Douglas M. Tatum v. SFN Group, Inc.
698 F. App'x 1000
11th Cir.2017Background
- Brothers Douglas and John Tatum (shareholders of Tatum, LLC) sold Tatum, LLC to SFN (formerly Spherion) under a merger agreement that created two $2.3M post-closing holdback funds: an Indemnification Holdback and an Adjustment Holdback.
- The Agreement required SFN to notify indemnification claims "on or before" August 1, 2011 (the Termination Date), and appointed a Holders’ Agent (Hipps) with authority to approve holdback disbursements on behalf of shareholders.
- Post-closing audit showed a $1,636,799 working-capital shortfall; Hipps approved SFN’s proposed adjustment and authorized release of the remaining Adjustment Holdback funds to shareholders.
- SFN discovered pre-closing 401(k) compliance failures, claimed indemnification from the Indemnification Holdback (Hipps approved), entered the IRS Voluntary Correction Program, and ultimately incurred about $192,000 in fees; SFN disbursed the remainder of the Indemnification Holdback.
- The Tatums sued for breach of contract, conversion, equitable accounting, and sought to amend to add fraud/negligent-misrepresentation claims. The district court denied leave to amend, granted SFN summary judgment, and the Eleventh Circuit affirmed.
Issues
| Issue | Tatum's Argument | SFN's Argument | Held |
|---|---|---|---|
| Whether SFN could claim indemnification for unpaid/liabilities not yet paid | SFN could only be indemnified for actual out-of-pocket losses already paid | Agreement indemnified liabilities and losses, including accrued/unpaid obligations | Court: Agreement covers liabilities (including unpaid/ accrued obligations); SFN entitled to indemnification without having paid first |
| Whether SFN’s indemnification notice was timely (on vs. before Termination Date) | Notice on the Termination Date was untimely; must be prior to that date | Agreement required notice “on or before” Termination Date; submission on the date is timely | Court: "On or before" and related provisions allow notice on the Termination Date; SFN’s notice timely |
| Whether SFN breached implied covenant of good faith in administering Adjustment Holdback (alleged collusion/inflation) | SFN colluded pre-closing to inflate the estimate and planned to recoup via holdback—breach of implied covenant | No breach of express contractual terms; alleged wrongdoing predates contract/closing and sounds in fraud | Court: No independent implied-covenant claim without breach of an express term; claims sounding in fraud were not pleaded; summary judgment for SFN |
| Whether Tatums stated conversion/equitable accounting claims | Tatums: SFN wrongfully withheld funds (conversion); holdbacks created fiduciary/trust duty (equitable accounting) | SFN: withholding authorized under Agreement; transaction was arm’s-length; no fiduciary duty | Court: Withholding permitted by Agreement so no conversion; no fiduciary relationship (arm’s-length and negotiated holdbacks), so equitable accounting fails |
Key Cases Cited
- Rioux v. City of Atlanta, 520 F.3d 1269 (11th Cir. 2008) (standard for reviewing summary judgment)
- Celotex Corp. v. Catrett, 477 U.S. 317 (U.S. 1986) (summary-judgment standard)
- Equity Lifestyle Props., Inc. v. Fla. Mowing & Landscape Serv., Inc., 556 F.3d 1232 (11th Cir. 2009) (contract interpretation; avoid treating words as surplusage)
- Centurion Air Cargo, Inc. v. United Parcel Serv. Co., 420 F.3d 1146 (11th Cir. 2005) (implied covenant of good faith cannot be an independent cause absent breach of express term)
- Kee v. Nat’l Reserve Life Ins. Co., 918 F.2d 1538 (11th Cir. 1990) (requirements for equitable accounting under Florida law)