Widmer Engineering, Inc. v. Dufalla

• Court: Pennsylvania Superior Court
• Writing for the Court: CAVANAUGH, J.
• Citation: Widmer Engineering, Inc. v. Dufalla, 837 A.2d 459 (Pa. Super. Ct. 2003)
• Decision Date: 21 October 2003
• Parties: WIDMER ENGINEERING, INC., Appellee, v. Michael H. DUFALLA, Appellant. Widmer Engineering, Inc., Appellant, v. Michael H. Dufalla, Appellee.

837 A.2d 459

WIDMER ENGINEERING, INC., Appellee, v. Michael H. DUFALLA, Appellant.

Widmer Engineering, Inc., Appellant, v. Michael H. Dufalla, Appellee.

Superior Court of Pennsylvania.

Argued June 18, 2003.

Filed October 21, 2003.

Reargument Denied December 19, 2003.

Peter M. Suwak, Washington, for Dufalla.

David R. Johnson, Pittsburgh, for Widmer Engineering.

Before: HUDOCK, LALLY-GREEN and CAVANAUGH, JJ.

CAVANAUGH, J.

¶ 1 These are consolidated appeals from judgment in the amount of $139,420.86 entered in favor of Michael H. Dufalla (seller) and against Widmer Engineering, Inc., (buyer) following verdict in a non-jury trial on competing breach of contract claims arising from the sale of an engineering firm, Engelhardt-Power and Associates, Inc. We affirm in part, reverse in part, and remand for further proceedings. ¶ 2 The relevant facts, as gleaned from the record, show that Dufalla, a civil engineer, had been the sole shareholder of Engelhardt, a closely held corporation providing engineering, design and surveying services for public and private construction projects. In 1993, Dufalla was appointed by Governor Robert Casey to the post of District Engineer for the State Department of Transportation. In order to avoid any potential appearance of conflict of interest, Dufalla decided to sell his engineering firm and initially approached Harvey Treschow, its corporate manager, about any possible interest he might have in purchasing it. Although Treschow was interested, negotiations stalled and Dufalla sought other potential buyers while Treschow continued on in his position as corporate manager.

¶ 3 On February 28, 1995, Dufalla entered into an agreement to sell Engelhardt to Widmer Engineering. Closing was held that date. The agreement of sale provided that "[a]t closing, Corporation, through its officers, will issue a termination notice to Corporation's present manager." When Engelhardt became a wholly-owned subsidiary of Widmer the following day, March 1, 1995, Harvey Treschow had not been terminated from employment by Dufalla or by any other officer of Engelhardt. Moreover, Engelhardt was staffed by persons who were not employees of Engelhardt, but who were contract employees of Technical Personnel Services, Inc. (TPSI), a temporary employment agency. Harvey Treschow, in addition to being Engelhardt's corporate manager, was the president and chief shareholder of TPSI, which had contracted with Engelhardt to provide Engelhardt with personnel.

¶ 4 Paragraph 7(h) of the sales agreement between Dufalla and Widmer provided that:

The Corporation [Engelhardt] has not entered into, and is not subject to, any: (i) written contract or agreement for the employment of any employee of the business; (ii) contract with any labor union or guild; (iii) pension, profit-sharing, retirement, bonus, insurance, or similar plan with respect to any employee of the business; or (iv) similar contract or agreement affecting or relating to the corporation.

¶ 5 The contracts between Engelhardt and TPSI and between TPSI and its employees had not been disclosed by seller to buyer and buyer did not discover the existence of those contracts during its due diligence period. When it learned of the contracts, buyer sought to hire TPSI's employees as its own. Treschow demanded, as per TPSI's contract with Engelhardt, that Engelhardt reimburse TPSI in an amount equal to 20% of each individual TPSI employee's annual salary in order to "buy out" the employment contracts. Engelhardt/Widmer declined to pay. TPSI subsequently filed suit against seller and Engelhardt. The suit eventually settled for $8000. Buyer spent $22,486.35 in attorneys' fees defending the action and contributed $3000 to the settlement amount. When buyer later sued seller for breach of the sales agreement, it claimed, among other things, entitlement to $25,486.35 in damages to cover its attorneys' fees and settlement contribution in the TPSI suit under the following indemnification provision contained in the agreement:

Each party hereto shall indemnify and hold the other party harmless from and against all liability, claim, loss, damage or expense, including reasonable attorneys' fees, incurred or required to be paid by such other party by reason of any breach or failure of observance or performance of any representation, warranty, covenant or other provision of this agreement by such party.

¶ 6 Buyer's suit against seller also alleged that seller materially breached the sales agreement by failing to pay 2/3 of Engelhardt's corporate taxes, a requirement which was set forth among others in the following provision of the sales agreement:

4. Adjustments to Purchase Price. If the face amount of the Accounts Receivable and Payroll Account on the closing date shall be greater or less than $100,000.00, then the amount to be paid pursuant to Article 3 above [Purchase Price] shall be increased or decreased as the case may be, by the amount by which the face total amount of the Accounts Receivable and Payroll account is greater than or less than $100,000.00. These amounts do not include any reserve for taxes set aside as required under Article 7(l) hereof. After the closing, Seller shall transfer and deliver to Purchaser all cash and other property which Seller may receive relating to the Accounts Receivable after the closing date. All receivables not collected within one year of closing will be deducted from any amount due Seller by Purchaser. Any receivables not collected within one year will be assigned by Purchaser to Seller. Any liabilities of the Corporation, to the extent that such liabilities in the aggregate exceed the lien on the building where the corporation's offices are located, and which is estimated to be approximately $60,000.00 will be deducted from the payment due to Seller under Article 3 hereof. In addition, Seller will pay to Purchaser an amount equal to two-thirds (2/3) of the corporate income taxes which would be due from the corporation for the fiscal year beginning July 1, 1994 and ending July 30, 1995, without the application of the existing carry forward credit. Also, Seller will pay to Purchaser the amouhnt [sic] of any checks issued prior to closing in payment of the T1010 Theomat and presented for payment after closing. Purchaser shall reimburse Seller for any bills bpaid [sic] by Seller prior to closing but applicable to the period after closing. The aforesaid adjustments will be made by the parties on March 15, 1996.

¶ 7 As the above provision in the parties' agreement shows, the purchase price of Engelhardt was not for a fixed amount. On the date of closing, seller, who was seeking approximately $600,000 in value in return for all his shares of the corporation, received cash in the amount of $181,500. Sixty thousand dollars of that amount was via check from buyer to seller. Seller additionally received $121,500, directly out of Engelhardt's operating funds.¹ As will be discussed in greater detail below, seller also received title to the building which housed Engelhardt,² and buyer promised that it would pay seller at least $120,000 plus 7.5% interest over a period of fifteen years for seller's covenant not to compete. Moreover, the parties agreed that adjustments to the purchase price would be computed one year after closing based upon the amount of accounts receivable collected during that time.

¶ 8 During negotiations for the sale of the business, buyer decided that it was not interested in acquiring the building which Engelhardt owned and out of which it operated. Thus, the agreement of sale provided that upon closing, the corporation would tender a deed for the property to seller, who would then lease the building back to buyer in exchange for fixed rent of $1000 per month. The lease agreement was incorporated into and made part of the agreement of sale. Realizing that the transfer of the real estate would result in a capital gain for the corporation, the parties agreed, as per the lease agreement, that:

Lessor [Dufalla] shall grant to lessee [Widmer] a credit in the amount of one half of the accrued corporate income taxes on the capital gain reportable because of the sale of real estate from the Corporation to Seller. This credit shall be applied to Rent payments due, beginning with the payment due March 1, 1995, until the credit is exhausted. For the purposes of this paragraph, the corporate income taxes referred to herein shall be 15% of the first $50,000.00, 25% of the next $25,000.00, and 34% of the next $25,000.00, of the amount by which the sum exceeds the depreciated basis of the building and land as shown on the corporation's books.

¶ 9 A covenant not to compete was also included in the agreement of sale which provided that, in exchange for seller's promise not to compete with buyer within Washington County for a period of five years, buyer would reimburse seller a minimum of $120,000 and up to a maximum of $270,000. The agreement provided, in pertinent part:

...The Purchaser will pay the Seller for the said covenant not to compete an amount to be computed as follows: the sum of $120,000.00 plus a sum equal to the amount of the average annual billings of Corporation exceeding $527,000.00 during the period from July 1, 1995, until June 30, 2000, but not to exceed an additional amount of $150,000.00 (that is, the maximum payment shall be $120,000.00 plus $150,000.00 or $270,000.00). Payment for the covenant not to compete shall be made over a fifteen year period with the first payment due thirty days after closing. Payment for the first five years shall be at a fixed rate of interest of 7.5% per annum with the principal amount of $120,000.00. At the end of the fifth year, the increment, if any, shall be computed, and payment of the increment and accrued interest thereon from March 1, 1995, shall be made in installments for the remaining ten years with interest at the same rate. Payment of the amounts due as computed

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