Breach of Contract Case Over Failed $30M Deal May Proceed

Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...

By Michael Greene

June 2 — A supply chain managing company will have to face breach of contract claims arising out of a failed merger between NAF Holdings LLC and Hampshire Group Ltd., the U.S. District Court for the Southern District of New York ruled June 1 ( NAF Holdings LLC v. Li & Fung (Trading) Ltd., 2016 BL 173731, S.D.N.Y., No. 10 Civ. 5762 (PAE), 6/1/16 ).

Judge Paul Engelmayer said that based on evidence in the record, a jury could conclude that Li & Fung (Trading) Ltd. caused NAF's $30 million acquisition to fall apart allegedly by backing out of a commitment to provide post-merger services to the new company.

“Viewing the evidence in light of the principle that causation is generally a jury question,” Engelmayer refused to dismiss NAF's breach of contract claims.

The court also declined to dismiss the case on the grounds that there was inadequate proof of damages. Instead, it found that NAF had presented sufficient evidence of damages resulting from its lost opportunity to acquire Hampshire and that nominal damages also were available.

Competing Evidence

The lawsuit stemmed from NAF's claims that its financing arrangements for the merger were scuttled when Li & Fung at the last minute withdrew a crucial component of the then-pending deal.

However, Li & Fung countered that NAF's own reassessment of Hampshire caused the deal to fail.

In reaching its ruling, the court looked to its 2013 decision which found that when there are competing evidence and arguments, a jury must determine what caused a deal to fall through— Hospital Authority of Rockdale County v. GS Capital Partners V Fund LP, 2013 BL 59985.

The court found that, similar to Hospital Authority, NAF introduced evidence that parties to the transaction were ready and willing to go forward at the time of the alleged breach and that they tried to revive the deal post-breach.

“While far from conclusive on the issue of causation, this evidence could support a jury verdict in NAF's favor,” Engelmayer wrote.

Case Revived on Appeal

The district court had earlier dismissed NAF's claims because they didn't meet the pleading requirements of a derivative lawsuit.

On appeal, the U.S. Court of Appeals for the Second Circuit asked the Delaware Supreme Court to decide whether a parent corporation may bring a direct action against a third party for losses it suffered as a result of injury to a subsidiary.

After the Delaware high court determined that NAF may sue to enforce its own contractual rights (13 CARE 1448, 6/26/15), the Second Circuit remanded the case for consideration of Li & Fung's remaining arguments (13 CARE 1932, 9/11/15).

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The opinion is available at http://src.bna.com/fwU.