Pegasus Management Co., Inc. v. Lyssa, Inc.

• Decision Date: 06 February 1998
• Docket Number: Civil Action No. 95-12489-RCL.
• Citation: 995 F.Supp. 29
• Parties: PEGASUS MANAGEMENT COMPANY, INC., Kahuna, Inc., as General Partner of Lahaina Realty Limited Partnership, Olympus Healthcare Group, Inc., and Daniel J. Kane, Plaintiffs, v. LYSSA, INC., Robko, Inc., Ginko, Inc., Amram, Inc., TRJ, Inc., Josh Manor, Inc., Michael Konig, Individually and as General Partner of HRG Realty, L.P., Scott Swamp Realty, L.P., 1312 West Main Realty, L.P., 33 Roy Street, L.P., and Bidwell Realty, L.P., Defendants.
• Court: U.S. District Court — District of Massachusetts

995 F.Supp. 29

PEGASUS MANAGEMENT COMPANY, INC., Kahuna, Inc., as General Partner of Lahaina Realty Limited Partnership, Olympus Healthcare Group, Inc., and Daniel J. Kane, Plaintiffs, v. LYSSA, INC., Robko, Inc., Ginko, Inc., Amram, Inc., TRJ, Inc., Josh Manor, Inc., Michael Konig, Individually and as General Partner of HRG Realty, L.P., Scott Swamp Realty, L.P., 1312 West Main Realty, L.P., 33 Roy Street, L.P., and Bidwell Realty, L.P., Defendants.

Civil Action No. 95-12489-RCL.

United States District Court, D. Massachusetts.

February 6, 1998.

Robert P. Sherman, David R. DeVeau, Hutchins, Wheeler & Dittmar, Boston, MA, for Pegasus Management Company, Inc., Kahuna, Inc., Olympus Healthcare Group, Inc., Daniel J. Kane.

David R. DeVeau, Hutchins, Wheeler & Dittmar, Boston, MA, for Lahaina Realty Limited Partnership.

James J. Marcellino, Susan M. Insoft, Judith A. Goldberg, McDermott, Will & Emory, Boston, MA, for Lyssa, Inc., Robko, Inc., Ginko, Inc., Amram, Inc., TRJ, Inc., Josh Manor, Inc., Michael Konig, Scott Swamp Realty, L.P., 1312 West Main Realty, L.P., 33 Roy Street, L.P., Bidwell Realty, L.P.

MEMORANDUM AND ORDER ON PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AS TO LIABILITY ON COUNT II (BREACH OF WARRANTY) (# 26)

COLLINGS, United States Magistrate Judge.

I. Introduction

Originally filed in the Worcester County Superior Court, this civil action was removed to the federal court in November of 1995. In their four count complaint the plaintiffs, Pegasus Management Company, Inc. ("Pegasus"), Kahuna, Inc. ("Kahuna"), as general partner of Lahaina Realty Limited Partnership ("Lahaina Realty"), Olympus Healthcare Group, Inc. ("Olympus") and Daniel J. Kane ("Kane") (collectively "the plaintiffs"), have alleged claims for breach of contract, breach of warranties, misrepresentation, and violation of Massachusetts General Laws chapter 93A in connection with the purchase of a group of nursing homes located in Connecticut. The defendants, Lyssa, Inc. ("Lyssa"), Robco, Inc. ("Robco"), Ginko, Inc. ("Ginko"), Amram, Inc. ("Amram"), TRJ, Inc. ("TRJ"), Josh Manor, Inc. ("Josh Manor"), Michael Konig ("Konig"), individually and as general partner of HRG Realty, L.P. ("HRG Realty"), Scott Swamp Realty, L.P. ("Scott Swamp"), 1312 West Main Realty, L.P. ("1312 West Main Realty"), 33 Roy Street L.P. ("33 Roy Street"), and Bidwell Realty, L.P. ("Bidwell Realty") (collectively "the defendants"), were the sellers of the properties and assets.

Following the removal to this court, the defendants duly filed their answer to the complaint together with a four count counterclaim seeking payment on a certain promissory note from the payor of the note, Lahaina Realty, as well as the guarantors of the note, Kane, Olympus, and Pegasus. The answer to the counterclaim was timely filed by the four counterclaim-defendants and, thereafter, discovery continued apace.

In June, 1997, with the parties' consent, this case was referred and reassigned to the undersigned for all purposes, including trial and the entry of judgment, pursuant to 28 U.S.C. § 636(c). The plaintiffs filed their motion for summary judgment as to liability on Count II of the complaint (# 26) on November 10, 1997; the defendants submitted their motion for summary judgment on the complaint and the counterclaim (# 31) the same day. After all the relevant papers and supporting materials had been filed, argument was heard on the dispositive motions on December 23, 1997, and they were taken under advisement.

At a further status conference on January 12, 1998, the Court orally ruled that under the terms of the contracts between the parties, the plaintiffs could recover on their breach of warranty claims even if they knew at the closing that what was warranted was not true. Eight days later at another status conference, the Court indicated that rulings would be made on the remaining issues raised by the parties' dispositive motions. Thus, at this juncture, the issues outstanding in the plaintiffs' motion for summary judgment on Count II are in a posture for decision.

II. The Facts

The plaintiffs have filed a Statement Of Undisputed Facts In Support Of Their Motion For Summary Judgment (# 28) as to which the defendants have objected in part, and moved to strike. (# 35) In the course of recounting the background facts, the Court shall rely largely upon the Statement of Undisputed Facts to the extent that no objection has been interposed or that the particular objection is determined to be without merit. See Local Rule 56.1.

First, to identify the players: plaintiff Olympus, which was formed in the Spring of 1994 by plaintiff Kane, is the parent company of plaintiffs Pegasus and Kahuna. (# 28 ¶ 1)¹ Kahuna is the general partner of plaintiff Lahaina Realty. (Id.) The twelve named defendants were the owners, and ultimately the sellers, of six Connecticut nursing homes and their related assets. (# 28 ¶ 2)

Messrs. Kane and Konig met through a mutual friend in May of 1994 shortly after Mr. Kane had begun a search for nursing homes to be bought and managed by Pegasus. (# 28 ¶ 3) Through the various entities named as parties defendant, Konig owned the six nursing homes involved in this litigation. (Id.) With a view toward a potential sale of the real estate and assets, Konig gave Kane a tour of the six facilities and provided financial statements for the nursing homes as of September 30, 1993, that had been prepared by his outside accountants, Martin Friedman & Co. (Id.) As a result of the discussions which continued through June of 1994, the men agreed upon a tentative purchase price of $27 million for the six nursing homes and their related assets. (# 28 ¶ 4)² During the month of June, 1994, Kane and his attorney, Jack H. Fainberg, Esquire, began to negotiate the terms of an asset purchase agreement with Konig and his lawyer, Jay M. Silberner, Esquire. (# 28 ¶ 5)

Effective August 12, 1994, Pegasus entered into an Asset Purchase Agreement with the defendant-sellers whereby Pegasus would purchase the six nursing homes and related assets for $27 million. (# 28 ¶ 6) It is uncontested that in Article III of the Asset Purchase Agreement, defendant-sellers made several warranties, representations and covenants with regard to both the legal and financial status of the facilities and assets. (# 28 ¶ 6) Moreover, the preamble to Article III, entitled Warranties, Representations and Covenants of the Sellers, reads:

To induce the Purchaser to execute and deliver this Agreement and to consummate the transactions contemplated hereby, the Sellers and Konig hereby make each of the representations, warranties and covenants set forth in this Agreement, including those set forth in this Article, each of which shall survive the execution and delivery of hereof (sic) and the Closing Date hereunder, all of which are material and have been relied upon by the Purchaser and each of which shall be true and correct in all respects as of the date hereof and as of the Closing Date hereunder.

Plaintiffs' Statement Of Undisputed Facts # 28 ¶ 6.

Numerous of the warranties delineated in Article III refer to information, as for instance certification defects and environmental issues, that was to be disclosed in schedules and exhibits to the Asset Purchase Agreement which as of August 12, 1994, had yet to be prepared by the defendant-sellers. (# 28 ¶ 7)

Under cover of a letter dated September 7, 1994, Attorney Silberner forwarded certain disclosure schedules to be attached to the Asset Purchase Agreement to Attorney Fainberg, and further advised "[t]here are no items to list on Schedules ... 3.10 [concerning licensing and certification defects][and] 3.11 [concerning environmental issues] ... If you wish to make up a separate heading for each of those and say none, I have no problem with that." (# 28 ¶ 8)³ While Pegasus was undertaking its due diligence prior to closing, the defendant-sellers requested that Pegasus help them in completing certain of the disclosure schedules. (# 28 ¶ 10) Pegasus agreed to assist in the preparation of the schedules, with the parties nonetheless specifically agreeing that "[t]he truth, accuracy and completeness of the Disclosure Schedules are the sole, complete and final responsibility of the Sellers." (Id.) On November 8, 1994, an assistant to Konig sent him a memorandum regarding the status of the disclosure schedules which reflected that "none" should be entered on schedule 3.10 (licensing and certification defects), that no information was set forth for inclusion in schedule 3.11 regarding environmental issues,⁴ and further that schedule 3.14 regarding financial statements needed "updated financials — still outstanding." (# 28 ¶ 12) Approximately eight days later, Attorney Silberner wrote to Attorney Fainberg confirming, inter alia, that schedule 3.10 (licensing and certification defects) should read "none" and that schedule 3.11 (environmental issues) should include "[o]ne underground oil storage tank at Bidwell Health Center." (# 28 ¶ 13)

The Asset Purchase Agreement which was signed on August 12, 1994, contained the following provisions:

ARTICLE IX

Indemnification

Section 9.1 The Sellers' Obligations to Indemnify Purchaser. The Sellers jointly and severally agree to indemnify and hold harmless Purchaser from and against any claim, loss, damage, liability, tax, interest, penalty, cost, suit, judgment, order, lien, obligation or expense whether administrative, judicial or otherwise (including, but not limited to, reasonable attorneys', consultants', accountants' and expert witness fees), whether or not suit is brought arising (i) by reason of or from any misrepresentation or breach of any warranty contained in this Agreement including, but not limited to, Article III hereof; (ii) out of or in connection with any Retained Liabilities or other liabilities of any one or more of the Sellers; (iii) any federal, state or local taxes, penalties or interest assessed against...