DealLawyers.com Blog

In Monica, et al. v. Delta Data Software, Inc. (Del. Super.; 2/26), the Delaware Superior Court denied a motion to dismiss claims that a buyer breached the covenant of good faith and fair dealing by undermining the collection of a customer payment to avoid an earnout. The case arose out of the purchase of Phoenix Systems by the defendant, Delta Data Software. Plaintiffs were entitled to an earnout payment conditioned on annual recurring revenue (ARR) for any contract that met certain conditions, including that an initial payment was made under the contract prior to March 31. Following the closing, one plaintiff served as Delta Data’s VP of Business Development and negotiated a contract with a new customer, requiring an initial payment by March 29. However, in what plaintiffs allege was an affirmative act for the purpose of avoiding the earnout, Delta instructed the new customer not to pay the invoice. The new customer contract would have met the conditions to be included in the earnout, but for the payment being received after March 31. The threshold ARR was not met.

The court found that the plaintiffs pleaded that there was a contractual gap for the implied covenant to fill (related to payment collections) and sufficient facts to allege a breach.

The SPCA provides an Earnout Payment conditioned on, among other things, when initial customer payments are made. For those payments to be made, Defendant had to collect, or at least accept, them. Defendant agrees that the SPCA “is silent” on the issue of how it was required to act when collecting payments and emphasizes that the SPCA contains no “efforts” clause in that regard. There is thus a “gap” regarding the range of actions Defendant either must or is prohibited from taking when it comes to collection of payments.

Beyond pleading a gap, Plaintiffs plead an implied obligation that Defendant breached. The complaint pleads that Defendant took affirmative acts to prevent the Customer from making payment on the MSLA for the purpose of undermining Plaintiffs’ right to an Earnout Payment. Specifically, Plaintiffs plead, after Delta Data had already invoiced the Customer for payment due on March 29, 2025, Defendant “t[old] the customer that it would void the invoice and that the Customer did not need to pay.” The complaint alleges that Defendant took this action for the purpose of “manipulat[ing] 2024 ARR,” thus undermining Plaintiffs’ right to an Earnout Payment. Plaintiffs also plead that Defendant terminated Monica “to ensure that he could not participate in the performance of Delta Data’s contract with the Customer and the collection of the Customer’s first payment.”

The parties agreed to an Earnout Payment contingent on Delta Data receiving certain customer payments prior to March 31, 2025. When Plaintiffs entered that agreement, it was reasonable for them to expect at least that Delta Data would not take affirmative acts to avoid receiving customer payments by that date. By pleading that Delta Data took such acts for the purpose of undermining the Earnout Payment, Plaintiffs allege a breach of the implied covenant.

The court also refused to dismiss the breach of contract claims — despite plaintiffs’ acknowledgement that the earnout was not met — under the prevention doctrine since plaintiffs allege that defendant’s own conduct prevented the earnout payment threshold from being met.

– Meredith Ervine