Summary
In Harvey v. Dixie Graphics, Inc., 628 So.2d 113, 115-16 (La.App. 4th Cir. 1993), writ denied, 634 So.2d 380 (La. 1994), it was held that express warranties in a stock purchase agreement that the shares were "free and clear of all encumbrances of any nature" and that the business's tax returns had "been filed as required by law, and all taxes shown thereon [had] been paid when due" were breached by the seller because its income tax liability had not been discharged.
Summary of this case from Levin v. MayOpinion
No. 92-CA-1223.
November 30, 1993.
APPEAL FROM CIVIL DISTRICT COURT, PARISH OF ORLEANS, STATE OF LOUISIANA, HONORABLE RICHARD GARVEY, J.
Charles E. Hamilton, III, Galen S. Brown, Lamothe, Hamilton Odom, New Orleans, for defendant-appellant.
Robert E. Tarcza, G. Anthony Gelderman, III, New Orleans, for plaintiff-appellee.
Before BYRNES, CIACCIO and JONES, JJ.
In June of 1981 Theo H. Harvey, Jr. sold all of the outstanding stock of Harvey Press, Inc. to Dixie Graphics, Inc., a Tennessee corporation, for cash and other consideration including a promissory note in the amount of $1,500,000.00 pursuant to a stock purchase agreement.
Shortly thereafter Dixie found itself unable to make the payments due under the note. Dixie requested and Harvey granted concessions and extensions of the terms of payment.
When it became evident that Dixie would not be able to pay the installments due under the note, Harvey and Dixie negotiated a buy-back agreement whereby Harvey re-acquired all of the outstanding stock of Harvey Press, Inc. pursuant to a Stock Purchase Agreement dated November 19, 1982, annexed to this opinion as Exhibit A. The transaction was essentially a dation en paiment.
On November 22, 1982, Harvey sold and transferred all of the outstanding stock of Harvey Press, Inc. to Rebsamen Companies, Inc. The Stock Purchase Agreement between Harvey and Rebsamen dated November 22, 1982 contained certain warranties requiring Harvey to indemnify Rebsamen for losses it might sustain as a result of the breach of any warranty given by Harvey or as a result of any undisclosed or contingent liability in excess of $10,000.00.
In July of 1984 Rebsamen notified Harvey that the Internal Revenue Service was examining the tax returns of Dixie and its present and former subsidiaries and was proposing certain adjustments that would create a large tax deficiency against Harvey Press, Inc.
Although Harvey vigorously contested the proposed assessment, in view of the apparent correctness of the claim of the Internal Revenue Service, the tax case was settled. Harvey Press, Inc. paid a tax deficiency of $91,542.00 plus interest of $85,682 and Rebsamen called Theo Harvey in warranty for reimbursement of these sums. Harvey paid Rebsamen, received a conventional subrogation, and made demand upon Dixie for reimbursement of the tax assessment, interest and legal and accounting fees of $31,000.00, claiming that Dixie was liable for those amounts under the terms of the November 19, 1982 Stock Purchase Agreement.
Dixie denied liability. Harvey sued on June 15, 1987, the case was tried in November of 1991 and judgment was rendered on January 14, 1992 in favor of Theo D. Harvey, Jr. and against Dixie Graphics, Inc. in the amount of $208,233.98. Dixie filed a suspensive appeal and Harvey answered the appeal asking for attorney fees and expenses of the trial.
The tax assessment resulted from the action of the Internal Revenue Service disallowing a loss claimed on the tax return of Harvey Press while it was owned by Dixie. Shortly after Dixie had purchased Harvey Press several hundred thousand dollars were withdrawn from Harvey Press and approximately $450,000 was placed in a pooled bank account of several interrelated companies. These funds were never repaid to Harvey Press. When the 1981 tax return was filed for Harvey Press as part of a consolidated return the cash funds that had been taken from Harvey Press and not repaid were claimed as a loss, resulting in a loss carry-back and a claim for refund for prior tax years when Harvey Press had been profitable. When the returns were audited the loss was disallowed because the Internal Revenue Service claimed the deduction was in violation of the income tax laws and regulations, resulting in the tax assessment ultimately paid by Harvey. The correctness of the assessment is not raised as a defense in this litigation.
On appeal Dixie urges that the trial court erred by basing its holding on a warranty not contained in the stock purchase agreement and by misinterpreting the specific warranties contained in the agreement. Dixie further urges that the trial court erred in finding that Dixie had actual knowledge of the undisclosed tax liability.
We define the issues in this appeal to be two-fold:
1) Does the language of the stock purchase agreement make Dixie liable to indemnify Harvey for an undisclosed tax liability;
2) If the agreement is silent or ambiguous regarding a contingent or unknown tax liability, who should bear the risk of loss.
At the outset we find that the trial court erred in excluding plaintiff's claim for relief under the provisions of Section 3E of the contract.
Our Code of Civil Procedure provides for fact pleading and does not require the petition to allege the theory of the case. C.C.P. Art. 862 requires the court to grant any relief to which the party is entitled even if such relief was not demanded in the pleadings.
Plaintiff's suit alleged breach of the purchase agreement contract and a claim for indemnification for the loss sustained by Harvey. The allegations of plaintiff's petition were broad enough to allow the introduction of evidence to prove the breach of any warranty or provision of the contract. The entire contract was offered in evidence and the trial judge permitted the introduction of evidence on all facets of the agreement. Although the trial judge apparently believed he was limited to granting relief under the provisions of Section 3D and focused his reasons for judgment on the actual knowledge of the seller, we find additional grounds to affirm and we are not limited to the reasons given by the trial judge.
The trial court gave the following reasons for judgment:
Harvey repurchased the stock of Harvey Press from Dixie on November 19, 1982. This was accomplished by a Stock Purchase Agreement. After repurchase, Harvey sold the stock to Rebsamen with warranties.
The I.R.S., after an audit of the tax returns, charged Harvey Press with taxes and interest. Mr. Harvey paid to Harvey Press the sum of $177,233.98 including interest and accumulated a bill for professional fees of $31,000.00 in this transaction.
Mr. Harvey now sues Dixie under this Stock Purchase Agreement for this sum plus the costs of this litigation.
In the Stock Purchase Agreement, Dixie agreed to hold Mr. Harvey harmless for any breach of warranty on the part of Dixie.
The court finds that Dixie had actual knowledge of the problems with the tax returns which were filed and thereby had actual knowledge that the tax returns were not filed as required by law.
The trial court made a finding of fact that Dixie had actual knowledge that the tax returns were not filed as required by law. Our review of the testimony and exhibits offered in evidence supports this finding.
Plaintiff offered the testimony of Joseph Murphy, C.P.A., an experienced tax practitioner, who stated that the deductions which produced the tax loss on the Harvey Press tax return were clearly in violation of the Internal Revenue Code and should not have been claimed. He further testified that the I.R.S. was correct in disallowing the deductions and in making the assessment.
The trial judge apparently concluded that Dixie knew or should have known that these deductions would result in a later assessment. This conclusion was supported by the chain of events beginning with the tax bill of $135,189.59 sent Harvey Press by the I.R.S. on April 26, 1982, the granting of a power of attorney to Dixie's C.P.A. to handle this matter with the I.R.S., and the absence of any documentation to prove that this tax matter had been conclusively resolved in Dixie's favor.
Lengthy testimony was offered by accountants, lawyers, and representatives of plaintiff and defendant. Some of the testimony was contradictory and the actions of defendant's representatives were subject to more than one interpretation. The trial court apparently weighed the testimony of the experts and of the other witnesses and made a credibility call in plaintiff's favor. We cannot say he was clearly wrong.
We find that the judgment of the trial court was correct for other reasons.
The stock purchase agreement expresses the following warranties:
1.
Sale of Stock
. . . Seller agrees to transfer . . . to the Purchaser, . . . 100% of the outstanding shares of capital stock of the Company, all of such shares to be free of liens and encumbrances of any nature, all of which shares of stock are owned by the Seller.
2.
Closing and Effective Date
A. . . . At the Closing, the Seller shall deliver to the Purchaser, free and clear of all encumbrances, certificates for all of the outstanding shares of the Company's stock . . .
3.
Seller's Representations and Warranties
C. Ownership of Capital Stock of the Company. The Seller is the owner, free and clear of any encumbrances . . . 223 shares of the Company's outstanding stock, representing all of the issued and outstanding stock of the Company.
D. Absence of Undisclosed Liabilities; Financial Statements. As of the Balance Sheet date, July 31, 1982, the Seller has no actual knowledge of any undisclosed liabilities of any nature, whether accrued, absolute, contingent or otherwise, against the Company which are not disclosed on the financial statements and which exceed $10,000 in the aggregate including, without implied limitation, all Federal, State, County and municipal tax liabilities due or to become due. The audited balance sheet of the Company as of July 31, 1982 and related statements . . . do not omit to state any material liability (contingent or otherwise) or other fact necessary to be set forth therein to make such balance sheet and income statements not misleading. . .
E. Tax Returns. The Company's tax returns have been filed as required by law, and all taxes shown thereon have been paid when due
O. Accuracy of Statements. No representation or warranty of the Seller in this Agreement nor any document, statement, or certificate furnished or to be furnished to the Purchaser pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained therein not misleading.
A fair reading of the entire document leads to the inescapable conclusion that Harvey was purchasing the stock with a clear understanding that the stock was free and clear of all liens and encumbrances of any nature. The income tax assessment would have matured into a lien against the assets of Harvey Press, Inc. had it not been paid prior to the lien being imposed. All of the representations made by the Seller that the shares of stock were free and clear of all liens would have been breached by the imposition of the tax lien, and Harvey would have been entitled to reimbursement of any amount paid to extinguish the tax assessment.
Section 3E warrants that the tax returns "have been filed as required by law, and all taxes shown thereon have been paid when due." Appellant urges that this language merely asserts that the appropriate return was timely filed and payment made in accordance with the return, regardless of the correctness of the return and irrespective of future audits. We disagree.
The tax liability does not arise from the filing of the return but arises by operation of the income tax laws and regulations as applied to the income earned by the taxpayer during the reporting period. The return is merely the taxpayer's declaration of its understanding of its tax obligation. Payment of the tax declared on the return may or may not be correct and is always subject to review, audit and assessment.
The words of a contract must be given their generally prevailing meaning. La.C.C. Art. 2047. Payment of taxes means the delivery of money to the I.R.S. for the purpose of extinguishing the tax obligation and results in the discharge of the tax debt. In other words, if the taxes have been paid the tax liability for the income reported on the return has been extinguished, discharged, closed, wiped-out and finished. This warranty was breached because the income tax obligation had not been discharged. The representation was, at best, mistaken, but, since it was unqualified, it did not depend upon Dixie's actual knowledge or good faith, and it was unnecessary for plaintiff to prove actual knowledge in order to obtain judgment for breach of this warranty. Accordingly, if Dixie relied in good faith on its C.P.A. and was unaware of this tax liability exposure when the purchase agreement was signed, its good faith would not relieve it of liability.
Finally, may the agreement be interpreted in such a way as to relieve Dixie of responsibility for this undisclosed or unknown liability, assuming, arguendo, that Dixie had no actual knowledge of the latent tax liability and was in good faith? We find no basis for such an interpretation.
Dixie offered testimony that it had no knowledge of the tax liability and had Section 3D reworded to include the actual knowledge language with regard to undisclosed liabilities. If Dixie had no knowledge that this tax matter was in dispute, the tax matter could not have been the basis for the language change. In fact, it is obvious from the testimony of Dixie's attorney that the language change was inserted to protect Dixie from any liabilities that may have arisen from the actions of Harvey during the period when he was operating the business prior to the actual closing of the sale.
Dixie urges that the provisions of Sec. 3D and 3E, when read together, require the "actual knowledge" language of Sec. 3D to be superimposed on Sec. 3E. If we construe the language to be in conflict or ambiguous, the ambiguity must be construed against Dixie, the Seller. La.C.C. Art. 2474.
If we declare the provisions to be doubtful we must look to the nature of the contract, equity, usages and the conduct of the parties. La.C.C. Art. 2053.
Harvey testified that he was purchasing the stock with the understanding that all prior taxes had been paid. Harvey did not create the tax liability — it arose from the actions of Dixie and its related companies while Dixie owned Harvey Press. Equity dictates that the loss should fall upon Dixie, not upon the innocent purchaser.
The Seller failed to make provisions in the language of the contract to exonerate itself from responsibility if there was an undisclosed liability that exceeded $10,000 and of which the Seller had no actual knowledge. Nowhere in the contract does any language appear that declares: "and if there are any undisclosed liabilities in excess of $10,000 of which the Seller has no actual knowledge, the Seller shall be relieved from responsibility and the Buyer shall have no claim for indemnification in respect thereto." Applying C.C. Art. 2054 to this fact situation we find that equity does not allow us to supply the missing verbiage to the contract in order to relieve Dixie of its responsibility.
The only way for Dixie to escape liability for this tax indebtedness would be to prove that Harvey had expressly waived the warranties which entitled him to reimbursement under the language of the contract and under the provisions of La.C.C. Art. 2476. We find no such language in the contract.
We further find that equity dictates that the absence of specific language waiving Harvey's rights in warranty be construed against Dixie. Civil Code Arts. 2474, 2053 and 2054. Accordingly, we find that Harvey did not waive his rights to call Dixie in warranty for this undisclosed tax liability.
Plaintiff answered the appeal seeking an award of additional attorney's fees. We decline to remand for this purpose. Appellee could have sought a rehearing at the trial level for the introduction of evidence and a ruling by the trial court. Absent the necessary evidence we are powerless to grant further relief.
For the foregoing reasons the judgment of the trial court is affirmed. Appellant is assessed for all costs of the trial and of this appeal.
AFFIRMED.
EXHIBIT "A"
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, entered into the 19th day of November, 1982, between Theo H. Harvey, Jr., a resident of Louisiana, hereinafter called "the Purchaser," Dixie Graphics, Inc., a Tennessee corporation, hereinafter called "the Seller," and Harvey Press, Inc., a Louisiana corporation, hereinafter called "the Company."
WHEREAS, the Seller is the owner of all of the issued and outstanding shares of the capital stock of the Company; and
WHEREAS, the Seller is willing and desires to sell such stock, and the Purchaser is ready, willing and able to buy all of such shares on the terms and subject to the obligations and conditions herein stated.
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows:
1.
SALE OF STOCK
Subject to the terms and conditions hereof, the Seller agrees to transfer and effectively convey and deliver at the Closing to the Purchaser, and the Purchaser will acquire from the Seller, 100% of the outstanding shares of capital stock of the Company, all of such shares to be free of liens and encumbrances of any nature, all of which shares of stock are owned by the Seller. In consideration for such shares, the Purchaser shall release a certain promissory note dated June 12, 1981 in the original principal amount of $1,500,000.00.
2.
CLOSING AND EFFECTIVE DATE
A. Subject to the fulfillment of all conditions and prerequisites set forth herein, the Closing shall take place in New Orleans, Louisiana, on the 19th day of November, 1982, or on such other date as may be mutually agreed upon between the parties. The sale will be effective as of the beginning of business on the first day of November, 1982. At the Closing, the Seller shall deliver to the Purchaser, free and clear of all encumbrances, certificates for all of the outstanding shares of the Company's stock referred to in Paragraph 1 in negotiable form, and all of the corporate records of the Company in Seller's possession. Upon such delivery, the Purchaser, subject to the terms and conditions set forth in this Purchase Agreement, shall release and deliver to the Seller the promissory note dated June 12, 1981 in the original principal amount of $1,500,000.00.
3.
SELLER'S REPRESENTATIONS AND WARRANTIES
The Seller represents and warrants to the Purchaser as follows:
A. Organization and Standing of the Company. The Company is, and will be at the Closing, a corporation duly organized, validly existing, and in good standing under the laws of the State of Louisiana and is duly and properly authorized and empowered to own its properties and to conduct its business in the places, and in the manner, in which its business is now, and will be on the Closing, conducted; the copies of the Company's Certificate of Incorporation and all amendments thereof to date, certified by the Secretary of State of Louisiana, and of the Company's By-Laws as amended to date, certified by the Company's Secretary, which have been delivered to the Purchaser, are complete and correct as of the date of this Purchase Agreement.
B. The Capitalization of the Company. The Company's issued and outstanding capital stock consists of 223 shares of common stock, all of which is owned by the Seller. All of the issued and outstanding shares of the Company's shares of common stock have been duly authorized and are validly issued, fully paid and nonassessable. There are no existing options, calls or other commitments of any nature relating to the Company's authorized or issued stock.
C. Ownership of Capital Stock of the Company. The Seller is the owner, free and clear of any encumbrances except for a pledge in favor of the Purchaser, of 223 shares of the Company's outstanding stock, representing all of the issued and outstanding stock of the Company.
D. Absence of Undisclosed Liabilities: Financial Statements. As of the Balance Sheet date, July 31, 1982, the Seller has no actual knowledge of any undisclosed liabilities of any nature, whether accrued, absolute, contingent or otherwise, against the Company which are not disclosed on the financial statements and which exceed $10,000 in the aggregate including, without implied limitation, all Federal, State, County and municipal tax liabilities due or to become due. The audited balance sheet of the Company as of July 31, 1982 and related statements, prepared by Main Hurdman have been previously identified and have been delivered or will be delivered to Purchaser and, to the best of Seller's knowledge, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, correctly set forth the financial condition of the Company at the date of said balance sheet, and do not omit to state any material liability (contingent or otherwise) or other fact necessary to be set forth therein to make such balance sheet and income statements not misleading, and are attached hereto as Exhibit A.
E. Tax Returns. The Company's tax returns have been filed as required by law, and all taxes shown thereon have been paid when due.
F. Absence of Certain Changes. Since July 31, 1982, the Seller has no actual knowledge of (i) any change in the financial condition, assets, liabilities or business of the Company other than changes in the ordinary course of business, none of which has been materially adverse except for the sale of the finishing line and sale, replacement and refinancing of the Chromoscope and scanner; (ii) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the property or business of the Company; (iii) any declaration of setting aside payment of any dividend or other distribution in respect of the capital stock of the Company, or any direct or indirect redemption purchase or other acquisition of such stock; (iv) any material increase in the compensation payable or to become payable by the Company to the director, officer, employee or agent, or any stock options, bonus payment or arrangement made to or with any of them, or any employee welfare, retirement or similar payment or arrangement made or agreed to by the Company except payments made pursuant to existing insurance plans; (v) any labor trouble; or (vi) any other event or condition of any character which has materially and adversely affected the business, properties or immediate prospects of the Company.
G. Labor and Employment Contracts. To the best of the Seller's knowledge, the Company has complied with all applicable Federal, State and municipal laws regarding employment of labor, including the provisions therof [thereof] relating to wages, hours, collective bargaining and the payment of Social Security taxes, and the Company as of July 31, 1982 was not liable for any arrears of wages or any tax or penalties for failure to comply with any of the foregoing.
H. Directors and Officers; Compensation, and Banks. The Company has delivered to Purchaser, marked for identification, a true and complete list showing (i) the names of all of the directors and officers of the Company.
I. Litigation. To the best of the Seller's knowledge there is no litigation or proceeding pending or threatened against or relating to the Company, its properties or its business which might materially and adversely affect such properties or business, nor is any basis known to exist for any such action or for any governmental investigation relative to the Company, its properties or its business.
J. Eminent Domain. To the best of the Seller's knowledge there are no eminent domain proceedings pending or threatened against any properties of the Company.
K. Court Orders, Decrees, Etc. To the best of the Seller's knowledge there is no outstanding order, writ, injunction, or decree of any court, government agency or arbitration tribunal against or materially affecting the Company or its properties or business.
L. Compliance with Laws. To the best of the Seller's knowledge the Company is in substantial compliance with all applicable laws, regulations and administrative orders of any state, municipality or sub-division of either to which it, its business, or its properties may be subject.
M. Execution and Performance of Purchase Agreement. The execution and performance by the Seller and the Company of this Purchase Agreement and the transactions contemplated hereby will not violate any provisions of, or result in the breach of, or constitute a default under, any law, or any order, writ, injunction or decree of any court, governmental agency or arbitration tribunal, or any contract, agreement, or instrument.
N. Corporate Records. The By-Laws, minute books and stock record book of the Company contain accurate, complete and correct copies of all such documents and of all minutes of meetings, resolutions and other proceedings of the Board of Directors and shareholders of the Company, duly executed by the Secretary or an Assistant Secretary or by all directors or all shareholders, as may be appropriate, and shall be complete and accurate as of the Closing Date.
O. Accuracy of Statements. No representation or warranty of the Seller in this Agreement nor any document, statement, or certificate furnished or to be furnished to the Purchaser pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained therein not misleading.
P. Absence of Illegal Payments. To the best of the Seller's knowledge neither the Seller nor the Company has offered, paid or agreed to pay, directly or indirectly, any money or anything of value to any individual who is an official or employee of any governmental agency, either federal, state, county or municipal, or any agency or instrumentality for the purpose of inducing that individual to use his or her influence to obtain or maintain business or any other benefit of the Company, nor has the Company or the Seller made any political payment or contribution in convention of law.
Q. No Duty of Investigation. All of the foregoing warranties made by the Seller that relate to the knowledge of the Seller are made without specific investigation of the circumstances relating to such warranties, and the reference in such warranties to the knowledge of the Seller shall not be deemed to impose a duty upon the Seller to undertake such an investigation.
4.
PURCHASER's REPRESENTATIONS AND WARRANTIES
The Purchaser hereby represents and warrants to the Seller that no change, whether by recharacterization, reclassification or otherwise, shall be made with respect to any item shown on the audited balance sheet of the Company as of July 31, 1982, and statements related thereto, prepared by Main Hurdman, Certified Public Accountants.
5.
CONDUCT OF BUSINESS OF THE COMPANY PENDING CLOSING
The Seller covenants that pending the Closing, except as otherwise consented to by the Purchaser:
A. The business of the Company will be conducted only in ordinary course;
B. No change will be made in the Certificate of Incorporation or By-Laws of the Company;
C. No change will be made in the authorized or issued capital stock of the Company;
D. No dividend or other distribution or payment shall be declared or made in respect of the capital stock of the Company;
E. No increase will be made in the compensation payable to or to become payable by the Company to any of its directors, officers, employees or agents, nor shall any stock options, bonus payments or other benefits be granted;
F. No contract or commitment will be entered into by or on behalf of the Company except in the ordinary course of business;
G. No indebtedness for borrowed money will be created, assumed or incurred by the Company.
H. No sale, transfer or other disposition, and no mortgage, pledge or other encumbrance, of any assets, will be made or entered into by or on behalf of the Company except in the ordinary course of business;
I. No change will be made with respect to the management and supervisory personnel or banking arrangements of the Company.
J. Company will use its best efforts to keep intact the organization of the Company, to keep available the services of its present officers and employees, and to preserve the good will of its suppliers, customers and others having business relations with the Company;
K. The Company will promptly file all required income tax returns and will promptly pay all federal, state and local tax assessments and governmental charges lawfully levied or assessed upon it or upon its properties or upon any part thereof
6.
ACCESS AND INFORMATION
The Seller warrants that the Company will permit the Purchaser, its counsel, accountants and other representatives to have full access, during normal business hours, throughout the period prior to the Closing, to all of the properties, books, leases, contracts, commitments and records of any and every kind of the Company and shall cause to be furnished to the Purchaser and its representatives during such period all such information concerning the affairs of the Company as the Purchaser or its representatives may reasonably request, and shall make available such personnel as the Purchaser may reasonably request for the furnishing of such information. The Purchaser hereby agrees that, following the Closing, it will give to the Seller and to its counsel and accountants, during normal business hours, full access to the Company's books, records and other data delivered to the Purchaser to the extent that such access may reasonably be required to facilitate the preparation by the Seller of such tax returns as it may be required to file and the investigation, litigation and final disposition of any claims which may be made against the Company.
7.
CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS HEREUNDER
All obligations of the Purchaser and the Company to be discharged under this Purchase Agreement at the Closing are subject to the fulfillment, prior to or at the Closing, of each of the following conditions unless expressly waived in writing by the Purchaser at any time prior to the Closing:
A. Representations and Warranties True When Made. All of the representations and warranties made by the Seller in Paragraph 3 hereof shall be true as of the date of this Purchase Agreement.
B. Representations and Warranties True at Closing. The representations and warranties of Seller contained in this Purchase Agreement shall be deemed to have been made again at the time of Closing, and shall then be true in all material aspects; the Seller shall have caused all agreements and conditions required by this Purchase Agreement to be performed or complied with by him prior to or at the Closing to be so performed or complied with.
C. Opinion of Counsel. The Purchaser shall have been furnished with an opinion of Thomas J. Sherrard, attorney-at-law, in form and substance satisfactory to the Purchaser, dated the Closing, to the effect that:
(1) This Purchase Agreement has been duly executed and delivered by the Seller; and it constitutes the valid and binding obligation of the Seller in accordance with its terms.
(2) The Seller has complete and unrestricted power to sell, convey, transfer and deliver to the Purchaser at the Closing all of the capital stock of the Company to be vested in the Purchaser by virtue of this Purchase Agreement.
(3) The shares of the Company's common stock delivered to the Purchaser and the Company by the Seller at the Closing hereunder are, to the best of counsel's knowledge, free and clear of encumbrances except for the pledge in favor of the Purchaser, represent all of the outstanding shares of capital stock of the Company and are in the requisite negotiable form and with all requisite stock transfer stamps attached, to effectively transfer all of the Seller's right, title and interest in such capital stock of the Company.
D. Supplemental Exhibits. The Seller shall have delivered to the Purchaser such supplements to the exhibits and other documents furnished to the Purchaser by the terms of this Purchase Agreement as may be necessary to reflect the changes required to make such exhibits and documents accurate as of the Closing.
E. Permits and Approvals. The Seller has received all permits and approvals from any and all governmental agencies having jurisdiction which in the judgment of the Purchaser are necessary for the consummation of the transactions contemplated by this Purchase Agreement.
8.
INDEMNIFICATION
Seller agrees to reimburse and save Purchaser and the Company harmless from any loss, costs or expense payable to or for the benefit of or asserted by any person, resulting from or arising out of, or incurred with respect any of the following:
A. Any and all damages or deficiencies resulting from any misrepresentation, breach of warranty, or nonfulfillment of any agreement on the part of the Seller under this Agreement or from any misrepresentations in or omission from any certificate or other instrument furnished or to be furnished to the Purchaser pursuant to this Agreement or in connection with the transactions contemplated hereby.
B. Any and all actions, suits, proceedings, demands, assessments, judgments, costs and expeneses [expenses] incident to any of the foregoing; provided, however, that in the event any liability of the Seller shall arise under the terms of the indemnification granted hereby or by virtue of any warranty, representation or covenant stated or provided for under the terms of this Agreement, the Purchaser shall give to the Seller written notice thereof and the Seller will thereupon within 20 days following the receipt of such notice, either settle such liability or liabilities by joint action with the Purchaser, or undertake to defend such claim or claims jointly with the Purchaser. In the event of the failure of the Seller to undertake to settle or jointly defend against said liability or liabilities within the time specified, the Purchaser may settle said liability and the claim of the Purchaser against the Seller to the extent provided by the terms of this Agreement shall be conclusively established by such settlement.
C. Any and all actions, suits, proceedings, demands, assessments, judgments, costs and expenses relating to the Company's involvement in any bankruptcy proceedings, including, without limitation, a certain Adversary Proceeding No. 381-0574 in the United States Bankruptcy Court for the Middle District of Tennessee, Nashville Division, in which the Trustee in Bankruptcy for H S Transportation Company, Inc. has alleged that the assets of the Company should be applied to the bankruptcy estate to satisfy the creditors of the estate by virtue of the Company's involvement in a certain cash account at Citizens Bank of Hendersonville, Tennessee, denominated as the "JWA Master Account;" provided that the Company, in consideration of the foregoing promise of indemnification, hereby assigns to the Seller all of the Company's rights arising out of the aforesaid JWA Master Account or in anywise relating to the aforesaid bankruptcy proceeding or any other bankruptcy or reorganization proceedings relating thereto.
9.
SURVIVAL OF COVENANTS AND WARRANTIES
The representations, warranties and agreements made by the Seller, except as they may be fully performed prior to or contemporaneously with the Closing, shall survive the Closing and shall be fully enforceable at law or in equity by the Purchaser or the Company, their successors and assigns.
10.
MISCELLANEOUS
A. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been fully given if delivered or mailed, first class, postage prepaid:
(a) If to the Purchaser to:
Theo H. Harvey, Jr. Harvey Press, Inc. 3632 Desire Parkway New Orleans, LA 70126
with a copy to:
Steven O. Medo, Jr. Mars Medo 210 Baronne Street New Orleans, LA 70112
(b) If to the Seller to:
James R. Meadows, Jr. Dixie Graphics, Inc. P.O. Box 1290 Nashville, TN 37202
with a copy to:
Thomas J. Sherrard O'Hare, Sherrard Roe 500 Church Street Nashville, TN 37219
B. Amendments. This Purchase Agreement may be amended or modified by, and only by, a written instrument executed by the Purchaser, the Seller and the Company.
C. No Brokers. The Seller and the Purchaser agree that no third person has in any way brought the parties together or been instrumental in making this Purchase Agreement. Accordingly, the Seller and the Purchaser agree to indemnify each other against any claim by any third person for any commission, brokerage, finder's fee or other payment.
D. Parties in Interest. This Purchase Agreement shall inure to the benefit of and be binding upon the Purchaser, the Seller, and the Company and their respective successors, heirs and assigns. This Purchase Agreement shall not be assigned by any party thereto except upon the written consent of the other parties. Nothing in this Purchase Agreement, express or implied, is intended to confer upon any other person any rights or remedies under or by reason of this Purchase Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Purchase Agreement as of the day and year first above written.
SELLER: DIXIE GRAPHICS, INC. By: [Signature] PURCHASER: /s/ Theo H. Harvey, Jr. Theo H. Harvey, Jr. COMPANY: HARVEY PRESS, INC. By: [Signature] President
I respectfully dissent. On November 19, 1982, Mr. Harvey repurchased from Dixie Graphics all of the stock of Harvey Press, Inc. Three days later in a related transaction Mr. Harvey sold the stock to Rebsamen Industries Inc. Mr. Harvey previously owned the stock and had sold it to Dixie Graphics in 1981. Because of financial problems, Mr. Harvey had difficulty receiving all payments due him in connection with the sale. He was, therefore, placed back in substantial control of the business for several months pending the repurchase. He employed his own firm of accountants to examine the books and records of Harvey Press before the repurchase. This process is known in the field of commercial transactions as due diligence. His accounting firm determined the scope of the audit. No request the auditors made for information was refused.
Subsequent to Mr. Harvey's repurchase of Harvey Press and resale to Rebsamen Industries the I.R.S. disallowed a large portion of the bad debt deductions taken by Harvey Press for the tax year ending October 31, 1981. Based upon the unqualified warranties in his sale to Rebsamen, Mr. Harvey was required to pay this tax liability of $91,542.00 in taxes and $85,681.98 in interest. The trial court ordered these sums plus $31,000.00 for professional fees be paid by Dixie to Mr. Harvey pursuant to the trial court's finding that Dixie had actual knowledge of the tax liability at the time it sold Harvey Press to Mr. Harvey which was a violation of warranties contained in the sales contract.
I. SELLER'S REPRESENTATIONS AND WARRANTIES
There appear to be no cases applying the rules of quanti minoris and redhibition to the sale of incorporeals such as was involved in the instant case but LSA-C.C. art. 2475 provides that: "The seller is bound to two principal obligations, that of delivering and that of warranting the thing which he sells." [Emphasis added] LSA-C.C. art. 2476 provides that: "The warranty respecting the seller has two objects: the first is the buyer's peaceable possession of the things sold, and the second is the hidden defects of the thing sold or its redhibitory vices." [Emphasis added] The language of these articles appear to apply to all sales generally. Their position at the beginning of that chapter of the Civil Code entitled "Chapter 6 — Of The Obligations of The Seller" implies general applicability. Placed as they are at the outset of this chapter prior to the numbered and titled sections within the chapter, it appears that they were intended for general application throughout the chapter. Sales include incorporeals such as the stock in Harvey Press. LSA-C.C. art. 2449. Therefore, one could conceivably infer from the structure of "Title VII — OF Sale" of the Civil Code that LSA-C.C. arts. 2520-2548 dealing with the redhibitory action and quanti minoris apply to the sale of incorporeals such as the stock in Harvey Press that Dixie sold to Harvey. Consequently the tax liability of Harvey Press which was unknown to Mr. Harvey when he bought the company was a latent defect or vice as defined by LSA-C.C. arts. 2520 and 2523 of the type that would give rise to an action for a reduction of price pursuant to LSA-C.C. arts. 2541-2544. Although the parties have never referred to this as an action in redhibition or quanti minoris, if those concepts do apply Mr. Harvey's pleadings could be given that effect. American Insurance Co. v. Hartford Acc. Indem. Co., 198 So.2d 757, 763 (La.App. 1 Cir. 1967) application not considered 250 La. 735, 199 So.2d 179 (La. 1967); writ refused 251 La. 26, 202 So.2d 649 (La. 1967). Mr. Harvey's claim under these articles would survive his sale to Rebsamen Industries, Inc. LSA-C.C. art. 2503; McKneely v. Don Coleman Const. Co. Inc., 441 So.2d 497 (La.App. 2 Cir. 1983). However, legal warranty against latent defects may be waived or modified. LSA-C.C. art. 2503; McKneely, supra. The question then becomes: Did the "Stock Purchase Agreement" contain language sufficient to constitute a waiver or modification? By viewing this as an action in redhibition or quanti minoris this Court would be taking the position most favorable to Mr. Harvey. Mr. Harvey would be entitled to the warranty against redhibitory vices unless expressly waived. Tuttle v. Lowrey Chevrolet, Inc., 424 So.2d 1258, 1260 (La.App. 3 Cir. 1982). Regardless of the fact that the parties referred to certain provisions in the agreement as warranties or representations, the legal effect of those provisions that are at issue in this litigation would be those of limitation, modification, or partial waiver of the legal warranty implicit in all sales. LSA-C.C. art. 2503. The best explanation of the rules governing waiver of the seller's legal warranty against hidden defects contained in LSA-C.C. art. 2476 is found in Thibodeaux v. Meaux's Auto Sales, Inc., 364 So.2d 1370, 1371 (La.App. 3 Cir. 1978): It is well established that, for a waiver of warranty to be effective, three requirements must be met: "(1) The waiver must be written in clear and unambiguous terms; "(2) The waiver must be contained in the sale document; and "(3) The waiver must either be brought to the attention of the buyer or explained to him." Hendricks v. Horseless Carriage, Inc., 332 So.2d 892 (La.App. 2nd Cir. 1976). The waiver in the instant case meets all three of these requirements: it was unquestionably contained in the sale document; it was clear and unambiguous; and it was brought to the attention of the buyer. In Thibodeaux the plaintiff was an unsophisticated purchaser of an automobile. The court found that the waiver in question was not clear and unambiguous and was never properly explained to the plaintiff — purchaser: The language of this purported waiver is couched in legal terms, and not in terms which may be read and understood by a layman. The requirement "clear and unambiguous" means that the language used must be comprehensible by the average buyer. The plaintiff, a woman with a sixth grade education, stated that she did not know the meaning of the words "redhibitory vices," "redhibition," nor was she acquainted with these legal terms or their implications. Clearly the standards are not to be applied mechanically without reference to the peculiar facts of each case. It is obvious that what is meant by "clear and unambiguous" and "brought to the attention of the buyer or explained to him" is determined in the context of the particular transaction, a sliding scale, so to speak, taking into account the nature of the specific parties involved and practices in the marketplace. This sliding scale is implicit in virtually all cases involving the waiver of the seller's warranty for hidden defects. The Thibodeaux court would have undoubtedly reached the opposite result had the case involved a significant commercial transaction between experienced businessmen with the benefit of professional representation, such as exists in the instant case. Where a party to a commercial transaction is represented by expert lawyers and accountants, he cannot later repudiate what they negotiated on his behalf on the ground that he did not understand certain clauses or they were not fully explained to him or called to his attention. Such a holding by this court would not only undermine the integrity of commercial transactions, it would be an open invitation to bad faith. Therefore, even if the law were to recognize a cause of action in quanti minoris, it would deny Mr. Harvey's claim on the facts.
The stock purchase agreement contains the following language in Section "3" relevant to the warranty issue:
The Seller represents and warrants to the Purchaser as follows:
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D. Absence of Undisclosed Liabilities; Financial Statements. As of the Balance Sheet date, July 31, 1982, the Seller has no actual knowledge of any undisclosed liabilities of any nature, whether accrued, absolute, contingent or otherwise, against the Company which are not disclosed on the financial statements and which exceed $10,000 in the aggregate including, without implied limitation, all Federal, State, County and municipal tax liabilities due or to become due. The audited balance sheet of the Company as of July 31, 1982 and related statements, prepared by Main Hurdman have been previously identified and have been delivered or will be delivered to Purchaser and, to the best of Seller's knowledge, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, correctly set forth the financial condition of the Company at the date of said balance sheet, and do not omit to state any material liability (contingent or otherwise) or other fact necessary to be set forth therein to make such balance sheet and income statements not misleading, and are attached hereto as Exhibit A. (Emphasis added).
E. Tax Returns. The Company's tax returns have been filed as required by law, and all taxes shown thereon have been paid when due.
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Q. No Duty of Investigation. All of the foregoing warranties made by the Seller that relate to the knowledge of the Seller are made without specific investigation of the circumstances relating to such warranties, and the reference in such warranties to the knowledge of the Seller shall not be deemed to impose a duty upon the Seller to undertake such an investigation.
When these sections are read together it is clear that Dixie Graphics does not provide any warranties for undisclosed liabilities, contingent or otherwise of which Dixie had no actual knowledge. This specifically includes tax liabilities such as the one that is the subject of this suit. The term "actual knowledge" must be understood as it is normally understood. We note that on both sides of the transaction in the instant case were sophisticated businessmen, accountants and attorneys.
There is no reason to believe that the purchaser did not know, or should have known the significance of the warranty limitations. There is overwhelming proof in the record that the parties specifically adverted to the significance of the phrase "no actual knowledge." The same sentence in an earlier draft of the agreement was identical except that it lacked the phrase "no actual knowledge." The subsequent insertion of that phrase in the final document had to be deliberate. This is reinforced by reference to the corresponding paragraph in the agreement whereby Theo Harvey turned around and resold Harvey Press to Rebsamen Industries, Inc. in a similar transaction three days later which does not contain the "no actual knowledge" limitation. The two documents are so close in form and language that it is obvious that they are closely related. The correlation between the two agreements is best demonstrated by reference to the section in both agreements entitled "Closing and Effective Date" which commences with the following sentence identical to both:
"Subject to the fulfillment of all conditions and prerequisites set forth herein, the Closing shall take place in New Orleans, Louisiana, on the 19th day of November, 1982, or on such other date as may be mutually agreed upon between the parties."
Although there was a three day delay between the closing of the sale by Harvey to Rebsamen, the true propinquity of the agreements is proved by the above quoted language showing that it was the original intention of the parties that the two agreements be executed on the same day. Such differences as exist in the language of the two documents had to be deliberate and intentional. Therefore, we find that given the facts of this case the language of the agreement whereby Mr. Harvey purchased from Dixie is clear and specific enough to waive the warranty for undisclosed liabilities, including taxes, where the seller had no actual knowledge.
The second sentence of Section 3.D dealing with the July 31, 1982 financial statement prepared by Main Hurdman is also subject to the requirement of "actual knowledge" for two reasons:
1. In the earlier draft of the sale by Dixie to Harvey and in the Rebsamen agreement this sentence is in a separate paragraph preceding the paragraph concerning undisclosed liabilities. The deliberate transfer of this provision in the final draft of the agreement between Dixie and Harvey to a position in the same paragraph with and immediately following the "no actual knowledge" limitation constitutes a clear intention that the representation concerning the financial statement be subject to that limitation.
2. The paragraph as a whole makes no sense unless the second sentence is subject to the limitation of the first sentence that, "as of the Balance Sheet date, July 31, 1982, the Seller has no actual knowledge of any undisclosed liabilities. . . ." If the seller is bound regardless of knowledge in the second sentence to a warranty that "the audited balance sheet of the Company as of July 31, 1982 and related statements . . . do not omit to state any material liability (contingent or otherwise) . . ." it would nullify the "no actual knowledge of undisclosed liabilities" warranty limitation contained in the immediately preceding sentence. We are not permitted to adopt such a self-contradictory and inconsistent interpretation. LSA-C.C. art. 2049.
If actual knowledge meant constructive knowledge, Section 3.Q. "No Duty of Investigation" would be meaningless. Section Q is not surplus boiler plate. It was not included in the draft of the sale by Dixie to Harvey nor the sale by Harvey to Rebsamen. It is no coincidence that it was inserted in the final draft of the sale by Dixie to Harvey along with the actual knowledge language. We cannot ignore it. We are required to give it effect. LSA-C.C. art. 2049.
In essence, all of Mr. Harvey's problems can be traced to the fact that his acquisition of Harvey Press from Dixie was with limited warranties but his sale to Rebsamen contained no such limitations. If his sale to Rebsamen had been identical to his purchase from Dixie, Mr. Harvey would not have had to pay the taxes, Rebsamen would.
By specifically relieving Dixie of the duty to investigate, Section 3.Q. reinforces the fact that Dixie will not be held to a "could have known" or "should have known" standard. Constructive knowledge is not actual knowledge for purposes of this agreement. Mr. Harvey does not contest this point. He argues only about what constitutes proof of actual knowledge and about which provisions in the agreement the actual knowledge requirement is applicable. The only standard by which Dixie may be held accountable besides actual knowledge is that of good faith which is implicit by law in all Louisiana contracts. As applied to the issue of knowledge it would mean that Dixie would be in bad faith if it refused to look at information offered to it in a deliberate attempt to avoid responsibility for such knowledge by adopting a "Don't tell me, I don't want to know" stance. There is no suggestion of such deliberate, calculated ignorance on Dixie's part.
II. TAX RETURNS
Section 3.E. of the agreement provides that:
The Company's tax returns have been filed as required by law, and all taxes shown thereon have been paid when due.
This means that all required tax returns have been filed in good faith; that they are complete and regular on their face; and that all taxes as shown on the returns have been paid. It is not a warranty against the possibility of a future audit and recalculation of the taxes due.
Mr. Harvey's contention that this paragraph provides an absolute warranty against future review by the IRS is inconsistent with the limitation of Dixie's warranty to only those undisclosed tax liabilities of which it had actual knowledge as set forth in the section 3.D which immediately precedes this provision. The only ambiguities in this contract are those that would be created if we were to adopt Mr. Harvey's interpretation of the document which is internally inconsistent and contradictory. If we were to adopt Mr. Harvey's interpretation of Section 3.E. it would render ineffective language in Section 3.D. limiting the warranty to only those tax liabilities of which Dixie had actual knowledge. A provision susceptible of different meanings must be interpreted with a meaning that renders it effective and not with one that renders it ineffective. LSA-C.C. art. 2049. Each provision in a contract must be interpreted in light of the other provisions so that each is given the meaning suggested by the contract as a whole. LSA-C.C. art. 2050.
III. MR. HARVEY FAILED TO PROVE BY A PREPONDERANCE OF THE EVIDENCE THAT DIXIE HAD ACTUAL KNOWLEDGE OF HARVEY PRESS' TAX LIABILITY
Mr. Harvey has the burden of proving by a preponderance of the evidence that Dixie had "actual knowledge" of the tax liability. Although this does not require an admission by Dixie that it had knowledge, it does require more than a few vague hints and innuendos [innuendoes].
The record contains a $135,189.59 IRS tax bill dated April 26, 1982 for Harvey Press' tax year ending June 12, 1981. A substantial portion of Mr. Harvey's brief was devoted to arguing that Dixie breached its warranty to him because this tax bill was not resolved until after July 31, 1982, the cut-off date contained in the stock purchase agreement. Whether this bill was satisfied before or after July 31, 1982 is irrelevant. The $135,000 tax bill has nothing to do with the IRS's decision to disallow the bad debt deductions that are the subject of this litigation. It is not sufficient for Mr. Harvey to show a technical violation of the purchase agreement. He must show actual damages. Mr. Harvey has not claimed, nor does the record support a claim for damages in connection with the $135,000 tax bill. In any event the tax bill was satisfied by offset prior to July 31, 1982.
In response to the IRS bill, Rodney Brower, who was the accountant at Touche, Ross handling Harvey Press' taxes wrote a letter to the IRS dated April 30, 1982 requesting that the IRS use the $167,383 refund due Harvey Press to offset Harvey Press' tax liability. After this offset, Harvey Press was due a cash refund of $32,194 plus interest.
On June 10, 1982, Mr. Brower forwarded to the IRS a letter containing an IRS Form 2848 "Power of Attorney and Declaration of Representative" dated June 8, 1982 and three Forms 1139 "Corporation Application for Tentative Refund."
There is not the slightest hint of controversy in the letter. The letter informs the IRS that Harvey Press, Inc. is a member of the Dixie Graphics Inc. consolidated group.
The only references in the letter implying ongoing interaction between the IRS and Harvey Press were:
1. Notification to the IRS that Harvey Press had received a check [presumably from the IRS] accompanied by no explanation.
2. A reiteration of the Harvey Press' previous request "that the balance due and the refunds be offset against each other and the remainder plus interest be refunded as soon as possible."
3. A request for "an accounting of the amounts of the refunds and interest applied to the prior year liability."
At the end of June, Linda Yates, the IRS' "Problem Resolution Officer," notified Mr. Browner that the refund check due Harvey Press had been delivered to an address across the street from Harvey Press. On June 30, 1982, Mr. Brower wrote a letter to the IRS thanking Ms. Yates for her assistance. The IRS then issued another refund check of $31,846.49 prior to July 31, 1982. As this was the approximate amount of Harvey Press' excess net operating loss carry-back, from Dixie's perspective the offset had been accomplished, the taxes due satisfied, and all issues resolved.
Although the power of attorney form is broad enough to include other matters, the record does not support Harvey's contention that it really is proof that there was an unresolved dispute with the IRS.
Nor does the record support Mr. Harvey's contention that the decision by Dixie to have Harvey Press claim the bad debt deduction was so obviously unjustified as to constitute bad faith or actual knowledge of invalidity.
Mr. Harvey's brief contends that: "Dixie and its accountants [Touche-Ross] decided well in advance of the end of the consolidated tax year to show a big loss in Harvey Press by hook or by crook since everybody at Touche-Ross and Dixie knew that there was no way the tax due with the June 12, 1981 return would get paid." [Emphasis added] This is the very foundation of Mr. Harvey's case. But a decision to claim a large deduction is not the same as a decision to knowingly claim an invalid deduction. The record does not support Mr. Harvey's contention that a decision was made to claim a large deduction "by hook or by crook."
Mr. Harvey asserts that Dixie by failing to join him in the defense of the Harvey Press tax return "waived any right to argue the substantive correctness of Mr. Harvey's settlement of the IRS audit related to Dixie's bad debt deduction in this case" pursuant to section 8.B. of the stock purchase agreement. Section 8.B. does not determine liability; it only determines quantum in the event liability is found. Dixie's liability is determined "by the terms of the Agreement", i.e., as limited by the warranty clauses.
Mr. Harvey asserts that Mr. Brower's testimony concerning the offset of the $135,000 tax bill is not credible. This argument is based upon the premise that if Mr. Brower had really requested an offset, he would have also requested an accounting from the IRS which he would have documented. Mr. Harvey states that no such documentation exists. The letter from Mr. Brower to the IRS of June 10, 1982 clearly requests such an accounting.
The "received" and "allowed" stamps on Harvey Press' refund request forms denote only procedural compliance and are not conclusive as to the substantive correctness of the deductions which were the catalyst triggering the refund request, but they do provide evidence of Dixie's good faith and lack of actual knowledge.
By analogy, Mr. Harvey's contention that the "received" and "allowed" stamps are procedural only in nature and not conclusive against future review by the IRS, applies equally to the warranty found in Section 3.E stating that the tax returns have been filed and "all taxes shown thereon have been paid", i.e., it was only a warranty of procedural regularity and implicit good faith, and was never intended as a conclusive warranty against future review.
Mr. Harvey argues that the gap in documentation of Dixie's interaction with the IRS from July of 1982 until March of 1983 when the tax audit began is proof that Dixie was hiding something. However, this pattern of evidence is entirely consistent with Dixie's position that the question of the $135,000 tax bill had been resolved by offset by July of 1982 and that there was no further involvement with the IRS until the audit began in March of 1983.
Mr. Harvey commissioned Main Hurdmann [Hurdman] to do a balance sheet audit of Harvey Press in anticipation of the stock purchase. Albert Richard, III, the audit partner in charge of the Harvey Press audit testified for Mr. Harvey that as part of the audit Dixie furnished a copy of the consolidated tax return "with the other companies blocked [whited] out."
However, on cross examination Mr. Richard testified that he determined the scope of the audit, and that no attempt was made to restrict his access to documents or information. Mr. Richard did not testify that he found anything irregular, suspicious, improper, unusual, or alarming in this at that time, or later, with the benefit of hindsight. If he had he certainly would have made an issue of it at the time of the audit. He did testify that he was never refused access to any information he requested. If Dixie's intention had been to hide the numbers that had been whited out from the auditors for improper reasons they would not have chosen such a clumsy method. Entries that are whited scream from the page for your attention. It is the equivalent of erecting a neon sign on top of a buried treasure. Neither Dixie's actions nor the actions and testimony of Mr. Harvey's auditor on this point are indicative of "actual knowledge" on Dixie's part.
Mr. Harvey argues repeatedly that Dixie had "knowledge of the defects contained in the tax returns as a matter of law." This is nothing more than a restatement of the maxim "ignorantia legis neminem excusat" or "ignorance of the law excuses no one." The fact that Dixie is presumed by law to know the tax law is not "actual knowledge" as that term is used in the stock purchase agreement. It is most unlikely that anyone has actual knowledge of all that the tax laws and regulations presume we know, and it is an absolute certainty that even legal scholars may disagree in complete good faith as to applicability of tax laws and regulations to a particular set of facts.
A review of the tax laws and regulations at issue along with Dixie's reasons for believing that the deductions were reasonable and had in fact been allowed reveals nothing that would support a finding of bad faith or actual knowledge.
Mr. Harvey testified that it was his opinion that Dixie had actual knowledge. He gave three reasons:
I. ". . . [T]he tax returns signed under the law of purjery [sic] and I think any officer that signs a tax return must know what's in the tax return. So since he signed it on the penalty of purjery [sic], I would think they would have known."
The signature on the return is not a guarantee under penalty of perjury against unknown good faith errors. Dixie's position is that if there was an error it was made unknowingly and in good faith. Mr. Harvey's testimony on this point is of no probative value.
II. Mr. Harvey testified that:
This was in November right after I bought the Company back and then sold it to Rebsamen. I said, `Well, Tom [Cole], what is your future at Dixie Graphics and are you happy there?' . . . [Tom Cole] said, `Well I'm happy here, but I don't think I'm going to be here much longer.' He says, "I don't want to be here when things blow up. "I said `What do you mean?' He said, "Well, I think we're going to have some severe tax problems." And, you know, at that time, in retrospect, I know exactly what he was talking about because I knew they filed a consolidated return.
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The Court:
. . . He asked you at the end of November [sic], did Mr. Cole tell you anything that made you believe that was a tax problem?
Mr. Harvey:
Oh, no.
By Mr. Tarcza:
Q. And he knew there was a tax problem?
A. Well, he said there was a tax problem, yes. But he didn't specifically say what it was.
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By Mr. Hamilton:
* * * * * *
Q. Do you remember exactly what Mr. Cole said to you?
A. Oh, I could remember he said that he was probably not going to stay around Dixie too long because he was afraid when things blew up he didn't want to be. And then he referenced that to a tax problem. He used those words.
Q. He was talking about a Dixie tax problem, wasn't he?
A. Well, he didn't indicate whether it was a Dixie problem only or a Harvey Press problem. [Emphasis added]
Q. Right, he didn't indicate.
A. Well, he didn't indicate. But he knew there was a lot of things wrong with the taxes. That's what he told me.
Q. Okay. And he was at that time employed by Dixie and not by Harvey.
A. Yes, he was employed by Dixie, that's correct.
Q. Do you know whether Mr. Cole was involved in any improper conduct with respect to preparing or filing tax returns of Dixie on Harvey Press? [Emphasis added]
A. No, I wouldn't say that. No, I don't think that's true.
This testimony by Mr. Harvey is of little probative value. It is not a matter of credibility concerning which we should defer to the trier of fact in the absence of manifest error. I accept as true Mr. Harvey's sincerity in expressing his opinion that Tom Cole knew of Harvey Press's undisclosed tax liability prior to November 19, 1982. But he offered nothing to support that opinion. Mr. Harvey had no way of knowing what the tax problem was, or even if it was a Harvey Press tax problem. It was all conjecture on his part. Opposed to Mr. Harvey's unsupported conjecture is the uncontroverted, objective evidence that Mr. Cole did not leave Dixie's employ contrary to what Mr. Harvey testified he told him. He was still employed by Dixie at the time he testified in this case. If Mr. Harvey's testimony has any significance, it is his belief that Tom Cole was not involved in any improper conduct.
III. ". . . [T]he chronology of events that happened when the I.R.S. questioned the return, then Dixie geared up to defend their position" was the remaining reason given by Mr. Harvey to explain why he had formed the opinion that Dixie had actual knowledge. This is not a matter of credibility. Again, I accept as true the sincerity with which Mr. Harvey offered this opinion. However, Mr. Harvey offered nothing to support his opinion.
This was a large commercial transaction. Mr. Harvey was represented by expert accountants and lawyers. It undermines the security of commercial transactions to allow him to repudiate what they negotiated on his behalf. This Court should turn a deaf ear to arguments that he did not understand certain clauses or they were not fully explained to him or called to his attention. It should not be the function of this court to protect sophisticated businessmen from the consequences of their voluntary business decisions entered with the assistance of accountants and lawyers.
Mr. Harvey was required to prove by a preponderance of the evidence that Dixie had actual knowledge of the tax liability. Hints and innuendos [innuendoes] are not sufficient. Mr. Harvey failed to sustain his burden of proof.
I would reverse the judgment of the trial court.