LL Funds Administrative Agent, LLC v. Fifth Third Bank, National Association

Background

The opinion contains findings of fact and conclusions of law after a one-day bench trial. LL Funds Administrative Agent, LLC sold Dividend Solar Finance, LLC to Fifth Third Bank, National Association, under a merger agreement dated January 14, 2022. The agreement placed $30 million of the purchase price in an escrow account through August 10, 2023. The escrow fund was intended to protect Fifth Third against losses caused by Dividend’s breach of certain representations or warranties, including a warranty that Dividend was not materially violating applicable law at closing.

The agreement did not provide protection for liability based only on another party’s violation of law. The parties called this “derivative liability.” To seek protection, Fifth Third had to give notice promptly, and no later than 20 days after receiving written notice of a third-party claim or action that might support an indemnification claim. The notice had to include a good-faith estimate of possible losses, a reasonably detailed description of the matter and the basis for the claim, and copies of papers served in the matter.

A group of state attorneys general investigated Power Home Solar, LLC, doing business as Pink Energy, an installer whose customers had received financing from Dividend. Dividend received several civil investigative demands and a coalition letter concerning Power Home. The court found that these earlier materials focused on Power Home and possible liability derived from Power Home’s conduct, not on Dividend’s platform fees. On August 4, 2023, the attorneys general’s coalition verbally told Dividend that it was investigating Dividend’s platform fees and claimed that those fees violated state and federal law. On August 10, 2023, Fifth Third sent LL Funds a notice seeking indemnification and stating that possible losses were approximately $39.9 million. The notice sought to retain the full escrow fund.

The parties later agreed to release the escrow in installments while reserving their rights. Fifth Third released $10 million to LL Funds on January 2, 2024. That same day, the attorneys general’s coalition sent a written demand concerning Dividend. Fifth Third refused to release the rest of the escrow. LL Funds sued for breach of contract, seeking release of the remaining funds, damages, and attorney’s fees. Fifth Third filed counterclaims seeking declarations that its indemnification claim was valid and that LL Funds’ right to take over the defense had expired, as well as return of the $10 million payment.

Court’s Findings

The court found that Fifth Third’s indemnification notice was timely. It determined that the earlier materials about Power Home did not start the notice period because they did not commence or threaten an action against Dividend that could support indemnification. The court found that the first such threat occurred during the August 4, 2023, verbal communication about Dividend’s platform fees. Fifth Third’s notice six days later therefore satisfied the agreement’s requirement that notice be given promptly and within 20 days after written notice of a qualifying claim or action.

The court also found that the notice was adequate. Fifth Third gave a good-faith estimate based on fees assessed on more than 3,500 transactions before closing. The notice described the allegation that Dividend’s platform fees were unlawful undisclosed finance charges and explained the basis for indemnification. Because the August 4 demand was verbal and provided limited information, the court found that Fifth Third was not required to include additional papers or the earlier Power Home investigative demands.

Legal Conclusions and Disposition

Applying Delaware law, the court explained that a breach-of-contract claim requires a contract, a breach, and resulting damages. The parties disputed only whether either side breached its obligations. The court concluded that Fifth Third’s notice was timely and adequate, so Fifth Third did not breach the merger agreement. Judgment was entered for Fifth Third on LL Funds’ complaint.

The court also granted relief to Fifth Third on both counterclaims. It ruled that Fifth Third had submitted a valid indemnification claim and that, under the merger agreement and escrow-release agreement, the $10 million released to LL Funds had to be returned to the escrow fund unless a final determination of the attorneys general’s action had occurred after trial. If there had been no final resolution, no escrow funds could be disbursed until the action was finally resolved. If there had been a final resolution, LL Funds had to return the portion of the $10 million needed to satisfy any payment required by that resolution, and payment would be made to Fifth Third from the escrow fund as provided by the agreements.

The court further ruled that LL Funds did not timely exercise its right to take over the defense. Under the parties’ confidentiality agreement, the deadline was 10 business days after receipt of a written demand. The court calculated that LL Funds’ deadline was March 27, 2024, but LL Funds did not notify Fifth Third that it would assume the defense until July 23, 2024. The court rejected LL Funds’ argument that the confidentiality agreement was induced by withheld information and stated that the attempted takeover was untimely under either the original 30-day period or the later 10-business-day period.

Further Proceedings

The court directed Fifth Third to file a pre-motion letter if it intended to seek attorney’s fees, costs, or disbursements, and directed the parties to provide a status update regarding the underlying attorneys general’ action.