By Rose Krebs

Law360 (April 3, 2020, 7:44 PM EDT) -- A franchisee of CorePower Yoga LLC has sued the yoga studio chain in Delaware Chancery Court, claiming it's trying to use coronavirus-caused studio closures to back out of an agreement to buy 34 studios even though there is no force majeure clause permitting CorePower to do so.

Level 4 Yoga, which operates franchised yoga studios under CorePower's brand, asserted Wednesday in its breach of contract suit that the Denver-based company had expressed interest last spring in acquiring the studios, with the parties eventually settling on an April 1 closing date for some of the studios.

"Now, while people around the world deal with the devastating consequences of the COVID-19 pandemic, defendants have seized upon the crisis to renege," Level 4 Yoga contends. "The agreement has no force majeure clause that would allow defendants to back out, so defendants have manufactured a series of excuses based on the temporary closure of their yoga studios — plaintiff's and defendants' — to claim a material adverse effect that justifies not closing on the purchase."

Level 4 Yoga said it had wanted to close on the studio sales earlier, but agreed to delay closing given that certain conditions were met under an asset purchase agreement. CorePower assumed certain "market and industry-wide risks" per the agreement, Level 4 Yoga asserts.

"As the agreement makes clear, the parties specifically envisioned that there may be market and industry-wide events, including events like COVID-19, that would impact the yoga business between execution and closing and the parties assigned the risk of those events to defendants," the suit claims.

CorePower was set to finalize the purchase of eight studios in Colorado for roughly $6.3 million on April 1, in the first in a series of sale closings, the suit said. The rest of the closings are set for July through October, with CorePower set to pay $13.9 million for 15 studios in Illinois, $3.2 million for certain locations in South Carolina, North Carolina and Arizona, and a yet-to-be-determined amount for other studios in Arizona and North Carolina, the suit said.

Citing the Chancery Court's 2008 ruling in Hexion Specialty Chemicals Inc. v. Huntsman Corp. , Level 4 Yoga said CorePower must "be assumed to be purchasing the target as part of a long-term strategy."

"The important consideration therefore is whether there has been an adverse change in the target's business that is consequential to the company's long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months," the suit said, citing the Hexion decision.

The temporary closure of studios that Level 4 Yoga operates because of state and local coronavirus-related quarantine orders does not justify CorePower's attempt to back out of the sale agreement, the suit asserts.

Level 4 Yoga argues that finalization of the sales was staggered and delayed at CorePower's request, and in doing so, the chain agreed to assume certain risks.

Until just days before the April 1 closing on the first wave of studio sales, CorePower "did not mention anything about a material adverse effect on operations in plaintiff's studios or in defendants' studios, did not ask for a delay in the initial closing date, and did not ask for additional time to complete the balance of the transaction in light of the pandemic," the suit said.

CorePower wants "out of the obligation to buy plaintiff's thirty-four yoga studios because COVID-19 and the government responses to it, including the temporary closure of businesses like yoga studios, have changed the economics of the deal," Level 4 Yoga said. "This is precisely the risk that defendants agreed to assume when they bargained for a delayed and staggered closing."

CorePower did not demand a force majeure clause or "set a break fee that allowed them to walk away from the deal for a fixed amount of money," the suit said.

Level 4 Yoga is asking the court to declare that the asset purchase agreement "remains in full force" and that CorePower must abide by its terms. It is also seeking damages and legal costs.

Counsel information for CorePower was not available Friday.

Counsel for Level 4 Yoga declined comment Friday.

Representatives for CorePower did not immediately respond to a request for comment Friday.

Level 4 Yoga is represented by Lisa A. Schmidt and Matthew D. Perri of Richards Layton & Finger PA and Michael Dockterman and Cara Lawson of Steptoe & Johnson LLP.

The case is Level 4 Yoga LLC v. CorePower Yoga LLC et al., case number 2020-0249, in the Court of Chancery of the State of Delaware.

--Editing by Marygrace Murphy.

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