Opinion
NO. 2012-CV-00037
06-21-2013
Brockway-Smith Company v. Traditional Living, Inc. and W.H. Silverstein, Inc. Traditional Living, Inc. Cross Plaintiff v. W.H. Silverstein, Inc. Cross Defendant W.H. Silverstein, Inc. Counter-claim Plaintiff and Third Party Plaintiff v. Todd H. Schweitzer d/b/a Lyme Investment Company and d/b/a Lyme Investment Partnership, Third Party Defendant
ORDER
Brockway-Smith Co. ("Brockway") is a vendor of building supplies. The defendant Traditional Living, Inc. ("TLI") was a Brockway customer until January 2011 when TLI sold its assets to WH Silverstein, Inc. ("WHS") pursuant to an asset purchase agreement ("APA"). As part of the APA, WHS agreed to assume certain TLI financial obligations. At the time of the closing, TLI's account with Brockway amounted to $164,857.17. $132,599.41 of this balance was for building supplies that TLI had purchased on account through January 3, 2011. The balance was for late charges. Neither TLI nor WHS paid Brockway, and Brockway brought this action against both TLI and WHS. A plethora of other actions followed.
TLI has brought a cross-claim against WHS, alleging in substance that WHS is responsible under the APA for the debt owed to Brockway. WHS has filed a Motion for Summary Judgment on TLI's cross-claim. For the reasons stated in this Order, the Motion for Summary Judgment is DENIED.
I
Brockway has attempted to collect the amount owed on its open account from both or either WHS or TLI. That claim has been resolved. However, the litigation between WHS and TLI has become more complex. Initially, TLI filed cross-claims against WHS for breach of contract, unjust enrichment, and indemnification, while WHS filed a single cross-claim against TLI for indemnification. As the dispute progressed, WHS filed additional claims against TLI for misrepresentation, breach of warranty, reimbursement, indemnification, unjust enrichment, conversion, and a claim under the New Hampshire's consumer protection act, all based on the APA between WHS and TLI. WHS then filed for summary judgment on TLI's cross-claim. TLI subsequently sought, and was permitted, to file an amended cross-claim, including five claims for breach of contract, unjust enrichment, and indemnification.
The issue in the pending motion for summary judgment is a narrow one. The APA required WHS to assume liabilities of TLI of no greater than $1.7 million. TLI argues that customer deposits on contracts were "Assumed Liabilities" within the meaning of the APA and that it did not have to pay TLI's trade payables of $1.7 million. TLI, on the other hand, argues that a principal part of the agreement was that WHS would pay $1.7 million in trade payables, and that customer deposits were not intended to be included in the $1.7 million WHS was required to pay.
II
To prevail on a motion for summary judgment, the moving party must "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." RSA 491:8-a, III (2005). A dispute of fact is "material" when it "affects the outcome of litigation." Porter v. City of Manchester, 155 N.H. 149, 153 (2007). "A dispute of fact is 'genuine' if the evidence is such that a reasonable [fact finder] could return a verdict for the nonmoving party." Pennichuck Corp. v. City of Nashua, 152 N.H. 729, 739 (2005) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (citation omitted)). In order to defeat summary judgment, the non-moving party "must put forth contradictory evidence under oath, 'sufficient . . . to indicate that a genuine issue of fact exists so that the party should have the opportunity to prove the fact at trial . . .'" Phillips v. Verax, 138 N.H. 240, 243 (1994) (quoting Dolan v. Maple Leaf Health Care Ctr., Inc., 119 N.H. 424, 425 (1979)). In considering a party's motion for summary judgment, the evidence must be evaluated in the light most favorable to the non-moving party, together with all reasonable inferences therefrom. Sintros v. Hamon, 148 N.H. 478, 480 (2002).
III
The critical issue here is the meaning of the term "Assumed Liabilities" within the context of Section 1.2 of the APA, and what liabilities this provision required WHS to assume. Section 1.2 provides in relevant part:
1.2 Assumption of Liabilities. At the Closing, Buyer will assume only the following liabilities ("the Assumed Liabilities"):(Emphasis in original). At the time of the closing, according to WHS, liabilities existed in certain categories: 1.2(a) Trade Payables $1,831,032.07; 1.2(b) Customer Contracts $1,270,789.28; and 1.2(c) Employee Vacation Time $119,840.61. WHS's Mot. Summ. J. 3.
(a) Liabilities reflected on the balance sheet (and schedules) of Seller attached as Exhibit A hereto (the "Closing Balance Sheet");
(b) Liabilities of Seller under the Assumed Contracts, including warranty issues, but excluding any obligations for pre-Closing default or breach by Seller for which Seller shall remain liable; and
(c) Liabilities of Seller for vacation time accrued by the Seller Employees (as defined in Section 2.12) and not yet used as of the, Closing Date, but only to the extent such amounts are set forth on Schedule 2.13(a).
The total amount of the Assumed Liabilities shall not exceed One Million Seven Hundred Thousand Dollars ($1,700,000). Buyer expressly shall not assume, or be responsible for, any other liabilities or obligations of Seller or Stockholder, whether actual or contingent, matured or unmatured, known or unknown, and whether arising out of occurrences prior to, at or after the Closing (the "Excluded Liabilities").
WHS maintains that it fulfilled its obligations under the APA when it assumed $2,208,449.57 of liabilities—some $500,000 more than it was required to pay. Specifically, WHS asserts that it:
[A]ssumed all of the existing TLI customer contracts (Item 1.2 (b)), and all of the employee vacation time (Item 1.2 (c)). It selectively assumed and paid trade payables, according to whether the relationship would be useful in WHS' ongoing business or the deliverables from the vendor were necessary to complete a TLI project which WHS had committed to complete.WHS's Mot. Summ. J. TLI Cross-cl. 6. ("Mot. Summ. J.").
TLI objects to WHS's Motion for Summary Judgment on two grounds. First, TLI argues that the parties understood that liabilities under the APA related to trade payables, and not customer deposits. It also argues that the deposits on customer contracts that WHS assumed should not count toward the $1.7 million cap on "Assumed Liabilities" because those deposits may never be refunded.
Second, TLI argues that the term "Assumed Liabilities" is ambiguous because: (1) the balance sheet referred to in Section 1.2(a) was not attached to the APA and WHS submitted two different documents purporting to be the balance sheet; and (2) the term "liability" could refer to an "accounting liability, a legal liability, or a common sense understanding of the term." Surreply to Mot. Summ. J. 3. WHS, on the other hand, argues that the term "Assumed Liabilities" is not ambiguous because: (1) the two different balance sheets are consistent; and (2) the term "Assumed Liabilities" has a definite and precise meaning under the APA and according to relevant accounting authority.
The interpretation of a contract is a question of law. Birch Broad., Inc. v. Capitol Broad. Corp., 161 N.H. 192, 196 (2010). The Court will give effect to clear, unambiguous language. Id. But when parties to a contract reasonably differ as to the meaning of a clause or term, the clause or term is ambiguous. Sunapee Difference, LLC v. State, _ N.H. _, _ (Apr. 30, 2013) (slip op. at *8); Birch Broad., 161 N.H. at 196.
Considering TLI's arguments in turn, TLI first asserts that the term "Assumed Liabilities" is ambiguous because Section 1.2(a) "refers to schedules and exhibits that were never attached to the APA at the time of closing." Surreply to Mot. Summ. J. 5. To support this argument, TLI seeks to admit extrinsic evidence. However, because this portion of the agreement can be reasonably interpreted without the use of extrinsic evidence, the Court declines to consider the extrinsic evidence TLI offers. Kendall v. Green, 67 N.H. 557, 562 (1894) ("If the language [of a contract] is plain and unambiguous, it cannot be contradicted by extraneous evidence, for that would be giving effect to a contract not reduced to writing, which was not the question proposed."). And, in any event, the portion of the contract the parties dispute is Section 1.2(b), in which WHS agreed to alleges it assumed customer contract liabilities instead of trade payables as TLI wanted WHS to assume. Even if the Court admitted extrinsic evidence to interpret the exhibits that the parties failed to attach to the contract, that extrinsic evidence would be limited to the question of interpreting the schedules and exhibits only, and it would fail to address the parties central dispute—which liabilities must WHS assume first. Thus, the Court declines to decide whether the absence of the exhibits and schedules creates an ambiguity.
TLI's second argument asserts that the term "Assumed Liabilities" is ambiguous because the term "liability" has several meanings. Specifically, TLI references the Financial Accounting Standards Board ("FASB"), Statement of Financial Accounting Concepts ("SFAC"), which states: "Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events." SFAC No. 6 ¶ 35 (emphasis added). As TLI indicated, the SFAC also acknowledges a difference, though slight, between legally enforceable liabilities and equitable liabilities. SFAC No. 6 ¶ 40. TLI also relies on Black's Law Dictionary, which defines "liability" as: "The quality or state of being legally obligated or accountable; legal responsibility to another or to society, enforceable by civil remedy or criminal punishment or [a] financial or pecuniary obligation; DEBT." BLACK'S LAW DICTIONARY 997 (9th ed. 2009). Essentially, TLI argues that there is a difference between a legal liability and an accounting liability; therefore, the entirety of Section 1.2 of the APA is ambiguous because it is unclear which definition of "liability" applies.
TLI further argues that assumed contractual liabilities under Section 1.2(b) will actually result in revenue, given the unique circumstances of TLI's business. Obj. Mot. Summ. J. 7. TLI requires customer deposits on design contracts, on which TLI earned fees on an hourly basis. On build contracts, TLI earned fees as it manufactured the components of a home or addition. If a customer canceled a contract, TLI would refund the deposit, less any fees earned. Therefore, according to TLI, "[m]ost, if not all, of the net liability account shown on the [TLI] books in connection with uncompleted build contracts was not a liability, but would, in the event of cancellation, be recognized as Sales Revenue on the Company's [profit and loss statement.]" Obj. Mot. Summ. J. at 13. In other words, TLI asserts that Section 1.2(b) of the APA does not represent liabilities.
This argument however, is contrary to the very language of Section 1.2, which by its own terms defines "Assumed Liabilities." An interpretation that runs contrary to the plain language of a contract is not reasonable. See Sherman v. Graciano, 152 N.H. 119, 123 (2005) (finding that where the language of a contract is not ambiguous, any difference in the parties' interpretation of the agreement was not reasonable). TLI's argument is not sufficient to overcome the presumption that the parties' written agreement memorializes their negotiated agreement. TLI asserts that because customer contracts eventually become profits, these contractual liabilities cannot truly be considered liabilities. However, the APA demonstrates that the parties placed customer contracts into the category of assumed liabilities. In other words, the parties themselves defined customer contracts as a liability. Thus, TLI's interpretation of "Assumed Liabilities" is not reasonable.
WHS also argues that "Assumed Liabilities" is not ambiguous because the parties defined it in Section 1.2 of APA, and the term "liability" has a definite and precise meaning. WHS maintains that "liability" is defined clearly in SFAC No. 6, paragraph 35—the same definition TLI cited. In addition to paragraph 35, WHS cites another portion of SFAC No. 6, which states: "Deposits and prepayments received for goods or services to be provided - 'unearned revenues,' such as subscriptions or rent collected in advance - likewise qualify as liabilities under the definition because an entity is required to provide goods or services to those who have paid in advance." SFAC No. 6, ¶ 197. WHS also relies on a variety of references, which indicate that customer deposits on services to be rendered are, in fact, liabilities. Essentially, WHS argues that receiving a deposit creates a "liability" in the sense that, when a company receives a cash deposit from a customer, it must either refund that cash or provide the requested services; there is a debt that must be paid back, whether in cash or in service. In substance, it argues that assumed liabilities includes contingent liabilities for the return of customer deposits.
NEEDLES, ANDERSON & CALDWELL, PRINCIPLES OF ACCOUNTING 56-57 (4th Ed. 1990); LEARNING CENTER, ACCOUNTING CONCEPTS AND CLASSIFIED FINANCIAL STATEMENTS 341 (n.d.); MCGRAW-HILL, INTERMEDIATE ACCOUNTING EBOOK ch. 13 (2011), available at http://highered.mcgraw-hill.com/sites/0077328787/student_viewo/.
WHS's argument is consistent with the intent of the parties in including assumed contractual liabilities in the definition of liabilities in Section 1.2 of the APA. WHS's argument is also consistent with general accounting principles. See note 1 infra. The term "liability" is not ambiguous, and the Court declines to admit extrinsic evidence to interpret it.
Nonetheless, one issue remains: does the APA permit WHS to choose among the three categories of contractually defined liabilities for which liabilities it would assume? TLI argues that the APA must be interpreted to require WHS to assume all liability to trade vendors and that this interpretation is consistent with the parties' agreement prior to contracting. WHS asserts the APA permitted it to choose among the categories at its discretion. The APA is silent on this issue. It defines assumed liabilities and categorizes them into three groups. It does not prioritize among those three groups.
While liability pursuant to contracts with customers which are likely to lead to revenue and liability for trade payables may both be liabilities from a strict accounting sense, from the view of practical business people, they are quite different. The contract's silence as to this term also creates ambiguity because prioritizing the liabilities WHS would assume is a term the contract should have included, but it did not. "Silence creates ambiguity when it involves a matter 'naturally within the scope of the contract.'" See Saccucci Auto Grp. v. Am. Honda Motor Co., 617 F.3d 14, 22 (1st Cir. 2010) (quoting 11 RICHARD A LORD, WILLISTON ON CONTRACTS § 30.4) (4th Ed. 1999)) (recognizing the principle but declining to apply it to the case before it because a term constraining internet sales was not reasonably within the scope of an agreement drafted when the internet was not ubiquitous). See Adria Int'l Grp., Inc. v. Ferre Dev., Inc., 241 F.3d 103, 110 (1st Cir. 2001) (applying Puerto Rican law, finding "silence can be a source of ambiguity"); Thomas v. Gusto Records, Inc., 939 F.2d 395, 402 (6th Cir. 1991) (finding silence created an implied term by admitting extrinsic evidence); Hewlett-Packard Co. v. Benchmark Elecs., Inc., 142 S.W.3d 554, 561-62 (Tex. App. 2004) (explaining silence may create a latent ambiguity that must be determined by the trier of fact, making summary judgment inappropriate).
In this way, each party's interpretation of the APA is reasonable. Ambiguity exists where a contract can be reasonably interpreted in multiple ways. Sunapee Difference, LLC v. State, _ N.H. _, _ (Apr. 30, 2013) (slip op. at *8); Birch Broad., 161 N.H. at 196. Therefore, the absence of a definition of priority or other clarifying term relating to WHS's obligation to assume certain categories of TLI's liabilities creates an ambiguity.
The final issue is whether this ambiguity creates a genuine issue of material fact, precluding summary judgment. A disagreement over the meaning of an ambiguous term is likely to be an issue of material fact. Hopkins v. Fleet Bank-NH, 143 N.H. 385, 389-90 (1999). To interpret the ambiguous term for the purpose of determining whether the ambiguity creates an issue of fact for a jury, the Court will admit extrinsic evidence. Birch Broad., 161 N.H. at 196.
TLI has produced substantial evidence indicating that the parties did not intend to include deposits on customer contracts within the meaning of "liability" in Section 1.2 of the APA, and that the parties intended WHS to assume a large percentage of trade payables. Specifically, according to Jay Foster, TLI's Chief Operating Officer, the company's desire for trade creditors to be paid in full was a principal condition for the company's sale. Foster Aff. ¶ 3. Also, TLI produced a letter of intent, in which William Silverstein ("Silverstein"), the principal of WHS, expressed an intention to assume a portion of TLI's debt, including "the accounts payable of approximately One Million Seven Hundred Thousand Dollars ($1,700,000)." Foster Aff., Ex. A. ¶ 3. Additionally, TLI produced evidence that Silverstein promised Stephen Post, Vice-President of Credits and Collections at Brockway, that WHS would "pay the old TLI debt with Brockway-Smith." Post Aff. ¶ 5. From this, a reasonable jury could find that the parties intended "Assumed Liabilities" in Section 1.2 of the APA to include only trade payables, and not deposits on customer contracts.
The evidence TLI produced plainly creates a genuine issue of material fact as to the parties' intent regarding the priority of "Assumed Liabilities" and WHS's obligation to assume those liabilities. Therefore, WHS's Motion for Summary Judgment must be DENIED.
SO ORDERED.
______________________
Richard B. McNamara,
Presiding Justice