Brae Transp., Inc. v. Coopers & Lybrand

• Citation: 790 F.2d 1439
• Decision Date: 03 June 1986
• Docket Number: No. 85-1891,85-1891
• Parties: BRAE TRANSPORTATION, INC. and Brae Communication, Inc., Plaintiffs-Appellants, v. COOPERS & LYBRAND, a partnership; Luke G. Williams; Luke G. Williams, a Trustee for the Luke G. Williams Trust; Charles M. Williams; Donald Sherwood; Pioneer Investment Company, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1439

790 F.2d 1439

BRAE TRANSPORTATION, INC. and Brae Communication, Inc., Plaintiffs-Appellants, v. COOPERS & LYBRAND, a partnership; Luke G. Williams; Luke

G. Williams, a Trustee for the Luke G. Williams Trust;

Charles M. Williams; Donald Sherwood; Pioneer Investment

Company, Defendants-Appellees.

No. 85-1891.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted April 17, 1986.

Decided June 3, 1986.

William A. Brockett, Keker & Brockett, San Francisco, Cal., for plaintiffs-appellants.

Marc P. Fairman, Morrison & Foerster, San Francisco, Cal., for defendants-appellees.

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

Before FARRIS and BOOCHEVER, Circuit Judges, and KEEP, ^* District Judge.

FARRIS, Circuit Judge:

Brae Transportation, Inc. and Brae Communication, Inc. appeal from summary judgment granted to the Shareholders of American Sign and Indicator Corporation. After buying 85% of the stock of AS & I from the Shareholders, Brae discovered a shortfall in the warranted net worth of AS & I. Settlement of that claim included the execution of a Release Agreement whereby Brae released the Shareholders of AS&I from all claims as to net worth. After settlement, Brae discovered an allegedly improper accounting method used by AS & I which, when corrected, resulted in a further decrease in AS & I's net worth. Brae sued to recover this belatedly discovered decline. The district court granted summary judgment to the Shareholders of AS & I, holding that as a matter of law the Release barred this suit. We affirm.

FACTS

Brae agreed to buy 85% of the stock of AS & I. The selling Shareholders represented in the Stock Purchase Agreement that AS & I's net worth would be at least $19,625,000. This figure was based on audits by Coopers & Lybrand, AS & I's regular accountants, who vouched that its audit complied with Generally Accepted Accounting Principles and Generally Accepted Auditing Standards.

Brae retained the accounting firm of Arthur Andersen to conduct a purchase review of AS & I. After a review of AS & I's books, the sale was closed at the end of March in 1983. After the closing. Coopers conducted an audit of AS & I, in consultation with Arthur Andersen, certifying the financial statements and finding a shortfall of $1.2 million in the warranted net worth. The Stock Purchase Agreement provided that any shortfall in net worth would be off-set against the purchase price. After further scrutiny of AS & I's books, Brae claimed additional shortfalls in net worth totalling nearly $4 million. All of this shortfall was allegedly attributable to errors in inventory computation, overvaluation of accounts receivable, and other "counting" errors affecting net worth.

To settle these conflicting claims Brae and the Shareholders, after two months of negotiations, executed a Release and Amendment to the Stock Purchase Agreement. The Shareholders paid Brae nearly $2.8 million as an off-set to the purchase price, and Brae released the Shareholders from further liability as to net worth. The Shareholders argue that the legal effect of the Release was to foreclose further litigation over net worth. The trial court agreed as a matter of law.

The Release provided:

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RECITALS

2. The parties desire fully and freely to settle differences which have arisen with respect to certain representations and warranties of RELEASEES under the Stock Purchase Agreement and their indemnification obligations in connection therewith.

AGREEMENT

IN CONSIDERATION OF RELEASEES' AGREEMENT to permit BRAE ... to set off $2,281,000 ... as satisfaction in full for certain claims for indemnity against payments otherwise due from BRAE to RELEASEES ... BRAE, notwithstanding anything in the Stock Purchase Agreement to the contrary ... releases and forever discharges RELEASEES, and each of them, their successors and assigns, from all claims, demands, indemnifications and causes of action that BRAE may now have or that might subsequently accrue to BRAE arising out of or connected with, directly or indirectly, any representations or warranties of RELEASEES contained in the Stock Purchase Agreement ... except those contained in Section 2 [representations and warranties concerning stock ownership].

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This Release is freely and unconditionally executed by the parties after having fully satisfied themselves by review of all considerations and data relevant to such a release. In executing this Release they do not rely on any inducements, promises or representations not contained herein.

Several days after the Release had been signed Brae became aware of alleged accounting errors used by Coopers with the knowledge of the Shareholders. According to Brae, Coopers was valuing certain future residual interests not at their discounted present value but at their value in the future. This alleged improper methodology overvalued these future reversions and inflated AS & I's net worth by some $5 million. Brae alleges that this methodology was not in accord with Generally Accepted Accounting Principles and Generally Accepted Auditing Standards, contrary to Coopers' representations, and that the shareholders participated in Coopers' fraud.

Upon discovery of the methodology and its effect on AS & I's stated net worth, the CEO of Brae informed the Shareholders that Brae intended to sue Coopers. The CEO also told the Shareholders that they need not be concerned with the suit because the Release precluded litigation against them. After consulting counsel, Brae changed its position and sued the Shareholders as well as Coopers.

Formal discovery was limited to requests for admissions under Rule 36 filed by the Shareholders. Brae admitted each request, authenticating the Release and admitting that it did not rely on any inducements, promises or representations made by the Shareholders. Brae also admitted, in language tracking that of the Release, that its claims arose out of the representations and warranties in the Stock Purchase Agreement. AS & I informally produced documents in August of 1984, and after the Shareholders' motion for summary judgment was filed in September of 1984, Brae stipulated to stay formal discovery until the motion was decided. Brae refers in its memoranda in opposition to summary judgment to the need for discovery, but it never made a Fed.R.Civ.P. 56(f) motion.

The district judge granted the Shareholders' motion for summary judgment and denied Brae's post-judgment motion to amend or withdraw one of its admissions. This court has jurisdiction under 28 U.S.C. Sec. 1291.

DISCUSSION

1. Was the appeal timely?

The district judge entered final judgment on February 13, 1985. The next day Brae filed a motion to vacate or stay the judgment pursuant to Fed.R.Civ.P. 59 and a motion to amend or withdraw an admission pursuant to Rule 36.

On March 12 Brae filed a Notice of Intention to Dismiss Action, as follows:

Plaintiffs hereby advise the Court of their intention to dismiss the Complaint filed against Defendant Coopers & Lybrand in this action.

It is Plaintiffs' intention not to dismiss until after the Court has determined pending motions, set for hearing on April 1, 1985.

The intention to dismiss will moot one of the pending motions, a Motion to Vacate or Stay a Final Judgment Order in favor of the Individual Defendants in this case.

At the hearing on April 1, the district judge denied the Rule 36 motion to amend the admission. Her order referred to the Motion to Vacate as "Having been withdrawn." After hearing argument on the period of appeal, the district judge set April 1 as the commencement of the appeal period. Brae filed its Notice of Appeal on April 12.

A timely Rule 59 motion will suspend the appeal period under Fed.R.App.P. 4(a)(4). The Shareholders argue that Brae "withdrew" and thus nullified its Rule 59 motion on March 12 when it filed its Notice of Intention to Dismiss. With Brae's Rule 59 motion thus nullified, the Shareholders argue that the appeal period was not suspended. The Shareholders buttress this argument by pointing to Rule 4(a)(4), which provides that "the time for appeal ... shall run from the entry of the order ... granting or denying ... such motion." The Shareholders contend that because the Rule 59 motion was withdrawn, no Rule 4(a)(4) order was issued, and therefore the appeals period was never suspended by this short-lived Rule 59 motion.

We reject the argument. The Notice of Intention to Dismiss did not withdraw the Rule 59 motion. The Notice, expressing Brae's litigation plan, has no legal effect beyond expressing Brae's intent to keep the motion alive until the April 1st hearing. Furthermore, an order was issued disposing of the Rule 59 motion. The district judge referred to the motion and declared that it had been withdrawn. The date of its withdrawal was April 1, not March 12. The withdrawal operated as a concession of defeat by Brae, and the order disposed of it along with the Rule 36 motion. The district judge did not err in recognizing that the time for appeal began to run on April 1. Brae's April 12 Notice of Appeal was timely.

2. Should the district court have allowed discovery to Brae before summary judgment?

We review a denial of discovery for abuse of discretion. Foster v. Arcata Associates, Inc., 772 F.2d 1453, 1467 (9th Cir.1985) cert. denied, --- U.S. ----, 106 S.Ct. 1267, 89 L.Ed.2d 576 (1986).

Brae complains that several factual issues, such as the intent behind the Release and the Shareholders' role in the challenged accounting methodology, require discovery. Brae complains that it postponed discovery in reliance on the Shareholders' assurances that they were not responsible for the alleged accounting fraud. After Brae discovered the Shareholders' role, so Brae argues, it diligently pursued discovery through its Memoranda in Opposition to Summary Judgment, its Declarations in Opposition to Summary Judgment, its oral...