Braga Investment v. Yenni Income Opportunities

Thursday, September 17, 2020

In Braga Funding & Advisory, LLC v. Yenni Earnings Alternatives Fund I, L.P., C.A. No. 2017-0393-AGB (Del. Ch. June 8, 2020), Braga Funding & Advisory, LLC (“Braga”), a minority investor in Steven Feller, P.E., LLC (“Newco”) alleged that Yenni Earnings Alternatives Fund I, L.P. (the “Fund”), the bulk investor in Newco, had breached a purchase order settlement for pursuits in Newco when the Fund amended it with out Braga’s consent. Braga additionally contended that the Fund breached its co-investment settlement with Braga when it revoked Braga’s proper to obtain board packages underneath that settlement. The Delaware Courtroom of Chancery (the “Courtroom”) concluded that the Fund’s modification of the acquisition settlement didn’t require Braga’s consent, and that the Fund didn’t breach Braga’s proper to obtain board packages primarily based on the abnormal use of that time period.

In 2015, the Fund entered into a purchase order settlement (the “Buy Settlement”) with Steven Feller and Louise Feller (the “Sellers”) and Steven Feller P.E., PL (“Oldco”). The Buy Settlement contemplated a sequence of transactions that may switch all of Oldco’s belongings to Newco (excluding sure specified belongings), and outcome within the Fund and Oldco holding 80% and 20% of Newco’s fairness pursuits, respectively. The Buy Settlement set goal web working capital at $3.Eight million, with a post-closing adjustment mechanism if ultimate closing web working capital differed from the goal. All of Oldco’s accounts receivable, together with accounts receivable that had not been collected for 120 days or longer (“Aged AR”), weren’t talked about within the record of excluded belongings underneath the Buy Settlement, and all such accounts had been to be included within the calculation of web working capital.

In August 2016, the Fund’s managing associate, Musa Yenni (“Yenni”) approached Braga relating to a minority funding in Newco. The funding memo supplied to Braga said that Aged AR was not thought of a part of Oldco’s belongings in calculating the $3.Eight million goal web working capital. In September 2016, Braga entered into an settlement to buy a 23.3% curiosity in Newco (the “Co-Funding Settlement”). Beneath the Co-Funding Settlement, Braga was granted sure board observer rights, together with receiving board packages. Braga and Yenni (critically not the Fund) additionally entered right into a joinder settlement (the “Joinder Settlement”), which said that Braga could be deemed a “Purchaser” underneath the Buy Settlement, entitled to the rights and topic to the obligations of the Buy Settlement.

Shortly earlier than closing, Oldco insisted that Aged AR ought to be handled as an asset of Oldco – which might lead to a working capital adjustment in favor of Sellers and Oldco of greater than $2 million. Following negotiations, Oldco, Sellers and the Fund agreed in a aspect letter executed at closing (the “Facet Letter”) to deal with Aged AR as a part of the excluded belongings that may be retained by Oldco, to exclude all the Aged AR from post-closing working capital changes, and to cap the rights of Sellers and Oldco to hunt reimbursement for skilled charges (amounting to roughly $200,000). Braga participated within the closing name and post-closing discussions by which these issues had been mentioned, and didn’t increase objections.

Braga filed its grievance with the Courtroom in Could 2017, alleging that (1) the Fund had breached the Buy Settlement (as amended by the Joinder Settlement) when it entered into the Facet Letter with out Braga’s specific written consent; had (2) the Fund had breached the Co-Funding Settlement by not offering Braga with adequate info to represent full board packages.

The Courtroom famous that to determine a breach of contract declare underneath Delaware legislation, a plaintiff has the burden of proving, by a preponderance of the proof, (1) the existence of a legitimate and enforceable contract; (2) that the defendants breached the contract; and (3) that the plaintiff was broken because of these breaches. Delaware courts should give unambiguous contract phrases their plain that means, with out regard to extrinsic proof, and provides precedence to the events’ intentions as mirrored within the “4 corners of the settlement”, construing the settlement as a complete and giving impact to all of its provisions.

The Courtroom first addressed the disputes regarding the Buy Settlement and Facet Letter. The Courtroom famous that by its phrases, the Buy Settlement might solely be amended with the written consent of Oldco, the Sellers and the “Purchaser”. Braga contended that it had been made a “Purchaser” pursuant to the phrases of the Joinder Settlement it had entered into with Yenni. Nonetheless the Courtroom famous that the Joinder Settlement, which purported to switch the Buy Settlement and make Braga a “Purchaser”, was itself invalid as a result of it had solely been signed by Yenni and never by any of the particular events to the Buy Settlement. Braga additionally pointed to a number of items of outdoor proof in assist of its arguments, which the Courtroom dismissed in flip. Braga argued that the Fund had conceded in its opening temporary that Braga grew to become a celebration to the Buy Settlement when it entered into the Joinder Settlement, however the Courtroom famous that the Fund was not precluded underneath any authorized doctrine from taking a unique place at trial. Braga additionally famous that Yenni testified that he believed the Joinder Settlement made Braga a Purchaser underneath the Buy Settlement, however the Courtroom identified that the Buy Settlement is unambiguous on this subject and outdoors testimony shouldn’t be thought of. Lastly Braga claimed that the Joinder Settlement was ratified by an e mail by all needed events earlier than the Facet Letter was executed. Nonetheless the Courtroom famous that there was no proof any consultant of Oldco and the Sellers ratified the Joinder Settlement.

The Courtroom additionally identified that Braga had not suffered damages because of any breach. Braga claimed damages from the alleged Buy Settlement breach of $488,725, which was primarily based on its purported share within the quantity of Aged AR that ought to have been transferred to Newco at closing had the Buy Settlement not been amended. Nonetheless the Courtroom identified that if the Facet Letter had by no means been executed, Newco’s profit from receiving the Aged AR would have been offset by the working capital adjustment in favor of Oldco. Furthermore, the Courtroom famous that Braga’s reliance on the funding memo it obtained stating that Aged AR could be excluded from the working capital calculation didn’t override the plain language of the Buy Settlement. The Courtroom additionally famous that sure damages claimed by Braga that arose post-closing didn’t outcome from the alleged breach of the Buy Settlement, and that even when Newco suffered damages from a breach, Braga didn’t have a contractual proper to obtain a professional rata share of such damages.

Lastly the Courtroom discovered that the Fund materially complied with its obligation to offer Braga with board packages. The Courtroom rejected Braga’s sweeping interpretation of its rights set forth within the Co-Funding Settlement, which was primarily based the in depth info the Fund initially supplied to Braga instantly following the Newco closing. As a substitute, the Courtroom opted for a plain language studying of the time period “Board packages”, and located that the Fund had materially complied with this requirement by offering Braga with the identical set of supplies Newco had decided had been needed for its board members to carry out their duties.

Braga Funding & Advisory, LLC v. Yenni Earnings Alternatives Fund I, L.P., C.A. No. 2017-0393-AGB (Del. Ch. June 8, 2020)