Katun Corp. v. Clarke

• Decision Date: 02 May 2007
• Docket Number: No. 06-2789.,06-2789.
• Citation: 484 F.3d 972
• Parties: KATUN CORPORATION, a Minnesota Corporation, Plaintiff/Appellant, v. Terence Michael CLARKE, a Florida citizen, Defendant/Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

484 F.3d 972

KATUN CORPORATION, a Minnesota Corporation, Plaintiff/Appellant, v. Terence Michael CLARKE, a Florida citizen, Defendant/Appellee.

No. 06-2789.

United States Court of Appeals, Eighth Circuit.

Submitted: March 16, 2007.

Filed: May 2, 2007.

John F. Hartmann, argued, Chicago, IL (Joshua Z. Rabinovitz, Daniel C. Moore, Chicago, IL, Stephen P. Safranski, Minneapolis, MN, on the brief), for appellant.

Douglas Ray Peterson, argued, Mankato, MN (James G. Bullard, S. Steven Prince, Minneapolis, MN, on the brief), for appellee.

Before WOLLMAN, JOHN R. GIBSON, and MURPHY, Circuit Judges.

MURPHY, Circuit Judge.

Appellant Katun Corporation (Katun) brought this breach of contract action against former shareholder Terence Michael Clarke after he refused to pay his share of a settlement agreement. That agreement had resolved claims asserted by Katun and its parent company PNA Holdings, LLC (PNA) against the previous owners of Katun. One of the settled claims had asserted indemnification for criminal penalties imposed on Katun, and Clarke moved to dismiss this case on grounds of public policy and in pari delicto. The district court granted his motion, and Katun appeals. We reverse.

Katun is a Minnesota corporation that supplies replacement parts for photocopiers, facsimile machines, and printers. Clarke cofounded the company in 1978 and served as a director and officer until he was removed from office for financial improprieties in June 2000. Clarke remained Katun's largest shareholder until PNA acquired the company in July 2002.

PNA acquired Katun by means of a merger with a wholly owned subsidiary of PNA, leaving Katun as the surviving subsidiary. At the time of the sale Katun and its officers were under investigation by the United States Attorney for possible criminal conduct. Clarke and other selling shareholders of Katun made a number of representations to PNA in the merger agreement about the health of the company. The shareholders represented that Katun had not violated any material applicable laws as of the July 5, 2002 closing date. They also agreed to indemnify PNA and the surviving Katun for losses resulting from a breach of any representation made in the agreement, as well as for losses related to Clarke's financial improprieties. Xerox Corporation, which was also one of the selling shareholders, was appointed as the selling group's agent and attorney in fact to settle any indemnification claims that might arise out of the merger agreement. Clarke himself received more than $68 million as part of the merger transaction.

On December 11, 2002, five months after PNA's acquisition of Katun, Clarke pled guilty to four counts of filing false tax returns for failing to report the proceeds of his self dealing at Katun. He cooperated with the government in providing information about additional criminal activity that took place at the company during his tenure, and his cooperation helped lead to guilty pleas by several Katun officers for bribery and computer fraud. Clarke was subsequently charged with aiding and abetting mail fraud for unlawfully gathering competitive intelligence while an officer at Katun, and he again pled guilty in March 2004. These violations were not disclosed to PNA by the selling shareholders prior to its acquisition of Katun.

The government also brought charges against the company directly, and on February 6, 2004 Katun pled guilty to a twelve count information dealing with three separate criminal schemes involving computer fraud for unlawful gathering of competitive information, mail fraud arising out of the misappropriation of customer credit balances, and wire fraud. All three criminal schemes were initiated prior to the merger, but two of them continued until March or April of 2003, a number of months after PNA's acquisition of the company. As part of its plea agreement Katun was required to pay more than $11 million in criminal fines, restitution, and forfeiture, and it was placed on probation for two years. Katun also incurred millions of dollars in attorney fees and costs.

Citing provisions in the merger agreement, PNA and Katun sought indemnification from the selling shareholders against losses sustained as a result of the sellers' misrepresentations about the company at the time of the sale, including the fines and costs associated with the criminal investigations and the guilty plea of Katun. On behalf of the selling shareholders, Xerox Corporation, acting as their attorney in fact, entered into a settlement agreement with Katun and PNA on June 7, 2005. The settling shareholders agreed to pay PNA "or its designee" $11.65 million in exchange for a release of the indemnification claims. PNA named Katun as its designee to receive the settlement funds.

After Clarke refused to pay his portion of the settlement, Katun brought this action for breach of contract, alleging that he owed $1,731,575.99 under the settlement agreement. Katun attached both the settlement and merger agreements to the complaint. Clarke moved to dismiss, arguing that it would violate public policy to permit a company to shift responsibility for its own criminal penalties onto another party and that the action was also barred by the doctrine of in pari delicto. Katun moved for summary judgment to collect under the terms of the settlement agreement. The district court granted Clarke's motion to dismiss on both of the grounds he advanced, concluding that the indemnification provision in the merger agreement was void as against public policy because it permitted Katun to avoid the consequences of its illegal actions. Katun's motion for summary judgment was denied without further discussion.

Katun appeals, arguing that the district court erred in dismissing its claim. It contends that the district court mischaracterized the present action as an attempt by Katun to obtain indemnification when in reality Katun seeks to enforce the settlement agreement. That agreement between the parties necessarily resolved any defenses Clarke might have had to the indemnification claims. Even if the settlement agreement had not waived the defenses of public policy and in pari delicto, they would not bar this present action. Katun points out that the indemnification claims were settled not for the benefit of Katun, but for the benefit of PNA, an innocent third party purchaser. PNA was entitled to protect itself by means of the indemnification provision against losses stemming from any illegal conduct occurring prior to the signing of the merger agreement and concealed by the selling shareholders.

We review the grant of a motion to dismiss de novo, taking all well pleaded factual allegations as true and drawing all reasonable inferences in favor of the plaintiff. Knieriem v. Group Health Plan, Inc., 434 F.3d 1058, 1060 (8th Cir.2006). When there are documents attached to the complaint, we consider this material along with the allegations in the complaint. See Abels v. Farmers Commodities Corp., 259 F.3d 910, 921 (8th Cir.2001); see also Fed. R.Civ.P. 10(c). We may also take into account matters of public record referenced in the complaint. Deerbrook Pavilion, LLC v. Shalala, 235 F.3d 1100, 1102 (8th Cir.2000). "A motion to dismiss should be granted only if it appears beyond doubt that the plaintiff can prove no set of facts to warrant a grant of relief." Knieriem, 434 F.3d at 1060 (quoting Gilmore v. County of Douglas, Neb., 406 F.3d 935, 937 (8th Cir.2005)).

Katun first challenges the district court's conclusion that the indemnification provision violated public policy, arguing that the settlement agreement resolved all defenses that Clarke and other settling shareholders might have had to the claims of PNA and Katun, including a public policy defense. Katun stresses that Minnesota courts recognize a "strong public policy favoring the settlement of disputed claims without litigation." Hentschel v. Smith, 278 Minn. 86, 153 N.W.2d 199, 204 (1967) (citation omitted). Courts generally will not examine the value or validity of a claim or defense where the parties have settled a bona fide dispute in good faith. See De Mars v. Musser-Sauntry Land, Logging & Mfg. Co., 37 Minn. 418, 35 N.W. 1, 1 (1887); see also Libby v. Uptegrove, 988 S.W.2d 131, 133 (Mo.Ct.App.1999) ("by settling, the [defendants] necessarily waived any defenses they might otherwise have had to the underlying claim"). That a plaintiff ultimately would have been unsuccessful had the claim proceeded to trial does not normally affect the enforceability of a settlement agreement. See Johnson v. St. Paul Ins. Cos., 305 N.W.2d 571, 574 (Minn.1981). On the other hand a settlement agreement is a type of contract, State v. Philip Morris, 713 N.W.2d 350, 355 (Minn.2006), which itself might offend public policy. Cf. Goodrich v. Nw. Tel. Exch. Co., 161 Minn. 106, 201 N.W. 290, 292 (1924) (defendant's agreement to waive defense of illegality "would be tainted with the vice of the original contract").

In Hoyt v. Wickham, 25 F.2d 777 (8th Cir.1928), decided under Iowa law, we drew a distinction between the settlement of a claim of doubtful validity, for which finality should be preserved, and the settlement of a claim that is invalid on its face as offensive to public policy. Id. at 781. The defendant in Hoyt had argued that plaintiffs should be prevented from enforcing a settlement agreement because their settled claim centered around an illegal gambling contract. Id. at 777-78. Plaintiffs disputed this characterization of their contract both factually and legally. Id. at 778. We concluded that the original claim was not a per se illegal demand, but rather one of reasonably disputed validity. The defendant was therefore estopped by the settlement agreement from challenging the contract's legality. Id. at 781. We think the distinction drawn in Hoyt, between per se invalid claims and claims of doubtful validity, is equally appropriate under Minnesota law.

The...