Envo, Inc. v. Walters, C.A. No. 4156-VCP (Del. Ch. July 18, 2012).
Issue Presented: Whether promissory estoppel was established to impose personal liability in connection with the poorly documented sale of a business when the acquiring entity was never properly formed.
Short Answer: Yes.
This 38-page post-trial decision involved an incompletely documented sale of a business and transfer of assets that were kept and used to run a business even though the entity named in the purchase agreement was never formed. The defendants had failed to pay for those assets even as of the date of trial. This opinion describes in great detail the tortuous factual background and the less than complete documentation that was used to memorialize the sale of a small business, but the documents were never finalized. Because of the relatively small amount involved for the purchase of this small business, the parties did not want to spend the unnecessary money for legal fees to properly “paper” the transaction.
The parts of this opinion that will be of the most widespread interest relate to the Court’s discussion of promissory estoppel, and its imposition of personal liability in connection with the use of an entity that was never properly formed.
Parenthetically, and initially, it is useful to highlight a procedurally unusual aspect of this case which involved one of the defendants disclosing for the first time after the trial started that he had relevant documents that he did not produce. The penalty imposed by the Court for that unjustified late disclosure was to make those late-produced documents inadmissible. The Court observed that it could not condone the failure of one of the defendants so belatedly producing those documents–that were clearly covered by at least two sets of document requests (one of which was almost three years earlier).
The explanation by the defendant was not accepted by the Court. That excuse was that the defendant simply did not remember. Moreover, the Court emphasized that the defendant presented no evidence that he or his counsel conducted an appropriate search for the responsive documents, and even though they admittedly knew about the documents before the trial, they failed to notify the Court and opposing counsel until after the trial started.
Latches and “Discovery Rule” for Statute of Limitations
The Court provided a helpful discussion of the concept of latches although it found that even if the Court did accept the proposition that the applicable statute of limitations was three years for the breach of a promise pursuant to 10 Del. C. § 8106, those claims would not be barred by latches because they were tolled under the “doctrine of inherently unknowable injuries.” Sometimes referred to as the “discovery rule,” the doctrine of inherently unknowable injuries provides that a statute of limitations will not run “where it would be practically impossible for a plaintiff to discover the existence of a cause of action.” See footnote 42. In any event, the latches argument was rejected.
The Court explained that under Delaware law, a plaintiff asserting a claim for promissory estoppel must show by clear and convincing evidence that: (1) A promise was made; (2) The promisor reasonably expected to induce action or forebearance by the promisee; (3) The promisee reasonably relied on the promise and took action to his detriment; and (4) The promise is binding because injustice can be avoided only by its enforcement. See footnote 59. In addition, the promise must be reasonably definite and certain. See footnote 60.
The Court carefully applied each of those elements in a discussion of the factual details as applied to the foregoing elements.
In part, the Court’s reasoning was that the assets of the business were used for years following the transaction and it would be inequitable, and would work an injustice, if the individual defendants and the new company were not held jointly and severably liable for failing to pay. The two individual defendants did not operate via an entity, therefore they would be treated by default as general partners who would each be liable for the obligations of the other. See 6 Del. C. Section 15-202(a).
The Court explained that in awarding damages for promissory estoppel, whose primary purpose is to prevent injustice, the Court has the following options: (1) It can do nothing; (2) It can grant restitution; (3) It can reimburse the promisee for the losses incurred by reliance; or (4) It can secure for the promisee the expectancy for its value. See footnote 71 and 72.
The Court also found the individual defendants personally liable because the corporation was never formed as planned, so they could not limit their liability to a non-existent entity. The Court explained the details on which its reasoning was based and why the defendants could not limit liability to an entity that was not properly formed.
Pre- and Post-Judgment Interest
The Court awarded both pre- and post-judgment interest, as well as costs under Court of Chancery Rule 54(d). The post-judgment interest shall accrue at the legal rate pursuant to 6 Del. C. § 2301. The Court used its discretion to reduce the rate of pre-judgment interest, although in Delaware pre-judgment interest is awarded as a matter of right, and the same is true of post-judgment interest. See footnote 75.