## Facts

- Horizon Marine LC manufactured aluminum utility boats in Kansas; Geoffrey Pepper was its founder and president, and Cassandra and John O’Tool were investor-managers.
- Genmar, a large boat manufacturer, acquired Horizon’s business in 1998 through a newly formed subsidiary, Genmar Manufacturing of Kansas, Inc. (GMK); Pepper became GMK’s president and the O’Tools held managerial roles.
- The purchase agreement included a five-year earn-out paying the sellers a percentage of GMK’s annual gross revenues from specified boat lines, conditioned on meeting gross-profit-percentage thresholds.
- After closing, Genmar required the Horizon brand to be discontinued and rebranded the boats as “Nova.”
- Genmar prioritized production of its existing brands (including Ranger and Crestliner) at GMK, allegedly placing Nova boats low in the production schedule.
- GMK was required to absorb substantial design and production costs associated primarily with Genmar brands, reducing GMK profitability and affecting the earn-out.
- Plaintiffs alleged Genmar redirected (“flipped”) Horizon dealers to other Genmar brands, reducing demand for Nova boats and undermining earn-out performance.
- Pepper asserted he lacked meaningful authority to set production priorities consistent with achieving the earn-out; GMK was never profitable and Genmar closed the facility in 2002.
- By 2000, Pepper and the O’Tools had been terminated from GMK.

## Issues

1. Whether sufficient evidence supported a finding that Genmar breached Delaware’s implied covenant of good faith and fair dealing by exercising post-closing discretion in a way that frustrated the earn-out, such that JMOL was properly denied.
2. Whether the jury instructions misstated Delaware law by permitting liability without requiring fraud, deceit, or other subjective “bad faith.”
3. Whether the $2.5 million award was supported by the evidence and barred or limited by Delaware’s “new business” rule on lost profits.
4. Whether plaintiffs were entitled to post-judgment interest at a contractual rate rather than the federal statutory rate.

## Decision

- The Tenth Circuit affirmed the judgment for plaintiffs on the contract claim and affirmed the denial of Genmar’s JMOL motion.
- The court held the jury could reasonably find Genmar’s cumulative post-closing decisions arbitrarily or unreasonably interfered with plaintiffs’ ability to obtain the earn-out’s expected benefits.
- The court upheld the jury instructions as a correct statement of Delaware implied-covenant law and not misleading.
- The court affirmed the $2.5 million damages award, concluding it was supported by projections, records, and testimony and was not barred by Delaware’s “new business” rule in this negotiated earn-out setting.
- On cross-appeal, the court affirmed use of the federal statutory post-judgment interest rate because plaintiffs did not properly preserve entitlement to the contractual rate.

## Legal Principles

- Under Delaware law, every contract includes an implied covenant of good faith and fair dealing requiring parties to refrain from arbitrary or unreasonable conduct that destroys or injures the other party’s right to receive the contract’s benefits.
- The implied covenant can constrain a party’s discretionary performance where the contract is silent and the discretion is exercised to frustrate the agreement’s basic purpose and the parties’ reasonable expectations.
- A claim for breach of the implied covenant does not necessarily require proof of fraud or deceit; the focus is on whether the conduct unreasonably undermined expected contractual benefits.
- In an earn-out dispute between sophisticated parties, lost-profit damages may be recoverable when proven with reasonable certainty, including through projections and financial evidence that formed the basis of the earn-out structure.
- Post-judgment interest generally follows the federal statutory rate absent a properly preserved and applicable basis to apply a different contractual rate.

## Conclusion

The Tenth Circuit upheld a jury verdict that Genmar breached Delaware’s implied covenant by managing post-acquisition operations in a manner that foreseeably thwarted the sellers’ earn-out expectations, affirmed a lost-profits-based damages award, and left post-judgment interest at the federal statutory rate due to plaintiffs’ failure to preserve a contractual-rate claim.


O’Tool v. Genmar Holdings, Inc., 387 F.3d 1188 (10th Cir. 2004)