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M&A Law

Delaware Superior Court Sides with CANarchy on Breach of Implied Covenant Claim in connection with its Purchase of Deep Ellum Brewing

By Kolby A. Boyd

On June 4, 2021, the Superior Court of the State of Delaware (the “Court”) granted a motion to dismiss on one of four counts in connection to a lawsuit brought by John Reardon, a representative of the Sellers of Texas-based brewery Deep Ellum Brewing (the “Plaintiff”), against CANarchy, a company that owns several breweries and was the buyer of Deep Ellum Brewing (“CANarchy”, and collectively with several related entities, the “Defendants”), based on an alleged breach of the implied covenant of good faith and fair dealing. The lawsuit also involves three counts of alleged breach of contract that were not addressed in the present opinion.

In 2018, CANarchy agreed to buy Deep Ellum Brewing pursuant to a purchase agreement that contained an earnout provision under which the sellers were entitled to receive additional post-closing consideration based on the number of barrels of Deep Ellum branded beer that CANarchy sold, with a schedule whereby CANarchy would report the number of barrels sold and make earnout payments. A subordinated promissory note provided that principal and interest payments would be made on a set schedule, and those payments were guaranteed by several of the Defendants under a guaranty agreement. Plaintiff alleged that CANarchy failed to timely report the number of barrels sold and make the scheduled payment in 2019, after which Plaintiff and CANarchy entered into a forbearance agreement where CANarchy agreed to pay Plaintiff approximately $10.5 million to cure the default. Plaintiff alleged that CANarchy again failed to deliver the necessary report and earnout payment in 2020. Additionally, Plaintiff alleged that CANarchy did not devote enough resources to brewing, which left numerous orders unsatisfied, invested less in marketing Deep Ellum Brewing than represented in the forbearance agreement, and cut Plaintiff off from the brewery’s operations, all of which led to Deep Ellum Brewing missing sales milestones for earnout payments. Plaintiff subsequently filed suit against the Defendants for three counts of breach of contract and one count of breach of the implied covenant of good faith and fair dealing.

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