                                     COURT OF CHANCERY
                                             OF THE
                                     STATE OF DELAWARE

KATHALEEN ST. JUDE MCCORMICK                                        Leonard L. Williams Justice Center
      VICE CHANCELLOR                                                500 N. King Street, Suite 11400
                                                                    Wilmington, Delaware 19801-3734


                                        August 19, 2019

       Brian C. Ralston, Esquire                Paul D. Brown, Esquire
       Mathew A. Golden, Esquire                Joseph B. Cicero, Esquire
       Potter Anderson & Corroon LLP            Chipman Brown Cicero & Cole, LLP
       1313 N. Market Street                    1313 N. Market Street, Suite 5400
       P.O. Box 951                             Wilmington, DE 19801
       Wilmington, DE 19801

            Re:    NASDI Holdings, LLC v. North American Leasing, Inc.,
                   C.A. No. 10540-VCM

      Dear Counsel:
            This letter addresses the parties’ respective exceptions to the Special Master

      Reports of Henry A. Silva.

            In April 2014, the plaintiffs sold two operational construction and demolition

      businesses to the defendants. When the transaction closed, the businesses were

      actively engaged in work on numerous projects and had billed their customers for

      some but not all of the work performed. To compensate the plaintiffs for work that

      had been performed prior to the sale, the defendants agreed to collect and remit to

      the plaintiffs payments received as a result of pre-closing work. That agreement

      covered accounts receivable that had already been billed as well as unbilled work in

      progress. In January 2015, the plaintiffs commenced this litigation claiming that the

      defendants breached their post-closing payment obligations.
Civil Action No. 10540-VCM
August 19, 2019
Page 2


      The purchase agreement named an accounting firm to resolve accounting

disputes arising out of post-closing activity. On January 29, 2016, this Court

appointed an accountant from that firm, Mr. Silva, to act as a Special Master to make

reports and recommendations on issues relating to the accounts receivable and work

in progress, including the issue of whether the post-closing work in progress report

complied with Generally Accepted Accounting Principles (“GAAP”).

      On October 4, 2018, the Special Master filed two reports. The first, the

Special Master’s Report on Closing Work-in-Process (the “WIP Report”), found that

the closing work in progress report complied with GAAP. The second, the Special

Master’s Report on Closing Accounts Receivable (the “A/R Report”), recommended

that the Court award specific amounts of accounts receivable to the plaintiffs. Both

sides took exceptions to the Special Master’s reports.

      In their exceptions, the defendants argued that the WIP Report and record fail

to provide sufficient analytical detail to enable the Court to conduct de novo review,

necessitating an evidentiary hearing.1

      Under Court of Chancery Rule 144(a), a master’s final report must “include

factual and legal determinations sufficient to support the Master’s decision and to


1
 See also C.A. No. 10540-VCM Docket (“Dkt.”) 194, Oral Arg. re Exceptions to Master’s
Report (“Oral Arg. Tr.”) at 54:12–55:2.
Civil Action No. 10540-VCM
August 19, 2019
Page 3


permit de novo review by the Court.”2 A “master’s rulings, findings of fact,

conclusions of law, and recommended disposition have no effect until they are

adopted by a judge after a ‘meaningful review.’”3

         Section 6 of the Court’s Order Appointing Special Master empowered the

Special Master to build the factual and legal determinations sufficient to support his

decision, providing that:

                The Special Master shall have the power to control the
                proceedings before him. To the extent possible, the
                Special Master shall follow the procedures set forth in [the
                relevant provision of the purchase agreement]. The
                Special Master’s authority includes the power to alter the
                time periods contemplated by the Agreement, to require
                different or additional submissions, and to determine what
                discovery is appropriate in connection with the
                proceedings.4
         Despite the Special Master having the powers needed to build a record,

aspects of the WIP Report failed to include factual support. The WIP Report

assessed whether there were any “changes to the contract value and cost for each job

after the closing date that would have negatively impacted the percentage of




2
    Ct. Ch. R. 144(a).
3
 DiGiacobbe v. Sestak, 743 A.2d 180, 183 (Del. 1999) (quoting Redden v. McGill, 549
A.2d 695, 698 (Del. 1988)).
4
    Dkt. 89, Order Appointing Special Master § 6.
Civil Action No. 10540-VCM
August 19, 2019
Page 4


completion at the closing date.”5 And the WIP Report concluded that the changes

in contract value and cost “appeared to be reasonable with respect to expectations

given the nature of the industry.”6 But the Report provides scant factual or legal

support for this conclusion. The appendices too are summary in nature, and the

Special Master did not conduct an evidentiary hearing.

          Where the Court lacks information sufficient to conduct a de novo review of

a special master’s report, ordering an evidentiary hearing or other development of

the record is appropriate.7 In this case, an evidentiary hearing would aid the Court’s

de novo review of the WIP Report. Accordingly, the parties shall confer to select a

date for an evidentiary hearing, at which the Special Master will be called upon for

examination by the parties. The evidentiary hearing will focus on the factual bases

for the Special Master’s report; it will not involve expert testimony from each side.

          In advance of the hearing, the parties shall confer with each other and the

Special Master to discuss whether it would be desirable to depose the Special Master

or develop the factual record in other ways. The Special Master may elect at his


5
  Dkt. 142, Special Master Henry A. Silva’s Special Master’s Report on Closing Work-
In-Process (Oct. 4, 2018) at 2.
6
    Id.
7
  See generally DiGiacobbe, 743 A.2d at 184 (“De novo review generally means a new
trial or hearing on questions of fact.”).
Civil Action No. 10540-VCM
August 19, 2019
Page 5


discretion to supplement the bases for his conclusion and may invoke his powers

under Section 6 of the Order Appointing Special Master to develop those bases. The

parties shall confer on an appropriate schedule and procedure. As part of this

procedure, the Court requests supplemental submissions concerning the changes to

the contract value and cost for each job evaluated by the Special Master and the

relevant standards applied or considered by the Special Master when making his

assessment of reasonableness.

         Although the parties agree that an evidentiary hearing is not necessary to

resolve exceptions to the A/R Report,8 the Court requests supplemental information

concerning the parties’ exceptions. Specifically, during oral argument, counsel for

the defendants state that they had “mapped out every piece of evidence showing the

account receivable that was listed, each check, and each piece of evidence showing

that the money was collected, either into an account or by check,” but the record is

not as clear as it could be. The defendants’ counsel offered to provide a chart. A

chart, or some other form of clarity, would be useful. The supplemental submission

should specifically identify the relevant accounts receivable and corresponding

remittances. If a receivable was not collected, identify any collection efforts.



8
    See Oral Arg. Tr. at 51:15–20.
Civil Action No. 10540-VCM
August 19, 2019
Page 6


      The plaintiffs moved to strike portions of the defendants’ reply brief in support

of the defendants’ exceptions. In the alternative, the plaintiffs sought leave to file a

sur-reply. The plaintiffs are granted leave to make sur-reply arguments in their

supplemental submission.

                                        Very truly yours,

                                        /s/ Kathaleen St. Jude McCormick

                                        Kathaleen St. Jude McCormick
                                        Vice Chancellor

KSJM/lef

cc:   All counsel of record (via File & ServeXpress)
