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Chancery Grants Specific Performance For Release of Escrowed Funds, Rejects Sellers’ Representative’s Arguments to Withhold Funds As Inconsistent With Purchase Agreement’s Plain Language and the Implied Covenant of Good Faith and Fair Dealing

Am. Healthcare Admin. Services Inc. v. Aizen, C.A. No. 2019-0793-JTL (Del. Ch. Nov. 18, 2022)
Parties to acquisition agreements often have discretion concerning when to instruct an escrow agent to distribute funds post-closing, but any such discretion is limited by the plain language of the agreement and implied covenant of good faith and fair dealing. This decision addresses the availability of an unclean hands defense to contract claims seeking equitable relief. 

Here, following an asset sale, the seller-corporation’s former CEO refused to provide written instructions to release funds after a holding period expired under the terms of the parties’ Asset Purchase Agreement (the “Agreement”). The stockholders sued the former CEO to compel him to release the funds and he asserted several defenses, including and unclean hands defense. The former CEO first argued that, as the Agreement gave him the “sole and absolute” discretion, he did not have to agree to release the funds because that could render the corporation unable to satisfy a judgment in his own parallel litigation against the corporation for amounts allegedly due under the agreement governing his termination. The Court of Chancery disagreed, reasoning that the agreement set forth express conditions, upon the satisfaction of which the seller’s representative was required to instruct the escrow agent to release the funds.  The Court also found that the former CEO was not using his discretion in a manner faithful to “the scope, purpose, and terms of the parties’ contract” as required by the implied covenant of good faith and fair dealing. The former CEO then attempted to invoke the unclean hands defense. The Court found that the defense was generally unavailable against a legal claim, but because plaintiffs sought equitable relief, the former CEO could invoke this defense.  The Court found, however, that he failed to plead facts supporting that the plaintiffs’ conduct was “sufficiently reprehensible” in relation to the specific matter before the Court “as to forfeit their right to relief.”  The former CEO’s allegations relating to his wrongful termination and the potential for future fraudulent transfers did not satisfy this standard.  The Court accordingly granted judgment on the pleadings and ordered the release of the funds.  Based on the possibility that the corporation could purposely render itself judgment-proof, however, the Court allowed the former CEO a brief window to seek relief in the California court presiding over termination-related claims against the corporation.

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