Swanson v. Baker Industries, Inc.
| Decision Date | 07 March 1980 |
| Docket Number | No. 79-1359,79-1359 |
| Parties | Gilbert C. SWANSON, Jr., the Estate of Jay F. Swanson, Gilco Trust Company, Trustee for the Gilbert C. Swanson Family Sprinkle Trust, Appellees, v. BAKER INDUSTRIES, INC., a Delaware Corporation, Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Richard A. Spellman, Kutak, Rock & Huie, Omaha, Neb., argued, J. Thomas Marten, Omaha, Neb., on brief, for appellant.
D. C. Bradford, III, Bradford & Coenen, Omaha, Neb., argued, George F. Heiden and D. C. Bradford, Omaha, Neb., on brief, for appellees.
Before BRIGHT, ROSS and STEPHENSON, Circuit Judges.
This appeal arises out of a breach of contract action brought by Gilbert C. Swanson, Jr., and his relatives (the Swansons) against Baker Industries, Inc. (Baker). Baker had purchased the Swansons' family-owned businesses under two related contracts of sale. The Swansons sued Baker, alleging that the company owed them part of the purchase price due under one of the sale contracts. Following a bench trial, the district court found for the Swansons and determined that Baker owed them $335,538.87. 1 The court accordingly entered judgment in that amount in favor of the Swansons. 2 Baker appeals from the district court's judgment, asserting that the court erred in construing certain contract clauses and thereby miscalculated the damages. We agree in part with Baker's contentions. Accordingly, we reverse and remand for recalculation of damages.
The Swansons owned the capital stock of Samardick of Omaha, Inc., (Samardick) and seven other companies which provided armored car and security services to financial institutions in Nebraska, Iowa, and South Dakota. In two contracts of sale dated August 21, 1968, the Swansons essentially agreed to exchange the assets of all eight companies for 26,000 shares of Baker stock. 3 One of the contracts, which provided for sale and transfer of Samardick's assets alone, contained a "second closing" or contingent payment provision. Under this provision, Baker agreed to make a supplementary payment (payable in Baker stock) to the Swansons if Samardick 4 earned a greater average annual after-tax profit in 1971 and 1972 than its adjusted after-tax profit for 1967.
This second closing provision represented an effort by the parties to ascertain, by hindsight, the true value of Samardick at the time of sale. During contract negotiations the parties could not agree on Samardick's value, largely because of the disparity in its earnings for 1966 and 1967. Samardick earned a pre-tax profit of $83,000 in 1966, but only $38,000 in 1967. 5 Baker offered to purchase Samardick and the Swansons' seven other companies at ten times their aggregate 1967 after-tax earnings approximately $1,280,140 in all less outstanding indebtedness. The Swansons, however, contended in precontract negotiations that Samardick's greater 1966 after-tax earnings should be aggregated with the 1967 after-tax earnings of the seven other companies to determine the true value of all eight businesses. To compromise their dispute over valuation, the parties agreed on an initial purchase price (to be paid in Baker stock) of ten times the aggregate 1967 after-tax earnings of all eight companies, to be supplemented by a contingent additional payment for Samardick under the second closing provision.
The second closing provision in the contract for sale of Samardick provided as follows:
3.4 Second Closing. Subject to the terms and conditions of this Agreement, Baker agrees to issue to Samardick on a date specified in writing not later than April 30, 1973 (herein called the "Second Closing Date"), additional shares of Baker Stock, the number of which shall be determined by:
(a) subtracting $600,000 from the product of ten (10) multiplied by the Average Annual Earnings of Samardick during the period January 1, 1971 through December 31, 1972 (as hereinafter defined), and dividing the figure thus obtained by
(b) the average price (being the mean between the high and the low prices) of Baker Stock on the American Stock Exchange (or, if not so listed or traded, on any other national stock exchange on which Baker Stock is listed or traded, or if not so listed or traded on any national stock exchange, the mean between the quoted bid and asked prices of Baker Stock) on the last day of each quarter such shares shall have been traded during the period from January 1, 1971 to December 31, 1972, and rounding the number so obtained (if a fraction) to the next lowest number of full shares; provided, however, the total additional shares issuable under this Section 3.4 shall not exceed 10,000.
For all purposes of this Section 3.4, Average Annual Earnings of Samardick shall mean the net income of Samardick after all Federal, state and local income taxes calculated by deducting $70,000 from the net income of Samardick's business transferred to Baker before Federal, state and local income taxes for each fiscal year during the period January 1, 1971, to December 31, 1972, as determined by the then regularly employed independent certified public accountants of Baker, and dividing the sum so obtained by 2. The computation of net income before Federal and state income taxes shall be determined in accordance with the Wells Fargo branch accounting procedures described in Exhibit F hereto.
The undisputed evidence establishes that Samardick's adjusted 1967 after-tax income was approximately $60,000. This amount multiplied by ten totals $600,000, the base figure used in the contract for the second closing valuation of Samardick. 6 The second closing formula required Baker to pay, in stock, additional compensation in the amount of the difference (if any) between ten times Samardick's average annual after-tax earnings for 1971 and 1972 and $600,000. This is the formula:
Average net profits for 1971 and
1972, less tax adjustments, times
ten = $
Less 1967 adjusted net profits, less tax
adjustments, times ten = $600,000
--------
= Difference, if any, to be paid in
Baker stock as additional
compensation = $
--------
The crux of the controversy in this case relates to the determination of the initial figure in this formula. The parties dispute the construction to be given to the final paragraph of the second closing agreement. We reiterate the final paragraph, underlining the two clauses in dispute:
For all purposes of this Section 3.4, Average Annual Earnings of Samardick shall mean the net income of Samardick after all Federal, state and local income taxes calculated by deducting $70,000 from the net income of Samardick's business transferred to Baker before Federal, state and local income taxes for each fiscal year during the period of January 1, 1971, to December 31, 1972, as determined by the then regularly employed independent certified public accountants of Baker, and dividing the sum so obtained by 2. The computation of net income before Federal and state income taxes shall be determined in accordance with the Wells Fargo branch accounting procedures described in Exhibit F hereto.
The Swansons contend that the $70,000 deduction states an agreed figure (in lieu of actual taxes) to be applied over the full two-year period of January 1, 1971 to December 31, 1972. In other words, they argue for an annual deduction from net income of $35,000 in lieu of actual taxes. Baker, by contrast, interprets this "in lieu of tax" clause to require a deduction of $70,000 from net income for each fiscal year in 1971 and 1972.
The Swansons contend additionally that the final sentence of the disputed paragraph precludes Baker from deducting from Samardick's gross income a portion of the salaries of certain administrative, sales and accounting employees which had been paid by Wells Fargo Armored Service Corporation of Nebraska, Inc. 7 They argue that such a deduction is inconsistent with the terms of the contract specifically, "Wells Fargo branch accounting procedures described in (attached) Exhibit F."
The district court decided both of these issues in favor of the Swansons. The district court determined initially that the stipulated tax provision was ambiguous. Accordingly, the court admitted and relied upon evidence extrinsic to the contract, including testimony concerning an alleged oral agreement to deduct $70,000 as taxes for the entire two-year period of 1971-1972. The district court then concluded that the tax clause authorized a deduction from net income of $70,000 over the two-year period, or $35,000 per year. The district court also denied the allocation of certain salaries from Wells Fargo to Samardick, holding that the contract's exhibit F unambiguously barred deduction of such expenses.
After allocating undisputed expenses, the district court determined the sum that Baker owed the Swansons by making the following calculations:
1971 1972
---- ----
Adjusted (Samardick) branch
earnings $137,100 $127,863
Income Tax 35,000 35,000
------------ ------------
Net earnings after tax $102,100 $ 92,863
$102,100
92,863
--------
$194,963 k 2 = average earnings of $97,481.50
Multiplication of this sum ($97,481.50) by ten and
subtraction of $600,000 yields the sum of $374,815.
The district court adjusted the $374,815 figure to reflect the value of Baker stock at the time of breach and then determined that Baker owed the Swansons $335,538.87. 8
Nebraska law controls the substantive issues in this diversity case. Under the law of...
To continue reading
Request your trial
-
John Morrell & Co. v. Local Union 304A of United Food and Commercial Workers, AFL-CIO
...is a matter of law and is not therefore subject to the clearly erroneous standard of review by this court); Swanson v. Baker Industries, Inc., 615 F.2d 479, 483 (8th Cir.1980) (the proper construction of a written contract is a question of law to be determined by the The general rules just ......
-
First Nat. Bank of Biwabik Minnesota v. Bank of Lemmon, s. 18816
...See, e.g. Orvis v. Higgins, 180 F.2d 537 (CA2 1950); Lydle v. United States, 635 F.2d 763, 765, n. 1 (CA6 1981); Swanson v. Baker Industries, Inc. 615 F.2d 479, 483 (CA8 1980). This theory has an impressive genealogy, having first been articulated in an opinion written by Judge Frank and su......
-
Lamb Engineering & Const. Co. v. Nebraska Public Power Dist.
...Nebraska law, the proper construction of a written contract is a question of law to be determined by the court. Swanson v. Baker Indus., Inc., 615 F.2d 479, 483 (8th Cir.1980). Where a provision in a written contract is not ambiguous, the trial court must determine its meaning as a matter o......
-
Manzi v. State
...Orvis v. Higgins, 180 F.2d 537 (C.A.2 1950); Lydle v. United States, 635 F.2d 763, 765, n. 1 (C.A.6 1981); Swanson v. Baker Industries, Inc., 615 F.2d 479, 483 (C.A.8 1980). This theory has an impressive genealogy, having first been articulated in an opinion written by Judge Frank and subsc......
-
28 APPENDIX U.S.C. § 52 Findings and Conclusions By the Court; Judgment On Partial Findings
...Cir.), cert. denied, 459 U.S. 880 (1982); Lydle v. United States, 635 F.2d 763, 765 n. 1 (6th Cir. 1981); Swanson v. Baker Indus., Inc., 615 F.2d 479, 483 (8th Cir. 1980); Taylor v. Lombard, 606 F.2d 371, 372 (2d Cir. 1979), cert. denied, 445 U.S. 946 (1980); Jack Kahn Music Co. v. Baldwin ......