Money Left in the Wrong Pocket Stays in the Wrong Pocket after Sale

Last month, the Delaware Court of Chancery issued its letter opinion granting a motion to dismiss in Deluxe Entertainment Services Inc. v. DLX Acquisition Corporation and Deluxe Media Inc.  The context is an acquisition, but the outcome is reminiscent of the Citibank case we discussed in February, drawing on Matt Levine’s outstanding coverage, — when big companies (or really big companies) make big mistakes (or really big mistakes) all the best lawyers and all the best men sometimes can’t put the money back in their pockets again.  

Deluxe Entertainment (Deluxe) sold a wholly-owned subsidiary to DLX Acquisition Corporation (DLX).  At the time of the transaction, several million dollars remained in the subsidiary’s bank accounts, and Deluxe somehow neglected to “sweep” those funds before the transaction.  After the transaction,  Deluxe asked DLX to return the money.  (“Hey, give me back the money I left in my pants when I gave you my pants!”). DLX refused.   It asked DLX’s parent company to get the money back. (“If you don’t give me back my money, I’ll tell your mom!”).  DLX refused.  It asked its former employees, now DLX employees, to get its money back. (“If you don’t give me my money back, I’m going to tell everybody how mean you are!”).  DLX refused.

A law suit followed, alleging breach of contract, breach of the duty of good faith and fair dealing, and asking for the court to reform the agreement.  The court sided with DLX.  The agreement provided for a transfer of assets.  Enumerated assets were not supposed to be transferred.  There were “wrong pocket” provisions (lovely!) that required the return to Deluxe of enumerated assets mistakenly transferred.  The funds that Deluxe neglected to sweep were not among the enumerated assets, so the “wrong pocket” provisions did not apply.  

Deluxe argued that the parties had agreed that the transaction was to be “cash free, debt free” and thus that the cash transfer that accidentally occurred could not be construed as consistent with the parties’ intent.  The court adopted a more limited understanding of the “cash free, debt free,” as simply intended to exclude consideration of cash as part of the calculation of the final purchase price.  The parties knew how to exclude assets from the transaction.  That’s what the “wrong pocket” provisions were about.  They did not do so with respect to the cash that Deluxe failed to sweep.  

The court found no “gap” in the agreement into which a violation of the covenant of good faith and fair dealing could creep.  There was a contractual provision (the “wrong pocket provision) that covered this scenario.  DLX did not violate that provision, and since the alleged breach is covered by a provision, there is no gap of unanticipated conduct for the covenant of good faith and fair dealing to address.

Finally, the court denied Deluxe’s argument that the court should reform the contract to address a mistake. Reformation is appropriate to address errors in drafting or transcription.  The mistake at issue here was operational and thus not the sort of mistake that would empower the court to reform the agreement.  

I can’t dispute any portion of the opinion, but the whole thing just seems like an exercise in blinkered formalism.  It appears to be undisputed that millions of dollars were accidentally transferred to DLX at closing.  That seems like a simple case of unjust enrichment.  DLX, don’t be a putz!  Return the money to that schlemiel that left it in the pockets.  It’s not your money.  You have no right to it, and your mother would be ashamed of you for keeping it!

Thanks to Eric Chiappinelli for sharing the case with us!