Cathbake Inv. Co., Inc. v. Fisk Elec. Co., Inc., 81-7752

• Citation: 700 F.2d 654
• Decision Date: 14 March 1983
• Docket Number: No. 81-7752,81-7752
• Parties: CATHBAKE INVESTMENT COMPANY, INC., Plaintiff-Appellee, v. FISK ELECTRIC COMPANY, INC., Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 654

700 F.2d 654

CATHBAKE INVESTMENT COMPANY, INC., Plaintiff-Appellee, v. FISK ELECTRIC COMPANY, INC., Defendant-Appellant.

No. 81-7752.

United States Court of Appeals,

Eleventh Circuit.

March 14, 1983.

Bradley, Arant, Rose & White, Dewey W. Hammond, III, Birmingham, Ala., Bracewell & Patterson, Michael A. Caddell, Houston, Tex., for defendant-appellant.

Denaburg, Schoel, Meyerson & Ogle, Richard F. Ogle, Birmingham, Ala., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Alabama.

Before KRAVITCH, HATCHETT and CLARK, Circuit Judges.

CLARK, Circuit Judge:

Appellant Fisk Electric Company, Inc. ("Fisk"), a Texas corporation, organized a wholly-owned subsidiary, Dyer Electric Company, Inc. ("Dyer"), under the laws of Alabama in 1972. From May 1972, until December 31, 1977, Fisk, together with Dyer and its other wholly-owned subsidiaries, filed consolidated federal income tax returns. At all times applicable, both Fisk and Dyer were on the calendar year basis for tax reporting purposes.

In connection with the filing of Fisk's consolidated income tax return, it was Fisk's practice to have the estimated tax credit or debit attributable to each of its subsidiaries, including Dyer, handled as follows: If the subsidiary's operations resulted in taxable net income, then 50% of such amount (an approximation of the applicable corporate income tax rate) was entered on the subsidiary's books as an account payable and on Fisk's books as a receivable; if the subsidiary's operations resulted in a net loss, then 50% of such loss was entered on the subsidiary's books as a receivable and on Fisk's books as an account payable.

On August 31, 1978, Dyer ceased to be a wholly-owned subsidiary of Fisk pursuant to a Stock Purchase Agreement in which appellant Fisk agreed to sell to appellee Cathbake Investment Co., Inc. ("Cathbake") all of the issued and outstanding shares of stock of Dyer. The agreement was prepared by a Birmingham, Alabama, law firm and the fees for this work were shared equally by Fisk and Cathbake.

Article 9.4 of the agreement, the article relevant to the present matter, provided as follows:

The parties to this Agreement recognize that there are certain inter-company accounts between Seller [Fisk] and the Corporation [Dyer]. At the closing, or as soon as practicable thereafter, Seller and the Corporation will clear these inter-company accounts, with each party paying to the other party all amounts due from inter-company transactions.

At or shortly after the closing, Fisk, pursuant to the above article, issued Dyer a check for $802,232.45, which Dyer accepted. Included in this amount was the net amount due from Dyer to Fisk for the tax years prior to 1978, calculated according to the procedure for consolidated tax returns described above.

During the period from January 1, 1978, through August 31, 1978, Dyer incurred a net operating loss of $150,917. Pursuant to the Internal Revenue Code and Regulations, Fisk reported this loss in its 1978 consolidated income tax return, which it filed in 1979. Inclusion of this loss reduced Fisk's taxable income for the tax year ending 1978 and thus Fisk's tax liability for 1978.

At trial, appellee Cathbake, Dyer's purchaser, contended that Article 9.4 of the Stock Purchase Agreement obligated appellant Fisk to pay appellee approximately $75,000, or half the net operating loss Dyer incurred, because Fisk had included Dyer's 1978 tax loss on its 1978 consolidated return. This amount was calculated pursuant to Fisk's usual manner of treating subsidiaries' ordinary tax losses. Fisk contended at trial that the meaning of Article 9.4 was unclear, requiring the introduction of evidence of negotiations regarding inter-company accounts. Fisk argued that the article dealt with certain existing accounts between Dyer and Fisk as of the date of the closing of the sale, and these accounts were cleared by Fisk's payment to Dyer of the $802,232.45, which included amounts in the inter-company tax accounts for years prior to 1978.

Before making its findings, the district court concluded that the language of Article 9.4 was "clear" and "unambiguous"; the district court determined that no parol evidence was needed to determine the intention of the parties as to the meaning of the article. On this basis, the court refused admission of various testimony and documents which apparently would have illuminated the negotiated meaning of Article 9.4.

Having reached the conclusion that the article was unambiguous, the district court determined that the pivotal issue was whether the 1978 loss would fall within "inter-company accounts," as that term is used in Article 9.4. In concluding that the 1978 tax loss would fall within an "inter-company account," the district court first noted the usual treatment by Fisk of its subsidiaries' losses, and then noted that the Stock Purchase Agreement contained no provision explicitly altering this treatment insofar as Dyer's losses were concerned (R. 145). The court then found that Fisk's records showed that Fisk's accountants in March 1979, had treated Dyer's operating loss as an account payable to Dyer, in conformity with practice prior to Fisk's sale of Dyer, and had suggested that Dyer treat the loss as an account receivable from Fisk. Finally, the court concluded that, although Article 9.4 called for the clearing of the inter-company accounts "as soon as practicable" after the closing, the earliest practicable time for computing the loss of income was the time of filing the returns, March or April of 1979, six months after the closing. On the basis of these findings, the district court concluded that appellant Fisk breached Article 9.4 and that appellee Cathbake, Dyer's purchaser, was entitled to damages of $75,458.50, or half $150,917.00, plus interest.

At issue on appeal is the question of whether Article 9.4 was clear and unambiguous, as the district court concluded during trial, and whether extrinsic evidence should have been admitted to elucidate the article's meaning. Fisk asserts that the parties, during negotiations of the Stock Purchase Agreement, neither discussed nor contemplated any anticipated tax credits or liabilities for the first eight months of 1978; that the parties did not contemplate that Dyer's 1978 tax loss would relate to the term "inter-company accounts"; that representatives of Fisk and Cathbake agreed during the negotiations to the amounts of the "inter-company accounts." Fisk asserts further that these agreed-upon amounts did not include an amount for Dyer's 1978 tax performance.

Whether a writing is ambiguous is a question of law for the court. Medical Clinic Bd., etc. v. Smelley, 408 So.2d 1203, 1206 (Ala.1981); Mass Appraisal Services, Inc. v. Carmichael, 404 So.2d 666, 673 (Ala.1981). A question of law is subject to plenary review before this court. Suburban Realty Company v. United States, 615 F.2d 171 (5th Cir.1980).

"A latent ambiguity arises when the writing on its face appears clear and unambiguous, but there is some collateral matter which makes the meaning uncertain." Gibson v. Anderson, 265 Ala. 553, 92 So.2d 692, 694 (Ala.1957). "It is well established that parol or other extrinsic evidence is admissible to explain or clarify a latent ambiguity." 92 So.2d at 692; Mass Appraisals Services, Inc. v. Carmichael, 404 So.2d 666, 672 (Ala.1981); Medical Clinic Bd., etc. v. Smelley, 408 So.2d 1203, 1206 (Ala.1981). For this court to resolve the question of law of whether latent ambiguity exists in Article 9.4, it must necessarily examine extrinsic evidence. "Such evidence is received, not for the purpose of importing into the writing an intention not expressed therein, but simply with the intention of elucidating the meaning of the words employed." Gibson v. Anderson, 90 So.2d at 694. Given Alabama's recognition of latent ambiguity, a trial court must be alert to the possibility of such ambiguity. ¹

Despite the district court's restraints on such evidence, the record contains much evidence of the ambiguity of Article 9.4. Mr. Leroy Barber, an officer of both Dyer and Cathbake, a participant in the negotiations for the sale of Dyer to Cathbake, and a witness at the trial, prepared a document important to this case labeled Defendant's Exhibit No. 1. This document was prepared in conjunction with Mr. Barber's negotiations with Mr. Chenault, a principal of Cathbake, as to the balances of the inter-company accounts. (R. 106, lines 17-22). Defendant's Exhibit No. 1 indicates that there were indeed express negotiations of specific inter-company accounts.

The second page of the exhibit shows the following:

                                          INTER COMPANY

...