In re KDI Corp.
| Decision Date | 11 January 1980 |
| Docket Number | Bankruptcy No. 61463. |
| Parties | In re KDI CORPORATION, Debtor. HAGEN SIGN CORPORATION, Claimant, v. KDI CORPORATION, Debtor. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio |
James W. Halloran, Jeffrey P. Harris, Cors, Hair & Hartsock, Cincinnati, Ohio, for appellee/debtor.
Benjamin Gettler, Dennis J. Buckley, Gettler & Katz, Cincinnati, Ohio, for appellant/creditor.
In this Chapter XI proceeding, claimant Hagen Sign Corporation filed a proof of claim on August 30, 1972. The claim recites that it is filed as a priority claim in the amount of $319,149.00, the claim arising from the guarantee of debtor of the obligations of KDI Hagen Corporation which entered into an agreement with Hagen Sign whereby KDI Hagen sold its assets to Hagen Sign. On September 29, 1978, claimant filed an amended proof of claim, increasing the amount sought to $359,149.00, including $50,000.00 attorneys fees and $25,000.00 accountants fees. Debtor has objected to the claim, saying it "is not justly or truly indebted" to the claimant.
On May 18, 1979, we entered our decision on burden of proof in this case. We concluded that the claimant stood in the position of plaintiff in this case, and that the burden of proof rested upon it to prove its claim. We held further that claimant must present a prima facie case and thereupon the burden of going forward shifted to the debtor. We said that in view of Bankruptcy Rules 301(b) and 302(c), a prima facie case as to validity and the amount of claim would have been presented when claimant had filed the contract upon which it relied. This was done in conjunction with the filing of the proof of claim itself. In addition, we said that a certificate by Alexander Grant indicating conformity with the requirements of the agreement was also necessary and this would complete the prima facie case of plaintiff. We also held that the contention of debtor that Alexander Grant was not acting independently, and that the audit did not conform to the provision of the contract calling for application of generally accepted accounting principles etc., were not matters of affirmative defense as to which debtor had the burden of proof. We held instead that they were simply matters of defense regarding the contentions asserted by claimant. Finally, we held that the burden of proof upon claimant was to prove its case by a preponderance of the evidence.
Debtor defendant is a conglomerate, which on September 20, 1969, acquired a company called Hagen Advertising Displays from one Leonard Hagen. The assets of Hagen Advertising were transferred to a new entity known as KDI Hagen Corporation (hereafter "KDI Hagen"). Subsequently, on December 29, 1970, debtor KDI, having encountered financial difficulties and needing cash, divested itself of the company which it had acquired, by entering into an agreement on December 29, 1970, with Hagen Sign Corp. (hereafter "Hagen Sign"), a new entity formed by its principal, Lloyd Miller, for the purpose of the acquisition. Hagen Sign is a wholly owned subsidiary of Schaefer's Bakery, another Miller enterprise. Closing was held January 14, 1971. On December 30, 1970, debtor filed for relief under Chapter XI of the Bankruptcy Act. The sale price of KDI Hagen to Hagen Sign was one million dollars with $200,000.00 being withheld by the purchaser.
The agreement between the parties in para. 5 sec. (c) stated:
"As soon as possible after January 1, 1971, an examination is to be conducted by Alexander Grant & Company certified public accountants, of the balance sheet of KDI Hagen Corporation as of October 31, 1970, to be prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of seller\'s preceding fiscal period."
It is the position of debtor that claimant can only succeed here if it can establish that there was compliance with this paragraph, and in addition the result of the audit shows that the figures set out in a balance sheet Exhibit B attached to the agreement, required adjustment in claimant's favor. Claimant does not see the issues as so limited, asserting that it has independent grounds for recovery because of breaches of express warranties to be found in the agreement. Debtor contends that the audit of Alexander Grant was not prepared in accordance with generally accepted accounting principles and applied on a basis consistent with that of seller's preceding fiscal period, and therefore, a contract condition, prerequisite to performance by debtor, was not performed.
As we have noted, together with its proof of claim, claimant filed in support thereof a copy of the agreement between the parties. We held that claimant had completed its prima facie case when there was admitted into evidence a balance sheet prepared by Alexander Grant containing an appropriate recitation of compliance with the language of the agreement.
It is the position of claimant that the agreement provides alternate bases for it to recover, first, an action pursuant to para. 5(a) of the agreement for breach of warranty, and second, suit under para. 5(c) of the agreement for price adjustment based upon a post closing audit by Alexander Grant & Company. Debtor, to the contrary, says that only the second alternative is available to claimant. We conclude that a proper interpretation of the agreement permits recovery only under the second stated alternative.
It is true that para. 4 of the agreement, entitled Warranties And Undertakings of Seller, contains subparagraphs typical of an agreement in an acquisition of a business, boiler plate, but it also contains subparagraphs directed at matters specific to the transaction of the acquisition of KDI Hagen by Hagen Sign. For instance, subparagraph (f) warrants the accounts receivable as recited on Exhibit B attached to the agreement, and subparagraph (g) warrants current and usable inventories as shown on Exhibit B.
Notwithstanding the title of para. 5, 5(a) does not deal specifically with the warranty of accounts receivable.
Subparagraph 5(b) deals first with claims of third parties which may give rise to "losses" as defined in the contract language above, and sets up a mechanism whereby seller could participate in the settlement of any such claim. Furthermore, the subparagraph deals with the accounts receivable of Fotolab Corporation and Dunkin' Donuts, Inc. providing that seller could take over the collection of such accounts receivable. The subparagraph finally defines the obligation of purchaser to pursue these accounts receivable in the absence of efforts by seller to collect them. We note here that no evidence was introduced that the seller did utilize this contract provision in regard to the collection of the Fotolab or Dunkin' Donuts accounts.
We come then to the critical subparagraph 5(c), which we have already quoted above. This subparagraph provides for an audit "of the balance sheet of Seller as of October 31, 1970", and in the event that "such examination reveals a breach of any of the warranties or representations contained in this Agreement, Purchaser shall be entitled to a credit against the purchase price."
Subparagraph 5(d) states the right of purchaser to retain $200,000.00 of the purchase price as "security for the warranties and representations of Seller and, in particular, the warranty that the accounts receivable of Seller are current and collectible, except to the extent of reserve for doubtful accounts of $7,193.00." The paragraph further spells out the rights and obligations of the parties as accounts receivable are collected and the time arrives for payments to seller from the retained $200,000.00 of the purchase price.
Subparagraph 5(e) provides a limitation as to consequences of an audit pursuant to 5(c) which is more favorable to the seller than Exhibit B attached to the agreement.
It is an elementary legal proposition that there is no room for extrinsic evidence in the interpretation of a contract, if the terms of the contract are clear and unambiguous. We do not think this contract clear and unambiguous, at least so far as the intention of the parties is concerned, with regard to the remedies available to the purchaser in the event of a breach of the warranties relating to the balance sheet, Exhibit B. If it were the intention of the parties that the purchaser have a remedy by way of an action for breach of contract for breach of the contract warranties, there is no need for subparagraph 5(c), which directly and specifically requires that there be an audit by Alexander Grant, and an adjustment based upon the result of that audit. Resorting to familiar rules of contract construction, we are not justified in assuming that a substantial provision in a contract, clearly deliberately included by the parties, was pointless.
Under the circumstances, we are justified in looking at extrinsic evidence to determine the intention of the parties in entering into the agreement. The only evidence in the record on this score is to be found in the testimony of Lloyd Miller. It was his testimony that the deal for the acquisition of KDI Hagen by Hagen Sign was negotiated by himself and by Keith Taylor, Chairman of the Board and Chief Executive Officer of KDI. Only Miller and Taylor were involved in the...
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