Deep Six, Inc. v. Abernathy

• Decision Date: 08 September 2000
• Docket Number: No. A00A1005.,A00A1005.
• Citation: 246 Ga. App. 71,538 S.E.2d 886
• Parties: DEEP SIX, INC. et al. v. ABERNATHY et al.
• Court: Georgia Court of Appeals

538 S.E.2d 886

246 Ga. App. 71

DEEP SIX, INC. et al. v. ABERNATHY et al.

No. A00A1005.

Court of Appeals of Georgia.

September 8, 2000.

Reconsideration Denied September 20, 2000.

Certiorari Denied February 2, 2001.

O. Jackson Cook, Atlanta, for appellants.

Ted Marcus, Atlanta, for appellees.

MILLER, Judge.

The issues on appeal are (1) whether undisputed evidence that sellers of a business had title and the right to immediate possession of tax refund checks arising from the business's pre-sale operations, authorized the court to grant the sellers summary judgment on their trover action, and (2) whether the trial court erred in holding that the sellers had not agreed to indemnify the purchaser for all appellate attorney fees connected with a pre-sale tax dispute of the business with the Internal Revenue Service. We hold that the court correctly granted the sellers summary judgment on the trover action but that it erred in granting the summary judgment on the indemnity question. Accordingly, we affirm in part and reverse in part.

Elaine Marcus (as executrix of an estate), John Scasino, and John Abernathy sold to Deep Six, Inc. a business whose alcoholic beverage licenses were held by an allegedly non-profit corporation known as Post 112 of the Jewish War Veterans. At the time, all parties knew that the IRS was auditing Post 112 and calling into question its non-profit status. The parties executed an indemnity agreement, which they attached as Exhibit I to the simultaneously executed purchase agreement and which they incorporated into the purchase agreement by reference. The indemnity agreement obligated the sellers to indemnify Deep Six for expenses arising out of pre-sale operations of the business, and the purchase agreement specifically obligated the sellers to pay expenses and tax payments resulting from the ongoing audit. The sellers deposited money in an escrow account to defray the anticipated expenses.

As a result of its audit, the IRS claimed that Post 112 was not entitled to nonprofit status and demanded back taxes and fines. Deep Six sought to appeal this determination, but the sellers refused to fund the appellate attorney fees. Deep Six intercepted three tax refund checks, drafted to Post 112 for pre-sale tax payments of the business and admittedly belonging to the sellers, and announced it would hold these until the sellers and it resolved the attorney fees question.

The sellers filed a two-count lawsuit against Deep Six and Post 112, seeking to recover the checks in trover (or in the alternative for conversion damages) and requesting a declaratory judgment construing the agreements such that the sellers were not required to fund any appeal from the loss of tax-exempt status for Post 112. The court granted the sellers summary judgment on both counts,¹ which Deep Six and Post 112 appeal. 1. The undisputed evidence shows that the sellers had both title to and the right to immediate possession of the tax refund checks. Accordingly, the court correctly granted the sellers summary judgment on their trover claim.²

2. The declaratory judgment claim hinges on an interpretation of the sellers' indemnity obligations as set forth in the written contracts. Since the construction of a contract is a question of law for the court based on the intent of the parties as set forth in the contract,³ the trial court must follow a three-step procedure in construing the contract language.

The trial court must first decide whether the contract language is ambiguous; if it is ambiguous, the trial court must then apply the applicable rules of construction (OCGA § 13-2-2); if after doing so the trial court determines that an ambiguity still remains, the jury must then resolve the ambiguity.⁴

This three-step procedure is a question of law that we review de novo and is independent of those rules allocating burdens of proof on motions for summary judgment.⁵

Here the indemnity agreement obligated the sellers to indemnify Deep Six for "any and all losses, claims, damages, liabilities, costs or expenses including without limitation, attorneys' fees, and all trial and/or appellate court costs" arising out of or connected with the pre-sale operations of the business. The tax audit and associated appellate attorney fees concerned the pre-sale operations of the business and thus were covered by this indemnity obligation. On its face, this contract language does not appear ambiguous.

The parties addressed the sellers' indemnity obligations specifically related to the tax audit in the text of the purchase agreement executed the same day, and thus the agreements must be construed together.⁶ In the purchase agreement the sellers agreed to indemnify Deep Six for "any and all expenses and tax payments accruing to the non-profit corporation or the Business as a result of said audit and investigation, including but not being limited to, accountants and attorneys' fees and expenses authorized and approved by Sellers." The reference to "attorneys' fees and expenses authorized and approved by Sellers" could be construed to give the sellers the right to not pay those fees which they do not authorize and approve and thus could possibly create an ambiguity or inconsistency with the more expansive language of the general indemnity agreement and with the "any and all expenses" language of the purchase agreement provision.

At this point, therefore, we apply the rules of construction to resolve the potential ambiguity. OCGA § 13-2-2(4) directs that we favor that construction which upholds the contract in whole and in every part, and that we look at the whole contract in arriving at the construction of any part.⁷ We should avoid...