Schwan-Stabilo v. Pacificlink Intern.
| Decision Date | 03 March 2005 |
| Docket Number | Docket No. 04-0645-CV. |
| Citation | 401 F.3d 28 |
| Parties | SCHWAN-STABILO COSMETICS GMBH & CO., Plaintiff-Appellee, v. PACIFICLINK INTERNATIONAL CORPORATION and Paul Shieh, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Second Circuit |
Thomas J. Fleming, Olshan, Grundman, Frome, Rosensweig & Wolosky L.L.P., New York, NY, for Defendants-Appellants.
Paul M. Brown (Timothy T. Brock and Jennifer S. Smith on the brief), Satterlee, Stephens, Burke & Burke L.L.P., New York, NY, for Plaintiff-Appellee.
Before: FEINBERG, MESKILL and B.D. PARKER, Circuit Judges.
Defendants-appellants PacificLink International Corporation ("PacificLink") and Paul Shieh appeal from a judgment of the United States District Court for the Southern District of New York (Charles L. Brieant, Judge) granting plaintiff-appellee Schwan-Stabilo Cosmetics GmbH & Co.'s ("SSC") motion for summary judgment, denying defendants' motion for summary judgment, and awarding plaintiff $492,525 plus interest, to be paid jointly and severally by defendants. For the reasons set forth below, we affirm in part and vacate in part, and remand for further proceedings.
Plaintiff-appellee SSC is a private German company specializing in cosmetics manufacture and distribution. For several years prior to the events giving rise to this dispute, SSC's products were distributed by Tianjin Kerma Laboratories Co., Ltd. ("Kerma"), a Chinese cosmetics manufacturer. At the time, 99 percent of Kerma stock was owned by PacificLink (a New York corporation) and its chairman and sole shareholder, Shieh. SSC and Shieh began discussing the possibility of SSC's acquiring a majority interest in Kerma, and in April 1999 the parties signed a letter of intent reflecting SSC's intention to buy 67 percent of Kerma's outstanding shares for $1 million. SSC then conducted a due diligence inquiry, and learned from its auditors about various liabilities carried by Kerma — including unpaid taxes, customs duties, and social insurance contributions — that were not disclosed on the financial statements that had been provided to SSC. It emerged that Kerma maintained two sets of books, one internal and the other for the Chinese authorities; the latter apparently excluded records of certain sales for taxation purposes. The auditors also opined that equipment and inventory listed by Kerma as assets were obsolete and should not be carried at full value.
After SSC expressed to Shieh its concern about these apparent irregularities, Shieh assured SSC that the liabilities would not be realized. SSC then agreed to follow through with the deal as long as Shieh agreed to indemnify SSC in the event that the liabilities came due. An indemnification provision was included in the share purchase agreement ("Agreement"), which was executed by the parties on May 3, 2000. The indemnification provision capped the financial obligation to indemnify at $492,525. The Agreement also required, among other things, that SSC pay approximately $1 million in exchange for 67 percent of outstanding Kerma stock, that SSC contribute additional capital to Kerma over the course of the following two years, and that SSC share with Shieh any profits from Kerma's operation.
Not long after the Agreement took effect and SSC had purchased the Kerma shares, SSC conducted an internal audit of the company and discovered that Kerma's liabilities were even greater than the pre-Agreement audit had revealed. Soon thereafter, the Chinese authorities demanded the unpaid taxes, social insurance costs, and customs fees — which amounted to almost $1 million — and the obsolete inventory allegedly had to be written down by approximately $405,000. SSC approached PacificLink and Shieh, requesting indemnification, and was refused.
SSC filed a complaint in the district court on February 22, 2002, claiming jurisdiction based on diversity and alleging breach of the indemnification provision. After filing suit, SSC did not make the further capital contributions or profit distributions called for in the Agreement. Shieh and PacificLink asserted counterclaims against SSC, including claims for these contributions and distributions.
Both plaintiff and defendants moved for summary judgment. The district court heard argument, after which it granted plaintiff's motion and denied defendants' in a memorandum and order dated December 10, 2003. The judge found that PacificLink was indeed obligated to indemnify under the Agreement, and that the damages — which were not well documented in the record before the district court — doubtlessly exceeded the indemnification cap of $492,525 established in the Agreement (see note 1, infra). Defendants moved for reargument and modification of the final judgment, arguing that they should have been allowed to tender Kerma shares instead of paying monetary damages, as provided by the indemnification provision, and that Shieh should not have been held liable, since only PacificLink, as the "seller" under the Agreement, was contractually liable for indemnification. The district court denied the motion in January 2004, concluding that Shieh was a seller in his individual capacity and was also the alter ego of PacificLink. The court further found that defendants could not tender Kerma stock instead of paying money damages, because they had waived their right to do so when they refused to indemnify SSC. This appeal followed.
Defendants raise several challenges to the district court's rulings. First, they maintain that the court should not have granted summary judgment to plaintiffs on the indemnification claim, since a genuine issue of material fact existed as to whether defendants were obliged to indemnify under the circumstances. Second, defendants contend that the district court should not have granted summary judgment on damages because the parties sought only summary judgment on liability and therefore defendants were not on notice that they had to advance arguments and submit evidence relating specifically to damages. Third, defendants argue that since the Agreement specifically permitted PacificLink to tender shares of Kerma stock in lieu of money under the indemnification provision, the district court erred in refusing to permit such tender in satisfaction of the judgment. Fourth, defendants assert that the district court erred when it concluded that Shieh was liable under the indemnification provision, since it identifies only the "seller" as potentially liable and the Agreement defines PacificLink as the "seller." Fifth, defendants argue that the district court erroneously found that Shieh was PacificLink's alter ego, despite the existence of a factual dispute on this point. Sixth, defendants contend that the district court erred in dismissing all of their counterclaims, since these claims were legitimately made against SSC for its own contractual obligations and those of Kerma, which SSC controlled. If they had been given the opportunity to argue and prove them, defendants maintain, these counterclaims would offset the amount they were ordered to pay SSC pursuant to the indemnification provision.
We review a district court's grant or denial of summary judgment de novo, World Trade Ctr. Props., L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154, 165 (2d Cir.2003), and all factual inferences are to be drawn in favor of PacificLink and Shieh. Clarett v. Nat'l Football League, 369 F.3d 124, 130 (2d Cir.2004). Summary judgment is appropriate only where "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The district court applied New York law in its rulings in this case, and the parties agree that New York law governs their dispute.
The district court, without identifying which clause of the indemnification provision of the Agreement applied,1 found that this provision was breached. Defendants argue that section 6a(4), which provides for indemnification arising out of "any liability not disclosed by the balance sheet(s) or other financial record of [Kerma]," is too ambiguous (as indicated by the parties' conflicting interpretations) to make summary judgment proper. We agree that clause (4) is not a model of clarity, since it must be acknowledged both that some of Kerma's financial records (those prepared for the benefit of the Chinese authorities) do not disclose Kerma's liabilities, and that some of Kerma's liabilities are disclosed in some of the financial records of the company. However, some of Kerma's liabilities were undisputedly not disclosed on any balance sheet, and were only revealed by the audit. Further, it is not disputable that the indemnification provision was added to the Agreement to address SSC's concern about all of the liabilities disclosed in the audit. Moreover, subsection b of the indemnification provision unmistakably expresses the parties' intent to provide indemnification even against liabilities of which SSC had actual or constructive knowledge. See CBS Inc. v. Ziff Davis Publ'g Co., 75 N.Y.2d 496, 503-04, 554 N.Y.S.2d 449, 553 N.E.2d 997 (1990) (). All of the evidence plainly indicates that the parties intended SSC to be indemnified in the event that the financial statements prepared for the benefit of the Chinese authorities turned out to misrepresent Kerma's actual liabilities — the precise event that came to pass. Accordingly, we affirm the district court's finding that the indemnification provision was breached.
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