Opinion
CV-S-02-0537-PMP (LRL), BK-S-00-10533-LBR, ADV-02-1023-LBR.
January 4, 2005
ORDER
Presently before the Court is KPMG LLP's Motion for Summary Judgment as to Counts 21 and 30 of the Third Amended Complaint (Doc. #689), filed on July 20, 2004. Plaintiff Anthony H.N. Schnelling filed the Trustee's Response to KPMG LLP's Motion for Summary Judgment as to Counts 21 and 30 of the Third Amended Complaint (Doc. #703) on August 13, 2004. KPMG LLP ("KPMG") filed a Reply (Doc. #737) on September 13, 2004.
I. BACKGROUND
AgriBioTech, Inc. ("AgriBioTech" or "ABT") originally was founded in 1983. (Third Amended Compl. (Doc. #328) ¶ 51.) As of 1998, AgriBioTech was the largest forage and turfgrass seed producer in the United States. (Id. ¶ 1.) "On January 25, 2000, ABT and three of its subsidiaries, L[as] V[egas] F[ertilizer Co.], Garden West [Distributors,] and [Geo. W.] Hill [ Co., Inc.] (collectively, the "Debtors") commenced jointly administered Chapter 11 cases by filing voluntary petitions under Chapter 11 of the United States Bankruptcy Code. . . ." (Id. ¶ 12.) The Debtors created a Creditors' Trust pursuant to the First Amended Joint Plan of Reorganization ("Reorganization Plan" or "Plan"), which United States Bankruptcy Judge Linda B. Riegle confirmed. (Id.; Trustee's Resp. to KPMG LLP's Mot. for Summ. J. on All Claims Purportedly Brought by Trustee on Behalf of Non-Debtor Third Parties, Ex. B.)
Plaintiff Anthony H.N. Schnelling ("Trustee"), as Trustee of the AgriBioTech Creditors' Trust, brought this lawsuit against former AgriBioTech professionals based on the rights assigned him pursuant to the Plan. (First Am. Compl. (Doc. #438) ¶¶ 1, 7.) The Trustee brought several claims against ABT's former outside accountant, Defendant KPMG. Counts 21 and 30 of the Third Amended Complaint seek to avoid certain alleged preferential transfers to KPMG under 11 U.S.C. § 547(b), and recover those amounts for the benefit of ABT's bankruptcy estate under 11 U.S.C. § 550. (Third Am. Compl. ¶¶ 426-33, 478-81.) To avoid a transfer, a trustee must show:
The Third Amended Complaint also asserts against KPMG claims for professional negligence (count 8), participation in breach of fiduciary duty (count 9), actual and constructive fraud (count 16), and aiding and abetting actual and constructive fraud (count 18). (Third Am. Compl. ¶¶ 351-387, 393-97, 403-09.)
(1) the transfer was made for the benefit of a creditor; (2) the transfer was for or on account of a debt owed before the debtor made the transfer; (3) the debtor was insolvent when the transfer was made; (4) the transfer was made during the ninety days immediately preceding the filing of the bankruptcy petition; and (5) the transfer enabled the creditor to receive more than he would otherwise have received from the bankruptcy estate.In re Koubourlis, 869 F.2d 1319, 1321 (9th Cir. 1989); In re Bullion Reserve of N. Am., 836 F.2d 1214, 1216-17 (9th Cir. 1988).
According to the Complaint, in October and November 1999, ABT made a series of payments to KPMG for services rendered totaling $500,000. (Id. ¶ 427.) These transfers were made within ninety days of ABT's petition for bankruptcy, which was filed on January 25, 2000. (Id. ¶ 12.) According to KPMG's undisputed evidence, these transfers were in payment of consulting services KPMG provided to ABT. (Sealed Exs. Referenced in KPMG LLP's Mot. for Summ. J. as to Counts 21 and 30 of Third Am. Compl.; KPMG LLP's Submission in Response to the Court's Nov. 18, 2004 Order, Aziz and Winter Decls.; Trustee's Response to KPMG LLP's Mot. for Summ. J. as to Counts 21 and 30 of the Third Am. Compl. ("Trustee's Resp."), Ex. I, Exs. I-1 to I-4.)
On December 29, 1999, KPMG LLP entered into a Separation Agreement with KPMG Consulting, Inc. and KPMG Consulting LLC (collectively, "Consulting"). (Trustee's Resp., Ex. F at 1.) Pursuant to this Separation Agreement, KPMG LLP separated its consulting services from its auditing and accounting business. (Id. at 13-20.) Consulting assumed the assets and liabilities of the consulting business, including any liabilities arising out of past, present, or future operations of the consulting business. (Id.) The Separation Agreement became effective as of January 31, 2000, and was memorialized in an amended Separation Agreement dated February 2001. (Id. at 1-2.)
In the Third Amended Complaint, the Trustee identified as a defendant "KPMG Peat Marwick LLP," the entity that is now known as Defendant KPMG. (Third Am. Compl. ¶ 29.) The Trustee also identified as a defendant KPMG Consulting, Inc., which is now doing business as BearingPoint. (Id. ¶ 30.) The Third Amended Complaint refers to KPMG and Consulting collectively as "KPMG," and does not attempt to differentiate the entities. (Id. ¶ 31.) The Third Amended Complaint thus seeks to avoid and recover preferential transfers against both KPMG and Consulting/BearingPoint. (Id. ¶¶ 426-33, 478-81.)
In January 2004, the Trustee and BearingPoint entered into a Settlement Agreement. (Trustee's Resp., Ex. K.) Pursuant to the Agreement, the Trustee agreed "to dismiss with prejudice . . . all claims asserted, or that could have been asserted relating to, or arising out of, consulting services provided to ABT by KPMG LLP or BearingPoint." (Settlement Agreement at § III.1.) The Agreement specifies that the Trustee did not agree to dismiss or release "any claim relating to auditing or accounting services provided to ABT by KPMG LLP," and the Trustee "specifically retain[ed] the right to pursue against KPMG LLP in this Litigation all such auditing or accounting claims. . . ." (Id. at § III.2.) The Settlement Agreement also contained a separate mutual release clause in which the Trustee agreed to "release and forever discharge BearingPoint from any and all losses, liabilities, claims, preference or avoidance actions, acts, transactions, disputes . . . and expenses of whatever kind or nature, known or unknown, contingent or otherwise, that the Trustee has or may have against BearingPoint as of the effective date of this Agreement." (Id. at § III.4.) The mutual release clause again specifically indicated the release "has no effect on any claims asserted, or to be asserted, in the Litigation against KPMG LLP for auditing or accounting services provided to ABT." (Id.) This Court approved the Settlement Agreement on June 5, 2004. (Trustee's Resp., Ex. J.)
KPMG now moves for summary judgment on counts 21 and 30 of the Third Amended Complaint. According to KPMG, the payments which form the basis of the preferential transfer allegations in counts 21 and 30 were for consulting services, not audit services. KPMG thus contends the Trustee settled these claims when it entered into the Settlement Agreement and agreed to dismiss with prejudice "all claims . . . relating to, or arising out of, consulting services provided to ABT by KPMG LLP or BearingPoint."
The Trustee does not dispute the payments were based on consulting services, but the Trustee contends that it did not release KPMG from preferential transfer claims. The Trustee notes that the Settlement Agreement's agreed dismissal section, which refers to both KPMG and BearingPoint, does not specifically reference preference or avoidance actions, but the mutual release section, which refers only to BearingPoint, does refer to preference and avoidance actions. According to the Trustee, this difference in language demonstrates a conscious choice and intent to release BearingPoint from preference claims, but not KPMG. The Trustee also argues that because preference and avoidance actions are statutory claims and do not depend on the nature of the underlying debt upon which the transfer is based, those claims do not "arise out of or relate to" consulting services.
The Trustee also argues KPMG waived its defense of release because KPMG did not plead release as an affirmative defense in its Answer. Release is an affirmative defense that ordinarily is waived if not specially pled. Fed.R.Civ.P. 8(c); Rotec Indus., Inc. v. Mitsubishi Corp., 348 F.3d 1116, 1119 (9th Cir. 2003). Where an affirmative defense does not arise until after the parties have filed the pleadings, however, a party can raise such a defense by a motion for leave to file a supplemental answer under Federal Rule of Civil Procedure 15(d). Sanchez v. City of Santa Ana, 915 F.2d 424, 431-32 (9th Cir. 1990). Courts "liberally construe such attempts to raise the defense as motions for leave to file a supplemental answer." Id.
Pursuant to Rule 15(d), a party may move to supplement their pleadings to "set forth transactions or occurrences or events which have happened since the date of the pleading sought to be supplemented." Fed.R.Civ.P. 15(d). As a tool of judicial economy and convenience, supplemental pleadings are "favored" and courts should grant such motions as a matter of course. Keith v. Volpe, 858 F.2d 467, 473 (9th Cir. 1988). Prejudice to the other party is a consideration in determining whether to allow a supplemental pleading. Id. at 475-76. The decision whether to grant or deny the motions lies within the court's discretion.Id. at 473.
KPMG did not plead release in its Answer. KPMG could not have done so, however, because the Trustee and BearingPoint did not enter into the Settlement Agreement until after KPMG had filed its Answer. KPMG filed its Answer to the Third Amended Complaint on January 30, 2003 (Doc. #369). The Trustee and BearingPoint entered into the Settlement Agreement in January 2004, and the Court approved the Agreement in June 2004 (Doc. #667.) Because KPMG now attempts to raise a release defense it could not have raised in the initial pleadings, the Court will treat KPMG's Motion for Summary Judgment as a motion to supplement its Answer. The Court will grant the motion. KPMG moved for summary judgment on the release a little over a month after this Court's approval of the Settlement Agreement. Thus, KPMG did not unduly delay acting on its affirmative defense, and the Trustee has presented no argument that it is prejudiced by the assertion of the defense.
III. DISCUSSION
The Settlement Agreement contains a choice of law provision designating Nevada law as controlling its construction. (Trustee's Resp., Ex. K at § III. 15.) Under Nevada law, settlement agreements are governed by principles of general contract law. Wallaker v. Wallaker, 639 P.2d 550, 550 (Nev. 1982). When the facts are not in dispute, interpretation of a contract is a question of law. Shelton v. Shelton, 78 P.3d 507, 510 (Nev. 2003). "[I]f no ambiguity exists, the words of the contract must be taken in their usual and ordinary signification." Dickenson v. State Dept. of Wildlife, 877 P.2d 1059, 1061 (Nev. 1994); see also Sandy Valley Assocs. v. Sky Ranch Estate Owners, 35 P.3d 964, 966 (Nev. 2001). Whether a contract is ambiguous is a question of law for the court.Margrave v. Dermody Properties, Inc., 878 P.2d 291, 293 (Nev. 1994). A contract is ambiguous if it is reasonably susceptible to more than one interpretation. Agric. Aviation Eng'g Co. v. Clark County Bd. Comm'rs, 794 P.2d 710, 712 (Nev. 1990).
A court "should not revise a contract under the guise of construing it." Traffic Control Servs., Inc. v. United Rentals Northwest, Inc., 87 P.3d 1054, 1059 (Nev. 2004). Rather, "[a] court should ascertain the intention of the parties from the language employed as applied to the subject matter in view of the surrounding circumstances." Mohr Park Manor, Inc. v. Mohr, 424 P.2d 101, 111 (Nev. 1967). "'[E]very word must be given effect if at all possible,'" and the court should not render meaningless contractual provisions. Musser v. Bank of Am., 964 P.2d 51, 54 (Nev. 1998) (quoting Royal Indem. Co. v. Special Serv., 413 P.2d 500, 502 (1966) and citing Phillips v. Mercer, 579 P.2d 174, 176 (1978)).
Viewing the contract as a whole and giving each section effect, the Court finds the Settlement Agreement is unambiguous, and the Trustee agreed therein to dismiss with prejudice the preference and avoidance claims against KPMG. It is undisputed that the funds ABT transferred to KPMG that are the basis of the preference and avoidance claims were payments for consulting services. Consequently, the antecedent debt upon which the alleged preferential transfer is based was owed for consulting services. The dismissal provision language dismissing claims "related to" consulting services is broad enough to include the preference and avoidance claims where the antecedent debt is based on consulting services. The Settlement Agreement specifically exempts from dismissal or release claims "relating to auditing or accounting services provided to ABT by KPMG LLP," but makes no reference to the Trustee retaining and preserving the preference and avoidance claims against KPMG.
This reading does not render meaningless the mutual release provision. The agreed dismissal provision dismisses against KPMG and BearingPoint only those claims arising out of or relating to consulting services. The mutual release provision releases BearingPoint from any and all claims of any sort the Trustee may have against BearingPoint as of the effective date of the Agreement. The mutual release given to BearingPoint thus is significantly broader in scope than the limited release given to KPMG and BearingPoint in the agreed dismissal section.
Because the Trustee dismissed with prejudice all claims arising out of or relating to consulting services provided to ABT by KPMG or BearingPoint, the Trustee dismissed and released the preference and avoidance claims related to payments on consulting services.
IT IS THEREFORE ORDERED that KPMG LLP's Motion for Summary Judgment as to Counts 21 and 30 of the Third Amended Complaint (Doc. #689) is hereby GRANTED.