NewCSI, Inc. v. Staffing 360 Solutions, Inc.

• Decision Date: 25 July 2017
• Docket Number: No. 16-50009,16-50009
• Citation: 865 F.3d 251
• Parties: NEWCSI, INCORPORATED, Plaintiff–Appellee, v. STAFFING 360 SOLUTIONS, INCORPORATED, Defendant–Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

865 F.3d 251

NEWCSI, INCORPORATED, Plaintiff–Appellee,

v.STAFFING 360 SOLUTIONS, INCORPORATED, Defendant–Appellant.

No. 16-50009

United States Court of Appeals, Fifth Circuit.

FILED July 25, 2017

Jane Webre, Robyn Bigelow Hargrove, Scott, Douglass & McConnico, L.L.P., Austin, TX, for Plaintiff–Appellee.

D. Todd Smith, Smith Law Group, P.C., Austin, TX, for Defendant–Appellant.

Before ELROD, SOUTHWICK, and GRAVES, Circuit Judges.

JENNIFER WALKER ELROD, Circuit Judge:

A jury found that a staffing company violated the terms of the stock purchase agreement by which it had acquired another company. The district court entered a judgment against the staffing company for approximately $1.3 million in actual and liquidated damages. The staffing company appeals on three grounds. First, it argues that the evidence was insufficient to support the jury's determination. Second, it argues that the district court erred in enforcing the stock purchase agreement's liquidated damages clause and, alternatively, that the district court miscalculated the damages to be paid under that clause. Third, the company argues that the district court abused its discretion by instructing the jury not to consider whether finding a breach would trigger liquidated damages. Because none of these arguments is persuasive, we AFFIRM the judgment of the district court.

I.

In August 2013, the staffing company, Staffing 360 Solutions, Inc., acquired Control Solutions International from its parent company, NewCSI, pursuant to a stock purchase agreement.¹ The agreement contained two provisions that are relevant to this case. One is the provision that the jury determined Staffing 360 breached. The other is the liquidated damages clause that the district court determined was triggered by Staffing 360's breach.

The first provision, Section 2.7, had to do with "Deferred Tax Benefit." Section 2.7 defined Deferred Tax Benefit to mean:

[T]he dollar value of Deferred Tax Assets as of the Closing Date that have accrued or will benefit in the future to CSI or the Purchaser as a result of the Purchaser's acquisition of CSI ... without regard as to whether or not such Deferred Tax Asset has been or can be used in the current tax year or is deferred to a future tax year.

Section 2.7 required Staffing 360 to calculate the Deferred Tax Benefit by March 31, 2014, and to pay fifty percent of the Deferred Tax Benefit to NewCSI by April 15, 2014.

The second provision, Section 2.2(d), obligated Staffing 360 to pay liquidated damages upon the occurrence of various "Adjustment Events." One Adjustment Event was "[t]he failure of the Purchaser to perform, keep or observe any term, provision, condition, covenant, warranty or representation contained in this Agreement." Such an event was to trigger payment by Staffing 360 of an "Adjustment Amount" equal to "$1.4 million less the amount of any Earn Out previously paid to NewCSI or the Shareholders."² Section 2.2(d) specified that "the actual damages likely to result from an Adjustment Event are difficult to estimate on the date of this Agreement" and that the parties intended the Adjustment Amount as compensation for any Adjustment Event rather than as a penalty.

On March 31, 2014—the same day that Staffing 360 was to finalize its valuation of CSI's deferred tax assets—Staffing 360 and NewCSI representatives began to dispute the meaning of "Deferred Tax Benefit" under Section 2.7. Three days earlier, Staffing 360's CFO, Jeff Mitchell, had written to Charlie Cooper, NewCSI's Managing Partner, stating, "I think the purpose of this clause was basically to say, if there is a tax benefit to the parent, 50% of that benefit will be paid to you guys in cash." On March 31, Cooper responded, "[T]he agreement speaks to [Staffing 360] paying 50% of any deferred tax asset, not the net of any deferred tax asset and deferred tax liability. That was deliberate and highly negotiated as part of the overall deal." Mitchell replied that he would be happy to discuss further, but that his initial review of CSI's balance sheet at the time of purchase showed liabilities in both the Tax Asset account and the Tax Liability account. On April 9, Cooper wrote back with a detailed calculation of $308,866 in deferred tax assets and stated that Staffing 360 owed fifty percent of this amount, or $154,433, to NewCSI. Mitchell promised to "take a look and get back to you shortly." It appears Mitchell did not follow up and Staffing 360 did not make a Section 2.7 payment.

NewCSI sued Staffing 360 in state court for breach of contract, and Staffing 360 removed the case to federal court on the basis of diversity of citizenship. In the district court, Staffing 360 argued that calculating a Deferred Tax Benefit under Section 2.7 required netting deferred tax assets and liabilities, which resulted in a negative value and therefore showed that no Section 2.7 payment was owed. NewCSI argued that the Deferred Tax Benefit consisted of the total value of all deferred tax assets without netting out liabilities, which resulted in a positive value and therefore showed that Staffing 360 had breached the contract by failing to make a Section 2.7 payment.

During the five-day jury trial, both parties offered expert testimony as to the meaning of the disputed term. Staffing 360 called Paul Howell, a tax accounting expert. Howell testified that deferred taxes "is really only a GAAP [Generally Accepted Accounting Principles] term." He explained that, to calculate deferred taxes under GAAP, "[y]ou net your deferred tax assets and the—your deferred tax liabilities." According to Howell, CSI's deferred tax liabilities exceeded its deferred tax assets by approximately $117,134, so that Staffing 360's acquisition of CSI produced no net reduction in deferred taxes. Moreover, even if CSI had more deferred tax assets than liabilities, Howell testified that this would not have resulted in a reduction of Staffing 360's deferred taxes because Staffing 360 already had more deferred tax assets than it could use. Howell also testified that he thought Cooper overestimated CSI's gross deferred tax assets by $199,961 because he treated as assets items that should not have been so treated.

NewCSI called Cooper to describe the negotiations surrounding Section 2.7, including statements by Staffing 360 personnel clearly stating that the payout was not to be reduced by tax liabilities. Otto Wheeler, a public accounting expert, testified that nothing in Section 2.7 calls for deferred tax liabilities to be netted against deferred tax assets. This interpretation was supported by an email from Nancy Peck, a CPA at an auditing firm that NewCSI hired to calculate the amount owed under Section 2.7. Peck wrote that the clause "specifically uses the term ‘Deferred Tax Assets' and thus not net of deferred tax liabilities." She prepared a memo valuing CSI's deferred tax assets at the time of closing at $308,866—the same amount that Cooper had calculated in his email to Mitchell.

After the close of evidence, the jury was asked whether Staffing 360 breached Section 2.7 of the stock purchase agreement and, if so, what damages this breach caused. The jury instructions provided that "[t]echnical words should be interpreted as usually understood by persons in the profession or business to which they relate and must be taken in the technical sense, unless the context of the instrument or applicable usage or surrounding circumstances clearly indicate a different meaning." The jury was also instructed to find breach only if Staffing 360's failure to comply was material and listed several factors to consider in evaluating materiality, including "[t]he extent to which the party failing to perform will suffer forfeiture." The jury question on damages limited the valuation to fifty percent of the Deferred Tax Benefit. While it was deliberating, the jury sent out a note to ask whether its answers could trigger liquidated damages and whether these damages should be included in the damages calculation. Staffing 360's counsel asked the court to instruct the jury that a finding of breach would trigger liquidated damages, arguing that this could influence the jury's evaluation of whether the breach was material. However, the court instructed the jury, "You are not to consider the result of your answers to the questions submitted to you."

The jury returned a verdict finding that Staffing 360 breached Section 2.7 of the stock purchase agreement, causing $154,433 in damages. The district court denied Staffing 360's motion for a new trial, which was based on allegations that the jury's finding of breach was against the great weight of the evidence, that the jury charge was erroneous because the court failed to submit a construction of Section 2.7, and that the court's response to the jury note was erroneous. Staffing 360 filed a renewed motion for judgment as a matter of law under Federal Rule of Civil Procedure 50(b), arguing that there was no evidence supporting a finding that Staffing 360 owed a payment to NewCSI under Section 2.7. However, Staffing 360 had not made a Rule 50(a) motion before the jury's verdict, and the district court denied Staffing 360's Rule 50(b) motion. The district court entered a judgment against Staffing 360 of $1,306,576 plus pre- and post-judgment interest, pursuant to the jury's findings and the liquidated damages clause.³

Staffing 360 appeals the district court's judgment, arguing that the jury's findings should be set aside as contrary to uncontradicted expert testimony, that the district court's award of liquidated damages should be vacated because the liquidated damages provision is an unenforceable penalty or should be revised because the credit for earn-out payments was miscalculated, and that a new trial should be ordered because the district court abused its discretion by instructing the jury not to consider the consequences of its answers.

II.

We review an unpreserved challenge to the sufficiency of the evidence for...