Introduction
In Paragon Metals Holdings v. Smith, C.A. No. N21C-12-090-SKR-CCLD (Del. Super. Aug. 13, 2025), the Delaware Superior Court, through its Complex Commercial Litigation Division, resolved claims relating to alleged fraud in connection with the 2018 purchase of Paragon Metals LLC (Paragon) from Michael J. Smith and The Paragon Industrial Holdings Group, Inc. (together, the sellers). The buyers (collectively, buyers or Stellex) alleged that the sellers knowingly made false representations and warranties in the relevant equity interest purchase agreement, particularly by failing to disclose information indicating that two of Paragon’s largest customers—ZF and FCA—would materially reduce or change their business with Paragon. The sellers countered that they made all required disclosures and that any alleged harm resulted from the buyers’ inadequate diligence.
After a bench trial, the court rejected the fraud claim and entered judgment for the sellers, concluding that the buyers “did not conduct sufficient due diligence and ignored the sellers’ repeated, though perhaps inartful, disclosure of the information at the heart of their claim.”
Factual Background
- The Parties and Pre-Transaction Diligence
Smith founded and operated Paragon for decades before seeking a sale in 2018. Stellex submitted an indication of interest and conducted extensive due diligence, retaining legal, accounting, tax, environmental and industry advisers. Paragon provided access to a data room containing more than 10,000 documents, including customer contracts, historical financials, and forward-looking projections based on customer forecasts and industry data.
Among the disclosed materials were contracts with ZF and FCA—two of Paragon’s most significant customers—and internal sales forecasts projecting future volumes, including anticipated business that was not yet formally booked.
- Customer Communications During Diligence
While diligence was ongoing, Paragon received updated forecasts from both ZF and FCA showing declining volumes for certain transmission-related components. FCA communications in mid-to-late 2018 reflected reduced order expectations, and ZF sent revised projections showing lower anticipated volumes for certain parts. These updates prompted Smith to prepare revised internal projections—the October Reforecast—which were shared with Stellex along with supporting documentation.
Around the same time, ZF informed Paragon that FCA intended to cancel a transmission program, which Smith acknowledged made part of the October Reforecast inaccurate. Paragon and ZF also negotiated an amendment to their supply agreement, which included pricing changes and a rebate paid by Paragon’s Chinese affiliate. The parties disputed the significance of that rebate and whether it reflected a deterioration in Paragon’s relationship with ZF.
- The Buyers’ Continued Diligence
Stellex continued its diligence while these developments unfolded. It created a transaction valuation model that relied heavily on earlier projections and did not materially incorporate the revised forecasts. Smith arranged for Stellex’s diligence lead to meet directly with ZF and FCA representatives, and Stellex prepared lists of topics for those meetings. Despite having the opportunity to ask detailed questions—including about declining volumes and cancellation notices—Stellex did not meaningfully probe those issues or revise its financial assumptions afterward.
- The Purchase Agreement
The parties executed the equity interest purchase agreement in December 2018. Key provisions included representations that no material adverse changes had occurred (Section 3.8) and that Paragon had not received notice that major customers would stop, decrease, or change the terms of their purchases (Section 3.23). The agreement also contained detailed disclosure schedules, a disclaimer of extra-contractual representations, and provisions emphasizing that the buyers conducted their own investigation and assumed responsibility for evaluating projections (Section 5.10).
- Post-Closing Events
After the January 2019 closing, FCA informed Paragon that it planned to bring certain production in-house, reducing orders. Paragon’s financial performance deteriorated, and revised projections showed that earlier forecasts were not achievable. Stellex injected additional capital and negotiated debt relief but ultimately attributed Paragon’s difficulties to pre-closing customer declines allegedly known to the sellers, leading to the Delaware lawsuit.
Procedural History
The buyers filed suit in December 2021. The sellers’ motion to dismiss was denied in June 2022. In January 2025, the court issued a partial summary judgment opinion that dismissed breach-of-contract claims and narrowed the fraud theories. The court also held that Section 3.23 could apply to a decrease in a single product line and that the agreement imposed a diligence obligation on the buyers. The remaining fraud claim proceeded to a five-day bench trial in February 2025.
The Court’s Analysis and Conclusion
The court analyzed the remaining claim as an intra-contractual fraud claim, which, under Delaware law, requires proof of a false representation, knowledge of falsity, intent, justifiable reliance, and damages. The buyers argued that the sellers knowingly concealed information showing that ZF and FCA would materially reduce volumes and change purchasing terms, rendering key representations false at closing.
The court rejected several contractual defenses advanced by the sellers, concluding that the customer contracts and disclosed projections related to longer-term business expectations and that “terms” under Section 3.23 were not limited strictly to written contract provisions. The court also held that the buyers could rely on Sections 3.8 and 3.23, notwithstanding general disclaimers.
However, the fraud claim ultimately failed on the element of justifiable reliance. The court emphasized that the agreement “imposed upon Stellex a diligence obligation and expressly stated that Stellex relied on the results of its own investigation.” The evidence showed that the sellers provided revised forecasts, disclosed the substance of customer communications, and facilitated direct customer meetings. Despite these disclosures, the buyers did not meaningfully investigate, ask follow-up questions, or adjust their valuation model.
Because the buyers failed to prove that they reasonably relied on any alleged misrepresentation, the court concluded that the fraud claim failed and entered judgment in favor of the defendants.
This conclusion is notable because it draws a sharp line between contractual falsity and actionable fraud in a way that is highly fact- and deal-structure dependent. Unlike many Delaware fraud cases arising from M&A transactions, the court did not resolve the dispute by finding that no misrepresentation occurred. Instead, the court assumed—at least in part—that certain representations may have been false at closing, yet it still entered judgment for the sellers based on the buyers’ failure to prove justifiable reliance.
Most importantly, this case stands apart from classic “concealment” fraud cases. In this case, the sellers:
- disclosed revised forecasts
- provided access to underlying data
- arranged direct meetings between buyers and key customers
In that context, the court found it dispositive that the buyers had the information and the opportunity to investigate further—but chose not to do so.
Key Takeaways
- Fraud Claims Can Fail Even if a Representation Is False
This decision reinforces that falsity alone is not enough. A buyer must still prove justifiable reliance. Where the record shows that a buyer had access to the relevant facts, fraud claims are vulnerable.
- Diligence Clauses Have Real Teeth
The court relied heavily on provisions stating that the buyer conducted its own investigation and relied on the results of that investigation. Accordingly, buyers should assume diligence acknowledgments will be enforced as written; sellers should insist on them.
- Customer Access Undermines Reliance Arguments
When buyers have direct customer access, courts expect them to use it. Failure to ask obvious follow-up questions can be fatal to later fraud claims.
- Forecast Disclaimers Do Not Immunize Sellers—but They Shift Risk
The court rejected the argument that forecast disclaimers barred fraud claims entirely. However, the disclaimers were powerful evidence that the buyers understood forecasts were uncertain and assumed responsibility for evaluating them. In other words, forecast disclaimers do not eliminate fraud exposure, but they materially weaken buyer reliance arguments.
- Post-Closing Business Declines Are Not Automatically Fraud or MAEs
The court distinguished this case from material adverse events (MAE) cases, emphasizing that projected volume declines in cyclical industries that were disclosed during diligence and subject to buyer investigation do not equate to fraud simply because the business later performs poorly.
The Process Matters
Ultimately, this ruling turned less on what the agreement said and more on the quality of the due diligence. The court repeatedly emphasized what the buyers did not do despite having the information and opportunity.
Reprinted with permission from the Jan. 28, 2026 edition of “Delaware Business Court Insider” © 2026 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.