484 F.3d 972 (8th Cir. 2007), 06-2789, Katun Corp. v. Clarke

Docket Nº:06-2789.
Citation:484 F.3d 972
Party Name:KATUN CORPORATION, a Minnesota Corporation, Plaintiff/Appellant, v. Terence Michael CLARKE, a Florida citizen, Defendant/Appellee.
Case Date:May 02, 2007
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
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Page 972

484 F.3d 972 (8th Cir. 2007)

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.

May 2, 2007

Submitted: March 16, 2007.

Page 973

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

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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...

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