B.F. Goodrich Co. v. United States Filter Corp.

• Decision Date: 01 November 2000
• Docket Number: No. 99-4353,99-4353
• Citation: 245 F.3d 587
• Parties: (6th Cir. 2001) B.F. Goodrich Company, Plaintiff-Appellant, v. United States Filter Corporation, Defendant-Appellee. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 587

245 F.3d 587 (6th Cir. 2001)

B.F. Goodrich Company, Plaintiff-Appellant, v. United States Filter Corporation, Defendant-Appellee.

No. 99-4353

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: November 1, 2000

Decided and Filed: March 29, 2001

Appeal from the United States District Court for the Northern District of Ohio at Akron. No. 97-03157, Dan A. Polster, District Judge.

Steven C. Bennett, JONES, DAY, REAVIS & POGUE, New York, New York, Elizabeth A. Grove, Cleveland, OH, for Appellant.

Kenneth A. Zirm, Walter & Haverfield, Cleveland, OH, Peter J. Vodola, Thomas G. Rohback, LEBOEUF, LAMB, GREENE & MacRAE, Hartford, Connecticut, for Appellee.

Before: KEITH, BOGGS, and COLE, Circuit Judges.

BOGGS, Circuit Judge.

OPINION

Plaintiff B.F. Goodrich Co. ("Goodrich") appeals the district court's decision granting summary judgment in favor of defendant United States Filter Corp. ("Filter") upon cross-motions for summary judgment in a diversity action for breach of a stock purchase agreement governed by New York law. For the following reasons, we reverse and remand for trial.

I

This case concerns competing interpretations of a single provision of a Stock Purchase Agreement (the "Agreement"). Goodrich and Filter entered into the Agreement on February27, 1995. Pursuant to the Agreement, Goodrich conveyed to Filter 100% of the issued and outstanding shares of common stock of Arrowhead Industrial Water, Inc. ("Arrowhead" or "AIW"), then a Goodrich subsidiary. Section 8.2(g) of the Agreement provides that:

Buyer [Filter] covenants to compensate Seller [Goodrich] for any Income Tax paid by Seller with respect to income accrued and included in Seller's taxable income, but not paid to Seller prior to Closing¹.

After the closing, Goodrich demanded reimbursement of certain tax payments from Filter, pursuant to Section 8.2 of the Agreement, and Filter refused. This simple description, however, belies a much more complex chain of events.

Both Goodrich and Filter had experience in negotiating similar transactions when they entered into negotiations regarding the Agreement. Goodrich drafted Section 8.2(g) of the Agreement. Although four versions of the Agreement were drafted, Filter's representatives never discussed or proposed any modification to Section 8.2(g) and it remained unchanged throughout the course of negotiations over the Agreement.

Both Goodrich's principal negotiator, Steven Esakov, and its principal tax advisor, George Sherwood, testified that Section 8.2(g) was intended to deal with the problem of taxes on accrued but unpaid income, such as receivables. The Agreement called for the buyer to acquire Arrowhead on a going-forward basis. Thus, any cash received by Arrowhead after the closing would belong to the buyer -- Filter. Both Arrowhead and Goodrich were consolidated, accrual taxpayers at the time of the sale, however. As a result, Goodrich included any income accrued by Arrowhead prior to closing in Goodrich's consolidated tax returns, even though Goodrich would never receive the cash pertaining to that accrued income since it would be received by Arrowhead after Filter's purchase of Arrowhead. Therefore, Goodrich claims it included Section 8.2(g) in the Agreement because, according to Sherwood, it was "fair" to ask Filter to "pay the taxes that came as a result of income that Goodrich had accrued (as part of its consolidated tax returns) but for which it had not received cash." Goodrich included the section in the Agreement after such a provision had been proposed by the seller in another agreement in which Goodrich was the buyer. Goodrich assumed that Filter understood Goodrich's interpretation of Section 8.2(g) and anticipated some discussion of the section during negotiations or questions from Filter if Filter did not understand the provision.

The transaction closed on April 28, 1995. After closing, an issue remained concerning a purchase price adjustment, resulting in implementation of an audit process. The issue was resolved over the course of nine months and with four amendments to the Agreement. Section 8.2(g) was not discussed by the parties during this process.

In mid-1996, Goodrich was in the process of finalizing its tax returns for 1995 (including tax returns for Arrowhead, a member of its consolidated group for the first part of 1995). On July 11, 1996, Sherwood, Goodrich's Vice President of Tax Administration, informed Kevin Spence, Filter's Vice President and Chief Financial Officer, that in accordance with Section 8.2(g) of the Agreement, Filter was "required to compensate" Goodrich for "any Income Tax paid by Seller with respect to income accrued and included in Seller's taxable income, but not paid to Seller prior to Closing." The letter estimated that Filter owed Goodrich $2.9 million on account of tax on "accrued but uncollected income at April 30, 1995 (the accounts receivable)."

On October 15, 1996, Sherwood sent a second letter to Spence. This time Goodrich included an invoice representing "the billing for the federal and state income tax paid" by Goodrich. Goodrich claimed that such "income accrued" amounted to roughly $7 million dollars in Arrowhead accounts receivable that Goodrich included in its gross income from 1995, resulting in payment of $2,943,942 in income tax.

Filter returned correspondence denying that it owed any money to Goodrich pursuant to Section 8.2(g) of the Agreement. Filter interprets Section 8.2(g) as pertaining not to accounts receivable, but to money that Arrowhead owed Goodrich for inter-company services rendered prior to closing of the sale. The first time Filter offered this interpretation of Section 8.2(g) was during Spence's deposition in this case. The interpretation was not raised in Filter's letters responding to Goodrich's correspondence or in Filter's Answer to the Complaint, all of which stated other reasons for Filter's refusal to pay.

The term "accounts receivable" is not included in Section 8.2(g) and was never used by Goodrich as a term in the drafting of Section 8.2(g). In addition, Section 8.2(g) does not mention Arrowhead. Other sections of the Agreement placed tax obligations on Goodrich, in particular, Section 1.3(a) and Section 11.1(b)(i). Goodrich's Sherwood asserted that Section 8.2(g) was a "carve out" from Goodrich's retention of all tax liabilities, but Filter notes that no "carve-out" language was used in Section 8.2(g), or in any of the other relevant sections concerning tax liabilities.

Filter maintains that Goodrich's own records showed that Arrowhead had operated at a loss and generated no taxable income, but nevertheless Goodrich demanded an amount equal to roughly one-fifth of Goodrich's entire corporate tax payment, claiming that it paid this amount as income taxes solely on the accounts receivable income from Arrowhead.

II

Goodrich filed its complaint on December 4, 1997. On February 4, 1998, a Case Management Plan was entered, placing the case on an expedited track with discovery to be completed by May 6, 1998. Counsel were directed to confer and prepare "written stipulations" as to "uncontested facts" to be considered on cross-motions for summary judgment. If the case could not be brought to a "prompt conclusion" on summary judgment a trial was to be conducted.

The parties submitted a sixty-five-page "Joint Statement of Undisputed Material Facts" (the "Joint Statement"). The Joint Statement was divided into two parts: one highlighting facts in Filter's favor and the other highlighting facts in Goodrich's favor. The parties stated that they had "different views as to which undisputed facts are material." In addition, the parties planned for the possibility that summary judgment might be denied, noting that supplementation of the Joint Statement might be required "for purposes of trial." On the basis of the Joint Statement, both parties filed motions for summary judgment. On January 25, 1999, the district court permitted both parties to supplement the record. On April 7, 1999, the parties conducted the deposition of George K. Sherwood, Goodrich's Vice President of Tax Administration, and filed supplemental memoranda in support of their cross- motions for summary judgment. On September 30, 1999, the district court granted Filter's motion for summary judgment and denied Goodrich's cross-motion.

In granting Filter's summary judgment motion, the district court relied on two independent bases for its decision. First, the court found that, as a matter of contract interpretation, Section 8.2(g) could not have the meaning urged by Goodrich when considered in the context of the contract as a whole. Specifically, the court noted that Goodrich retains all pre-closing tax liability under Section 11.1(b) of the Agreement and that Section 8.2(g) does not refer to accounts receivable and does not use "carve-out" language. The court also noted that "carve-out" language was used in other portions of the Agreement. Second, the court found that Goodrich did not offer proof that it actually paid income taxes on Arrowhead's accounts receivable. The district court found that Arrowhead operated at a loss during the first quarter of 1995, that it had no taxable or net income during the pre-closing period, and that Arrowhead's loss resulted in a tax credit for Goodrich.

III

A

This court reviews a district court's grant of summary judgment de novo, using the same standard employed by the district court. See National Enterprises, Inc. v. Smith, 114 F.3d 561, 563 (6th Cir. 1997) (citing Moore v. Philip Morris Cos., 8 F.3d 335, 339 (6th Cir. 1993)); Kraus v. Sobel Corrugated Containers, Inc., 915 F.2d 227, 229 (6th Cir. 1990). Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of...