820 F.3d 46
1st Cir.2016Background
- Mercury purchased KOR pursuant to a 2011 merger agreement; $10.65 million of the purchase price was held in escrow to cover indemnity obligations.
- The agreement required SRS (on behalf of KOR's former securityholders) to prepare KOR's 2011 tax returns and to claim specified merger-related deductions (Section 10.05).
- Section 10.02(a) required the escrow agent to pay Mercury an amount ‘‘equal to the aggregate Tax liabilities due’’ calculated for indemnification purposes by excluding the Section 10.05 deductions (i.e., a counterfactual, larger tax liability), while Mercury would actually file and pay the tax returns that reflect the deductions.
- After taking the permitted deductions, KOR had no taxable income for 2011 and received $1.76 million in federal and state tax refunds; Mercury (as KOR’s post-closing owner) received those refunds.
- Mercury recalculated the indemnity without deducting refunds and sought $1.83 million (after crediting prior partial payments); SRS conceded the $2.4 million counterfactual liability but argued the $1.76 million refunds must offset the indemnity, leaving only $640,000 owed.
- The district court entered judgment for SRS, finding the indemnity unambiguously required offset by the refunds; the First Circuit vacated and remanded, holding the contract ambiguous on that point.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether tax prepayments/refunds must offset the Section 10.02(a) indemnity payment | Mercury: indemnity is a price adjustment tied to the fictional tax liability; refunds were separate and should not reduce the escrow payment | SRS: indemnity covers actual "Losses" and thus must be reduced by prepayments/refunds (otherwise Mercury gets a double recovery) | Ambiguous — both readings are reasonable; remand for extrinsic evidence and fact-finding |
| Whether Section 10.01 (general tax indemnity) resolves the offset question | Mercury: Section 10.01’s "notwithstanding" language preserves the special fiction in 10.02(a) so ordinary loss-offset rules do not apply | SRS: Section 10.01’s reference to "Losses" and ordinary indemnity principles requires offset for prepayments/refunds | Ambiguous — Section 10.01 can be read both ways and does not conclusively resolve the issue |
| Whether the contract language should be re-written to imply an offset despite silence | Mercury: court must not rewrite a contract; silence means no offset unless clearly expressed | SRS: linkage between return preparation and indemnity implies net calculation inclusive of prepayments/credits | Court: cannot decide as a matter of law on the pleadings; factual record and extrinsic evidence required |
| Whether the anticipated refunds were solely attributable to the Section 10.05 deductions (relevant to double-recovery argument) | Mercury: refunds were expected irrespective of 10.05 deductions; indemnity stands | SRS: refunds resulted from the 10.05 deductions and are part of the economic benefit that should reduce indemnity | Disputed factual question; cannot be resolved on the pleadings |
Key Cases Cited
- Den Norske Bank AS v. First Nat'l Bank of Boston, 75 F.3d 49 (1st Cir. 1996) (ambiguous contract language requires resort to extrinsic evidence)
- Fashion House, Inc. v. K Mart Corp., 892 F.2d 1076 (1st Cir. 1989) (contract terms ambiguous where phraseology supports reasonable differing opinions)
- Paterson-Leitch Co. v. Mass. Mun. Wholesale Elec. Co., 840 F.2d 985 (1st Cir. 1988) (courts should not rewrite contracts freely entered by sophisticated parties)
- Curran v. Cousins, 509 F.3d 36 (1st Cir. 2007) (standard for reviewing cross-motions for judgment on the pleadings)
- R.G. Fin. Corp. v. Vergara-Nuñez, 446 F.3d 178 (1st Cir. 2006) (limits on materials a court may consider on judgment-on-the-pleadings)
- Mass. Mun. Wholesale Elec. Co. v. Town of Danvers, 577 N.E.2d 283 (Mass. 1991) (context may show parties assigned an unusual meaning to a term)