Summary
rejecting MMI's claim that it did not know that a certain building was covered by the agreement, "MMI's argument is rejected because it amounts to an ostrich defense. It is undisputed that Schedule 4(j) was included in the SPA, and that Schedule 4(j) contained explicit references to the `extension' property. MMI's officers and attorneys . . . presumably read (or should have read) the entire SPA prior to signing it."
Summary of this case from Michigan Elec. Employees v. Encompass ElecOpinion
Case No. 1:02-CV-161
January 7, 2003
Sheldon Finkelstein/Robert J. Jonker/Dean F. Pacific, for Plaintiff(s)
Patrick F. Geary/John R. Oostema/Marilyn S. Tyree, for Defendant(s)
OPINION
The Court has before it two motions filed by Plaintiff, DRS Precision Echo, Inc. ("DRS"): (1) DRS' Motion for a Declaration That Defendant Michigan Magnetics, Inc. ("MMI") Is Not Entitled to Arbitration or, Alternatively, Is Permitted Only Limited Arbitration; and (2) DRS' Motion for Partial Summary Judgment Regarding Section 3(c) of the Stock Purchase Agreement. Having considered the written and oral presentations of the parties, and all other pertinent matter of record, the Court will order the parties to immediately engage in arbitration as set forth below and will grant summary judgment to DRS on Paragraphs 26 and 34 of MMI's Counterclaim.
Arbitration
A. Factual Background
Pursuant to Section 2(b)(i) of the parties' Stock Purchase Agreement ("SPA"), DRS had sixty days from the closing date of the sale to deliver to MMI "a statement (the "Statement"), certified by an officer of Seller, setting forth Working Capital (as defined below) as of the close of business on the Closing Date ("Closing Working Capital")." The closing between DRS and MMI took place on August 31, 2000. (MMI Resp. Br. at 2.) Thus, DRS had until October 30, 2000, to provide the Statement mandated by Section 2(b)(i) of the SPA. DRS transmitted the Statement to MMI on October 30, 2000. (MMI Resp. Br. at 1.)
Upon receipt of the Statement, Section 2(b)(i) of the SPA provided MMI with thirty days to review the Statement and make objections within the parameters of Section 2(b)(i). If MMI objected to the Statement, it had to provide a written Notice of Disagreement to DRS. MMI objected in writing on November 7, 2000. (MMI Resp. Br. at 1.)
If MMI took no action within those thirty days, the Statement became final on the thirtieth day.
Section 2(b)(i)(A)-(C) of the SPA requires that the Notice of Disagreement reasonably describe MMI's objections, but, those objections could only consist of mathematical errors or miscalculation errors of Closing Working Capital. In addition, MMI was required to certify that it had complied with Section 2(b)(iv) of the SPA. MMI asserts that its certification compliance was included within its Notice of Disagreement dated November 7, 2000.
Pursuant to Section 2(b)(i), once MMI provided its Notice of Disagreement to DRS, another thirty days was allotted for DRS and MMI to attempt to resolve the issues raised in the Notice of Disagreement. If the parties could not resolve their differences within those thirty days, Section 2(b)(i) provides that any outstanding issues are to be submitted by DRS and MMI to an independent accounting firm for resolution. This reference to the referral of certain disputes to an accounting firm is the arbitration clause at issue in this motion.
B. Analysis
1. MMI's Notice of Disagreement
Section 2(b)(i)(A) of the SPA states that MMI's Notice of Disagreement was to "specify in reasonable detail the nature of any disagreement so asserted." In the motion before the Court, DRS asserts that MMI's Notice of Disagreement was not as detailed as the SPA requires. MMI's Notice of Disagreement, dated November 7, 2000, specified its disputes as follows:
(a) it does not include certain accrued liabilities which have been omitted from the books and records of the Company, (b) it does not include certain contractual obligations to one of the Company's customers which have been deleted from the books and records of the Company, (c) it includes certain accounts receivables which have heretofore been collected by Seller and not credited on the books and records of the Company, (d) it includes a lower than actual reserve for inventory obsolescence, (e) it does not include any liability or reserve for the then pending lawsuits against the Company, (f) contrary to the agreement, it includes assets not previously reflected on either the books and records of the Company or in its financial reports, and (g) it does not reflect the restricted use of a substantial portion of the Company's cash in bank(s) to support guarantees given by the Company. . . .
(Def.'s Resp. Br. Ex. 4.)
There is no definition in the SPA for "reasonable detail." Black's Law Dictionary defines "reasonable" as: "Fair, proper, just, moderate, suitable under the circumstances. Fit and appropriate to the end in view." Black's Law Dictionary 1138 (5th ed. 1979). Applying this definition, MMI's Notice of Disagreement had to contain enough detail to permit DRS to substantively respond to the issues raised therein. This Court finds the amount of detail provided by MMI to be reasonably sufficient to permit DRS to respond.
2. Compliance with the Certification Requirement
DRS argues that MMI's Notice of Disagreement did not comply with Section 2(b)(i)(C) of the SPA, because it failed to provide the required certification of compliance. The Notice of Disagreement sent by MMI to DRS states that "the undersigned certifies, without personal liability that Buyer is in compliance with Section 2(b)(i)(C) of the Agreement." Section 2(b)(i)(C) of the SPA expressly refers to compliance with Section 2(b)(iv). While MMI did not specifically cite "Section 2(b)(iv)" in its Notice of Disagreement, there is no other reasonable way to read MMI's reference to Section 2(b)(i)(C) other than as a certification of compliance with Section 2(b)(iv) as required. Thus, this Court finds that MMI's Notice of Disagreement complied with Section 2(b)(i)(C) of the SPA.
3. Waiver of Right to Arbitrate
The SPA evidences that the parties recognized time was of the essence, based on the parties' inclusion of many dates and specific time periods. The parties did not, however, state a time frame for submitting outstanding issues to arbitration. Additionally, the SPA imposes a joint request or submission, as it states in Section 2(b)(i): "At the end of such 30-day period, Seller and Buyer shall submit to an independent accounting firm . . . for arbitration of any and all matters which remain in dispute and which were properly included in the Notice of Disagreement." (Emphasis added.) Thus, the SPA does not place the onus to submit remaining disputes to arbitration solely upon MMI, and DRS' argument that MMI did not act timely in regard to arbitration submission fails.
4. The Arbitration Clause's Limited Scope
Section 2(b) of the SPA, in two different subsections, references a referral to arbitration. DRS is correct that the parties agreed to a narrow scope for arbitral issues. The first reference is in Section 2(b)(i): "At the end of such 30-day period, Seller and Buyer shall submit to an independent accounting firm . . . for arbitration of any and all matters which remain in dispute and which were properly included in the Notice of Disagreement." The second reference is found in Section 2(b)(iii), in the provision that defines "Working Capital" and "Closing Working Capital":
The term "Working Capital" shall mean Current Assets minus cash minus Current Liabilities. The W.C. Amount equals Working Capital on the date of the Balance Sheet (as defined in Section 4(g)), and shall not be subject to change. The terms "Current Assets" and "Current Liabilities" shall mean the current assets (other than cash) and current liabilities, respectively, of the Company, calculated in the same way, using the same methods, as the line items on the Balance Sheet. Without limiting the generality of the foregoing, Closing Working Capital is to be calculated in the same way, using the same methods, as the line items comprising Working Capital on the Balance Sheet, which calculations are consistent with generally accepted accounting principles ("GAAP"). The parties agree that the adjustment contemplated by this Section 2(b) is intended to show the change in Working Capital from the date of the Balance Sheet to the Closing Date, and that such change can only be measured if the calculation is done in the same way, using the same methods, practices and categories at both dates. The scope of the disputes to be resolved by the Accounting Firm is limited to whether such calculation was done in the same way, using the same methods, and whether there were mathematical errors in the Statement, and the Accounting Firm is not to make any other determination, including any determination as to whether generally accepted accounting principles were followed for the Balance Sheet or the Statement or as to whether the W.C. Amount is correct. Any items on or omission from the Balance Sheet that are based upon errors of fact or mathematical errors or that are not in accordance with generally accepted accounting principles shall be retained for purposes of calculating Closing Working Capital.
(emphasis added). The Court must thus determine whether the disputed issues that are within the scope of this provision should be referred to arbitration.
Section 2 of the Federal Arbitration Act, 9 U.S.C. § 1-208 ("FAA"), embodies what is recognized as a liberal federal policy favoring arbitration as a means of resolving disputes between parties. Perry v. Thomas, 482 U.S. 483, 489, 107 S.Ct. 2520, 2525 (1987). In relevant part, 9 U.S.C. § 2 provides:
A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . or the refusal to perform the whole or any part thereof . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
In furtherance of this policy, the Supreme Court has directed federal courts to "rigorously enforce agreements to arbitrate." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221, 105 S.Ct. 1238, 1242 (1985). An arbitration agreement must evidence "a transaction involving commerce" to fall within the scope of the FAA. 9 U.S.C. § 2. DRS, a Delaware corporation with its principal place of business in New Jersey, does not dispute that the sale of its subsidiary, another Delaware corporation, to MMI, a Michigan corporation with its principal place of business in Michigan, is a transaction involving commerce.
Next, the Court must determine the issues that are subject to arbitration under the SPA. The guiding principles for determining whether a dispute is arbitrable are set forth by the Sixth Circuit inUnited Steelworkers of America v. Mead Corp., 21 F.3d 128 (6th Cir. 1994):
(1) a party cannot be forced to arbitrate any dispute that it has not obligated itself by contract to submit to arbitration; (2) unless the parties clearly and unmistakably provide otherwise, whether a [contract] creates a duty for the parties to arbitrate a particular grievance is an issue for judicial determination; (3) in making this determination, a court is not to consider the merits of the underlying claim; and (4) where the agreement contains an arbitration clause, the court should apply a presumption of arbitrability, resolve any doubts in favor of arbitration, and should not deny an order to arbitrate "unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute."Id. at 131 (citing ATT Techs., Inc. v. Communications Workers, 475 U.S. 643, 648-51, 106 S.Ct. 1415, 1418-19 (1986) (quoting United Steelworkers v. Warrior Gulf Navigation Co., 363 U.S. 574, 582-83, 80 S.Ct. 1347, 1353 (1960))).
The Court may not, however, find that an issue is arbitrable on the basis of the presumption in favor of arbitration where the agreement excludes specific matters from arbitration. See Ballay v. Legg Mason Wood Walker, Inc., 878 F.2d 729, 733 (3d Cir. 1989) (noting that although the FAA establishes presumption in favor of arbitration, it does not prevent parties from excluding matters from arbitration) (citing Volt Info. Scis., Inc. v. Bd. of Trs. of the Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, 1255 (1989)). In Section 2(b)(iii) of the SPA, the arbitrators' authority in the instant case is expressly limited as follows:
The scope of the disputes to be resolved by the Accounting Firm is limited to whether such calculation [of Closing Working Capital] was done in the same way, using the same methods, and whether there were mathematical errors in the Statement, and the Accounting Firm is not to make any other determination, including any determination as to whether generally accepted accounting principles were followed for the Balance Sheet or the Statement or as to whether the W.C. Amount is correct.
The only disputes subject to arbitration are: (1) whether the calculation of Closing Working Capital was done in the same way and using the same methods as the calculation of Working Capital; and/or (2) whether there were mathematical errors in the statement.
5. Standards for Arbitrator
The Court agrees with MMI that all of the issues raised in its Notice of Disagreement fall within Section 2(b)(iii). DRS' Statement provided the following information to MMI:
Current Assets $4,815,779
Less: Cash (181,167)
Less: Current Liabilities (530,992)
Working Capital $4,103,620
(Def.'s Resp. Br. Ex. 3.) The seven issues raised by MMI in the Notice of Disagreement relate to one or more of the figures in the above-quoted information. Thus, the issues raised by MMI in its Notice of Disagreement are proper on their face. For arbitration purposes, however, the Court holds that the accounting firm is limited to determining: (1) whether the calculation of Closing Working Capital was done in the same way and using the same methods as the calculation of Working Capital; and/or (2) whether there were mathematical errors in the statement.
Issue (a) relates to liabilities; issue (b) relates to liabilities; issue (c) relates to assets; issue (d) relates to assets or cash; issue (e) relates to liabilities or cash; issue (f) relates to assets; and issue (g) relates to cash.
6. Stay of the Proceedings for Arbitration
DRS argues that even if a limited amount of issues present in this case are referred to arbitration by order of this Court, such referral should not delay discovery or trial in this matter. On the other hand, MMI asserts that the non-arbitrable claims, such as DRS' claim that money is owed under the Promissory Note given at closing, cannot be resolved until the dispute surrounding any adjustments to working capital is finalized.
The parties committed to a thirty-day arbitration period in the SPA if at all possible, with both parties acknowledging that the time constraints of the accounting firm chosen might dictate otherwise. Section 3 of the FAA states that once this Court makes a determination that "the issue involved in such suit or proceeding is referable to arbitration under such an agreement, [this Court] shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement." In a situation like the present case, where some claims are non-arbitrable, they can simultaneously proceed in this Court only if they can be separated out; in other words, if their resolution has no effect on the arbitrable issues. See Lipskey v. Oppenheimer Co., 717 F.2d 314, 319-20 (6th Cir. 1983). MMI asserts that the issues are sufficiently dependent to prevent any proceedings until arbitration is completed.
It is a close call, but this Court sees some advantage in a short stay if the arbitration occurs in an expeditious manner to comport with the SPA and to allow the balance of the dispute to be timely resolved. The parties must thus submit the disputed issues to an independent accounting firm within the next fifteen days and indicate to the accounting firm that a decision must be made within thirty days of said submission. Both parties shall fully cooperate with the arbitrator and supply the arbitrator with any and all documents needed to render a decision on the arbitrable issues. During that forty-five-day time period, the remainder of the case shall be stayed.
Section 2(b)(i) of the SPA provides: "The Accounting Firm shall be Ernst Young or, if such firm is unable or unwilling to act, such other nationally recognized independent accounting firm as shall be agreed upon by the parties hereto in writing."
II. Partial Summary Judgment A. Factual Background
DRS has filed a motion for partial summary judgment against MMI based upon Section 3(c) of the SPA. DRS's motion affects Paragraphs 25-35 and 38-49 of Count I of MMI's Counterclaim and Count II of MMI's Counterclaim in its entirety.
B. Summary Judgment Standard
Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56. Material facts are facts which are defined by substantive law and are necessary to apply the law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510 (1986). A dispute is genuine if a reasonable jury could return judgment for the non-moving party. Id.
A motion for summary judgment is properly supported if the moving party shows that there is no evidence to support the non-moving party's case.Celotex Corp. v. Catrett, 477 U.S. 317, 324-25, 106 S.Ct. 2548, 2553-54 (1986). If the moving party makes its showing, the non-moving party must demonstrate with "concrete evidence" that there is a genuine issue of material fact for trial. Id.; Frank v. D'Ambrosi, 4 F.3d 1378, 1384 (6th Cir. 1993). The court must draw all inferences in a light most favorable to the non-moving party when evaluating a summary judgement motion.Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 578-88, 106 S.Ct. 1348, 1352-58 (1986). It may, however, grant summary judgment when "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party." Agristor Fin. Corp. v. Van Sickle, 967 F.2d 233, 236 (6th Cir. 1992) (quoting Matsushita Elec. Indus. Co., 475 U.S. at 587, 106 S.Ct. at 1356).
A party cannot resist a motion for summary judgment with conclusory statements and affidavits. Williams v. Ford Motor Co., 187 F.3d 533, 544 (6th Cir. 1999); McDonald v. Union Camp Corp., 898 F.2d 1155, 1162 (6th Cir. 1990). "Plaintiffs cannot challenge [a] motion for summary judgment by relying on allegations contained in their complaint or on affidavits that merely state conclusory allegations." Williams, 187 F.3d at 544. Chief Judge Bell recently addressed this issue in Varnado v. Dawson Manufacturing Co., No. 00CV60, 2001 WL 1798477, at *6 (W.D.Mich. July 10, 2001), and stated: "Conclusory allegations or subjective beliefs set forth in an affidavit fail to create a genuine issue of fact for trial." MMI must thus put forth more than mere statements in affidavits to overcome summary judgment.
C. "Actual Knowledge" Under Section 3(c) of the SPA
Section 3(c) of the SPA states:
3(c) Waiver of Closing Conditions. The parties acknowledge and agree that if Buyer or Seller has knowledge of a failure of any condition set forth in Section 3(a) or 3(b), respectively, or of any breach by the other party of any representation, warranty or covenant contained in this Agreement, and such party proceeds with the Closing, such party shall be deemed to have waived such condition or breach and such party and its successors, assigns and affiliates shall not be entitled to be indemnified pursuant to Section 11, to sue for damages or to assert any other right on [sic] remedy for any losses arising from any matters relating to such condition or breach, notwithstanding anything to the contrary contained herein or in any certificate delivered pursuant hereto.
(SPA § 3(c) (emphasis added).) The SPA defines the term "knowledge" in Section 21(b)(iii) as "the actual knowledge of the officers of Buyer listed in Schedule 21." (SPA § 21(b)(iii) (emphasis added).) Section 27 of the SPA, entitled "Governing Law," states:
27. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE APPLIED TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES OF SUCH STATE.
(SPA § 27 (upper case in original) (emphasis added).) Federal courts sitting in diversity jurisdiction must apply the conflict-of-law rules of the forum state. Johnson v. Ventura Group, Inc., 191 F.3d 732, 738 (6th Cir. 1999). Michigan courts, and federal courts applying Michigan conflicts law, have consistently upheld the enforceability of contractual choice-of-law provisions. See, e.g., id.; Kerns, Inc. v. Wella Corp., 114 F.3d 566, 569 (6th Cir. 1993). The Court must thus interpret the term "actual knowledge" in accordance with Delaware substantive law.
"In Delaware, all written contracts . . . are to be read, understood and interpreted according to the plain and ordinary meaning and import of the language employed in them." USH Ventures v. Global Telesystems Group, Inc., 796 A.2d 7, 23-24 (Del.Super.Ct. 2000) (citing Neary v. Philadelphia, W. B.R. Co., 9 A. 405, 407 (Del. Ct. Err. 1887));Phillips Home Builders, Inc. v. Travelers Ins. Co., 700 A.2d 127, 129 (1997) ("[I]f the relevant contract language is clear and unambiguous, courts must give the language its plain meaning"). While the meaning of "actual knowledge" has been loosely defined under Michigan law, see, e.g., Hudson v. O. A. Elec. Co-operative, Inc., 332 Mich. 713, 716, 52 N.W.2d 565, 567 (1952) ("Knowledge of facts putting a person or [sic] ordinary prudence on inquiry is equivalent to actual knowledge of the facts which a reasonably diligent inquiry would have disclosed.") (citing McDonald v. Robertson, 104 F.2d 945, 948 (6th Cir. 1939) ("Knowledge of facts putting a person of ordinary prudence on inquiry is the equivalent of actual knowledge and if one has sufficient information to lead him to a fact, he is deemed conversant therewith . . .")), there is no indication that Delaware takes a similarly broad approach. The Court is thus bound to strictly construe "actual knowledge" to its plain meaning. Alpine Inv. Partners v. LJM2 Capital Mgmt., L.P., 794 A.2d 1276, 1286 (Del.Ch. 2002). Accordingly, the Court does not interpret "actual knowledge" to include inquiry under Delaware law.
D. Appropriateness of Summary Judgment Based on a Party's Knowledge
In its Brief in Opposition to Plaintiff's Motion for Partial Summary Judgment, MMI asserts that this case is not appropriate for summary judgment because the facts involving knowledge of the parties are unclear at this pre-discovery stage. (Def.'s Br. Opp'n Pl.'s Mot. Partial Summ. J. at 22-24.) MMI primarily relies on the Court of Chancery of Delaware's opinion in Turner v. Bernstein, 776 A.2d 530 (Del.Ch. 2000).
The issue presented in Turner was whether shareholders could bring suit against their board of directors for failing to provide material information prior to the shareholders' approval of a merger. Id. at 531. The case turned on the shareholders' knowledge of critical aspects of the merger at the time of the approval vote. Id. The Turner court stated that summary judgment is inappropriate if "it is more desirable to inquire into or develop more thoroughly the facts in order to clarify application of the law to the circumstances." Id. at 537. It concluded that since there was "sufficient reason to doubt the plaintiffs' profession of ignorance of [the corporation's] pre-merger financial condition," summary judgment was inappropriate prior to conducting discovery. Id. ("Further discovery is needed to flesh out what specific facts the plaintiffs knew or had available to them when they decided to accept the merger consideration."). The court only reached the question of summary judgment after the record was further developed. Id. at 543.
MMI argues by analogy that the factual record in this case is similarly undeveloped prior to discovery. However, MMI does not point to any specific instances in which discovery is needed to clarify the record before the Court, and MMI has failed to file a Rule 56(f) affidavit attesting to its ability to prove material facts that are not presently on the record. Thus, the applicability of the Turner case hinges on the Court finding that the facts set forth below are insufficient to determine the question of "actual knowledge."
E. The Counterclaim 1. Paragraph 25: Deferred Taxes
Paragraph 25 of the Counterclaim relates to MMI's allegation that DRS created a "new category for deferred taxes, for which there is no historical precedent," and is contrary to the Generally Accepted Accounting Principles required by Paragraph 2(b)(iii).
At issue is a document titled "Balance Sheet as of 07/30/00," in which DRS lists "Deferred Tax Assets" for the first time. (Pl. Mot. for Partial Summ. J. at Ex. K.) The "Balance Sheet as of 07/30/00" was telefaxed to MMI's President, Maxwell Schwartz ("Schwartz"), on August 29, 2000. (Id.) It is undisputed that MMI received the facsimile before closing. (Def.'s Br. Opp'n Pl.'s Mot. Partial Summ. J. at 4.) However, MMI disputes DRS' Secretary, Richard A. Schneider's ("Schneider"), claim that Schwartz discussed the deferred tax information with him and requested the information provided in the "Balance Sheet as of 07/30/00" before closing. (Schneider Aff. ¶ 12, Pl.'s Mot. Partial Summ. J.; Def.'s Br. Opp'n Pl.'s Mot. Partial Summ. J. at 4.) While it is unclear whether MMI relied on the "Balance Sheet as of 07/30/00" in deciding whether to close, it is undisputed that MMI received the document and had actual knowledge of the document's existence within the time frame specified in Section 3(c).
MMI's actual knowledge of the document does not necessarily equate to knowledge that the tax "asset" was actually a liability. DRS' listing deferred taxes as assets may have been misleading. Therefore, there are genuine issues of material fact about whether the "Deferred Tax Asset" gave MMI actual knowledge of the accruing tax liability. Therefore, summary judgment on Paragraph 25 will be denied.
Paragraph 26: Bulgarian Property
In Paragraph 26 of the Counterclaim, MMI alleges that "[t]he financial statements of Plaintiff included a real estate asset which it valued at [$307,930.00], despite the fact that DRS's senior management knew was vacant, and had been vacant and unused for a period approximating ten (10) years . . . ." Section 4(j) of the SPA, entitled "Title to Real Property," states that "Schedule 4(j) sets forth a complete list of all real property." Schedule 4(j)(A) lists the property DRS owned in Bulgaria. It states that it is:
Comprised of:
Land: Main production complex — 160,000 sq. ft.
Extension — 322,000 sq. ft.
Buildings: Main production complex — 108,000 sq. ft.
Extension — 130,000 sq. ft.
(SPA, Schedule 4(j)(A).)
During the due diligence period, Schwartz traveled to Bulgaria to inspect the property. (Am. Schwartz Aff. ¶¶ 20-28.) Schwartz claims that his tour of the property included only the eight-buildings comprising the main production complex and that he was told by DRS officers that these eight buildings constituted all of DRS' property in Bulgaria. (Id. ¶ 23.) On a subsequent visit following the closing, Schwartz states that he was informed of additional DRS property located outside of the main production complex. (Id. ¶ 26-27.) The additional property consisted of a "worthless," "half-shell" building ("the Building") that MMI claims DRS represented as "construction in progress," despite the building's clear abandonment. MMI thus contends that it did not have actual knowledge of the existence of the Building prior to closing.
DRS states that it did not list the Building as "construction in progress"; rather that listing represented "improvements to buildings at the Bulgarian facility." (Pl.'s Br. Supp. Mot. Partial Summ. J. at 2.) It asserts that the Building is the "extension" listed in Schedule 4(j), while the eight-building complex is the "main production complex." DRS also points out that when Schwartz toured DRS' Bulgarian property, he had access to the facility's records and the opportunity to observe the condition of the buildings. (Id. at 2-3.) DRS thus claims that MMI had actual knowledge of the Building prior to closing and is prohibited by Section 3(c) from raising the issue.
MMI's argument is rejected because it amounts to an ostrich defense. It is undisputed that Schedule 4(j) was included in the SPA, and that Schedule 4(j) contained explicit references to the "extension" property. MMI's officers and attorneys, including Schwartz, presumably read (or should have read) the entire SPA prior to signing it. MMI's argument regarding this extension realty is also inconsistent with MMI's argument that actual knowledge extended to, and only to, those items specifically listed within the four corners of the SPA. Here, the Building was listed, and MMI had actual knowledge of this fact.
The Court need not determine whether DRS intended to list the Building or general facility improvements as "construction in progress" when determining whether there are genuine issues of material fact in dispute, because this issue turns on MMI's knowledge of the building's existence. The heart of MMI's claim is a lack of knowledge at closing that the Building existed. Since this argument fails in light of the facts discussed above, summary judgment is appropriate on Paragraph 26.
3. Paragraphs 27 through 33: Privatization Agreement
Paragraphs 27 through 33 of the Counterclaim relate to MMI's allegations that DRS breached a warranty regarding performance of a Privatization Agreement with the government of Bulgaria. MMI alleges that DRS failed to provide sufficient financial investment to satisfy the Privatization Agreement, which mandated that DRS invest over $2 million in its Bulgarian operation over five years. Specifically, MMI claims that DRS officers assured Schwartz that the Bulgarian government would accept DRS' "pre-payment" of a portion of the outstanding investment amount for the year following the closing. The Bulgarian government, however, rejected DRS' computation of its investment requirements and refused to accept the payment. MMI seeks indemnification for the outstanding amount.
Initially, MMI asserted that DRS' Bulgarian legal counsel had assured MMI that "DRS had fully discharged its financial obligation under the Privatization Agreement." (Def.'s Br. Opp'n Pl.'s Mot. Partial Summ. J. at 6.) MMI claimed that Schwartz relied on a letter from DRS' Bulgarian counsel ("the Letter") that attested that DRS' obligation was satisfied. (Id. Ex. D.) DRS countered these assertions by pointing out that the Letter contained no such assurance, and that numerous correspondences evidence that Schwartz was fully aware of that fact prior to closing. (Pl.'s Br. Supp. Mot. Partial Summ. J. at 3-4.) For example, a letter from MMI's counsel to DRS's counsel, which was copied to Schwartz before closing, stated:
I also understand that it is the position of DRS Precision Echo, Inc., that the total investment required by the Privatization Agreement has been completed and that the Bulgarian government is totally satisfied that this is the case. If this is true, that I would like to see that included as part of Mr. Boyanov's Opinion letter. If it is there , I do not see it.
(Letter from Rollinger to Dunn of 7/20/00 at 1, Schneider Aff. Ex. C.) Additional correspondences written by Schwartz show that neither DRS' American nor Bulgarian counsel provided any definitive assurance that DRS' total obligation was satisfied or that the Bulgarian government had indicated that the obligation was satisfied. For example, in an e-mail dated July 27, 2000, that Schwartz sent to MMI's Bulgarian counsel, Schwartz stated:
2. DRS informs me that by law the Boyanov firm is unable to opine to DRS' fulfillment of its investment obligations required by the Privatization Agreement beyond that which was required through 12/31/99.
(E-mail from Schwartz to Shalamanova of 7/27/00, Schneider Aff. Ex. E.) Additionally, in a letter dated July 27, 2000, Schwartz wrote to a DRS employee that:
You were absolutely right about what the Boyanov firm can and cannot opine to as regards the investment obligation required by the Privatization Agreement. Accordingly, will you please ask counsel to opine as to the amount of the investment required through 12/31/99 and the satisfaction of that requirement?
(Letter from Schwartz to Stern of 7/27/00, Schneider Aff. Ex. F.)
While it is thus evident that MMI had actual knowledge that the Boyanov firm would not provide its opinion on this issue, this does not equate to MMI's actual knowledge that DRS' obligations were unsatisfied. Simply stated, knowledge of a potential discrepancy falls short of knowledge of an actual discrepancy. Since the Court must construe the facts in the light most favorable to MMI, the non-moving party, the Court cannot reach a conclusion that MMI had actual knowledge of DRS' deficient Bulgarian investment prior to closing. MMI contends that it received assurances from "several DRS representatives and counsel" that the Bulgarian government had accepted the "pre-payment." (Schwartz Aff. ¶¶ 33-34.) The absence of the Boyanov opinion letter does not squarely contradict these allegations. Accordingly, summary judgment will not be entered on Paragraphs 27 through 33 of the Counterclaim.
4. Paragraph 34: VAT Lien
Paragraph 34 of the Counterclaim relates to MMI's allegation that DRS breached a warranty of no liens or encumbrances because of an alleged customs lien ("VAT lien") against the Bulgarian facility. MMI alleges that "the Government of Bulgaria has continued through its customs authority to require of MMI that it hold the sum of [$31,672.00] to guarantee customs duties associated with the manufacturing process occurring at the Razlog Bulgaria facility." (Def.'s Countercl. ¶ 34.) MMI seeks to recover this amount from DRS.
MMI initially asserted that it was unaware of the VAT lien prior to closing. (Schwartz Aff. ¶ 37.) However, MMI later recanted most of its broad allegations in the face of clearly contradictory e-mail evidence, much like it did for its original allegations regarding the Privatization Agreement. DRS offered multiple messages, which documented that MMI had actual knowledge of the VAT lien issue prior to closing. For example, in an e-mail dated July 23, 2000, to DRS, Schwartz stated:
14. My Bulgarian counsel advises me as follows
. . .
c. Certain assets of DRS Bulgaria have been encumbered to protect the government against the loss of VAT, duties and other charges . . .
(E-mail from Schwartz to Stern of 7/23/00, Schneider Aff. Ex. D). Additionally, Schwartz stated in an e-mail dated July 27, 2000, to MMI's Bulgarian counsel that:
1. DRS informs me that the equipment lien of the government to secure them for VAT, duties and other charges is, in and of itself, not a lien which would, barring any other circumstances, prevent a bank in Bulgaria from lending money secured by those assets. . . . Is the lien automatically discharged or does the company have to take some action to achieve the discharge?
(E-mail from Schwartz to Shalamanova of 7/27/00.) The VAT lien is also extensively detailed in other e-mails and the opinion letter from DRS' Bulgarian counsel. (Letter from Schwartz to Stern of 7/27/00, Schneider Aff. Ex. F; Letter from Schwartz to Stern of 8/29/00, ¶ 2, Schneider Aff. Ex. G; Letter from Boyanov Co. to MMI of 8/29/00 ("Opinion Letter"), Schneider Aff. Ex. H.)
In the wake of this evidence, MMI admits that while it knew of the VAT lien issue, it justifiably relied on the SPA's contradictory calculations of DRS' working capital because MMI requested clarification from DRS and never received it. (Def.'s Br. Opp'n Pl.'s Mot. Summ. J. at 8.) MMI's assertion, however, fails under Section 3(c) since its admission of actual knowledge of the VAT lien issue is part-and-parcel of its claim. MMI cannot on one hand admit that it was aware of the calculation problem in the SPA, and on the other say it reasonably ignored them because DRS did not respond to their requests for clarification prior to closing. Schwartz testified that DRS told MMI that the VAT liens were a "non-issue." Since it had actual knowledge of the VAT lien issues prior to closing, MMI should have definitively clarified its concerns with DRS to avoid Section 3(c). Summary judgment is thus proper on Paragraph 34.
5. Paragraph 35: Three Lawsuits
Paragraph 35 of the Counterclaim relates to MMI's allegation that DRS breached a warranty of no lawsuits, (SPA § 4(m)), pending at the time of closing. MMI alleges that DRS failed to disclose three lawsuits. It does not, however, specify the lawsuits that DRS failed to disclose.
DRS admits that there were two labor related lawsuits pending against DRS Bulgaria prior to closing. (Pl.'s Br. Supp. Mot. Partial Summ. J. at 6-7.) However, it asserts that MMI had actual notice of these suits. It points to a July 23, 2000, e-mail that Schwartz sent to DRS that stated:
14. My Bulgarian counsel advises me as follows
. . .
h. DRS Bulgaria, contrary to what I have been informed, is engaged as the defendant in 2 labor related lawsuits.
(E-mail of 7/23/00 from Schwartz to Stern.) DRS also notes that a "Protokol" of documents provided to MMI during due diligence in July 2000 included "two summonses regarding labor disputes/suits." (Pl.'s Br. Supp. Mot. Partial Summ. J. at 7.)
MMI does not contest that it had notice of the lawsuits in July 2000. Rather, MMI contends that the opinion Letter sent by DRS' Bulgarian counsel on August 29, 2000, superceded its notice prior to closing. The Letter stated:
8. To the best of our knowledge, DRS Bulgaria is not involved in any pending or threatened litigation, arbitration or other proceedings, which may cause a material adverse change to the business or financial position of the said company . . . .
(Opinion Letter at 3.) DRS counters that the Letter only warranted that no material suits existed. DRS asserts that the two disclosed labor suits, and any other pending suits, were not material to the SPA.
Paragraph 35 presents a genuine issue of material fact. In Section 4(m), DRS warrants that there are no suits pending against it. While it is unclear to what suits MMI refers in Paragraph 35, it is evident that there were at least two suits pending against DRS at closing and that MMI was aware of them. The difficulty lies in determining whether the Letter supersedes MMI's earlier notice. The Letter does not state that the prior suits had been resolved, nor does it state that no suits are pending against DRS. However, there is nothing in the pleadings to indicate that the two acknowledged suits were immaterial to the SPA, or that Paragraph 35 is even referring to those suits since it states that there were "three (3) separate lawsuits" outstanding at closing. Thus, summary judgment will be denied on Paragraph 35.
6. Paragraphs 38-40: Outstanding Obligation to Litton
Paragraphs 38 through 40 of the Counterclaim relate to MMI's allegations that DRS breached a warranty of no customer obligations in excess of $100,000.00, (SPA § 4(l)(xiv)), because DRS had obligations to a customer in excess of $100,000.00. MMI identified the customer as Litton Marine Systems ("Litton") in its Brief in Opposition.
DRS acknowledges that it had a relationship with Litton. However, DRS contends that all obligations of the relationship were disclosed to MMI prior to closing. DRS provided Litton with a series of discounts on products and services to serve as credits against an informal claim by Litton that it had incurred certain expenses relating to past orders from DRS. MMI points to two documents which evidence DRS' obligations to Litton: (1) a February 8, 2000, letter from a DRS' vice-president, Dennis Charlesbois ("Charlesbois"), to Litton; and (2) undated minutes from a meeting between DRS and Litton. DRS counters that MMI had actual knowledge of the relationship, because in or about June 2000, Charlesbois arranged a meeting between Schwartz and Litton representatives in Bulgaria to discuss the discount program. Schwartz contests this account and claims he only learned of DRS' obligations to Litton after closing.
The only evidence on either side of this issue consists of contradictory affidavits offered by Schwartz and Charlesbois. Genuine and material issues of fact remain in dispute, such as whether the meeting in Bulgaria took place, how much information MMI received about the discount plan at the meeting, and how much additional information about Litton was disclosed by DRS during due diligence. Summary judgment will thus be denied on Paragraphs 38 through 40.
7. Paragraphs 41-43: ISO-Certification
Paragraphs 41 through 43 of the Counterclaim relate to MMI's allegations that DRS violated the SPA by not disclosing that it committed to at least one customer that the acquired company would become ISO-certified no later than March 2001.
DRS does not dispute that it assured Litton that the new company would become ISO-certified. It contends, however, that MMI had actual knowledge of the commitment prior to closing. Specifically, DRS claims that Charlesbois explained the commitment to Schwartz during their June meeting with Litton representatives in Bulgaria. Schwartz denies that he was notified of the commitment before closing, and he says that he only learned of it when Litton demanded the warranty issue be resolved.
Similar to Paragraphs 38 through 40, this issue comes down to contradictory statements in affidavits regarding material facts. Since there is no way to determine these issues of material fact at this stage, summary judgment will be denied on Paragraphs 41 through 43.
8. Paragraphs 44-47: Withholding Business Records
Paragraphs 44 through 47 of the Counterclaim relate to MMI's allegations that DRS wrongfully withheld business records following the closing in violation of Section 8(b). Specifically, MMI contends that DRS denied MMI access to DRS' internal computer system by refusing to give it a password needed to access the records.
MMI states that DRS provided MMI with a trial balance, which is a listing of all bookkeeping accounts and their balances. However, MMI claims that the information in the trial balance was unreliable. MMI says that DRS then refused its multiple attempts to clarify the data in violation of the SPA's sixty-day cooperation provisions. (SPA § 8(b).)
DRS states that it informed MMI that DRS operates its computer system under license from AFTEC and that the license precludes the use by third parties. DRS contends that it told Schwartz that MMI would not have access to DRS' computer system during an April 26, 2000, meeting at DRS' St. Croix Falls, Wisconsin facility. Further, DRS says that it discussed the issue with Schwartz on other occasions following the April meeting and provided Schwartz with a magnetic copy of all of the data. DRS thus asserts that MMI had knowledge of the condition in which it would receive the data prior to closing.
This issue again turns on conflicting statements in affidavits that are not supported by independent evidence in the record. There is no way to determine what Schwartz knew, and when he knew it, regarding DRS' computer systems. Summary judgment will thus be denied on Paragraphs 44 through 47.
9. Paragraphs 48-49: Customer Warranty Claim Reserves
Paragraphs 48 through 49 of the Counterclaim relate to MMI's allegations that DRS violated Section 4(p) by failing to provide any reserve for customer warranty claims in violation of generally accepted accounting practices and failing to disclose at least two outstanding customer complaints. DRS sold products to TEC, which in turn sold DRS' products to IBM. At some point prior to closing, IBM had expressed concern regarding the quality of the DRS products. Schwartz knew of this potential problem prior to closing, as evidenced by his July 23, 2000, e-mail to DRS, in which he stated: "I have again been informed that DRS Ahead is still encountering quality problems with the product being shipped to TEC/IBM, their largest customer." (E-mail from Schwartz to Stern of 7/23/00.)
MMI says Schwartz discussed this matter with IBM (presumably after the e-mail) and received assurances that the product control issues had been resolved satisfactorily. However, Schwartz contends that the problem was actually resolved by a off-the-books agreement made between DRS and TEC to issue credits against outstanding receivables. Since the agreement was never recorded in DRS' books, Schwartz claims he was never actually aware that it would directly reduce the amounts to be received by MMI on its TEC accounts. DRS did not address this agreement in its brief, and instead relies simply on Schwartz's awareness of the problem as evidenced by his e-mail.
There remain questions of material fact at issue on Paragraphs 48 through 49. For instance, if the off-the-books deal did occur, how much did Schwartz know about its ramifications on MMI's future profits? Thus, summary judgment will be denied.
10. Paragraphs 53-60: Wisconsin Environmental Response and Remediation Costs
Paragraphs 53 through 60 of the Counterclaim relate to MMI's allegation that DRS created hazardous substances at a facility in Minnesota (which MMI did not purchase) and moved the hazardous substances to a facility in Wisconsin (which MMI did purchase) in violation of the parties' Environmental Indemnification Agreement ("EIA"). This caused MMI to incur environmental response and remediation costs of approximately $10,000.00 in connection with the disposal of the hazardous substances located at the Wisconsin facility.
DRS acknowledges that the movement of the waste violated the SPA. However, it asserts that MMI had notice of the breach prior to closing since MMI had numerous chances to visit both sites and inspect DRS' books during due diligence. DRS points out that in the EIA, MMI "acknowledge[s] that it has had an opportunity to conduct, or to have others conduct, due diligence to its satisfaction." (EIA at 2, Schneider Aff. Ex. I .) MMI claims that it did not know about the transfers and DRS' officers failed to disclose them when Schwartz specifically asked about environmental issues. While DRS does not address this conspiracy allegation, it would presumably deny it.
This issue again turns almost exclusively on statements in affidavits. While it is evident that MMI agreed in the EIA that it had conducted due diligence to its satisfaction, its defense to summary judgment hinges on facts that were allegedly intentionally hidden from it during due diligence. Since these genuine issues of material fact remain in dispute, summary judgment will be denied on Paragraphs 53 through 60.
11. Paragraphs 61-67: Bulgaria Environmental Response and Remediation Costs
Paragraphs 61 through 67 of the Counterclaim relate to MMI's allegation that it is subject to environmental response and remediation costs resulting from DRS' breach of the EIA at its Razlog, Bulgaria facility.
MMI contends that, prior to closing, DRS did not disclose that the Bulgarian government was conducting an environmental audit/inspection at the Razlog facility. As a result of the inspections, MMI was forced to incur remediation and response costs and undertake alterations in the manufacturing process. MMI says that Schwartz made inquires to DRS regarding the environmental conditions at the facility and he was told that there were no problems. DRS counters that MMI had notice of the breach since it conducted extensive due diligence at the Bulgarian facility.
This issue is almost identical to that raised in Paragraphs 53 through 60. MMI is alleging that it had no knowledge of the environmental conditions at the Bulgarian facility prior to closing because DRS concealed its environmental records. Neither party offers evidence other than affidavits to support its allegations. Summary judgment will also be denied on Paragraphs 61 through 67 since genuine and material issues of fact remain.
III. Conclusion
For the foregoing reasons, the Court will grant in part and deny in part: (1) DRS' Motion for a Declaration That Defendant MMI Is Not Entitled to Arbitration or, Alternatively, Is Permitted Only Limited Arbitration; and (2) DRS' Motion for Partial Summary Judgment Regarding Section 3(c) of the SPA.
An Order consistent with this Opinion shall be entered.