JACOBS, VICE CHANCELLOR
In this action the plaintiffs, Fleet Financial Group, Inc., Fleet National Bank, Fleet Bank (RI), National Association, Fleet Credit Card Services, LP and Fleet Credit Card Holdings, Inc. (collectively, "Fleet") seek (among other things) damages in excess of $141 million against the defendants Advanta Corp., Advanta National Bank, Advanta Insurance Company and Advanta Life Insurance Company (collectively, "Advanta"). Fleet charges Advanta with wrongdoing in connection with Fleet's acquisition of Advanta's consumer credit card business in February 1998. More particularly, Fleet claims that Advanta (inter alia) breached a Contribution Agreement the parties entered into on October 28, 1997, by failing to submit in timely fashion a "Closing Balance Sheet" that Advanta was required to provide Fleet in connection with Advanta's February 20, 1998 contribution of its consumer credit card business to Fleet Credit Card Services LLC. ("Fleet LP").
As used herein, "Contribution Agreement" means the October 28, 1997 Contribution Agreement as amended on February 20, 1998.
In its answer Advanta denied Fleet's material allegations, and asserted counterclaims against Fleet seeking (among other things) $101 million in damages for breach of contract, breach of fiduciary duty, and tortious interference with contractual relations. Advanta also filed a Motion to Compel Limited Alternative Dispute Resolution Procedures (the "ADR Motion"), whereby Advanta seeks to compel Fleet to submit its claims to limited dispute resolution procedures prescribed in the parties' Contribution Agreement.
Thereafter, Fleet filed a Motion for Summary Judgment seeking dismissal of Counts I and II of Advanta's Counterclaim. Those Counts seek a judicial declaration that: (i) Advanta used the correct dates to value certain assets and liabilities in preparing the Closing Balance Sheet, (ii) certain of Fleet's claims are subject to the alternative dispute procedures set forth in the Contribution Agreement, but if those ADR procedures are not ordered, then (iii) a judicial declaration that the Statement of Assets and Liabilities that Advanta delivered to Fleet on February 15, 1999 was a final and binding Closing Balance Sheet.
These two motions — Fleet's Motion for Summary Judgment and Advanta's ADR Motion — are presently sub judice. For the reasons next discussed, I conclude that (1) the proper date for valuing the interest-bearing liabilities assumed by Fleet is February 28, 1998, (2) Advanta did not submit to Fleet a Closing Balance Sheet that conformed to the requirements of the Contribution Agreement, and (3) accordingly, there is no ripe subject matter to be resolved under the contractual ADR procedures. Therefore, Fleet's Motion for Summary Judgment must be granted and Advanta's ADR Motion must be denied.
I. FACTUAL BACKGROUND
The issues presented by the pending motions arise out of the following factual background. On October 28, 1997, Advanta Corp. and Fleet Financial Group, Inc. entered into a Contribution Agreement, under which Advanta would contribute certain consumer credit card business assets and liabilities to a newly created entity which now does business as Fleet LP. The transaction was structured so that Fleet would manage, control, and own the credit card business Advanta contributed, as well as manage the employees needed to operate that business. The Contribution Agreement provided that after closing Fleet would hold an approximately 95% interest in Fleet LP and Advanta would initially hold the remaining 5% interest in Fleet LP.
The principal assets that Advanta would contribute were termed "Managed Receivables." That term is defined as ". . . all consumer credit card receivables owned, managed or serviced by [Advanta] . . ." The primary liabilities Advanta would transfer (the "Interest Bearing Liabilities") were identified in Schedule 2 to the Contribution Agreement, and included interest bearing accounts, bank notes, repurchase agreements, subordinated debt and certificates of deposit.
The Contribution Agreement required Advanta to contribute to Fleet LP. (in terms of dollar value) more liabilities than assets. To express it in the contracting parties' terminology, after post-closing adjustments the liabilities contributed by Advanta would be equal in value to (i) the assets contributed, plus (ii) an "Agreed Deficit." The term "Agreed Deficit" was contractually defined as $510 million, plus a Special Adjustment — later agreed to be $43 million — minus (or plus) an Agreed Adjustment. The Agreed Adjustment was to be calculated by a formula based on the volume of Managed Receivables (the "Volume Adjustment") and the income potential of the Managed Receivables (the "Yield Adjustment") that Advanta contributed to Fleet LP. The Volume Adjustment would decrease the Agreed Adjustment if the Managed Receivables exceed $12.1 billion; the Yield Adjustment would increase the Agreed Adjustment if the total Managed Receivables subject to Introductory Rates exceed $2,192,520,000.
The Agreed Deficit represents the contractually agreed difference between the liabilities and assets Advanta would ultimately contribute to Fleet LP and as such the true purchase price that Fleet would pay for Advanta's credit card business. The Agreed Adjustment is the primary component of the Agreed Deficit that is the subject of the parties' dispute.
Thus, because the amount of the Agreed Deficit under this formula would depend upon the volume and yield of the Managed Receivables, the consequence was that the Agreed Deficit could not be determined until after Advanta had contributed the Managed Receivables to Fleet LP and the parties had determined the volume and yield of those assets. Similarly the amount of liabilities Advanta ultimately would contribute to Fleet LP could not be determined until after the parties had determined the volume and yield of the Managed Receivables contributed by Advanta to Fleet LP.
The parties were aware of these formula-generated issues. Accordingly, to ensure that Fleet would receive from Advanta the amount of assets and liabilities contractually bargained for, the parties provided in the Contribution Agreement that after Advanta contributed assets and liabilities to Fleet LP on the Closing Date, Advanta would deliver to Fleet a "Closing Balance Sheet" reflecting the book value of the assets and liabilities Advanta had contributed. Advanta would also deliver a report of its independent public accountant, Arthur Andersen LLP, confirming that the Closing Balance Sheet had been prepared in accordance with GAAP, subject to the terms of the Contribution Agreement.
This process (to repeat) was intended to enable the parties to determine whether or not the difference between the amount of assets and liabilities that Advanta contributed was equal to the Agreed Deficit. If Fleet disagreed with an item on Advanta's Closing Balance Sheet or Advanta's calculation of the Agreed Deficit, Fleet had the right to object. If objections were made, the parties agreed to engage in a good-faith effort to resolve their disagreements. If those differences could not be resolved, the Contribution Agreement required the parties to submit their disputes to an independent accounting firm for resolution. Specifically, Section 1.06(j) provided that "[i]n the event that [Advanta] and Fleet are unable to resolve all differences with respect to the Closing Balance sheet or Agreed Deficit. . . . then the issues remaining unresolved shall be determined by Coopers Lybrand L.L.P." Advanta and Fleet agreed "that the scope of the retention of [Coopers] shall be limited to resolving the disputed issues presented to it and matters related thereto and . . . in no event shall the resolution of any issue be outside the parameters [of] . . . the issues . . . determined by each of [Advanta] and Fleet . . ."
After signing the Contribution Agreement Coopers Lybrand L.L.P. merged with Price Waterhouse and is now known as PricewaterhouseCoopers. For ease of reference, that firm is referred to as "Coopers."
Amended Contribution Agreement, § 1.06(j)(2).
The transaction closed on February 20, 1998, which was the "Closing Date" under the Contribution Agreement. On that date Advanta delivered, and Fleet assumed control over, the assets and liabilities of Advanta's credit card business. Thus, beginning February 20, 1998, Fleet, not Advanta, operated the consumer credit card business that had previously been Advanta's.
The closing also triggered Advanta's obligation to prepare the Closing Balance Sheet. Section 1.06(f) of the Contribution Agreement required Advanta to ". . . prepare and deliver to . . . Fleet as promptly as possible but by no event later than April 30, 1998, the pro forma balance sheet of the Business as of the close of business on February 28, 1998 . . . subject to the provisions of Section 1.02 (of the Contribution Agreement)."
Advanta acknowledges that it was contractually obligated to prepare and submit a Closing Balance Sheet, its calculation of the Agreed Deficit, and its auditor's report. On September 18, 1998, Advanta provided Fleet with a draft Closing Balance Sheet which valued the principal assets and liabilities Advanta had transferred to Fleet as of February 20, 1998, as well as additional assets and liabilities Advanta had transferred to Fleet as of February 28, 1998.
Five months later, on February 15, 1999, Advanta provided Fleet with a "Statement of Assets and Liabilities" that (Advanta contends) constituted a Closing Balance Sheet, again using valuations from February 20 and February 28. At that time Advanta advised Fleet that it could not (and did not) calculate the Yield Adjustment, the Agreed Adjustment and, consequently, the Agreed Deficit, because (Advanta claimed) Fleet had failed to provide access to personnel and documents which would permit these tasks to be completed. Advanta claims that Arthur Andersen also was unable to provide its final report, because Fleet had not provided that firm with certain engagement and general representation letters that Arthur Andersen had requested, and that Advanta claims Fleet was obligated to provide.
Three weeks before Advanta submitted its February 15, 1999 "Statement of Assets and Liabilities," Fleet filed this action on January 22, 1999. Fleet claims, among other things, that Advanta has overstated the assets and understated the liabilities that it had transferred to Fleet LP, and that as a result, Fleet has received $78.7 million in liabilities that it was not required to assume and that Advanta was not entitled to transfer.
II. THE ISSUES AND CONTENTIONS
The two motions pending raise three issues. The first summary judgment issue (the "Date Dispute" Issue) concerns the date as of which the interest-bearing liabilities transferred by Advanta to Fleet should be valued. Advanta contends that the proper valuation date is the Closing Date, February 20, 1998. Fleet argues that the proper valuation date for interest-bearing liabilities is February 28, 1998. Each side relies upon different provisions of the Contribution Agreement for its position. Resolution of the Date Dispute Issue will therefore require the Court to construe the Contribution Agreement.
The second summary judgment issue (the "Closing Balance Sheet" Issue) is critical to both the Summary Judgment and ADR Motions. That issue is whether the "Statement of Assets and Liabilities" Advanta delivered to Fleet on February 15, 1999 constitutes a "Closing Balance Sheet" within the meaning of the Contribution Agreement. Fleet contends that it did not, because the Contribution Agreement required Advanta to deliver a schedule of each transferred asset and liability; as well as its calculations of the "Agreed Deficit," the "Yield Adjustment," and the "Agreed Adjustment;" and to deliver Arthur Andersen's signed report that the Closing Balance Sheet had been prepared in accordance with GAAP. Fleet claims that none of these documents and calculations were furnished.
Advanta does not dispute that it failed to provide the schedules, the calculations and the Arthur Andersen report with its February 15, 1999 submission to Fleet. Advanta contends, however, that these omissions were at most a minor, immaterial breach of the Contribution Agreement. Alternatively, Advanta argues that even if the omitted items were material, its failure to deliver these items was excused, because Fleet refused to furnish Advanta the information (and perform other tasks) that Advanta needed to complete the required schedules, calculations and other items.
The third issue ("the ADR Issue") which is the subject of Advanta's ADR Motion, concerns which, if any, of the claims alleged in Fleet's complaint should be remitted to the ADR procedures set forth in the Contribution Agreement. On this issue no extended discussion of the parties' positions is necessary, because (i) the subject matter of the ADR procedures is restricted to "[d]ifferences with respect to the Closing Balance Sheet or Agreed Deficit . . ." and (ii) it is undisputed that the Agreed Deficit was not calculated and the Court concludes elsewhere in this Opinion that Advanta's February 15, 1999 submission to Fleet was not a Closing Balance Sheet. Therefore, no subject matter appropriate for resolution under the contractual ADR procedures has yet arisen.
These three issues are addressed in the sequence outlined above.
III. ANALYSIS
A. Fleet's Motion for Partial Summary Judgment
1. The Applicable Procedural Standard
Summary judgment will be granted where the Court determines that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. In deciding a Rule 56 motion, the Court must view any disputed facts in the light most favorable to the nonmoving party, and must also accept all undisputed factual assertions made by either party as true. Summary judgment will be denied if "there is any reasonable hypothesis by which the opposing party may recover, or if there is a dispute as to a material fact or inferences to be drawn therefrom." 2. The Date Dispute Issue
Ch. Ct. R. 56(c); Mentor Graphics Corp. v. Quickturn Design Systems, Inc., Del. Ch., C.A. No. 16584, Mem. Op. at 7, Jacobs, V.C. (Oct. 9, 1998); see also Gilbert v. El Paso Co., Del. Supr., 575 A.2d 1131, 1142 (1990); Brown v. Ocean Drilling Exploration Co., Del. Supr., 403 A.2d 1114, 1115 (1979).
Mentor Graphics, supra note 4, at 7 (citing Brown, 403 A.2d at 1115).
Seagraves v. Urstadt Property Co., Inc., Del. Ch., C.A. No. 10307, Mem. Op. at 7, Jacobs, V.C. (April 1, 1996) (citations omitted).
The resolution of the "Date Dispute" Issue turns on which side's interpretation of the Contribution Agreement is accepted. For the reasons next discussed, I find Fleet's construction to be the correct one.
Section 1.06(f) of the Amended Contribution Agreement provides that Advanta would:
"[a]s promptly as practicable but in no event later than April 30, 1998 . . . deliver to [Fleet] the pro forma balance sheet of the Business as of the close of business on February 28, 1998, subject to the provisions of Section 1.02 . . ."
Section 1.02 pertinently provides that "the calculation of the Managed Receivables, the Agreed Deficit and the Gain Receivable shall be made as of the Specified date," which, (the parties agree), was the same as the "Closing Date," February 20, 1998. These two provisions may fairly be read together to require that the Closing Balance Sheet (including all assets and liabilities disclosed thereon) must be valued as of the close of business on February 28, 1998, with the exception of the items referred to in Schedule 1.06(a). The items excepted by Schedule 1.06(a) are Managed Receivables, the Agreed Deficit, and the Gain Receivables, which are to be valued as of February 20, 1998. Because "interest bearing liabilities" are not included among the items carved out by Schedule 1.06(a), it follows that the valuation of interest bearing liabilities is governed by the "general" rule, i.e. § 1.06(f), which requires a valuation as of February 28, 1998.
Amended Contribution Agreement. ¶ 1.06(a).
Advanta's contrary argument proceeds from different premises and Contribution Agreement provisions. The premise is that the Closing Balance Sheet was to be prepared "in conformity with the provisions of, and pursuant to the procedures prescribed in Schedule 1.06(g) . . ." Advanta contends that Schedule 1.06(g), Subsection II.2, requires that interest-bearing liabilities be valued as of February 20, 1998. Advanta relies on the following language:
Amended Contribution Agreement, § 1.06(g).
"[l]iabilities shall include those liability general ledger accounts included in the September 30, 1997 Pro Forma Balance Sheet and such accounts listed in Exhibit A hereto, with additions or deletions thereto between September 30, 1997 and the Closing Date, subject to the Conditions for Interest Bearing Liabilities to be contributed by [Advanta] referred to in Schedule 1.06(a)."
The quoted language, however, says nothing about the date as of which the liability amounts are to be valued. It states only that (i) the liabilities that Fleet would ultimately assume will include additions and deletions made between September 30, 1997 and the Closing Date, and that (ii) those liability accounts must conform to the general conditions set forth in Schedule 1.06(a), which relate to yields and maturities. Schedule 1.06(a) does not address the issue of what date must be used to value the accounts included in the group of liabilities disclosed on the Schedule.
Seetion II.1 of Schedule 1.06(g) reflects that intent as well. That Section pertinently provides that: "[t]he assets [included on the Closing Balance Sheet] will include all assets in the general ledger accounts included in the September 30, 1997 Pro Forma Balance Sheet and such accounts listed in Exhibit A hereto, adjusted for any changes therein between September 30, 1997 and Closing Date . . . A schedule with explanations of any new or deleted accounts will be supplementally provided with the statements." (emphasis added)
Besides having no support in the contract language on which Advanta relies, Advanta's argument also fails to come to grips with the conclusion that flows from the interrelated provisions of §§ 1.06 and 1.02 of the Contribution Agreement. Those provisions, read together, point clearly and logically to the conclusion that interest bearing liabilities are to be valued as of February 28, 1998. Advanta offers no plausible counter interpretations of those contract provisions, nor has Advanta shown that some other section of the Contribution Agreement "trumps" those provisions. Accordingly, Fleet is entitled to summary judgment on the "Date Dispute" Issue.
3. The Closing Balance Sheet Issue
The "Closing Balance Sheet" Issue must also be resolved by reference to the pertinent language of the Contribution Agreement. The relevant contract provisions, coupled with the undisputed facts, lead to the conclusion that the February 15, 1999 "Statement of Assets and Liabilities" Advanta submitted to Fleet did not constitute a Closing Balance Sheet within the meaning of the Contribution Agreement.
In their briefs the parties subdivide that issue into two subissues: (1) did Advanta's February 15, 1999 submission constitute a Closing Balance Sheet, and (ii) if so, did Advanta submit the Closing Balance Sheet in a timely fashion? Because I find that the February 15, 1999 submission did not constitute a Closing Balance Sheet, "the timeliness" issue is not reached.
Sections I.1 and I.2 of Schedule 1.06(g) require the Closing Balance Sheet to include a detailed schedule of each liability and asset being transferred. Section 1.06(g) requires "a calculation in reasonable detail of . . . the Yield Adjustment, the Agreed Adjustment and the Agreed Deficit," as well as an "unqualified report of Arthur Andersen, LLP . . ." It is undisputed that none of these schedules was provided with the February 15, 1999 submission. Nor did that submission include any calculation, "in reasonable detail" or otherwise, of the Yield Adjustment, the Agreed Adjustment or the Agreed Deficit. Finally, no unqualified report signed by Arthur Andersen was delivered: the report that was delivered was unsigned. Manifestly, a submission that failed to include these items of information could not and did not constitute a Closing Balance Sheet.
Advanta does not dispute these facts. Rather, it seeks to excuse them by arguing first, that these omitted items constituted at most minor immaterial breaches of the Contribution Agreement; and second, that Fleet refused (despite Advanta's request) to furnish Advanta the information and make the required calculations. Neither argument, in my view, is sufficient to defeat summary judgment.
Advanta's failure to furnish a calculation of the Yield Adjustment, Agreed Adjustment, or the Agreed Deficit — which together comprise the final steps in calculating the consideration that Fleet would pay for Advanta's credit card business — can hardly be regarded as minor omissions. The same is true of Advanta's failure to deliver a report, signed by an independent auditor, verifying the accuracy of the Closing Balance Sheet. The omitted information was material. Moreover, without that information, any invocation or use of the ADR procedures called for by the Contribution Agreement would be impossible. Without having Advanta's calculations of these items, including the schedules listing the general ledger accounts used to prepare the Closing Balance Sheet, Fleet could not make informed objections, which are the essential contractual predicate to invoke the bargained-for ADR procedures.
Fleet's response to Advanta's argument that it was deprived of necessary information, is both factual and legal. Factually, Fleet argues that the testimony of Fleet personnel establishes that in May, June, and July 1998, Fleet provided Advanta (and Arthur Andersen) unfettered on-site access to whatever information it needed. Fleet claims that it provided Andersen with tapes containing the same supporting data, and that it offered Andersen information with which to conduct its own testing against Fleet's database. That testimony, Fleet says, stands unrefuted.
The response the Court finds persuasive is Fleet's argument that whether or not Fleet withheld necessary information is, in this context, legally irrelevant. What is relevant is whether Advanta delivered to Fleet a Closing Balance Sheet. If (as I find) Advanta did not, the reason why it failed to do so is (in this context) immaterial and cannot serve as a basis to defeat summary judgment and thereby enable Advanta to invoke ADR procedures. Regardless of why Advanta failed to deliver the Closing Balance Sheet and Andersen report, the fact remains that the parties agreed to arbitrate only after those schedules, calculations, and other documents were produced and Fleet was then afforded an opportunity to object. If Advanta believed that Fleet had improperly frustrated Advanta's attempts to comply with its contractual obligations, Advanta's remedy would have been to seek relief in the form of a contract action to compel Fleet to deliver the information Fleet was obligated to provide. Having not done that, Advanta cannot use Fleet's alleged withholding of information to rewrite the ADR provisions of the Agreement so as to force the parties' dispute to arbitration before any arbitrable issues have been framed.
If the disputed withholding of information were found to be a triable issue of fact, the result would be in effect a trial on the issue of whether there should (or should not be) ADR — a perversely odd result, given that the purpose of arbitration is to avoid the expense of litigation.
I conclude, for these reasons, that Fleet is entitled to summary judgment on the "Closing Balance Sheet" Issue.
B. Advanta's Motion to Compel ADR
The analysis of Advanta's motion to compel arbitration must begin with the proposition that arbitration is a matter of contract between the parties. Arbitration is a recognized extrajudicial method to resolve disputes — but only those disputes — that the contracting parties agree to submit to arbitration.
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995).
In this case the ADR provision of the Contribution Agreement covers only disputes arising with respect to the Closing Balance Sheet and the Agreed Deficit. It is undisputed that Advanta never calculated or determined the Agreed Deficit, and the Court has determined that Advanta's February 15, 1999 "Statement of Assets and Liabilities" did not constitute a Closing Balance Sheet. For these reasons no arbitrable dispute has yet arisen: the subject matter of the contracted-for ADR procedures has not yet come into existence. Advanta's motion to compel arbitration must therefore be denied.
IV. CONCLUSION
For the foregoing reasons, Fleet's motion for partial summary judgment is granted, and Advanta's motion to compel arbitration is denied. IT IS SO ORDERED.
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