Pazos v. AdaptHealth LLC

Submitted: April 11, 2024

Issued: August 12, 2024 ^[*]

Upon Respondent's Motion to Dismiss, GRANTED.

Upon Petitioner's Motion for Summary Judgment, DENIED.

Kelly E. Farman, Esquire, Matthew W. Murphy, Esquire (argued), Edmond S. Kim, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Petitioner Cynthia Pazos.

Steven L. Caponi, Esquire (argued), Matthew B. Goeller, Esquire, Megan E. O'Connor, Esquire, K&L GATES LLP, Wilmington, Delaware, Attorneys for Respondent AdaptHealth LLC.

MEMORANDUM OPINION AND ORDER

PAUL R. WALLACE, JUDGE

Petitioner Cynthia Pazos sold her company to Respondent AdaptHealth LLC. That sale was executed through an agreement that allowed the parties to dispute certain post-closing calculations. One such dispute arose, and the agreement's resolution procedures were invoked.

Pursuant to those procedures, an independent accountant was tasked with resolving the parties' post-closing calculations dispute. The agreement's provisions state that the independent accountant's determination is final and binding upon the parties, absent manifest error.

Ms. Pazos objected to the independent accountant's determination. She says that the independent accountant committed manifest errors. Ms. Pazos initially identified several manifest errors she says the independent accountant committed. She has brought four of them to the Court for review.

After both parties filed dispositive motions, the Court requested limited discovery to better understand the independent accountant's determination and the Court's scope of review. With that limited discovery complete, the record is now clear; the independent accountant committed no manifest errors. And despite Ms. Pazos's repeated asks to do so, the Court won't otherwise interfere with the independent accountant's contracted-for authority to resolve the parties' dispute using its own substitute accountancy.

Accordingly, and for the reasons further explained now, AdaptHealth's

Motion to Dismiss is GRANTED, and Ms. Pazos's Motion for Summary Judgment is DENIED.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. The Parties

Petitioner Cynthia Pazos is the founder and former chief executive officer of Diabetes Management and Supplies, LLC ("DMS") and a Louisiana resident.^[1] DMS was a provider of diabetes products and services, including testing supplies and insulin pumps.^[2]

Respondent AdaptHealth LLC is a Delaware limited liability company.^[3] AdaptHealth operates a national network of medical equipment companies that provide products and services to outside-hospital patients.^[4]

B. The Agreement

Ms. Pazos sold DMS to AdaptHealth via a Membership Interest Purchase Agreement (the "MIPA") executed on December 31, 2020.^[5]

The MIPA included certain post-closing purchase price adjustment calculations.^[6] Under its section 2.4, DMS was required to deliver a certificate at

Closing "setting forth the Estimated Closing Cash Amount and the Estimated Closing Working Capital."^[7] AdaptHealth would then prepare and deliver to Ms. Pazos, within 90 days of closing and "in accordance with the Accounting Principles," "a consolidated balance sheet of the Company and the Subsidiary as of the Closing Date (without giving effect to the Transactions) and a statement (the "Closing Date Statement") . . . ."^[8]

The MIPA then provides dispute resolution provisions for disagreements about the Closing Date Statement.^[9] Under those provisions, Ms. Pazos had 30 days to review the Closing Date Statement provided by AdaptHealth and the ability to object.^[10] If the parties couldn't resolve an objection themselves, section 2.4(b)(iii) describes what happens next:

Resolution of Disputes. If Seller and Buyer fail to reach an agreement with respect to all of the matters set forth in the Statement of Objections before expiration of the 30 calendar days after delivery of the Statement of Objections, then any amounts remaining in dispute ("Disputed Amounts") shall be submitted for resolution to an impartial nationally recognized firm of independent certified public accountants as the Parties shall mutually agree (an "Independent Accountant") who, acting as experts and not arbitrators and making all calculations in accordance with the Accounting Principles, shall resolve the Disputed Amounts only and make any adjustments to the Post-Closing Adjustment as the case may be, and the Closing Date Statement.^[11]

Section 2.4(b)(iii) further states that:

The Independent Accountant's determination shall be final and binding on the Parties and shall not be subject to appeal or further review absent manifest error. In resolving any disputed item, the Independent Accountant may not assign a value to any item greater than the greatest value for such item claimed by either Party or less than the smallest value for such item claimed by either Party. The Independent Accountant shall determine and include in its report an award of the costs of its review and report based on the extent to which the Parties prevail in such matter.^[12]

"Accounting Principles" is defined in the MIPA as,

those accounting methods, practices, principles, policies and procedures, together with those classifications, judgments and valuation and estimation methodologies, used in the preparation of the Illustrative Working Capital Calculation, in each case, to the extent consistent with GAAP ....^[13]

The "Illustrative Working Capital Calculation" is attached as Exhibit B to the MIPA.^[14] It provides calculations of DMS's current assets and current liabilities.^[15]Notably, unbilled pump receivables is not included as a line item on the attached Illustrative Working Capital Calculation.^[16]

C. The Dispute

In April 2021, AdaptHealth emailed Ms. Pazos its Closing Date Statement.^[17]

Ms. Pazos objected to that statement, taking issue with AdaptHealth's purported exclusion of unbilled pump receivables from the Working Capital calculation as well as AdaptHealth's inventory obsolescence figure.^[18] The parties then invoked the dispute resolution procedures outlined in MIPA Section 2.4(b)(iii).^[19] Unable to resolve the dispute, the parties selected CohnReznick LLP as the "Independent Accountant" contemplated by the MIPA.^[20]

Both parties submitted opening statements to the Independent Accountant.^[21]As an exhibit to her opening statement, Ms. Pazos attached correspondence from December 29 and 30, 2020 (the "December Correspondence").^[22] The December Correspondence contained a back-and-forth between AdaptHealth and Ms. Pazos's counsel with Illustrative Working Capital Calculation drafts.^[23] AdaptHealth attached to its opening statement a worksheet by Elliot Davis LLC (the "Worksheet").^[24] Both parties then served rebuttal statements to the other sides' arguments.^[25] Next, the Independent Accountant asked both parties questions about the specifics of the dispute, the parties' interpretations of the term "Accounting Principles," and

questions about the Illustrative Working Capital Computation.^[26]

In February 2022, the Independent Accountant issued its report resolving the dispute (the "Independent Accountant's Report").^[27] The Independent Accountant determined that the unbilled pump receivables should not be included in the Closing Working Capital, and that the parties agreed to a 2.1 percent inventory obsolescence reserve.^[28] The Independent Accountant's Report further stated that it considered "all information and documentation provided by both parties," and the "relevant accounting standards governing the Disputed Amounts, as well as the nature, completeness, and accuracy of the support provided by the parties."^[29] The Independent Accountant's Report attached the Worksheet as Exhibit A.^[30]

Ms. Pazos requested reconsideration and clarification of the expert's determination.^[31] She complained of five allegedly manifest errors she believed the Independent Accountant committed.^[32] The Independent Accountant responded to that reconsideration request (the "March Response Letter") by informing Ms. Pazos that it had reviewed its original report and the parties' papers and determined that it

did not commit any manifest errors.^[33] Dissatisfied, Ms. Pazos brought this lawsuit.^[34]

D. Procedural Background

This action came to the Superior Court by way of a 10 Del. C. § 1902 transfer.^[35] Ms. Pazos's petition brings one count requesting declaratory judgment that the Independent Accountant's Report constitutes manifest error.^[36] AdaptHealth has moved to dismiss the petition.^[37] Ms. Pazos opposes

AdaptHealth's motion and has cross-moved for summary judgment.^[38] AdaptHealth responded to Ms. Pazos's cross-motion by asking for Rule 56(f) discovery.^[39]

The Court heard argument on the parties' cross-motions.^[40] At that hearing the Court ordered limited discovery from the Independent Accountant to answer two

narrow questions: (1) Did the Independent Accountant actually consider the December 20th correspondence and what weight did it give it, if any; and (2) did the Independent Accountant consider the Worksheet as a parties' agreed-upon document, or as one piece of evidence that it weighed against counter-evidence as to the intent of the parties.^[41] The Court also asked the parties to file supplemental briefing in light of the further record developed.^[42] As part of that briefing, the Court asked the parties to address the Delaware Supreme Court's recent decision in Terrell v. Kiromic Biopharma, Inc., and its effect on this case.^[43]

The Independent Accountant was deposed,^[44] and both parties filed their supplemental briefs shortly thereafter.^[45] The Court has heard argument from the parties on the supplemented...