander Whang 

Fax: (313) 465-7472; (313) 465-7605 

Emails: eleibhan@honigman.com; awhang@honigman.com 

To Buyer (or, after the Closing, to the Companies): 

Cinemex USA Real Estate Holdings, Inc. 

Av. Javier Barros Sierra No. 540 

Torre 1 Piso 2, Col. Santa Fé 

C.P. 01210 

Mexico City, Mexico 

Attn: José Leonardo Marti, Chief Executive Officer 

Email: joselm@cinemex.net 

with a copy to (that will not constitute notice): 

Simpson Thacher & Bartlett LLP 

425 Lexington Avenue 

New York, NY 10017 

Attn: Jaime Mercado 

Email: jmercado@stblaw.com 

Any Party may change the address to which notices or other communications hereunder are to be 

delivered by giving the other Parties notice in the manner herein set forth. 

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12.3. Construction; Interpretation. 

The term “this Agreement” means this Agreement together with all Schedules and Exhibits 

hereto, as the same may from time to time be amended, modified, supplemented or restated in 

accordance with the terms hereof. The headings contained in this Agreement are inserted for 

convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 

The Parties agree that they have been represented by counsel during the negotiation and execution 

of this Agreement and, therefore, waive the application of any Legal Requirement or rule of 

construction providing that ambiguities in an agreement or other document will be construed 

against the party drafting such agreement or document. Further, no party hereto, nor its respective 

counsel, shall be deemed the drafter of this Agreement for purposes of construing or enforcing the 

provisions hereof, and all provisions of this Agreement shall be construed according to their fair 

meaning and not strictly for or against any party, and no presumption or burden of proof will arise 

favoring or disfavoring any Person by virtue of its authorship of any provision of this Agreement. 

Unless otherwise expressly provided herein, any statute defined or referred to herein means such 

statute as from time to time amended, modified or supplemented, including by succession of 

comparable successor statutes. Any reference to any Legal Requirement shall be deemed also to 

refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. 

Unless otherwise indicated to the contrary herein by the context or use thereof: (i) the words, 

“herein,” “hereto,” “hereof” and words of similar import refer to this Agreement as a whole, 

including the Schedules and Exhibits, and not to any particular section, subsection paragraph, 

subparagraph or clause contained in this Agreement; (ii) masculine gender shall also include the 

feminine and neutral genders, and vice versa; (iii) words importing the singular shall also include 

the plural, and vice versa; (iv) the words “include,” “includes” or “including” shall be deemed to 

be followed by the words “without limitation”; (v) the words “party” or “parties” shall refer to 

parties to this Agreement; (vi) all references to Articles, Sections, Exhibits or Schedules are to 

Articles, Sections, Exhibits and Schedules of this Agreement; (vii) the words “writing”, “written” 

and comparable terms refer to printing, typing and other means of reproducing words (including 

electronic media) in a visible form; (ix) references to any Legal Requirement, agreement or 

contract are to that Legal Requirement, agreement or contract as amended, modified or 

supplemented from time to time in accordance with the terms hereof and thereof; (x) references to 

any Person include the successors and permitted assigns of that Person; (xi) references from or 

through any date mean, unless otherwise specified, from and including or through and including, 

respectively; (xii) the words “dollar” or “$” shall mean U.S. dollars; and (xiii) the word “day” 

means calendar day unless Business Day is expressly specified. If any action under this Agreement 

is required to be done or taken on a day that is not a Business Day, then such action shall be 

required to be done or taken not on such day but on the first succeeding Business Day thereafter. 

As used in this Agreement, the terms “knowledge” or “aware” with respect to one or more 

members of the Company Group or Equityholder will only include the actual conscious awareness 

(and shall in no event encompass constructive, imputed or similar concepts of knowledge), without 

any duty of inquiry, of Omar Khan and Ron Mock. 

12.4. Severability. 

Whenever possible, each provision of this Agreement will be interpreted in such a manner 

as to be effective and valid under applicable Legal Requirement, but if any provision of this 

Agreement is held to be prohibited by or invalid under applicable Legal Requirement, such 

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provision will be ineffective only to the extent of such prohibition or invalidity, without 

invalidating the remainder of such provisions or the remaining provisions of this Agreement. 

12.5. Entire Agreement; Assignment. 

This Agreement, together with all Exhibits and Schedules hereto, as the same may from 

time to time be amended, modified, supplemented, or restated in accordance with the terms hereof, 

(a) constitute the entire agreement among the Parties with respect to the subject matter hereof and 

supersedes all other prior agreements and understandings, both written and oral, among the parties 

hereto with respect to the subject matter hereof and (b) shall not be assigned by any Party (whether 

by operation of law or otherwise), other than for collateral purposes, without the prior written 

consent of the Equityholder and Buyer. Any attempted assignment of this Agreement not in 

accordance with the terms of this Section shall be void. 

12.6. Counterparts; Electronic Signatures. 

This Agreement may be executed in one or more counterparts, each of which will be 

deemed an original but all of which taken together will constitute one and the same instrument. 

Delivery of an executed counterpart of a signature page to this Agreement by facsimile or scanned 

pages shall be effective as delivery of a manually executed counterpart to this Agreement. 

12.7. Governing Law; Jurisdiction. 

All issues concerning the Transaction Documents (unless otherwise expressly specified in 

a particular Transaction Document) will be governed by and construed in accordance with the laws 

of the State of Delaware without giving effect to any choice of law or conflict of law provision or 

rule (whether of the State of Delaware or any other jurisdiction) that would cause the application 

of the law of any jurisdiction other than the State of Delaware. Each Party irrevocably agrees that 

any legal action or proceeding arising out of or relating to this Agreement or for recognition and 

enforcement of any judgment in respect hereof brought by any other party or its successors or 

assigns may be brought and determined by the State or Federal District Court located in Fort Bend 

County, Texas, and each Party hereby irrevocably submits to the exclusive jurisdiction of the 

aforesaid court for itself and with respect to its property, generally and unconditionally, with regard 

to any such action or proceeding arising out of or relating to this Agreement and the transactions 

contemplated hereby (and agrees not to commence any action, suit or proceeding relating thereto 

except in such courts). Each Party further agrees to accept service of process in any manner 

permitted by such court. Each Party hereby irrevocably and unconditionally waives, and agrees 

not to assert, by way of motion or as a defense, counterclaim or otherwise, in any action or 

proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, 

(a) any claim that it is not personally subject to the jurisdiction of the above-named courts for any 

reason other than the failure lawfully to serve process, (b) that it or its property is exempt or 

immune from jurisdiction of any such court or from any legal process commenced in such court 

(whether through service of notice, attachment prior to judgment, attachment in aid of execution 

of judgment, execution of judgment or otherwise) and (c) to the fullest extent permitted by Law, 

that (i) the suit, action or proceeding in any such court is brought in an inconvenient forum, (ii) the 

venue of such suit, action or proceeding is improper or (iii) this Agreement, or the subject matter 

hereof, may not be enforced in or by such courts. 

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12.8. Expenses. 

Each party will be responsible for all costs and expenses incurred by such party in 

connection with the negotiation, preparation and entry into this Agreement and the consummation 

of the Closing. Transaction Expenses are to be paid as provided in this Agreement. 

12.9. Parties in Interest. 

Except as otherwise expressly provided in this Agreement, nothing in this Agreement is 

intended to confer on any Person other than the Parties and their respective successors and 

permitted assigns any rights or remedies under or by virtue of this Agreement. 

12.10. Schedules and Exhibits. 

All Exhibits and Schedules, or documents expressly incorporated into this Agreement, are 

hereby incorporated into this Agreement and are hereby made a part hereof as if set out in full in 

this Agreement. Any item disclosed in any Schedule referenced by a particular Section in this 

Agreement shall be deemed to have been disclosed with respect to every other Section in this 

Agreement if the relevance of such disclosure to such other sections is reasonably apparent. The 

specification of any dollar amount in the representations or warranties contained in this Agreement 

or the inclusion of any specific item in any Schedule is not intended to imply that such amounts, 

or higher or lower amounts or the items so included or other items, are or are not material, and no 

party shall use the fact of the setting of such amounts or the inclusion of any such item in any 

dispute or controversy as to whether any obligation, items or matter not described herein or 

included in a Schedule is or is not material for purposes of this Agreement. The inclusion of 

information in any of such Schedules hereto shall not be construed as an admission that such 

information is material to the Equityholder or any member of the Company Group. In addition, 

matters reflected in such Schedules are not necessarily limited to matters required by this 

Agreement to be reflected in such Schedules. Such additional matters are set forth for 

informational purposes only and do not necessarily include other matters of a similar nature. Any 

capitalized term used in any Exhibit or Schedule but not otherwise defined therein shall have the 

meaning given to such term in this Agreement. The parties hereto acknowledge and agree that any 

disclosure related to SCG-N Inc., a Texas corporation, set forth in the Schedules will be treated as 

a disclosure to the representations and warranties set forth in the Naperville Purchase Agreement. 

12.11. Remedies. 

(A) Subject to the other terms and conditions of this Agreement, any and all 

remedies provided herein will be deemed cumulative with and not exclusive of any other remedy 

conferred hereby, or by law or equity upon such party, and the exercise by a party of any one 

remedy will not preclude the exercise of any other remedy. The Parties agree that irreparable harm, 

for which monetary damages, even if available, would not be an adequate remedy, would occur in 

the event that the Parties do not perform their respective obligations under the provisions of this 

Agreement (including failing to take such actions as are required of them hereunder to consummate 

the transactions contemplated by this Agreement) in accordance with their specific terms or 

otherwise breach such provisions. It is accordingly agreed that, prior to the valid termination of 

this Agreement pursuant to Section 9.1 and subject to the other terms and conditions of this 

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Agreement, the Parties shall be entitled to an injunction or injunctions, specific performance and 

other equitable relief to prevent breaches of this Agreement and to enforce specifically the terms 

and provisions of this Agreement (including Buyer’s obligations to consummate the transactions 

contemplated by this Agreement if it is required to do so hereunder), in each case without posting 

a bond or undertaking and without needing to prove damages, this being in addition to any other 

remedy to which they are entitled at law or in equity. The foregoing right shall include the right 

of the Equityholder to cause Buyer to cause the transactions contemplated by this Agreement to 

be consummated, in each case, if the conditions set forth in Section 8.1 have been satisfied or 

waived (other than conditions which by their nature cannot be satisfied until the Closing, but 

subject to the satisfaction or waiver of those conditions at the Closing). Each of the Parties agrees 

that it will not oppose the granting of an injunction, specific performance and other equitable relief 

when expressly available pursuant to the terms of this Agreement on the basis that the other parties 

have an adequate remedy at law or an award of specific performance is not an appropriate remedy 

for any reason at law or equity. 

(B) Following the Closing, except for the right to seek specific performance or 

injunctive relief, each Party acknowledges and agrees that the remedies set forth in ARTICLE 11 

shall constitute the sole and exclusive remedies for recovery by any of the Buyer Indemnitees for 

any claim arising out of or based on this Agreement or any Transaction Documents delivered by 

the Parties as part of the transactions contemplated hereby and thereby, including claims based 

upon any breach, inaccuracy, inadequacy or incompleteness of a representation or warranty of any 

other Party, or based on the failure of such other Party to perform any covenant, agreement or 

undertaking that the terms hereof or thereof required to be performed by such Party, and none of 

the Parties shall be entitled to a rescission of this Agreement or any such ancillary document, or to 

any further indemnification rights or claims or remedies of any nature whatsoever in respect 

thereof, all of which the Parties hereby waive. 

12.12. Non-Recourse. 

All claims or causes of action (whether in contract or in tort, in law or in equity) that may 

be based upon, arise out of or relate to this Agreement or the other Transaction Documents, or the 

negotiation, execution or performance of this Agreement or the other Transaction Documents 

(including any representation or warranty made in or in connection with this Agreement or the 

other Transaction Documents or as an inducement to enter into this Agreement or the other 

Transaction Documents), may be made only against the entities that are expressly identified as 

parties hereto and thereto. No Person who is not a named party to this Agreement or the other 

Transaction Documents, including any past, present or future director, officer, employee, 

incorporator, member, partner, stockholder, Affiliate, agent, attorney or Representative of any 

named party to this Agreement or the other Transaction Documents (“Non-Party Affiliates”), 

shall have any liability (whether in contract or in tort, in law or in equity, or based upon any theory 

that seeks to impose liability of an entity party against its owners or affiliates) for any obligations 

or liabilities arising under, in connection with or related to this Agreement or such other 

Transaction Document (as the case may be) or for any claim based on, in respect of, or by reason 

of this Agreement or such other Transaction Document (as the case may be) or the negotiation or 

execution hereof or thereof; and each party hereto waives and releases all such liabilities, claims 

and obligations against any such Non-Party Affiliates. Non-Party Affiliates are expressly intended 

as third party beneficiaries of this provision of this Agreement. 

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12.13. Waiver of Conflicts and Privileged Information. 

(A) Each Party acknowledges that (a) one or more members of the Company 

Group, the Equityholder and/or their respective Affiliates have retained Honigman LLP (the “Law 

Firm”) to act as their counsel in connection with the transactions contemplated by this Agreement 

(including the negotiation, preparation, execution and delivery of this Agreement and related 

agreements, and the consummation of the transactions contemplated hereby or thereby) as well as 

other past and ongoing matters, (b) Law Firm has not acted as counsel for any other Person in 

connection with the transactions contemplated by this Agreement and (c) no Person other than the 

Company Group, the Equityholder, or their respective Affiliates has the status of a Law Firm client 

for conflict of interest or any other purpose as a result thereof. Buyer hereby (i) waives and will 

not assert, and will cause each of its Affiliates (including, after the Closing, the each member of 

the Company Group) to waive and not assert, any conflict of interest relating to Law Firm’s 

representation after the Closing of the Equityholder or their respective Affiliates in any matter 

involving the transactions contemplated by this Agreement (including the negotiation, preparation, 

execution and delivery of this Agreement and related agreements, and the consummation of the 

transactions contemplated hereby or thereby), including in any litigation, arbitration, mediation or 

other proceeding, and (ii) consents to, and will cause each of its Subsidiaries (including, after the 

Closing, each member of the Company Group) to consent to, any such representation, even though 

in each case (x) the interests of the Equityholder or such Affiliates may be directly adverse to 

Buyer, the Company Group or their respective Affiliates, (y) Law Firm may have represented the 

Equityholder, the Company Group, or their respective Affiliates in a substantially related matter, 

or (z) Law Firm may be handling other ongoing matters for Buyer, the Company Group or any of 

their respective Affiliates. 

(B) Buyer agrees that, after the Closing, none of Buyer, any member of the 

Company Group or any of their Affiliates will have any right to access or control any of Law 

Firm’s records or communications relating to or affecting the transactions contemplated by this 

Agreement (including the negotiation, preparation, execution and delivery of this Agreement and 

related agreements, and the consummation of the transactions contemplated hereby or thereby), 

which will be the property of (and be controlled by) the Equityholder. In addition, Buyer agrees 

that it would be impractical to remove all Attorney-Client Communications from the records 

(including e-mails and other electronic files) of the Company Group. Accordingly, Buyer will not, 

and will cause each of its Affiliates (including, after the Closing, the Company Group) not to, use 

any Attorney-Client Communications remaining in the records of the Company Group after the 

Closing in a manner that may be adverse to the Equityholder or any of their respective direct or 

indirect equity holders or Affiliates. 

(C) Buyer agrees, on its own behalf and on behalf of its Affiliates (including, 

after the Closing, the Company Group), that from and after the Closing (a) the attorney-client 

privilege, all other evidentiary privileges, and the expectation of client confidence as to all 

Attorney-Client Communications belong to the Equityholder and will not pass to or be claimed by 

Buyer, any member of the Company Group, or any of their Affiliates, and (b) the Equityholder 

will have the exclusive right to control, assert or waive the attorney-client privilege, any other 

evidentiary privilege, and the expectation of client confidence with respect to such Attorney-Client 

Communications. Accordingly, Buyer will not, and will cause each of its Affiliates (including, 

after the Closing, the Company Group) not to, (x) assert any attorney-client privilege, other 

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evidentiary privilege, or expectation of client confidence with respect to any Attorney-Client 

Communication, except in the event of a post-Closing dispute with a Person that is not 

Equityholder or a direct or indirect equity holder or Affiliate thereof; or (y) take any action which 

could cause any Attorney-Client Communications to cease being a confidential communication or 

to otherwise lose protection under the attorney-client privilege or any other evidentiary privilege, 

including waiving such protection in any dispute with a Person that is not Equityholder or any of 

its direct or indirect equity holders or Affiliates. Furthermore, Buyer agrees, on its own behalf and 

on behalf of each of its Affiliates (including, after the Closing, the Company Group), that in the 

event of a dispute between the Equityholder, on the one hand, and any member of the Company 

Group, on the other hand, arising out of or relating to any matter in which Law Firm jointly 

represented both parties, neither the attorney-client privilege, the expectation of client confidence, 

nor any right to any other evidentiary privilege will protect from disclosure to the Equityholder or 

any of their direct or indirect equity holders or Affiliates any information or documents developed 

or shared during the course of Law Firm’s joint representation. 

12.14. Parent Guarantee. 

(A) As a material inducement for the Company Group to enter into this 

Agreement and the Equityholder to approve this Agreement, Parent hereby (a) absolutely, 

unconditionally and irrevocably guarantees to the fullest extent possible, as primary obligor and 

not merely as surety, the due and prompt payment and performance of all covenants, agreements, 

obligations, expenses and liabilities of Buyer under this Agreement and any other agreement or 

document executed in connection herewith and (b) Parent shall unconditionally and irrevocably 

waive (i) any right to revoke this guarantee, in whole or in part (including, without limitation, in 

respect of any waiver, amendment, assignment or modification of this Agreement authorized by 

Buyer or its permitted successors or assignees) and (ii) promptness, diligence, notice of 

acceptance, presentment, demand for performance, notice of non-performance, default, 

acceleration, protest or dishonor and any other notice with respect thereto, except to the extent 

otherwise provided in this Agreement. This guarantee is one of performance and payment, not 

merely collection, and a separate action or actions may be brought and prosecuted against Parent 

to enforce this guarantee, irrespective of whether any action is brought against Buyer or whether 

Buyer is joined in any such action or actions. Subject to the terms of Section 12.14(C), this 

guarantee is a continuing one and shall remain in full force and effect until the indefeasible 

payment and satisfaction in full of Buyer’s obligations, shall be binding upon Parent, its successors 

and assigns, and shall inure to the benefit of, and be enforceable by, the Company Group, the 

Equityholder and their respective successors and permitted transferees and assigns. 

(B) The representations and warranties set forth in Sections 6.1 (substituting the 

Parent’s entity type and jurisdiction of formation and disregarding the last sentence of such 

representation) through 6.8 and 6.9 and 6.10, which are incorporated herein by reference mutatis 

mutandis, are, hereby made by Parent in its individually capacity by substituting the term “Buyer” 

with “Parent”. 

(C) Parent’s obligations pursuant to this Section 12.14 shall automatically be 

released and of no further force and effect following the Closing. 

* * * * * 

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EXHIBIT C

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UNITED STATES DISTRICT COURT 

FOR THE SOUTHERN DISTRICT OF TEXAS 

HOUSTON DIVISION 

OMAR KHAN, et al. § 

 § 

vs. § Civil Action No. 4:20-cv-01178 

 § 

CINEMEX USA REAL ESTATE § Hon. Andrew S. Hanen 

HOLDINGS, INC., et al. § 

MOTION TO DISMISS PLAINTIFFS’ VERIFIED ORIGINAL COMPLAINT 

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TABLE OF CONTENTS 

Page 

STATEMENT OF THE ISSUES.....................................................................................................1

SUMMARY OF THE ARGUMENT ..............................................................................................1

STATEMENT OF FACTS ..............................................................................................................2

A. The Bidding Process ................................................................................................2

B. The March 2020 Equity Purchase Agreements .......................................................3

C. The COVID-19 Crisis In The United States And Impact On The Movie 

Theater Industry .......................................................................................................4

D. The Status Of The EPA............................................................................................6

NATURE AND STAGE OF PROCEEDINGS ...............................................................................7

LEGAL STANDARD ......................................................................................................................8

I. PLAINTIFFS FAILED TO SATISFY CONDITIONS PRECEDENT TO 

CLOSING ............................................................................................................................8

A. Plaintiffs Failed To Provide Reasonable Access To Property And 

Employees, As Required By Sections 7.2 And 7.9..................................................9

B. Plaintiffs Breached Their Obligation To Provide Truthful Representations 

And Warranties ......................................................................................................12

II. FRUSTRATION OF PURPOSE AND IMPOSSIBILITY EXCUSE CINEMEX’S 

PERFORMANCE ..............................................................................................................15

A. The Purpose Of The Agreements Has Been Frustrated By The Closures Of 

Plaintiffs’ Business, And Thus Cinemex Is Not Obligated To Close ....................15

B. Cinemex Has No Obligation To Close Because Performance Of The 

Agreements Is Impossible ......................................................................................18

CONCLUSION ..............................................................................................................................19

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TABLE OF AUTHORITIES 

Page 

Cases 

Achaian, Inc. v. Leemon Family LLC,

 25 A.3d 800 (Del. Ch. 2011) ................................................................................................ 15 

Ashcroft v. Iqbal, 

 556 U.S. 662 (2009) ................................................................................................................ 8

Bell Atl. Corp. v. Twombly, 

550 U.S. 544 (2007) ................................................................................................................ 8 

Bell Atl. Dir. Servs., Inc. v. Delaware Law Ctr., Inc., 

 No. CRIM.A.1997-07-083, 2000 WL 33654061 (Del. Com. Pl. Dec. 14, 2000) ................ 18 

Chase Manhattan Bank v. Iridium Africa Corp., 

474 F. Supp. 2d 613 (D. Del. 2007)................................................................................ 16, 17 

Cuvillier v. Taylor, 

503 F.3d 397 (5th Cir. 2007) .................................................................................................. 8 

Greek Catholic Congregation of Borough of Olyphant v. Plummer, 

12 A.2d 435 (Pa. 1940) ......................................................................................................... 16 

Kroblin Refrigerated Xpress, Inc. v. Pitterich, 

805 F.2d 96 (3d Cir. 1986) ................................................................................................... 17 

Little v. SKF Sverige AB, 

No. H–13–1760, 2014 WL 710941 (S.D. Tex. Feb. 24, 2014) .............................................. 8 

Martin v. Star Publishing Co., 

 126 A.2d 238 (Del. 1956) ..................................................................................................... 18 

Mueller v. Marvel, 

No. 03-07-110, 2004 WL 7325622 (Del. Com. Pl. Dec. 8, 2004) ........................................ 18 

Munro v. Beazer Home Corp., 

No. CIV. U608-03-081, 2011 WL 2651910 (Del. Com. Pl. June 23, 2011) .................... 8, 10 

Novipax Holdings LLC v. Sealed Air Corp., 

No. N17C-03-1682 EMD CCLD, 2017 WL 5713307 (Del. Super. Ct. Nov. 28,

2017) ...................................................................................................................................... 10 

R2 Invs. LDC v. Phillips, 

 401 F.3d 638 (5th Cir. 2005) .................................................................................................. 8

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 iii

TABLE OF AUTHORITIES (CONT’D) 

Page 

Cases 

Randall D. Wolcott, M.D., P.A. v. Sebelius, 

635 F.3d 757 (5th Cir. 2011) .................................................................................................. 8 

Rhines v. Alinas Constr. Techs., Ltd., 

 No. C–11–262, 2011 WL 4688706 (S.D. Tex. Oct. 3, 2011) ................................................. 2 

Sch. Dist. No. 16 of Sherman Cty. v. Howard, 

98 N.W. 666 (Neb. 1904) ..................................................................................................... 16 

Texas Co. v. Hogarth Shipping Corp., 

256 U.S. 619 (1921) .............................................................................................................. 15 

Toscano v. United Parcel Service, 

No. 4:14-CV-2680, 2015 WL 2089660 (S.D. Tex. Apr. 28, 2015) ........................................ 8 

Unihealth v. U.S. Healthcare, Inc., 

14 F. Supp. 2d 623 (D.N.J. 1998) ......................................................................................... 15 

United States ex rel. Lam v. Tenet Healthcare Corp., 

 481 F. Supp. 2d 673 (W.D. Tex. 2006) .................................................................................. 2 

Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 

872 A.2d 611 (Del. Ch. 2005), aff’d in part, rev’d in part on other grounds, 901 

A.2d 106 (Del. 2006) ............................................................................................................. 15 

Other Authorities 

Restatement Contracts § 454 (1932) ............................................................................................ 18 

Restatement (Second) of Contracts § 265 (1981) ........................................................................ 16 

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STATEMENT OF THE ISSUES 

1. Did Plaintiffs fail to state a claim for breach of contract where they failed to provide actual 

access to their property and employees until the date of closing and failed to truthfully 

represent that they have authority to operate their business, both of which are conditions 

precedent to closing? 

2. Did Plaintiffs fail to state a claim for breach of contract where the agreements presume the 

existence of an available, functioning business that will be sold, and thus the purpose of 

the agreements has been frustrated and performance is impossible? 

SUMMARY OF THE ARGUMENT 

Plaintiffs bring a single claim for breach of contract on the theory that Defendants Cinemex 

Holdings USA, Inc. (“Cinemex Holdings”), and its parent company, Cinemex USA Real Estate 

Holdings, Inc. (“Cinemex Real Estate”) (together, “Cinemex”) cannot rely on the COVID-19 

global pandemic to refuse an immediate closing of the sale of Plaintiffs’ movie theater business. 

Yet Plaintiffs themselves rely on the pandemic to excuse their own failures to meet conditions 

precedent to the closing. In particular, Plaintiffs were required to provide reasonable access to 

their properties and employees until closing. They were also required to represent truthfully that 

they are authorized to operate their business until closing. But both of these conditions precedent 

were not satisfied because governmental orders precluded access to the properties and employees 

before closing, and Plaintiffs do not have authority to operate their movie theaters. The agreements 

do not treat a pandemic as an excuse for the failure to meet these conditions precedent, and there 

is certainly no basis to imply such an excuse for Plaintiffs while simultaneously refusing to 

recognize the impact of the pandemic on Cinemex’s contractual obligations. While Plaintiffs rely 

on the statement in the agreements that a pandemic is not a Material Adverse Effect, the 

requirement to provide access does not depend on the existence of a Material Adverse Effect. And 

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while the requirement to provide truthful representations and warranties does mention Material 

Adverse Effect, it expressly disregards any limitations on Material Adverse Effect, which includes 

the pandemic limitation. Accordingly, because the conditions precedent to closing have not been 

satisfied, Cinemex did not breach the contract by refusing to proceed with the closing. 

Furthermore, Plaintiffs cannot enforce the agreements based on the doctrines of frustration 

of purpose and impossibility. The simple fact, apparent from the agreements themselves, is that 

the parties expected to close the sale of functioning, available movie theaters from Plaintiffs to 

Cinemex. Whatever the parties thought about the prospect of a pandemic, they plainly did not 

envision an indefinite, government-enforced shutdown of the theaters that are the very subject of 

this sale. Thus, Cinemex did not breach the agreements because the shutdown of the movie 

theaters has frustrated the purpose of the agreements and has rendered several provisions of the 

agreement impossible. 

STATEMENT OF FACTS 

 For purposes of this motion to dismiss, we accept the factual allegations of the Complaint 

as true, and the relevant facts are described below.1

A. The Bidding Process 

 On or around December 19, 2019, Cinemex, Delaware corporations that own and operate 

movie theaters in the United States, received an initial process letter from Star Cinema Grill 

(“SCG”), 2 a Houston-based dine-in movie theater company owned by Plaintiff Omar Khan 

 

1

 This Court can also take judicial notice of facts not subject to reasonable dispute and matters of public record in the 

government orders and newspaper articles discussed below. See, e.g., United States ex rel. Lam v. Tenet Healthcare 

Corp., 481 F. Supp. 2d 673, 680 (W.D. Tex. 2006); Rhines v. Alinas Constr. Techs., Ltd., No. C–11–262, 2011 WL 

4688706, at *2 n.2 (S.D. Tex. Oct. 3, 2011). 

2

 SCG encompasses the following Plaintiff entities: S.C.G.C. Inc., S.C.G.M. Inc., SCG-B Inc., SCG-VP Inc., District 

Theaters Inc., SCG-WR LLC, SCG-CS Inc., SCGK Inc., SCG-SW Inc., SCGWL Inc., and SCG-N, Inc.

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 3 

regarding a potential acquisition of SCG. (Compl. ¶ 20; Ex. B.) The parties engaged in a bidding 

process for approximately 10 weeks. (Compl. ¶¶ 19-25.) 

On or around March 3, 2020, Cinemex submitted a formal offer to purchase the 11 movie 

theaters owned by Mr. Khan (“SCG Theaters”) to PJ Solomon, the investment bank hired by 

Plaintiffs. (Compl. ¶¶ 19, 24.) That same day, the parties began negotiating two equity purchase 

agreements (together, the “EPA”). (Compl. ¶ 24.) 

B. The March 2020 Equity Purchase Agreements 

 On March 10, 2020, Cinemex entered into the EPA with SCG. (Compl. ¶¶ 2, 31; Exs. A, 

F.) The EPA related to Cinemex’s purchase of the SCG Theaters (the “Transaction”). (Compl. ¶¶ 

2, 31.) Specifically, one Equity Purchase Agreement governs Cinemex USA’s agreement to 

acquire the 10 SCG Theaters located in Texas (nine existing theaters and one currently under 

construction) and the other Equity Purchase Agreement governs Cinemex USA’s agreement to 

acquire one SCG Theater located in Illinois. (Compl. Exs. A, F.) 

Having agreed to multi-million dollar agreements in a mere week, Cinemex bargained for 

robust closing conditions that would enable it to inspect the business to ensure that what it was 

buying was in fact as advertised. (Compl. ¶ 36; Exs. A, F.) Indeed, the EPA contains numerous 

conditions precedent to closing (“Closing Condition(s)”). Those conditions include requirements 

that (1) SCG grant Cinemex “reasonable access” and the right to inspect “all of the properties, 

assets, premises, books and records . . . and other documents and data related to” SCG (EPA § 7.2); 

(2) SCG grant Cinemex “reasonable access” to “each Corporate Employee,”3 including to permit 

Cinemex to interview such employees (id. § 7.9); (3) SCG’s representations and warranties are 

 

3

 The EPA defines “Corporate Employee[s]” to mean those employed by SCG-AH, Inc. (a corporation registered in 

Texas and based in the Houston area). 

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true at the time of the closing, including the representation that SCG was authorized to operate its 

business (id. § 5.16(B)); and (4) no “Material Adverse Effect” (“MAE”) as defined in the EPA has 

occurred (id. § 8.1(E)). (Compl. ¶¶ 36; Exs. A, F.) 

C. The COVID-19 Crisis In The United States And Impact On The Movie 

Theater Industry 

 In the days leading up to March 10, 2020, President Donald Trump repeatedly conveyed 

to the public that the effects of the COVID-19 outbreak would (and could) be limited. These 

included the following statements: (1) “No, I’m not concerned at all. No, we’ve done a great job 

with it.” (March 7, to reporters);4 and (2) “[W]e’re prepared, and we’re doing a great job with it. 

And it will go away. Just stay calm. It will go away.” (March 10, to reporters following a meeting 

with Republican U.S. Senators).5 

 Only six days later, on March 16, 2020, the U.S. federal government (led by the Centers 

for Disease Control) issued a set of guidelines aimed at trying to slow the spread of COVID-19 

(the “Spread Guidelines”). 6 The Spread Guidelines include avoiding eating or drinking in 

restaurants and bars.7 That same day, the local governments of the City of Houston and Harris 

County (which encompasses Houston and its surrounding areas) announced that, as of midnight 

that day, all bars and nightclubs had to close and restaurants could only offer delivery, take-out or 

 

4

 See Katie Rogers, “Trump Now Claims He Always Knew the Coronavirus Would Be a Pandemic,” THE NEW YORK 

TIMES (March 17, 2020), https://www.nytimes.com/2020/03/17/us/politics/trump-coronavirus.html. 

5 See Kathryn Watson “A timeline of what Trump has said on coronavirus,” CBS NEWS (Apr. 3, 2020), 

https://www.cbsnews.com/news/timeline-president-donald-trump-changing-statements-on-coronavirus/. 

6

 See White House Statements & Releases, “The President’s Coronavirus Guidelines for America” (Mar. 16, 2020), 

https://www.whitehouse.gov/briefings-statements/coronavirus-guidelines-america/. 

7

Id. 

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5 

drive-through services.8 The next day, March 17, 2020 (at the latest), SCG announced that it would 

be closing all of the SCG Theaters “in accordance with local government direction and 

recommendations.”9 

 On March 20, 2020, the State of Illinois issued an order directing people to remain in their 

homes except for “essential” activities, such as to purchase food from the grocery store or seek 

medical care, effective March 21.10 These orders are generally called “stay-at-home,” “lockdown,” 

or “shelter-in-place” orders. 

 On March 23, 2020, Galveston County (which borders Harris County and surrounding 

areas outside of Houston) issued a stay-at-home order.11 On March 24, 2020, the City of Houston, 

Harris County, and Fort Bend County (which also borders Harris County and encompasses cities 

outside of Houston) also issued such orders effective at midnight that day.12 

 On March 29, 2020, President Trump extended the Spread Guidelines, which were set to 

expire on March 31, by another 30 days (i.e., until April 30).13 The next day, on March 30, 2020, 

the Governor of Texas announced that any persons traveling to Texas from other U.S. cities that 

 

8

 See, e.g., KHOU 11, “County bars must close and restaurants now limited to pickup, delivery services” (Mar. 16 & 

17, 2020), https://www.khou.com/article/news/coronavirus-update-schools-vaccine-texas-march-16-2020/285-

932d74d7-b5f0-4781-9295-b048671ad7aa.

9

 See Paul Takahashi, “Star Cinema Grill to temporarily close as movie theaters feel coronavirus impact,” THE 

HOUSTON CHRONICLE (Mar. 17, 2020), https://www.houstonchronicle.com/business/article/Star-Cinema-Grill-totemporarily-close-as-movie-15137543.php; Star Cinema Grill, “COVID-19 Update,” https://www.starcinemagrill net 

(pop-up notification appearing on SCG’s website). 

10 Ill. Exec. Order No. 2020-10 (Mar. 20, 2020), available at

https://www2.illinois.gov/documents/execorders/2020/executiveorder-2020-10.pdf. 

11

 See, e.g., KHOU 11, “These Houston-area counties have issued stay-at-home orders” (Mar. 25 & 27, 2020), 

https://www.khou.com/article/news/health/coronavirus/coronavirus-texas-counties-stay-at-home-orders/285-

c4b0f79b-90ec-48c1-bb84-bf4b9d7cc0d4.

12

 Id.

13

 See White House Press Briefing, “Remarks by President Trump, Vice President Pence, and Members of the 

Coronavirus Task Force in Press Briefing” (Mar. 29, 2020), https://www.whitehouse.gov/briefingsstatements/remarks-president-trump-vice-president-pence-members-coronavirus-task-force-press-briefing-14/.

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are considered “hot spots” for COVID-19 are required to self-quarantine for a period of 14 days.14 

These cities include, among others, Chicago and Miami.15 

D. The Status Of The EPA 

 On March 24, 2020, Cinemex informed Plaintiffs that closing could not proceed because 

the following conditions had not been satisfied: (1) Cinemex’s inspection of, inter alia, the SCG 

Theaters; and (2) Cinemex’s ability to meet with Plaintiffs’ Corporate Employees, including those 

managing the SCG Theaters. (Compl. ¶ 45.) Specifically, Cinemex’s counsel sent an email to 

Plaintiffs’ counsel explaining that Cinemex could not close because “[a]ttempting to close under 

these circumstances would imperil Cinemex personnel.” (Compl. ¶ 45; Ex. H.) 

 On March 26, 2020, Cinemex sent SCG a letter that further explained that two critical terms 

of the EPA had not been, and could not be, satisfied. (Compl. ¶ 47.) Cinemex reminded SCG that 

Section 3.1 of the EPA required that closing “shall take place . . . in Houston, Texas” and that a 

physical closing in Houston was required because Cinemex had not had the opportunity, either 

before the EPA was signed on March 10 or thereafter, to conduct a detailed inspection of the 

theaters. Cinemex further pointed out that the sellers could not satisfy the covenant in Section 7.2 

of the EPA, requiring them to provide Cinemex with “reasonable access to and the right to inspect 

all of the properties, assets, [and] premises.” (Compl. ¶ 52; Exs. A, F.) 

 

14

 See Proclamation, Office of the Texas Governor, “Governor Abbott Issues Executive Order Mandating 14-Day 

Quarantine For Travelers Arriving From CA, LA, WA, Atlanta, Chicago, Detroit, and Miami” (Mar. 30, 2020), 

https://gov.texas.gov/news/post/governor-abbott-issues-executive-order-mandating-14-day-quarantine-for-travelersarriving-from-ca-la-wa-atlanta-chicago-detroit-and-miami (“WHEREAS, on March 26, 2020, Executive Order GA11 imposed a mandatory self-quarantine of 14 days for air travelers flying to Texas from certain areas experiencing 

substantial community spread of COVID-19 . . . I, Greg Abbott, Governor of Texas, by virtue of the power and 

authority vested in me by the Constitution and laws of the State of Texas, do hereby add the following states and cities, 

effective at noon on March 30, 2020, to the list set forth in Executive Order GA-11 [listing California, Louisiana, 

Chicago and Miami, among others]”) (emphasis added).

15

 Id. 

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NATURE AND STAGE OF PROCEEDINGS 

Plaintiffs filed the complaint (the “Complaint”) on April 2, 2020, asserting a single count: 

breach of contract against Cinemex. (ECF No. 1.) In its prayer for relief, the Complaint sought 

(1) an order against Cinemex to specifically perform its obligations under the EPA and proceed to 

the Closing of the Transaction; (2) preliminary and permanent injunctive relief requiring Cinemex 

to close the Transaction as set forth in the EPA; (3) an order against Cinemex to pay any additional 

damages suffered by Plaintiffs as a result of Cinemex’s alleged breach of the EPA, in an amount 

to be determined at trial; (4) an award of costs and attorneys’ fees; and (5) other and further relief 

as the Court deems just and proper. (Id. at 20.) 

On April 8, 2020, Plaintiffs filed (1) a motion for expedited injunctive relief and specific 

performance (“Expedited Injunctive Relief Motion”) (ECF No. 6); and (2) a motion for accelerated 

briefing and hearing on the Expedited Injunctive Relief Motion (“Accelerated Briefing and 

Hearing Motion”). (ECF No. 8.) 

On April 10, 2020, Cinemex filed a response to the Accelerated Briefing and Hearing 

Motion. (ECF No. 10.) On the same day, the Court held a telephonic hearing on the Accelerated 

Briefing and Hearing Motion, during which the Court granted Plaintiffs’ motion in part, setting an 

accelerated briefing and hearing schedule, but extending the time for Cinemex’s response and 

Plaintiffs’ reply and permitting Cinemex an opportunity for a sur-reply. (ECF Nos. 11, 18.) 

Pursuant to the Court-ordered schedule, Cinemex filed its response to the Expedited Injunctive 

Relief Motion on April 17, 2020. (ECF No. 26.) 

On April 21, 2020, the Court held the second telephonic hearing, the purpose of which was 

to discuss the forthcoming hearing on the Expedited Injunctive Relief Motion, which is scheduled 

to start on April 27. (ECF No. 21.) 

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On April 22, 2020, Plaintiffs filed a reply in support of their Expedited Injunctive Relief 

Motion. (ECF No. 34.) Cinemex will file its sur-reply on April 24, 2020. 

LEGAL STANDARD 

Dismissal for failure to state a claim is appropriate “‘when the allegations in a complaint, 

however true, could not raise a claim of entitlement to relief.’” Cuvillier v. Taylor, 503 F.3d 397, 

401 (5th Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 558 (2007)). “Generally, 

a court ruling on a 12(b)(6) motion may rely on the complaint, its proper attachments, documents 

incorporated into the complaint by reference, and matters of which a court may take judicial notice.” 

Randall D. Wolcott, M.D., P.A. v. Sebelius, 635 F.3d 757, 763 (5th Cir. 2011) (internal quotation 

marks omitted). “[T]he factual allegations must allow for an inference of more than a sheer 

possibility that a defendant has acted unlawfully.” Little v. SKF Sverige AB, No. H–13–1760, 2014 

WL 710941, at *6 (S.D. Tex. Feb. 24, 2014) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)) 

(internal quotation marks omitted). “The court should not strain to find inferences favorable to the 

plaintiffs or accept conclusory allegations, unwarranted deductions, or legal conclusions.” 

Toscano v. United Parcel Service, No. 4:14-CV-2680, 2015 WL 2089660, at *1 (S.D. Tex. Apr. 

28, 2015) (quoting R2 Invs. LDC v. Phillips, 401 F.3d 638, 642 (5th Cir. 2005)) (internal quotation 

marks omitted). 

ARGUMENT 

I. PLAINTIFFS FAILED TO SATISFY CONDITIONS PRECEDENT TO CLOSING 

Under Delaware law, which governs the agreements here, see EPA § 12.7, if a condition 

precedent is not satisfied, then performance under a contract is not required, and there can be no 

claim for breach of contract. See, e.g., Munro v. Beazer Home Corp., No. CIV. U608-03-081, 

2011 WL 2651910, at *5 (Del. Com. Pl. June 23, 2011). Here, Plaintiffs failed to meet the 

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conditions precedent to (a) provide reasonable access to property and employees, and (b) provide 

truthful representations and warranties that they are authorized to operate their business. 

A. Plaintiffs Failed To Provide Reasonable Access To Property And Employees, 

As Required By Sections 7.2 And 7.9 

Based on their own allegations, Plaintiffs did not satisfy the conditions precedent that they 

provide reasonable access to property and employees. Section 7.2 of the EPA states: “From the 

date hereof [March 10, 2020] until the Closing . . . the [Plaintiffs] shall . . . afford [Cinemex] and 

its counsel, accountants and other authorized agents and representatives (collectively, 

‘Representatives’) reasonable access to and the right to inspect all of the properties, assets, [and] 

premises . . . .” EPA § 7.2. Similarly, Section 7.9 states: “From and after the date hereof [March 

10, 2020] until Closing Date, the [Plaintiffs] shall provide [Cinemex] with reasonable access to 

each Corporate Employee . . . , and [Cinemex] may conduct interviews and discussions with such 

Corporate Employees regarding employment with [Cinemex].” Id. § 7.9. Thus, the EPA is 

unequivocal in requiring that Plaintiffs provide reasonable access to property and employees. 

Cinemex did not have physical access to Plaintiffs’ properties, assets, premises, and 

employees from March 10, 2020 until the closing date, which Plaintiffs allege to be March 26 (or 

April 10 as to SCG-N). (Compl. ¶ 44.) Indeed, physical access was impossible for most of that 

period (and remains impossible) because government orders shut down the movie theaters and 

required that all people stay at home for non-essential activities before those closing dates. See 

supra notes 9, 10. Plaintiffs do not allege otherwise. Instead, Plaintiffs allege that Cinemex had 

physical access for some undefined portion of the time between the agreements were signed and 

the closing dates. (Compl. ¶ 55); see also ECF No. 34 at 7 (arguing that Cinemex could have 

traveled to Houston on or before March 17, 2020). However, this access for part of the time does 

not suffice under the plain language of the agreements. The EPA requires that Plaintiffs provide 

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 10 

access “until the Closing,” EPA § 7.2 (emphasis added), and “until Closing Date,” id. § 7.9 

(emphasis added). Thus, access must be provided throughout the closing period and Plaintiffs did 

not provide it.16

The failure to meet these requirements constitutes a failure to satisfy a condition precedent 

to closing. Under Section 8.1 of the agreements: 

The obligation of Buyer to consummate the purchase of the Equity Interests is 

subject to the satisfaction (or waiver by Buyer) of the following conditions as of 

the time of the Closing: . . . (B) The [Plaintiffs] will have performed and complied 

(or shall have cured any non-performance or non-compliance) with all of the 

covenants and agreements required to be performed by the [Plaintiffs], as the case 

may be, hereunder or under any of the Transaction Documents at or prior to the 

Closing.” 

EPA § 8.1(B). Because Cinemex’s obligation to close is “subject to” the “conditions” in Section 

8.1, they are conditions precedent as a matter of law. See, e.g., Novipax Holdings LLC v. Sealed 

Air Corp., No.: N17C-03-1682 EMD CCLD, 2017 WL 5713307, at *4 (Del. Super. Ct. Nov. 28, 

2017) (interpreting a similar provision as a condition precedent to closing); Munro, 2011 WL 

2651910, at *5 (noting that even more ambiguous language, like “if” and “provided that,” is 

sufficient to create a condition precedent). Sections 7.2 and 7.9 are, by their terms, two of the 

covenants that Plaintiffs were required to perform. Thus, Cinemex had no contractual duty to 

consummate the purchase until Plaintiffs comply with (and cure non-compliance with) those 

requirements, which has not occurred.17

 

16 To the extent Plaintiffs rely on the word “reasonable” here to justify providing access only during part of the period 

before closing (ECF No. 34 at 7), this likewise fails because the “reasonable access” must be provided until the closing. 

Thus, providing no access for much of the time before the closing does not suffice under the EPA. In addition, while 

Plaintiffs now argue that Cinemex did not use commercially reasonable best efforts to bring about the closing (id.

(citing EPA § 8.3)), Plaintiffs made no such allegation in their Complaint. Indeed, there is no plausible basis to treat 

as commercially unreasonable Cinemex’s demand to inspect the properties to be purchased before closing, and 

Cinemex’s refusal to defy governmental orders to complete that inspection. 

17 In their reply brief in support of their motion for expedited relief, Plaintiffs argue that the inability to inspect the 

theaters does not matter because it would not excuse performance (ECF No. 34 at 8), but they cite nothing in the EPA 

for this proposition because the EPA expressly makes the provision of access a condition precedent to closing. 

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To the extent Plaintiffs suggest that they did what they could given the limitations caused 

by the pandemic (Compl. ¶ 56), that argument is irrelevant under the agreements. There is nothing 

in the agreements to suggest that the failure to meet these conditions precedent is excused if 

Plaintiffs were not at fault. And unlike other provisions that require only “commercially 

reasonable efforts” to complete a particular requirement, see EPA § 7.1(A), there is no such 

limitation here; Plaintiffs “shall” provide the required access, see id. §§ 7.2, 7.9. Moreover, while 

the agreements state that a pandemic is not a defined “Material Adverse Effect,” id. at 9, Section 

8.1(B) makes the covenants in Article VII conditions precedent without requiring that a Material 

Adverse Effect also exists. Thus, the parties did not agree or suggest that a pandemic excused 

failures to meet these conditions precedent. 

Plaintiffs’ Complaint attempts to excuse their failure on this issue by positing that 

“reasonable access” does not include physical access. (Compl. ¶ 52.) However, access to property 

and people necessarily means being in the same place as the property and people. There is no 

plain meaning of “reasonable access” to properties and individuals such that a party can provide 

no access and instead offer to provide a video as a replacement for such access. And this makes 

sense because a party obviously would want to see in person the physical thing it is purchasing 

before completing the purchase. That is especially true here: as discussed supra at 3, Cinemex 

signed the agreements after only one week of negotiation and without inspecting the properties 

(including a movie theater under construction) only because it bargained for robust closing 

conditions entitling it to inspect all aspects of the business. A video from someone’s smartphone 

 

Whether and when closing could occur after the inspection would, of course, depend on what was found during the 

inspection. 

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12 

is not what Cinemex bargained for, and it is more than reasonable for Cinemex not to spend $ 

million based on a look via someone’s camera phone. 

Indeed, the EPA specifically refers to access to “premises,” and access to premises—i.e., 

land and buildings—necessarily means that the party can actually walk onto the premises. Here, 

Cinemex could not do so, as they were entitled to under the agreements as a prerequisite to closing. 

Simply put, in the absence of a pandemic, there is no doubt that allowing only a video would not 

be considered “access” to property and people, and as discussed above, the agreements do not 

modify the access requirement for a pandemic. 

B. Plaintiffs Breached Their Obligation To Provide Truthful Representations 

And Warranties 

Plaintiffs failed to satisfy the required conditions precedent for the additional and 

independent reason that their representations and warranties were false at the time that closing was 

set to occur. Section 5.16(B) states: “To the [Plaintiffs’] knowledge, the [Plaintiffs are] in 

possession of, and at all times ha[ve] possession of, and immediately following the Closing will 

hold, all . . . authorizations, . . . consents, . . . approvals and orders necessary to . . . operate its 

properties, to carry on its Business (collectively, the ‘Company Group Permits’).” EPA 

§ 5.16(B). Plaintiffs also represented that the Company Group Permits are all “in full force and 

effect,” that “no event has occurred that . . . would reasonably be expected to result in the 

revocation, suspension, lapse or limitation of any Company Group Permit,” and that “no member 

of the [Plaintiffs] has received any written notice to the contrary.” Id. Thus, Plaintiffs represented 

that they have authorization to operate their business, and that no event has occurred or written 

notice received that would change that authorization. 

Here, Plaintiffs do not have authorization to carry on their business. As explained supra

at 4-5, due to the government shut-down orders, Plaintiffs now cannot by law operate their theaters. 

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 13 

And they clearly are aware of the event causing that revocation of authority, and received notice 

of that revocation. Plaintiffs make no allegation to the contrary. 

Moreover, it does not matter that the representations were true at the time they were made. 

As the EPA states, the “representations and warranties set forth in ARTICLE 4 and ARTICLE 5 

will be true and correct . . . as of the time of the Closing as though then made (except those 

representations and warranties that address matters only as of a specified date . . . .).” EPA 

§ 8.1(A)(i) (emphasis added). Since the representations at issue in Section 5.16(b) do not claim to 

address matters only as of a specific date, they therefore must be true and correct as of the closing 

date. And they were undisputedly not true and correct as of that date. 

The falsity of the representations constitutes a failure of a condition precedent to the closing. 

The EPA states: 

The obligation of Buyer to consummate the purchase of the Equity Interests is 

subject to the satisfaction (or waiver by Buyer) of the following conditions as of 

the time of the Closing: (A) . . . (ii) each of the other representations and warranties 

set forth in ARTICLE 4 and ARTICLE 5 will be true and correct (in each case 

disregarding any limitations as to materiality or “Material Adverse Effect” therein) 

as of the time of the Closing as though then made . . . , except . . . where the failure 

of such representations and warranties to be true and correct would not, in the 

aggregate, have a Material Adverse Effect . . . . 

EPA § 8.1(A)(ii).18 Thus, under this provision, the truth of the representations and warranties at 

the time of closing is listed as a “condition[]” precedent to closing. The only exception is where 

the falsity of the representations and warranties would not have a Material Adverse Effect. Here, 

there is a Material Adverse Effect because the inability to operate the business constitutes a 

“change, development, event, occurrence, fact, circumstance or condition, that . . . has or is 

 

18 Section 8.1(a)(i) refers to designated “Company / Equityholder Fundamental Representations” that are not at issue 

in this motion to dismiss. 

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 14 

reasonably likely to have (a) a material adverse effect upon the financial condition, business or 

results of operations of [Cinemex].” Id. at 9 (defining Material Adverse Effect). 

Plaintiffs’ response seems to be that there is no Material Adverse Effect because there is a 

limitation on Material Adverse Effect for pandemics and matters affecting the U.S. economy or 

Plaintiffs’ industry as a whole. See Compl. ¶ 38; ECF No. 34 at 5. However, the limitations on 

Material Adverse Effect do not apply to representations and warranties. Instead, the EPA states 

(in language Plaintiffs ignore) that the representations and warranties must be true “disregarding 

any limitations as to materiality or ‘Material Adverse Effect’ therein.” EPA § 8.1(A)(ii) (emphasis 

added). Thus, the parties expressly chose not to limit Material Adverse Effect for purposes of 

treating the truthfulness of the representations as a condition precedent. And disregarding any 

limitations, there is no question that the falsity of the representations is material and has a Material 

Adverse Effect. 

Furthermore, the limitations on Material Adverse Effect are also inapplicable here because 

those limitations concern only what can be “taken into account . . . in determining whether a 

Material Adverse Effect has occurred.” EPA at 9. Here, Cinemex is not asking to “take into 

account” the pandemic or changes to the U.S. economy or the movie theater industry. Rather, 

Cinemex’s argument relies solely on the representation itself that Plaintiffs have authorization to 

operate their business. The question is whether “the failure of such representations and warranties 

to be true and correct . . . have a Material Adverse Effect . . . .” EPA § 8.1(A)(ii). And the falsity 

of the representation that Plaintiffs have authorization to operate their business has a Material 

Adverse Effect regardless of whether the pandemic (or its effects) separately constitute a Material 

Adverse Effect. Indeed, any other interpretation would be nonsensical because Section 8.1(E) 

already makes the lack of any Material Adverse Effect a condition precedent to closing. Thus, for 

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 15 

Section 8.1(A)(ii) to have any meaning, it must be that the truthfulness of a representation itself 

constitutes a condition precedent even where the reason for its falsity does not separately constitute 

a Material Adverse Effect. See Achaian, Inc. v. Leemon Family LLC, 25 A. 3d 800, 808 n.38 (Del. 

Ch. 2011) (quotation marks omitted) (“Contractual interpretation operates under the assumption 

that the parties never include superfluous verbiage in their agreement, and that each word should 

be given meaning and effect by the court.”). 

II. FRUSTRATION OF PURPOSE AND IMPOSSIBILITY EXCUSE CINEMEX’S 

PERFORMANCE 

Plaintiffs fail to plead that Cinemex breached the EPA because the doctrines of frustration 

of purpose and impossibility excuse Cinemex’s performance under the EPA. 

A. The Purpose Of The Agreements Has Been Frustrated By The Closures Of 

Plaintiffs’ Business, And Thus Cinemex Is Not Obligated To Close 

As reflected in the Complaint and throughout the agreements, the principal purpose of the 

agreements was for Cinemex to become the owner of 11 operating movie theaters. (Compl. ¶ 2.) 

Less than a week later, however, the government issued unprecedented orders closing movie 

theaters for an indefinite period of time to attempt to stop the spread of COVID-19, substantially 

frustrating the principal purpose of the agreements. While frustration of purpose is not applied 

lightly, see Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611, 621 (Del. Ch. 2005), aff’d in 

part, rev’d in part on other grounds, 901 A.2d 106 (Del. 2006), this is the prototypical case for 

application of the doctrine. Where, as here, an unexpected government order makes a contract 

valueless or unfair to one party, courts around the country have applied frustration of purpose to 

excuse performance of an agreement. See, e.g., Texas Co. v. Hogarth Shipping Corp., 256 U.S. 

619, 629-30 (1921) (excusing ship owner’s performance where its ships were requisitioned for use 

in the British navy); Unihealth v. U.S. Healthcare, Inc., 14 F. Supp. 2d 623, 635 (D.N.J. 1998) 

(excusing performance where the government ended its hospital billing system and where the 

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 16 

parties should have assumed that the billing rates under the system would fluctuate but not that the 

system would end); Sch. Dist. No. 16 of Sherman Cty. v. Howard, 98 N.W. 666, 666-67 (Neb. 

1904) (where school was shut down by Board of Health due to smallpox outbreak, school district 

was released from paying teacher’s wages). 

Delaware law follows the general common law definition of this doctrine, such that 

frustration of purpose exists where there is a “(1) substantial frustration of the principal purpose 

of the contract; (2) that the nonoccurrence or occurrence of the frustrating event was a basic 

assumption upon which the contract was made; and (3) no fault on the part of the defendant.” 

Chase Manhattan Bank v. Iridium Africa Corp., 474 F. Supp. 2d 613, 620 (D. Del. 2007); see also 

Restatement (Second) of Contracts § 265, cmt. a (1981) (“First, the purpose that is frustrated must 

have been a principal purpose of that party in making the contract . . . Second, the frustration must 

be substantial . . . Third, the non-occurrence of the frustrating event must have been a basic 

assumption on which the contract was made . . .”). Based on Plaintiffs’ own allegations and 

judicially noticeable facts, all three elements are satisfied here. 

First, the principal purpose of the agreements has been substantially frustrated. The 

undisputed purpose of the agreements was to acquire a business, and that business is no longer 

operating, as the movie theaters have been shut by government order for the past month. “When 

people enter into a contract which is dependent for the possibility of its performance on the 

continual availability of a specific thing, and that availability comes to an end by reason of 

circumstances beyond the control of the parties, the contract is prima facie regarded as dissolved.” 

Greek Catholic Congregation of Borough of Olyphant v. Plummer, 12 A.2d 435, 439 (Pa. 1940). 

There is no question that the purpose of an agreement to sell a functioning business has been 

substantially frustrated where, as here, the business cannot operate for an indefinite period of time. 

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 17 

Notably, Plaintiffs do not dispute this element in their reply in support of their motion for 

injunctive relief. (ECF No. 34 at 8-11.) 

Second, the operation of the business was a basic assumption on which the agreements 

were made. Plaintiffs allege that the parties foresaw the possibility of a pandemic when they 

signed the agreements on March 10, 2020. (Compl. ¶¶ 37-39.) However, regardless of whether 

the parties foresaw the possibility of a pandemic, the parties did not foresee the extreme and 

unprecedented shutdown that has occurred. When the agreements were signed, the government 

suggested that the effects of the COVID-19 outbreak would (and could) be limited—all of the 

relevant governmental orders shutting down movie theaters and requiring people to stay at home 

(aside from essential activities) were issued after the agreements were signed. See supra at 4. 

Moreover, the agreements themselves establish that the parties did not foresee the possibility of 

government orders shutting down the U.S. economy and closing all theaters. As discussed above, 

the agreements presuppose that Cinemex can access the properties until closing, that Plaintiffs 

would have authority to operate their theaters at the time of closing, and that the closing would 

occur in Houston. None of these assumptions would make sense if the parties foresaw that the 

theaters would be closed and travel would be essentially impossible. 

Third, Cinemex is not at fault for the frustration of purpose. To the extent Plaintiffs contend 

that Cinemex’s refusal to close is through its own fault (Compl. ¶¶ 49-56), even assuming that 

were true, it is irrelevant on this issue. The question is not generally whether Cinemex is at fault, 

but whether its fault caused the frustration of purpose. See, e.g., Kroblin Refrigerated Xpress, Inc. 

v. Pitterich, 805 F.2d 96, 102 (3d Cir. 1986) (cited in Chase Manhattan Bank, 474 F. Supp. 2d at 

620). And Cinemex is clearly not responsible for government orders shutting down movie theatres, 

which is the basis for the frustration of the purpose of the agreements. 

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 18 

B. Cinemex Has No Obligation To Close Because Performance Of The 

Agreements Is Impossible 

Cinemex has no obligation to close because performance of the agreements is impossible 

due to travel restrictions and stay-at-home orders. Under the doctrine of impossibility, a promisor 

is released from liability for breach of contract when further performance is impossible. Martin v. 

Star Publishing Co., 126 A.2d 238, 242 (Del. 1956). “The Restatement defines ‘impossibility’ as 

something that is impracticable because of extreme and unreasonable difficulty, expense, injury or 

loss.” Mueller v. Marvel, No. 03-07-110, 2004 WL 7325622, at *3 (Del. Com. Pl. Dec. 8, 2004) 

(citing Restatement Contracts § 454 (1932)) (finding impossibility where a chicken house which 

was the subject of a lease collapsed because of age, thereby rendering the use of the building by 

defendant for storage and retrieval of products impossible). “The party must demonstrate that the 

obligation under the contract cannot be performed by any means.” Bell Atl. Dir. Servs., Inc. v. 

Delaware Law Ctr., Inc., No. CRIM.A.1997-07-083, 2000 WL 33654061, at *1 (Del. Com. Pl. 

Dec. 14, 2000). The Delaware Supreme Court recognizes cases of “impossibility due to domestic 

law.” Martin v. Star Publishing Co., 126 A.2d 238, 242 (Del. 1956) (citation omitted).19

Here, the conditions precedent are impossible to meet. It is impossible for Plaintiffs to 

satisfy their obligation to provide Cinemex with reasonable access to property and people, as 

discussed supra Part I.A. Moreover, even if Plaintiffs could provide such access, key personnel 

from Cinemex are located in Miami and cannot get to Houston given the stay-at-home orders in 

place and the self-quarantine requirement for travelers from Miami. See supra at 6. Indeed, 

impossibility is the only excuse Plaintiffs have for failing to provide the required access, 

 

19 The impossibility must also be “fortuitous” and not the result of the promisor’s own volition. Martin v. Star 

Publishing Co., 126 A.2d 238, 242 (Del. 1956). Impossibility, just like the frustration of purpose, was not foreseeable 

or the fault of Cinemex. While Plaintiffs suggest that Cinemex did not exercise commercially reasonable efforts to 

close (ECF No. 34 at 7), the Complaint does not allege (nor could it) that it would be commercially unreasonable to 

require a closing in the place chosen by the parties in the agreements. 

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 19 

notwithstanding that the parties supposedly anticipated the pandemic. But if the impossibility of 

complying with Plaintiffs’ obligations and the unforseeability of the impediment to compliance is 

relevant, then it equally applies to Cinemex’s obligations. Accordingly, because it is impossible 

to perform the agreements as written, Cinemex has no obligation to close. 

CONCLUSION 

For the reasons set forth above, Cinemex respectfully requests that the Court grant this 

Motion to Dismiss, and dismiss Count I of the Complaint with prejudice (or, in the alternative, 

without prejudice). 

Dated: April 23, 2020 Respectfully submitted, 

 

 /s/ Patricia B. Tomasco 

 Patricia B. Tomasco (attorney in charge) 

Texas State Bar No. (01797600) 

Federal ID No. (10521) 

Email: pattytomasco@quinnemanuel.com 

QUINN, EMANUEL, URQUHART &

SULLIVAN, LLP 

711 Louisiana Street, Suite 500 

Houston, TX 77002 

Telephone: (713) 221-7010 

Facsimile: (713) 221-7100 

/s/ Juan P. Morillo 

Juan P. Morillo 

Pro Hac Vice granted. 

Email: juanmorillo@quinnemanuel.com

/s/ Derek L. Shaffer 

Derek L. Shaffer 

Pro Hac Vice granted. 

Email: derekshaffer@quinnemanuel.com 

/s/ Gabriel F. Soledad 

Gabriel F. Soledad

Pro Hac Vice granted. 

Email: gabrielsoledad@quinnemanuel.com

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 20 

QUINN, EMANUEL, URQUHART &

SULLIVAN, LLP 

1300 I Street, NW, Suite 900 

Washington, D.C. 20005 

Telephone: (202) 538-8000 

Facsimile: (202) 538-8100 

Attorneys for Defendants Cinemex USA Real Estate 

Holdings, Inc. and Cinemex Holdings USA, Inc. 

 

 

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 21 

CERTIFICATE OF CONFERENCE 

I certify that on April 22, 2020, I conferred with Jeff M. Golub and Nick Gorga, counsel 

for Plaintiffs, regarding the issues in this motion, and the parties could not agree that the pleading 

deficiency could be cured in any part by a permissible amendment offered by the pleading party. 

 /s/ Gabriel F. Soledad 

 By: Gabriel F. Soledad 

CERTIFICATE OF SERVICE 

I certify that this motion has been served on counsel of record by the Court’s ECF system 

on April 23, 2020. 

 /s/ Juan P. Morillo 

 By: Juan P. Morillo 

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UNITED STATES DISTRICT COURT 

FOR THE SOUTHERN DISTRICT OF TEXAS 

HOUSTON DIVISION 

OMAR KHAN, et al. § 

 §

vs. § Civil Action No. 4:20-cv-01178

§

CINEMEX USA REAL ESTATE § Hon. Andrew S. Hanen

HOLDINGS, INC., et al. §

APPENDIX TO MOTION TO DISMISS PLAINTIFFS’ 

VERIFIED ORIGINAL COMPLAINT

TABLE OF CONTENTS 

TAB CASE 

A-1 Achaian, Inc. v. Leemon Family LLC, 25 A.3d 800 (Del. Ch. 2011) 

A-2 Bell Atl. Dir. Servs., Inc. v. Delaware Law Ctr., Inc., No. CRIM.A. 1997-07-083, 

2000 WL 33654061 (Del. Com. Pl. Dec. 14, 2000) 

A-3 Greek Catholic Congregation of Borough of Olyphant v. Plummer, 12 A.2d 435 

(Pa. 1940) 

A-4 Little v. SKF Sverige AB, 2014 WL 710941 (S.D. Tex. Feb. 24, 2014) 

A-5 Martin v. Star Publishing Co., 126 A.2d 238 (Del. 1956) 

A-6 Mueller v. Marvel, No. 03-07-110, 2004 WL 7325622 (Del. Com. Pl. Dec. 8, 

2004)

A-7 Munro v. Beazer Home Corp., No. CIV. U608-03-081, 2011 WL 2651910 (Del. 

Com. Pl. June 23, 2011) 

A-8 Novipax Holdings LLC v. Sealed Air Corp., No. N17C-03-1682 EMD CCLD, 

2017 WL 5713307 (Del. Super. Ct. Nov. 28, 2017) 

A-9 Rhines v. Alinas Constr. Techs., Ltd., No. C–11–262, 2011 WL 4688706 (S.D. 

Tex. Oct. 3, 2011) 

A-10 Sch. Dist. No. 16 of Sherman Cty. v. Howard, 98 N.W. 666 (Neb. 1904) 

A-11 Toscano v. United Parcel Service, No. 4:14-CV-2680, 2015 WL 2089660 (S.D. 

Tex. Apr. 28, 2015) 

A-12 Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611 (Del. Ch. 2005), aff’d 

in part, rev’d in part on other grounds, 901 A.2d 106 (Del. 2006) 

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APPENDIX A-1 

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Achaian, Inc. v. Leemon Family LLC, 25 A.3d 800 (2011)

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

25 A.3d 800

Court of Chancery of Delaware.

ACHAIAN, INC., on behalf of itself and

derivatively on behalf of Omniglow, LLC, Plaintiff,

v.

LEEMON FAMILY LLC, and

Ira Leemon, Defendants,

and

Omniglow, LLC, Nominal Defendant.

Civil Action No. 6261–CS.

|

Submitted: May 23, 2011.

|

Decided: Aug. 9, 2011.

Synopsis

Background: Member of limited liability company (LLC),

which had owned 20% interest before buying another

member's 30% interest, brought action against member

owning a 50% interest, seeking dissolution of LLC on

grounds that management was deadlocked 50/50. Defendant

member filed motion to dismiss.

Holdings: The Court of Chancery, Strine, Chancellor, held

that:

where LLC agreement required written consent of existing

members in order for a transfer to confer the status of

“member” on a person who was not already a member,

plaintiff, who was already a member, was entitled to receive

other owner's entire 30% ownership interest upon transfer,

including voting rights; and

plaintiff stated valid claim for dissolution.

Motion to dismiss denied.

Procedural Posture(s): Motion to Dismiss.

Attorneys and Law Firms

*801 Herbert W. Mondros, Esquire, Stephanie Noble

Tickle, Esquire, Margolis Edelstein, Wilmington, Delaware;

Steven N. Leitess, Esquire, Gordon S. Young, Esquire,

Leitess Leitess Friedberg + Fedder PC, Baltimore, Maryland,

Attorneys for Plaintiff.

William E. Manning, Esquire, James D. Taylor, Jr., Esquire,

Charles T. Williams, III, Esquire, Michael J. Farnan, Esquire,

Saul Ewing LLP, Wilmington, Delaware, Attorneys for

Defendants.

OPINION

STRINE, Chancellor.

I. Introduction

Omniglow, LLC is a Delaware limited liability company

engaged in the manufacture of chemiluminescent novelty

items such as “glowsticks.” When it was founded in 2005,

Omniglow had a sole “Member,” its “Parent” corporation. 1

As part of a planned spin-off in 2006, Parent sold Omniglow

to three business entities. That resulted in Omniglow having

three Members, 2 each owning the following Membership

“Interests”: (i) 50% were owned by the defendant Leemon

Family LLC, a New York limited liability company controlled

by its managing member, the individual defendant Ira

Leemon (together, “Leemon”); (ii) 30% were owned by

the non-party Randye M. Holland and Stanley M. Holland

Trust, a revocable inter vivos trust controlled by non-parties

Stanley and Randye Holland as trustees (“Holland”); and (iii)

20% were owned by the plaintiff Achaian, Inc., a Nevada

corporation wholly owned by non-party William A. Heriot

(“Achaian”). 3

For two years, Holland and Leemon, together comprising

80% of the Interests, managed Omniglow's business with

Achaian taking a passive role as an investor. In 2008,

however, Leemon allegedly took sole control of Omniglow

over the objection of both Achaian and Holland, and in

contravention of Omniglow's “LLC Agreement” that vests

managerial authority in the Members in proportion to

their respective *802 Interests. 4 Holland, fed up with

controversy, purported to transfer and assign its entire

30% Interest to Achaian in a January 25, 2010 “Purchase

Agreement.” 5 Achaian then filed this suit on March 10,

2011, claiming that it and Leemon are now deadlocked,

50/50, as to the management of Omniglow and therefore

an order of dissolution is warranted under 6 Del. C. §

18–802 because it is no longer “reasonably practicable

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Achaian, Inc. v. Leemon Family LLC, 25 A.3d 800 (2011)

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 2

to carry on [Omniglow's] business in conformity with

[Omniglow's] [LLC] [A]greement.” 6 Leemon has moved

to dismiss the complaint under Rule 12(b)(6), arguing that

Holland's assignment was only effective to give Achaian an

additional 30% economic interest in Omniglow. Specifically,

Leemon says that in order for Achaian to have received a

30% Membership Interest in Omniglow, the LLC Agreement

required Leemon's consent to the assignment because, in its

view, Achaian was in effect being readmitted as a Member

with respect to its newly acquired 30% Interest.

This case therefore presents a single question of law: may

one member of a Delaware limited liability company assign

its entire membership interest, including that interest's voting

rights, to another existing member, notwithstanding the fact

that the limited liability company agreement requires the

affirmative consent of all of the members upon the admission

of a new member, or, must the existing member assignee be

readmitted with respect to each additional interest it acquires

after its initial admission as a member? In this opinion, I find

that, consistent with the Delaware Limited Liability Company

Act, an enabling statute whose primary function is to fill

gaps, if any, in a limited liability company agreement, the

answer to that question depends in the first instance on the

specific provisions governing the transferability of Interests

in Omniglow's LLC Agreement. When Omniglow's LLC

Agreement is read as a whole, as it must be, 7 it allows an

existing Member to transfer its entire Membership Interest,

including voting rights, to another existing Member without

obtaining the other Members' consent. Thus, Holland's

assignment of its 30% Interest to an existing Member,

Achaian, was effective to vest all of the rights associated with

that Interest in Achaian, and Omniglow now has two coequal

50% Members.

II. The Relevant Provisions Of The LLC Agreement

And The Parties' Competing Interpretations

This motion presents a discrete question of law. Both parties

believe that their dispute must be determined by reference

to the terms of the applicable statute, the Delaware Limited

Liability Company Act, and Omniglow's LLC Agreement. 8

Neither argues that there is any relevant parol evidence

bearing on this dispute, especially because neither Achaian

nor Leemon was involved in drafting the original LLC

Agreement. 9

 To resolve this dispute, it is useful to start with what is now

a mundane notion, which is that under the Act, the parties

*803 to an LLC agreement have substantial authority to

shape their own affairs and that in general, 10 any conflict

between the provisions of the Act and an LLC agreement will

be resolved in favor of the LLC agreement. 11

That principle applies here. As Leemon stresses, the default

provision of the Act dealing with the transfer of interests in

an LLC states:

A limited liability company interest is

assignable in whole or in part except as

provided in a limited liability company

agreement. The assignee of a member's

limited liability company interest

shall have no right to participate

in the management of the business

and affairs of a limited liability

company except as provided in a

limited liability company agreement

.... Unless otherwise provided in a

limited liability company agreement,

[a]n assignment of a limited liability

company interest does not entitle the

assignee to become or to exercise

any rights or powers of a member

[and instead only] entitles the assignee

to *804 share in such profits and

losses, to receive such distribution

or distributions, and to receive such

allocation of income, gain, loss,

deduction, or credit or similar item to

which the assignor was entitled, to the

extent assigned.... 12

Likewise, the Act provides that an assignee of a limited

liability company interest “is admitted as a member of the

limited liability company ... as provided in § 18–704(a) of this

title 13 and at the time provided in and upon compliance with

the limited liability company agreement....” 14

 Thus, it is clear that the default rule under the Act is that

an assignment of *805 an LLC interest, by itself, does not

entitle the assignee to become a member of the LLC; rather,

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an assignee only receives the assigning member's economic

interest in the LLC to the extent assigned. It is equally

clear, however, that the default rule may be displaced by the

provisions of an LLC agreement itself and that in the event of

a conflict, the LLC agreement prevails. 15

Here, Omniglow's LLC Agreement does contain specific

provisions bearing on Interests in Omniglow and their

transferability, namely §§ 7.1 and 7.2. In deciding the

legal question surfaced by Leemon's motion to dismiss, 16

therefore, I must first look to those provisions. If the

LLC Agreement allowed Holland to transfer and assign the

voting power associated with its Membership Interest to

Achaian, that ends the matter notwithstanding that the default

provisions in the Act, if applicable, might lead to a different

result.

For starters, Omniglow's LLC Agreement defines a Member's

Interest as meaning “the entire ownership interest of the

Member in [Omniglow].” 17 Two related sections of the LLC

Agreement then deal specifically with the transfer of Interests.

The first, § 7.1, allows a Member to transfer all or part of its

Interest to any “Person,” 18 at any time:

7.1. Transfer of Interest. 19 [A] Member may transfer all

or any portion of its Interest in [Omniglow] to any

Person at any time. If at any time such a transfer shall

cause [Omniglow] to have more than one Member, then

this [LLC] Agreement shall be appropriately amended

to reflect the fact that [Omniglow] will then be treated

as *806 a partnership for purposes of the [Internal

Revenue] Code [of 1986]. 20

Section 7.1's permissive grant of free transferability, however,

is subject to the express restriction contained in § 7.2, which

provides:

7.2. Admission of New Members.

No Person shall be admitted

as a Member of [Omniglow]

after the date of this [LLC]

Agreement without the written

consent of the Member and

delivery to [Omniglow] of a

written acknowledgement (in form

and substance satisfactory to

the Member) of the rights

and obligations of this [LLC]

Agreement and [an] agreement [to]

be bound hereunder. 21

Certain undisputed facts are also relevant to decide the current

motion. The parties agree that each of Leemon, Achaian,

and Holland were admitted as Members in 2006. 22 The

parties also agree that even though § 7.1 says that the LLC

Agreement “shall be appropriately amended” in the event that

Omniglow came to have more than one Member, 23 there was

never any such amendment. 24 Notably, the parties also agree

that despite the failure to amend the LLC Agreement, the

reference in § 7.2 to the “written consent of the Member” must

be read as now meaning “Members” affording any Member

the right to object to the admission of a Person as a new

Member. 25

From these undisputed facts, the key contractual provisions

in the LLC Agreement, and the default provisions of the Act,

the parties draw starkly different conclusions.

For its part, Leemon argues that none of the provisions in the

LLC Agreement clearly reverse the default rule under the Act,

which is that “[a]n assignment of a limited liability company

interest does not entitle the assignee to become a member or to

exercise any rights or powers of a member,” and instead only

entitles the assignee to the economic interest of the assigning

member. 26 Because, in Leemon's view, the LLC Agreement

does not plainly provide that the assignee of an Interest will

receive the voting rights along with the economic interest,

Achaian only received the economic interest associated with

Holland's 30% Interest and thus possesses only the original

20% voting power it received from Parent.

Alternatively, Leemon argues that the LLC Agreement itself

unambiguously distinguishes between the transferability of

a Member's economic interest (i.e., the right to share in

Omniglow's profits, losses and other distributions) and that

Member's voting rights (i.e., the right to manage). That is,

Leemon says that although § 7.1 allows a Member to freely

transfer its economic interest in Omniglow, § 7.2 *807

makes plain that a Member's voting rights can only be

transferred with the express written consent of the existing

Members. Were it otherwise, argues Leemon, and a Member

was allowed to transfer both his economic and voting interest

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under § 7.1 without first obtaining the consent of Omniglow's

other Members, § 7.2's prohibition against the admission

of a new Member without the written consent of existing

Members would be “superfluous.” 27 To avoid that result,

Leemon says that § 7.2 applies to transfers or assignments

of an Interest to existing Members, like Achaian. That is,

Leemon suggests that although Achaian was “admitted as

a Member” with respect to its original 20% Interest, § 7.2

requires Leemon's written consent in order for Achaian to

have been “admitted as a Member” with respect to the

additional 30% Interest it acquired from Holland. 28

Achaian, for its part, admits that if Leemon is correct that

the Act's default provisions it cites govern the transfer made

by Holland to Achaian in the Purchase Agreement, “it is

possible that the Court might find that Achaian did not acquire

Holland's voting rights and does not hold a fifty percent

full [I]nterest.” 29 But, says Achaian, the LLC Agreement's

specific provisions bearing on transferability trump the Act's

default rules and permitted Holland to assign its voting

rights to another existing Member, like Achaian. To that end,

Achaian first points to the LLC Agreement's broad definition

of Interest, which means “the entire ownership interest of the

Member in [Omniglow].” 30 Achaian says that because § 7.1

allows a “Member [to] transfer all or any part of its Interest

to any Person at any time,” Holland was free to transfer its

“entire ownership [I]nterest,” including that Interest's voting

rights, to Achaian in the Purchase Agreement. 31 What's

more, says Achaian, § 7.2 is far from superfluous, as Leemon

contends. Instead, § 7.2 has an important role to play when

a Member wishes to assign his Membership Interest to a

“Person” who is not already “admitted as a Member.” 32

When a Person is already “admitted as a Member,” Achaian

says that § 7.2 has no relevance, and a Member need not be

readmitted as to each subsequent Interest it acquires. 33

III. Leemon's Motion To Dismiss Is Denied

 For the following reasons, I conclude that Achaian has

the better of the argument. When read as a whole, as it

must be, 34 the LLC Agreement provides that all of the

rights accompanying an Interest—including the voting rights

—in Omniglow may be transferred to an already existing

Member of Omniglow without the written consent of the other

Members. Read in complete context, the LLC Agreement

makes Interests in Omniglow freely transferable subject only

to a limited proviso that requires the written consent of

the existing Members in order for a transfer to confer the

status of Member on a Person, who at the time of the

transfer was not already a Member. Because Achaian was

already a Member at the time of the Purchase Agreement

and nothing in *808 the LLC Agreement requires that it

be readmitted as a Member with respect to each additional

Interest it acquires in Omniglow, it was entitled to receive the

“entire ownership interest” owned by Holland, including that

Interest's corresponding voting rights. 35

I now explain that reasoning in more detail.

I start by noting that Achaian places substantial weight

on the LLC Agreement's definition of Interest—“the entire

ownership interest of the Member in [Omniglow].” 36

Although it might be read as a way to ensure that partial

positions can be transferred without saying anything about

whether the Interest transferred included voting rights, 37 the

fact that § 7.1 already permits a Member to transfer “all or any

portion of its Interest” casts doubt on that reading because that

reading renders the LLC Agreement's specific definition of

Interest unnecessary and superfluous. 38 That is, if “entire,”

as used to describe the extent of a Member's “ownership

interest” in Omniglow serves only to confirm that a Member

can, under § 7.1, transfer “all or any portion of its Interest” in

the sense that a 60% Member may transfer any percentage up

to and including its full 60% Interest, but does not speak at

all as to what rights are included in that 60% Interest, the two

provisions of the LLC Agreement would in effect be saying

the same thing. It is instead preferable to accord the specific

definition of Interest in the LLC Agreement independent

meaning and significance. 39

In that vein, given that the term “entire” is used only once

in the LLC Act, in a vastly different context, 40 and is not

a statutorily defined term, it is also reasonably susceptible

to a reading, as Achaian urges, that is consistent with its

plain meaning. 41 Under its plain meaning, entire would mean

what it ordinarily does, as “[h]aving no part excluded or left

out; [the] whole.” 42 It is in this sense that Achaian *809

claims that “entire” must mean that a Member, like Holland,

can transfer under § 7.1 “all or any portion of its Interest,”

i.e., all or any portion of its “entire ownership interest ...

in [Omniglow],” 43 including the Member's voting rights. 44

That this is what entire is best read as meaning, however,

need not be determined in isolation, and in candor only

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becomes clear and unambiguous when read in full contractual

context. 45

To that point, it is only when the second sentence of § 7.1

and § 7.2 are considered that the LLC Agreement's broad

definition of Interest emerges as unambiguously including all

aspects of Membership in Omniglow, including managerial

voting rights. The second sentence of § 7.1 provides that “[i]f

at any time such a transfer shall cause [Omniglow] to have

more than one Member, then this [LLC] Agreement shall be

appropriately amended to reflect the fact that [Omniglow]

will then be treated as a partnership for purposes of the

[Internal Revenue] Code [of 1986].” 46 The second sentence

of § 7.1 makes clear that a Member's Interest—i.e., its “entire

ownership interest ... in [Omniglow]” 47—includes every

aspect of a Member's Interest, including the portion that

confers the status of Member, in whom, under § 4.1 of the

LLC Agreement, managerial authority is vested. If it were

otherwise, and an Interest in Omniglow represented only a

Member's economic interest, as Leemon argues, the second

sentence of § 7.1 would seem to be unnecessary because in

that case, an existing Member could not transfer or assign the

voting rights included in its Interest to another Person such

that as a result of such transfer or assignment, that Person

could become a Member. In light of well settled principles of

contract interpretation in Delaware, 48 the reading proffered

by Leemon would tend to render the second sentence of § 7.1,

to phrase it in a word favored by Leemon, superfluous.

Of course, the fact that § 7.1 seems to permit the free transfer

of the entire Interest, including that Interest's associated

voting rights, does not end the inquiry. Instead, I must look

at what effect the section of the LLC Agreement addressing

the admission of Members has, keeping in mind that the Act

affords maximum contractual flexibility to provide in an LLC

agreement the precise mechanism by which an assignee of a

limited liability company interest may become a member. 49

As § 7.2 of the LLC Agreement provides in this case, “[n]o

Person shall be admitted as a Member of [Omniglow] ...

without the written consent of the Member[s]....” 50 As

noted, Leemon does not contest the fact that Achaian, like

Leemon, was admitted as a Member of Omniglow when

Parent assigned and sold all of Omniglow's Interests to

Leemon, Holland, and Achaian in 2006. 51 Instead, Leemon

focuses on the specific 30% Interest that was transferred

to Achaian under the Purchase *810 Agreement and

argues that “Achaian has not been admitted as a substituted

[M]ember with respect to the 30% Interest, as provided by

Section 7.2 of the LLC Agreement.” 52

But nothing in the text of § 7.2 suggests that once a Person

has been admitted as a Member, she must be admitted again

in order to acquire additional voting rights when she acquires

additional Interests in Omniglow. The reason for § 7.2's check

on § 7.1's free grant of transferability is most naturally read

as a manifestation of the unremarkable idea that one gets

to choose one's own business partners (or in the case of

an LLC, one's co-members). 53 Leemon's argument relies

on a very thinly sliced version of that, which is that once

one chooses his initial co-members, one continues to hold

a veto over how much additional voting power they may

acquire. That is a strained extension of the traditional idea

underlying partnerships and limited liability companies, and

is not supported rationally by the LLC Agreement's text or by

the context.

As it was, Leemon had already agreed in 2006 to become

partners (or more properly, co-members) with Achaian

and Holland in Omniglow's business. Thus, Leemon, as a

50% Interest holder, knew that Achaian and Holland could

have voted together at any time to stymie Leemon from

acting unilaterally. Leemon responds, however, that the LLC

Agreement makes sure that if Holland and Achaian agreed

to a transfer, in whatever direction, that vested all the voting

power in one of them, the transferee had to be admitted as a

Member for a second time—the first time being in 2006 when

Parent sold its Interests to both Achaian, Holland and Leemon

and approved their Membership.

The problem for Leemon is that nothing in the LLC

Agreement supports Leemon's reading of it that would require

an already admitted Member, like Achaian, to be become

once, twice (or even three times) a Member each and every

time that Member acquires an additional block of Interests. 54

By its plain terms, § 7.2 is directed at, and applies only to, a

“Person ” who is not yet “admitted as a Member.” 55 Because

Achaian *811 was already admitted as a Member at the

time of Holland's 2010 transfer, § 7.2 has no application. 56

Nor has Leemon cited anything in the LLC Act, the Uniform

LLC Act, or learned commentaries and treatises on alternative

entities suggesting that such a serial admission scheme is

standard practice. To the contrary, the Delaware LLC Act

seems to contemplate a singular admission governed by the

specific terms of the LLC agreement, providing that “[a]n

assignee of a limited liability company interest may become

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a member ... as provided in the limited liability company

agreement.”

57 To that point, Leemon's argument conflicts

with the LLC Agreement's definition of a Member's Interest

in Omniglow. That is, if § 7.2 requires, as Leemon argues,

that Achaian be admitted as two Members, one with respect

to each block of Interests it owns, the LLC Agreement's

definition of Interest—“the entire ownership interest of the

Member in [Omniglow]”—would make scant sense because

in that case, a Member's Interest would not be its entire

ownership interest in Omniglow, but, as in the case of

Achaian, only a portion of it, the other portion also being

owned by Achaian, albeit a “different” Achaian for purposes

of Membership in Omniglow.

On the basis of the foregoing, I conclude that under the

terms of the LLC Agreement, Holland was permitted, and

did, transfer its entire 30% Interest to Achaian, including

that Interest's voting rights. Thus, Achaian is entitled to the

declaratory *812 judgment it seeks, namely that Omniglow

currently has two Members 58—Leemon and Achaian—each

holding an identical 50% Membership Interest. The sole

remaining issue is therefore whether Achaian has pled facts

sufficient to support its application for judicial dissolution

under 6 Del. C. § 18–802.

 This court, when considering an application for judicial

dissolution of an LLC with two coequal managers, has

on several prior occasions analogized the situation to an

application made under 8 Del. C. § 273 for a judicial

dissolution of a joint venture corporation. 59 Thus, in order

for a plaintiff seeking judicial dissolution to survive a motion

to dismiss, the plaintiff must plead the recognized “three

prerequisites for a judicial order of dissolution [under § 273]:

1) the corporation must have two 50% stockholders, 2) those

stockholders must be engaged in a joint venture, and 3) they

must be unable to agree upon whether to discontinue the

business or how to dispose of its assets.” 60 Achaian has met

its pleading burden.

First, as Achaian pleads, I have now found that Omniglow

has two coequal 50% Interest owners, each with an equivalent

corresponding 50% right to manage Omniglow. 61

Second, Achaian adequately pleads that the two Members

are engaged in a joint venture, Omniglow. Although Leemon

argues in its briefs that Achaian purchased Holland's 30%

Interest in an effort to purchase a “phony deadlock,” 62

such extra-pleading factual contentions about Achaian's

motivations, even if relevant, are inappropriate considerations

at this procedural stage. 63

Lastly, Achaian alleges that it and Leemon have been unable

to agree on the management of Omniglow, and the LLC

Agreement does not provide a “reasonable exit mechanism”

or other provision to break the deadlock. 64 In fact, Achaian

alleges that since wresting control of Omniglow in 2008,

over the objection of both Achaian and Holland, Leemon has

managed *813 Omniglow to the exclusion of both Achaian

and Holland, who together at all relevant times represented

50% of Omniglow's Membership Interests. 65

Thus, Achaian has pled facts sufficient to give rise to the

inference that the management of Omniglow is deadlocked,

and I therefore deny Leemon's motion to dismiss.

IV. Conclusion

For the foregoing reasons, I grant Achaian's request

for declaratory judgment. Leemon's motion to dismiss is

DENIED. IT IS SO ORDERED.

All Citations

25 A.3d 800

Footnotes

1 The Parent was Omniglow Corporation. Compl. ¶ 5.

2 In carrying out the sale, Parent waived the provision in Omniglow's limited liability company agreement, to be

discussed below, that bars the admission of a new Member absent the written consent of the “Member,” which

at the time was just Parent. Compl. Ex. A (“Distribution and Assignment of Membership Interest” (January

26, 2006)) at 1.

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3 Id. Although some of the actions alleged to have been taken were taken by individuals, for the sake of

simplicity I group the individuals with their respective controlled entities.

4 Compl. Ex. A (“Limited Liability Company Agreement of ROG, LLC” (October 26, 2005)) § 4.1 (“LLC

Agreement”). Omniglow's original name was ROG, LLC. Compl. ¶ 8.

5 Compl. Ex. B (“Membership Interest Purchase Agreement and Mutual Release” (January 25, 2010))

(“Purchase Agreement”).

6 6 Del. C. § 18–802.

7 Kuhn Const., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396–97 (Del.2010) (“We will read a contract

as a whole and we will give each provision and term effect....”).

8 Tr. at 3 (Counsel for Leemon); id. at 18 (Counsel for Achaian).

9 Compl. ¶ 6.

10 See Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 290 (Del.1999) (quoting JAMES D. COX ET AL.,

CORPORATIONS § 1.12 at 1.37–.38 (1999)) (“The Act can be characterized as a ‘flexible statute’ because it

generally permits members to engage in private ordering [in the LLC agreement] with substantial freedom of

contract to govern their relationship, provided they do not contravene any mandatory provisions of the Act.”);

see also 2 R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, DELAWARE LAW OF CORPORATIONS

& BUSINESS ORGANIZATIONS § 20.3 at 20–3 (2009) (“BALOTTI & FINKELSTEIN”) (“The Act's basic

approach ... [is] to furnish answers only in situations in which the members have not made provision in their

limited liability company agreement.”); ROBERT L. SYMONDS, JR. & MATTHEW J. O'TOOLE, SYMONDS

& O'TOOLE ON DELAWARE LIMITED LIABILITY COMPANIES § 1.03[A][2] at 1–15 (2007) (“SYMONDS

& O'TOOLE”) (“As a safeguard to its essentially contract-based approach, the [Act] sets forth a number of

‘default rules' ... [that] cover a variety of potential omissions in the limited liability company agreement.”).

Because “the LLC Act was based upon the Delaware Revised Uniform Limited Partnership Act ... [and]

[o]verarching principles reflected in both of the statutes are, in many material respects, identical,” “it is logical

to conclude that, except where an analogy fails due to a fundamental difference between a Delaware limited

partnership and an LLC ..., authorities decided under the [Limited Partnership] Act should be relevant in

interpreting the LLC Act and in dealing with issues relating to LLCs.” MARTIN I. LUBAROFF & PAUL M.

ALTMAN, DELAWARE LIMITED PARTNERSHIPS § 13.1.2 at 13–2 (2010) ( “LUBAROFF & ALTMAN”); 2

BALOTTI & FINKELSTEIN §§ 20.1, 20.3 at 20–2, 20–3; see also Elf, 727 A.2d at 290–91 (observing that

because “[t]he Delaware [LLC] Act has been modeled on the popular Delaware LP Act [,] ... its architecture

and much of its wording is almost identical to that of the Delaware LP Act,” and that as a result “observation[s]

relating to limited partnerships appl[y] as well to limited liability companies....”). Like the LLC Act, the LP Act

is an enabling statute whose default rules are designed to fill gaps in the limited partnership agreement.

LUBAROFF & ALTMAN § 1.2 at 1–3 (“The [Limited Partnership] Act's basic approach is to permit partners

to have the broadest possible discretion in drafting their partnership agreements and to furnish answers only

in situations where the partners have not expressly made provision in their partnership agreement.”) (citing

various provisions of the Act).

11 See SYMONDS & O'TOOLE § 1.03[A][2] at 1–15 (“[e]ach default rule [in the Act] is a statutory provision

that governs only in the absence of an agreement among the members covering the particular point. If the

limited liability company agreement provides otherwise regarding the relevant subject matter, the statutory

provision does not control.”) (emphasis added); 2 BALOTTI & FINKELSTEIN § 20.3 at 20–3 (“Many of the

Act's most fundamental provisions are expressly made subject to modification in a limited liability company

agreement.”) (citing various provisions of the Act); LUBAROFF & ALTMAN § 13.1.2 at 13–2 (“[The Act]

expressly recognizes that provisions of [the Act] are subject to modification in ... a limited liability company

agreement. In doing so, [the Act] use[s] the ... formulation of ‘unless otherwise provided in a limited liability

company agreement’....”).

12 6 Del. C. § 18–702(a), (b)(2) (emphasis added).

13 6 Del. C. § 18–704(a) provides that an assignee of a limited liability company interest “may become a

member ... [a]s provided in the limited liability company agreement; or [u]nless otherwise provided in the

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limited liability company agreement, upon the affirmative vote or written consent of all of the members of the

limited liability company.” (emphasis added).

14 6 Del. C. § 18–301(b)(2). There are likely two motivations for the statutory default rules in §§ 18–702, 18–

704(a), and 18–301 concerning the assignment of a limited liability company interest and the assignee's

possible (and subsequent) admission as a member of the LLC. The first is tax-related. See generally Daniel

S. Kleinberger, Two Decades of “Alternative Entities”: From Tax Rationalization Through Alphabet Soup To

Contract As Deity, 14 FORDHAM J. CORP. & FIN. L. 445, 447–54 (2009) (observing that the emergence

of LLCs and statutory rules, sometimes mandatory, that prevented the free alienability of LLC interests was

part of states' early attempts “to create an entity that, as a matter of tax law, is classified as a partnership

with each owner treated as a partner, but whose owners are shielded by state law from automatic personal

liability,” and that such default statutory rules have now been rendered largely unnecessary after the United

States Treasury Department adopted the “check-the-box” federal income tax classification regime in 1997,

under which an unincorporated entity, like a limited liability company, “is taxed as a partnership if it has two or

more owners, or is disregarded for income tax purposes if it has one owner—unless it elects to be taxed as a

corporation by ‘checking the box.’ ”); see also Elf, 727 A.2d at 286 (“The wording and architecture of the Act

is ... designed to achieve what is seemingly a simple concept—to permit persons or entities (‘members') to join

together in an environment of private ordering to form and operate the enterprise under an LLC agreement

with tax benefits akin to a partnership and limited liability akin to the corporate form.”); LARRY E. RIBSTEIN

AND ROBERT R. KEATINGE, RIBSTEIN AND KEATINGE ON LIMITED LIABILITY COMPANIES § 7:4

(2011) (“RIBSTEIN & KEATINGE”) (observing that “[m]andatory provisions [in LLC statutes] are no longer

necessary to ensure that the firm will lack the corporate tax characteristic of free transferability in light of the

recent elimination of these classification features in the ‘check-the-box’ tax classification rule,” but noting that

“while more LLCs may come to adopt corporate-type transferability, it seems unlikely that LLC statutes will

eliminate restrictions on transfer of management rights as a default rule given the closely held nature of most

LLCs.”) (emphasis added). Omniglow's LLC Agreement itself recognizes the desirability of partnership tax

treatment. E.g., LLC Agreement § 7.1 (“If at any time [a transfer of an Interest] shall cause the Company to

have more than one Member, then this Agreement shall be appropriately amended to reflect the fact that

[Omniglow] will then be treated as a partnership for purposes of the [Internal Revenue] Code [of 1986].”). The

second reason for the default rules in the Act regarding the transferability of interests may rest on the notion

that one generally is entitled to select his own business associates in a closely held enterprise, like an LLC.

E.g., 68 C.J.S. Partnership § 1 (2011) (“A ‘partnership’ has been defined as a contractual relationship or a

voluntary association of two or more competent persons to place their money, effects, labor, and skill or some

or all of them in lawful commerce or business ....”) (emphasis added); 46 AM.JUR.2D § 1 (2011) (“[A] joint

venture is an association of persons with the intent ... to engage in and carry out a single business venture

for joint profit.”); cf. Milford Power Co., LLC v. PDC Milford Power, LLC, 866 A.2d 738, 760 (Del.Ch.2004)

(observing that the LLC Act's default rules that draw a distinction between an LLC member's economic rights

which are freely transferable and those aspects of membership, such as managerial rights, which are not

freely transferable, “recognize[ ] that it is far more tolerable to have to suffer a new passive co-investor one

did not choose than to endure a new co-manager without consent.”); Elf, 727 A.2d at 286.

15 Elf, 727 A.2d at 291; 2 BALOTTI & FINKELSTEIN § 20.3 at 20–3; SYMONDS & O'TOOLE § 1.03[A][2] at 1–

15; LUBAROFF & ALTMAN §§ 1.2 at 1–3, 13.12 at 13–2; see also Arvida/JMB Partners, L.P. v. Vanderbilt

Income and Growth Assocs., L.L.C., 1997 WL 294440, at *2 (Del.Ch. May 23, 1997) (noting that where

the limited partnership agreement speaks to the issue of whether an assignment of an interest confers a

voting interest in a limited partnership, the limited partnership agreement's unambiguous provisions control);

Monterey Investments, Inc. v. HealthCare Properties, L.P., 1997 WL 367038, at *1 (Del.Ch. June 26, 1997)

(“I conclude that when the limited partnership agreement clearly distinguishes between, and delineates the

requirements and procedures for, limited partner status as opposed to unit holder status, ... the status of the

purchaser will be determined by the limited partnership agreement.”).

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16 Rhone–Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del.1992) (citing Aetna

Cas. and Sur. Co. v. Kenner, 570 A.2d 1172, 1174 (Del.1990)) (“The proper construction of any contract ... is

purely a question of law.”); Allied Capital Corp. v. GC–Sun Holdings, L.P., 910 A.2d 1020, 1030 (Del.Ch.2006)

(observing that because issues of contractual interpretation are questions of law, “a motion to dismiss is a

proper framework for determining the meaning of contract language.”).

17 LLC Agreement art. I (emphasis added).

18 The LLC Agreement defines “Person” as meaning “any natural person, partnership, joint venture, association,

corporation, limited liability company, trust or other entity.” Id.

19 “The titles of the Articles and the headings of the Sections of this [LLC] Agreement are for convenience of

reference only, and are not to be considered in constructing the terms and provisions of this [LLC] Agreement.”

LLC Agreement § 10.5.

20 LLC Agreement § 7.1 (italicized emphasis added).

21 Id. § 7.2 (italicized emphasis added).

22 Tr. at 4 (Counsel for Leemon); Def. Op. Br. at 4; Tr. at 25 (Counsel for Achaian).

23 LLC Agreement § 7.1.

24 Achaian, Inc. v. Leemon Family, LLC, C.A. No. 6261–CS, at 11, 13, 14, 21 (Del. Ch. Mar. 28, 2011)

(TRANSCRIPT) (Counsel for Leemon, Achaian); see also Compl. ¶ 8 (“The LLC Agreement was not, and

has not been, amended.”).

25 Achaian, Inc. v. Leemon Family, LLC, C.A. No. 6261–CS, at 11, 13, 14, 21 (Del. Ch. Mar. 28, 2011)

(TRANSCRIPT) (Counsel for Leemon, Achaian); see also Compl. ¶ 8.

26 Def. Op. Br. at 9 (quoting 6 Del. C. § 18–702(b); citing Lusk v. Elliott, 1999 WL 644739, at *2 (Del.Ch. Aug.

13, 1999)).

27 Id. at 10.

28 Id. at 10–11.

29 Pl. Ans. Br. at 21 n. 9.

30 Id. at 20 (quoting LLC Agreement art. I) (emphasis added).

31 Id. at 18 (quoting LLC Agreement § 7.1).

32 LLC Agreement § 7.2.

33 Pl. Ans. Br. at 19–20.

34 Kuhn, 990 A.2d at 396–97.

35 LLC Agreement art. I.

36 Id.

37 In fact, that reading is buttressed by a default provision of the Act, 6 Del. C. § 18–702(a), which provides that

“[a] limited liability company interest is assignable in whole or in part except as provided in a limited liability

company agreement,” but as noted, goes on to provide that unless the limited liability company agreement

provides otherwise, such an assignment shall not include “the right to participate in the management of the

[LLC's] business....” 6 Del. C. § 18–702(a) (emphasis added).

38 NAMA Holdings, LLC v. World Market Ctr. Venture, LLC, 948 A.2d 411, 419 (Del.Ch.2007) (“Contractual

interpretation operates under the assumption that the parties never include superfluous verbiage in their

agreement, and that each word should be given meaning and effect by the court.”) (citing Majkowski v. Am.

Imaging Mgmt. Serv., 913 A.2d 572, 588 (Del.Ch.2006)).

39 Id.

40 The only time the word “entire” or any form of it is found in the Act is in the section dealing with corrections to

an LLC certificate of formation. 6 Del. C. § 18–211 (“The corrected certificate shall be specifically designated

as such in its heading, shall specify the inaccuracy or defect to be corrected and shall set forth the entire

certificate in corrected form.”) (emphasis added).

41 See, e.g., Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del.2006) (“Delaware courts look

to dictionaries for assistance in determining the plain meaning of terms which are not defined in a contract.”)

(citations omitted).

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42 THE AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 597 (4th ed. 2000); see

also WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE 758

(G. & C. Merriam Company 1976) (defining entire to mean “with no element or part excepted: whole,

complete....”); BLACK'S LAW DICTIONARY 477 (5th ed. 1979) (defining entire to mean “[w]hole; without

division, separation, or diminution; unmingled; complete in all its parts....”).

43 LLC Agreement art. I (emphasis added).

44 Pl. Ans. Br. at 20, 21, 24, 28.

45 Kuhn, 990 A.2d at 396–97.

46 LLC Agreement § 7.1 (emphasis added).

47 Id. art. I.

48 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del.2010) ( “We will not read a contract to render a

provision or term ‘meaningless or illusory.’ ”) (citations omitted).

49 6 Del. C. § 18–704(a)(1).

50 LLC Agreement § 7.2 (emphasis added).

51 Achaian, Inc. v. Leemon Family, LLC, C.A. No. 6261–CS, at 21 (Del. Ch. Mar. 28, 2011) (TRANSCRIPT)

(Counsel for Leemon).

52 Def. Op. Br. at 11.

53 68 C.J.S. Partnership § 1 (2011); 46 AM.JUR.2D § 1 (2011); cf. Milford Power Co., 866 A.2d at 760; Elf,

727 A.2d at 286.

54 See COMMODORES, Three Times a Lady, on NATURAL HIGH (Motown Records 1978) (“You're once,

twice, three times a lady/And I love you....”).

55 LLC Agreement § 7.2 (emphasis added). This is in stark contrast to the provisions of a materially different LLC

agreement considered in a case cited by Leemon from outside this jurisdiction, Ault v. Brady, 37 Fed.Appx.

222 (8th Cir.2002) (applying Arkansas law). Importantly, unlike § 7.2 that expressly cabins its reach to

“Persons” who are not “admitted as a Member,” the applicable provision in the Ault case provided a blanket

restriction on the transfer of a membership interest's attendant voting rights:

No member shall sell, assign, transfer, pledge or encumber any interest in the Company without the prior

written consent of the Manager and the other Members. Any person acquiring rights with respect to any

interest in the Company ... shall not be deemed a substituted Member and shall be restricted to the right to

receive any distributions made with respect to such interest. Ault, 37 Fed.Appx. at 225 (emphasis added).

In holding that an already existing member received only the economic interest associated with the transferred

interest, the Eighth Circuit observed that the above-quoted provision, unlike § 7.2 of the LLC Agreement

at issue in this case, “does not expressly limit transfers covered by the provision to only non-member

transfer[ees]. Instead, [it] states that no transfers shall be made without the consent of the members

regardless of to whom the transfer is made, [and that the clause] applies to ‘any person’ acquiring rights,

which clearly would include members and non-members alike.” Id. (emphasis in original). Thus, Ault is of

no relevance to this case other than for the proposition, implicitly recognized by the Eighth Circuit, that the

precise provisions of a given limited liability company agreement control the question of what interests a

member can transfer.

56 That § 7.2's restriction on transferability applies only to a Person who is not yet admitted as a Member

does not, contrary to Leemon's argument, render § 7.2 superfluous. For instance, § 7.2's written consent

requirement would clearly apply to the counterfactual situation in which Holland, instead of assigning its 30%

Interest to Achaian (an existing Member), assigned that Interest to a non-Member. In the case where Holland

assigned its Interest to the non-Member, § 7.2 would require both Leemon and Achaian's written consent

as Members.

57 6 Del. C. § 18–704(a)(1) (emphasis added); see also 6 Del. C. § 18–301(b)(2) (“After the formation of a

limited liability company, a person is admitted as a member of the limited liability company ... [i]n the case

of an assignee of a limited liability company interest, as provided in § 18–704(a) of this title and at the time

provided in and upon compliance with the limited liability company agreement ....”) (emphasis added). The

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Uniform LLC Act and the Revised Uniform LLC Act are similarly focused on the specific terms of the LLC

agreement. See RIBSTEIN & KEATINGE § 7:4 (citing REVISED UNIFORM LIMITED LIABILITY COMPANY

ACT § 401 (2006)) (observing, under the Revised Uniform LLC Act, that “[a]fter formation of the LLC a person

becomes a member as provided in the operating agreement. ...”) (emphasis added); see also UNIFORM

LIMITED LIABILITY COMPANY ACT § 503 (1995) (“A transferee of a distributional interest may become a

member of a limited liability company if and to the extent that the transferor gives the transferee the right in

accordance with authority described in the operating agreement or all other members consent.”) (emphasis

added). Thus, Leemon's citation in its briefs to a case interpreting a materially different provision in a different

LLC agreement is unconvincing. See Rowe v. Voyager Hospicecare Holdings LLC, 2010 WL 2502878, at

*5 (Kan.Ct.App. June 18, 2010) (applying Delaware law) (holding, on the basis of a provision in an LLC

agreement that provided that “[a]n assignee of any Units or other interests in the Company of a Member ...

shall become a substituted Member ... if and only if the assignor gives the assignee such right and the Board

has granted its prior written consent to such assignment ...,” that absent the Board's consent, the assignee

did not become a Member, but instead only received the Units' corresponding economic interest) (emphasis

added).

58 Holland, upon the execution of the Purchase Agreement, ceased to be a Member of Omniglow. See 6 Del.

C. § 18–702(b)(3) (“Unless otherwise provided in a limited liability company agreement: [a] member ceases

to be a member and to have the power to exercise any rights or powers of a member upon assignment of all

of the member's limited liability company interest.”) (emphasis added).

59 See, e.g., Vila v. BVWebTies, 2010 WL 3866098, at *7 (Del.Ch. Oct.1, 2010); Haley v. Talcott, 864 A.2d

86, 94 (Del.Ch.2004) (analogizing to 8 Del. C. § 273 in the court's consideration of an application for judicial

dissolution of an LLC with two coequal members); see also In re Silver Leaf, L.L.C., 2005 WL 2045641, at *10

n. 82 (Del.Ch. Aug. 18, 2005) (citing Haley for the proposition that where an LLC has two deadlocked owners,

the court should analogize to 8 Del. C. § 273); Homer C. Gutchess 1998 Irrevocable Trust v. Gutchess Cos.,

LLC, 2010 WL 718628, at *1 (Del.Ch. Feb. 22, 2010) (same).

60 Haley, 864 A.2d at 94.

61 Compl. ¶¶ 10–11.

62 Def. Op. Br. at 11; see also id. at 1, 7.

63 See Malpiede v. Townson, 780 A.2d 1075, 1082 (Del.2001) ( “The complaint ordinarily defines the universe of

facts from which the trial court may draw in ruling on a motion to dismiss.... [T]he Court of Chancery may not

resolve material factual disputes; instead, the court is required to assume as true the well-pleaded allegations

in the complaint.”).

64 E.g., Haley, 864 A.2d at 88; Silver Leaf, 2005 WL 2045641, at *11 (“Silver Leaf is no longer able to carry

on its business in a reasonably practicable manner. The vote of the members is deadlocked and the [LLC]

Agreement provides no means around the deadlock....”).

65 Compl. ¶¶ 13, 24–26.

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APPENDIX A-2 

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Bell Atlantic Director Services, Inc. v. Delaware Law Center, Inc., Not Reported in A.2d...

2000 WL 33654061

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2000 WL 33654061

Only the Westlaw citation is currently available.

UNPUBLISHED OPINION. CHECK

COURT RULES BEFORE CITING.

Court of Common Pleas of Delaware.

BELL ATLANTIC DIRECTORY SERVICES,

INC., A Delaware Corporation, Plaintiff,

v.

DELAWARE LAW CENTER, INC.,

a Delaware Corporation, Defendant.

No. CRIM.A.1997-07-083.

|

Submitted Nov. 30, 2000.

|

Decided Dec. 14, 2000.

Attorneys and Law Firms

Edward T. Ciconte, Esquire, Ciconte, Roseman &

Wasserman, Wilmington, DE, for plaintiff.

Arlen Mekler, Esquire, Wilmington, DE, for defendant.

DECISION AFTER TRIAL

ALEX J. SMALLS, Chief Judge.

*1 Bell Atlantic Directory Services, Inc. (hereinafter

“Bell”) brings this action against Delaware Law Center, Inc.

(hereinafter “Law Center”) to collect a debt for services

rendered totaling $38,270.09 plus cost and interest. On

November 30, 2000 trial was held and the Court reserved

decision. This is the Court's decision after trial.

At trial, the parties stipulated that the amount of damages due

for unpaid bills was $38,270.09. The sole issue at trial was

liability.

The facts which led to this dispute indicate that Arlen Mekler,

the attorney representing the Delaware Law Center, Inc.

(hereinafter “Law Center”), entered into a contract with

Bell Atlantic Directory Services, Inc. (hereinafter “Bell”)

on or about August 2, 1995 (hereinafter “the Contract”).

The contract provided for advertisement of Mekler's legal

practice in their yellow page directory for 1996. Mekler had

in previous years placed advertisements for his legal practice

in Bell's directory.

At the time of the contract, Mekler was under investigation by

the Delaware Board of Professional Responsibility. Mekler

testified that while this investigation was ongoing, at no time

did he anticipate he would be suspended from the practice

of law. However, on November 1995, the Delaware Supreme

Court suspended Mekler for a period of one year commencing

January 1, 1996. Mekler testified he spoke with the Bell by

contacting them at their billing phone number located in the

directory numerous times in December 1995 and the first

few months of 1996. He was attempting to have his business

phone forwarded to another attorney. He testified at no time

did Bell mention his unpaid advertising bill.

As a result of Mekler's inability to practice law in the State

of Delaware for 1996, he defends this action against the Law

Center on the grounds of impossibility of performance and

frustration of purpose. To avail itself of this defense, the

Law Center must carry the burden of proving by affirmative

evidence that its performance under the contract is rendered

impossible by an act of God, law or the other party. 17

Am.Jur. 2nd, “Contracts” § 673. To be released, the party must

demonstrate that the obligation under the contract cannot be

performed by any means. Martin v. Star Pub. Co ., Del.Supr.,

126 A.2d 238 (1956).

Bell responds by stating that the suspension of Mekler was

both conceivable at the time of the contract and a result

of his own voluntary actions. Further, the Law Center is a

corporation that has in the past published legal materials and

conducted the Delaware Bar Review course. Mekler at the

time of the contract was one of a number of attorneys involved

in the corporation. Mekler's testimony confirmed that in 1995

the Law Center was in the process of developing materials

to publish books on legal subject matters. He contributed to

these publications, but was not the sole author. Therefore,

the facts appear to indicate that the Law Center was able to

perform some services in 1996, even if not legal services.

*2 Rebecca Lepone, assistant manager for Bell, testified

they first realized there was a problem with Mekler's account

April 1996. She stated they were informed by Mekler

that he had been suspended from the practice of law in

Delaware and would be unable to make payments on the

advertisement. However, the deadline for determining which

advertisement would be placed in the 1996 directory takes

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2000 WL 33654061

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place approximately in October 1995, because the book is

printed and distributed in November and December.

Bell argues that Mekler and the Law Center are not the

same party and the suspension of Mekler does not relieve

the Law Center of its obligation. Bell attempts to hold Law

Center liable for the debt, not Mekler as an individual. In

response to Mekler's defense of impossibility and frustration

of purpose, Bell argues the business of the Law Center is

not rendered impossible, for it continues to function despite

Mekler's suspension.

In response, Law Center agrees with Bell's position that it and

Mekler are separate parties, and directs the Court's attention

to the contract itself. The contract indicate an agreement

between Bell and Arlen Mekler, Esquire, for advertisement

services in the 1996 edition of the Bell directory (see

Plaintiff's Exhibit # 4). The contract makes no mention of the

Law Center, nor does the ad refer to the Law Center. The

agreement is signed by Mekler, in his individual capacity.

Mekler signed the contract, and there was no indication

that he signed as an agent or principal of the Law Center.

The standard in this jurisdiction is that courts will give the

language of a contract its ordinary meaning. Phillips Home

Builders v. The Travelers Ins. Co., Del.Supr., 700 A.2d 127,

129 (1997). Since the Law Center is not a party to nor

referred to in the contract between Bell and Mekler, and

does not, based upon the evidence, receive any services from

the advertisement, there is no basis to hold it liable for

the charges. Additionally, there was no evidence introduced

that Mekler participated in the formation of the contract on

behalf of the Law Center. This conclusion is supported by

the language of advertisement (see Plaintiff's Exhibit # 3).

The advertisement refers to Mekler's various specialties in the

practice of law. The advertisement does not mention the Law

Center or its businesses in any aspect. Mekler's involvement

in the Law Center does not make the Law Center a party to the

contract such that it would impose liability without specific

reference.

Accordingly, I find and enter judgment for the Defendant

Delaware Law Center, Inc.

SO ORDERED this 14th day of December, 2000.

All Citations

Not Reported in A.2d, 2000 WL 33654061

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APPENDIX A-3

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Greek Catholic Congregation of Borough of Olyphant v. Plummer, 338 Pa. 373 (1940)

12 A.2d 435, 127 A.L.R. 1008

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

338 Pa. 373

Supreme Court of Pennsylvania.

GREEK CATHOLIC CONGREGATION

OF BOROUGH OF OLYPHANT

v.

PLUMMER et al.

March 25, 1940.

|

As Amended on Reargument April 15, 1940.

Synopsis

Appeal No. 16, January term, 1940, from judgment of Court

of Common Pleas, Lackawanna County, No. 794, May term,

1938; Lewis, Judge.

Action in trespass by the Greek Catholic Congregation of the

Borough of Olyphant against Emma A. Plummer, executrix of

Edward E. Cannon, deceased, and others, to recover damages

for mining and removing coal from plaintiff's land. From a

judgment for defendants, plaintiff appeals.

Affirmed.

*374 **436 Argued before SCHAFFER, C. J.,

and MAXEY, DREW, LINN, STERN, BARNES, and

PATTERSON, JJ.

Attorneys and Law Firms

*375 O'Malley, Hill, Harris & Harris, Walter L. Hill, all of

Scranton, for appellant.

Valentine L. Fine and William J. Fitzgerald, both of Scranton

(Kelly, Fitzgerald & Kelly, of Scranton, of counsel), for

appellees.

Opinion

MAXEY, Justice.

Plaintiff brought an action in trespass against defendants for

the recovery of damages for the mining and removal of coal

from plaintiff's land.

The statement of claim avers that defendants mined and dug

from plaintiff's land, without the latter's consent, 25,472 tons

of coal of the value of $12,736, knowing the same to be upon

plaintiff's land, and removed and converted the coal to their

own use, and did the mining through their agent, the Wilson

Coal Company, to which defendants had made a lease dated

May 1, 1931, and, in addition to making the lease, defendants

aided and abetted their agent, and participated in the mining

of the coal, and required their agent to account therefor to

them and to pay over proceeds thereof to them, and that they

received and retained such proceeds. Plaintiff claimed treble

damages of $38,208, with damages for detention thereof.

The affidavit of defense raised questions of law in that the

mining was not done by defendants but by their lessee, under

the terms of the contract of May 1, 1931.

The court below held that the agreement ‘constituted a sale

of the defendants' interest in the coal therein described’ and

that plaintiff's statement of claim did not set froth a cause

of action, and entered judgment in favor of defendants. This

appeal followed.

The lease between Emma A. Plummer, executrix, heir and

devisee under the will of Edward E. Cannon, deceased, et al.,

and the Wilson Coal Company, set forth that ‘the Lessors have

demised, leased and to mine let unto the Lessee, all their right,

title and interest in and to the remaining coal [in certain veins]

lying and being *376 in and under that part of the Samuel

Callender Tract.’ The tract containing the coal demised was

described as ‘a division of the Edward London Warrant and

situate in the Borough of Blakely, County of Lackawanna’. Its

boundaries are stated but its acreage is not. As to the tenure,

it was provided that the lessee would ‘remove all the coal

therefrom which can be mined, stripped and removed by a

diligent and energetic prosecution of the business'. The lease

further provides: ‘It is understood and agreed that this lease is

given and accepted subject to any failure of title to any part of

said coal or otherwise, and that said Lessee, its successors and

assigns, assume sole and entire responsibility in the mining of

the coal hereunder, without any liability in the lessors under

any circumstances whatsoever.’ The lease then provides for

the payment of rent and royalty based upon the tonnage of

coal taken out.

**437 It is the contention of the defendants that the

relationship between them and the Wilson Coal Company is

that of grantor-grantee and that the lease referred to above was

in legal effect a quit-claim deed to such coal. The defendants

gave no warranty as to their title to the coal described in the

lease, but, on the other hand, the lease expressly stipulated,

as above noted, that ‘it is given and accepted subject to

any failure of title.’ It is clear that this agreement of lease

constituted a sale of the coal in the veins leased until ‘all the

coal’ was removed: Hosack v. Crill, 204 Pa. 97, 53 A. 640.

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Greek Catholic Congregation of Borough of Olyphant v. Plummer, 338 Pa. 373 (1940)

12 A.2d 435, 127 A.L.R. 1008

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The coal of whose mining plaintiffs complain was the coal

whose ownership was decided by this court in Greek Catholic

Congregation of Olyphant v. Wilson Coal Co., 329 Pa. 341,

198 A. 841. That there was a substantial dispute as to the

ownership of this coal is indicated by the litigation which

gave rise to that case. The question of ownership hinged on

an interpretation of a deed from Samuel Callender to Newell

Callender, dated January 16, 1850. When the lease of May

1, 1931, was made, both parties to it understood that the

question of Lessors' *377 title was in dispute. If Samuel

Callender, the grantor in the 1850 deed to his son, Newell

Callender, died seised of a reversionary interest in the coal

in question, the Wilson Coal Company obtained a good title

to the coal when it secured its lease from those who claimed

under Samuel Callender, i. e. the defendants below. It was not

until our decision on March 21, 1938 that it became judicially

established that Samuel Callender did not die seised of a

reversionary interest in the coal in question and that therefore

the Wilson Coal Company had no title to the coal it mined

under color of the 1931 lease's authority.

In view of the substantial dispute as to the ownership of the

coal in controversy, there is no question as to the good faith of

the Lessor in this matter. The coal which was later adjudged to

belong to the plaintiffs in this action was only a portion of the

acreage of coal subject to the 1931 lease. Since this lease was

in effect, if not in form, a quit-claim deed, the question before

us comes down to this: Is the grantor in a quit-claim deed

liable for trespasses committed by his grantee on the property

subject to the deed after it is established that the grantor held

no title to the property quit-claimed?

 Both on reason and authority this question must be answered

in the negative. Quit-claim deeds, long known to the law,

are used when a party wishes to sell or otherwise convey an

interest he may think he has in land but does not wish to

warrant his title. It does not purport to convey anything more

than the interest of the grantor at the time of its execution. 16

Am.Jur. p. 560, sec. 219: ‘The distinguishing characteristic of

a quitclaim deed is that it is a conveyance of the interest or title

of the grantor in and to the property described, rather than of

the property itself.’ If persons who in good faith believe that

they have title to real estate or possibility of title to real estate

cannot convey whatever right or title they have in such real

estate without being answerable in trespass should it later be

decided that they had no *378 title and the person to whom

the conveyance was made exercised an owner's right in the

property, the use of quit-claim deeds will be greatly curtailed.

Their long continued employment indicates that they serve

a useful purpose and, except for compelling reasons, courts

should not impose on the grantors in quit-claim deeds such

obligations as would check the employment of such deeds.

There is nothing in a quit-claim deed which should incite the

grantor therein to commit a trespass by exercising dominion

over property he did not own. If there is any doubt of his

ownership, he proceeds at his own peril and not at the peril of

the party who quit-claimed to him. He is supposed to know

the law, and the law is that ‘a quitclaim deed is one which

purports to convey, and is understood to convey, nothing more

than the interest or estate of which the grantor is seised or

possessed, if any, at the time’. 18 C.J. p. 156, sec. 32.

In the few instances where the question has arisen, courts have

taken the view that ‘one who merely sells property to which

he has no title is not liable for trespasses committed by his

vendee’. 63 C.J. p. 934, sec. 77.

 It is settled law in this Commonwealth that the Lessor of

a coal mine is not responsible in trespass for the negligent

mining by his lessee which results in damage to the surface.

In Hill v. Pardee, 143 Pa. 98, 22 A. 815, this court held that

in such a case the disturbance of a right of surface support

is a tort for which the party which did the mining and not

the Lessor was responsible. In Offerman v. Starr, 2 Pa. 394,

44 Am.Dec. 211, this court said **438 in an opinion by

Chief Justice Gibson: ‘Respondeat superior is inapplicable

to an owner of land, for acts of negligence in a business

not conducted by him and for his account. What had these

defendants to do with the direction of the business or the coal

when it was mined? Lewis covenanted to sink the slope, erect

the engine, to take out a certain number of tons each year,

according to the most approved method of mining, and carry

it to the landing; and to pay a certain sum per ton for it. So

*379 far the defendants had nothing to do with the business,

but to receive their rent. But they reserved a right to visit and

examine the manner in which the business should be carried

on in the mine; and to resume the possession should the tenant

refuse to furnish statements of the amount taken out, or pay

the rent. These clauses do not constitute a reservation of the

possession or a right to interfere with the direction of the

business. The right of visit was to enable them to see whether

the tenant was performing his engagements, in order to found

process against him if he were breaking them; and the right

to resume the possession was to put an end to the business

altogether. The lease was analogous in all respects to the lease

of a farm with a clause of re-entry for bad farming, or nonpayment of rent. On no principle, then, could the acts of Lewis

be imputed to his lessors'.

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 Appellant cites two Pennsylvania cases in which the Lessor

was held liable for damage caused by its lessee: Dundas v.

Muhlenberg's Executors, 35 Pa. 351, and Telford Coal Co. v.

Prothero et al., 24 Pa. D. & C. 183. The court below correctly

determined that the facts in those cases were not applicable

to the facts in this case. In the former case, this court, in an

opinion by Chief Justice Lowrie, said: ‘The charge of the

court was in substance that, in order to entitle the plaintiff

to recover against the defendants, it must appear, not only

that they were landlords of Bittinger, who took out the coal,

but also that they participated in the act of going into the

plaintiffs' land to get it. We think this instruction is quite

accurate, and is sustained by most familiar authorities.’ This

court said further: ‘Such being the facts found by the jury [all

italics supplied], the defendants are trespassers with Bittinger;

* * * and, the tort being waived, may be sued in assumpsit

for the value of the coal taken.’ In the second case cited by

appellant, which is a lower court case, the lessors actually

supervised and directed the removal of the coal and were

personally present when it was being removed. The court

stated in *380 that case: ‘The mining operations were carried

on under the directions of W. B. Prothero, and after his death

under the directions of Harry B. Prothero. The engineer in

charge during all the operations was L. R. Owen, who was

acting for the lessors. One of the lessees testified that no

map was ever furnished, but that the work was directed by

the engineer and the Protheros. Harry B. Prothero was in the

mine frequently when the plaintiff's coal was being mined.’

The difference between the facts in those two cases and the

facts in the case at bar obvious. The defendants in those

cases participated directly in the torts. In the instant case

there was no such participation. Mere collection of ‘rents and

royalties' as a part of the purchase price does not constitute a

participation in the mining.

 The allegations in plaintiff's statement of claim and which

are quoted in paragraph two of this opinion as to defendants'

mining and digging from plaintiff's land and ‘aiding and

abetting’ the mining by the Wilson Coal Company would

sufficiently plead a cause of action, were it not based (as

we understand from the argument of appellant's counsel 1

it is based) on the lease itself, which lease is attached to

plaintiff's statement. The language of the lease warrants no

such conclusion, and therefore we must treat the allegation

of defendants' ‘mining and digging’ coal and ‘aiding and

abetting their agent, the Wilson Coal Company’ in doing so

as mere legal conclusions and not as averments of facts.

*381 Appellant cites section 158, ‘Comment I’, p. 363, of

Restatement of Torts. In this ‘comment’ it is set forth that

‘if the actor **439 has commanded or requested a third

person to enter land in the possession of another, the actor is

responsible for the third person's entry if it be a trespasser.’ It

is self-evident that one who merely quit-claims his right, title

and interest (if any) in land to another for a consideration does

not come within the description of an actor who ‘commands

or requests' a third person to enter another's land. When A

quit-claims to B he is not ‘intentionally causing’ B to commit

a trespass on the land in respect to which A quit-claimed

whatever title or interest (if any) he had. If B proceeds to

exercise dominion over that land, he does so at his own peril,

and if it is shown that A had no title or interest in the land he

quit-claimed, B's quit-claim deed is no defense to an action

of trespass nor does that deed make A a joint tort-feasor with

B. In Robinson v. Vaughton & Southwick, 34 Eng.Com.Law

Rep. 718, it was held that if A gives B leave to go on a field,

in which A has no right and B goes there, this will not make

A liable as a co-trespasser with B.

In the case of Power v. Foley, Newfoundland Reports,

1897-1903, p. 540, the Supreme Court of Newfoundland held,

in an opinion by Justice Emerson: ‘A mere sale of property,

to which a man has no title, does not of itself carry with it a

cause of action against the seller, even though the purchaser

subsequently trespasses on and converts the property to his

own use. It must first be proved that the defendants actually

took possession of the property in question, or exercised

actual dominion over it, or delivered it to the trespassers in

some other manner than by the mere delivery of a document

purporting by its alleged construction to convey a title. In

order to fasten a liability on defendants in this action for

legal damage, * * * these defendants must have actually by

themselves, or their agents or servants, wilfully trespassed

upon the plaintiff's property, and taken *382 down the house

and converted the goods to their own use, or wrongfully

deprived the plaintiff of them. Has this been proved?’ This

question was answered in the negative. The following cases

were cited: England v. Cowley, L.R. 8 Ex. 126, and Owen v.

Legh, 3 B. & Ald. 470.

Appellant contends that the defendants were trespassers

because they put the lessee ‘under legal obligation to mine the

plaintiff's coal.’ This obligation arose, so it is argued, from the

fact that the lessee ‘covenanted and agreed to work the veins

demised’ continuously and to remove ‘all the coal therefrom

which can be mined by a diligent and energetic prosecution

of the business.’

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 The answer to this contention is that the provision in the

lease as to diligent mining is subject to the condition that

the title of the lessors does not fail. The lease (as already

noted herein) was expressly ‘given and accepted subject to

any failure of title to any part of said coal’. Failure of title

to the coal ipso facto terminated the lessee's agreement to

mine it. There is in the law the doctrine of ‘frustration,’ which

holds that under the implied condition of the continuance

of a contract's subject matter, the contract is dissolved when

the subject matter is no longer available. In Nitro Powder

Co. v. Agency of Canadian Car & Foundry Co., 233 N.Y.

294, 135 N.E. 507, 508, Judge Pound said: ‘When people

enter into a contract which is dependent for the possibility

of its performance on the continual availability of a specific

thing, and that availability comes to an end by reason of

circumstances beyond the control of the parties, the contract

is prima facie regarded as dissolved.’ See also Clarksville

Land Co. v. Harriman, 68 N.H. 374, 44 A. 527, and Howell v.

Coupland, 1 Q. B. 258. In the leading English case of Tamplin

Steamship Co., Ltd., v. Anglo-Mexican Pet. Products Co.,

Ltd., 2 A. C. 397, it is said at 403: ‘A court can and ought to

examine the contract and the circumstances in which it was

made, not of course to vary, but only to explain it, in order

to see *383 whether or not, from the nature of it the parties

must have made their bargain on the footing that a particular

thing or state of things would continue to exist. And if they

must have done so, then a term to that effect will be implied,

though it be not expressed in the contract.’

 In the lease now under review what the lessors said to

the lessee, in effect, was this: ‘We do not guarantee title

to the coal we are quit-claiming. If the title proves to be

good, you are obligated to mine the coal diligently,’ etc. It

was reasonably assumed that if the title failed, the owner of

the coal would take appropriate action to stop its mining.

The lease provisions quoted by appellant were not either

commands, directions or incitements to commit trespasses

upon another's property. These provisions were subject to

the limitation **440 that when title failed the lease became

inoperative.

 Appellant also contends that because the defendants sent a

mining engineer into the mine from time to time to inspect

and report to the lessor on the mining operations, they ‘aided

and abetted and participated in the mining and digging out

of the said coal as fully and effectually as they individually

could have done had they been present in person.’ In making

this contention the appellant is asking this court to attribute

to a well recognized custom in respect to mining ‘leased’

coal a legal significance the custom does not have. Lessors of

coal, whose remuneration depends on the tonnage mined, are

properly vigilant in seeing to it that none of the coal is wasted

by reckless, unskilful mining and to this end they customarily

reserve the right to inspect the workings either by themselves

or by a competent mining engineer. That such a provision does

not make the lessor a ‘director’ of the mining operation was

expressly held by this court in Offerman v. Starr, 2 Pa. 394, 44

Am.Dec. 211, supra. In Miles v. Pennsylvania Coal Co., 217

Pa. 449, 66 A. 764, 10 Ann.Cas. 871, this court held that a

provision giving the lessor the right to enter the workings for

inspection of the *384 mining ‘does not change the character

of the instrument’, i. e., the coal lease.

The case of McCloskey et al. v. Powell et al., 123 Pa. 62, 16

A. 420, 421, 10 Am.St.Rep. 512, cited by appellant, is easily

distinguishable from the case at bar. In that case there was

no quit-claim deed involved. Certain dealers in cherry timber

sent their agent, Ryder, into Elk County to purchase such

timber. Ryder found two tracts of cherry timber supposedly

owned by Powell. The latter promised to have his lines run.

The line as run included a large part of the grove of cherry

timber which Ryder wanted, but the true line excluded the

whole of it. Powell advised Ryder that a survey had been

made and the cherry found to be on his land. Powell then

sold on a contract all the merchantable cherry, etc., timber

standing on two tracts of land including ‘260 acres west of

the true line’. The timber was removed under the contract

and Powell was paid for it. The owners brought an action in

trespass q. c. f. against Powell et al. At the trial the court below

refused this request of plaintiffs: ‘If the jury believe from the

evidence that [the defendant] Powell procured the west line

of his lands to be so run and marked as to include some two

hundred and sixty acres of the land belonging to the plaintiffs,

* * * and caused said line * * * to be pointed out as his line

* * * [that] he Powell would be liable to the plaintiffs as a

co-trespasser.’ This court, in reversing the court below, said:

‘[Powell] caused the line to be pointed out, and said, in legal

effect: ‘This land is mine. These timber trees are mine. I will

sell them to you, and you shall cut and remove them, and pay

me ten dollars per thousand feet for the cherry as it now stands

on the stump.’ * * * The mistake was Powell's * * *. He sold

what he did not own, and took pay for it. He put his vendees

on the ground to cut the trees. By his contract he authorized

and directed the work done under it. * * * The point should

have been affirmed.' The difference between the facts in that

case and those in this case are obvious.

The judgment is affirmed.

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All Citations

338 Pa. 373, 12 A.2d 435, 127 A.L.R. 1008

Footnotes

1 In appellant's paper book appears the following statements: ‘The defendants acted in concert with the mining

company in making the lease and in requiring accounting and payment of proceeds of mining. They not only

requested or procured or incited their lessee to do the mining but put their lessee under legal obligation

to them to mine the plaintiff's coal, and to pay them royalties thereon, and they received and retained the

royalties. * * * The case is not at all one of non-participation, for the participation was as real and substantial

and remunerative as if it had been physical.’

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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APPENDIX A-4

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2014 WL 710941

Only the Westlaw citation is currently available.

United States District Court,

S.D. Texas,

Houston Division.

Donald E. LITTLE, Plaintiff,

v.

SKF SVERIGE AB, et al., Defendants.

Civil Action No. H–13–1760.

|

Feb. 24, 2014.

Attorneys and Law Firms

Donald Edward Little, Lakeway, TX, pro se.

Alejandro Salicrup, David Richman, Evan Wainhouse Davis,

Pepper Hamilton LLP, Philadelphia, PA, John Kevin Spiller,

William A. Worthington, Strasburger Price LLP, Houston,

TX, for Defendants.

ORDER

GRAY H. MILLER, District Judge.

*1 Pending before the court are (1) the Magistrate Judge's

Memorandum and Recommendation (Dkt.37) (hereinafter

“M & R”) recommending that Defendants SKF Sverige AB

and SKF International AB's Motion to Dismiss (Dkt.19) and

Defendant SKF USA Inc.'s Motion to Dismiss (Dkt.27) be

GRANTED; and (2) a motion to amend filed by Plaintiff

Donald E. Little (Dkt.41). After considering the M & R,

motions, related filings, and applicable law, the court is of the

opinion that the M & R should be ADOPTED and the motion

to amend should be DENIED.

I. M & R

With regard to the M & R, neither Defendants nor Plaintiff

Donald E. Little filed objections to the M & R. The court

finds that the M & R is well reasoned and accurately

concludes (1) that the court cannot exercise general or specific

jurisdiction over SKF Sverige AB and SKF International, and

(2) that Little failed to allege facts sufficient to state a claim

against SKF USA Inc. for misappropriation of trade secrets,

defamation, and fraud. The M & R therefore is ADOPTED in

its entirety. Little's claims against SKF Sverige AB and SKF

International AB are hereby DISMISSED for lack of personal

jurisdiction. Little's claims against SKF USA Inc. are hereby

DISMISSED WITH PREJUDICE for failure to state a claim.

II. MOTION TO AMEND

Subsequent to the M & R, Little filed a motion to amend.

Dkt. 41. The court has reviewed the proposed third amended

complaint and finds that allowing amendment would be futile,

as the proposed third amended complaint does not adequately

correct the deficiencies noted in the M & R. 1See Dkt. 41–1.

Accordingly, Little's motion to amend (Dkt.41) is DENIED.

III. CONCLUSION

Little's motion to amend (Dkt.41) is DENIED. The M &

R (Dkt.37) is ADOPTED in its entirety. Little's claims

against SKF Sverige AB and SKF International AB are

hereby DISMISSED for lack of personal jurisdiction. Little's

claims against SKF USA Inc. are hereby DISMISSED WITH

PREJUDICE for failure to state a claim. Since the SKF

Sverige AB, SKF International AB, and SKF USA Inc. are

the only defendants Little has served in this lawsuit, the court

will enter a final judgment concurrently with this order.

MEMORANDUM AND RECOMMENDATION

NANCY K. JOHNSON, United States Magistrate Judge.

Pending before the court 1 are Defendants SKF Sverige AB

and SKF International AB's Motion to Dismiss (Doc. 19) and

Defendant SKF USA Inc.'s (“SKF USA”) Motion to Dismiss

(27). The court has considered the motions, the responses

thereto, all other relevant filings, 2 and the applicable law. For

the reasons set forth below, the court RECOMMENDS that

both motions be GRANTED.

I. Case Background

Plaintiff Donald E. Little filed this lawsuit against six

purported corporate entities that belong to the SKF group of

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companies seeking money damages for theft of trade secrets,

fraud, and defamation. 3

Non-party AB SKF (“SKF”) is a publicly traded Swedish

company and the parent company of the SKF Group. 4

SKF owns one hundred percent of the shares in Defendants

SKF USA and SKF International AB . 5 Defendant SKF

International AB owns one hundred percent of the shares in

Defendant SKF Sverige AB. 6

*2 In 2002 and 2003, Defendants SKF International AB and

SKF Sverige AB (collectively, the “Swedish Defendants”)

entered into a series of contracts with Rolls–Royce AB for

the design, development, and sale of bearings for integration

into the “Mermaid” pod propulsion system utilized in cruise

ships. 7 According to Plaintiff, Mermaid pod malfunctions

resulted in multiple lawsuits by cruise ship owners against

Rolls–Royce companies. 8 Plaintiff alleges that Rolls–Royce

contracted with him for legal services to assist in the

company's defense of these lawsuits. 9 Plaintiff claims that, in

this capacity, he undertook an investigation into the cause of

the pod malfunctions and, in so doing, developed trade secrets

relating to the roller bearing system installed in the Mermaid

pods. 10

Plaintiff filed this action on March 22, 2013, in state

court in Harris County, and an amended petition on April

4, 2013, alleging that all six defendants “misappropriated

Plaintiff's trade secrets in a number of ways, including

coercion, deception, defamation, conspiracy and fraud.” 11

Plaintiff further claimed that the defendants “committed

fraud and strong armed [Rolls–Royce AB] counsel ... to

state in a settlement agreement that [Rolls–Royce AB]

(Plaintiff) misappropriated the patent claims developed by

Plaintiff.” 12 Lastly, Plaintiff alleged that the defendants

“defamed [P]laintiff by written agreement that [Rolls–Royce

AB] had misappropriated SKF intellectual property via

Plaintiff.” 13

The Swedish Defendants and SKF USA are the only

entities that Plaintiff has attempted to serve. 14 The Swedish

Defendants filed a special appearance and moved to quash

service and dismiss in state court on June 13, 2013. 15 On

June 17, 2013, the Swedish Defendants removed the case on

the basis of diversity jurisdiction. 16

The Swedish Defendants filed a motion to dismiss on August

19, 2013. 17 Plaintiff filed a response on September 16,

2013, and the Swedish Defendants replied on September 23,

2013. 18 SKF USA filed a motion to dismiss on November

22, 2013. 19 Plaintiff filed a response on January 22, 2014,

and SKF USA replied on January 29, 2014. 20

II. The Swedish Defendants' 12(b)(2) Motion to Dismiss

The Swedish Defendants move to dismiss Plaintiff's suit for

lack of personal jurisdiction.

A. Legal Standard for Personal Jurisdiction

The Federal Rules of Civil Procedure (“Rules”) authorize

a court to dismiss an action against a defendant when

the court lacks personal jurisdiction over that defendant.

See Fed.R.Civ.P. 12(b)(2). On a motion to dismiss decided

without the benefit of an evidentiary hearing, the plaintiff

bears the burden of establishing a prima facie case in support

of jurisdiction. Johnston v. Multidata Sys. Int'l Corp., 523 F.3d

602, 609 (5th Cir.2008).

The district court may receive “any combination of the

recognized methods of discovery,” including affidavits,

interrogatories, and depositions to assist it in the jurisdictional

analysis. Walk Haydel & Assocs., Inc. v. Coastal Power Prod.

Co., 517 F.3d 235, 241 (5th Cir.2008) (internal quotation

marks omitted). The court resolves all conflicts in the

evidence in favor of the plaintiff and accepts as true all of the

plaintiff's uncontroverted allegations. Johnston, 523 F.3d at

609.

*3 A federal court has personal jurisdiction over a

nonresident defendant if the forum state's long-arm statute

confers jurisdiction and if jurisdiction is consistent with due

process under the United States Constitution. Johnston, 523

F.3d at 609. In Texas, the long-arm statute permits personal

jurisdiction to the full extent allowed by the Due Process

Clause. Id.

The Due Process Clause ... permits the exercise of

personal jurisdiction over a nonresident defendant when

(1) that defendant has purposefully availed himself of the

benefits and protections of the forum state by establishing

“minimum contacts” with the forum state; and (2) the

exercise of jurisdiction over that defendant does not offend

“traditional notions of fair play and substantial justice.”

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Latshaw v. Johnston, 167 F.3d 208, 211 (5th Cir.1999)

(quoting Int'l Shoe Co. v. Wash., 326 U.S. 310, 66 S.Ct. 154,

90 L.Ed. 95 (1945).

Minimum contacts are established with a state by a defendant

whose “conduct and connection” with that state are significant

enough that the defendant “should reasonably anticipate

being haled into court” in that state. Nuovo Pignone, SpA

v. STORMAN ASIA M/V, 310 F.3d 374, 379 (5th Cir.2002)

(quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462,

475, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985)). The defendant

must “purposely avail[ ] itself of the privilege of conducting

activities within the forum state, thus invoking the benefits

and protections of its laws.” Nuovo Pignone, SpA, 310 F.3d at

379 (quoting Burger King Corp., 471 U.S. at 475). Unilateral

activity on the part of the plaintiff will not satisfy this

requirement. Hydrokinetics, Inc. v. Alaska Mech., Inc., 700

F.2d 1026, 1028 (5th Cir.1983) (quoting Hanson v. Denckla,

357 U.S. 235, 253, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958)).

A federal court may exercise general or specific jurisdiction.

“[C] ontinuous and systematic general business contacts”

are grounds for the exercise of general jurisdiction over a

nonresident defendant for any cause of action regardless of

whether the claim arose from specific activity within the

forum. Luv N' care, Ltd. v. Insta–Mix, Inc., 438 F.3d 465, 469

(5 th Cir.2006) (citing Helicopteros Nacionales de Colombia,

S.A. v. Hall, 466 U.S. 408, 414 n. 9, 415, 104 S.Ct. 1868, 80

L.Ed.2d 404). “The continuous and systematic contacts test is

a difficult one to meet, requiring extensive contacts between

a defendant and forum.” Johnston, 523 F.3d at 609 (quoting

Submersible Sys., Inc. v. Perforadora Cent., S.A., 249 F.3d

413, 419 (5th Cir.2001) (internal quotation marks omitted).

Alternatively, specific jurisdiction may exist if the asserted

cause of action “aris[es] out of or [is] related to the defendant's

contacts with the forum.” Luv N'care, 438 F.3d at 469 (citing

Helicopteros, 466 U.S. at 414 n. 8). In the Fifth Circuit,

courts apply a three-prong test in deciding whether specific

jurisdiction exists, considering, “(1) whether the defendant

has minimum contacts with the forum state, i.e., whether

it purposely directed its activities toward the forum state

or purposely availed itself of the privileges of conducting

activities there; (2) whether the plaintiff's cause of action

arises out of or results from the defendant's forum-related

contacts; and (3) whether the exercise of personal jurisdiction

is fair and reasonable.” McFadin v. Gerber, 587 F.3d 753, 759

(5th Cir.2009).

B. Analysis

*4 The Swedish Defendants argue that Plaintiff failed to

establish that they had sufficient contacts with Texas to justify

either general or specific jurisdiction.

1. General Jurisdiction

In his amended petition, Plaintiff asserted that the Swedish

Defendants had “subjected [themselves] to jurisdiction in the

courts of Texas by virtue of engaging in, and/or carrying on

a business or business venture in this state with Plaintiff.” 21

Plaintiff claimed that “Defendants have extensive, systematic

and continuous contacts with and dealings in the State of

Texas,” and that “SKF has an office specifically call the SKF

Solution Factory in this state.” 22

The Swedish Defendants contest these claims in their motion

to dismiss, providing testimony that they are headquartered

in Sweden and organized under the laws of Sweden; neither

lease nor own real property or any other assets in Texas;

maintain no facilities in Texas; have no employees who work

in Texas; are not registered to conduct business in Texas; have

never advertised in Texas; have never designed, developed,

or manufactured products in Texas; have never sold products

to customers in Texas on a regular basis, if at all; and have no

subsidiaries or divisions in Texas. 23

Plaintiff responds that “[t]he SKF group is the largest bearing

manufacturer in the world,” and “numerous ... companies in

the State of Texas ... sell SKF products.” 24 Plaintiff adds

that he “can interact with SKF's website and has a login

number.” 25 Plaintiff claims that SKF USA has previously

brought suit in Texas federal courts. 26

Plaintiff does not distinguish between the corporate entities

that belong to the SKF group of companies. Plaintiff has failed

to demonstrate that any contacts SKF or SKF USA may have

with Texas may be imputed to the Swedish Defendants. “As

a general rule, ... the proper exercise of personal jurisdiction

over a nonresident corporation may not be based solely upon

the contacts with the forum state of another corporate entity

with which the defendant may be affiliated.” Freudensprung

v. Offshore Tech. Servs., 379 F.3d 327, 346 (5th Cir.2004);

see also Hargrave v. Fidreboard Corp., 710 F.2d 1154, 1160

(5th Cir.1983) (“[S]o long as a parent and subsidiary maintain

separate and distinct corporate entities, the presence of one in

a forum state may not be attributed to the other.”).

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Overcoming the presumption of corporate separateness

requires “proof of control by [one corporation] over the

internal business operations and affairs of another corporation

to make the other its agent or alter ego, and hence fuse

the two together for jurisdictional purposes.” Freudensprung,

379 F.3d at 346 (alteration in original) (quoting Hargrave,

710 F.2d at 1160) (internal quotation marks omitted). In

determining whether this burden has been met, courts

consider the following nonexhaustive factors: (1) the amount

of stock owned by the parent of the subsidiary; (2) whether

the entities have separate headquarters, directors, and officers;

(3) whether corporate formalities are observed; (4) whether

the entities maintain separate accounting systems; and (5)

whether the parent exercises complete control over the

subsidiary's general policies or daily activities. Hargrave, 710

F.2d at 1160.

*5 Plaintiff has failed to allege, let alone adduce any

evidence demonstrating, that the Hargrave factors compel

the conclusion that SKF or the other SKF entities controlled

the Swedish Defendants. Accordingly, the contacts of SKF

and SKF USA with Texas may not be attributed to the

Swedish Defendants in order to support the exercise of

general jurisdiction.

In his response, Plaintiff also claims that, “[o]n information

and belief, it is believed SKF distributors in Texas order

parts from SKF Sweden by computer communication.” 27

Plaintiff provides no support for this allegation, which is

directly contradicted by testimony provided by the Swedish

Defendants. This unsubstantiated contention is insufficient to

support the exercise of general jurisdiction over the Swedish

Defendants.

2. Specific Jurisdiction

In addition to the assertion of general jurisdiction discussed

above, Plaintiff asserts that the Swedish Defendants' contacts

with Texas related to the present litigation justify haling them

before this court. Plaintiff contends that specific jurisdiction

is proper because propulsion systems equipped with SKF

bearings are housed in cruise ships that “operate[ ] out of the

Texas port of Galveston”; drafts of the allegedly defamatory

settlement agreement were “sent between Sweden, Miami

and Austin”; a contract between Plaintiff and a third party

“MARIN” was executed in Texas; and the “drafting and

development of many of the trade secrets” took place in

Texas. 28

Neither Plaintiff's unilateral activities, such as the work he

allegedly performed developing trade secrets in Texas, nor his

execution of a contract with a third party are contacts that can

be attributed to Defendant. See Hydrokinetics, Inc., 700 F.2d

at 1028.

Plaintiff has failed to introduce competent evidence regarding

his allegation that cruise ships incorporating SKF products

operate out of Texas. Regardless, this contention alone

provides no basis for inferring that the Swedish Defendants

could “reasonably anticipate[ ] being haled into court” in

Texas. Luv N' care, 438 F.3d at 470 (citing World Wide

Volkswagen Corp. v. Woodson, 444 U.S. 286, 100 S.Ct. 559,

62 L.Ed.2d 490 (1980)); see also McFadin, 587 F.3d at 759

(“The defendant must not be haled into a jurisdiction solely as

a result of random, fortuitous, or attenuated contacts, or of the

unilateral activity of another party or third person.” (quoting

Electrosource, Inc., v. Horizon Battery Techs., Ltd., 176

F.3d 867, 871–72 (5th Cir.1999)) (internal quotation marks

omitted)).

Plaintiff's claim that drafts of the allegedly defamatory

settlement agreement were sent to Austin is likewise

insufficient to support the exercise of specific jurisdiction

over the Swedish Defendants. To support personal

jurisdiction against a defaming defendant, the Fifth Circuit

requires that the “forum be the focal point of the story.”

Clemens v. McNamee, 615 F.3d 374, 379 (5th Cir.2010)

(quoting Calder v. Jones, 465 U.S. 783, 788–89, 104 S.Ct.

1482, 79 L.Ed.2d 804 (1984)) (internal quotation marks

omitted). In Clemens, the Fifth Circuit held that the plaintiff

had failed to make a prima facie showing that Texas was the

focal point of allegedly defamatory statements because the

statements did not concern activity in Texas and they were

neither made in Texas nor directed to Texas residents any

more than residents of any other state. See id. at 380. Plaintiff

has introduced no evidence that the allegedly defamatory

statements concerned activity in Texas, were made in Texas,

or were directed to Texas residents.

*6 The court finds that Plaintiff has failed to meet his

prima facie burden of establish that the court has personal

jurisdiction over the Swedish Defendants. The court need

not reach the Swedish Defendants' additional arguments for

dismissal.

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III. SKF USA's 12(b)(6) Motion to Dismiss

SKF USA moves to dismiss Plaintiff's suit for failure to state

a claim.

A. Legal Standard for Failure to State a Claim

Pursuant to Rule 12(b)(6), dismissal of an action is

appropriate whenever the pleading, on its face, fails to state a

claim upon which relief can be granted. When considering a

motion to dismiss, the court should construe the allegations in

the complaint favorably to the pleader and accept as true all

well-pleaded facts. Harold H. Huggins Reality, Inc. v. FNC,

Inc., 634 F.3d 787, 803 n. 44 (5th Cir.2011).

A complaint need not contain “detailed factual allegations”

but must include sufficient facts to indicate the plausibility

of the claims asserted, raising the “right to relief above the

speculative level.” Bell Alt. Corp. v. Twombly, 550 U.S. 544,

127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); see also Ashcroft v.

Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868

(2009). Plausibility means that the factual content “allows the

court to draw the reasonable inference that the defendant is

liable for the misconduct alleged.” Iqbal, 556 U.S. at 678.

A plaintiff must provide “more than labels and conclusions”

or “a formulaic recitation of the elements of a cause of

action.” Twombly, 550 U.S. at 555. In other words, the factual

allegations must allow for an inference of “more than a sheer

possibility that a defendant has acted unlawfully.” Iqbal, 556

U.S. at 678.

B. Analysis

SFK USA argues that dismissal is proper because Plaintiff

has failed to allege facts sufficient to state claims for

misappropriation of trade secrets, defamation, or fraud.

1. Misappropriation of trade secrets

To establish a cause of action for trade secret misappropriation

under Texas law, a plaintiff must show: (1) a trade secret

existed; (2) the trade secret was acquired through a breach of

a confidential relationship or discovered by improper means;

and (3) use of the trade secret without authorization from the

plaintiff. See Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867,

874 (5th Cir.2013). “A trade secret is any formula, pattern,

device or compilation of information used in one's business,

and which gives an opportunity to obtain an advantage over

competitors who do not know or use it.” Taco Cabana Intern.,

Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1123 (5th Cir.1991).

The facts pled in Plaintiff's amended petition do not make

out a plausible claim for trade secret misappropriation against

SKF USA. Plaintiff fails to articulate how SKF USA allegedly

acquired, discovered, or made use of a trade secret. Instead,

Plaintiff makes conclusory statements such as “SKF relied

on Plaintiff's trade secrets in misappropriating [P]laintiff's

trade secrets,” and “SKF misappropriated Plaintiff's trade

secrets in a number of ways, including coercion, deception,

defamation, conspiracy, and fraud.” 29 Such pleading is

insufficient under Twombly. See In re Superior Air Parts,

Inc., 486 B.R. 728 (Bankr.N.D.Tex.2012) (dismissing trade

secret misappropriation claim that failed to allege facts

supporting claim that defendant obtained alleged trade secrets

by improper means). The court concludes that Plaintiff has

failed to state a claim for trade secret misappropriation against

SKF USA.

2. Defamation

*7 To establish a cause of action for defamation under

Texas law, a plaintiff who is a private individual must

show that the defendant: “(1) published a statement; (2)

that was defamatory concerning the plaintiff; (3) while

acting negligently with regard to the truth of the statement.”

Nasti v. CIBA Specialty Chem. Corp., 492 F.3d 589, 596

(5th Cir.2007) (citing WFAA–TV, Inc. v. McLemore, 978

S.W.2d 568, 571 (Tex.1998)). Defamation claims must also

“specifically state the time and place of the publication.”

Watkins v. Tex. Dep't of Crim. J., 269 F. App'x 457, 465 (5th

Cir.2008) (unpublished) (internal quotation marks omitted).

A statement is defamatory if the words tend to injure a

person's reputation, exposing the person to public hatred,

contempt, ridicule, or financial injury or to impeach that

person's honesty, integrity, or virtue. Abbot v. Pollock, 946

S.W.2d 513, 519 (Tex.App.-Austin 1997, writ denied).

Plaintiff alleges no facts in support of his claim that “SKF ...

defamed [P]laintiff by written agreement that [Rolls–Royce

AB] had misappropriated SKF intellectual property via

Plaintiff.” 30 Plaintiff fails to plead the alleged defamatory

statement, the time or place of publication, and the author

of the statement. Accordingly, Plaintiff's cause of action for

defamation cannot survive SKF USA's motion to dismiss.

See Roebuck v. Dothan Sec., Inc., 515 Fed. App'x 275, 280

(5th Cir.2013) (affirming dismissal of defamation claim for

failure to state a claim because plaintiff “failed to set forth

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any specific allegations regarding the alleged defamatory

communications in his complaint”); Shaunfield v. Bank of

Am., No. 3:12–CV–3859–B, 2013 WL 1846885, at *3

(N.D.Tex. Apr.24, 2013) (dismissing claim upon finding

that plaintiff “ha [d] not made sufficient allegations as to

the substance of the allegedly defamatory statements and,

therefore, ha[d] failed to adequately allege that he [was]

entitled to relief from [defendant] on his defamation claim.”).

3. Fraud

Under Texas law, the elements of a fraud cause of action are:

“(1) a material representation was made; (2) it was false when

made; (3) the speaker either knew it was false, or made it

without knowledge of its truth; (4) the speaker made it with

the intent that it should be acted upon; (5) the party acted in

reliance; and (6) the party was injured as a result.” Herrmann

Holdings Ltd. v. Lucent Tech. Inc., 302 F.3d 552, 563 n. 3 (5th

Cir.2002).

Fraud claims are subject to a heightened pleading standard

under Rule 9(b), which provides that, “[i]n alleging fraud

or mistake, a party must state with particularity the

circumstances constituting fraud or mistake.” Fed.R.Civ.P.

9(b). Rule 9(b) “requires, at a minimum, that a plaintiff set

forth the who, what, when, where, and how of the alleged

fraud.” U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d

262, 266 (5th Cir.2010) (internal quotation marks omitted).

*8 Plaintiff offers only a conclusory statement in support

of his fraud claim, asserting that “SKF committed fraud and

strong armed [Rolls–Royce] counsel defending the Mermaid

Pod lawsuits to state in a settlement agreement that [Rolls–

Royce AB] (Plaintiff) misappropriated the patent claims

developed by Plaintiff.” 31 This unelaborated reference to

“fraud” does not satisfy the requirements of Rule 9(b).

Plaintiff's fraud claim fails to state a claim against SKF USA.

IV. Conclusion

Based on the foregoing, the court RECOMMENDS that

the Swedish Defendants and SKF USA's motions be

GRANTED.

The court is aware that, while this matter was pending,

Plaintiff attempted to amend his complaint. That complaint

was struck for Plaintiff's failure to comply with Rule 15(a).

The court has reviewed this complaint in light of its finding

that Plaintiff has failed to state claims for trade secret

misappropriation, defamation, and fraud against SKF USA.

The court finds that this amended complaint would not have

corrected the pleading deficiencies discussed above. Because

the court has no confidence that Plaintiff can state facts that

would support its claims against SKF USA, the court does not

grant Plaintiff the opportunity to file an amended complaint.

The court may reconsider this recommendation if Plaintiff

alleges, in timely filed objections, specific facts that would

support a claim against SKF USA.

The Clerk shall send copies of this Memorandum and

Recommendation to the respective parties who have fourteen

days from the receipt thereof to file written objections thereto

pursuant to Rule 72(b) and General Order 2002–13. Failure to

file written objections within the time period mentioned shall

bar an aggrieved party from attacking the factual findings and

legal conclusions on appeal.

The original of any written objections shall be filed with the

United States District Clerk electronically. Copies of such

objections shall be mailed to opposing parties and to the

chambers of the undersigned, 515 Rusk, Suite 7019, Houston,

Texas 77002.

SIGNED in Houston, Texas, this 31st day of January, 2014.

All Citations

Not Reported in F.Supp.3d, 2014 WL 710941

Footnotes

1 Little attempts to assert the “who, what, when, where, and how of the alleged fraud” in his amended pleading.

See Dkt. 37(M & R) (noting that Little offered “only a conclusory statement in support of his fraud claim”

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and thus failed to satisfy the elements of fraud); Dkt. 41–1 (proposed third amended complaint) (specifically

discussing facts under the headings “who, what, when, where, how, and why”). However, while Little presents

facts that could satisfy the questions, who, what, when, where, how, and why, the alleged facts fail to come

together in a cohesive fashion to actually satisfy the elements of a fraud cause of action.

1 This case was referred to the undersigned magistrate judge pursuant to 28 U.S.C. § 636(b)(1)(A) and (B),

the Cost and Delay Reduction Plan under the Civil Justice Reform Act, and Federal Rule of Civil Procedure

72. Doc. 14.

2 SKF USA complaints that Plaintiff's response to its motion was untimely. The court will consider it despite

its untimeliness.

3 See Doc. 1–5, Ex. B3 to Swedish Defs.' Notice of Removal, Pl.'s Am. Orig. Pet.

4 See Doc. 19–1, Ex. 1 to Swedish Defs.' Mot. to Dismiss, Aff. of Erik Wiksten ¶ 3.

5 See id.

6 See id.

7 See Doc. 19–2, Ex. 2 to Swedish Defs.' Mot. to Dismiss, Aff. of Par Malmberg ¶ 2.

8 See Doc. 1–5, Ex. B3 to Swedish Defs.' Notice of Removal, Pl.'s Am. Orig. Pet. ¶¶ 6, 10, 32, 34

9 See id. ¶ 6.

10 See id. ¶¶ 6, 10, 19.

11 Id. ¶ 16; Doc. 1–4, Ex. B2 to Swedish Defs.' Notice of Removal, Pl.'s Orig. Pet.

12 Doc. 1–5, Ex. B3 to Swedish Defs.' Notice of Removal, Pl.'s Am. Orig. Pet. ¶ 16

13 Id.

14 See Doc. 19–1, Ex. 1 to Swedish Defs.' Mot. to Dismiss, Aff. of Erik Wiksten ¶ 5; Doc. 25, Req. for Issuance

of Summons as to SKF USA.

15 See Doc. 1–6, Ex. B4 to Swedish Defs.' Notice of Removal, Swedish Defs.' Special Appearance, Mots. to

Quash Service and to Dismiss for Forum Non Conveniens, and Orig. Answer.

16 See Doc. 1, Swedish Defs.' Notice of Removal

17 See Doc. 19, Swedish Defs.' Mot. to Dismiss.

18 See Doc. 23, Pl.'s Resp. to Swedish Defs.' Mot. to Dismiss; Doc. 24, Swedish Defs.' Reply to Pl.'s Resp. to

Swedish Defs.' Mot. to Dismiss.

19 See Doc. 27, SKF USA's Mot. to Dismiss.

20 See Doc. 31, Pl.'s Resp. to SKF USA's Mot. to Dismiss; Doc. 34, SKF USA's Reply to Pl.'s Resp. to SKF

USA's Mot. to Dismiss.

21 Doc. 1–5, Ex. B3 to Swedish Defs.' Notice of Removal, Pl.'s Am. Orig. Pet. ¶ 5.

22 Id.

23 See Doc. 1–6, Ex. B4 to Swedish Defs.' Notice of Removal, Aff. of Eva Karlsson ¶¶ 2–8; Doc. 1–6, Ex. B4

to Swedish Defs.' Notice of Removal, Aff. of Per Thoren ¶¶ 2–8.

24 Doc. 23, Pl.'s Resp. to Swedish Defs.' Notice of Removal, pp. 3–4.

25 Id. p. 5.

26 See id. p. 4

27 Id. p. 5.

28 See id. pp. 5–6.

29 Doc. 1–5, Ex. B3 to Swedish Defs.' Notice of Removal, Pl.'s Am. Orig. Pet. ¶¶ 29, 61.

30 Id. ¶ 63.

31 Id. ¶ 62.

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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APPENDIX A-5

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Martin v. Star Pub. Co., 11 Terry 181 (1956)

50 Del. 181, 126 A.2d 238

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

11 Terry 181

Supreme Court of Delaware.

Joseph H. MARTIN, Appellant,

v.

STAR PUBLISHING COMPANY, a

corporation of the State of Delaware, Appellee.

Oct. 25, 1956.

Synopsis

Suit by former owner of capital stock of newspaper publishing

company to recover agreed compensation as advisor in

conduct of company's business under written contract of

employment by company for 400 weeks with option given

former owner to continue such employment for additional 120

weeks. From a decision of the Superior Court of New Castle

County, granting defendant's motion for summary judgment,

plaintiff appealed. The Supreme Court, Southerland, C. J.,

held that voluntary discontinuance of business by publishing

company did not constitute such impossibility of performance

or frustration of purpose as would discharge contractual

obligation to pay agreed compensation during option period

and that continuance of such business could not be implied as

an additional condition of such obligation.

Decision reversed and order granting summary judgment

vacated and cause remanded with instructions and for further

proceedings not inconsistent with opinion.

**240 *182 Appeal from a decision of the Superior

Court of New Castle County granting defendant's motion for

summary judgment. Reversed and remanded.

Attorneys and Law Firms

Russell J. Willard, Jr., and Clarence W. Taylor, Hastings,

Lynch & Taylor, Wilmington, for appellant.

William E. Taylor, Jr., Wilmington, for appellee.

SOUTHERLAND, C. J., and WOLCOTT and BRAMHALL,

JJ., sitting.

Opinion

*183 SOUTHERLAND, Chief Justice.

The principal question in this case is whether the doctrine of

impossibility or ‘frustration’ excused the defendant from its

contractual obligations to the plaintiff.

The facts are these:

Prior to October 3, 1946, Joseph H. Martin, plaintiff below,

was the president and owner of all the capital stock of Star

Publishing Company, the principal business of which was the

printing and publishing in the City of Wilmington of The

Sunday Star, a weekly newspaper.

On October 3, 1946, Martin entered into an agreement with

J. Edwin Carter for the sale of the business. This agreement

was the genesis of a later contract sued on in this case.

The October 3, 1946 agreement has given rise to a series of

law suits, and the end is not yet. Various aspects of the matter

have been three times before this Court. For its prior opinions

see the following cases: Star Publishing Co. v. Martin, 47 Del.

585, 95 A.2d 465; Star Publishing Co. v. Martin, 48 Del. 106,

95 A.2d 835; Bayard v. Martin, Del., 101 A.2d 329.

By the agreement of October 3, 1946, Martin sold to Carter all

his shares of stock in the Star for the sum of $105,500, payable

in installments and evidenced by a series of promissory notes

the last of which will mature February 1, 1957. These notes

include a power of attorney to confess judgment.

Paragraph 9 of the contract of October 3 provided in part:

‘Carter will cause The Star Publishing

Company, upon final settlement, to retain

Martin as an advisor in the conduct

of its printing and publishing business,

such employment to be for the lifetime

of said Joseph H. Martin, Sr. Martin

hereby agrees to act in such capacity

and hold himself available at reasonable

times to perform his said duties.

The consideration for such contracted

employment shall be $40,000.00 payable

at the rate of $100.00 a week for the

first four hundred weeks from and *184

after October 7, 1946, until the full

amount of $40,000.00 shall have been

paid to Martin, his heirs, administrators,

executors or nominees; and further that

if Martin shall be living and able and

willing to perform his duties hereunder

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50 Del. 181, 126 A.2d 238

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Martin shall continue to receive the sum

of $100.00 a week for a period of 120

weeks.’

The four-hundred-week period we shall refer to as ‘the first

period’; the one-hundred and twenty-week period as ‘the

renewal period’.

Although these provisions were cast in the form of an

employment agreement, it is quite clear that, at least so far as

concerns the first period, the contract was little more than a

means of paying Martin for the sale. Even if he died during

this period his estate was to continue to receive the payments.

Moreover, it is also clear that as concerns the renewal period

the payment of the additional $12,000 was conditioned only

upon his being alive and able to perform his duties.

**241 On November 15, 1946, in compliance with the

covenant in paragraph 9 above quoted, Star entered into an

agreement with Martin reciting the facts about the sale and

providing in substance as follows:

1. The Star retained and employed Martin as an adviser ‘in

the conduct of its printing and publishing business.’

2. Martin agreed to perform the duties of advisor at reasonable

times upon one week's notice from Star on every occasion

when his services were demanded.

3. The Star agreed to pay to Martin or his estate $40,000 in

weekly installments of $100 each for four hundred weeks,

beginning from October 7, 1956. It was further provided:

‘Said installments shall be due and

payable irrespective of the extent or value

of the services performed by Martin and

irrespective of whether or not Martin is

able to perform the above stated duties

during any part or any of the period

covered by the installments.’

*185 Paragraph 5 of the contract provides:

‘Upon the expiration of the

aforementioned period of four hundred

weeks beginning and from October 7,

1946, if Martin shall be living and able

and willing to continue to perform the

duties stated above, Martin shall have

an irrevocable option to continue his

employment and retainer as described in

paragraphs 2 and 3 hereof for a period of

one hundred and twenty weeks from the

date on which Martin shall exercise such

option or for such lesser period as Martin

may be able to perform such duties,

during which period The Star Publishing

Company shall pay to Martin the sum of

One Hundred Dollars ($100.) per week,

payable weekly; irrespective of the extent

or value of the services performed by

Martin. Said option herein granted to

Martin shall be exercised by him within

thirty days from the date of expiration

of the aforementioned four hundred week

period by the mailing of written notice of

the exercise of such option to The Star

Publishing Company at 305–309 Shipley

Street, Wilmington, Delaware.’

This is the agreement sued upon.

The contract of November 15 does little more than to

spell out the provisions of paragraph 9 of the contract

of October 3, 1946. The $40,000 is to be paid whether

Martin lives or dies, or whether he is able to perform any

services whatever. The payments during the renewal period

are expressly conditioned only (1) upon the exercise by

Martin of the option, and (2) upon his being alive and able

to perform his duties, if any, during the period. The advisory

service in the renewal period, as in the first period, is to be

rendered only upon demand at every time when Star desires

such service; and the payments in the renewal period, as in

the first period, are due ‘irrespective of the extent or value

of the services performed by Martin’. Hence, although the

provisions relating to the renewal period have some aspects of

an employment agreement, they also, like the provisions for

the first period, provide a means for giving Martin additional

compensation for the sale of his business.

*186 The Star discontinued its business on April 18, 1954

and thereafter declined to make any payments on the contract.

Martin brought an action to recover the remaining payments

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Martin v. Star Pub. Co., 11 Terry 181 (1956)

50 Del. 181, 126 A.2d 238

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 3

due under the first period. This is not the suit before us. The

trial court appears to have held that as to the first period the

voluntary cessation of Star's business did not excuse Star from

its contractual obligation to make the payments. This decision

is not here questioned.

On June 1, 1954, some days before the end of the first

period, Martin gave written notice of his exercise of the

option granted to him by paragraph 5 of the November 15

agreement. Star refused payment and **242 the present

suit was brought. Cross motions for summary judgment were

filed. The court granted Star's motion. The trial judge held

that the continued existence of Star's business was an implied

or constructive condition of Star's obligation under paragraph

5; that the non-existence of the business made performance

thereunder by Star excusably impossible; and that Star was

therefore discharged from liability from the payments during

the renewal period. Martin appeals.

Was the continued existence of the Star's business an implied

condition of its liability to Martin for the payments during the

renewal period?

In answering this question in the affirmative the trial judge

first reviewed the principles of law relating to the defense

of impossibility of performance. He then held that in the

circumstances of this case it was reasonable to presume that

when the contract was made both parties assumed that the

defendant's business would be in existence when the time for

performance in the renewal period arrived. He accordingly

held that the existence of that business at such time was an

implied condition of the contract.

With the statement of the general principles of the law in the

court's opinion we are in accord. The doctrine of impossibility

or ‘frustration’ has been evolved ‘from the court's sense of

justice’. 6 Williston on Contracts', § 1937. The classes of

cases *187 to which the rule is applicable are stated by

Williston as follows:

‘(1) Impossibility due to domestic law;

‘(2) Impossibility due to the death or illness of one who by the

terms of the contract was to do an act requiring his personal

performance;

‘(3) Impossibility due to fortuitous destruction or change in

character of something to which the contract related, or which

by the terms of the contract was made a necessary means of

performance.

‘The fourth class of cases, to which allusion was made

above as standing on more debatable ground, comprises cases

where impossibility is due to the failure of some means of

performance, contemplated but not contracted for.

‘The fifth class does not strictly fall within the boundaries of

impossibility. Performance remains entirely possible, but the

whole value of the performance to one of the parties at least,

and the basic reason recognized as such by both parties, for

entering into the contract has been destroyed by a supervening

and unforeseen event.’

In applying the law the courts have attempted to square

the result with the principles of contract law by finding

‘an implied condition’ in the contract. It is increasingly

recognized that in this field of the law the so-called implied

condition is a fiction—an effort ‘at rationalizing a judicial

process'. 6 Corbin on Contracts, § 1331. See the English

authorities cited in note 61 to the text.

 It is unnecessary for us to review the development of this

rule or attempt to delimit its scope, since we are clearly of

the opinion that the rule has no application to the case before

us. We find no decision, either in the opinion of the court

below or in the Star's brief, holding the rule to be applicable

to a case in which the unforeseen event or the destruction

of *188 the subject matter of the contract is the voluntary

act of the promisor in closing down his business. The event

that creates the impossibility must be a fortuitous one. See the

quotation from Williston, above, and see § 1959 in which the

author says: ‘It is only fortuitous impossibility that excuses

from liability * * *’.

In 6 Corbin on Contracts, § 1329, it is said:

‘In all the cases holding that the

promisor was discharged from duty by

**243 impossibility of performance

or frustration of purpose, it has been

assumed that the promisor was not

himself the responsible cause of the

impossibility or frustration.’

 A corporation is not excused from performance of an

agreement to pay money because it voluntarily dissolves

or discontinues its business. There may be cases in which

enforced dissolution of a corporation will relieve it of

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Martin v. Star Pub. Co., 11 Terry 181 (1956)

50 Del. 181, 126 A.2d 238

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 4

obligations of a personal character under a contract. Tenner v.

Retlaw Dev. Corp., 163 Misc. 248, 295 N.Y.S. 31.

‘If, however, the corporation involuntarily dissolves itself,

or winds up its business, even such a contract [where the

obligation is personal in character], though made impossible

of performance, is made so by the act of the corporation, and

it or its assets are liable for its failure to fulfill its obligations'.

6 Williston, § 1960.

A fortiori, where the obligation is merely to pay money, as

here, the corporation remains liable.

 Star voluntarily chose to discontinue its business, presumably

for financial reasons. Impossibility originating in financial

incapacity is no excuse. 6 Williston on Contracts, § 1960.

 There is ample authority that a contract to pay for services

to be rendered over a specified period is not discharged by

the voluntary cessation of business of the employer. Tiffin

Glass Co. v. Stoehr, 54 Ohio St. 157, 43 N.E. 279 (voluntary

dissolution); *189 Merchants Life Ins. Co. v. Griswold,

Tex.Civ.App., 212 S.W. 807 (voluntary amendment of charter

precluding continuation of certain type of business); St.

Louis & Denver Land & Mining Co. v. Tierney, 5 Colo.

582 (voluntary discontinuance of certain type of business);

Madden v. Jacobs, 52 La.Ann. 2107, 28 S. 225 (voluntary

cessation of business); MacGregor v. Union Life Ins. Co.,

8 Cir., 121 F. 493 (discontinuance of business by insurance

company is no defense to suit on five-year contract with

agent).

In Baumer v. Franklin County Distilling Co., 6 Cir., 135 F.2d

384, 388, it was held that a contract with a salesman to push

a certain brand of whiskey was not discharged because the

distilling company elected to withdraw the brand from the

market. The Court said:

‘No specific provision that the appellee

should remain in the distilling business

was necessary to entitle appellant to

rely upon the implied obligation inherent

in appellee's promise to supply the K.

Taylor brand during the three-year life

of the contract. An agency contract,

terminable at will, is not to be deduced

from the terms of the contract itself, or

by necessary implication from its setting.

On the contrary, the contract expressly

provided for performance by both parties

of their several obligations throughout

a course of three years' time. It has

long been established law that one, who,

by his own action has rendered himself

incapable of performing a contract, may

not successfully plead impossibility of

performance in defense of his breach.’

See also Brearton v. De Witt, 252 N.Y. 495, 170 N.E.

119; and compare Gamble v. Penn Valley Crude Oil Corp.,

Del.Ch., 104 A.2d 257 (voluntary dissolution of corporation

no defense to action for damages on stock option contract).

We have examined all the cases cited in the opinion of the

trial court and in the brief for Star. None of them is in point.

Duff v. Trenton Beverage Co., 4 N.J. 595, 73 A.2d 578,

is a case of impossibility because of illegality. Gouled v.

Holwitz, 95 N.J.L. 277, 113 A. 323, is a case of frustration

by destruction by *190 a third party of the subject matter of

the contract. Greek Catholic Congregation v. Plummer, 338

Pa. 373, 12 A.2d 435, 127 A.L.R. 1008 is a case **244 of

discharge ‘by reason of considerations beyond the control of

the parties'. Tamplin Steamship Co. Ltd. v. Anglo-Mexican

Pet. Products Co. Ltd., 2 AC 397 [1916], involves a seizure

by the Admiralty of a ship under charter party. Housing

Authority v. East Tennessee, etc., 183 Va. 64, 31 S.E.2d 273,

involves the failure of a nearby supply of natural gas caused

by no fault of either party. Lagenberg v. Guy, 77 Cal.App. 664,

247 P. 621, turns on the language of the contract itself.

We are accordingly constrained to disagree with the court's

conclusion that the doctrine of impossibility or frustration

availed to defeat Martin's action on the contract.

However, the opinion below may be read as holding that even

if the defense of impossibility is not applicable, yet an implied

term or condition may be read into the contract, i. e., that the

language of the agreement, in the light of the situation of the

parties, discloses an intention that Star was not to be liable to

Martin during the renewal period if it had no business to offer

him and therefore no occasion for his services.

 Of course, there are cases in which a necessary term of a

contract, omitted through inadvertence, may be supplied by

the court from principles of law. If no time for performance is

fixed, the court will imply a reasonable time, or if a contract

fails to provide specifically for the payment of goods sold, a

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Martin v. Star Pub. Co., 11 Terry 181 (1956)

50 Del. 181, 126 A.2d 238

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promise to pay will be implied, and the like. See 17 C.J.S.,

Contracts, § 328, and cases cited. These are cases in which a

court may confidently say that it has merely effectuated the

intention of the parties. But no such case is made here.

There is no language in the contract justifying the inference

that anything was omitted. Moreover, the provisions for

payment over a specified period, conditioned only on Martin's

life and capacity, are inconsistent with the term sought to

be implied. As the court said of the contract before it in the

Baumer case, *191 supra, a contract terminable at will is not

to be deduced from the terms of this contract or its setting.

 One usual test for implying a term omitted from a contract is

a determination by the court that the parties would certainly

have agreed to it had it been proposed. See Cousins Inv. Co.

v. Hastings Clothing Co., 45 Cal.App.2d 141, 113 P.2d 878,

882. How can we say that Martin would have agreed to such

a condition if Star had proposed it? Against the background

of this contract it seems most unlikely, because the provisions

for the payments were, as we have said, a means by which

Star itself paid Martin additional consideration for the sale.

It is said there is no reason for the distinction between

the provisions respecting the first period and the provisions

respecting the renewal period if the continued existence of

Star's business was not to be implied as a condition of Star's

liability. This does not follow. Martin's age was a sufficient

reason for the distinction. It was not strange that the parties

should stipulate for the payment of $40,000 over a period

of four hundred weeks as an absolute obligation and an

additional $12,000 only if Martin continued to live and was

able to render services. At all events that is the bargain they

made. Indeed, the contract of October 3 contained a clause

that the payments were to be made during Martin's lifetime,

although this clause is inconsistent with subsequent clauses.

The contract sued upon resolves this ambiguity in favor of

Star, but in our opinion does nothing more than to make

the obligation during the renewal period dependent upon the

conditions expressly set forth, and upon nothing more.

The court below held, correctly we think, that there was no

implied term that the Star continue its business for Martin's

benefit; but we think that there is likewise no implied term

that Star's obligation to **245 Martin should cease merely

because it chose to discontinue its business.

In any view of the case we are of the opinion that the implied

condition cannot be read into the contract.

*192 Our holding on this point requires us to consider a

second contention on behalf of Star made below and renewed

here. Because of his holding on the first contention, it was

unnecessary for the trial judge to consider it.

It is contended that Martin's exercise of his option under

paragraph 5 of the November 15th contract was legally

ineffective because given prior to June 10, 1954, the date of

the expiration of the first period. Paragraph 5 of the contract

quoted above provides that Martin shall exercise his option

‘within thirty days from the date of the expiration of the Star's

four hundred week period * * *’. This means, says Star, that

the notice must be given after the date of such expiration and

a notice given before such expiration is ineffectual.

The notice given by Martin was in the following language:

‘I hereby exercise my irrevocable option

as provided in that paragraph of our

agreement to continue my employment

and retainer. I am ready and able to

comply with its terms and ask that

I be paid therefore $100 a week for

120 weeks beginning with the week

of June 20, 1954 and payable on the

subsequent Wednesday of each week

until the agreement ends.’

 We think that the natural interpretation of the notice is

that Martin elected to exercise the option as of the date

he specified, i. e., ‘beginning with the week of June 20,

1954’. The legal effect was the same, it seems to us, as

if Martin had dated and mailed his letter on the first day

of the week of the weekly period referred to—presumably

June 20, 1954. However the reference to the week may be

interpreted, the effective renewal date falls within the thirtyday period prescribed by the contract, and hence the notice

was a compliance with its terms. Star's argument to the

contrary is based on the assumption that Martin's letter is to

be construed as giving notice of a renewal to commence with

the date of his letter. Since this assumption is erroneous, the

contention falls. Likewise falls with it the further contention

that Martin must be alive at the time of actually *193 giving

the notice. Its legal effect was conditioned upon his being

alive at the time of the effective date of the exercise of the

option. Since he was alive at that time the notice was valid.

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Martin v. Star Pub. Co., 11 Terry 181 (1956)

50 Del. 181, 126 A.2d 238

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It follows that the decision below must be reversed and the

order of the trial court granting summary judgment must be

vacated.

In remanding the cause to the court below, we should add that

an examination of the pleadings shows that our decision does

not terminate this litigation. Star has pleaded defenses other

than those we have passed upon, and it will be open to Star to

press any or all of such other defenses as it sees fit.

The cause is remanded to the Superior Court of New Castle

County with instructions as above set forth and for further

proceedings not inconsistent with this opinion.

All Citations

11 Terry 181, 50 Del. 181, 126 A.2d 238

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APPENDIX A-6

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Mueller v. Marvel, Not Reported in A.2d (2004)

2004 WL 7325622

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

2004 WL 7325622

Only the Westlaw citation is currently available.

UNPUBLISHED OPINION. CHECK

COURT RULES BEFORE CITING.

Court of Common Pleas of Delaware,

IN AND FOR SUSSEX COUNTY.

Jerry MUELLER, Appellant/Defendant Below,

v.

Harold MARVEL, Appellee/Plaintiff Below.

C.A. No. 03–07–110

|

Submitted October 26, 2004

|

Decided December 8, 2004

Attorneys and Law Firms

Jerry Mueller, Pro Se, Appellant/Defendant

James C. Reed, Esquire, counsel for Appellee/Plaintiff

DECISION AFTER TRIAL

Kenneth S. Clark, Jr.

*1 On October 9, 2004 a trial de novo was held in the abovecaptioned matter, on appeal from the Justice of the Peace

Court. This is the Court's findings and decision.

FACTS

At all times relevant to this matter, Appellant–Defendant

Jerry Mueller (“Defendant”) owned real property in this

County improved by a two-story chicken house no longer

used to grow chickens. Appellee–Plaintiff Harold Marvel

(“Plaintiff”) is a farmer who grew hay and straw. The parties

entered into a one-year, oral contract sometime in the late

spring of 2000, for Plaintiff's use of the two-story chicken

house to store hay and straw, which Plaintiff offered for sale

to his customers. The annual rent for use of the building

was $1,000.00. Plaintiff began storing hay and straw in the

chicken house in the late spring of 2000. He paid the annual

rent for the 2000–2001 year on January 27, 2001.

The Defendant allowed the Plaintiff to continue storing and

selling hay and straw at the chicken house the following year,

through the summer of 2001. The Plaintiff paid the rent for

the 2001–2002 year on April 8, 2002.

The Plaintiff continued to store and sell hay and straw at the

chicken house through the summer of 2002. As of August 26,

2002, the Plaintiff had not yet paid his annual rent for the

2002–2003 year.

In July 2002 the structure of the chicken house began to

significantly lean and collapse in parts. The sides buckled

and caved in between floors. In the center of the building

the roof collapsed and was resting on the hay and straw

stored on the second floor. The Defendant became concerned

with the safety of the structure, since Plaintiff continued to

send his customers, unescorted, into the building to retrieve

purchased product. In July and early August, the Defendant

spoke to Plaintiff at least twice and expressed his concerns,

and requested that Plaintiff remove his product from the

building and cease sending customers into the building to

purchase hay and straw. Plaintiff did not remove the product,

and continued to send customers into the building. In early

to mid August the Defendant placed yellow tape and a “No

Trespassers” sign at the entrance of the chicken house.

On August 26, 2002, the Defendant hand-delivered a letter to

the Plaintiff's wife and to the Plaintiff's residential mailbox.

It stated that the lease agreement was terminated and that the

building would be demolished on August 27, 2002. The letter

gave Plaintiff permission to remove his hay and straw from

the premises on August 27 th “upon payment of the rent due.”

On the same day, the Plaintiff hired a demolition crew to tear

down the chicken house. On August 27, 2002 the demolition

began.

Plaintiff did not remove the product prior to the

commencement of the demolition. Defendant testified it was

his intention to continue storing the product on his property

during and after the demolition to enable Plaintiff to retrieve

the hay and straw, and that the demolition was planned in

such a way to permit the Plaintiff to remove the material.

After the first day of demolition work, however, and after

many months of drought, it rained non-stop for the next eight

days. Some of the hay and straw was damaged by water.

After the rains, Plaintiff removed less than half of the hay

and straw, and claims that the balance was unusable. Plaintiff

claims he lost 3,753 bales of hay, at $4.00 per bale, and

3,554 bales of straw, at $2.50 per bale. Plaintiff filed suit

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against Defendant for damages, claiming Defendant breached

the rental agreement by unilaterally terminating the lease

and demolishing the building. Defendant counterclaimed for

damages, claiming, inter alia, that Plaintiff's negligence and

misuse of the structure caused it to collapse, creating an

immediate danger to Defendant and Plaintiff's employees and

customers.

DISCUSSION

Applicable Law

*2 The facts establish that in mid–2000 the parties entered

into an oral, annual commercial lease, as defined in 25

Del. C. § 6102(1).The Residential Landlord Tenant Code is

not applicable in this case. See, Lloyd Walsh, Inc. v. M.C.

Holdings Co., 2001 WL 1555960, *3 (Del. Com. Pl. 2001).

Under the provisions of the Landlord–Tenant Code in effect at

the time the subject lease was entered into, a rental agreement

for a commercial rental unit is excluded from the Code. 25

Del. C. § 5101(b). The statute also provides that all legal rights

and remedies related to a commercial rental unit are governed

by general contract principles. Id. Therefore, the questions

before this Court will be decided under Delaware contract

law. To be successful under general contract law, the Plaintiff

has the burden of proving that the Defendant breached the

contract by a preponderance of the evidence. Guthridge v.

Pen–Mod, Inc., 239 A.2d 709, 713 (Del. Super. 1967).

Validity of the Lease Agreement in August 2002

The parties agree that the lease agreement was valid for

the 2000–2001 and 2001–2002 years. However, Defendant

contends that the agreement was no longer in effect in August,

2002, because the Plaintiff had not paid the 2002–2003 annual

rent by August. In the late spring of 2000, the Plaintiff orally

agreed to pay $1,000.00 per year to the Defendant for use

of the chicken house. No exact beginning date of this oral

lease was established at trial, but the Plaintiff testified that he

had the chicken house cleaned out just prior to storing hay

and straw in the structure. The cleaning invoice indicates that

occurred on June 8–9, 2000. Thus, the Court infers that the

agreement took effect shortly before June 8, 2000. According

to the testimony of both the Plaintiff and the Defendant, the

Plaintiff stored hay and straw in the building continuously

until the chicken house was destroyed on August 26, 2002.

Copies of two checks in the amount of $1,000.00 from the

Plaintiff to the Defendant were admitted in evidence. The

Plaintiff testified that the first check, dated January 27, 2001,

represented payment for the 2000–2001 lease period. He

also testified that the second check, dated April 8, 2002,

represented payment for the 2001–2002 year.

The facts before the Court indicate that the parties engaged

in an oral, bare-bones agreement. The parties agreed only on

an annual rental price and the purpose for which the chicken

house would be used. They did not specify when or how the

rent would be paid. Because the agreement itself is void of a

payment date, this Court must look to the parties' course of

conduct to determine when the 2002–2003 rent became due.

The only consistent characteristic of the payments received

for the 2000–2001 and 2001–2002 years is that the payments

were not made at the beginning of the lease period; rather

they were made near the end of the lease term, and prior to

the harvesting and storage of the next crop. The Defendant

accepted these payments both years. The course of conduct

between the parties establishes that rent payable at the end of

each lease period. Since the rent was not past due on August

26, 2002, the lease had not terminated for non-payment of

rent.

Breach of Contract

The Defendant testified that he became increasingly

concerned about the condition of the chicken house through

the month of August 2002. After his requests that Plaintiff

remove the product from the collapsed building went

unheeded, Defendant delivered a letter to the Plaintiff

unilaterally terminating the lease agreement on August 26,

2002.

A unilateral attempt to terminate a contract is a repudiation.

Rochdale Village, Inc. v. Public Service Employees Union,

605 F.2d 1290, 1297 (2nd Cir. 1979). If the contract does

not provide a right to unilaterally terminate the contract then

the repudiation does not terminate the contract, it breaches

the contract. Id. The agreement at issue did not provide any

right for either party to unilaterally terminate the contract.

Therefore, the Defendant's repudiation on August 26, 2002

constituted a breach of the contract.

*3 The Court finds, however, that Plaintiff has failed to

meet his burden of proof as to the amount of damages with

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sufficient specificity. Plaintiff was unable to establish by a

preponderance of the evidence the amount of hay and straw

remaining in the chicken house as of August 27, 2002. It is

clear from the evidence that Plaintiff permitted his customers

to come, unescorted, to the chicken house and remove hay and

straw, and that such activity had occurred all summer. Further,

the Court is not convinced by the testimony and evidence

as to the amount of straw and hay Plaintiff removed after

the demolition of the chicken house, or the amount of hay

and straw rendered unusable, if any. Finally, Plaintiff gave

conflicting evidence regarding the price he sold his product

for at the end of August, 2002. In order to prevail upon

his claim, Plaintiff must meet his burden of proof as to the

amount of his damages. He has failed to do so; the Court

may not speculate as to Plaintiff's damages. The Court cannot

reasonably infer or approximate the amount of Plaintiff's

damages with any degree of certainty from the evidence

presented. Pioneer Hi–Bred Int'l v. Holden Found. Seeds,

35 F.3d 1226, 1245 (8 th Cir. 1994); Del. Express Shuttle v.

Older, 2002 Del. Ch. LEXIS 124, at 59–60. Plaintiff's claim

therefore must be denied.

Impossibility Defense

Even if Plaintiff had sufficiently proven the amount of

his damages, the Court finds that Defendant was excused

from further performance under the contract. Defendant's

allegations of the collapse and unsafe condition of the chicken

house raised in his pleadings amount to an asserted defense

of impossibility. A promisor is released from liability for

breach of contract when further performance is impossible.

Under Delaware law, this defense is applicable only when

the impossibility of performance is caused by a fortuitous

event and not by an act of the promisor's own volition. Martin

v. Star Publishing Co., 126 A.2d 238, 242 (Del. 1956).

The Restatement defines “impossibility” as something that is

impracticable because of extreme and unreasonable difficulty,

expense, injury or loss. Restatement Contracts § 454 (1932).

The Delaware Supreme Court has noted different classes of

impossibility or frustration. One class is, “impossibility due

to fortuitous destruction or change in character of something

to which the contract related, or which by the terms of

the contract was made a necessary means of performance.”

Martin at 242,. Although the Martin court did not find that

the stated class applied, in dicta, the court acknowledged the

validity of the class. Id.

Section 460(2) of the Restatement of Contracts explains the

class of impossibility that relates to the fortuitous destruction

of something that is material to the contract. The Restatement

provides that where the existence of a specific thing is

necessary for performance of a promise in the bargain, and

that thing is materially deteriorated, the parties are discharged

from their duty to perform. Id. The Restatement explains

that when the essential thing is materially deteriorated, the

promisor is discharged from his obligation to perform, unless

the promisee remains ready and willing to render in full the

agreed exchange for that part of the performance that remains

possible. Id. However, even if the promisee remains willing

to perform, the promisor may still be discharged from his

obligation if the deterioration would make performance by

him materially more burdensome. Id.

To determine whether the defense of impossibility applies to

this case, the Court will consider three elements: first, whether

the chicken house was necessary for the performance of the

promise between the Defendant and the Plaintiff; second,

whether the chicken house was materially deteriorated; and

third, whether fortuitous circumstances rendered the chicken

house materially deteriorated.

As the actual object of the lease, the chicken house obviously

was necessary for the performance of the contract. The

chicken house had materially deteriorated, to the point of

collapse, at the time of the breach. Pictures submitted by

the Defendant, dated August 26, 2002, provide the Court

with a visual image of the structure's severe dilapidation.

Defendant testified that the building had collapsed some

time in July 2002, and over a short period of time. Plaintiff

testified that the building had become so unstable that it

collapsed in the center portion, and that he would be unable

to remove approximately one half of the hay and straw

stored in the structure due to its condition. Finally, it is clear

from the testimony and evidence that Plaintiff continued to

send customers to retrieve straw and hay from the building,

despite Defendant's warnings about the unsafe condition of

the building. The Court is not in need of expert testimony to

find the building was unsafe for invitees to enter. A two-story

building with buckled and caved-in sides and a collapsed

roof held up only by the straw and hay stored inside it is

clearly unsafe for continued use and occupation. Although

Plaintiff may have wished to continue using the collapsed

building, such use would have made Defendant's continued

performance under the contract materially more burdensome

due to his potential liability for personal injury damages to

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Plaintiff's customers. Consequently, the Court finds that the

second element of the impossibility defense is satisfied.

*4 The final element requires the Court to consider whether

the material deterioration was the result of a fortuitous

circumstance. The evidence supports a finding that it was

fortuitous circumstances, and no action or inaction of

Defendant, that caused the structure's collapse. Evidence

submitted by both parties indicates the building was old, and

at the end of its useful life, and in fact was being used by

Plaintiff for a use other than that for which it was designed.

The evidence indicates the building collapsed suddenly due to

its age and the Plaintiff's contracted use of the building. Thus,

fortuitous circumstances caused the material deterioration of

the chicken house. The Court finds that further performance

under the lease by Defendant, i.e., the provision of the rented

building for storage of Platinff's product and retrieval of that

product by Plaintiff's customers, was rendered impossible by

the collapse of the building.

Counterclaim

In his counterclaim, Defendant alleges that Plaintiff's

negligence and “misuse” of the building caused its collapse.

Defendant seeks $9,907.00 in damages as his costs in

demolishing the building, as well as damages for “pain and

suffering of mental anguish and duress.” After review of

the evidence, the Court finds that Defendant failed to meet

his burden of proof as to any element of his counterclaim.

Although the building may have collapsed from Plaintiff's use

of the building in storing thousands of bales of straw and hay

on both floors, that is exactly the use the parties anticipated in

their contract. Plaintiff failed to establish any other “misuse”

or negligence on the part of Plaintiff, or any related causation

as to the collapse of the building. Plaintiff's counterclaim is

denied.

CONCLUSION

The lease contract between the parties was valid and effective

as of August 26, 2002. The Defendant's termination letter

dated that same day constituted a repudiation of the contract

between the parties. Thus, the Defendant breached the

contract. However, Plaintiff has failed to prove its damages

with specificity. Further, the Defendant is excused from

any liability stemming from the breach because further

performance was rendered impossible by the prior collapse

and unsafe condition of the building. Therefore, judgment

is entered in favor of Defendant, and against Plaintiff on

Plaintiff's claim. Defendant failed to meet his burden of

proof as to his counterclaim. Therefore, judgment on the

counterclaim in entered in favor of Plaintiff, and against

Defendant. Each party shall bear his own costs.

IT IS SO ORDERED.

All Citations

Not Reported in A.2d, 2004 WL 7325622

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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APPENDIX A-

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Munro v. Beazer Home Corp., Not Reported in A.3d (2011)

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

2011 WL 2651910

Only the Westlaw citation is currently available.

UNPUBLISHED OPINION. CHECK

COURT RULES BEFORE CITING.

Court of Common Pleas of Delaware,

Sussex County.

Timothy J. MUNRO, Plaintiff

v.

BEAZER HOME CORPORATION,

Kenwood Development LLC,

Kenneth S. Woodring, Defendant(s).

Civil No. U608–03–081.

|

Submitted: May 5, 2011.

|

Decided: June 23, 2011.

Attorneys and Law Firms

Dean A. Campbell, Esquire, counsel for Plaintiff.

Charles J. Brown, Esquire, counsel for Beazer Homes.

David N. Rutt, Esquire, counsel for Kenneth Woodring.

DECISION AFTER TRIAL

ROSEMARY BETTS BEAUREGARD, Judge.

*1 Plaintiff Timothy Munro brings this action for damages

alleging that defendants promised to connect his property

to the Fenwick Island Sewer District and failed to do

so. In addition to breach of contract against all parties,

Munro brings an action in fraud against Defendant Kenneth

Woodring and an action in quantum meruit against Defendant

Beazer Homes Corporation. Both defendants deny liability

or, in the alternative, assert the other is liable. Finally,

the parties stipulate that Woodring's sole proprietorship,

Kenwood Development Co., is a nominal party only and

that Woodring assumed personal liability for all Kenwood

contracts material to the litigation.

There are essentially two issues: (1) Was Woodring or Beazer

contractually obligated to connect Munro's home to the

Fenwick Island Sewer District; and (2) if so, did Munro suffer

any damages?

At the conclusion of the trial on this matter, the Court reserved

decision and requested that the parties submit their closing

arguments in writing. After carefully reviewing the parties'

submissions, the Court finds in favor of Munro and Beazer

and against Woodring for the reasons stated herein.

FACTUAL BACKGROUND

Woodring is a Maryland-based real estate developer who,

during the late 1990s, operated in Sussex County, Delaware.

Woodring, with the help of two third-party investors,

purchased a parcel of land now known as Ashley Manor for

approximately $300,000.

The Ashley Manor parcel is located northwest of Fenwick

Island, a popular beach community. Woodring and his

investors purchased the parcel with the intention of

developing it into a large residential community, complete

with a community pool and club house. 1 As for the

prospective residents, Woodring envisaged their “average

age ... [to be] between 65 and 75. Not the type of people to

be running thru [sic] the woods ...”; that is to say, Woodring

intended to create a relaxing retirement community by the

beach. 2

Before Woodring could begin construction of the Ashley

Manor development, however, he needed to rezone the

parcel. At the time of its purchase, Ashley Manor sat

in an agricultural residential district. This would not suit

the large retirement community planned by Woodring. 3

Thus, Woodring and his landscape architects submitted an

application to the Sussex County Council to rezone the

Ashley Manor parcel into a high density residential district. 4

Woodring's application was a partial success. The Sussex

County Council agreed to rezone the Ashley Manor parcel

into a high density residential district on the condition

that Woodring connect it and adjacent properties to the

Fenwick Island Sanitary Sewer District. 5 Satisfaction of

this condition required the approval of adjacent landowners

whose properties were served by privately owned septic

systems. 6

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Woodring's architects first proposed to accomplish the

necessary connection through a series of subterranean

easements. Pursuant to this proposal, Woodring planned to

run eight-inch diameter pipes from the Ashley Manor parcel

in a southeasterly direction across adjacent properties and,

ultimately, connect the pipes to a pump station within the

Sewer District. One of these planned easements would run

through the property of Timothy Munro. 7

*2 Munro did not share Woodring's desire to bring sewer

services to the area. It was Munro's view that his new septic

system capably served his needs and he did not want to pay

any additional expenses associated with a sewer connection.

Moreover, Munro feared that the future residents of Ashley

Manor would trespass across his land by way of the proposed

easement toward a convenience store located across the street.

Accordingly, Munro objected to Woodring's initial plan. 8

In response, Woodring submitted a new proposal that avoided

the need for an easement across Munro's property. 9 The new

proposal, however, did not avoid the annexation of Munro's

property into the Sewer District. Thus, Woodring still required

Munro's acquiescence to the plan. 10

The rezoning was vital to Woodring's success with the Ashley

Manor project. Woodring, therefore, approached Munro to

gain his approval. After some negotiation, Munro agreed

to remove this objection of Woodring's second proposal as

consideration for the first of two agreements (“first contract”):

In consideration for your cooperation in the expansion

of the sewer district, we hereby agree to be responsible

for any monetary impact this may have on your property.

This would include Front Foot Benefit Charges, increase in

property taxes and if required, connection fees and cost of

sewer service.

Sussex County allows for exemptions for sewer

connections under certain circumstances. Kenwood

Development Co. [i.e., Woodring's sole proprietorship]

accepts the responsibility for filing any documents if an

exemption is required.

This agreement will be for a period of 10 years from date

of sewer services availability. 11

Pursuant to this agreement, Munro sent a letter to Sussex

County Council and removed his objection to Woodring's

second proposal. 12 Woodring, however, never sought an

exemption on behalf of Munro.

Despite his contractual obligation to withhold his opposition

to the Sewer District expansion, Munro renewed his objection

less than one year later at a public hearing. 13 Evidently,

Munro still had concerns, perhaps new concerns, regarding

the expansion of the Sewer District. The Council, therefore,

reserved its decision on Woodring's second proposal and

provided Woodring and Munro an opportunity to discuss

possible solutions. The parties' negotiations produced a

second agreement (“second contract”):

As we discussed ... the expansion of the sewer district will

eliminate the possibility in the future for you to construct

a replacement LPP septic system to serve your personal

residence. This letter is offered to confirm an agreement we

discussed as follows:

At such time that Ashley Manor residential planned

community is constructed, and the gravity sewer

piping is installed ... to serve Ashley Manor, a small

diameter force main will be installed from [the

gravity sewer] to your residence. The force main as

currently envisioned will be approximately one (1)

inch in diameter ... The cost of installation of the force

main will be borne entirely by the Ashley Manor

developer. 14

*3 In a subsequent letter, Woodring assured Munro that the

foregoing agreement incorporated the original contract. 15

Munro, thereafter, removed his second objection to

Woodring's proposal. As a result, the Sussex County Board

adopted a resolution to expand the Sewer District to include

Ashley Manor and, incidentally, the Munro property. 16

Despite his success in securing all the necessary approvals

for the Ashley Manor development, Woodring could not

maintain ownership of the project long enough to see

construction begin. A business dispute between Woodring

and his investors required the intervention of the Court of

Chancery which resolved the conflict by ordering a partition

of the property. As a result, Woodring and his fellow investors

entered into negotiations with Beazer, a home builder and

dealer.

Beazer ultimately agreed to purchase Ashley Manor from

Woodring and his investors for $4,275,000. The Agreement

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of Sale contained a Due Diligence Clause whereby Beazer

reserved the right to walk away freely if dissatisfied with

the information provided by Woodring. The parties twice

executed amendments to the agreement which, together,

extended the due diligence period to over 100 days. 17

During this time, Woodring provided Beazer access to a

series of private business documents. These documents

included a federal wetlands delineation and boundary survey,

a series of preliminary site plans, letters associated with

an environmental impact study, letters concerning zoning

approval, agreements with a local water company, and a copy

of minutes from the Sussex County Council hearing wherein

the Council approved the expansion of the Sewer District. 18

To the Court's knowledge, the copy of these minutes is the

only document that gives mention of Munro. The minutes do

not document any obligation to connect Munro to the Sewer

District.

In addition, Beazer had access to any publicly accessible

information concerning the Ashley Manor development

held by State agencies. A memorandum drafted by

Woodring's architects and provided to Beazer during the due

diligence period recommended that “[a]dditional research

should be undertaken at the Sussex County Planning

and Zoning Department, Sussex County Engineering

Department, Delaware Department of Transportation, Sussex

Conservation District, Natural Resources Conservation

Services, DNREC, and the Office of The State Fire

Marshall.” 19

The Court heard testimony that information held by these

agencies contained references to the Munro–Woodring

contracts. Despite the architects' recommendations, Beazer

did not inspect these public resources.

After the due diligence period expired, but before settlement,

Beazer assigned the Agreement of Sale to Beazer's general

contractor, Ashley Manor, LLC, which ultimately settled on

the property. Prior to closing, Woodring and his investors

assigned “all their rights, title, and interest in all Plans and

other Development Data prepared by and/or acquired by and

utilized by Seller's engineer ... to secure the approval of the

Preliminary Site Plan ...” 20

*4 Ashley Manor, LLC began construction of the retirement

community sometime after settlement and, in the process,

connected it to the Sewer District. At this time, however,

the subcontractor responsible for Ashley Manor's sewer

connection refused to connect Munro.

Munro contacted his counsel in this case soon after it became

apparent that Ashley Manor's subcontractor did not intend

to connect Munro's property to the Sewer District. Munro's

councel, thereafter, dispatched a letter to both Beazer and

Woodring demanding assurance that the parties intend to

honor the Munro–Woodring contracts by performing a sewer

connection and by paying any economic impact incurred to

Munro associated with the Sewer District expansion. 21

In response, then-councel for Beazer denied any knowledge

of the MunroWoodring contracts and indicated that it had

no intention of performing any obligation undertaken by

Woodring. 22 Woodring, likewise, denied any liability for

the Munro–Woodring contracts. Instead, Woodring stated

that Beazer assumed his prior obligations at the time of its

purchase of the Ashley Manor development. 23

At the present time, Munro's property remains unconnected to

the Sewer District. Although the Court heard some testimony

that it is possible for Munro to obtain an exemption from

Sussex County's requirement that residents living within the

Sewer District connect to the sewer, neither Munro nor any

of the defendants have applied for one. Woodring, however,

testified that he is ready to do so now. Even so, such

exemptions are discretionary with Sussex County Council

and not guaranteed. Moreover, it is clear that, even with

an exemption, Munro would be required by the County to

purchase a sewer connection should his septic system fail in

the future.

In light of the foregoing, Munro alleges that Woodring

undertook a contractual obligation to connect his home

to the Sewer District and failed to do so. Alternatively,

Munro argues that Beazer assumed Woodring's obligation

in connection with its purchase of the Ashley Manor

development. Both defendants deny liability or, in the

alternative, assert that the other is liable. In addition, Munro

argues that, even if Beazer did not assume a contractual

obligation to connect Munro to the Sewer District, it is liable

for the unjust benefit it incurred through Woodring's alleged

breach. Finally, Munro brought an action against Woodring

for common law fraud. The Court, however, did not hear

any evidence concerning this claim. Munro's fraud claim is,

therefore, dismissed at this time.

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ANALYSIS

Breach of Contract

The first issue is whether the two contracts, when read

together or independently, impose an enforceable contractual

obligation on Woodring to connect Munro to the Sewer

District. The defendants argue that the first contract is not

presently enforceable because, although it does impose such

an obligation, that obligation was conditional on Munro's

need to connect to the Sewer District in the first instance.

The Court finds instead that Woodring waived the alleged

condition through both his conduct and by express promise.

*5 Delaware courts adhere to the objective theory of

contracts. Unless a contract is ambiguous or there exists a

suggestion of mistake, fraud, or duress, our courts give effect

to the contract as it is written and understood by a reasonable

third-party. 24 In doing so here, the Court looks only to the

plain meaning of the terms found within the four corners of

the agreement. 25

In the first contract, Woodring expressly assumed liability

“for any monetary impact” the sewer expansion had on

Munro's property, including “connection fees and costs of

sewer service ... for 10 years from date of sewer service

availability.” 26 The Court finds that it was reasonable for

Munro to expect, based on this language, that Woodring

assumed a contractual obligation to connect Munro's property

to the sewer. The additional term “if required,” however,

raises a supplemental issue as to whether the parties intended

to make this obligation conditional.

Express language in a contract that qualifies a promise to

perform upon the happening of a stated event creates what

is known as a condition precedent. 27 A condition precedent

is an event that, although not certain to occur, must occur

before performance under a contract becomes due. 28 Courts

interpret language such as “if,” “as soon as,” or “provided

that” as the express creation of a condition. Even if such

language is used and a condition precedent is created, it may

be waived when a party conducts itself in such a way that

evidences such an intention. 29 Consideration is not necessary

to support a waiver if the condition precedent is inserted into

the contract for the waiving party's benefit. 30

The Court finds that the parties' inclusion of the phrase

“if required” is sufficient for the creation of a condition

precedent. Further, a reasonable interpretation of the

condition is that Woodring's performance obligation arises

only if Sussex County deems Munro's sewer connection

necessary. This interpretation of the condition is supported

by the language of the contract itself: “Sussex County

allows for exemptions for sewer connections under certain

circumstances. Kenwood Development Co. [i.e., Woodring's

sole proprietorship] accepts the responsibility for filing any

documents if an exemption is required.” 31

Woodring argues, however, that the condition precedent

has not been satisfied because Sussex County has yet to

require Munro to connect to the sewer. Notwithstanding

this contention, the Court finds that Woodring waived the

condition precedent in two ways:

First, Woodring's conduct following execution of the contract

evidences his intent to waive the condition. Woodring

“accept[ed] the responsibility for filing any documents if

an exemption is required.” 32 Woodring and his architects

learned that an exemption was required only a few months

after the execution of the contract upon receipt of a letter

from the Sussex County Engineering Department which

stated precisely that. 33 Despite this understanding, Woodring

testified that he did not bother to file the necessary exemption

application with Sussex County until faced with the present

litigation. If Woodring intended to secure the benefit of the

condition precedent, he would have followed through with the

exemption application process and made certain that a sewer

connection was unnecessary.

*6 Second, Woodring expressly waived the condition

precedent through the language of the second agreement. That

agreement provides that “[a]t such time that the Ashley Manor

residential planned community is constructed, and that the

gravity sewer piping is installed along Route 20 to serve

Ashley Manor, a small diameter force main will be installed

from the Route 20 gravity sewer to your residence.” 34 The

language “[a]t such time” and “will be” effectively eliminate

the function of the condition.

Beazer contends that the second agreement should be

disregarded because it is a modification of the initial contract

and lacks valid consideration. Specifically, Beazer posits that

the purported consideration for the modification was Munro's

promise to withhold his objection to the Sewer District

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expansion. Beazer argues that Munro had a preexisting duty

that arose from the first contract to withhold his objection and

such past consideration cannot supply new consideration for

a subsequent modification.

While it is true that the modification is unenforceable

because it is supported only by past consideration, lack of

consideration does not bar enforcement of a waiver. Woodring

inserted the condition into the initial contract for his benefit

—it served as a means by which Woodring could avoid

performance. His unconditional promise to undertake the

sewer connection, regardless of whether or not a sewer

connection was required, effectuates an express waiver of this

benefit.

Accordingly, the Court finds that Woodring owed Munro an

enforceable obligation to connect Munro's home to the sewer.

Cross–Claim

Woodring contends that Beazer assumed responsibility for

honoring the MunroWoodring contracts and, therefore, is the

true party liable for breach. Specifically, Woodring submits

that a buyer operating under a due diligence clause has an

affirmative duty to discover the unperformed prior obligations

of the seller and that the buyer assumes any liability after the

due diligence period expires, regardless of whether such prior

obligations were discovered. In support of this contention,

Woodring cites Homan v. Turoczy. 35

In Homan, the Chancery Court dismissed the plaintiffs' claim

of equitable fraud because the plaintiffs failed to satisfy

the reasonable reliance element of the claim. The plaintiffs

alleged that the defendant omitted material information

in connection with the sale of his business. The court

reasoned that the information sought by plaintiffs would have

been disclosed had they engaged in serious due diligence

investigation. The court concluded that the plaintiffs'

purchase of the defendant's business without conducting such

an investigation was commercially unreasonable.

Woodring asserts that the Homan opinion stands for the

principle that due diligence investigations must be done in

a commercially reasonable manner and that the buyer under

these circumstances is responsible for any liability after

purchase that arises as a consequence of not doing so. The

Court does not agree.

*7 The Homan court's analysis of commercial

reasonableness in connection with due diligence

investigations is limited to whether a buyer who brings

an equitable fraud claim reasonably relied on the seller's

representations. Homan does not impose an affirmative duty

to uncover the outstanding obligations of the seller to which

the buyer is not in privity of contract.

Thus, the real inquiry here is whether Beazer's conduct

placed it in privity with Munro. There are several means

by which a third-party, such as Beazer in this case, can

establish privity with the contracting parties: assignment and

delegation, a third-party beneficiary relationship, or agency.

Of these means of privity, Woodring seriously asserts only

that he assigned the Munro–Woodring contracts to Beazer.

Woodring submits as evidence of assignment a document

entitled “Assignment as to Plans and Development

Data” (“Assignment”). In that document, Woodring

purportedly assigned to Ashley Manor, LLC “all ... rights,

title, and interest in all Plans and other Development Data

prepared by and/or acquired by and utilized by Seller's

engineer ... to secure the approval of the Preliminary Site

Plan ...” Even assuming that this assignment to Ashley Manor,

LLC is enforceable against Beazer as well, the Court does not

find that this assignment contemplates the Munro–Woodring

contracts.

An assignment is the transfer of rights or property. 36 Thus,

one can assign only rights through an assignment-not a duty

to perform a personal obligation. 37 A delegation, conversely,

is “a transaction by which a party to a contract arranges to

have a third party perform the party's contractual duties.” 38

The above quoted language does not suggest that the parties

intended to delegate to Beazer an obligation to perform the

Munro–Woodring contracts. It appears to the Court only that

Woodring intended to assign Ashley Manor, LLC certain

proprietary information—nothing more. Moreover, the Court

cannot reasonably interpret “Plans and other Development

Data prepared by and/or acquired by and utilized by Seller's

engineer ... to secure the approval of the Preliminary Site

Plan ...” to include copies of the MunroWoodring contracts.

While the contracts may have been integral to the approval

of the “Preliminary Site Plan,” the Court finds that, had

Woodring intended to delegate a personal service contract, it

would have done so expressly.

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In addition, an assignee of rights is not bound to perform

the assignor's duties and obligations associated with those

rights unless the assignee expressly agrees to do so. 39 There

is no language in the Assignment or the Agreement of Sale

that convinces the Court that Beazer expressly assumed any

obligation to connect Munro to the Sewer District.

Accordingly, the Court does not find that an effective

delegation of the MunroWoodring contracts occurred.

Quantum Meruit

Finally, Munro asserts a claim of quantum meruit against

Beazer. Quantum meruit is “a quasi-contract claim that allows

a party to recover the reasonable value of his or her services

if: (i) the party performed the services with the expectation

that the recipient would pay for them; and (ii) the recipient

should have known that the party expected to be paid.” 40

*8 The Court finds that Munro's quantum meruit claim lacks

merit because Munro could not have reasonably expected that

Beazer, an entity whose future participation in the Ashley

Manor development project was unknown to Munro at the

time of his performance, would ultimately pay him for his act

of removing his opposition to the Sewer District. Moreover,

even had Beazer known of the Munro–Woodring contracts, it

would have no reason to know that Munro expected Beazer

to pay him for his performance. After extensive review of the

trial testimony and exhibits submitted by the parties, the Court

finds nothing that would serve to put Beazer on notice that

Woodring failed to perform his part of the Munro–Woodring

contracts and that Munro expected Beazer to pay for his

service of removing his objection.

Accordingly, the Court finds that Munro failed to meet his

burden for quantum merit.

Damages

As discussed above, Woodring owed Munro an obligation to

connect Munro's property to the sewer. Woodring breached

this obligation by repudiating the contract. 41 Accordingly,

Woodring must pay Munro damages.

The standard measure for damages recoverable for breach

of contract is the expectation interest of the non-breaching

party. 42 To be entitled to expectation damages, the plaintiff

“must show that the injuries suffered are not speculative or

uncertain, and that the Court may make a reasonable estimate

as to an amount of damages.” 43 This requires proof of

damages to a reasonable certainty. 44

Delaware recognizes the affirmative defense of failure to

mitigate damages. “As an affirmative defense, it is necessary

for the defendant to specially plead plaintiff's failure to

mitigate damages.” 45 Failure to timely raise an affirmative

defense constitutes a waiver of the right to do so. 46

Based on the first contract, which the Court found to be

enforceable, Munro reasonably expected Woodring to pay for

any economic impact the expansion of the Sewer District

had on his property. The parties stipulate that this includes

System Connection Charges, Permit Fees, Service Charges,

and Sewer Assessment Charges. These charges and fees

amount to $7,413.

In addition, the Court finds that the first contract also

contemplates the actual construction of the sewer connection.

At trial, Munro's expert plumber testified that such a

connection will cost Munro $14,300. 47

In defense of these damages, the defendants allege that Munro

could have mitigated damages by applying to Sussex County

Council for an exemption from its requirement that residents

within the Sewer District must connect to the sewer. However,

the defendants failed to raise the affirmative defense of

failure to mitigate damages during the pleading stages of

this litigation. Because affirmative defenses must be specially

pleaded or else waived, the Court must treat the defendants'

failure to plead the defense as a waiver.

The Court is convinced after hearing the evidence and

submissions of the parties, that Munro has proven his

reasonable damages in the amount of $21,713.00.

CONCLUSION

*9 For the foregoing reasons, the Court finds that Plaintiff

has proven its claim of breach of contract against Defendant

Woodring by a preponderance of the evidence. Therefore,

judgment is entered against Woodring in the amount of

$21,713.00, together with pre-and post-judgment interest at

the legal rate of 5.75 percent plus costs. The Court finds in

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favor of Defendants Kenwood Development Co. and Beazer

Homes Corporation on this claim.

The Court finds that Plaintiff has failed to prove its remaining

claims by a preponderance of the evidence. Accordingly,

judgment is entered in favor of Defendant Woodring on

Plaintiff's claim for fraud. Additionally, on Plaintiff's claim

for quantum meruit, judgment is entered in favor of Defendant

Beazer Homes Corporation.

Finally, the Court finds that Defendant Woodring failed

to prove its cross-claim against Defendant Beazer Homes

Corporation. Therefore, judgment is entered in favor of

Defendant Beazer Homes Corporation on that claim.

IT IS SO ORDERED,

All Citations

Not Reported in A.3d, 2011 WL 2651910

Footnotes

1 Woodring ex. 4.

2 Munro ex. A.

3 Munro ex. B.

4 Munro ex. B.

5 Munro ex. B.

6 Woodring ex. 3.

7 Woodring ex. 3.

8 Munro ex. A.

9 Woodring ex 4.

10 Woodring ex. 5.

11 Munro ex. C.

12 Munro ex. D.

13 Munro ex. E.

14 Munro ex. F (emphasis in original).

15 Munro ex. F.

16 Munro ex. E.

17 Woodring ex. 9.

18 Woodring ex. 15.

19 Woodring ex. 15.

20 Woodring ex. 13.

21 Munro ex. G.

22 Munro ex. H.

23 Munro ex. I.

24 Osborn ex rel. v. Kemp, 991 A.2d 1154, 1159 (Del.2010).

25 Id.

26 Munro ex. C.

27 17A Am.Jur.2d Contracts § 455.

28 Restatement (Second) of Contracts § 224 (1981).

29 Pouls v. Windmill Estates, LLC, 2010 WL 2348648 (Del.Super. June 10, 2010).

30 Id. at n. 9; see also, 17A Am.Jur.2d Contracts S 637.

31 Munro ex. C.

32 Munro ex. C.

33 Woodring ex. 5.

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34 Munro ex. F (emphasis added).

35 2005 WL 2000756 (Del. Ch. Aug. 12, 2005).

36 Black's Law Dictionary 128 (8th ed.2004).

37 Reserves Dev. LLC v. Crystal Properties, LLC, 986 A.2d 362, 370 (Del.2009), reargument denied (Jan. 6,

2010).

38 Black's Law Dictionary 459 (8th ed.2004).

39 Chrysler v. Airtemp Corp., 426 A.2d 845, 852 (Del.Super.1980).

40 Petrosky v. Peterson, 859 A.2d 77, 79 (Del.2004).

41 Restatement (Second) of Contracts §§ 251 and 253 (1981).

42 E.I. Dupont de Nemours and Co. v. Pressman, 679 A.2d 436, 445 (Del.1996).

43 LaPoint v. AmerisourceBergen Corp., 2007 WL 2565709, at *9 (Del. Ch. Sept. 4, 2007) aff'd sub nom.

Amerisourcebergen Corp. v. LaPoint, 956 A.2d 652 (Del.2008).

44 Id.

45 Tanner v. Exxon Corp., 1981 WL 191389 (Del.Super.Ct. July 23, 1981).

46 Fletcher v. Ratcliff, 1996 WL 527207 (Del Super. Aug. 6, 1996) aff'd, 690 A.2d 466 (Del.1996).

47 Woodring disputes Munro's expert's belief that two-inch diameter sewer discharge lines are necessary to

complete the connection. Instead, Woodring suggests that one-inch lines are adequate. Because Woodring

did not submit any expert testimony in rebuttal of Munro's expert plumber, the Court must again find in favor

of Munro on this issue.

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APPENDIX A-

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Novipax Holdings LLC v. Sealed Air Corporation, Not Reported in A.3d (2017)

2017 WL 5713307

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2017 WL 5713307

Only the Westlaw citation is currently available.

UNPUBLISHED OPINION. CHECK

COURT RULES BEFORE CITING.

Superior Court of Delaware.

NOVIPAX HOLDINGS LLC

and Novipax LLC, Plaintiffs,

v.

SEALED AIR CORPORATION, Cryovac,

Inc., Sealed Air Corporation (US), and

Sealed Air (Canada) CO./CIE, Defendants.

C.A. No.: N17C–03–1682 EMD CCLD

|

Submitted: September 25, 2017

|

Decided: November 28, 2017

Upon Defendants' Motion to Dismiss, DENIED.

Attorneys and Law Firms

Jeffrey Moyer, Esquire, Richard P. Rollo, Esquire, Travis

S. Hunter, Esquire, Richards, Layton & Finger, P.A.,

Wilmington, Delaware and Robert M. Hoffman, Esquire,

Michael J. Chiusano, Esquire, James C. Bookhout, Esquire,

Andrews Kurth Kenyon LLP, Dallas, Texas. Attorneys for

Novipax Holdings LLC and Novipax LLC.

Kenneth J. Nachbar, Esquire, John P. DiTomo, Esquire,

Barnaby Grzaslewicz, Esquire, Morris, Nichols, Arsht &

Tunnell LLP, Wilmington, Delaware and Robin L. Cohen,

Natasha Romagnoli, Esquire, McKool Smith P.C., New York,

New York. Attorneys for Sealed Air Corporation, Cryovac,

Inc., Sealed Air Corporation (US), and Sealed Air (Canada)

Co./CIE.

Eric M. Davis, Judge

I. INTRODUCTION

*1 This breach of contract and fraud case is assigned to

the Complex Commercial Litigation Division of this Court.

This civil action arises out of a sale and purchase of a North

American foam tray and absorbent pad business. Plaintiffs

Novipax Holdings LLC and Novipax LLC (collectively,

“Novipax”), the purchasers, allege that Defendants Sealed Air

Corporation, Cryovac, Inc., Sealed Air Corporation (US), and

Sealed Air (Canada) (collectively, “Sealed Air”) intentionally

misled and induced Novipax to purchase the business based

on omissions, concealments, and material misrepresentations.

Novipax now brings an action against Sealed Air. Through

a complaint filed on or about March 31, 2017 (the

“Complaint”), Novipax asserts claims for: Fraud, Fraudulent

Inducement, and Willful or Intentional Misrepresentations

(Count I), Breach of Asset Purchase Agreement (Count

II); Breach of Transition Services Agreement (Count III);

Declaratory Judgment and Setoff (Count IV); and Unjust

Enrichment (Count V).

Sealed Air has filed its Motion to Dismiss (the “Motion to

Dismiss”). Through the Motion to Dismiss, Sealed moves to

dismiss Counts I–V for failure to state a claim upon which

can be granted. For the reasons set forth below, the Court will

DENY the Motion to Dismiss.

II. RELEVANT FACTS1

A. THE FOAM TRAY AND ABSORBENT PAD

INDUSTRY

According to the Complaint, there are two types of foam trays

in the industry—barrier and non-barrier foam trays. 2 Barrier

foam trays provide an airtight package that extends the shelf

life of meat, poultry, seafood, and other protein products. 3

Barrier foam trays are sold to processors, who then package

the food in the barrier foam trays and sell the packaged food to

retail outlets like Walmart. 4 Non-barrier foam trays are more

of a “commodity product sold directly to customers for overwrapped applications.” 5

Absorbent pads are used in conjunction with both barrier

and non-barrier foam trays. 6 Absorbent pads are designed

to absorb product fluids in order to create a more attractive

presentation of the product to consumers. 7

B. SEALED AIR SELLS ITS BARRIER FOAM TRAY

AND PAD BUSINESS

Sealed Air owned and operated a food tray business that sold

rigid trays, foam trays, and absorbent pads to food handlers

and processors. 8 In 2013, Sealed Air attempted to sell its

foam tray and pads business, which at that time included

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European and South American assets. 9 During the initial sale

process, Sealed Air was purportedly receiving bids of over

$300 million. 10 Sealed Air, however, was unable to close a

sale at that price. 11

*2 In the summer of 2014, Sealed Air initiated a second

sale process, this time for the North American assets only. 12

Sealed Air sought to sell its North American foam tray and

pads business, but not its rigid tray business. 13 On September

16, 2014, Novipax bid $152.5 million for the foam tray and

pad business (the “Business”).

Sealed Air conducted its first management presentation to

Novipax on October 21, 2014. 14 At this meeting, Sealed

Air disclosed to Novipax that the Business's largest customer,

Tyson, might demand a price concession in order to continue

purchasing foam trays and pads. 15 Sealed Air therefore

asked all remaining bidders, including Novipax, for new bids

reflecting the valuation impact of Tyson's demand. 16 On

November 4, 2014, Novipax reduced its bid to $80 million.

On February 11, 2015, Novipax and Sealed Air entered into an

Asset Purchase Agreement (the “APA”) for the Business. 17

Novipax and Sealed Air also executed a Transition Services

Agreement (the “TSA”). Novipax closed its purchase of the

Business on April 1, 2015 (the “Closing”). 18

C. THE APA

The APA defines the parties as: (i) Sealed Air Corporation,

referred to as the “Parent”; (ii) Cryovac, Inc., (iii) Sealed Air

Corporation (US), and (iv) Sealed Air Corporation (Canada),

referred to with the Parent as the “Sellers”; and (iii) DankPak

LLC 19 , referred to as the “Buyer.” For internal consistency,

unless quoting the language of the APA, the Court will refer

to the “Sellers” as “Sealed Air,” and the Court will refer to

the “Buyer” as Novipax.

As part of the sale and purchase of the Business, the APA

imposes certain disclosure duties and alike on Sealed Air and

Novipax. This includes representations and warranties and

affirmative and negative covenants.

i. Sealed Air's Representations and Warranties

Article IV of the APA specifies Sealed Air's representations

and warranties. 20 Section 4.5 requires Sealed Air to represent

and warrant about changes related to the Business. 21 Under

Section 4.5, Sealed Air represents and warrants that:

(a) there has not been any Material

Adverse Effect, (b) the Business has

been operated in the Ordinary Course

in all material respects ... (d) except

as set forth on Section 4.5 of the

Disclosure Schedule, there has not

been any action by any Seller that, if

taken during the period from the date

of this Agreement through the Closing

Date, would constitute a breach of

Section 6.1(a), (f), (g), (i), or (l). 22

Material Adverse Effect is defined as “any change,

event, circumstance, condition, or effect that is materially

adverse to ... (ii) the condition (financial or otherwise),

assets, business, operations, or results of operations of the

Business.” 23 Ordinary Course is defined as the ordinary and

usual course of normal day-to-day operations consistent with

past practice. 24

Section 4.6(b) requires Sealed Air to represent and warrant

regarding possible changes to certain Material Contracts. 25

Under Section 4.6(b), Sealed Air represents and warrants that:

*3 There is not any existing material

default or event of material default,

or any event which, with or without

notice or lapse or time or both, would

constitute a material default under any

Material Contract by any Seller, or, to

the Knowledge of Parent, by any other

party thereto. No Seller has received

any notice of the intention of any

party to terminate any such Material

Contract. 26

The Material Contracts are listed in Section 4.6(a) to the

Disclosure Schedule and include the supply agreements with

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certain customers of the Business such as Tyson, Perdue, and

Cargill. 27

Section 4.7 then requires Sealed Air to represent and warrant

about Purchased Assets, specifically that the Purchased

Assets “constitute the rights, assets, and services required to

conduct the Business following the Closing.” 28 Purchased

Assets include tangible and intangible assets of the Business,

including Sealed Air's goodwill. 29

Finally, Section 4.18 requires Sealed Air to make certain

representations related to the Business's Major Customers. 30

Under Section 4.18, Sealed Air represents and warrants that

“in the last 12 months, no Major Customer has provided

written notice to Sellers of its intention to terminate its

relationship with any Seller with respect to the Business,

whether as a result of the Transaction or otherwise.” 31 The

Major Customers are the ten largest customers of the Business

(in terms of dollar volume of purchases from Sellers) and

are defined on Section 4.18 of the Disclosure Schedule and

include Tyson, Perdue, and Cargill. 32

Article IV of the APA concludes by providing a disclaimer

about Sealed Air's representations and warranties—that

neither Sealed Air nor any of its representatives or alike made

any other representation or warranty, express or implied, other

than those provided in Article IV. 33

ii. Novipax's Representations and Warranties

Article V of the APA sets forth Novipax's representations

and warranties. 34 Under Section 5.7, Novipax must represent

and warrant that it has conducted a financial investigation of

the Business, which includes Novipax's “own estimate of the

value of the Business and the Purchased Assets. 35 Section

5.7 also requires Novipax to represent and warrant that:

Buyer has received certain estimates,

budges, forecasts, plans and financial

projections (collectively, “Forward

Looking Statements”). There are

uncertainties inherent in the Forward

Looking Statements, and Buyer is

familiar with such uncertainties. Buyer

is taking full responsibility for

making its own evaluation of the

adequacy and accuracy of all Forward

Looking Statements (including the

reasonableness of the assumptions

underlying the Forward Looking

Statements). 36

Section 5.7 also required Novipax to represent and warrant

that:

Buyer is not relying on any

representations, warranties, omission

or covenants of Sellers or

any of their Representatives

(including any financial statements

not expressly covered in

Section 4.4, any projections,

and the information contained

in the confidential information

memorandum, management

presentation and other due diligence

materials made available to Buyer)

except as expressly set forth in this

Agreement and any Seller Related

Agreement executed and delivered

to any Buyer Party pursuant to this

Agreement. 37

iii. The Covenants

*4 Article VI of the APA places certain affirmative and

negative covenants on the parties before the Closing. 38 As it

related to Sealed Air's operation of the Business, Section 6.1

states that:

Sellers shall conduct the Business in

all material respects in the Ordinary

Course and, to such extent, use

reasonable best efforts to preserve

intact its current business organization

and the goodwill of the Business ...

maintain its existing relationships

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with customers, suppliers, vendors,

distributors, agents ... including

the Major Customers and Major

Suppliers ... Sellers shall maintain

all of the Purchased Assets in their

current condition, ordinary wear and

tear excepted. 39

Section 6.1 further places negative covenants on Sealed Air's

operation of the Business:

Sellers shall not do any of the following with respect to the

Business without the prior written consent of Buyer (which

consent will not be unreasonably withheld, conditioned, or

delayed):

(a) breach any material obligation or duty imposed upon

a Seller by any applicable Law;

(b) except in the Ordinary Course, make any purchase,

sale, or disposition of any Purchased Asset

(c) except in the Ordinary Course, (i) amend or terminate

any Assumed Contract or (ii) materially amend or

terminate any material business arrangements 40

Section 6.3(b) then places affirmative duties on Sealed Air

and Novipax related to party communications. 41 Section 6.3

states that:

Parent and Buyer shall give written

notice to the other promptly

upon becoming aware of (i) any

representation or warranty contained

in this Agreement becoming untrue or

(ii) the failure of any party to comply

with or satisfy in any respect any

covenant, condition, or agreement to

be complied with or satisfied by it

under this Agreement. 42

Article VII makes compliance with the foregoing

representations, warranties and covenants a condition

precedent to the Closing. 43 Sections 7.2 and 7.3 state that the

obligations of Novipax and Sealed Air to effect the Closing

shall be subject to the fulfillment of the representations,

warranties, and covenants contained in the Agreement. 44

iv. Indemnification Rights

Article IX provides indemnification rights to Sealed Air and

Novipax. 45 Under Sections 9.1 and 9.2, Sealed Air and

Novipax are entitled to indemnification for all losses arising

from breach of any representation or warranty or breach or

non-fulfillment of any covenant in the APA. 46 Section 9.3,

however, places limits on these indemnification rights. 47

Section 9.3(b) requires the indemnifying party to receive

notice of the indemnification claim within certain timeframes:

A party otherwise liable for

indemnification under this Article IX

(an “Indemnifying Party”) shall have

no liability for and Indemnification

Claim under Section 9.1(a) or 9.2(a)

unless such Indemnifying Party shall

have received a Claim Notice with

respect thereto on or before the

following applicable deadline: (A)

for a claim relating to a Core

Representation or a claim that involves

fraud, at any time after Closing ...

(C) for any other claim, the eighteen

(18) month anniversary of the Closing

Date. 48

*5 Section 9.3(h) then provides that:

From and after the Closing, the

indemnification rights provided by

this Article IX shall constitute the

sole and exclusive remedy of the

Indemnified Parties for any breach of

representation, warranties, covenants,

or agreements contained in this

Agreement or any Closing Instrument;

provided, however, that nothing herein

shall limit (i) any claim based on fraud,

willful misrepresentation or willful

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breach, or (ii) any party's right to seek

specific performance, injunctive relief,

or other equitable remedies. 49

Finally, Article X, Section 10.3 affirms that the APA

and the other instruments and agreements contemplated

by the APA “constitute the entire agreement amount the

parties and supersede any prior understanding, agreement, or

representations by or among the parties. 50

D. THE TSA

Novipax and Sealed Air executed the TSA concurrently

with the APA. The only parties to the TSA are Sealed Air

Corporation and Novipax LLC.

The TSA specifies certain transition services that Sealed

Air must provide to Novipax following the Closing. 51 For

example, Service Schedule 1, A requires Sealed Air to work

to maintain its relationship with customers of the Business as

of the Closing. 52 In addition, Service Schedule 1, B requires

Sealed Air to provide sales administration support for: (i)

formula pricing for U.S. customers, and (ii) U.S. barrier foam

tray pricing and rebate management. 53

In the event of a dispute or an alleged breach of the TSA,

the parties agreed under Section 5.15 to engage in good faith

negotiations to resolve the dispute. 54 Specifically, Section

5.15 provides that:

In the event of a dispute or alleged

breach of the Agreement by either

Party, the Parties agree to engage in

a good faith effort and negotiation in

an attempt to resolve the dispute or

alleged breach. In the event that this

initial negotiation is not successful, the

parties agree to elevate the dispute or

alleged breach to the executive level of

each Party, and the senior executives

of each Party agree to negotiate in

good faith and attempt to arrive at

a mutual resolution of such dispute

or alleged breach. In the event that

this discussion is unable to resolve the

controversy within a reasonable period

of time, the Parties may then pursue

their respective remedies pursuant to

applicable Law and in accordance with

Section 10.6 of the [APA]. 55

E. NOVIPAX MAKES CERTAIN DISCOVERIES

AFTER CLOSING

Following the Closing, Sealed Air gave Novipax access to

its pre-acquisition e-mails pursuant to the terms of the APA

and the TSA. 56 Through such e-mails, Novipax contends that

it discovered various representations and discussion about

the Business that were contrary to the representations in the

APA. 57

i. Sealed Air failed to disclose material information

about the Business

*6 Novipax claims that Sealed Air knew of material

information relevant to the value of the Business but failed to

disclose it to Novipax. 58 Specifically, Novipax alleges that

Sealed Air knew that: (i) major customers were migrating, or

preparing to migrate, to rigid trays; (ii) barrier foam trays were

not cost advantaged relative to rigid trays; and (iii) the cost

for customers to shift from barrier foam trays to rigid trays

was de minimus. 59

In early December 2014, Bimal Kalvania (VP & GM Rigids &

Absorbents) sent an e-mail to others at Sealed Air chastising

them for working to switch Cargill (one of its clients)

from foam trays to rigid trays, stating, “it will confirm

their worst fears that [foam] is changing to [rigid] ... we

can expect buyers to walk away or deeply discount the

valuation/price for the business.” 60 In another e-mail, Sealed

Air decided to withhold information about then on-going

customer negotiations with Cargill for a 2% foam tray price

reduction because disclosing it “could put the deal at risk.” 61

ii. Sealed Air concealed material information about the

Business

Novipax also alleges that Sealed Air concealed material

information about the Business, mainly the Business's

customer base. 62 While Sealed Air disclosed Tyson's

demand for a price reduction, Sealed Air purportedly

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concealed facts undermining the value of the Perdue and

Cargill businesses. 63

On March 2, 2015, Perdue advised Sealed Air of its intent

to transition its foam business to rigid trays sometime in

“the middle of April.” 64 In an e-mail dated March 3, 2015,

Sealed Air confirmed that it “[l]ooks like Perdue is planning

on moving all of its foam trays to a solid barrier rigid tray

mid-April.” 65 Another e-mail dated March 4, 2015 included

a statement from Perdue that orders for two of the barrier

foam trays “will taper down beginning the week of March

23 rd .” 66 Despite acknowledging that this information likely

had to be disclosed to Novipax, Sealed Air's in-house counsel

claimed there was no “legal obligation” to notify Novipax

and left it up to Sealed Air's VP of Global Mergers to inform

Novipax. 67 Sealed Air supposedly never notified Novipax.

As noted above, Novipax contends that Sealed Air concealed

the potential loss of Cargill before the APA was signed. 68

In Mr. Kalvani's December 14, 2014 e-mail, he instructed

sales teams to stop attempting to switch Cargill from soft to

rigid trays because it could undermine the transaction with

Novipax since the Cargill business “represents more than

33% of barrier trays.” 69 Sealed Air also discussed Cargill's

request for a 2% price reduction on barrier foam for the next

contract cycle based on the fact that the price of rigid trays

was becoming competitive with the price of foam trays. 70 In

an internal e-mail pertaining to the 2% reduction, Sealed Air's

Jackie Anderson stated that it “must disclose anything above

$150,000 P&L change to the Business,” and confirmed that

the Cargill P&L change would have exceeded $300,000. 71

Rather than disclose the facts undermining the value of

Cargill, Sealed Air concealed the information to preserve the

deal—“having this discussion with [Buyer] could put the deal

at risk as we already have difficult conversations about Tyson

RFP.” 72

iii. Sealed Air provided false assurances about the

Business

*7 Finally, Novipax alleges that Sealed Air made false

assurances about the Business after execution of the APA

and before the Closing. 73 First, Sealed Air purportedly

misrepresented that the Business constituted a viable,

sustainable product line which was protected from competing

packaging, including Sealed Air's rigid tray business. 74

In the Confidential Information Memorandum, provided

pursuant to Section 6.4 of the APA, Sealed Air stated that

“foam will remain the material of choice going forward

due to consumer preference, pricing advantages, and the

significant capital investment required to upgrade equipment

to other resin-based packaging solutions.” 75 Sealed Air's

management presentation also confirmed that “foam is the

resin of choice,” that “switching to rigid trays negatively

impacted retailer sales,” and that “foam trays are more cost

effective than rigid trays.” 76

Novipax discovered numerous e-mails from Sealed Air's

Regional Sales Manager Scott Mauer admitting that foam

trays were not as cost advantageous as originally believed.

Mr. Mauer stated that “to move from foam to solid is not too

expensive ... around $2000–2,500 for a single lane,” and that

for certain processing machines “no changes are required”

to switch from foam to rigid trays. 77 Mr. Mauer also stated

that the estimate provided to Novipax of the cost to convert

production lines was “significantly high” and “much higher

than would actually occur,” and acknowledged that he may

have “misled the decision” and caused Novipax to believe that

“foam barrier trays don't have serious competition.” 78

Second, Novipax alleges that Sealed Air provided the false

assurance that it would preserve and protect the value of the

Business to be transitioned to Buyer. Novipax contends that

Sealed Air breached the representations and warranties under

Article IV by migrating the Business's Major Customers

to non-Business products, failing to conduct the Business

in the Ordinary Course, and amending material business

arrangements. Novipax points to the fact that Sealed Air

helped transition Perdue from the Business's barrier foam

trays to its retained rigid trays. Novipax also argues that

Sealed Air knew Cargill planned to perform testing on rigid

tray replacement and confirmed that Cargill would use Sealed

Air's rigid tray product.

Finally, Novipax contends that Sealed Air provided the

false assurance that it would advise Novipax if it breached

a representation or covenant between the signing and the

Closing pursuant to Section 6.3 of the APA. Instead, in March

of 2015, Sealed Air provided notice of certain de minimus

inaccuracies under Section 6.3, but did not disclose any of

the inaccuracies surrounding foam trays and rigid trays, the

Business, and the Business's customer base. The closing

certificate provided before the Closing did not disclose any of

the foregoing inaccuracies or material changes. 79

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F. NOVIPAX INITIATES THIS CIVIL ACTION

AGAINST SEALED AIR

Based on these discoveries, Novipax filed the Complaint

against Sealed Air principally for fraud. The Complaint

also asserts claims for breach of the APA and TSA, unjust

enrichment, and declaratory judgment.

On May 16, 2017, Sealed Air moved to dismiss Counts

I–V and filed Defendants' Opening Brief in Support of

Motion to Dismiss. Novipax filed Plaintiffs' Answering

Brief in Opposition to Defendants' Motion to Dismiss (the

“Opposition”) on July 21, 2017. On August 15, 2017, Sealed

Air filed Defendants' Reply Brief in Further Support of their

Motion to Dismiss (the “Reply”).

The Court heard argument on the Motion to Dismiss, the

Opposition and the Reply on August 25, 2017. At this

hearing, the Court also heard argument on the Motion for a

Protective Order to Stay Discovery, filed by Sealed Air and

the Opposition to Defendants' Motion for Protection Order

and to Stay Discovery, filed by Novipax. By Order dated

July 21, 2017, the Court temporarily stayed discovery, but

must decide at the hearing whether a further stay is required

pending resolution of the Motion to Dismiss.

IV. PARTIES' CONTENTIONS

A. Sealed Air's Contentions

*8 Sealed Air argues that the Complaint must be dismissed

in its entirety because Novipax failed to comply with

certain contractual prerequisites to litigation. Sealed Air next

contends that the individual claims in Counts I–V fail to

state cognizable causes of action. On the fraud claim, Sealed

Air claims that the non-reliance and integration provisions

of the APA—Sections 4.20, 5.7, and 10.3—bar Novipax

from claiming it relied on extra-contractual representations

or warranties. Sealed Air also argues that the fraud claim is

not pleaded with particularity and fails to demonstrate that the

damages are separate from the breach of contract damages.

On the breach of contract claims, Sealed Air contends that

the Complaint fails to allege any act that constitutes a breach

of the APA or the TSA. On the equitable claims, Sealed Air

alleges that the claim for unjust enrichment fails because

it arises out of the parties' contractual relationship. Finally,

Sealed Air claims that Novipax is not entitled to declaratory

judgment negating the APA's requirement with respect to

alternative dispute resolution (“ADR”).

B. Novipax's Contentions

Novipax argues that there are no contractual prerequisites

that bar this civil action. On the fraud claim, Novipax

contends that the non-reliance and integration provisions do

not unambiguously bar a fraud claim and that Section 9.3(h) in

fact expressly permits a fraud claim. Novipax also asserts that

the fraud damages are separate from the breach of contract

damages. On the breach of contract claim, Novipax claims

that the Complaint asserts numerous breaches of the APA,

specifically Sections 4.5, 4.18, 6.1, and 6.3(b). As to the

equitable claims, Novipax contends it may bring an unjust

enrichment claim as an alternative remedy based on the theory

that no contract exists because of Sealed Air's fraud. Finally,

Novipax argues that it is entitled to declaratory judgment as

to its right to offset the damages in this suit from the Closing

Net Working Capital, and that this determination can only be

made by this Court.

V. STANDARD OF REVIEW

Upon a motion to dismiss, the Court (i) accepts all wellpleaded factual allegations as true, (ii) accepts even vague

allegations as well-pleaded if they give the opposing party

notice of the claim, (iii) draws all reasonable inferences in

favor of the non-moving party, and (iv) only dismisses a case

where the plaintiff would not be entitled to recover under any

reasonably conceivable set of circumstances. 80 However, the

Court must “ignore conclusory allegations that lack specific

supporting factual allegations.” 81

V. DISCUSSION

A. SEALED AIR HAS NOT DEMONSTRATED THAT

THERE ARE PROCEDURAL OR TIME BARS THAT

REQUIRE DISMISSAL OF THIS CIVIL ACTION IN

ITS ENTIRETY

Sealed Air first argues that the lawsuit must be dismissed

because Novipax has not complied with certain contractual

prerequisites to litigation set forth in the APA and TSA.

i. Sealed Air's construction of Article IX of the APA is

not the only reasonable construction as a matter of law

Sealed Air first argues that Novipax did not provide

appropriate Claim Notice (as defined in the APA) that

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Sealed Air breached a representation or warranty as

required by Section 9.4 of the APA. Section 9.4, under

Article IX “Indemnification,” provides that “any claim for

indemnification under this Article IX shall be brought and

asserted by Buyer or Parent ... by delivering written notice of

such claim to the Indemnifying Party.” 82 Section 9.4 clarifies

that the Claim Notice must set forth the facts giving rise to

the claim and, in the event of any claim for indemnification

against Sealed Air, Novipax must provide Sealed Air access

to its books and records. 83 Sealed Air asserts the Claim

Notice was insufficient and that it was not provided access to

Novipax's books and records and seeks to dismiss the entire

Complaint on this basis.

*9 Under this same theory, Sealed Air also seeks to

dismiss the breach of contract and equitable claims because

Novipax did not provide Sealed Air notice of those claims

within eighteen months as required under Section 9.3(a).

Section 9.3(a) clarifies that no party shall be liable for an

indemnification claim unless it has received notice of the

claim within certain timeframes—for a fraud claim, the party

must receive notice “at any time after Closing” and for “any

other claim” within the “eighteen (18) month anniversary of

the Closing Date.” 84 Sealed Air contends it did not receive

notice of the claim until Novipax filed the Complaint on

March 31, 2017—long after the time to serve notice expired

on October 1, 2016.

In response to the above arguments, Novipax contends that

Sections 9.4 and 9.3(a) do not apply because they are under

Article IX, which is entitled “Indemnification.” Moreover,

the language in Sections 9.4 and 9.3(a) are conditioned

on a claim for indemnification. Novipax contends these

indemnification provisions do not apply to this case or its

claims because Novipax is not seeking indemnification. In

fact, the Complaint does not mention indemnification or seek

a declaration from the Court as to its right to indemnification.

Instead, Novipax asserts fraud, willful misrepresentation,

willful breach, and equitable claims, which are exempt

from Article IX under Section 3.9(h). 85 Therefore, Novipax

argues that the requirements in Sections 9.4 and 9.3(a) do not

impose any prerequisites to litigation.

In deciding a motion under Rule 12, the Court cannot

choose between two differing reasonable interpretations of a

contract. Rather, dismissal is proper only if the defendant's

interpretation is the only reasonable construction as a matter

of law. Here, the language of the APA is reasonably

susceptible to different interpretations, as illustrated by the

above discussion. 86 The Court, therefore, must resolve any

ambiguity in favor of Novipax at this stage in the litigation

and, on this basis, cannot grant the Motion to Dismiss on this

basis.

ii. Sealed Air does not demonstrate that Section 5.15 is

a clear and unambiguous condition precedent that bars

all claims in this case

Sealed Air next argues that Novipax did not engage in prelitigation negotiation as required under Section 5.15 of the

TSA. Section 5.15 provides that in the event of a dispute

relating to an alleged breach of the TSA, the parties agree

to engage in good faith negotiation to resolve the dispute. 87

If, however, the parties cannot resolve their dispute, “the

Parties may then pursue their respective remedies pursuant

to applicable Law and in accordance with Section 10.6” of

the APA. 88 Section 10.6 of the APA permits the parties to

pursue legal action for any dispute arising out of the APA. 89

Therefore, Sealed Air argues that the negotiations mentioned

in Section 5.15 of the TSA are a condition precedent to

litigation under Section 10.6 of the APA.

*10 Novipax argues that Section 5.15 does not bar the claims

in this case because the APA does not require negotiation prior

to filing a lawsuit. 90 Moreover, Novipax contends Section

5.15 cannot be incorporated into the APA because Section

5.15 contains limiting language that it applies only to a dispute

or alleged breach of “this Agreement,” which is defined as

the TSA. 91 In addition, Section 5.15, or any other provisions

of the TSA, cannot be incorporated in the APA because

the parties to the two agreements are different—the APA

is between all defendants in this case and the TSA is just

between Novipax and Sealed Air.

Sealed Air does not demonstrate that Section 5.15 operates

as a clear and unambiguous condition precedent to filing this

civil action. In fact, this condition precedent is not reaffirmed

or included in Article VII of the APA, entitled “Conditions

Precedent.” 92 Novipax in turn provides an alternative

reasonable interpretation of Section 5.15. Therefore, the

Court cannot dismiss the civil action in its entirety.

However, neither party addresses the fact that Novipax brings

a claim specifically for breach of the TSA. While it is still

unclear whether Section 5.15 is an unambiguous condition

precedent, Novipax's argument seems to be that Section

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5.15 applies only to claims for breach of the TSA. If this

is the argument, then Count III may be the grounds for a

counterclaim by Sealed Air. In any event, it is not a procedural

bar to the litigation (like a mandatory mediation or arbitration

provision).

B. THE COMPLAINT ASSERTS A VIABLE CLAIM

FOR FRAUD

Sealed Air next argues that the fraud claim must be dismissed

because it is barred by the non-reliance and integration

provisions of the APA. Sealed Air also argues that the fraud

claim is not pleaded with particularity and fails to demonstrate

that the damages are separate from the breach of contract

damages.

i. The non-reliance provision limits fraud claims to

written representations in the APA

Sealed Air first argues that the Court should dismiss the

fraud claim because it is barred by the non-reliance and

integration provisions of the APA. According to Sealed Air,

these provisions bar Novipax from claiming it reasonably

relied on any alleged misrepresentation or omission by Sealed

Air outside of those representations and warranties specified

in the APA.

Article IV of the APA pertains to Sealed Air's representations

and warranties about the Business. Section 4.5 requires

Sealed Air to represent and warrant that there has not been

any Material Adverse Effect, that the Business has been

operated in the Ordinary Course, and that it has not taken

any action before the Closing that would constitute a breach

of the covenants provided in Section 6.1. 93 Section 4.6(b)

then requires Sealed Air to represent and warrant that there

is no material default of any Material Contract and that

Sealed Air has not received notice of any party's intention to

terminate any such Material Contract, which includes supply

agreements with certain key customers of the Business. 94

Finally, Section 4.18 requires Sealed Air to represent and

warrant that “in the last 12 months, no Major Customer has

provided written notice to Sellers of its intention to terminate

its relationship with any Seller with respect to the Business,

whether as a result of the Transaction or otherwise.” 95

Sealed Air relies principally on the purported non-reliance

and integration provisions Sections 4.20, 5.7, and 10.3 of the

APA to make its argument. Section 4.20 provides that, except

as set forth in Article IV (the representations and warranties

of Sealed Air):

*11 [N]ONE OF THE

SELLERS, THEIR RESPECTIVE

AFFILIATES OR ANY OF

THEIR RESPECTIVE OFFICERS,

DIRECTORS, EMPLOYEES OR

REPRESENTATIVES MAKE OR

HAVE MADE ANY OTHER

REPRESENTATION OR

WARRANTY, EXPRESS OR

IMPLIED, AT LAW OR IN EQUITY,

IN RESPECT OF SELLERS, THEIR

RESPECTIVE AFFILIATES OR THE

BUSINESS. 96

Section 5.7, under the heading “Representations and

Warranties of Buyer” reaffirms this same principle:

Buyer is not relying on any

representations, warranties, omission

or covenants of Sellers or

any of their Representatives

(including any financial statements

not expressly covered in

Section 4.4, any projections,

and the information contained

in the confidential information

memorandum, management

presentation and other due diligence

materials made available to Buyer)

except as expressly set forth in this

Agreement and any Seller Related

Agreement executed and delivered

to any Buyer Party pursuant to this

Agreement. 97

Finally, Section 10.3 provides that the APA and

accompanying Schedules, Exhibits, and Annexes and other

agreement contemplated by the APA “collectively constitute

the entire agreement among the parties and supersede any

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prior understanding, agreement, or representations by or

among the parties.” 98

Sealed Air argues that these provisions preclude all of

the alleged misrepresentations and omissions cited in the

Complaint because they all occurred prior to closing or

outside the Agreement. For example, Sealed Air alleges

that Novipax's reliance on statements in the management

presentations and Confidential Information Memorandum is

expressly barred by the language of Section 5.7. Sealed Air

relies on a number of Delaware cases to argue that these

express non-reliance provisions bar any claim based on extracontractual fraudulent misrepresentations. 99

In response, Novipax argues the Sections 4.20, 5.7, and

10.3 do not bar the fraud claim because Section 9.3(h)

expressly preserves fraud claims. As previously discussed,

Section 9.3(h), in the Article entitled “Indemnification,”

provides that the indemnification rights provided by Article

IX shall be the “sole and exclusive remedy” for any breach

of representations, warranties, or covenants in the APA. 100

However, Section 9.3(h) qualifies that remedy by stating,

“nothing herein shall limit (i) any claim based on fraud,

willful misrepresentation, or willful breach, or (ii) any party's

right to seek ... other equitable remedies.” 101

Novipax relies on Anvil Holding Corp. v. Iron Acquisition Co.

Inc. 102 to argue that its fraud claim is cognizable in spite of

the non-reliance provisions. 103 In Anvil, the Delaware Court

of Chancery declined to dismiss a fraud claim based on the

non-reliance provisions of an agreement for two reasons. 104

First, the Anvil court found that the non-reliance provisions

did not unambiguously demonstrate that both parties

disclaimed reliance on extra-contractual statements. 105

Instead, the non-reliance provisions at issue merely stated

that neither the seller nor any of its representatives was

making extra-contractual representations. 106 Second, the

Anvil court found that the “exclusive remedies” clause, in

which the parties agreed to reserve all rights to claims

based on fraud, preserved the fraud claim. 107 The exclusive

remedies provision thus provided further evidence that the

parties intended that fraud claims could be based on extracontractual representations. 108

*12 Novipax also relies on Airborne Health, Inc. v. Squid

Soap LP.

109 In Airborne, the Delaware Court of Chancery

found that an asset purchase agreement did not contain a

non-reliance provision that barred a fraud claim. 110 The

Airborne court found that an integration clause could not

form the basis for a non-reliance provision because that

clause was standard in most contracts and did not contain any

language resembling anti-reliance. 111 The Airbone court also

found that the exclusive remedy provision preserved the fraud

claim and that, absent any limit on that fraud claim through

a non-reliance provision, extra-contractual representations

were allowed. 112

The facts of this case lie somewhere in between Anvil

and Airborne. Here, unlike Anvil and Airborne both parties

expressly represented in Sections 4.20 and 5.7 that they

were not relying on any extra-contractual representations. 113

Section 10.3 is a standard integration clause that should

not be considered a non-reliance provision. However, as in

Anvil and Airborne, the parties also included an exclusive

remedies provision and expressly provided that fraud and

other equitable claims were reserved. In this instance, the

non-reliance provision likely places a limit on the types

of fraud claims that can be brought to those based on

written representations in the APA. As Airborne explained,

“when drafters specifically preserve the right to assert fraud

claims, they must say so if they intend to limit that right to

claims based on written representations in the contract.” 114

Therefore, at this stage of the proceedings, the Court finds

that the parties preserved a fraud claim in Section 9.3(h), but

limited that fraud claim through the non-reliance provisions

in Section 4.20 and 5.7 to written representations in the APA.

ii. As alleged, the representations relied upon are intracontractual, however, to the extent that Novipax is

relying on extra-contractual representations, those are

barred by the non-reliance provisions

Novipax's alternative argument is thus that Sections 4.20,

5.7, and 10.3 do not bar the fraud claim because each of the

representations it relied upon were intra-contractual or based

on the written representations in the APA. A fraud claim can

be based on representations found in a contract. 115 However,

as discussed more fully below, the allegations of fraud must

be separate from the breach of contract claim. 116 Allegations

that are focused on inducement to contract are separate and

distinct conduct. 117

Here, Novipax alleges that Sealed Air fraudulently induced

it into closing the transaction. In making this argument,

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Novipax relies on the representations, warranties, and

covenants contained in Sections 4.5, 4.18, 6.1, and 6.3.

Under these sections, Sealed Air represented, warranted,

and covenanted to perform certain functions related to the

Business and to make certain disclosures about the Business

prior to the Closing. For example, Sealed Air represented

that it has operated the Business in the Ordinary Course

and that there has not been any Material Adverse Effect. 118

Additionally, Sealed Air represented that no Major Customer

had provided written notice of its intent to terminate the

relationship with the Business for any reason. 119 Moreover,

Sealed Air covenanted to conduct the Business in “all material

respects in the Ordinary Course” and to use its best efforts

to “preserve intact its current business organization” and

“maintain its existing relationships with customers, suppliers,

vendors, distributors, and agents having business dealing with

them.” 120 Finally, Sealed Air covenanted to provide written

notice to Novipax if any representation became untrue or if it

failed to comply with any of its covenants.” 121

*13 Despite these representations, Novipax alleges that

Sealed Air affirmatively worked to harm the Business by

helping certain customers migrate from foam trays to rigid

trays. 122 Novipax alleges that Sealed Air concealed its

conduct, as well as information regarding the viability of the

Business and customers such as Tyson and Perdue's intent

to switch from foam to rigid trays. 123 Instead of alerting

Novipax to this change, however, Sealed Air represented

in the closing certificate that all of the representations and

warranties contained in the APA are true and correct as of the

date of the closing certificate. 124 Sealed Air also represented

that it performed in all material respects the covenants and

agreements in the APA. 125 Therefore, Novipax contends that

the representations in the APA, and Sealed Air's attestation

to those representations, fraudulently induced Novipax into

closing the transaction.

The facts of this case are similar to the facts in Abry Partners

V, L.P. v. F & W Acquisition, LLC. 126 In Abry, the parties

entered into a Stock Purchase Agreement (the “Agreement”)

for the buyer's purchase of a portfolio company. 127 The

Agreement contained several representations and warranties

about the company's financial statements. 128 After the

parties entered into the Agreement, the buyer discovered

that the financial statements prior to the Agreement were

fraudulently manipulated by the buyer. 129 The Court of

Chancery refused to dismiss the fraudulent inducement claim,

finding that the “financial statements were represented and

warranted in the Agreement and were therefore intended to

induce the Buyer to sign the Agreement and close the sale to

purchase the Company.” 130

Here, Novipax points to representations in the APA about

how Sealed Air was to conduct the Business and about

the financial viability of the Business before the Closing,

including the Business's Major Customers. However, after

the parties closed the transaction, Novipax learned that those

representations were false, and that Sealed Air did not correct

the misrepresentations before the Closing in an attempt to

induce Novipax into closing the transaction. This is sufficient

to support a claim for fraudulent inducement at this stage in

the litigation.

To the extent, however, that Novipax is relying on extracontractual misrepresentations, those misrepresentations are

barred by the non-reliance provision, as well as, other

express provisions in the relevant agreements. 131 It appears

that Novipax is relying on certain statements made by

Sealed Air outside the APA. In paragraphs 51–57 of the

Complaint, Novipax cites to false assurances provided by

Sealed Air that the Business constituted a viable, sustainable

product line. 132 However, Novipax doesn't allege that

these representations are contained in the APA. Rather,

Novipax relies on representations made by Sealed Air in the

Confidential Information Memorandum and the management

presentation. 133 Both of these documents are expressly

excluded under the non-reliance provision in Section 5.7.

ii. The Fraud Claim is pleaded with the requisite

particularity including the claim for damages

Sealed Air also attacks the fraud claim on the basis that it

is not pleaded with particularity and is not separate from the

breach of contract damages.

As to the first argument, it is abundantly clear that the

Complaint pleads fraud with the requisite particularity,

and this opinion will not highlight each specific fraud

allegation made. Generally, however, the Complaint alleges

that: Defendants made material misrepresentations, 134 that

Novipax justifiably relied on those misrepresentations, 135

that Sealed Air knew the representations were false or

made them recklessly and with the intent to deceive

Novipax, 136 that Novipax was fraudulently induced into

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the transaction, 137 and that Novipax suffered damages as a

result. 138

*14 As to the second argument, Sealed Air argues that

Novipax is attempting to “bootstrap” its fraud claim to a

breach of contract claim because the fraud damages are not

separate and apart from the breach of contract damages.

Delaware courts have consistently held that to successfully

plead a fraud claim, the allegedly defrauded plaintiff must

have sustained damages as a result of a defendant's action. 139

The damages allegations, however, may not simply rehash

the damages allegedly caused by breach of contract. 140

Moreover, plaintiff cannot “bootstrap a claim of breach of

contract into a claim for fraud by alleging that a contracting

party never intended to perform its obligations.” 141 In other

words, plaintiff cannot adequately state a fraud claim merely

by adding the term “fraudulently induced” to a claim for

breach of contract. 142

Here, at this point, the Court does not find that Novipax is

trying to “bootstrap” a fraud claim to a breach of contract

claim. In fact, the principal claim in the Complaint is

for fraud and fraudulent inducement that renders the APA

void. The breach of contract claim is an alternative remedy.

Novipax alleges that it obtained contractual representations

and covenants to ensure that the Business, including

stability of customers, still existed at the Closing. 143 Sealed

Air, however, purportedly misrepresented and concealed

information regarding the viability of the Business, including

obstacles to customers converting to rigid trays, and Sealed

Air's facilitation of customer migration to rigid trays, before

the Closing in order to induce Novipax to purchase the

Business. 144 These allegations, if true, go beyond a mere

intention not to comply with the terms of the Agreement. As

such, at this juncture, the fraud claim is different from the

breach of contract claim.

While the two claims are different, Seal Air is correct that

Novipax pleads damages that are similar for both claims. 145

However, Novipax prays for rescission of the transaction

or recessionary damages, which is a remedy for fraud. 146

This Court has twice held that a claim for rescission or

recessionary damages separates a fraudulent inducement

claim from breach of contract damages. 147 Nonetheless, if

discovery demonstrates that Novipax's damage claims for

breach of contract and fraud are the same, the Court can revisit

the issue prior to a trial.

C. THE COMPLAINT ASSERTS FACTS WHICH, IF

TRUE, SUPPORT A CLAIM FOR BREACH OF THE

APA AND TSA

Sealed Air next seeks to dismiss the breach of contract claims.

Sealed Air argues that Novipax has not alleged any facts that

demonstrate that Sealed Air breached any provision of the

APA and TSA. This is not true.

Similar to the basis for Novipax's fraud claim, Novipax argues

that Sealed Air breached the representations, warranties, and

covenants in Sections 4.5, 4.18, 6.1, and 6.3 of the APA. As

it relates to the representations, the Complaint alleges that

Sealed Air breached the representation in Section 4.5 that

there has not been any Material Adverse Effect and that the

Business has been operated in the Ordinary Course. 148 The

Complaint cites to e-mails from several Sealed Air employees

acknowledging that customer preference is moving away

from foam trays and that the cost to convert specialty

production lines from foam trays to rigid trays was de

minimus. 149 In addition, the Complaint alleges that Sealed

Air breached Section 4.18 when it represented that in the last

12 months, no Major Customer had provided written notice

to Sealed Air of its intent to terminate its relationship with

any Seller with respect to the Business. 150 The Complaint

alleges that Sealed Air knew of Cargill and Perdue's intent to

migrate away from foam trays, but that this intent was never

disclosed to Novipax. 151

*15 As it relates to the covenants, the Complaint alleges

that Sealed Air breached Section 6.1 because it was not

“Ordinary Course” to migrate the Business's customers

such as Cargill and Perdue to non-Business products. 152

Moreover, this conduct did not amount to Sealed Air's

“reasonable best efforts to preserve intact the Business”

or Sealed Air's maintenance of “existing relationships

with customers,” including the Major Customers such as

Cargill and Perdue. 153 In addition, the Complaint alleges

that Sealed Air breached the covenant in Section 6.1

by failing to “maintain all of the Purchased Assets” in

their current condition. 154 The Complaint contends that

Sealed Air breached this covenant because it actively

transitioned patronage to their rigid tray business, which

harmed the Business and devalued the goodwill that Novipax

acquired. 155

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Finally, as it relates to the TSA, the Complaint asserts

minimal, but sufficient facts to support breach of the TSA.

The Complaint alleges that under the TSA, Sealed Air

agreed to provide specific transition services to Novipax

after the Closing so that Novipax could receive the full

benefit of its Purchased Assets. 156 The TSA sets forth

Sealed Air's commitment to assist in maintaining existing

customer relationships in Service Schedule 1, A and to

provide sales administrative support for formula pricing and

U.S. barrier foam tray pricing in Service Schedule 1,B. 157

Based upon Sealed Air's conduct and its statements in

various e-mails of Sealed Air employees, Sealed Air breached

these provisions of the TSA, specifically by attempting to

improperly transition barrier foam trays to the rigid trays sold

by Seller. 158

The Court need not address each allegation in support of the

breach of contract claims. At this stage in the litigation, the

Court must accept all well-pleaded allegations as true. Sealed

Air can argue that its conduct did not breach the APA or

TSA, but Novipax alleges that Sealed Air's pattern of conduct

before the Closing demonstrates that Sealed Air did breach

the APA and TSA. The Court must construe these allegations

and the inferences to be drawn therefrom in the light most

favorable to Novipax. In doing so, the Court finds that the

allegations, if true, support a claim for breach of contract,

specifically Sections 4.5, 4.18, 6.1, and 6.3 of the APA and

Schedule I, A, and Schedule I, B of the TSA. Therefore, the

Court will not dismiss Counts II and III for breach of contract.

As discussed previously, however, the claim for breach of the

TSA may be barred by Novipax's failure to engage in prelitigation negotiation as provided in 5.15, but the briefing is

not clear on this point.

D. THE EQUITABLE CLAIMS FOR UNJUST

ENRICHMENT AND DECLARATORY JUDGMENT

ARE, AT THIS TIME, COGNIZABLE

As a final argument, Sealed Air seeks to dismiss the equitable

claims for unjust enrichment and declaratory judgment.

i. The unjust enrichment claim is a viable alternative

remedy at this stage in the litigation

Sealed Air argues that Novipax cannot recover for unjust

enrichment because the APA governs the relationship

between the parties. In other words, Sealed Air argues that

Novipax cannot maintain both a cause of action for breach

of contract and unjust enrichment. Sealed Air is correct;

however, Novipax is asserting the two claims as alternative,

not parallel, claims for relief. 159 The principle claim in this

case is for fraud and fraudulent inducement. Sealed Air argues

that this fraudulent inducement renders the APA void. A claim

for unjust enrichment may thus proceed under the theory

that no valid contract exists. The breach of contract claim

is an alternative theory of relief. Therefore, the Court will

not dismiss the unjust enrichment claim, but Novipax must

eventually decide under what theory it wishes to proceed—

fraud and unjust enrichment or breach of contract.

ii. The declaratory judgment claim is appropriate based

on the relief sought in this case

*16 Novipax seeks declaratory judgment as to the purchase

price adjustment mentioned in Sections 3.3 and 3.4 of the

APA. Specifically, Novipax seeks a declaration that there is

no remaining claim by Sealed Air for any adjustment amount

due to Sealed Air. Alternatively, should the claim remain,

Novipax seeks a declaration that it is entitled to a set off its

damages in this case with any working capital obligation that

Novipax might owe Sealed Air.

Sealed Air argues that declaratory judgment as to setoff is

improper because any disagreement pertaining to working

capital adjustments must be resolved by an accounting referee

under Section 3.4(d) of the APA. Sealed Air contends that

declaratory judgment is improper because it would negate

Section 3.4(d)'s requirement that these disputes be resolved

via binding ADR.

Section 3.3. states that at the Closing, Novipax will pay Sealed

Air an amount equal to $80,000,000, which is the purchase

price. 160 The purchase price, however, may be adjusted

by adding the Estimated Working Capital Adjustment to

that amount. 161 The Estimated Working Capital Adjustment

equals the difference between the Closing Net Working

Capital and the Base Net Working Capital. 162 At least

three days prior to the Closing, Sealed Air must deliver to

Novipax a certificate setting forth Sealed Air's calculation

of this Estimated Working Capital Adjustment, which shall

be used to determine the Adjusted Purchase Price payable at

the Closing. 163 If, however, Novipax disputes Sealed Air's

calculation of the Closing Net Working Capital, Novipax may

deliver to Sealed Air a certificate setting forth its calculation

of the closing Net Working Capital. 164

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If Sealed Air then contests in good faith Novipax's

calculation, it may deliver notice to Novipax of its calculation

of the Closing Net Working Capital. 165 If after all this,

Sealed Air and Novipax still disagree on the amount, they

must retain an accounting referee to resolve all disputed

items or amounts and to calculate the Closing Net Working

Capital. 166

Novipax argues that Section 3.4(d) does not bar the

declaratory judgment claim because Novipax is seeking to

rescind the APA. In other words, Sealed Air's fraud vitiates

its right to rely on any provision of the APA to bar Novipax's

claims. Since the Court is permitting the fraud claim to go

forward, the declaratory judgment claim is also cognizable at

this time.

While not argued by the parties, it does not appear that

Novipax's request for declaratory judgment even implicates

Sections 3.3 and 3.4. Novipax appears to seek a declaration

only as to Sealed Air's right to make a claim for an adjustment

amount. If true, then this is an issue for the Court to determine

in the first instance. This is not a dispute between the parties

over the Closing Net Working Capital that must be resolved

by an account referee.

V. CONCLUSION

For the reasons set forth above, the Court will DENY the

Motion to Dismiss. The Court understands this to be a large

sales transaction between sophisticated parties. Those parties

were represented by quality lawyers. The various agreements

were extensively negotiated and the provisions, even ones

characterized as “boilerplate,” have to be enforced as intended

by the parties when they negotiated the sales transaction.

The Court believes that appropriate discovery should allow

the parties to narrow the issues in this case leading up to

dispositive motions and/or trial.

All Citations

Not Reported in A.3d, 2017 WL 5713307

Footnotes

1 Unless otherwise indicated, the following are the Relevant Facts as alleged in the Complaint. For purposes

of the Motion to Dismiss, the Court must view all well-pleaded facts alleged in the Complaint as true and

in a light most favorable to Novipax. See, e.g., Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings

LLC, 27 A.3d 531, 536 (Del. 2011); Doe v. Cedars Acad., LLC, C.A. No. 09C–09–136, 2010 WL 5825343,

at *3 (Del. Super. Oct. 27, 2010).

2 Compl. ¶ 24.

3 Id. ¶ 25.

4 Id. ¶ 26.

5 Id. ¶ 27.

6 Id. ¶ 28.

7 Id.

8 Id. ¶ 3.

9 Id. ¶ 41.

10 Id.

11 Id.

12 Id. ¶ 42.

13 Id. ¶ 4.

14 Id. ¶ 44.

15 Id.

16 Id. ¶ 45.

17 Id. ¶ 19.

18 Id. ¶ 20.

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19 DankPak LLC was the former name of Novipax Holdings LLC, the holding company for the other Novipax

entity. See Compl. Ex. A. Asset Purchase Agreement p. 1. Exhibit A to the Complaint will be cited to as “APA

§ ___” or “APA p. ___” if no section is specified.

20 See APA Art. IV.

21 Id. § 4.5.

22 Id.

23 Id. p. 9.

24 Id. p. 10.

25 Id. § 4.6.

26 Id.

27 Id. § 4.6 to the Disclosure Schedule.

28 Id. § 4.7.

29 Id. p. 11.

30 Id. § 4.18.

31 Id.

32 See § 4.18 of Disclosure Schedule.

33 Id. § 4.20.

34 See id. Art. V.

35 Id. § 5.7

36 Id.

37 Id. § 5.7.

38 See id. Art. VI.

39 Id. § 6.1.

40 Id. § 6.1 (a)-(c).

41 Id. § 6.3(b).

42 Id.

43 See id. Art. VII.

44 Id. §§ 7.2(a)-(b), 7.3(a)-(b).

45 See id. Art. IX.

46 Id. §§ 9.1(a)-(b), 9.2(a)-(b).

47 Id. § 9.3.

48 Id. § 9.3(a).

49 Id. § 9.3(h).

50 Id. § 10.3.

51 See Compl. Ex. B, Transition Services Agreement p. 1. Exhibit B to the Complaint will be cited to as “TSA §

___”, “TSA Sch. ___”, or “TSA p. ___” if no section is specified.

52 TSA Serv. Sch. 1, A.

53 Id. Serv. Sch. 1, B.

54 Id. § 5.15.

55 Id.

56 Compl. ¶ 1; see also APA § 6.4(b).

57 Compl. ¶ 5.

58 Id. ¶ 47.

59 Id.

60 Id. ¶ 48.

61 Id. ¶ 49.

62 Id. ¶¶ 87–89.

63 Id. ¶ 92.

64 Id. ¶ 93

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65 Id.

66 Id. ¶ 95.

67 Id. ¶¶ 97–99.

68 Id. ¶ 104.

69 Id.

70 Id. ¶ 105.

71 Id. ¶ 106.

72 Id. ¶ 109.

73 Id. ¶ 51.

74 Id.

75 Id. ¶ 53.

76 Id. ¶ 55

77 Id. ¶ 58.

78 Id. ¶¶ 59–63.

79 Id.

80 See Central Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 227 A.3d 531, 536 (Del. 2011); Doe

v. Cedars Academy, No. 09C–09–136, 2010 WL 5825343, at *3 (Del. Super. Oct. 27, 2010).

81 Ramunno v. Crawley, 705 A.2d 1029, 1034 (Del. 1998).

82 APA § 9.4.

83 Id.

84 Id. § 9.3(a).

85 Id. § 9.3(h) (explaining that indemnification rights under Article IX are the exclusive remedy for breach of any

representation or warranty in the APA, but clarifying that “nothing herein shall limit (i) any claim based on

fraud, willful misrepresentation or willful breach, or (ii) any party's right to seek ... other equitable remedies”).

86 Eni Holdings, LLC v. KBR Group Holdings, LLC, 2013 WL 6186326, at *6 (Del. Ch. Nov. 27, 2013) (“Faced

with a question of contract interpretation on a motion to dismiss, [the Court] must determine whether the

contractual language at issue is unambiguous. If so, [the Court] must give effect to its meaning. If, however,

the contractual language is reasonably or fairly susceptible to different interpretations, [the Court] must

resolve the ambiguity in favor of the non-moving party.”).

87 TSA § 5.15

88 Id.

89 See APA § 10.6.

90 See id.

91 See TSA p. 1.

92 See APA Art. VII.

93 See id. § 4.5.

94 Id. § 4.6(b).

95 Id. § 4.18.

96 Id. § 4.20.

97 Id. § 5.7.

98 Id. § 10.3.

99 See e.g., Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35 54–55 (Del. Ch. 2015)

(Representation-limiting language defines the universe of information on which the contracting party relied.

If the contract says the buyer only relied on the representations in the four corners of the agreement, then

that is sufficient).

100 APA § 9.3(h).

101 Id.

102 2013 WL 2249655, at *1 (Del. Ch. May, 17, 2013).

103 Anvil, 2013 WL 2249655, at *1.

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2017 WL 5713307

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104 Id. at *8.

105 Id.

106 Id.

107 Id.

108 Id.

109 984 A.2d 126 (Del. Ch. 2009).

110 Airborne, 984 A.2d at 140–41.

111 Id. at 141.

112 Id.

113 See APA §§ 4.20, 5.7.

114 Airborne, 984 A.2d at 141.

115 ITW Glob. Invest. Inc. v. Am. Indus. Partners Cap. Fund IV, L.P., 2015 WL 3970908, at *5 (Del. Super. June

24, 2015).

116 Id. at *6.

117 Id.

118 APA ¶ 4.5.

119 Id. ¶ 4.18.

120 Id. ¶ 6.1.

121 Id. ¶ 6.3(b).

122 Compl. ¶¶ 52–64.

123 Id.

124 See id. Ex. W.

125 Id.

126 981 A.2d 1032.

127 Abry, 981 A.2d at 1034–35.

128 Id.

129 Id. at 1038–40.

130 Id. at 1051.

131 See ITW Glob. Invest. Inc. v. Am. Indus. Partners Cap. Fund IV, L.P., 2015 WL 3970908, at *5 (Del.

Super. June 24, 2015) (permitting a fraudulent inducement claim based on representations contained in the

parties' agreement, but excluding a fraudulent inducement claim based on representations made outside the

agreement).

132 Compl. ¶¶ 51–57.

133 Id. ¶¶ 53–56.

134 See e.g., Compl. ¶¶ 5, 6, 32, 33, 46–53, 55, 57–59, 65, 66, 68, 71, 94, 103, 104, 110, 118–20, 125, 135,

136, 155.

135 Id. ¶¶ 112–16, 121, 122, 127, 128, 147, 165.

136 Id. ¶¶ 29, 47–50, 58–62, 68, 71–73, 76, 77, 90, 91, 96–99, 102–09, 111, 112, 118–20, 125, 126, 133.

137 Id. ¶¶ 86, 101, 116, 119, 121,122, 165.

138 Id. ¶¶ 167, 170, 171.

139 ITW Glob. Invest. Inc., 2015 WL 3970908, at *5.

140 Id.

141 Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *15 (Del. Ch. Dec. 22, 2010).

142 Id.

143 Compl. ¶¶ 30–40, 66–86

144 Id. ¶¶ 47–50, 54–64, 87–91, 92–114, 117 –124.

145 See id. ¶¶ 167, 175, 179.

146 See id. VI.3.

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147 See ITW Glob. Invest. Inc., 2015 WL 3970908, at *6 (“Count I for fraud must be dismissed because it pleads

damages that are simply a “rehash” of the breach of contract damages. Because Count II for fraud in the

inducement pleads damages for rescission or rescissory damages, the Court will not address Count II.”); see

also EZLinks Golf, LLC v. PCMS Datafit, Inc., 2017 WL 1312209, at *6 (Del. Super. Mar. 21, 2017) (finding

that plaintiff's count for fraud in the inducement is materially identical to the breach of contract complaint and

rejecting plaintiff's reliance on ITW because plaintiff pleads neither for rescission or rescissory damages as

did the ITW complaint).

148 Compl. ¶¶ 71–73.

149 Id. ¶¶ 47–49; 71 –74.

150 Id. ¶¶ 78–80.

151 Id. ¶¶ 80–82.

152 Id. ¶ 66.

153 Id.

154 Id. ¶ 67.

155 Id.

156 Id. ¶ 40.

157 Id. ¶¶ 40, 145.

158 Id. ¶¶ 145–147.

159 Avantix Labs, Inc. v. Pharmion, LLC, 2012 WL 2309981, at *9 (Del. Super. June 18, 2012).

160 APA § 3.3.

161 Id.

162 Id. p. 6.

163 Id. § 3.4(a).

164 Id. § 3.4(b).

165 Id. § 3.4(c).

166 Id. § 3.4(d).

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APPENDIX A-

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Rhines v. Salinas Const. Technologies, Ltd., Not Reported in F.Supp.2d (2011)

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

2011 WL 4688706

Only the Westlaw citation is currently available.

United States District Court,

S.D. Texas,

Corpus Christi Division.

Dexter C. RHINES, Plaintiff,

v.

SALINAS CONSTRUCTION

TECHNOLOGIES, LTD., Defendant.

Civil Action No. C–11–262.

|

Oct. 3, 2011.

Attorneys and Law Firms

Stephen J. Chapman, Chapman Law Firm, Corpus Christi,

TX, for Plaintiff.

Kala S. Dumont, Gaul and Dumont, San Antonio, TX, for

Defendant.

ORDER DENYING RULE 12(b)(4)

AND 12(b)(5) MOTION TO DISMISS

NELVA GONZALES RAMOS, District Judge.

*1 Defendant Salinas Construction Technologies, Ltd.

(“Salinas”) has filed its “Motion to Dismiss Pursuant

to Federal Rules of Civil Procedure 12(b)(4) and 12(b)

(5)” (D.E.9) complaining that, while Defendant has actually

received summons and the complaint for this case twice,

Plaintiff has failed to properly effectuate service in order to

confer on this Court personal jurisdiction over Salinas.

In particular, with respect to service that was accomplished on

September 19, 2011, 1 Salinas complains that: (1) service was

effectuated by Joe R. Perez, Perez Service Company, which

is not an “authorized person” to serve summons because he

is not the clerk of the court; and (2) the proof of service does

not reflect who was served or the date of service. A review

of the proof of service shows that service was on “Salinas

Construction Technologies, Ltd.; Registered Agent Daniel

Salinas” on “9/19/11.” Defendant admits that it received

summons on this date. Thus the complaint regarding the

alleged lack of content in the proof of service is overruled.

Defendant's remaining complaint requires a determination

of whether the only “authorized person” who can effectuate

service on a partnership by mail is the clerk of the court.

It is clear that, under Federal law, “Any person who is at

least 18 years old and not a party may serve a summons

and complaint.” Fed.R.Civ.P. 4(c). This includes Joe R. Perez

and Perez Service Company. However, Defendant suggests

that this Federal provision does not apply because Texas

law governs service on a partnership such as this Defendant.

Fed.R.Civ.P. 4(h) (referencing Rule 4(e)(1), which provides

for “following state law for serving a summons in an action

brought in courts of general jurisdiction in the state where the

district court is located ....”).

Defendant Salinas asserts that, under Texas law, only the clerk

of the court is permitted to serve a summons and complaint

by certified mail. For this argument, Salinas cites Tex.R. Civ.

P. 103 and 106(a), along with Jernigan v. Jernigan, 2010 WL

3768076 (S.D.Tex.2010). This Court disagrees with Salinas'

interpretation of Texas law and the Jernigan opinion.

Judge Rosenthal, in Jernigan, very simply held that under

Texas law, the Plaintiff, personally, was not authorized to

effectuate service—the same rule as applies under Federal

Rule of Civil Procedure 4(c)(2), which prohibits a party from

serving a summons and complaint. Nothing in that holding

restricts a private process server from serving a summons and

complaint by certified mail.

Tex.R. Civ. P. 106(a) prescribes the method of service to

include certified mail, return receipt requested, by those

authorized to effectuate service under Tex.R. Civ. P. 103. Rule

103 permits service by “any person authorized by law” and

“any person certified under order of the Supreme Court.”

Under 28 U.S.C. § 2072(a), the Supreme Court of the United

States is empowered to promulgate rules of procedure to

govern legal proceedings in the Federal courts. Federal Rule

of Civil Procedure 4(c)(2), being such a rule, thus constitutes

the designation of a person over the age of 18 who is not a

party as a “person authorized by law” to effectuate service.

Thus the process server in this case would be properly

authorized under Texas Rule of Civil Procedure 103(1) and

103(2) to effectuate service by certified mail as permitted by

Texas Rule 106.

*2 Additionally, the Court takes judicial notice of the

website 2 of the Supreme Court of Texas, which lists those

who have been certified to serve process as permitted by

Rule 103(3). That website lists Joe R. Perez, Perez Service

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Company (“Perez”) as a certified process server. 3 Thus

Perez's service of summons and complaint by certified mail,

return receipt requested, complies with Texas law and Federal

law and confers on this Court personal jurisdiction over

Defendant Salinas.

Defendant Salinas, however, argues that the provisions and

structure of Tex.R. Civ. P. 103 must be read as restricting the

power to effectuate service by certified mail to the clerk of

the court. Construction of a Texas rule of procedure starts

with the express language of the rule or statute. See Galbraith

Eng'g Consultants, Inc. v. Pochucha, 290 S.W.3d 863, 867

(Tex.2009); In re Christus Spohn Hosp. Kleberg, 222 S.W.3d

434, 437 (Tex.2007). The Court applies the plain or literal

meaning of the text unless a different meaning is supplied

by legislative definition or is apparent from the context, or

the plain meaning leads to absurd results. Marks v. St. Luke's

Episcopal Hosp., 319 S.W.3d 658, 663 (Tex.2010); In re

Christus Spohn Hosp. Kelberg, 222 S.W.3d at 437.

The plain language of Texas Rule of Civil Procedure 103 does

not say that other authorized persons cannot effectuate service

by certified mail. Instead, it provides for the clerk to be an

additional “authorized person” to effectuate a party's service

only if the method of service is by certified mail, registered

mail, or by publication. In other words, it does not authorize

parties to send the clerk to hunt down those evading service

in order to obtain personal service upon them. The rule states:

Process—including citation and other

notices, writs, orders, and other papers

issued by the court—may be served

anywhere by (1) any sheriff or

constable or other person authorized

by law, (2) any person authorized by

law or by written order of the court

who is not less than eighteen years of

age, or (3) any person certified under

order of the Supreme Court. Service by

registered or certified mail and citation

by publication must, if requested, be

made by the clerk of the court in which

the case is pending. But no person

who is a party to or interested in

the outcome of a suit may serve any

process in that suit ....

Tex.R. Civ. P. 103. The first sentence does not restrict the

method of service that the three categories of authorized

persons may use. The method of service is supplied by

Tex.R. Civ. P. 106. Rule 106's reference to Rule 103 is

only for the purpose of determining who is “authorized.”

Furthermore, Rule 103 is rather expansive in permitting the

three itemized categories of authorized persons to effectuate

service “anywhere.”

The second sentence, “Service by registered or certified mail

and citation by publication must, if requested, be made by

the clerk of the court in which the case is pending” does not

ipso facto eliminate the three preceding options. Rather, it

gives a party a fourth option—the right to call upon the clerk

to effectuate service, but only if the request is to serve by

certified mail, registered mail, or by publication. In the event

of such a request, the clerk is required by this rule to comply

with the request.

*3 If the second sentence were intended to modify the first

sentence rather than add a new option, one would expect

it to be prefaced by language indicating that the following

language was to be applied as an exception to the preceding

language. Furthermore, there is no public interest to be served

by Defendant Salinas' interpretation of Rule 103 to restrict

all certified mail to be served by the clerk and the clerk only.

Defendant has not cited any authority for that interpretation

and none has been found by this Court.

Defendant Salinas' interpretation would create an

unnecessary conflict between Texas Rules of Civil Procedure

103 and 106. Rule 106 provides the method for service,

which includes certified mail. Rule 103 provides the persons

authorized to effectuate service. To interpret Rule 103 to

restrict the method of service permitted under Rule 106

is to create an internal inconsistency. Defendant Salinas'

interpretation would also lead to an absurd result. If service

by certified mail, which is clearly permitted in Texas as

incorporated into the Federal rules by Fed.R.Civ.P. 4(e)(1),

must be effectuated by the “clerk of the court in which the

case is pending,” then the Texas rule would be purporting to

prescribe the duties of the Federal clerk. The Federal clerk

cannot be governed by the Texas state legislature.

The Court holds that the September 19, 2011 service of

summons and complaint by Perez on Defendant Salinas

was accomplished pursuant to an authorized means by

an authorized person. Thus Defendant's complaint under

Fed.R.Civ.P. 12(b)(5) (“insufficient service of process”)

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Rhines v. Salinas Const. Technologies, Ltd., Not Reported in F.Supp.2d (2011)

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is without merit. Defendant has not complained that the

summons or the copy of the complaint, which it received, was

in improper form. So Defendant has not stated a claim under

Fed.R.Civ.P. 12(b)(4) (“insufficient process”).

For the reasons set forth above, Defendant's “Motion to

Dismiss Pursuant to Federal Rules of Civil Procedure 12(b)

(4) and 12(b) (5)” (D.E.9) is DENIED.

ORDERED.

All Citations

Not Reported in F.Supp.2d, 2011 WL 4688706

Footnotes

1 While Defendant also complains about service by regular mail on September 7, 2011, the Court assumes

without deciding for purposes of argument that this first attempt at service, which utilized more informal

means, was deficient. Thus the Court focuses on the second attempt.

2 Government websites are presumptively reliable and subject to judicial notice. E.g., Kitty Hawk A ircargo,

Inc. v. Chao, 418 F.3d 453, 457 (5th Cir.2005).

3 See http://www.courts.s tate.tx.us/psrb/docs/Statewide_ Authorized_Servers.htm.

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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APPENDIX A-

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School Dist. No. 16 of Sherman County v. Howard, 5 Neb. (Unof.) 340 (1904)

98 N.W. 666

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

5 Neb. (Unof.) 340

Supreme Court of Nebraska.

SCHOOL DIST. NO. 16 OF SHERMAN COUNTY

v.

HOWARD.

Feb. 17, 1904.

Synopsis

Commissioners' Opinion. Department No. 3. Error to District

Court, Sherman County; Gutterson, Judge.

“Not to be officially reported.”

Action by Henry Howard against School District No. 16 of

Sherman County. Judgment for plaintiff. Defendant brings

error. Reversed.

Attorneys and Law Firms

*666 H. M. Mathew, for plaintiff in error.

Aaron Wall and R. J. Nightingale, for defendant in error.

Opinion

DUFFIE, C.

Howard was employed by the school district as a teacher

for the period of nine months at $50 per month, the district

to furnish the services of a janitor. After eight months of

the term had expired, the school was closed by order of the

board of health of the village of Ashton on account of the

prevalence of smallpox, and Howard, although ready and

willing to complete his contract, was unable to do so in

consequence of such order. In this action he sues the school

district for one month's wages, and also for money advanced

by him to pay for janitor services, which the district failed

to furnish. The district offered to confess judgment for the

sum of $16, the amount claimed by Howard on account of

payment for janitor services, but defended against his claim

for one month's wages upon the ground that the district was

prevented from fully carrying out its contract by order of the

board of health. Judgment went in favor of Howard, and the

district has taken error to this court.

Plaintiff in error insists that full performance of the contract

on the part of the district was rendered impossible by law, and

*667 asserts that under such circumstances it is not liable. It

is clearly settled by innumerable authorities that whenever a

contract which was possible and legal at the time it was made

becomes impossible by act of God, or illegal by an ordinance

of the state, the obligation to perform it is discharged. Baylies

v. Fettyplace, 7 Mass. 325; Vol. 9, Cyc. Law & Pro. 629.

No contract can be carried into effect which was originally

made contrary to the provisions of law, or which, being made

consistently with the rule of law at the time, has become

illegal by virtue of some subsequent law. This is so well

settled and so thoroughly understood by the profession that

a citation of authorities is unnecessary. It is not claimed that

the board of health did not have authority to close the school,

or that the order was illegal in any respect. This being so,

that order, so long as it remained in force, was a valid legal

prohibition against the continuance of the school, and the

district, by force of law, was unable to complete its contract.

Had the board of health failed to act, and had the school

been closed by the district on its own motion, then the rule

contended for by the defendant in error, and followed in the

case of Dewey v. Union School District (Mich.) 5 N. W. 646,

38 Am. Rep. 206, and Libby v. Inhabitants of Douglas (Mass.)

55 N. E. 808, might be invoked. But the action of the district

in closing the school was not voluntary. It was the act of the

law, which the district and all others were compelled to obey.

In Baylies v. Fettyplace, supra, it was held that, where the law

interposes to prevent the performance of a contract, but such

prohibition is temporary only, the parties are not excused from

its performance after the law has ceased to operate. Whether

this rule should apply to a contract for personal services in

all cases we are not called upon to determine; but, even if it

should be applied in this case, the district would still not be in

default, as it offered to allow the defendant in error to teach

the remaining months of his term after the order of the board

of health had been recalled.

Defendant in error calls attention to section 5440, Comp. St.

1903, which provides that, if a school be closed on account

of epidemic sickness or the destruction of the schoolhouse,

the district nevertheless may draw its proper share of the state

apportionment; and it is argued that, as the funds received

by the district from this apportionment can be used only in

payment of teacher's wages, the law contemplates payment

of the teacher during the time a school may be closed. We

cannot agree that such is a proper construction of the statute.

In our opinion, the law allows the payment of the usual state

apportionment to a district under the conditions mentioned

that the district may not suffer loss from a cause over which

it has no control, and in order to allow it to make up for the

time lost by the closing of the school, if the directors see fit,

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School Dist. No. 16 of Sherman County v. Howard, 5 Neb. (Unof.) 340 (1904)

98 N.W. 666

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 2

by providing for a longer or an extra subsequent session of

the school.

We think the court was wrong in finding for defendant in error,

and recommend that the judgment be reversed, and the case

dismissed.

KIRKPATRICK and LETTON, CC., concur.

PER CURIAM.

The conclusions reached by the Commissioners are approved,

and, it appearing that the adoption of the recommendations

made will result in a right decision of the cause, it is ordered

that the judgment of the district court be reversed, and the case

dismissed.

All Citations

5 Neb. (Unof.) 340, 98 N.W. 666

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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APPENDIX A-

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Toscano v. United Parcel Service, Not Reported in F.Supp.3d (2015)

2015 WL 2089660

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

2015 WL 2089660

Only the Westlaw citation is currently available.

United States District Court,

S.D. Texas,

Houston Division.

Edward J. TOSCANO, Plaintiff,

v.

UNITED PARCEL SERVICE, Defendant.

Civil Action No. 4:14–CV–2680.

|

Signed April 28, 2015.

Attorneys and Law Firms

Jeffrey Thomas Michalczak, Michalczak PLLC, New York,

NY, for PLaintiff.

Shannon Brown Schmoyer, Schmoyer Reinhard LLP, San

Antonio, TX, for Defendant.

MEMORANDUM AND ORDER

KEITH P. ELLISON, District Judge.

*1 Pending before the Court is Defendant's Partial Motion to

Dismiss Plaintiff's First Amended Complaint. (Doc. No. 27.)

Defendant seeks dismissal of Plaintiff's race, color, national

origin, and age discrimination and retaliation claims. For the

reasons stated herein, Defendant's Motion is GRANTED.

I. BACKGROUND

Plaintiff filed the instant suit on September 17, 2014.

(Complaint, Doc. No. 1.) Defendant filed a Partial Motion

to Dismiss (Doc. No. 4), on which the Court held a hearing

January 29, 2015. In that prior Motion, Defendant argued

that Plaintiff had failed to exhaust his administrative remedies

with regard to claims for race and color discrimination and

retaliation. Plaintiff responded that he had not known the facts

supporting his claims for race and color discrimination and

retaliation when he filed his initial Charge of Discrimination

with the EEOC, and thereafter filed a subsequent Charge of

Discrimination. (Doc. No. 17.) However, Plaintiff received a

Dismissal and Notice of Rights in response to his subsequent

Charge, which stated that the EEOC would close its file on

the second Charge because it was not timely filed. (Doc.

No. 17–1 at 2.) In response to Defendant's Partial Motion to

Dismiss, the Court allowed Plaintiff the opportunity to amend

his Complaint to allege facts that would support equitable

tolling of the time limit for filing a Charge with the EEOC

with regard to his race and color discrimination and retaliation

claims.

II. LEGAL STANDARD

A court may dismiss a complaint for a “failure to state a claim

upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). “To

survive a Rule 12(b)(6) motion to dismiss, a complaint ‘does

not need detailed factual allegations,’ but must provide the

plaintiffs grounds for entitlement to relief-including factual

allegations that when assumed to be true ‘raise a right to relief

above the speculative level.’ ” Cuvillier v. Taylor, 503 F.3d

397, 401 (5th Cir.2007) (quoting Bell Atl. Corp. v. Twombly,

550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

That is, a complaint must contain sufficient factual matter

that, if it were accepted as true, would “state a claim to relief

that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S.

662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting

Twombly, 550 U.S. at 570). A claim has facial plausibility

“when the plaintiff pleads factual content that allows the court

to draw the reasonable inference that the defendant is liable

for the misconduct alleged.” Id. (citing Twombly, 550 U.S at

556). The plausibility standard “is not akin to a ‘probability

requirement,” ‘ though it does require more than a “sheer

possibility” that a defendant has acted unlawfully. Id.

Ultimately, the question for the court to decide is whether the

complaint states a valid claim when viewed in the light most

favorable to the plaintiff. The court must accept wellpleaded

facts as true, but legal conclusions are not entitled to the same

assumption of truth. Iqbal, 556 U.S. at 678 (citation omitted).

The court should not “strain to find inferences favorable to the

plaintiffs” or “accept ‘conclusory allegations, unwarranted

deductions, or legal conclusions.’ “ R2 Investments LDC v.

Phillips, 401 F.3d 638, 642 (5th Cir.2005) (quoting Southland

Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 361

(5th Cir.2004)). The court should not evaluate the merits of

the allegations, but must satisfy itself only that plaintiff has

adequately pled a legally cognizable claim. United States ex

rel. Riley v. St. Luke's Episcopal Hosp., 355 F.3d 370, 376 (5th

Cir.2004).

III. ANALYSIS

*2 “Employment discrimination plaintiffs must exhaust

administrative remedies before pursuing claims in federal

court. Exhaustion occurs when the plaintiff files a timely

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Toscano v. United Parcel Service, Not Reported in F.Supp.3d (2015)

2015 WL 2089660

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 2

charge with the EEOC and receives a statutory notice of

right to sue.” Taylor v. Books A Million, Inc., 296 F.3d 376,

378–79 (5th Cir.2002) (citing Dao v. Auchan Hypermarket,

96 F.3d 787, 788–89 (5th Cir.1996)). In states like Texas,

which have an agency with the authority to grant or seek

relief relating to unlawful employment practices, the plaintiff

must file the charge of discrimination no later than 300 days

after the act of discrimination occurred. Hixson v. Houston

Indep. Sch. Dist., No. 4:09–CV–3949, 2011 WL 1655581, at

*3 (S.D.Tex. May 2, 2011) (Ellison, J.). See also 29 U.S.C. §

626(d)(1)(B); Julian v. City of Houston, 314 F.3d 721, 725–

26 (5th Cir.2002). Plaintiffs must exhaust each alleged Title

VII violation. Taylor v. Texas S. Univ., No. 4:12–CV–01975,

2013 WL 5410073, at *4 (S.D.Tex. Sept.25, 2013) (Ellison,

J.) aff'd, 569 F. App'x 193 (5th Cir.2014).

“For the purpose of Title VII exhaustion, filing deadlines

are akin to statutes of limitation, and dismissal under Rule

12(b)(6) is appropriate ‘where it is evident from the plaintiff's

pleadings that the action is barred and the pleadings fail to

raise some basis for tolling or the like.’ “ Garrison v. Texas

S. Univ., No. CIV .A. H–11–2368, 2011 WL 4457374, at *4

(S.D.Tex. Sept.21, 2011) (Ellison, J.) (quoting Jones v. Alcoa,

Inc., 339 F.3d 359, 366 (5th Cir.2003)). Thus, dismissal is

appropriate here if (1) it is evident from Plaintiffs Amended

Complaint that he did not file a Charge of Discrimination

within the prescribed time frame, and (2) his Amended

Complaint does not present a basis for an exception such as

equitable tolling. Id.

According to Plaintiff's Complaint, he filed two separate

Charges of Discrimination with the EEOC. The first of

these Charges, filed April 26, 2010, was timely; the second

Charge, filed December 30, 2014, was not timely. The timelyfiled Charge alleged discrimination and retaliation based on

disability, claims that are not addressed by Defendant's Partial

Motion to Dismiss. However, the remainder of Plaintiff's

claims-discrimination and retaliation based on race, color,

national origin, and age-were addressed only in the Charge

that was filed outside of the 300–day window for timely filing.

Those untimely claims must be dismissed unless Plaintiffs

Amended Complaint raises some basis for an exception to the

administrative exhaustion requirement.

Like a statute of limitations, the time limit for filing a

charge of discrimination with the EEOC is subject to waiver,

estoppel, and equitable tolling. Garrison, 2011 WL 4457374,

at *3 (quoting Zipes v. Trans World Airlines, Inc., 455 U.S.

385, 393, 102 S.Ct. 1127, 71 L.Ed.2d 234 (1982)). Plaintiff

has argued that equitable tolling should be applied to allow

his claims to proceed. (Doc. No. 29.) Equitable tolling “is

a narrow exception” to “be applied sparingly.” Phillips v.

Leggett & Platt, Inc., 658 F.3d 452, 457 (5th Cir.2011)

(internal quotation marks omitted). The employee has the

burden of demonstrating entitlement to equitable tolling. Id.

at 458. The Fifth Circuit recognizes three general grounds for

equitable tolling in this context: “(1) a pending action between

parties in the wrong forum; (2) the plaintiff's unawareness of

the facts supporting his claim because defendant intentionally

concealed them; and (3) the EEOC's misleading the plaintiff

about his rights.” Id. at 457; see also Branch v. CEMEX, Inc.,

No. CIV.A. H–11–1953, 2012 WL 2357280, at *10 (S.D.Tex.

June 20, 2012) (Rosenthal, J.) aff'd, 517 F. App'x 276 (5th

Cir.2013).

*3 Plaintiff has not pled facts sufficient for his claims of

discrimination and retaliation based on race, color, national

origin, and age to fall within the grounds the Fifth Circuit

recognizes for equitable tolling. There is no other pending

action between the parties, and Plaintiff has not alleged that

either the Defendant or the EEOC misled him or concealed

any facts. Plaintiff's claims for discrimination and retaliation

based on race, color, national original, and age must be

dismissed.

IV. CONCLUSION

For the foregoing reasons, Defendant's Partial Motion to

Dismiss (Doc. No. 27) is GRANTED. Plaintiff's claims for

discrimination and retaliation based on race, color, national

origin, and age are DISMISSED. The Court notes that

Plaintiff's claims for discrimination and retaliation based on

disability remain.

IT IS SO ORDERED.

All Citations

Not Reported in F.Supp.3d, 2015 WL 2089660

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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APPENDIX A-

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Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106 (2006)

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901 A.2d 106

Supreme Court of Delaware.

WAL–MART STORES, INC., a Delaware

corporation, and Wachovia Bank of

Georgia, N.A., in its capacity as Trustee

of the Wal–Mart Stores, Inc. Corporation

Grantor Trust, Plaintiffs Below, Appellants,

v.

AIG LIFE INSURANCE COMPANY, a Delaware

corporation; Hartford Life Insurance Company, a

Connecticut corporation; Westport Management

Services, Inc., a Delaware corporation; International

Corporate Marketing Group, LLC, a Delaware

limited liability company; National Benefits

Groups, Inc., dba Marsh Financial Services, a

Minnesota corporation; Seabury & Smith, Inc., a

Delaware corporation; Marsh, Inc., a Delaware

corporation; and Marsh & McLennan National

Marketing Corporation, now known as J & H

Marsh & McLennan Private Client Services, Inc., a

Delaware corporation, Defendants Below, Appellees.

No. 172,2005.

|

Submitted: March 8, 2006.

|

Decided: June 6, 2006.

Synopsis

Background: Policyholder brought action against life

insurers, their representatives, and brokers to recover for

fraud, breach of contract and fiduciary duty, and unjust

enrichment after deductions based on corporate-owned life

insurance (COLI) policies were retrospectively disallowed

and policyholder's insurable interest in lives of employees

was challenged. The Court of Chancery, New Castle County,

granted motion to dismiss suit as time barred. Policyholder

appealed. The Supreme Court, 860 A.2d 312, reversed and

remanded. On remand, the Court of Chancery, Lamb, Vice

Chancellor, 872 A.2d 611, granted motions to dismiss for

failure to state a claim. Policyholder appealed.

Holdings: The Supreme Court, Berger, J., held that:

the failure of the COLI plans to provide tax benefits entitled

policyholder to no relief on theories of commercial frustration

or mutual mistake;

brokers owed no fiduciary duty to policyholder;

insurers were not partners or joint venturers with policyholder

and owed no fiduciary duty;

policyholder stated common-law and equitable fraud claims;

it failed to state claims for breach of contract or negligence.

Affirmed in part, reversed in part, and remanded.

Procedural Posture(s): On Appeal; Motion to Dismiss.

*109 Court Below: Court of Chancery of the State of

Delaware, in and for New Castle County, C.A. No. 19875.

Upon appeal from the Court of Chancery. AFFIRMED IN

PART; REVERSED IN PART and REMANDED.

Attorneys and Law Firms

Robert K. Payson, and Gregory A. Inskip, of Potter, Anderson

& Corroon, L.L.P., Wilmington, DE; Michael Y. Horton

(argued), and David S. Cox, of Morgan, Lewis & Bockius,

L.L.P., Los Angeles, CA; and Paul A. Zevnik, of Morgan,

Lewis & Bockius, L.L.P., Washington, DC, of counsel, for

Appellants.

Richard D. Heins, and Carolyn S. Hake, of Ashby &

Geddes, Wilmington, DE, and James F. Jorden (argued),

of Jorden Burt, L.L.P., Washington, DC, for Appellee AIG

Life Insurance Company; R. Franklin Balotti, Lisa A.

Schmidt, Michael R. Robinson, and Catherine G. Dearlove,

of Richards, Layton & Finger, P.A., Wilmington, DE, and

Barry A. Chasnoff (argued), of Akin, Gump, Strauss, Hauer

& Feld, L.L.P., San Antonio, TX, for Appellees Hartford Life

Insurance Company and International Corporation Marketing

Group; Edward P. Welch, Seth M. Beausang, and James A.

Whitney, of *110 Skadden, Arps, Slate, Meagher & Flom,

L.L.P., Wilmington, DE, and Marco E. Schnabl, of Skadden,

Arps, Slate, Meagher & Flom, L.L.P., New York City, for

Appellees Marsh Financial Services, Seabury & Smith, Inc.,

Marsh, Inc., and Marsh & McLennan National Marketing

Corporation, formerly known as J & H Marsh & McLennan

Private Client Services; and Elizabeth A. Wilburn, and Alisa

E. Moen, of Blank Rome, L.L.P., Wilmington, DE, and Roger

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F. Cox (argued), of Blank Rome, L.L.P., Philadelphia, PA, for

Appellee National Benefits Group, Inc.

Before HOLLAND, BERGER, JACOBS and RIDGELY,

Justices, and HERLIHY, Judge, 1 constituting the Court en

Banc.

Opinion

BERGER, Justice:

In this appeal, we consider whether the Court of Chancery

correctly decided that appellants' Amended Complaint must

be dismissed for failure to state a claim. The complaint

purports to state several different claims arising out of

appellants' purchase of corporate-owned life insurance

(COLI) policies that were supposed to generate significant

tax benefits. In fact, the COLI policies did not generate

tax benefits and appellants allegedly suffered more than

$100 million in damages. We conclude that the complaint

adequately alleges a claim of fraud. The complaint adequately

pleads that appellees sold appellants a product that was an

economic sham designed to create enormous tax deductions.

They did so knowing that their product was flawed, and

without disclosing that those flaws jeopardized the favorable

tax treatment that formed the basis of the deal. Accordingly,

we reverse.

Factual and Procedural Background

What follows is a recital of the well-pled facts from the

complaint. 2 Wal–Mart Stores, Inc. is a retail sales company

with more than one million employees. From 1993 to

1995, Wal–Mart purchased COLI policies for approximately

350,000 employees as part of a plan to provide for its

employees and generate revenues, primarily through tax

deductions. In 1996, legislation prospectively eliminated

most of the tax benefits associated with COLI plans. Shortly

thereafter, the Internal Revenue Service started enforcement

actions seeking to disallow pre–1996 tax deductions taken

in connection with other companies' COLI plans. The IRS

also challenged Wal–Mart's COLI program, and Wal–Mart

suffered a substantial tax liability when it settled with the IRS

in 2002. In addition, Wal–Mart was sued by its employees,

and their estates, claiming that Wal–Mart had no “insurable

interest” in the lives of its employees and that it should

disgorge the death benefits it received.

In September 2002, Wal–Mart and a trust created as part

of the COLI program filed this action against: a) AIG Life

Insurance Company and Hartford Life Insurance Company

(the “Insurers”); b) Westport Management Services, Inc.

and International Corporate Marketing Group, LLC (the

“Insurers' Representatives”); and c) National Benefits Group,

Inc., Seabury and Smith, Inc., Marsh, Inc., and Marsh &

McLennan National Marketing Corporation (the “Brokers”).

The seven count Amended Complaint purports to *111

state claims for unjust enrichment, breach of fiduciary duty,

equitable fraud, breach of contract, negligence, statutory

consumer fraud, and declaratory relief.

For many years, businesses have purchased COLI policies

for their top executives as “key man” insurance. During the

1980s, the insurance industry developed the idea of selling

COLI policies for large numbers of employees. These broadbased COLI programs, unlike the original key man insurance

programs, were designed to provide significant profit to the

corporate policyholder through tax deductions. As structured,

the corporate policyholder would pay a substantial premium

in the first three years, and borrow back approximately 90%

of the premium at a relatively high interest rate. The corporate

policyholder then would take a tax deduction for the interest

payments. Since Internal Revenue Code § 264 does not

permit policy premiums to be paid through policy borrowing

during years four through seven, the COLI plans provided

for “loading dividends” or partial policy surrenders and cash

withdrawals to cover most of the premiums for those years.

Upon the death of an insured employee, the corporation,

or the beneficiary it designated, would receive the policy

payment. Thus, through a relatively small investment of

cash, the corporation would get the benefit of a large tax

deduction on its loans and the cash value of the COLI

policies would accumulate interest tax free. In 1993 Wal–

Mart began exploring the possibility of investing in a broadbased COLI plan. Wal–Mart hired Brokers, who were experts

in COLI plans, to assist the company in soliciting proposals

from insurance companies, evaluating the proposals, and

negotiating terms and conditions on behalf of Wal–Mart.

Insurers' Representatives presented proposals for Insurers'

COLI plans, and Brokers advised Wal–Mart to select AIG and

Hartford. Brokers also advised Wal–Mart to use a Georgia

grantor trust to establish the situs for the COLI policies. This

was important because for the policies to be recognized as life

insurance, the beneficiary must have an “insurable interest”

in the employee whose life is being insured. Legislation in

Georgia expressly provided that companies have an insurable

interest in all of their employees.

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Before purchasing any COLI policies, Wal–Mart sought and

received assurances from appellees that the program was

designed to eliminate or minimize the potential adverse

impact of future tax law changes. One Broker allegedly

assured Wal–Mart that, in the “worst case” scenario, Wal–

Mart would only lose $283,000. In addition, both Insurers

represented that their products were designed to comply with

the requirements of IRC §§ 7702 and 264, for purposes of

qualifying as life insurance policies and qualifying for interest

deductions, respectively. In sum:

The AIG Life and Hartford Life COLI

plans were designed, promoted, sold,

and purchased with the understanding,

by all parties, that (i) the plans

were constructed to conform to,

and would be administered in

accordance with, standard accounting,

actuarial and operating principles in

the life insurance industry, (ii) the

plans would be financed through

favorable tax treatment and, if such

favorable tax treatment changed, the

plans would be modified so as

to eliminate or minimize adverse

financial consequences to Wal–Mart,

and (iii) Wal–Mart possessed an

“insurable interest” in the associates

covered by the plans, in conformance

with the insurance laws of the State of

Georgia. 3

*112 As noted above, in 1996 Congress passed a statute

that effectively eliminated the tax benefits of COLI plans. In

response, Wal–Mart began unwinding its COLI plans, and its

COLI policies were surrendered and cancelled in 2000. Over

the next two years, Wal–Mart suffered an adverse ruling in a

class action claiming that Wal–Mart had no insurable interest

in the lives of its employees, and it also settled a dispute with

the IRS that resulted in the disallowance of most of its pre–

1996 COLI interest deductions. Shortly before filing this law

suit, Wal–Mart allegedly learned, among other things, that:

1) the policy loan interest rates were substantially higher

than any other insurance product loan rate and had been

questioned by the New York Insurance Department as well

as industry insiders;

2) the “loading dividends” were not consistent with usual

dividends paid in the insurance industry, either in terms of

timing, amount, or internal accounting; and

3) the Connecticut Insurance Department determined that

the loading dividend was not really a dividend, but a

premium refund, which would not be eligible for a tax

deduction.

Wal–Mart alleges that it reasonably relied on appellees'

representations that they had accurately and completely

described all material facts relating to the COLI plans, and

that Wal–Mart would not have purchased the COLI policies

had it known the true facts.

Appellees moved to dismiss the Amended Complaint. The

trial court granted their motion, holding that the claims were

barred by the applicable statute of limitations. 4 This Court

reversed, stating that Wal–Mart had alleged facts from which

one could reasonably infer that the statute of limitations was

tolled until October 1999. 5 After remand, the trial court again

granted appellees' motion to dismiss, this time for failure to

state a claim on which relief could be granted. 6

Discussion

 The standard of review in this appeal is the same as it was

for the last:

This Court reviews de novo, for errors

of law, the dismissal of a complaint

under Court of Chancery Rule 12(b)

(6). Under Rule 12(b)(6), the facts

alleged in the complaint are taken as

true and all inferences are viewed in

the light most favorable to the nonmoving party.... A dismissal of the

claims will be upheld only if it appears

from the well-pleaded allegations of

the complaint that the plaintiffs would

not be entitled to relief under any set

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of facts that could be proven to support

the claims asserted. 7

Count 1—Unjust Enrichment and Restitution

 Wal–Mart alleges that one of the COLI plans' fundamental

purposes was to provide tax benefits to the company. The

COLI plans failed in that fundamental purpose and Wal–Mart

suffered substantial losses. Appellees, by contrast, profited by

their involvement in promoting and selling the COLI plans.

Wal–Mart alleges that it would be unjust to allow appellees

to retain their profits, and asks the trial court to impose a

constructive trust on the money Wal–Mart paid them.

*113 We agree with the trial court that Wal–Mart failed

to state a claim under the doctrine of commercial frustration.

First, that doctrine excuses future performance under a

contract:

Where, after a contract is made,

a party's principal purpose is

substantially frustrated without his

fault by the occurrence of an event the

non-occurrence of which was a basic

assumption on which the contract was

made, his remaining duties to render

performance are discharged, unless the

language or circumstances indicate the

contrary. 8

Wal–Mart does not seek relief from any future performance

under the COLI plans.

Second, Wal–Mart assumed the risk that its tax deductions

would be allowed and that it had an insurable interest in

all of its employees. The Amended Complaint repeatedly

acknowledges the disclosed risks associated with the COLI

plans, as well as Wal–Mart's interest in minimizing those

risks, 9 and there are no allegations suggesting that the parties

agreed to shift the risks to the appellees. Thus, Wal–Mart

cannot recover under a theory of commercial frustration (or

mutual mistake). 10

Count 2—Breach of Fiduciary Duties

Wal–Mart alleges that appellees were fiduciaries because

of their expertise with respect to COLI plans, their

representations to Wal–Mart, and their knowledge that

Wal–Mart was relying on their expertise. Wal–Mart also

alleges that appellees breached their fiduciary duties by

failing to disclose material information concerning the COLI

plans. Wal–Mart argues on appeal that these allegations are

sufficient to state a claim for breach of fiduciary duty because:

i) Brokers were acting as WalMart's agents; and ii) Insurers

were acting as partners with Wal–Mart.

 The Court of Chancery properly rejected Wal–Mart's

fiduciary duty claims. As the trial court noted:

Fiduciary relationships have often been described as

“special relationships,” for good reason. Generally, “[a]

fiduciary relationship is a situation where one person

reposes special trust in another or where a special duty

exists on the part of one person to protect the interests of

another.” 11

Agents are fiduciaries when they are authorized to “alter the

legal relations between the principal and third persons ...” 12

Although Wal–Mart argues that Brokers were its agents, the

Amended Complaint does not allege that Brokers had the

authority to act on behalf of Wal–Mart, either by purchasing

COLI policies or by otherwise committing Wal–Mart to an

investment plan. The Court of Chancery looked beyond the

“agent” label and examined the nature of the relationship as

*114 alleged in the Amended Complaint. We agree with the

trial court's analysis and its conclusion:

The court is mindful of the fact that normal business

dealings (such as that of an insurance broker and its

client) can sometimes take on certain aspects of a fiduciary

relationship, as, for example, where the broker agrees to act

as agent for the customer with power to bind the customer

contractually. At the same time, however, ... it is vitally

important that the exacting standards of fiduciary duties not

be extended to quotidian commercial relationships....

In this light, while Wal–Mart alleges that it placed trust in

the broker-defendants, it does not allege sufficient facts

that, if proven to be true, demonstrate that its relationship

with the broker-defendants went beyond that occurring

in normal commercial transactions....

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First, there is no alignment of interests between Wal–

Mart and the broker-defendants ... Wal–Mart was trying

to avoid paying the taxes it owed, while the brokerdefendants were trying to make money by brokering the

sale of the COLI policies ...

Second, Wal–Mart does not allege any facts from

which the court could reasonably infer that the brokerdefendants exerted control or domination over Wal–

Mart....

Third, Wal–Mart does not allege facts from which the

court could infer self-dealing....

In sum, the relationship that is alleged to have existed

between Wal–Mart and the broker-defendants was

merely a normal, arm's-length business relationship. 13

 Wal–Mart's contention that the Insurers are fiduciaries

likewise finds no support in the Amended Complaint. It is

settled law that the relationship between an insurer and an

insured generally is not fiduciary in character. 14 Wal–Mart

acknowledges this principle, but argues that this relationship

was atypical. Wal–Mart contends that it partnered with the

Insurers in a joint venture where both parties would profit

from Wal–Mart's borrowing. The Amended Complaint makes

it clear, however, that the parties' interests were not aligned.

Insurers allegedly profited from selling the COLI plans

through loan spread, mortality gains, premium loadings, and

investment earnings. 15 Wal–Mart, by contrast, expected to

profit from the COLI policies through tax deductions. 16 In

sum, the Amended Complaint alleges no facts from which one

could infer that the parties were partners, or joint venturers.

Thus, the breach of fiduciary duty claim fails.

Count 3—Equitable Fraud

 Wal–Mart claims that all appellees knew or should have

known, but failed to disclose, material information about the

risk that the COLI plans would not achieve their intended tax

benefits because of the structural flaws in those plans. Among

other things, Wal–Mart alleges that:

[C]ertain state insurance regulators

had disapproved COLI plans, such

as those sold to Wal–Mart ... based

on concerns relating to tax treatment,

insurable interest, and deviations

from acceptable accounting, actuarial,

and operating *115 principles in

the life insurance industry ... [T]he

AIG Life and Hartford Life COLI

plans were designed and administered

in a fashion that deviated from

acceptable accounting, actuarial, and

operating principles in the life

insurance industry, with respect to

the simultaneous “netting” out of

premium and interest payments by

way of partial withdrawals from policy

cash values ... loading charges to

cover insurance company expenses ...

payment of dividends ... timing

of dividend payments ... source of

dividends ... manner in which loan

interest rates were calculated 17 ...

These deviations from standard industry practice allegedly

increased the risk that the COLI plans would fail, as they

did, under the tax law in effect at the time Wal–Mart bought

the policies. Wal–Mart claims that it sought assurances from

appellees about the tax risks; that it reasonably relied on

appellees to fully disclose all material information; and that

had Wal–Mart known that the COLI plans were flawed in

the manner alleged, it would not have purchased the policies.

Finally, Wal–Mart alleges substantial damages as a result of

the COLI plans' failure to produce tax benefits.

 To state a claim for common law fraud, a party must allege:

1) a false representation, usually one of fact ...;

2) the defendant's knowledge or belief that the

representation was false, or was made with reckless

indifference to the truth;

3) an intent to induce the plaintiff to act or to refrain from

acting;

4) the plaintiff's action or inaction taken in justifiable

reliance upon the representation; and

5) damage to the plaintiff as a result of such reliance. 18

 Equitable fraud differs from common law fraud in one

respect—the defendant need not know that the representation

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is false. 19 Although an expression of opinion cannot form

the basis of a fraud claim, “the mere fact that a material

statement is in the form of an opinion, or of an estimate, is

not necessarily conclusive as to whether it must be treated as

such ...” 20 Thus:

Even though the language of a representation concerns only

legal consequences and is in the form of an expression

of opinion, it may, as in the case of any other statement

of opinion, carry with it by implication the assertion that

the facts known to the maker are not incompatible with

his opinion or that he does know facts that justify him

in forming it.... When the recipient does not know the

facts, he may justifiably rely upon these implied assertions

and recover on the basis of a misrepresentation of implied

fact. 21

Similarly, a statement that is “facially true ... may constitute

an actionable misrepresentation if it causes a false impression

as to the true state of affairs, and the actor fails to provide

qualifying information to cure the mistaken belief.” 22

*116 The Amended Complaint alleges that appellees

misrepresented the viability of the COLI plans by

failing to inform Wal–Mart that the plans deviated from

industry standards, and that those deviations had prompted

regulators to question or disapprove similar plans. These

are misrepresentations of implied fact—implied in light

of appellees' representations that the COLI plans were

“designed” or “intended” to comply with the requirements

of I.R.C. §§ 7702 and 264. In addition, a Broker allegedly

advised Wal–Mart that its maximum exposure under a “worst

case” scenario would be $283,000. That statement may be

classified as an “estimate” or “opinion,” since no one can

provide absolute assurance as to future events. Nonetheless,

it is the type of opinion that suggests the reasonable belief

that it was based on facts known to the maker. Thus, such a

statement can form the basis for an equitable fraud claim as

well.

Appellees argue that this claim must be dismissed, if for

no other reason, because Wal–Mart did not rely on their

representations. They point to a Letter of Understanding

(LOU) executed by Wal–Mart, which states:

[Wal–Mart] has reviewed with its own

legal and tax advisors all present and

future implications of its ownership

of the [COLI] Policies, including, but

not limited to, the tax consequences

of loans and/or withdrawals from the

Policies and the deductibility thereof,

and that it has not relied upon any

representations of AIG Life or any

employee, broker or agent of AIG Life

in that regard.

The trial court also questioned Wal–Mart's ability to seek

relief in light of this provision. We do not view the LOU

as dispositive. It is an agreement with AIG Life, not with

all appellees. Moreover, this provision states only that Wal–

Mart relied on its own tax advisors in analyzing the risks

of using COLI policies as a tax shelter, and did not rely on

AIG Life “in that regard.” It does not, by its terms, state that

Wal–Mart was absolving AIG Life of liability for material

misrepresentations as to the structural flaws in its product.

Count 4—Breach of Contract

 Wal–Mart alleges that appellees failed to fulfill their

contractual obligations and breached their covenant of

good faith and fair dealing by failing to disclose material

information about the COLI plans. The Amended Complaint,

however, does not identify any express contractual obligation

that was breached. As for the alleged breach of the implied

covenant of good faith and fair dealing:

[T]his Court has recognized the

occasional necessity of implying

contract terms to ensure the parties'

reasonable expectations are fulfilled.

This quasi-reformation, however,

should be [a] rare and fact-intensive

exercise, governed solely by issues

of compelling fairness. Only when

it is clear from the writing that the

contracting parties would have agreed

to proscribe the act later complained

of ... had they thought to negotiate

with respect to that matter may a party

invoke the covenant's protections. 23

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As noted above, Wal–Mart has not identified any express

contract provision that was breached. Nor has Wal–Mart

identified any implied contract term that it would have the

trial court read into the contract. Accordingly, this count fails

to state a claim upon which relief may be granted.

*117 Count 5—Negligence against Brokers

 Wal–Mart alleges that Brokers held themselves out as

professionals with special expertise in all aspects of COLI

plans, and that therefore Brokers had a duty to exercise the

care and skill of a “reasonably prudent business man in the

insurance brokerage and consulting business ...” 24 Brokers

allegedly failed to exercise that level of skill and diligence,

thereby causing Wal–Mart substantial losses.

As the trial court noted, this claim appears to be another

version of the rejected breach of fiduciary duty claim, but

with a different label. To the extent that Wal–Mart is alleging

a legally different claim based on negligence, the Amended

Complaint fails to identify either the conduct that constituted

a breach of the standard of care, or the manner in which that

conduct proximately caused Wal–Mart injury. Accordingly,

we conclude that this claim fails.

Count 6—Delaware Consumer Fraud Act

 Wal–Mart's statutory claim is based on the same

misrepresentations and failure to disclose discussed in

connection with the equitable fraud claim. The statutory claim

fails, however, because it requires that the unfair practice

occur “in part or wholly within this State.” 25 The Amended

Complaint does not allege that any of the conduct at issue took

place in Delaware.

Count 7—Declaratory Relief

 Wal–Mart's final claim seeks a declaration that appellees

are responsible for any losses it may incur in connection

with the failed COLI plans. Wal–Mart argues that, as a

matter of judicial economy, the trial court should adjudicate

the parties' responsibility for damages arising from the

“insurable interest” litigation against the company. The Court

of Chancery viewed this claim as one for indemnification, and

held that it is premature inasmuch as there are no judgments

against Wal–Mart at present. We agree for the reasons stated

by the trial court. 26

Finally, there remains a question as to whether Wal–Mart's

fraud claim may be heard in the Court of Chancery.

There is no fiduciary relationship between the parties, and

Wal–Mart seeks damages as its remedy. Although Wal–

Mart characterizes its claim as one for equitable fraud, we

conclude, for the reasons discussed above, that the Amended

Complaint adequately alleges the elements of common law

fraud as well. The parties did not address the possibility that

only the fraud claim would survive, although the trial court

noted:

[E]quitable fraud does not swallow

common law fraud because it can

only be applied in those cases in

which one of the two fundamental

sources of equity jurisdiction exists:

(1) an equitable right founded upon

a special relationship over which

equity takes jurisdiction, or (2) where

equity affords a special remedy (e.g.

rescission or cancellation). 27

We decline to resolve this question of equitable jurisdiction

in the first instance. The Court of Chancery will be able to

consider this matter and, if appropriate, transfer this claim to

the Superior Court.

*118 Conclusion

Based on the foregoing, the decision of the Court of Chancery

dismissing this action for failure to state a claim is affirmed in

part and reversed in part. This matter is remanded for further

proceedings in accordance with this opinion. Jurisdiction is

not retained.

All Citations

901 A.2d 106

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Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106 (2006)

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 8

Footnotes

1 Sitting by designation pursuant to Art. IV, § 12 of the Delaware Construction and Supreme Court Rules 2

and 4.

2 On a motion to dismiss the complaint under Court of Chancery Rule 12(b)(6), the well-pled facts are assumed

to be true and are reviewed in the light most favorable to the plaintiffs. In re Tri–Star Pictures, Inc., 634 A.2d

319, 326 (Del.1993).

3 Amended Complaint, ¶ 45.

4 Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 2004 WL 405913 (Del.Ch. Mar. 2, 2004).

5 Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312 (Del.2004).

6 Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611 (Del.Ch.2005).

7 Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d at 318.

8 Restatement (Second) Contracts § 265 (1981).

9 See, e.g.: Amended Complaint, ¶¶ 4 (“COLI plans [promoted] ... as a commonplace, low-risk means of

generating annual positive cash flow....”); 40 (“Wal–Mart recognized that continued favorable tax treatment

was essential to the viability of the plans....”); 42 (Wal–Mart purchased COLI policies in reliance on

“advice, recommendations, and assurances provided by the defendants....”); 44 (“The ‘final projections' that

accompanied the issuance of the first block of AIG Life policies ... projected positive cash flow ... of more

than $9,000,000,000.... Without [the deductibility of interest payments], the COLI plan projected to produce

a loss of nearly $2,000,000,000 over its life.”) (Emphasis in original.)

10 See Restatement (Second) Contracts § 154 (1981).

11 Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d at 624 (citations omitted).

12 Restatement (Second) Agency § 12 (1958); O'Malley v. Boris, 742 A.2d 845 (Del.1999).

13 Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d at 627–28 (citations omitted).

14 Corrado Bros., Inc. v. Twin City Fire Ins. Co., 562 A.2d 1188, 1192 (Del.1989).

15 Amended Complaint, ¶ 27.

16 Amended Complaint, ¶ 44.

17 Amended Complaint, ¶ 80.

18 Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del.1983).

19 Id.

20 E. States Petroleum Co., Inc. v. Universal Oil Products Co., 3 A.2d 768, 775 (Del.Ch.1939).

21 Restatement (Second) Torts § 545 (1977), Comment c.

22 See Norton v. Poplos, 443 A.2d 1, 5 (Del.1982) (where the Court described different types of

misrepresentations in its consideration of the innocent misrepresentation at issue.)

23 Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 442 (Del.2005) (internal quotation marks omitted).

24 Amended Complaint, ¶ 104.

25 6 Del. C. § 2512.

26 See Dana Corp. v. LTV Corp., 668 A.2d 752, 755 (Del.Ch.1995).

27 Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d at 629.

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

Case 4:20-cv-01178 Document 37-1 Filed on 04/23/20 in TXSD Page 89 of 89 Case 20-14695-LMI Doc 756 Filed 10/22/20 Page 220 of 221
UNITED STATES DISTRICT COURT 

FOR THE SOUTHERN DISTRICT OF TEXAS 

HOUSTON DIVISION 

OMAR KHAN, et al. § 

 § 

vs. § Civil Action No. 4:20-cv-01178 

 § 

CINEMEX USA REAL ESTATE § Hon. Andrew S. Hanen 

HOLDINGS, INC., et al. § 

ORDER GRANTING MOTION TO DISMISS PLAINTIFFS’ 

VERIFIED ORIGINAL COMPLAINT WITH PREJUDICE 

 Upon the motion of Cinemex USA Real Estate Holdings, Inc. and Cinemex Holdings, 

USA, Inc. for entry of an order dismissing the Plaintiffs’ Verified Original Complaint; and this 

Court having reviewed and considered the Motion to Dismiss, and the record in this matter, and 

after due deliberation and sufficient cause appearing therefor, it is HEREBY ORDERED THAT: 

The Motion to Dismiss is granted in its entirety with prejudice. 

Signed: 

 __________________________________________ 

 THE HONORABLE ANDREW S. HANEN 

 UNITED STATES DISTRICT COURT JUDGE 

 

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