Opinion
Civil Action No. 16728.
Date Submitted: October 4, 1999.
Date Decided: December 1, 1999. Date Corrected: December 7, 1999.
Kurt M. Heyman, Esquire, Richard L. Abbott, Esquire, Christopher P. Simon, Esquire, Kimberly L. Gattuso, Esquire, of THE BAYARD FIRM, Attorneys for Plaintiffs/Counterclaim Defendants.
Thomas P. Preston, Esquire, of DUANE, MORRIS HECKSCHER. OF COUNSEL: Barry D. Hunter, Esquire, of BROWN, TODD HEYBURN, Attorneys for Defendant/Counterclaim Plaintiff.
MEMORANDUM OPINION
Plaintiffs Cyprus Amax Coal Co. and its then-parent company, Cyprus Amax Minerals Co. (together, "Cyprus"), filed this action for specific performance, declaratory and injunctive relief, and damages against defendant AEI Resources, Inc. The motions before the court concern two disputes arising out of the May 28, 1998 stock purchase and sale agreement (the "Agreement") under which AEI acquired the stock of 20 Cyprus subsidiaries involved in the coal business (the "Subsidiaries").
The parties' identities have changed since the execution of the Agreement. One of the original plaintiffs, Cyprus Amax Coal Co., was sold in June of 1999 to a third party and then merged into RAG American Coal Company, which has been substituted as plaintiff. AEI Holding Company, Inc. assigned its interests in the Agreement to an affiliate, Coal Ventures, Inc., which later became AEI Resources, Inc., the named defendant. For simplicity, this opinion will refer to the plaintiffs and defendant, respectively, as Cyprus and AEI.
Both parties have moved for judgment on the pleadings pursuant to Court of Chancery Rule 12(c) on the question of which company must provide life and medical insurance coverage to former Cyprus employees on long-term disability (the "Benefits Dispute"). Cyprus has moved for judgment on the pleadings on the second issue of whether AEI has improperly retained certain tax refunds or credits to which Cyprus claims it is entitled (the "Tax Dispute"). For the reasons set forth below, AEI's motion for judgment on the pleadings is granted — and Cyprus's therefore denied — with respect to the Benefits Dispute, and Cyprus's Rule 12(c) motion is granted as to the Tax Dispute.
I. Standard of Review
A motion for judgment on the pleadings pursuant to Court of Chancery Rule 12(c) may be granted only when no material issue of fact exists and the movant is entitled to judgment as a matter of law based on the undisputed facts set forth in the pleadings and attached exhibits. When considering a Rule 12(c) motion, the court must accept well-pleaded facts in the complaint as true and view those facts in the light most favorable to the non-moving party.
Warner Communications, Inc. v. Chris-Craft Industries, Inc., Del. Ch., 583 A.2d 962, 965 (1989), aff'd without opinion, 567 A.2d 419 (1989); Bernstein v. Canet, Del. Ch., C.A. No. 12924, mem. op. at 15, 1996 Del. Ch. LEXIS 63, at *7, Chandler, V.C. (June 11, 1996).
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., Del. Supr., 624 A.2d 1199, 1205 (1993); Warner Communications, 583 A.2d at 965.
The parties' cross-motions require that I construe the meaning of the applicable contract provisions. The mere fact that the parties have both moved for judgment on the pleadings does not mean that the case will be resolved at this stage, however. Rather, if both sides have advanced reasonable but conflicting readings of the Agreement, both motions must be denied, and the parties must be permitted to develop the extrinsic evidence necessary to resolve the contractual ambiguity.
See, e.g. W.R. Ferguson, Inc. v. William A. Berbusse, Jr., Inc., Del. Supr., 216 A.2d 876, 879 (1966) (substantial issue of fact precludes grant of motion for judgment on the pleadings); Agranoff v. Miller, Del. Ch., 734 A.2d 1066, 1075 (1999) (denying party's motion for judgment on the pleadings where the court was unable to conclude that its "preferred reading [was] compelled by the Agreement's unambiguous terms").
II. Legal Analysis and Conclusions A. The Benefits Dispute
The Benefits Dispute concerns the parties' respective liabilities to certain salaried and non-union employees of the Subsidiaries who were on long-term disability at the time of the sale as well as to certain of those employees who were receiving short-term disability benefits at the time of the sale and later became entitled to long-term disability benefits (together, the "Long-Term Disabled Employees"). Cyprus argues that the Agreement limits Cyprus's liability to providing these employees with salary continuation payments under the "Cyprus Amax Minerals Company LongTerm Disability Plan for Salaried Employees, Amended and Restated Effective April 1, 1997" and the "Cyprus Amax Minerals Company LongTerm Disability Plan for Non-Represented Hourly Employees, Amended and Restated Effective April 1, 1994" (together, the "Minerals LTD Plan"). AEL contends that Cyprus's responsibility extends to providing the LongTerm Disabled Employees with life and medical insurance coverage (the "Disputed Benefits") as well.The parties point to several Agreement provisions as controlling this dispute. AEI claims that subsection (m) of § 5.12.2 expressly allocates liability for the Disputed Benefits to Cyprus. Even if this subsection does not render Cyprus liable for the Disputed Benefits, AEI argues, the specific "catch-all" provision of § 5.12.2(n)(i) does so by providing that Cyprus will retain responsibility for benefits due under Cyprus's employee benefit plans, provided such liabilities are not allocated to AEI elsewhere in § 5.12.
AEI also relies very weakly upon § 5.12.2(g).
Cyprus counters by asserting that § 5.12.2(m) explicitly limits Cyprus's liability to the Long-Term Disabled Employees to salary continuation payments. Subsection (m)'s silence as to the Disputed Benefits, according to Cyprus, does not trigger § 5.12.2 (n)(i) but instead invokes the Agreement's more general catch-all provisions of §§ 5.20 and 8.2.4, which assign otherwise unallocated liabilities to AEI. Cyprus contends that §§ 5.20 and 8.2.4, when read in light of § 3.6's and § 6.1.12's incorporation by reference of certain financial representations, require that AEI assume responsibility for the Disputed Benefits.
Upon reviewing these provisions, I conclude that Cyprus is correct that subsection (m) of § 5.12.2 does not unambiguously assign to Cyprus liability for the life and medical insurance coverage due the Long-Term Disabled Employees. But I find persuasive AEI's argument that, given the absence of another § 5.12 provision assigning liability for the Disputed Benefits to AEI, subsection (n) of § 5.12.2 clearly makes Cyprus responsible for them. Contrary to Cyprus's assertions, the remainder of § 5.12 and the Agreement as a whole do not provide otherwise or in any way preempt the catch-all provision of § 5.12.2(n)(i). And because express provisions of the Agreement assign liability for payments not otherwise allocated by the contract, it is inappropriate to infer that the parties' affirmative allocation of the salary continuation benefits to Cyprus implicitly assigns liability for the Disputed Benefits to AEI.
1. Section § 5.12.2(m) of The Agreement Is Ambiguous As To Liability For The Disputed Benefits
The Benefits Dispute centers largely on § 5.12 of the Agreement, entitled "Compensation and Benefits of Employees," and in particular § 5.12.2, entitled "Employee Benefit Matters." This section outlines in detail Cyprus's and AEI's respective liabilities for employee benefits following the sale. Both Cyprus and AEI focus initially on subsection (m) of § 5.12.2, an untitled provision that specifically addresses certain benefits due the Long-Term Disabled Employees. Subsection (m) provides:
With respect to represented, hourly Employees, their rights to disability payments, if any, shall be governed by the terms of any collective bargaining agreements to which the Subsidiaries are now or hereafter a party. With respect to salaried and nonrepresented hourly employees that are receiving short term disability payments as of the Closing Date, Purchaser assumes direct liability for, and shall indemnify and defend Seller and its Affiliates for, and hold each of them harmless from and against, and pay and reimburse each of them for, any and all payments due said Employees, or other Loss relating to and arising under the terms of the Mineral's [sic] short term disability plan currently in place. With respect to salaried and nonrepresented hourly employees that (i) are receiving long term disability payments as of the Closing Date, or (ii) are receiving short term disability payments as of the Closing Date, and thereafter become eligible for long term disability in accordance with the applicable Plan, Seller assumes direct liability for, and shall indemnify and defend Purchaser and its Affiliates for, and hold each of them harmless from and against, and pay and reimburse each of them for, any and all payments due said Employees, or other Loss relating to or arising under the terms of the Minerals long term disability plan currently in place .
Agreement § 5.12.2(m) (emphases added).
The Agreement does not define the term "payments" used in subsection (m). But § 1.1 of the Agreement does define the term "Loss" as:
. . . any and all losses, costs, Liabilities, damages, demands, penalties, fines, settlements, response, remedial, reclamation or inspection costs, reasonable expenses (whether or not known or asserted prior to the date hereof), including, without limitation, interest on any amount payable to a third party as a result of the foregoing, Liabilities on account of Taxes (including interest and penalties thereon) and any legal, accounting, auditing, consulting, or other expenses reasonably incurred in connection with investigating or defending any claims, actions or Proceedings, whether or not resulting in any Liability; . . . .
The parties agree that the phrase "said Employees" in subsection (m) is a typographical error and that the drafters instead intended to use the lower case "said employees" to denote the two categories of Long-Term Disabled Employees defined in clauses (i) and (ii) of the last sentence. Cyprus and AEI also do not dispute that subsection (m)'s concluding phrase, "the Minerals long term disability plan currently in place," refers to the Minerals LTD Plan. Nor do they dispute that the Minerals LTD Plan incorporates by reference portions of the summary plan provided to employees, which is entitled "Your Long-Term Disability Plan" ("Summary Plan"). The type-written version of the Summary Plan includes a section entitled "CONTINUATION OF OTHER COMPANY BENEFITS" indicating that "medical coverage" will continue for up to 24 months for salaried employees out on long-term disability and indefinitely for nonrepresented, hourly employees and that life insurance will also be provided. Cyprus claims that the version it gave to AEI during the contract negotiations struck through this language, making it clear that the medical and life benefits were not part of the Minerals LTD Plan. On this motion, I cannot resolve this issue of fact and will accept as true Cyprus's claim that the Minerals LTD Plan covers only salary continuation payments. This point of contention is therefore immaterial to the motion before me.
Compl., Ex. B-1 at A-1, Ex. B-2 at A-1.
Summary Plan, Compl., Ex. B-1 ("Your Long-Term Disability Plan," August 1996), Ex. B-2 ("Your Long-Term Disability Plan," November 1994). These sections were included in a binder given to employees that was entitled "Cyprus Amax Minerals Company — A Summary of Your Benefits." Again, for ease of reference, this discussion will refer to the summary plans given employees in the singular as the Summary Plan.
Id.
It appears that Cyprus employees were given the Summary Plan and informed that they would receive health benefits if they became disabled. AEI claims to have believed that the health benefits therefore arose under the Minerals LTD Plan or, at the very least, were "related to" the Minerals LTD Plan. Agreement § 5.12.2(m). This issue involves a factual dispute not resolvable on this motion.
More central to the dispute are Cyprus's and AEI's sharp differences as to the correct interpretation of subsection (m)'s last sentence. AEI asserts that this sentence allocates to Cyprus liability for "any and all payments due [the Long-Term Disabled Employees]" or for any "other Loss relating to or arising under the terms of the Minerals long term disability plan currently in place." Thus AEI reads this provision as making Cyprus liable for "any and all payments due [the Long-Term Disabled Employees]" in addition to or including any "other Loss" associated with the Minerals LTD Plan. By contrast, Cyprus argues that the phrase "relating to or arising under the terms of the Minerals long term disability plan currently in place" modifies "any and all payments" as well as "other Loss." Cyprus therefore interprets this passage as limiting Cyprus's liability for "any and all payments" or "other Loss" to the benefits payable under the Minerals LTD Plan, which covers only salary continuation benefits.
I reject both parties' arguments and conclude that the provision is ambiguous; it cannot be held either to explicitly limit Cyprus's liability to salary continuation payments or to definitively allocate liability for the Disputed Benefits to Cyprus. To some degree, the conclusion that § 5.12.2(m) does not explicitly limit Cyprus's liability to salary continuation payments and is silent as to the Disputed Benefits is one of limited consequence, in that it leaves the liability question unanswered. In fact, what is of most significance is that there is no reading of § 5.12.2(m) under which that subsection can be interpreted as assigning the Disputed Benefits to AEI. At most, Cyprus can hope to prove in the end that subsection (m) did not affirmatively assign responsibility for the Disputed Benefits to itself and that some other section of the Agreement therefore governs liability for those Benefits. But I will nevertheless review both parties' positions to explain why subsection (m) does not assist either party in obtaining Rule 12 (c) relief and to establish the scope of this provision, which bears on their remaining arguments.
Several considerations undermine Cyprus's position that subsection (m) unequivocally limits Cyprus's liability to the salary continuation payments arising under the Minerals LTD Plan. First, this interpretation would require ignoring the drafters' placement of the comma and disjunctive "or" between the phrases "any and all payments due said Employees" and "other Loss." On its face, this drafting choice indicates that the phrase "relating to or arising under the terms of the Minerals long term disability plan currently in place" modifies only the term "other Loss." Had the parties wanted the clause "relating to or arising under . . ." to modify both "any and all payments" and "other Loss," they could have done so either by omitting the comma altogether or by inserting a comma between "Loss" and "relating" in order to make "other Loss" an appositive phrase. "[O]rdinarily, qualifying words or phrases, where no contrary intention appears, usually relate to the last antecedent."
See Bryan A. Garner, A Dictionary of Modern American Usage 48 (1998) ("Generally, commas (or, less frequently, parentheses) must frame appositives except when the appositive is restrictive."); Webster's Ninth New Collegiate Dictionary 97 (1984) (defining apposition as "a grammatical construction in which two [usually] adjacent nouns having the same referent stand in the same syntactical relation to the rest of the sentence. . . .").
Patton v. Simone, Consol. C.A. No. 90C-JA-29, 90C-JL-219, Del. Super., 1992 Del. Super. LEXIS 316, at *17, Herlihy, J. (June 25, 1992) (citation omitted).
Giving effect to the language of subsection (m) as written, the provision can be construed as making Cyprus liable for the Disputed Benefits under two different interpretations. First, one may read the terms "any and all payments due [the Long-Term Disabled Employees]" and "other Loss" as referring to two separate categories of obligations. Under such a reading, the term "any and all payments due [the Long-Term Disabled Employees]" would denote payments owed directly to such employees, with "Loss" signifying "other" obligations "relating to or arising under the terms of" the Minerals LTD Plan but not those payable to the employees themselves. For example, transaction or administrative costs incurred to dispute or process claims would be in this category. Such an interpretation would be consistent with the definition of "Loss" found in § 1.1 of the Agreement. I therefore reject Cyprus's argument that the use of the word "other" makes little sense unless "other Loss" stands in contrast with the "first loss" also "relating to or arising under the terms of the Minerals long term disability plan" and that the only possible antecedent "Loss'" in subsection (m) is "payments due said Employees. . . ." Thus, contrary to Cyprus's contentions, a construction of subsection (m)'s last sentence that holds Cyprus liable for the Disputed Benefits does not necessarily "read out," or render mere "surplusage," the sentence's final clause.
See Agreement § 1.1 (defining "Loss"), supra.
E.I. du Pont de Nemours Co., Inc. v. Shell Oil Co., Del. Supr., 498 A.2d 1108, 1113 (1985) ("a court must construe the agreement as a whole, giving effect to all provisions therein") (citations omitted); Berdel, Inc. v. Berman Real Estate Mgmt., Inc., Del. Ch., C.A. No. 13579, mem. op. at 8, 1997 Del. Ch. LEXIS 177, at *12, Jacobs, V.C. (Dec. 15, 1997) ("The Court will not adopt an interpretation of a contract that would render one or more of its terms surplusage.").
Second, it is also conceivable that the drafters wished to assign the broadest possible liability to Cyprus with the expansive phrase "any and all payments due [the Long Term Disabled Employees]" and that the remainder of the sentence is simply redundant. That is, the last sentence of subsection (m), if it ended with "any and all payments due [the Long Term Disabled Employees"], period, would be dispositive of the Benefits Dispute in AEI's favor. Although the term "payments" is not defined under the Agreement, it is commonly understood to be extremely broad, and I believe that a plain English reading of that term would include the Disputed Benefits. As a practical matter, I therefore find credible AEI's explanation that this final clause is a result of the lawyerly inclination to gild the lily out of an excess of caution.
See, e.g., Black's Law Dictionary 1029 (6th ed. 1990) (defining "payment" as "[t]he fulfillment of a promise, or the performance of an agreement" or "[a] discharge of an obligation or debt, and part payment, if accepted, is a discharge pro tanto"); Webster's Ninth New Collegiate Dictionary 865 (defining "payment" as "the acting of paying" or "something that gets paid").
Of course, such an interpretation encroaches on the rule against surplusage, or that "a contract should be interpreted in such a way as to not render any of its provisions illusory or meaningless." But one may question whether a tempered recognition of the legal community's impulse toward overinclusiveness — especially in the context of a single-spaced, eighty-two page corporate sales agreement — necessarily conflicts with the mandate to give all contract provisions their fullest meaning. This seems particularly true where the first part of a sentence is so all-inclusive in relation to the remainder of that sentence as to suggest that the latter can only be a subset of the former. That said, the alternative interpretation above, which gives independent significance to the two clauses of subsection (m)'s last sentence, avoids the surplusage issue altogether.
Sonitrol Holding Co. v. Marceau Invetissements, Del. Supr., 607 A.2d 1177, 1183 (1992) (citation omitted).
For the above reasons, I therefore conclude that the modifier "related to or arising under the terms of the Minerals long term disability plan currently in place" in § 5.12.2(m) does not clearly confine Cyprus's responsibility toward the Long-Term Disabled Employees to the salary continuation payments. This court will not ignore a contract's language and choice of punctuation when doing so would essentially constitute "add[ing] a limitation not found in the plain language of the contract."
Emmons v. Hartford Underwriters Insur. Co., Del. Supr., 697 A.2d 742, 746-47 (1997) ("Contract interpretation that adds a limitation not found in the plain language of the contract is untenable") ( citing Northwestern Nat. Ins. Co. v. Esmark, Del. Supr., 672 A.2d 41, 44 (1996)).
But while I find AEI's construction of subsection (m) more viable than Cyprus's, I nevertheless cannot find that this provision conclusively assigns responsibility for the Disputed Benefits to Cyprus. I believe that such a holding would risk giving "undue weight to the `last antecedent rule' and to the niceties of punctuation and sentence structure," even if giving effect to the comma and disjunctive in subsection (m) would not be "at odds" with the rest of the subsection, § 5.12.2, or the Agreement as a whole. Delaware law holds that the "last antecedent rule" is "not inflexible," and this court will not hang a party's liability on weary drafters' placement of a comma where there is room for doubt as to the parties' intent. Thus subsection (m)'s susceptibility to conflicting interpretations precludes granting AEI the Rule 12(c) relief it seeks on the basis of this provision.
E.I. du Pont de Nemours Co. v. Green, Del. Supr., 411 A.2d 953, 956 (1980).
Id., 411 A.2d at 956; Patton v. Simone, 1992 Del. Super. LEXIS 316, at *17 (citation omitted). Indeed, AEI itself conceded that subsection (in) could be seen as "ambiguous." Argument on Cross-Motions for Judgment on the Pleadings, Oct. 4, 1999, tr. at 19.
AEI asserts that even if subsection (m) of § 5.12.2 does not assign liability for the Disputed Benefits to Cyprus, the last sentence of subsection (g) of this section explicitly does so. The final sentence of subsection (g) states that "[w]ith respect to the claims for benefits under Seller's Welfare Plans for legal services, financial counseling, long term disability, dependent life insurance, and business travel accident insurance, Seller shall indemnify, defend and hold harmless Purchaser, and pay and reimburse Purchaser, therefor[.]" While this sentence, read alone, appears to support AEI's reading, the sentence must be read in view of the prior sentences in the provision, which appear to limit the subsection's coverage to "Employees" as defined in Agreement § 3.11.3. AEI concedes that this group does not include the Long-Term Disabled Employees. On this motion, therefore, AEI cannot prevail by relying on § 5.12.2(g).
2. The Specific "Catch-All" Provision. Agreement § 5.12.2 (n)(i). Clearly Allocates Liability For The Disputed Benefits To Cyprus
AEI's primary argument is that even if subsection (m) of § 5.12.2 does not allocate liability for the Disputed Benefits to Cyprus, the silence of subsections (a) through (m) of § 5.12.2 concerning the Disputed Benefits triggers § 5.12.2(n) (i). Subsection (n)(i) is the catch-all provision specific to compensation and employee benefits that makes Cyprus responsible for liabilities stemming from Cyprus's "Plans." Subsection (n) provides in full:
Except as otherwise provided in Section 5.12 of this Agreement:
(i) Seller shall indemnify and defend Purchaser and the Subsidiaries for, and hold each of them harmless from and against, and pay and reimburse each of them for, any and all claims, Liabilities, Losses, payments, premiums, audits, assessments or other obligations relating to, or arising out of, the Plans; and
(ii) Purchaser shall indemnify and defend Seller and its Affiliates for, and hold each of them harmless from and against, and pay and reimburse each of them for, any and all claims, Liabilities, Losses, payments, premiums, audits, assessments or other obligations relating to, or arising out of, the pension benefit plans, whether or not tax-qualified, welfare benefit plans, fringe benefit plans, or any policies, procedures, plans, funds, programs or payroll practices, including without limitation, those maintained by Purchaser or its Affiliates, including the Subsidiaries, on and after the Closing Date.
The plain language of § 5.12.2(n)(i) allocates liability for the Disputed Benefits to Cyprus as the Seller. Again, under that provision, the "Seller," or Cyprus, shall retain liability for "any and all claims, Liabilities, Losses, payments, premiums, audits, assessments or other obligations relating to, or arising out of, the Plans[.]" The Disputed Benefits are undeniably "claims, Liabilities, Losses, payments, . . . or other obligations." Moreover, § 3.11.1 defines "Plans" as including "all life or other welfare or employee benefit insurance, incentive compensation, stock option, severance or termination pay, hospitalization or other medical plan, arrangement or agreement, bonus and other employee benefit, welfare or fringe benefit plans with respect to which contributions, premiums or other payments are made or required by Minerals or any of its Affiliates covering any current or former employee of any Subsidiary (the `Plans')."
Agreement § 3.11.1 (emphasis added); see also Agreement § 1.1.
Cyprus does not dispute that the Disputed Benefits "relate to, or arise out of" a "Plan" as defined in § 3.11.1 of the Agreement, whether that "Plan" be the Minerals LTD Plan or one of Cyprus's medical benefits plans. Rather than contest the straightforward language of subsection (n)(i) and its clear meaning, Cyprus essentially argues that subsection (n)(i) ought not be given its plain meaning on the basis of other provisions in the Agreement, contentions discussed at further length below.
But not only does AEI's construction of subsection (n)(i) find greater support in the text of that provision, its interpretation simply makes more sense in view of structure of the Agreement as a whole. First, subsection (n)(i) comports with the contract's overall allocation of employee benefits liabilities, whereby Cyprus generally retained liability for former employees it employed before the sale unless expressly provided otherwise by the Agreement. By contrast, I find highly counterintuitive Cyprus's suggestion that the parties intended to divide up the benefits owed the Long-Term Disabled Employees so as to make AEI liable for medical and life insurance benefits and Cyprus responsible for salary continuation payments — without stating such a division in more explicit terms. Furthermore, it is also logical that Cyprus, as the Seller, would be responsible to the Long-Term Disabled Employees for life and medical insurance payments arising under plans it chose and about which it was more knowledgeable than AEI, the Buyer. Indeed, it stands to reason that AEI would request, as AEI claims it did, a catch-all provision such as § 5.12.2(n)(i), precisely in order to avoid assuming liabilities arising under benefits plans with which AEI was largely unfamiliar at the time of the sale.
See, e.g., Agreement § 5.12.2(g) (assigning liability to AEI for benefits due certain active employees); Agreement § 5.12.2(h) (allocating responsibility to Cyprus for certain liabilities to retirees).
As mentioned above, Cyprus does not appear to take issue with AEI's argument that the Disputed Benefits fit within a natural reading of § 5.2.12(n)(i). Instead, Cyprus contends that subsection cannot be interpreted in accordance with that natural reading for two major reasons.
Cyprus's first line of attack is to call into question which "catch-all" provision should apply to resolve the Benefits Dispute. Cyprus suggests that subsection (m)'s silence concerning the Disputed Benefits triggers the more general catch-all provisions of §§ 5.20 and 8.2.4 rather than the specific catch-all of § 5.12.2(n)(i). Section 5.20 provides that ". . . except for . . . such . . . Liabilities of the Subsidiaries that are specifically assumed by Seller hereunder or as to which Seller has agreed to indemnify Purchaser for, Seller shall have no obligation or liability for or with respect to the Liabilities of the Subsidiaries and the Business, whether accruing prior to, on or after the Closing. . . ." Similarly, the general indemnity provision of § 8.2.4 states that "Purchaser shall indemnify, defend and hold harmless Seller and its Affiliates. . . ., for . . . . [e]xcept as otherwise expressly assumed or retained by Seller hereunder, any and all Liabilities, Losses or Third Party Claims relating to or arising out of the past, present or future operations of the Business."
Although Cyprus offers a range of potential grounds on which it may elude the operation of § 5.12.2(n)(i). Cyprus alights somewhat more profitably on the general catch-all provisions of §§ 5.20 and 8.2.4, provisions it suggests are invoked by subsection (m)'s limitation of Cyprus's liability to the salary continuation benefits (or silence as to the Disputed Benefits). See, e.g., Compl. at 4 (§§ 5.2.0 and 8.2.4 set forth the "general scheme of the Agreement" under which "all assets and liabilities of the Subsidiaries would pass to AEI unless they were expressly retained by [Cyprus]"); Cyprus Op. Br. at 7-8 (same); id. at 27 ("[u]nless Cyprus expressly retained a particular liability, it would be assumed by AEI") ( citing Agreement §§ 5.20, 8.2.4); id. (subsection (in) is essentially "an exception . . . to the liability retention and assumption provisions in Sections 5.20 and 8.2.4").
Agreement § 8.2.4.
It is indisputable that these provisions clearly express the parties' intent that AEI would assume all liabilities following the sale that were not explicitly retained by Cyprus. But Cyprus's arguments as to §§ 5.20 and 8.2.4 would have me ignore the fact that § 5.12.2(n)(i) expressly allocates liability for the Disputed Benefits to Cyprus, thereby obviating any need to resort to these more general catch-all provisions. The purpose of §§ 5.20 and 8.2.4 is to allocate liabilities not allocated in more specific sections of the contract, as is also true of § 5.12.2(n)(i) within the more limited context of § 5.12. Furthermore, both §§ 5.20 and 8.2.4 are more general than § 5.12.2(n)(i) and do not address liability for employee benefits, whereas the more specific § 5.12.2(n)(i) clearly does address such benefits. "`[W]here there is an inconsistency between general provisions and specific provisions, the specific provisions ordinarily qualify the meaning of the general provisions.'" Thus a catch-all provision specific to benefits liabilities preempts a provision allocating liabilities more generally. Furthermore, § 5.12.2 (n) explicitly states that it will apply "[e]xcept as otherwise provided in Section 5.12 of this Agreement"; because neither §§ 5.20 nor 8.2.4 are contained within § 5.12, neither provision qualifies under this exception.
Sonitrol Holding Co. v. Marceau Invetissements, 607 A.2d at 1184 ( quoting Stasch v. Underwater Works, Inc., Del. Super., 158 A.2d 809, 812 (1960)); Katell v. Morgan Stanley Group, Inc., Del. Ch., C.A. No. 12343, mem. op. at 7-8, 1993 Del. Ch. LEXIS 92, at *12, Chandler, V.C. (June 8, 1993) (this rule is based on "the reasonable inference that specific provisions express more exactly what the parties intended") (citation omitted).
In reading § 5.12.2(n)(i) as making Cyprus liable for the Disputed Benefits, I also reject Cyprus's other suggested ground for resorting to §§ 5.20 and 8.2.4, the doctrine of expressio unius est exclusio alterius. Cyprus claims that this tool of construction transforms subsection (m)'s silence concerning the Disputed Benefits into an invocation of §§ 5.20 and 8.2.4. Yet the Agreement's express instruction in § 5.12.2(n)(i) as to the allocation of a liability that no other sections of the contract address demonstrates that such a doctrinal stretch is unnecessary and inappropriate. See Robb v. Ramey Associates, Inc., Del. Super., 14 A.2d 394, 396 (1940) ( expressio unius est exclusio alterius "is not a rule of universal application, but is to be applied only as an aid in arriving at intention, and not to defeat the apparent intention") (citation omitted). Put another way, the expressio unius maxim is inapplicable here because contract itself specifically defines the consequences of its silence as to a specific liability, leaving no room for judicial inferences.
Cyprus further suggests that giving § 5.12(n)(i) its straightforward meaning renders such general provisions as §§ 5.20 and 8.2.4 — in addition to § 5.12.2(m) — mere "surplusage" in violation of the rule that "a court must construe the agreement as a whole, giving effect to all provisions therein." But the fact that §§ 5.20 and 8.2.4 are inapplicable to the Disputed Benefits does not strip them of their meaning as general liability and indemnity provisions assigning default liability for matters otherwise unallocated in the Agreement. Nor does an application of § 5.12.2(n)(i), a catch-all provision specific to employee benefits, "read out" subsection (m), a provision that affirmatively addresses certain employee benefits liabilities (e.g., the salary continuation benefits), regardless of whether it conclusively resolves the issue of liability for the Disputed Benefits.
E.I. du Pont de Nemours Co., Inc. v. Shell Oil Co., 498 A.2d at 1113 (citations omitted); see also Berdel, Inc. v. Berman Real Estate Mgmt., Inc., mem. op. at 8, 1997 Del. Ch. LEXIS 177, at *12.
Cyprus's argument in this regard is a rather odd one, which would appear to challenge the validity of all contractual "catch-all" provisions. If attorneys were consistently able to anticipate and provide with precision for all eventualities in transactions of this size, catch all provisions would always "read out" other contract language touching upon similar subject matter. In such a perfect world, catch-all provisions would, of course, serve no purpose whatsoever. But in the real world, they are included in contracts as a humble and pragmatic recognition of human fallibility and are as deserving of respect as any other contractual provisions. In this respect, it is Cyprus's argument that violates the surplusage rule, because it would deny any meaning at all to § 5.12.2(n)(i) by subordinating it to §§ 5.20 and 8.2.4.
I therefore conclude that, on the basis of Cyprus's failure to identify any Agreement provision that affirmatively allocates responsibility for the Disputed Benefits to AEI, subsection (n) (i) of § 5.12.2 unambiguously requires that Cyprus retain liability for the life and medical insurance benefits owed the Long-Term Disabled Employees.
3. The Financial Representations of §§ 3.6 And 8.2.4 Do Not Assign Liability For The Disputed Benefits To AEI Or Create Any Ambiguity As To The Parties' IntentCyprus's final argument is that the financial statements and audit incorporated by reference under §§ 3.6 and 6.1.12, respectively, establish the parties' intent to make AEI liable for the Disputed Benefits, requiring disposition of this motion in Cyprus's favor. Once again, Cyprus contends that these provisions demonstrate that AEI' s construction of § 5.12(n) (i) would impermissibly "read out" these provisions of the Agreement. At the very least, Cyprus suggests, §§ 3.6 and 6.1.12 create an ambiguity as to the parties' intended allocation of liability for the Disputed Benefits such that extrinsic evidence must be considered to determine the parties' true intent.
The rule holding that specific provisions trump more general ones applies with equal force to Cyprus's arguments concerning §§ 3.6 and 6.1.12. That is, these general provisions relating to the financial representations necessary to consummate the sale do not override the specific mandate of § 5.12.2(n)(i). Furthermore, Cyprus essentially argues that these provisions operate to modify § 5.12.2(n)(i). even though the plain language of §§ 3.6 and 6.1.12 demonstrates that they do not purport to allocate liabilities. Instead, these sections merely required Cyprus to provide AEI with financial representations accurately depicting the company's position and in so doing merely took their cue from the Agreement's express provisions.
Indeed, I question the utility of a construction that requires a court to hold that a contract is implicitly modified — notwithstanding that contract's express allocation of a liability to the seller — merely because the buyer goes to closing on financials erroneously indicating (because of an accountant's failure to track the contract accurately) that the liability at issue is to be one of those assumed by the buyer with the sale. Such a construction seems tortured and, if adopted, likely to add to the already considerable difficulties of consummating corporate transactions in an efficient, fair, and timely manner.
Nevertheless, I will examine the financial representations incorporated by §§ 3.6 and 6.1.12 to ensure that AEI's construction of § 5.12.2(n)(i) does not "read out" those provisions and that neither § 3.6 nor § 6.1.12 creates an ambiguity that would preclude granting AEI Rule 12(c) relief on the basis of § 5.12.2(n)(i).
a. The Financial Statements Under Agreement § 3.6
Section 3.6, entitled "Financial Statements," falls under Article III of the Agreement, which addresses the "Representations and Warranties of Seller." This section of the Agreement provides that Schedule 3.6 "sets forth on a consolidated basis . . ., an unaudited statement of net working capital and an unaudited balance sheet . . ., together with an unaudited income statement of the Subsidiaries for the three months ended March 31, 1998 (the `March Balance Sheet'), all of which have been adjusted to exclude therefrom all of the Excluded Assets and Excluded Liabilities. . . ." The March Balance Sheet contained in Schedule 3.6, in turn, lists several liability line items, including the "Deferred Long Term Liability" in the amount of $4,076,000 and the "Current Liability" of "Accrued Payroll Benefits" in the amount of $11,306,000. AEI does not appear to dispute Cyprus's assertion that the entire "Deferred Long Term Liability" line item consists of the Disputed Benefits payable and that $510,026 of the "Argued Payroll Benefits" line item consists of the amount of these benefits payable in fiscal year 1998. At the same time, the parties also do not dispute that these two items also include the salary continuation payments under the Minerals LTD Plan.
See Agreement § 2.1 ("At or prior to the Closing and consummation of the purchase and sale of the Shares contemplated hereby, and subject to the terms and conditions of this Agreement, Seller or a wholly owned subsidiary thereof (other than the Subsidiaries) shall retain and assume, as the case may be, pursuant to agreements and instruments (including instruments of conveyance) reasonably acceptable to Seller and Purchaser, the assets and rights listed on Schedule 2.1(a) hereof (collectively, the `Excluded Assets') and the liabilities and obligations listed on Schedule 2.1(b) hereof (collectively the `Excluded Liabilities'). . . ."
Compl. ¶ 16; Answer ¶ 16. The parties have estimated that the Benefits Dispute concerns between $4 and 7 million, while the Tax Dispute, discussed in Part 11(B), infra, involves approximately $1 million in total. Argument on Cross-Motions for Judgment on the Pleadings, Oct. 4, 1999, tr. at 47.
AEI Ans. Br. at 20; Cyprus Op. Br. at 15 n. 12.
Cyprus asserts that when AEI conceded that the unaudited balance sheet contained in Schedule 3.6 listed the Disputed Benefits under the liability line item of "Deferred Long Term Disability," AEI thereby admitted that it assumed responsibility for those payments under the Agreement. Because Cyprus represented in § 3.6 that the balance sheet had "been adjusted to exclude therefrom all of the Excluded Assets and Excluded Liabilities . . ." and because AEI did not object to Schedule 3.6 as required by § 5.2.3, Cyprus claims that AEI is therefore liable for the Disputed Benefits.
Cyprus Op. Br. at 14-15 ( citing AEI Op. Br. at 8).
Id. ( citing Agreement § 3.6, § 5.2.3). See Agreement § 5.2.3 (requiring AEI to notify Cyprus in writing before closing upon the discovery of any information relating to the "operations (including the financial condition, assets and properties) of the Business of any Subsidiary which constitutes (or would constitute) or indicates (or would indicate) a breach of any representation, warranty or covenant of [Cyprus] contained herein").
I agree with Cyprus that Schedule 3.6 is not "extrinsic evidence," as AEI maintains, because it is a document incorporated by reference into the contract. But I do not agree with Cyprus that § 3.6 and Schedule 3.6 establish AEI's assumption of liability for the Disputed Benefits.
Supermex Trading Co. v. Strategic Solutions Group, Inc., Del. Ch., C.A. No. 16183, mem. op. at 8-9, 1998 Del. Ch. LEXIS 66, at *9-10, Lamb, V.C. (May 1, 1998) (taking into consideration documents incorporated by reference into the contract under review); Hudson v. Wesley College, Inc., Del. Ch., C.A. No. 1211, mem. op. at 3, 1993 Del. Ch. LEXIS 260, at *4, Hartnett, V.C. (Nov. 19, 1993) (document incorporated by reference into an agreement is not a "matter outside the pleadings"), aff'd, 734 A.2d 641 (1999). See also Agreement § 10.3 ("This Agreement, including the Exhibits and Schedules hereto, contain all of the terms, conditions and representations and warranties agreed upon by the parties relating to the subject matter of this Agreement and supersede all prior and contemporaneous agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, respecting such subject matter.") (emphasis added).
First, the evident purpose of Schedule 3.6 was to support Cyprus's representation and warranty that there were no omissions in Cyprus's financial statements that could give rise to a later breach of warranty action by AEI against Cyprus. Section 3.6 of the Agreement does not purport to allocate liabilities among the parties, and this is not a breach of warranty action. Second, as AEI points out and as Cyprus does not dispute, Schedule 3.6 is consistent with that purpose, in that it does not exclude any material liabilities. The March Balance Sheet includes all obligations associated with Cyprus's long term disability plans, including the salary continuation payments Cyprus admits it was to retain under the Agreement. Given the concededly erroneous inclusion of the salary continuation payments, Schedule 3.6 cannot fairly be held dispositive as to liability for the Disputed Benefits. Cyprus complains that AEI should not be permitted to pick and choose among the liabilities in Schedule 3.6 it wishes to assume. Yet I see no reason why Cyprus should be able to make such a choice either, particularly when the purpose of § 3.6 was not to allocate liabilities and the purpose of § 5.12.2(n)(i) was to assign such responsibilities — and when § 5.12.2(n)(i) clearly states that Cyprus was to assume the category of liabilities into which the Disputed Benefits fall.
Cyprus Op. Br. at 15 n. 12.
Third, the mere fact that Schedule 3.6 excluded the "Excluded Liabilities" does not mean that it did not include liabilities that Cyprus was to retain under the Agreement. The term "Excluded Liabilities" is a defined one under the Agreement and is limited to those liabilities included on Schedule 2.1(a), which was negotiated under § 2.1 of the Agreement. Neither the Disputed Benefits nor the salary continuation payments are included on Schedule 2.1(a) and therefore are not "Excluded Liabilities" under the Agreement.
Finally, I also do not find Schedule 3.6 material to the Benefits Dispute on the basis of the parties' use of the March Balance Sheet in calculating working capital, which under § 2.3.1 of the Agreement was used in determining the purchase price. Cyprus does not dispute AEI's assertion that the "Deferred Long Term Disability" line was not relevant to this calculation, because only current liabilities were included in working capital. Although the $510,026 in Disputed Benefits found in the "Current Liabilities" line item of "Accrued Payroll Benefits" was used by the parties in determining the purchase price — a role that was most likely immaterial in a transaction valued at approximately $300 million — Cyprus has nevertheless failed to explain why I may ignore the Agreement's express allocation of liabilities merely on this basis.
Cyprus Reply Br. at 15.
Compl. at 2.
For these reasons, I conclude that § 3.6 does not override the catch-all provision of § 5.12.2(n)(i) or create a material ambiguity within the Agreement as to liability for the Disputed Benefits.
b. The Price Waterhouse Audit Under § 6.1.12 of the Agreement
Cyprus makes a similar argument with respect to the audit conducted by Price Waterhouse (the "PW Audit") that AEI was required to examine and approve before the closing, pursuant to § 6.1.12 of the Agreement. Section 6.1.12, entitled "Financial Statements," provides that a condition precedent to AEI's obligation to close on the transaction was that AEI "be satisfied, in its sole and absolute discretion, with the audited financial statements of the Subsidiaries prepared by Price Waterhouse LLP. . . ."
Because AEI closed on the transaction without objecting to the inclusion of the Disputed Benefits as a liability in the notes to the PW Audit, Cyprus argues, AEI acknowledged its responsibility for these benefits under the Agreement. The most viable claims made by Cyprus on this subject relate to the PW Audit's cover page and Note 17. The cover page states that "[t]he accompanying financial statements were prepared to present the assets, liabilities, revenues and direct expenses of the [Subsidiaries] to be sold to [AEI] pursuant to the [Agreement] and are not intended to be a complete presentation of the [Subsidiaries'] financial position or result of operations." This shows, according to Cyprus, that "an express purpose of the PW Audit was to catalog the liabilities being assumed by AEI." Cyprus also points to Note 14, entitled "Unaudited Financial Information," which contains "unaudited, condensed, combined financial information present[ing] the historical balance sheet as of December 31, 1997 excluding those assets and liabilities that are not being acquired by AEI." The balance sheet presented in Note 14 lists under the heading "Acquired Assets and Liabilities" over $41 million in "Deferred Employee and Retiree Benefits" including, among other things, the Disputed Benefits. Thus Cyprus contends that § 6.1.12 demonstrates AEI's recognition and acceptance of its liability for the Disputed Benefits.
Believe it or not, the parties have made numerous arguments I have not reached in this opinion, including some related to additional notes to the PW Audit. I have considered all of these arguments and find none that persuades me to reach a different result than I articulate.
Compl., Ex. D.
Cyprus Op. Br. at 16.
Compl., Ex. D at 13.
Id.; see also Cyprus Op. Br. at 17.
Once again, I agree with Cyprus that the PW Audit must be considered a document incorporated by reference into the Agreement. But I nevertheless do not find that PW Audit creates any ambiguity in light of the parties' clear allocation of liability for the Disputed Benefits in § 5.12.2(n)(i). First, although the PW Audit's cover page may suggest initially that the PW Audit provides more of an indication than Schedule 3.6 of the parties' understandings as to the allocation of liabilities, the purpose of § 6.1.12 was nevertheless to permit AEI to refuse to close if it was not "satisfied, in its sole and absolute discretion, with the audited financial statements" provided by Cyprus and, no doubt, to protect Cyprus against any post-closing complaints from AEI stemming from Cyprus's financial representations. More importantly, § 6.1.12 requires only that AEI be satisfied "with the audited financial statements of the Subsidiaries," not the unaudited financial information appended in a note to the auditor's report. Thus I believe that § 6.1.12 does not create a material ambiguity as to the parties' intended allocation of liabilities, given § 5.12.2(n)(i)'s unambiguous, final expression of the parties' intent to make Cyprus responsible for unassigned disability benefits liabilities arising out of its welfare plans.
As to Cyprus's related argument, I note that even though Price Waterhouse's knowledge of Note 14 and its contents may be imputed to AEI under Agreement § 1.1, AEI's knowledge of the existence of the unaudited financial information contained in Note 14 does not pose any ambiguity in light of § 5.12.2(n)(i)'s clear statement of the parties' intent as to the Disputed Benefits. See Cyprus Op. Br. at 17; Agreement § 1.1 ("the actual knowledge of the individuals set forth on Schedule II . . ." constitutes the "[k]nowledge of [AEI]").
For the reasons outlined above, I therefore find that the plain language of the Agreement renders Cyprus liable for the life and medical insurance benefits due the Long-Term Disabled Employees.
B. The Tax Dispute
The Tax Dispute concerns which company is entitled under the Agreement to tax credits and refunds stemming from payments made by Cyprus pursuant to the Coal Industry Retiree Health Benefit Act of 1992 (the "Coal Act") during certain periods preceding the closing date of the Agreement. The Coal Act is a federal statutory scheme requiring current and former employers of certain workers in the coal industry to pay premiums into several health and death benefits funds for those workers and their dependents. Cyprus contends that AEI has failed to comply with its obligation to disgorge to Cyprus refunds stemming from overpayments Cyprus made into two industry-wide benefits plans established under the Coal Act commonly known as the "1992 Benefit Plan" and the "Combined Fund." Thus the Tax Dispute consists in reality of two separate disputes arising out of the refunds or credits due the Subsidiaries as a result of the overpayments into the 1992 Benefit Plan and the Combined Fund (together, the "Disputed Refunds").
Coal Industry Retiree Health Benefit Act of 1992, Public Law 102-486, codified at 26 U.S.C. § 9701 et seq.
Congress passed the Coal Act in order to provide a legislative substitute for the collectively-bargained retiree health care benefit system maintained by unionized coal industry employers and the United Mine Workers of America. The Pittston Company v. United States, C.A. No. 3:97CV294, slip op. at 1-3, 1998 U.S. Dist. LEXIS 10175, at *3-4, Spencer, J. (E.D. Va. Feb. 3, 1998) (explaining history of Coal Act), amended and clarified on other grounds, 1998 U.S. Dist. LEXIS 10121 (Apr. 4, 1998); 26 U.S.C.A. § 9701 (West 1999), Pub.L. No. 102-486 § 19142(a)(2), 106 Stat. 3037 (legislative purpose of the Act was "to modify the current private health care benefit plan structure for retirees in the coal industry to identify persons most responsible for plan liabilities in order to stabilize plan funding and allow for the provision of health care benefits to such retirees"). See also Adventure Resources, Inc. v. Holland, 137 F.3d 786, 793 (4th Cir. 1998), cert. denied, 119 S.Ct. 404 (1998).
See 26 U.S.C. § 9701(a)(4) (defining term "1992 UMWA Benefit Plan"), § 9712 (providing for the "[e]stablishment and coverage of 1992 UMWA benefit plan"), § 9701(a)(5) (defining term "Combined Fund" as "the United Mine Workers of America Combined Benefit Fund established under section 9702"), § 9702 (providing for the "[e]stablishment of the United Mine Workers of America Combined Benefit Fund").
Cyprus's allegations regarding the 1992 Benefit Plan concern premiums paid by four of the Subsidiaries to pre-fund that plan. In 1998, the trustees of the 1992 Benefit Plan determined that formula errors resulted in overpayments by several employers during certain periods before the Agreement's closing date. As a result of these overpayments, the Subsidiaries became entitled to a credit against future 1992 Benefit Fund premiums. Cyprus now demands reimbursement from AEI for the refunds or for the value of any credit AEI receives on the basis of Cyprus's overpayments.
Similarly, Cyprus contends that AEI must reimburse Cyprus for the value of any tax refunds or credits the Subsidiaries may receive as a result of the case of National Mining v. Apfel, a suit brought by several coal industry employers to obtain refunds for overpayments these employers made into the Coal Act's Combined Fund. Before selling the Subsidiaries to AEI, Cyprus joined forces with other companies — through the National Mining Association — to bring National Coal Association v. Shalala and similar cases as a result of such overpayments. After the sale of the Subsidiaries to AEI, the court in National Mining ruled in favor of the employers who overpaid into the Fund, a decision that may result in either a cash award to the Subsidiaries or a credit against future payments. Cyprus contends that it is entitled to the benefits of that award such that AEI must disgorge to Cyprus the amount of any refund or credit the Subsidiaries may receive as a result of overpayments made by Cyprus into the Combined Fund before the sale of the Subsidiaries.
National Mining Association v. Apfel, Case No. CV-96-1385-S, Johnson, J. (N.D. Ala. Feb. 19, 1999).
National Coal Association v. Shalala, Case No. CV94-H-780-S, 1995 U.S. Dist. LEXIS 21116, Hancock, J. (N.D. Ala. June 2, 1995), amended, summ. judgment proceeding, National Coal Association v. Chater, Case No. CV94-H-780-S, 1995 U.S Dist. LEXIS 21125, Hancock, J. (N.D. Ala. July 20, 1995), aff'd sub nom. National Coal Association v. Chater, 81 F.3d 1077 (11th Cir. 1996).
In support of its argument that the unambiguous terms of the Agreement render AEI liable to Cyprus for the Disputed Refunds, Cyprus points to several Agreement provisions governing tax liability. The first, § 5.11.2(b), entitled "Other Taxes Accruing During Pre-Closing Tax Period, requires Cyprus to reimburse AEI for all "Other Taxes" paid by AEI after June 29, 1998 for periods before this date. In accordance with § 5.11.2(b)'s requirement that Cyprus pay such "Other Taxes" for periods before the closing date, § 5.11.5 of the Agreement correspondingly obligates AEI to reimburse Cyprus for any future refunds or credits stemming from such payments. Related to this provision is § 5.25.2 of the Agreement, which requires AEI to hold in trust any refunds or credits it receives and pay such funds to Cyprus within five days.
Additionally, § 1.1 of the Agreement defines "Taxes" or "Tax" as meaning,
"with respect to any Person, (a) any federal, state, local, provincial or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, business, occupation, premium, windfall profits, environmental, mineral, unmined coal, abandoned mined land fee, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, ad valorem, transfer, registration, value added, advance corporation, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether or not disputed, with respect to which such Person could be held liable;. . . ."
Agreement § 1.1 (emphases added).
Section 1.1 also defines "Other Taxes" or "Other Tax" as meaning "any Tax other than a Tax in respect of the income of any Subsidiary." Reference to any one of several Coal Act provisions makes clear that the payments made by employers into the benefit funds created under statute are "premiums" by the terms of the Act.
See, e.g., 26 U.S.C. § 9704(a) (stating that "[e]ach assigned operator shall pay to the Combined Fund for each plan year . . . an annual premium equal to the sum of the following three premiums — (1) the health benefit premium . . . plus (2) the death benefit premium . . . plus (3) the "unassigned beneficiaries premium . . ."), § 9712(d)(1) (explaining that "[a]ll 1998 last signatory operators shall be responsible for financing the benefits . . . in accordance with the contribution requirements established in the 1992 UMWA Benefit Plan" and that "[s]uch contribution requirements . . . shall include: (A) the payment of an annual prefunding premium . . ., (B) the payment of a monthly per beneficiary premium,. . . .") (emphases added).
The parties have not raised any factual contentions concerning the Disputed Refunds material to this motion, as AEI does not dispute that Cyprus did in fact pay the required amounts into the 1992 Benefits Plan and the Combined Fund during the period referenced in § 5.11.5. Resolution of the Tax Dispute therefore rests on the above contractual and statutory provisions and the applicable case law.
AEI Ans. Br. at 25-30.
Specifically, Cyprus argues that § 5.11.5, entitled "Refunds and Credits," clearly obligates AEI to "pay or cause to be paid to [Cyprus] all refunds, offsets or credits . . . of Other Taxes for which there shall not have existed any accrual in the March Balance Sheet (including any interest thereon) received by [AEI] or any Subsidiary after the Closing Date [June 29, 1998] and attributable to Taxes paid by [Cyprus] or any Subsidiary that accrued with respect to any Pre-Balance Sheet Period [i.e., the period before March 31, 1998]. . . ." Cyprus therefore maintains that it is entitled to refunds or credits stemming from Cyprus's payments made before March 31, 1998 to the 1992 Benefit Plan or Combined Fund. For support, Cyprus turns to the definitions in § 1.1 of the Agreement of "Tax" as "any federal . . . premium . . . or other tax of any kind whatsoever" and of "Other Taxes" as "any Tax other than a Tax in respect of the income of any Subsidiary"; to the Coal Act's definition of payments made pursuant to that statute as "premiums"; and to the fact that § 5.11.5 of the Agreement covers such "[r]efunds and [c]redits" as those received by the Subsidiaries from the 1992 Benefits Plan and the Combined Fund. Thus, according to Cyprus, the Agreement explicitly requires AEI to disgorge to Cyprus the value of any refunds or credits arising from overpayments Cyprus made into those plans before March 31, 1998.
Agreement § 5.11.5.
AEI appears to oppose Cyprus's position primarily on the basis that, although Cyprus will prevail on this issue at some later date, it simply may not do so at this stage of the proceedings. But it has advanced several arguments to support its holding action.
See, e.g., AEI Ans. Br. at 26, 29 (entitling its arguments "Cyprus Cannot Prevail On Its Claim To The 1992 Benefit Plan Refunds At This Stage of The Proceedings" and "Cyprus Cannot Prevail On Its Claim To The Combined Fund Premiums Refunds At This Stage of The Proceedings"). Indeed, at oral argument, it became apparent to me that AEI's opposition to Cyprus's Tax Benefits motion consisted of clever arguments advanced for their potential to delay, rather than prevent, Cyprus's ultimate right to prevail on this issue. At oral argument, AEI even went so far as to suggest that it would probably not have disputed the tax issue had Cyprus not sued it over the Disputed Benefits. Argument on Cross-Motions for Judgment on the Pleadings, Oct. 4, 1999, tr. at 105 (AEI counsel stating "I'll go one step further. I would think that if there weren't litigation between these parties, that this one probably would have been resolved. I think that it is clear and, you know, it —"); see also id. at 102-03 (AEI counsel stating that "I will trade you right now on judgment on the pleadings. You go with us on the disability.").
AEI argues first that § 5.11.5 only requires AEI to pay Cyprus the value of any tax credits for which there was no accrual on Cyprus's Schedule 3.6 balance sheets. AEI bases this contention on the language in § 5.11.5 stating that Cyprus is entitled to "refunds, offsets or credits . . . that accrued with respect to any Pre-Balance Sheet Date Period [before March 31, 1998]." Employing a very literal reading of this provision, AEI argues that judgment cannot be granted at this stage because Cyprus's complaint fails to allege that these premium refunds or credits were not accrued on the Schedule 3.6 balance sheets and because it is not apparent on the face of those balance sheets whether or not such an accrual was made. As a consequence, AEI asserts, it is entitled to discovery in order to determine whether Cyprus booked its Coal Act premium payables as accrued tax payables on the Subsidiaries' financial statements.
But I agree with Cyprus that it was impossible for Cyprus to accrue premium credits on a balance sheet prepared before the Agreement's closing date when the trustees did not determine before the closing date that the 1992 Benefit Plan would issue credits to entities such as Cyprus and when the court in National Mining v. Apfel did not determine before the closing date that the Subsidiaries had made overpayments into the Combined Fund. AEI does not dispute the fact that neither party could know the amounts of the Disputed Refunds as of the closing date of June 29, 1998 or that Cyprus still does not know the amounts of its 1992 Benefit Plan overpayments with any precision. And, as the current owner of the Subsidiaries and thus the party in control of the Subsidiaries' books, AEI has failed to establish any need for discovery relating to the accrual on the balance sheets or any prejudice from Cyprus's failure to allege accrual in its complaint.
Second, AEI contends that Cyprus's motion for judgment on the pleadings must fail because AEI denies that the 1992 Benefit Plan and Combined Fund premiums are a "Tax" within the meaning of the Agreement. But AEI's mere denial does not create an ambiguity in the contract terms. By contrast, I conclude that it is clear that the subject premiums fall within the meaning of "Taxes" in § 5.11.5, given the Agreement's definitions of that term as including "premiums," together with the Coal Act's designation of payments made pursuant to that statute as "premiums." AEI's reliance on the fact that the unpublished National Mining decision held that Coal Act premiums are not "taxes" is unavailing in light of the clear contract language as to the definition of "Taxes" under the Agreement and of the Coal Act. Parties may contractually agree to any definition of "Tax" they choose, regardless of that term's use in other contexts. Indeed, counsel for AEI conceded as much at oral argument.
Northwestern Nat. Ins. Co. v. Esmark, Inc., 672 A.2d at 43 ("Although the parties disagree as to the proper interpretation of the contract, their disagreement does not create an ambiguity.").
See note 50, supra.
National Mining Association v. Apfel, Case No. CV-96-J-1385-S, 1999 U.S. Dist. LEXIS 9202, at *14-15, Johnson, J. (N.D. Ga. Feb. 10, 1999) (stating that "[w]hile the premiums the plaintiffs have paid may be in the nature of taxes, they are not taxes" and finding that, contrary to Coal Act trustees' assertions, 26 U.S.C. § 7422 of the Internal Revenue Code was not the exclusive — or appropriate — means for recovering overpayments into Coal Act plans). Cf. Eastern Enterprises v. Apfel, 524 U.S. 498, 521 (1998) (stating that "[t]he payments mandated by the Coal Act, although calculated by a Government agency, are paid to the privately operated Combined Fund").
I note that National Mining relied on United States v. Reorganized CF I Fabricators for the definition of "tax" as "a pecuniary burden laid upon individuals or property for the purpose of supporting the Government." National Mining, 1999 U.S. Dist. LEXIS 9202, at *14 ( quoting United States v. Reorganized CF I Fabricators, 518 U.S. 213, 225 (1996)). But Reorganized CF I Fabricators was not a Coal Act case. Instead, it addressed whether certain federal government "exactions" from a company that failed to meet its statutory obligation to fund its pension plan qualified as "excise taxes" or "tax penalties" under the Bankruptcy Code for the purposes of determining the priority of claims. Id. at 215-18. The Court did not purport to define tax in a new way. In fact, the Court's citation in Reorganized CF I to the definition of "tax" found in United States v. Feiring suggested that a broader formulation of the term was also appropriate. Id. at 224 (citing United States v. Feiring, 313 U.S. 283, 285 (1941) (a "tax" priority under the Bankruptcy Code extends to "those pecuniary burdens laid upon individuals or their property . . . for the purpose of defraying the expenses of government or of undertakings authorized by it") (emphasis added). Indeed, the Court of Appeals for Second Circuit relied on the Feiring Court's broader formulation when concluding that Coal Act premiums are taxes for Bankruptcy Code purposes. LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 53 F.3d 478, 498 (2nd Cir. 1995) (applying Feiring definition), cert. denied, 516 U.S. 913 (1995).
Radio Corp. of America v. Philadelphia Storage Battery Co., Del. Supr., 6 A.2d 329, 334 (1939) ("where upon a consideration of the whole instrument, it appears that technical words are employed in a sense entirely different from their technical meaning, the meaning in which they are employed will be adopted") (citation omitted).
See Argument on Cross-Motions for Judgment on the Pleadings, Oct. 4, 1999, tr. at 96 (AEI counsel acknowledging that case law addressing Coal Act taxes "doesn't confirm whether it's a tax for purposes of this agreement").
As a matter of contractual interpretation, it bears emphasis that National Mining was handed down after the execution of the Agreement, whereas two federal Courts of Appeals had held before May 28, 1998 that Coal Act premiums were taxes for the purposes of the federal Bankruptcy Code. As the Court of Appeals for the Second Circuit put it, "`the Coal Act obligations are appropriately described as "taxes" due to their overwhelmingly involuntary nature, their explicitly stated public purpose, and their obvious potential to be imposed pursuant to the taxing power.'" For its part, the Court of Appeals for the Fourth Circuit held that Coal Act obligations are "`involuntary pecuniary burdens imposed by Congress for the public purpose of restoring financial stability to coal miners' benefit plans'" and that "`those burdens have been imposed as an exercise of Congress's taxing power[.]'" Moreover, "[t]he placement of the Coal Act at Subtitle I of the Internal Revenue Code of 1986 provides a strong indication of Congress's intent [to exercise its taxing power], as does its granting of enforcement powers to the Secretary of the Treasury." In this regard, the Coal Act premiums fully implicate the Agreement's definition of a "federal . . . premium . . . for which [Cyprus] could be held liable[.]" The Act's penalties for nonpayment — up to $100 per day per beneficiary — have been characterized by the United States Supreme Court as "severe."
In re Chateaugay Corp., 53 F.3d at 498 ( quoting In re Chateaugay Corp., 154 B.R. 416, 422 (S.D.N.Y. 1993)); see also The Pittston Company v. United States, slip op. at 12, 1998 U.S. Dist. LEXIS 10175, at *13 (determining that "the premiums imposed under the Coal Act are taxes" for the purposes of a tax refund action pursuant to 28 U.S.C. § 1346(a)(1)).
Adventure Resources, Inc. v. Holland, 137 F.3d at 794 ( quoting New Neighborhoods, Inc. v. West Virginia Workers' Comp. Fund, 886 F.2d 714, 718 (4th Cir. 1989)).
In re Chateaugay, 53 F.2d at 498.
Agreement § 1.1.
Eastern Enterprises v. Apfel, 524 U.S. at 529.
AEI also argues that the reference in Agreement § 1.1's definition of "Taxes" to "premium . . . tax" was to "taxes levied on insurance premiums" and not to premiums in the nature of taxes. In other words, AEI contends that the Agreement does not unambiguously define a "premium" mandated by a governmental act as a "Tax" because the inclusion of the word "premium" could have been intended to cover state taxes on insurance premiums. Such taxes are known as "premiums taxes" and exist in Kentucky, one of the states in which the Subsidiaries operate. Because several of the items listed in the Agreement's definition of "Tax" (e.g., "windfall profits" and "personal property") must be read as meaning a tax on the listed item, according to AEI, resolution of this definitional issue requires an examination of parol evidence. Yet the Subsidiaries are coal, not insurance companies. Premium taxes are a method of taxing insurance companies rather than "insurance." In view of the fact that AEI cannot even assert that any of the Subsidiaries ever paid a state "premiums tax" (or a tax on premiums), I do not believe that it has advanced a plausible reading of the Agreement.
AEI Ans. Br. at 27-28.
See Ky. Rev. Stat. Ann. § 136.330 (Banks-Baldwin 1998) ("Tax on premium receipts life insurance company — Exception"), § 136.340 ("Tax on amounts paid to stock insurance companies, other than life"), § 136.350 ("Tax on amounts to mutual companies, other than life and Lloyd's insurers"), § 136.360 (Tax on amounts paid to stock insurance, to defray cost of administering fire prevention and insurance laws"), § 136.370 ("Tax on attorneys for exchange of reciprocal or interinsurance contracts — Additional tax on premiums of stock insurers"); § 390 ("Tax on insurance companies other than stock or mutual"), § 136.392 ("Premium surcharge"), § 136.395 ("Hospital, medical or dental service companies exempt from premium tax").
See, e.g., Argument on Argument on Cross-Motions for Judgment on the Pleadings, Oct. 4, 1999, tr. at 94 (AEI counsel acknowledging lack of information as to whether the Subsidiaries ever paid a "premiums tax"). Counsel for AEI was asked to advise the court promptly if the Subsidiaries in fact ever paid such a "premiums tax" and responded with, I assume, studied silence.
It is clear that Cyprus had no choice but to pay Coal Act "premiums" or be "held liable" to the federal government, in the words of Agreement § 1.1. Given the parties' broad definition of "Taxes," their use of the word "premium" in that definition, and the fact that "premiums" in the context of the sale of a coal company is manifestly more appropriately applied to Coal Act premiums than to state "premium taxes" relevant to insurance companies, Cyprus's is the only reasonable construction of the Agreement.
Even if the Coal Act premiums were not "Taxes" under the Agreement, I believe that § 5.19, entitled "Insurance," would provide an independent basis for requiring AEI to repay Cyprus for the Coal Act overpayments as "insurance premium" refunds. Section 5.19 states that "any and all refunds of premiums paid by Seller and its Affiliates prior to the Closing Date under any insurance maintained by Seller and its Affiliates on behalf of any Subsidiary shall be for the account of and retained by Seller." AEI, however, contends that the Coal Act premium refunds cannot qualify as "insurance premiums refunds" because "Schedule 3.18, which pursuant to Section 3.18 covers all of the insurance maintained by the Subsidiaries . . . omits any reference to the Coal Act."
AEI Ans. Br. at 29 n. 14; Agreement Schedule 3.18 (entitled "Standard Insurance Coverage for Cyprus Amax Affiliates").
But Section 3.18, which incorporates by reference Schedule 3.18, states merely that "Schedule 3.18 . . . contains a true and complete list of . . . all . . . forms of insurance policies. . . maintained by any Subsidiary or [Cyprus] . . ." AEI concedes that Cyprus paid "premiums" under the Act to guarantee, or to insure, coverage for health and death benefits for former employees of the Subsidiaries to which the Coal Act has assigned responsibility to the Subsidiaries. Under the Act, the Subsidiaries also paid a premium for its pro-rated share of the liability for so-called orphaned employees, who were not assigned to any particular employer.
Agreement § 3.18 (emphasis added).
The Coal Act has all the attributes of a mandatory insurance scheme. The Subsidiaries are charged a particular "premium" — a term commonly associated with insurance — set by the federal Secretary of Health and Human Services in accordance with a formula in the Act so as to guarantee that the covered workers will receive the health and death benefits they are owed under the Act. These benefits reflect Congress's recognition that long-term coal miners were promised health and death benefits by the industry, and the Act codifies that promise as a statutory entitlement to certain benefits. Premiums are based on the cost of delivering the health and death benefits due to the employees. "In sum, the annual premium for an assigned operator equals the sum of the cost of providing health benefits to the company's assigned beneficiaries, its pro rata share of death benefit coverage, and its pro rata share of the health benefits for `orphaned' beneficiaries."
In re Chateaugay, 53 F.3d at 485 ("Congress directed the Secretary of Health and Human Services to levy annual health insurance and death benefit premiums on each `assigned operators'") ( quoting 26 U.S.C. § 9704, 9705).
Eastern Enterprises, 524 U.S. at 564 (Breyer, J., dissenting) (discussing legislative intent of Coal Act).
In re Chateaugay, 53 F.3d at 486.
Thus, while the Coal Act is not an "insurance policy" in the sense contended by AEI above, the funds created pursuant to the Act nevertheless provide a statutory form of insurance for health and death benefits for coal industry employees. To the extent that Cyprus overpaid for such insurance, I therefore believe that § 5.19 also requires AEI to reimburse Cyprus for its excess Coal Act payments. Contrary to AEI's assertion, § 5.19 does not state that Cyprus is entitled to "insurance premium refunds" only if those premiums were paid under an "insurance policy." Given that § 5.19 requires only that premium refunds derive from "insurance maintained by" Cyprus, the Coal Act premiums Cyprus paid to provide health and death benefits to former Subsidiary employees are plausibly regarded as "insurance" premiums, even though they were not made to obtain a commercial "insurance policy." Accordingly, I also reject AEI's contention that the absence of a reference to the Coal Act among the insurance policies listed on Schedule 3.18 undermines this conclusion. Thus § 5.19 provides an alternative basis for Cyprus's claim to the Disputed Refunds.
Put simply, AEI's overall argument with respect to the Tax Dispute is mere makeweight. The language and spirit of the Agreement clearly contemplate that Cyprus would get back any excess tax payments or excess insurance premiums it paid before the sale. AEI is trying to renege on that meeting of the minds by contending that the Coal Act premiums fit within some narrow crack between the contract's definition of a "tax" and its definition of an "insurance premium." It is clear to me, however, that Coal Act premiums qualify as both — or, at the very least, one or the other — but in no event are neither. Whether such payments be "taxes" or "insurance premiums" — and I think they are both for the purposes of the Agreement — Cyprus is entitled to the value of any refunds or credits resulting therefrom. I therefore find that AEI has failed to establish any grounds for noncompliance with Agreement § 5.11.5 and/or § 5.19, in accordance with the time frame set forth in § 5.25.2, with respect to the Disputed Refunds.
Cyprus puts forth an additional, alternative argument in support of its assertion that AEI is liable to Cyprus with respect to the Combined Funds refund or credit, a claim based on § 2.1 of the Agreement and corresponding Schedule 2.1(a). Agreement § 2.1 provides that "Seller . . . shall retain and assume, as the case may be, . . . the assets and rights listed on Schedule 2.1(a) hereof (collectively, the `Excluded Assets') and the liabilities and obligations listed on Schedule 2.1(b) hereof (collectively, the `Excluded Liabilities')." Schedule 2.1(a) includes as an "Excluded Asset" to be retained by Cyprus several assets, including under the "Litigation" heading the item "[a]ll rights, credits, offsets, claims, judgments and awards of the Subsidiaries, as applicable, under or arising out of the following items of pending litigation, claims or threatened claims: . . . National Coal Association et. al. v. Shalala and all related litigation." Cyprus asserts that the National Mining v. Apfel case qualifies as "related litigation" and that any award in this case is therefore an "Excluded Asset" under the Agreement. I need not reach this argument, however, because the Agreement's tax and insurance refunds or credits provisions provide a sufficient basis for concluding that the contract obligates AEI to reimburse Cyprus for any credits or refunds stemming from Cyprus's overpayments into Coal Act plans, whether into the 1992 Benefit Plan or the Combined Fund.