Aes-Apex Emp'r Servs., Inc. v. Rotondo

• Decision Date: 17 May 2019
• Docket Number: Nos. 17-2068/17-2211,s. 17-2068/17-2211
• Citation: 924 F.3d 857
• Parties: AES-APEX EMPLOYER SERVICES, INC.; AES-Apex Employer Solutions, Inc., Plaintiffs-Appellees (17-2068), Plaintiffs-Appellants (17-2211), v. Dino ROTONDO; Richard Mark; United States Department of the Treasury, Internal Revenue Service, Defendants-Appellees (17-2068 & 17-2211), Akouri Investments, LLC, Intervenor-Appellant (17-2068), Intervenor-Appellee (17-2211).
• Court: U.S. Court of Appeals — Sixth Circuit

924 F.3d 857

AES-APEX EMPLOYER SERVICES, INC.; AES-Apex Employer Solutions, Inc., Plaintiffs-Appellees (17-2068), Plaintiffs-Appellants (17-2211),

v.Dino ROTONDO; Richard Mark; United States Department of the Treasury, Internal Revenue Service, Defendants-Appellees (17-2068 & 17-2211),

Akouri Investments, LLC, Intervenor-Appellant (17-2068), Intervenor-Appellee (17-2211).

Nos. 17-2068/17-2211

United States Court of Appeals, Sixth Circuit.

Argued: May 8, 2019

Decided and Filed: May 17, 2019

ARGUED: H. Nathan Resnick, RESNICK LAW, P.C., Bloomfield Hills, Michigan, for Akouri Investments. Geoffrey J. Klimas, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for United States Department of the Treasury and Internal Revenue Service. Scott D. MacDonald, DIXON & MACDONALD, Southfield, Michigan, for AES-Apex. ON BRIEF: H. Nathan Resnick, RESNICK LAW, P.C., Bloomfield Hills, Michigan, for Akouri Investments. Geoffrey J. Klimas, Teresa E. McLaughlin, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for United States Department of the Treasury and Internal Revenue Service. Scott D. MacDonald, DIXON & MACDONALD, Southfield, Michigan, for AES-Apex.

Before: SUHRHEINRICH, THAPAR, and LARSEN, Circuit Judges.

THAPAR, Circuit Judge.

Dino Rotondo serves as a consultant for AES-Apex. This case is a dispute about who gets the money that he makes consulting. The IRS says that it should get the money because Rotondo is behind on his taxes. Akouri Investments says it should get the money instead because Akouri loaned Rotondo money that he has not paid back yet. And finally, AES-Apex says that it should get to keep some of the money pursuant to its contract with Rotondo. The district court granted summary judgment in favor of the IRS, and we affirm.

I.

As relevant here, Dino Rotondo was the sole owner of Apex Administrative Services ("Apex"). Apex, in turn, wholly owned four limited liability companies: Apex HR Services, LLC, Pinnacle HR Services, LLC, AS Holdings Group, LLC, and AS South, LLC (collectively, the "Directional Entities"). Together with these Directional Entities, Apex provided a variety of services, such as human resources, to different clients.

Eventually Rotondo opted to sell the Directional Entities' key asset—their customer lists, essentially lists of who their clients were. He sold the customer lists in a deal with two firms, AES-Apex Solutions, Inc. and AES-Apex Employer Services, Inc. (collectively, "AES"). As part of that deal, AES agreed to pay Rotondo a share of its gross profits in the form of "Consulting Fees."

Yet the bad news for Rotondo is that he will not keep the Consulting Fees because he owes a lot of money and is behind on his payments. Two entities have claims to collect Rotondo's Consulting Fees. First, a firm named Akouri Investments, LLC ("Akouri") loaned money to one of Rotondo's other companies.¹ In return for that loan, Akouri gained a security interest in Apex's assets. When Rotondo failed to pay back his loan, Akouri obtained a judgment against Rotondo and Apex for $ 1.4 million.

Second, Rotondo owes the IRS. Over the years, Rotondo failed to pay his taxes, so the IRS has assessed various tax penalties against him. As of 2015, Rotondo owed the IRS $ 3.4 million. To try and get that money, the IRS filed several notices of tax liens against Rotondo, Apex, and the Directional Entities.

Once Rotondo started earning his Consulting Fees, both the IRS and Akouri saw an opportunity to get what they were owed. The IRS contacted AES directly, claiming it was entitled to the Consulting Fees because of its tax liens. Then, several months later, Akouri claimed that it was entitled to the Consulting Fees. Facing conflicting claims to the Consulting Fees—and the possibility of having to pay twice—AES filed this interpleader action in state court. Interpleader permits a party facing claims "that may expose [it] to double or multiple liability" to join all claimants as defendants in a single action. Fed. R. Civ. P. 22(a)(1). The IRS removed the case to federal district court, and the district court granted summary judgment in its favor. The parties now appeal several of the district court's decisions. We review each in turn.

II.

Before determining whether the IRS or Akouri gets the Consulting Fees, we must first figure out the size of the pot—i.e., how much money does AES owe Rotondo? That turns on two sets of agreements between AES and Rotondo: the Consulting Agreement and the Asset Purchase Agreement.² AES claims that both of those agreements allow it to deduct the costs and attorneys' fees that it incurs in this case from what it owes Rotondo in Consulting Fees. The district court disagreed and found instead that AES must pay the "full value" of those Consulting Fees. This is a matter of contract interpretation that we review de novo. Royal Ins. Co. of Am. v. Orient Overseas Container Line Ltd. , 525 F.3d 409, 421 (6th Cir. 2008).

A.

AES first claims that the Consulting Agreement allows it to deduct litigation expenses. In AES's Consulting Agreement with Rotondo, AES agreed to pay Rotondo a percentage of gross profits as Consulting Fees. But the agreement permits it to deduct two types of costs from those gross profits: the taxes that AES owes on its own profits and "direct expenses attributable to the employees leased under [a client's] account." R. 1, Pg. ID 52. AES claims that the costs of this litigation (including related state court actions) are such "direct expenses." In interpreting the Consulting Agreement, we apply the "plain and ordinary meaning" of these terms. Rory v. Cont'l Ins. Co. , 473 Mich. 457, 703 N.W.2d 23, 28 (2005) ; see also Stryker Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh , 842 F.3d 422, 426 (6th Cir. 2016) (applying Michigan law).

This "direct expenses" argument does not go very far. Even assuming the meaning of the phrase "direct expenses" could include the costs of this litigation, we do not interpret contract language in isolation. We must read "direct expenses" in context. See Mich. Twp. Participating Plan v. Pavolich , 232 Mich.App. 378, 591 N.W.2d 325, 328 (1998). The full clause in the contract says that AES is only entitled to deduct "direct expenses attributable to the employees leased under [a client's] account." R. 1, Pg. ID 52 (emphasis added). "Attributable" essentially means "produced by." Oxford English Dictionary (2012). And the "employees leased" are AES's clients' employees. Thus, the "direct expenses" clause covers expenses "produced by" the employees of one of AES's clients. But neither AES's clients nor its clients' employees did anything to produce these litigation expenses. None of AES's clients are parties to this litigation, and there is no suggestion that any of the clients' employees are bringing claims for Rotondo's Consulting Fees—only the IRS and Akouri are. Indeed, AES's briefing does not even mention its clients' employees or point to any evidence that the costs of this litigation could be attributed to its clients' employees. The litigation expenses from this case are not "attributable" to any of AES's employees at all—they are "attributable" to AES's lawyers, the IRS, and Akouri. So, under the plain meaning of the Consulting Agreement, AES cannot deduct its litigation expenses from Rotondo's Consulting Fees.

AES counters by saying that the purpose of this provision was to enhance its profitability. Thus, anything that lowers its profitability should be deducted from the Consulting Fees. But such an expansive definition does not fit the language to which the parties agreed. Again, that language expressly limits AES's deductions to only two categories—not anything that could "significantly diminish[ ]" profit. 17-2068 Appellant Br. 20. We "honor the intent of the parties" by enforcing their agreement "as written"—not based on whatever vague purposes can be supplied after the fact. Superior Commc'ns v. City of Riverview , 881 F.3d 432, 438 (6th Cir. 2018) (quoting Rasheed v. Chrysler Corp. , 445 Mich. 109, 517 N.W.2d 19, 29 n.28 (1998) ). Accordingly, AES may not deduct costs or attorneys' fees on account of this provision.

B.

Next, AES contends that the Asset Purchase Agreement allows it to deduct litigation expenses. AES relies on two interwoven provisions in this Agreement: the Indemnification Provision and the Offset Provision. Our analysis again rests on the plain and ordinary meaning of these provisions. Rory , 703 N.W.2d at 28.

Indemnification Provision. This provision states that Rotondo and the Directional Entities must "indemnify" AES from the costs of litigation in a variety of circumstances, including "any claim, litigation or other action of any nature arising out of any act ... prior to the date" the deal closed. R. 1, Pg. ID 19. The provision further requires Rotondo to indemnify AES for litigation expenses incurred in "enforc[ing] the indemnification obligations." Id. The Indemnification Provision may indeed encompass expenses incurred in this litigation since Rotondo owed taxes and did not pay his loan before the deal closed.

While Rotondo may owe AES money, it does not follow that AES can automatically deduct what it thinks Rotondo owes from the Consulting Fees. The Indemnification Provision does not create an automatic right for AES to be paid. Instead, this provision qualifies Rotondo's indemnification obligation by stating that Rotondo must pay after AES has made a "demand." Id . Without a demand, there is no right to payment under the contract. But there is no evidence that AES made such a demand—and thus no evidence that the Indemnification Provision has even been triggered.

Offset Provision . AES alternatively suggests that the last line of the Indemnification Provision, called the Offset Provision, proves that it has an automatic right to deduct costs and attorneys' fees. The Offset Provision states that AES "shall have a right to offset such losses, damages, liabilities, deficiencies, costs, expenses and attorneys' fees...