Paragon Metals Holdings, LLC v. Michael J. Smith

majority opinion

IN THE SUPREME COURT OF THE STATE OF DELAWARE

PARAGON METALS HOLDINGS §

LLC, PARAGON METALS LLC, §

STELLEX PARAGON METALS § No. 385, 2025

SPLITTER LP, and STELLEX §

CAPITAL INVESTORS, § Court Below—Superior

§ Court of the State of

Plaintiffs Below, Appellants/ § Delaware

Cross-Appellees, §

§ C.A. No. N21C-12-090 CCLD

v. §

MICHAEL J. SMITH and THE §

PARAGON INDUSTRIAL §

HOLDINGS GROUP, INC., §

Defendants Below, §

Appellees/Cross-Appellants. §

Submitted: April 1, 2026

Decided: July 1, 2026

Before SEITZ, Chief Justice; TRAYNOR and GRIFFITHS, Justices.

Upon appeal from the Superior Court of the State of Delaware. AFFRIMED in part, REVERSED and REMANDED in part.

Sarah R. Martin, Esq., Samuel L. Moultrie, Esq., GREENBERG TRAURIG, LLP,

Wilmington, Delaware; Joseph J. Mamounas, Esq. (argued), GREENBERG

TRAURIG, P.A., Miami, Florida; John L. McManus, Esq., GREENBERG

TRAURIG, P.A., Fort Lauderdale, Florida, for Appellants/Cross-Appellees.

S. Michael Sirkin, Esq., Holly E. Newell, Esq., ROSS ARONSTAM & MORITZ,

LLP, Wilmington, Delaware; Matthew T. Nelson, Esq. (argued), Lawrence J.

Murphy, Esq., Katherine L. Pullen, Esq., Adam T. Ratliff, Esq., WARNER

NORCROSS & JUDD LLP, Detroit, Michigan, for Appellees/Cross-Appellants.

GRIFFITHS, Justice:

In August 2018, a group of corporate investors expressed interest in acquiring

Paragon Metals LLC, an automobile components manufacturer, from its founder and

then-CEO, Michael Smith. Around the same time, two of Paragon’s largest

customers informed Smith that they intended to materially decrease their future

purchase orders. One customer intended to stop ordering select components from

Paragon altogether; the other customer planned a significant reduction in future

purchase orders over the next several years. The investors did not discover the exact

nature and scope of these changes during their due diligence process – despite

encountering several “red flags.”

The investors and Smith entered into an agreement to sell the business for

$100 million. In the agreement, Smith warranted that he was unaware of any

material changes in business terms with Paragon’s largest customers. The

transaction closed in early 2019. After closing, the investors learned that two

customers intended to reduce their business with Paragon. The decrease in orders

caused the investors to default on a loan to finance the transaction. After infusing

an additional $37 million into Paragon, the investors sued Smith for common law

fraud. The investors claimed that they had relied on Smith’s false warranties in the

agreement when they entered into the transaction.

After a five-day trial, the Superior Court entered judgment in Smith’s favor.

The court agreed with the investors that Smith had made false representations in the

agreement and that Smith intended to defraud them. But the court found that the

investors were “willfully blind” to the falsity of Smith’s warranties by not

conducting reasonable due diligence. The court held that the investors’ reliance on

the false warranties was not justifiable and therefore they had not met their burden

of proving their fraud claim. The investors appealed, and Smith cross-appealed.

For the reasons that follow, we affirm the Superior Court’s conclusions that

Smith’s warranties were false, and that Smith intended to defraud the investors; but

we reverse the court’s holding that the investors’ reliance on Smith’s warranties was

not justified. We remand the case to the trial court to consider damages.

BACKGROUND

A. The Parties and the Customers

Stellex Capital Investors LP and Stellex Paragon Metals Splitter LP (together,

“Stellex”) are affiliates of a private equity firm that “invests in companies with highgrowth potential in automotive, specialty manufacturing, industrial, business

services, aerospace, defense, and government services sectors.”1

App. to Appellants’ Opening Br. at A440 [hereinafter A_] (Amended Compl. dated Dec. 19, 2023, at ¶ 10) [hereinafter Compl.].

Michael Smith founded Paragon Metals LLC (“Paragon”) and served as its

Chief Executive Officer.2 Paragon manufactures automobile components, including

bearing brackets that are used in the production of automobile transmissions.3

ZF Transmissions Gray Court, LLC (“ZF”) and Fiat Chrysler Automobiles

(“FCA”) both make automobile transmissions. For years, ZF and FCA were two of

Paragon’s largest customers, regularly ordering high volumes of bearing brackets.4

ZF recognized Paragon as its “sole supplier” of bearing brackets for 9HP48 and

9HP50 transmissions, ordering these brackets from Paragon. 5 ZF and FCA also

maintained a separate business relationship with each other – ZF sold transmissions

to FCA. These transmissions were made with bearing brackets that ZF bought from

Paragon.6

B. The Paragon Acquisition

In August 2018, Stellex wrote to Smith expressing an interest in acquiring

Paragon.7 The parties soon started pre-transaction due diligence. During the due

Id. (Compl. ¶ 11). Smith owned Paragon Metals LLC through Paragon Industrial Holdings Group, Inc.

A11708 (Hearing Tr. dated Dec. 4, 2024, at 6:5–8) [hereinafter Dec. 4 Tr.]. 4

A448, 453 (Compl. ¶¶ 31, 49).

A12419 (Trial Tr. dated Feb. 4, 2025, at 105:1–18) (Michael Cochran) [hereinafter Feb. 4 Tr.]. 6

Appellees’/Cross-Appellants’ Answering Br. & Opening Br. on Cross-appeal at 8 (Dec. 4, 2025) [hereinafter Answering Br.].

A11980 (Trial Tr. dated Feb. 3, 2025, at 72:2–15) (David Waxman) [hereinafter Feb. 3 Tr.]. Stellex ultimately acquired Paragon through Paragon Metals Holdings, LLC.

diligence process, Smith gave Stellex access to over 10,000 documents, including a

five-year sales projection.8 In the same month, ZF and FCA told Smith that they

intended to buy fewer bearing brackets moving forward.9 Smith updated the fiveyear sales projection with that information and sent the latest data to Stellex in

October 2018.10

Paragon’s business with ZF and FCA continued to shrink. In November 2018,

a month after updating the sales projections, Smith learned that FCA would stop

ordering 9HP48 transmissions from ZF, which utilized bearing brackets ZF

purchased from Paragon.11 As a result, ZF needed fewer bearing brackets from

Paragon.12 ZF communicated this change to Smith by letter dated November 15,

2018 (the “ZF Letter”).13 ZF also informed Smith that Paragon would no longer be

its “sole supplier” of bearing brackets.14 These changes amounted to more than $4

million in lost revenue for just 2019.15

A11984 (Feb. 3 Tr. 76:12–21) (David Waxman).

See, e.g., App. to Answering Br. at B98–100 [hereinafter B_] (email dated Aug. 30, 2018). 10

B106–07 (email dated Oct. 18, 2018).

B114 (email dated Nov. 16, 2018).

B115 (9HP48 FCA Program Cancellation Letter dated Nov. 15, 2018).

Id.

A12623 (Feb. 4 Tr. 309:10–20) (Michael Cochran).

A14201–02 (Michael Smith Dep. dated Aug. 13, 2024, at 208:8–209:1) [hereinafter “Smith Dep.”].

Given these substantial changes, ZF sought to amend its general contract with

Paragon. ZF drafted a proposed contract amendment in which it specified its

expected lower purchasing volume.16 Smith insisted that ZF remove the specific

numbers reflecting the declining volume from the contract and promised to pay ZF

a $300,000 rebate.17 Paragon had never offered ZF a rebate of this magnitude.18 ZF

agreed to remove the purchasing volume details from the contract amendment and

accepted Smith’s promise of the rebate. In December 2018, Smith executed the

general contract amendment with ZF.19

C. Stellex’s Due Diligence

As Smith and ZF amended their business terms, Stellex’s due diligence on

Paragon continued. Stellex hired professional legal, tax, insurance, and accounting

experts in the automobile industry to facilitate the due diligence process, incurring

$1 million in costs.20 Even with a team of professionals, Stellex overlooked “red

flags” concerning the future lower purchasing volume.

For example, on November 29, 2018, Stellex noticed a strike-through in a

draft document, which read: “Mike says there’s a letter from ZF saying [they’re]

A12475–80 (Feb. 4 Tr. 161:7–166:14) (Michael Cochran); B118–22 (ZF General Contract 2018 Amendment).

A12477–78 (Feb. 4 Tr. 163:8–164:16) (Michael Cochran).

A12638, A12640 (Feb. 4 Tr. 324:10–18, 326:8–13) (Michael Cochran).

See B118–22 (ZF General Contract 2018 Amendment).

A12553 (Feb. 4 Tr. 239:1–21) (Michael Cochran).

going to decrease their purchases.”21 When Stellex asked about the strike-through

text, Smith explained that ZF did not intend to withdraw business from Paragon but

would instead order more 9HP50 brackets while “decreas[ing] their purchase” of

9HP48 brackets.22 In other words, Smith represented to Stellex that the purchase

volume would be net-neutral. Stellex was satisfied with Smith’s explanation and did

not request to inspect the “letter from ZF.”23

Stellex also met with ZF and FCA representatives as a part of its due diligence

process. A few days before its meeting with ZF, Stellex prepared a list of topics it

intended to discuss, including ZF’s anticipated decrease in purchase volume from

Paragon.24 One day before the meeting, a ZF representative contacted Smith and

asked him if Paragon had sent the $300,000 rebate.25 At the meeting, for unknown

reasons, Stellex did not ask ZF to explain the expected decrease in detail; instead,

Stellex simply asked “is the business still good.”26 ZF confirmed that its

collaboration with Paragon was “still good” and noted that there would be “some

A12217–21 (Feb. 3 Tr. 309:17–313:22) (Bruce Swift). The “letter from ZF” (referred to in this decision as the “ZF Letter”) announced FCA’s cancellation of all future 9HP48 orders. B115 (9HP48 FCA Program Cancellation Letter dated Nov. 15, 2018).

A12217–21 (Feb. 3 Tr. 309:17–313:22) (Bruce Swift).

Id.

A12343–44 (Feb. 4 Tr. 29:22–30:2) (Bruce Swift).

A12437–40 (Feb. 4 Tr. 123:11–126:2) (Michael Smith).

A12344–46 (Feb. 4 Tr. 30:14–32:7) (Bruce Swift).

noise . . . in the volumes.”27 After meeting with Stellex, ZF emailed Smith that he

should not “disappoint” ZF regarding the rebate that he had promised.28 Smith

arranged for one of his overseas affiliates to wire the rebate to ZF so that the payment

would not show on Paragon’s books.29 Curiously, after this exchange about the

rebate with ZF, Smith threw his work cell phone into the trash.30

Also, Stellex did not uncover the nature or scope of amended business terms

during its meeting with FCA. In fact, after speaking with an FCA representative,

Stellex mistakenly thought that FCA’s purchase volume in 2019 would stay the same

as the previous year.31

Last, approximately a month before closing, Stellex overlooked an email from

Smith that referenced the ZF Letter.32 An employee who worked for Smith drafted

the email. The email covered matters that the parties had to finalize before closing.

The draft email referred to the ZF Letter and added it as an attachment.33 The

employee submitted the draft email to Smith.34 Upon review, Smith removed the

A12346–47 (Feb. 4 Tr. 32:5–33:13) (Bruce Swift).

A12446–49 (Feb. 4 Tr. 132:1–135:16) (Michael Smith).

Id.; A13922 (Michael Smith Dep. dated Feb. 27, 2024, at 74:10–24); see also B123 (Michael Smith email to LaTarte Paul at ZF dated Dec. 11, 2018).

A14109 (Smith Dep. 69:3–14).

A12206 (Feb. 3 Tr. 298:17–20) (Bruce Swift).

See B442–446 (email thread dated Dec. 29, 2018).

A12358–59 (Feb. 4 Tr. 44:19–45:7) (Bruce Swift).

Id.

ZF Letter from the attachments.35 He also edited the email by summarizing the ZF

Letter’s contents in a few bullet points, noting that the parties should “Review

Anticipated Sales & ZFBB Cancellation Letter” and “FCA Volume only is cancelled

with ZFBB.”36 Smith then forwarded the edited email to Stellex without the ZF

Letter attached. Stellex did not read the email and therefore missed the critical

reference to the ZF Letter.37

D. The Agreement and Post-Closing Events

On December 14, 2018, the parties executed an Equity Interest Purchase

Agreement (the “Agreement”) to facilitate the acquisition of Paragon.38 In the

Agreement, both parties made express warranties and acknowledgments.

Specifically, in Article 3 of the Agreement, Smith warranted:

§ 3.8 No Material Adverse Effect. Since December 31, 2017, no fact,

event or circumstance has occurred or arisen that, individually or in

combination with any other fact, event or circumstance, has had or

would reasonably be expected to have a Material Adverse Effect.[39]

Since December 31, 2017, [Paragon] has conducted the Business only

in the ordinary course of business consistent with past practice.40

Id.

B443 (email thread dated Dec. 29, 2018).

A12032 (Feb. 3 Tr. 124:10–21) (David Waxman).

A123 (Equity Purchase Agreement at 1) [hereinafter Agreement].

The “Material Adverse Effect” (“MAE”) in this section is defined as “a material adverse effect which has occurred to the business, operations, assets, [l]iabilities, condition (financial or otherwise) or operating results of [Paragon.]” A189 (Agreement at Annex 1). 40

A130 (Agreement at 8).

§ 3.12 Contracts and Commitments. Except for as set forth on the

attached Schedule 3.12, [Paragon] is not a party to or bound by . . . [a]ny

long term of master supply agreement between [Paragon] and [the

Customers][.]41

§ 3.23 Customers and Suppliers. . . . Except as set forth on Schedule

3.23 and other than in the ordinary course of business, [Paragon] has

not received any notice from [the Customers] to the effect that, and

none of [Paragon] . . . or [Smith] has any [k]nowledge that, [the

Customers] will stop, decrease the rate of, or change the terms (whether

related to payment, price, or otherwise) with respect to, buying products

from [Paragon][.]42

In Article 5, Stellex acknowledged:

§ 5.10 Acknowledgment by Buyer. [Stellex] has conducted to its

satisfaction an independent investigation and verification of the

financial condition, results of operations, assets, liabilities, properties

and projected operations of [Paragon], and in making its determination

to proceed with the transactions contemplated by this Agreement,

[Stellex] has relied on the results of its own independent investigation

and verification and the representations and warranties expressly and

specifically set forth in Article 3 . . . of this Agreement . . . . [Smith]

do[es] not make or provide, and [Stellex] hereby waives, any warranty

or representation, express or implied, as to the quality, merchantability,

fitness for a particular purpose, conformity to samples, or condition of

[Paragon’s] assets or any part thereto, except as set forth in Article 3.43

Notably, the Agreement did not disclose the ZF Letter, Paragon’s loss of sole

supplier status with ZF, or the rebate to ZF.

A132–33 (Agreement at 10–11).

A144 (Agreement at 22).

A150–51 (Agreement at 28–29).

The transaction closed on January 31, 2019, with Stellex acquiring Paragon

for $100 million.44 The day after closing, Stellex learned that FCA would no longer

order 9HP50 and 9HP48 bearing brackets from Paragon after 2019, as it intended to

make them in-house.45 Stellex also discovered after closing that ZF was scheduled

to scale back its 9HP48 bearing bracket orders starting in 2019.46 With ZF and FCA

significantly reducing their purchase volumes, Stellex soon defaulted on a loan that

it had used to finance the transaction, bringing the newly acquired company to the

verge of bankruptcy.47 Stellex invested an additional $37 million to stabilize the

company.48

E. The Lawsuit

In December 2021, Stellex sued Smith in the Superior Court for common law

fraud. Stellex claimed that Smith’s warranties in §§ 3.23 and 3.8 of the Agreement

were false and that Stellex had relied on those false warranties in acquiring Paragon.

The Superior Court held a five-day bench trial and entered judgment in Smith’s

favor.49 The court concluded that Stellex had met its burden of proving that Smith’s

A451 (Compl. ¶ 42).

A12836–38 (Trial Tr. dated Feb. 5, 2025, at 108:8–110:4) (Michael Cochran). 46

B115 (letter dated Nov. 15, 2018).

A457 (Compl. ¶¶ 61–62); A551 (Comerica Debt Commitment Letter to Stellex dated Dec. 14, 2018); A560 (Terms & Conditions of Commitment Letter at 1).

A467–68 (Compl. ¶¶ 95–96).

Paragon Metal Holdings, LLC v. Smith, 2025 WL 2531610, at *20 (Del. Super. Aug. 13, 2025) [hereinafter Opinion].

warranties were false and that Smith intended to defraud; but, given the multiple

opportunities where Stellex could have discovered the amended business terms, the

court held that Stellex’s reliance on Smith’s false warranties was not justifiable.50

Thus, Stellex did not prove its common law fraud claim. Stellex appealed the court’s

holding on justifiable reliance, and Smith cross-appealed the court’s holdings on

falsity and scienter. Smith also claimed that the court applied the incorrect

evidentiary standard when it assessed Stellex’s common law fraud claim.

STANDARD OF REVIEW

We review questions of law, including evidentiary standards, de novo.51 We

also review contract interpretation de novo.52

ANALYSIS

A plaintiff claiming common law fraud must prove five elements: (1) the

defendant made a false representation; (2) the defendant knew that the representation

was false; (3) the defendant intended to induce plaintiff to act; (4) the plaintiff acted

in justifiable reliance on the defendant’s false representation; and (5) the plaintiff

suffered damages.53

Id. at *18–20.

Williams v. Hall, 2026 WL 35922, at *2 (Del. Jan. 6, 2026) (TABLE).

Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1158 (Del. 2010).

Johnson & Johnson v. Fortis Advisors LLC, 352 A.3d 229, 269 (Del. 2026).

We first address the threshold issue Smith raises – whether the proper burden

of proof for a common law fraud claim is “preponderance of the evidence” or “clear

and convincing evidence.” We then address Smith’s arguments on the first two

elements of common law fraud. Lastly, we address Stellex’s three arguments

regarding justifiable reliance.

A. Evidentiary Standard for Fraud Claims

Smith asserts that the Superior Court erred in applying the preponderance of

the evidence standard to Stellex’s common law fraud claim. According to Smith,

the stricter standard of clear and convincing evidence should apply, and under that

standard, we should vacate the court’s scienter finding.54 He argues “uncertainty”

exists as to the proper standard of proof for fraud claims.55 Yet, just last year, we

affirmed the Superior Court’s application of the preponderance standard in a fraud

case.56 In Delaware, the applicable evidentiary standard for common law fraud is a

preponderance of the evidence.57

Answering Br. 49–50.

Id. at 53 (quoting Project Boat Hldgs, LLC v. Bass Pro Grp., LLC, 2019 WL 2295684, at *1 (Del. Ch. May 29, 2019)).

Sofregen Medical Inc. v. Allergan Sales, LLC, 2024 WL 4297665, at *16 (Del. Super. Sep. 26, 2024) (“While in some jurisdictions fraud must be shown by clear and convincing evidence, the burden of proof in a fraud case in Delaware is by a preponderance of the evidence.”), aff’d, 349 A.3d 1148 (Del. 2025).

Smith contends that historically, Delaware courts “uniformly required fraud claims to satisfy a clear-and-convincing or equivalent intermediate evidence standard.” Answering Br. 50. He points to a few cases from the 18th and the 19th century that required fraud be “clearly proved” or “clearly

Smith argues that fraud claims should be subject to a higher evidentiary

standard because fraud carries a “moral stigma” of “quasi-criminal wrongdoing.”58

We disagree. We have held that serious consequences alone are not “enough to raise

the standard of proof,” as “serious consequences follow from application of the

‘preponderance of the evidence’ standard in all fields of civil law, including contract

and tort.”59 We accept the argument that an allegation of fraud tends to profoundly,

or even irreparably, affect a corporation’s business, but such serious consequences

do not demand a higher evidentiary standard.

Last, Smith argues that “[p]roving fraud typically requires circumstantial

evidence. Because circumstantial evidence creates a greater risk of error, a higher

evidentiary threshold is warranted.”60 We disagree with this premise. There are

existing procedural rules that are adequate to guard against this “greater risk of

error.” Superior Court Civil Rule 9 requires that “[i]n all averments of fraud . . . the

circumstances constituting fraud . . . shall be stated with particularity.” 61 Under this

heightened pleading standard, “pleading a claim of fraud has at its core the charge

established” by the evidence. Id. at 50–51 (quoting Killen v. Purdy, 99 A. 537, 538 (Del. 1916); Griffin v. Star Printing Co., 74 A. 1072, 1072 (Del. 1910)). However, these authorities do not support Smith’s position, as none of them explicitly articulated the “clear and convincing evidence” standard.

Answering Br. 54.

G.L. v. S.D., 403 A.2d 1121, 1126 (Del. 1979).

Answering Br. 53.

Super. Ct. Civ. R. 9(b).

that the defendant knew something”; and “there must, at least, be sufficient wellpled facts from which it can reasonably be inferred that this ‘something’ was

knowable and that the defendant was in a position to know it.”62 This strict

requirement for particularity at the pleading stage is a sufficient safeguard against

meritless fraud claims. Accordingly, we decline to elevate the evidentiary standard

for fraud claims.

B. Falsity and Scienter

Having clarified the applicable evidentiary standard, we next address the

court’s judgment on the merits. We start with Smith’s arguments that the court erred

in its holdings against him on falsity and scienter.

1. Smith’s Warranties Were False

The Superior Court held that the warranties in §§ 3.23 and 3.8 of the

Agreement were false at the time of closing.63 Specifically, regarding § 3.23, the

court found that, ZF told Smith before closing that it would significantly reduce its

purchase volume and stop ordering 9HP48 brackets for FCA. This finding undercut

the warranty – that Smith was unaware of any substantial changes in business terms

Valley Joist BD Holdings, LLC v. EBSCO Indus., Inc., 269 A.3d 984, 988 (Del. 2021). 63

Opinion at *8.

with Paragon’s largest customers.64 Smith does not challenge the court’s factual

finding. Instead, he argues that the court erred in interpreting the warranty in § 3.23.

Smith contends that Paragon never secured binding terms with ZF or FCA

that required them to buy a fixed quantity of products.65 For example, with ZF, the

general contract provided for a two-week “firm window,” during which ZF could

not cancel or amend its orders.66 Smith relies on this “firm window” to argue that

the customers’ purchase quantity would naturally vary from order-to-order every

two weeks, and that variation would not be a substantial change in the “terms” that

he warrantied against.67 We are not persuaded by Smith’s interpretation.

The Superior Court noted that Paragon and ZF’s general contract explicitly

provided for its “term” to last “seven years from the effective date,” and Smith

himself testified that the amendment to the general contract he executed with ZF in

December 2018 “was going to continue to at least [] 2027 and maybe even further.”68

Similarly, the court found that Paragon’s contract with FCA also mandated that

Paragon “have a tooling and production plan in place that will enable [Paragon] to

Id. at *8, *13.

Answering Br. 60–65.

A14248–49 (Smith Dep. 268:19–269:9).

Id.

Opinion at *10.

supply FCA[’s] . . . annual requirement.”69 The plain language in the ZF and FCA

general contracts evidenced the long-term nature of their deals. That language

supports the court’s reading that the word “terms” in § 3.23 referred to Paragon’s

long-term business arrangements with its customers.

And despite Smith’s arguments to the contrary, changes in “terms” are not

limited to changes in sale volumes. Black’s Law Dictionary defines “term” as “a

contractual stipulation.”70 It further defines “material term” as “[a] contractual

provision dealing with a significant issue such as subject matter, price, payment,

quantity, quality, duration, or the work to be done.”71 Section 3.23 states that a

change in “terms” shall cover changes “related to payment, price, or otherwise []

with respect to [] buying products from [Paragon].”72 Under this definition, a

“change in terms” could include the loss of an entire category of business. Because

Smith knew at the time of closing that FCA would no longer order 9HP48 brackets,

we agree with the trial court that the warranty in § 3.23 was false.

As for § 3.8, Smith argues that the court erred in holding that the decrease in

the ZF’s and FCA’s purchase volumes “falsified [Smith’s] representations in Section

Id. (emphasis added).

Term, BLACK’S LAW DICTIONARY (12th ed. 2024).

Id.

A144 (Agreement at 22).

3.8.”73 Smith misreads the Superior Court’s holding. The court did not conclude

that Smith’s warranty under § 3.8 was false because Smith knew that the customers

would decrease their purchase volumes. Instead, it found that “[t]rial evidence

showed that these extensive changes to Paragon’s business with two of its top three

customers[] made it reasonably likely that [Paragon] would default on its bank

loan.”74 The court concluded that Paragon’s imminent risk of bankruptcy was a

“material adverse effect” that ran against Smith’s warranty in § 3.8.75 Smith does

not challenge that finding. We therefore affirm the court’s holding that Smith’s

warranties were false at the time of closing.

2. Smith Intended to Defraud

The Superior Court held that Stellex proved, by a preponderance of the

evidence, that Smith intended to defraud Stellex. We see no error in the court’s

conclusion that Stellex proved scienter. “Proof by a preponderance of the evidence

means proof that something is more likely than not. It means that certain evidence,

when compared to the evidence opposed to it, has the more convincing force and

makes you believe that something is more likely true than not.”76 “Plaintiffs can

Answering Br. 60.

Opinion at *14.

Id.

R.I. Off. of Gen. Treasurer on Behalf of Employees’ Ret. Sys. of R.I. v. Paramount Glob., 331 A.3d 179, 190 (Del. Ch. 2025).

establish scienter . . . by setting forth facts that constitute circumstantial evidence of

either reckless or conscious behavior.”77

To prove scienter, Stellex offered the following evidence at trial: Smith

deleted the ZF letter as an attachment to his email to Stellex; Smith insisted that ZF

remove details concerning the declining volume from its general contract

amendment; Smith did not tell Stellex that Paragon had lost its sole supplier status

with ZF; Smith rerouted the rebate payment to ZF through a foreign affiliate to keep

it off-the-books; Smith “destroyed his company issued phone despite having no legal

right to do so”; and Smith knew, as early as November 2018, that the sales projection

he sent in October 2018 was no longer accurate yet he never updated the data with

Stellex.78 These facts are sufficient to support a finding that Smith “more likely than

not” intended to conceal the truth and to induce Stellex to enter the transaction

through misrepresentations.

C. Justifiable Reliance

We now turn to the court’s holding that Stellex’s reliance on Smith’s false

warranties was not justifiable. Stellex advances three arguments to challenge this

holding. First, it argues that the court erred when it ignored § 5.10 and “open[ed] up

Deloitte LLP v. Flanagan, 2009 WL 5200657, at *8 (Del. Ch. Dec. 29, 2009) (internal quotation marks omitted).

Opinion at *15–18.

inquiry into [Stellex’s] due diligence” and extra-contractual documents.79 Second,

Stellex contends that it had no obligation to conduct due diligence and that, therefore,

the court erred in holding that its failure to do so barred its justifiable reliance on

Smith’s warranties.80 And third, Stellex argues that the court erred in holding that

Stellex “should have known” the truth behind Smith’s false warranties but chose to

be “willfully blind” to the facts.81 We address each argument in turn.

1. The “Anti-Reliance Clause” Does Not Protect Stellex

Stellex cannot invoke the anti-reliance clause in the Agreement to establish

justifiable reliance because Stellex was not the intended beneficiary of the clause.

The intended beneficiary of § 5.10 is Smith – not Stellex. In Johnson & Johnson,

we held that when a contract “contains a one-sided anti-reliance clause disclaiming

reliance by only one party, and . . . the other party to the contract made no

comparable promise . . . [the] clause cannot be invoked to bar the other party’s postclosing claims for intentional extra-contractual fraud.”82 In other words,

Appellants’ Opening Br. 23 (Nov. 6, 2025) [hereinafter Opening Br.].

Id. at 24–25.

Id. at 26. Stellex also claims that its reliance on some of Smith’s extra-contractual representations was reasonable. But the argument has no merit, as the “anti-reliance clause” bars Stellex from relying on any extra-contractual representation made by Smith and Stellex appears to concede this point. See Opening Br. 25 (“If Buyers had relied on the ‘ZF/FCA customer meetings, Ducker’s diligence report,’ Smith’s e-mail on the ‘softening automotive market,’ and ‘Smith’s communications to Stellex’ to form their fraud claim, the reliance on such information would be barred as unjustifiable.” (citation omitted)). Therefore, we will not discuss that issue here. 82

Johnson & Johnson, 352 A.3d at 274.

sophisticated parties to a transaction “may allocate the risk of extra-contractual

fraud,”83 but, in agreeing to a one-sided anti-reliance clause, only one party

“contractually promise[s] that it did not rely upon statements outside the contract’s

four corners in deciding to sign the contract.”84 Here, § 5.10 protects Smith from

potential fraud claims based on extra-contractual representations. It cannot be used

to establish justifiable reliance for an intra-contractual fraud claim against Smith.

2. Stellex Had No Obligation to Conduct Due Diligence

Next, we address Stellex’s argument that the court erred in finding that it had

a duty to conduct reasonable due diligence. The court based its conclusion on § 5.10

of the Agreement, where Stellex stated that it “has conducted to its satisfaction an

independent investigation . . . and . . . has relied on the results of its own independent

investigation and verification[.]”85 The court interpreted this language as

“requir[ing] [Stellex] to conduct reasonable diligence” and “impos[ing] upon

[Stellex] a diligence obligation.”86 We disagree.

As we explained above, § 5.10 is an anti-reliance clause in which Stellex

waived potential extra-contractual fraud claims against Smith. In agreeing to the

provision, Stellex intended to waive a right, rather than assume an obligation.

Id. at 273.

Id.

A150 (Agreement at 28).

Opinion at *18.

Further, even if the provision required Stellex to perform some due diligence, it did

not impose an objective standard requiring that the diligence be “reasonable.” The

plain text of § 5.10 – “[Stellex] has conducted to its satisfaction an independent

investigation and verification”87 – shows that the diligence need only satisfy

Stellex’s own subjective standard of completeness. Nothing in the Agreement

purports to hold Stellex accountable should it fail to perform reasonable or effective

due diligence. Thus, even if Stellex’s due diligence was insufficient, that fact does

not prevent Stellex from relying on Smith’s warranties in the Agreement.88

3. Stellex’s Reliance on Smith’s Warranties Was Reasonable

Finally, we address Stellex’s argument that the Superior Court erred in

holding that Stellex “should have known” the truth behind Smith’s

misrepresentations but remained “willfully blind.”89 Willful blindness has two parts.

A party must “subjectively believe that there is a high probability that a fact exists”

and “take deliberate actions to avoid learning of that fact.”90 In other words, a

willfully blind party “is one who takes deliberate actions to avoid confirming a high

A150 (Agreement at 28).

See Urvan v. AMMO, 2024 WL 863688, at *12 (Del. Ch. Feb. 27, 2024) (holding that even when a plaintiff had access to contradictory extra-contractual information, “[a] buyer justifiably may rely on contractual representations.”).

See Opinion at *20 (“Although [Smith’s] disclosures could have been more explicit, the evidence shows that [Stellex] had at least some understanding of the information underlying their fraud claim. A party that “had means of obtaining knowledge” cannot claim a lack of knowledge based on “willful blindness.”).

Glob.-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011).

probability of wrongdoing and who can almost be said to have actually known the

critical facts.”91

The court found that Stellex “knew or should have known about Section

3.23’s and Section 3.8’s falsity before [c]losing.”92 The court reasoned that Stellex’s

failure during due diligence “defeat[ed] justifiable reliance,” because “a party is not

excusably ignorant if it is willfully blind to the relevant facts.”93 We disagree and

find that the court erred in applying stringent “willful blindness” to these

circumstances.

Determining what constitutes “reasonable” reliance can be difficult, as the line

lies somewhere between actual knowledge and negligence.94 On one hand, “it is

axiomatic that a plaintiff does not justifiably rely on a defendant’s misrepresentation

if the plaintiff knows that the representation is false.”95 On the other, a plaintiff’s

“failure to discover the fraud through due diligence does not excuse it.”96 Although

Id.

Opinion at *20.

Id. at *18.

Arwood v. AW Site Servs., LLC, 2022 WL 705841, at *24 (Del. Ch. Mar. 9, 2022). 95

Id.

Delaware reveres freedom of contract, “contracts may not insulate a party from

damages or rescission resulting from the party’s fraudulent conduct.”97

Nothing on the face of §§ 3.23 or 3.8 gave Stellex reason to doubt the truth of

the warranties. Instead, when Stellex raised questions, Smith concealed the truth.98

When Stellex questioned Smith about the strike-through language that said ZF was

“going to decrease their purchases,”99 Smith was untruthful. He told Stellex that ZF

and FCA were going to shift their purchase orders from one bracket type to another

and would not decrease the total quantity of brackets they purchased.

Smith stresses that he placed Stellex on notice of Paragon’s declining orders

by sending it an email that referred to the ZF Letter and that Stellex should have

read the email.100 Yet, in the same email, Smith wrote that he would review the

listed items with Stellex in ten days.101 It therefore should not have altered the

court’s analysis that Stellex did not prioritize reading and digesting the email when

Smith stated in the same email that he would discuss it with Stellex at a later date.

Express Scripts, Inc. v. Bracket Holdings Corp., 248 A.3d 824, 830 (Del. 2021) (quoting Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006)). 98

See NetApp, Inc. v. Cinelli, 2023 WL 4925910, at *16 (Del. Ch. Aug. 2, 2023) (holding that the plaintiff’s reliance on the company’s financial statements was justified because it “had no reason to investigate whether [the company’s] financial submissions recorded intracompany transactions that lacked economic substance.”).

A12217–21 (Feb. 3 Tr. 309:17–313:22) (Bruce Swift).

100

Answering Br. 41.

101

B442 (email thread dated Dec. 29, 2018).

The record before us does not show that Stellex took deliberate actions to

avoid learning of Paragon’s amended business terms with its customers. Stellex’s

trust in Smith, while perhaps naïve, did not amount to deliberate action to avoid

discovering the truth. Given Smith’s efforts to conceal the truth, he should not have

been surprised when Stellex did exactly what he intended – it justifiably relied on

his false warranties in the Agreement.

CONCLUSION

The judgment of the Superior Court is affirmed as to falsity and scienter,

reversed as to justifiable reliance, and remanded to the Superior Court to assess

damages consistent with this opinion.

Paragon Metals Holdings, LLC v. Michael J. Smith

Authorities cited

Opinion · public domain