Kelly Capital, LLC v. S&M Brands, Incorporated , 532 F. App'x 422 ( 2013 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-1819
KELLY CAPITAL, LLC; KELLY ESCROW FUND V, LLC,
Plaintiffs - Appellants,
v.
S&M BRANDS, INCORPORATED,
Defendant – Appellee,
v.
SEI PRIVATE TRUST COMPANY, as Trustee of the SEI Private
Trust,
Third Party Defendant - Appellant.
Appeal from the United States District Court for the Eastern
District of Virginia, at Richmond. Robert E. Payne, Senior
District Judge. (3:10-cv-00728-REP)
Argued: May 14, 2013 Decided: July 15, 2013
Before NIEMEYER, MOTZ, and FLOYD, Circuit Judges.
Affirmed by unpublished per curiam opinion.
ARGUED: David Barmak, MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND
POPEO, P.C., Washington, D.C., for Appellants. Bryan Michael
Haynes, TROUTMAN SANDERS LLP, Richmond, Virginia, for Appellee.
ON BRIEF: Andrew Nathanson, Bridget Moorhead, Matthew Cohen,
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C., Washington,
D.C., for Appellants. Alan D. Wingfield, Timothy J. St. George,
TROUTMAN SANDERS LLP, Richmond, Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
I.
In 1998, the Attorneys General of forty-six states entered
into a Master Settlement Agreement (MSA) with four major tobacco
companies to resolve class actions that certain states had
initiated against the manufacturers. See Grand River Enter. Six
Nations, Ltd. v. Pryor, 481 F.3d 60, 63 (2d Cir. 2007) (per
curiam). Later, to broaden the reach of the MSA, states adopted
legislation, commonly known as Tobacco Escrow Statutes,
requiring all tobacco manufacturers either to (1) join the MSA
or (2) make annual contributions to escrow accounts for the
purpose of paying tobacco-related claims. VIBO Corp. v. Conway,
669 F.3d 675, 681 (6th Cir. 2012). In this case, we deal with a
Virginia-based tobacco manufacturer, Appellee S & M Brands, Inc.
(S & M), and the contributions it made to escrow accounts.
Specifically, we consider the terms of a contract through which
it sold certain interests in those contributions.
A.
Virginia law mandates that escrow contributions remain in
escrow for twenty-five years and be used only to pay judgments
or settlements on tobacco-related claims. Va. Code Ann. § 3.2-
4201(B). Unused principal that remains in an account after
twenty-five years reverts back to the manufacturer that placed
3
it in escrow. Id. Although manufacturers may invest the funds
and pocket any income generated from such investments, they may
not sell or transfer the fund principal. Id. Importantly,
however, they may sell their interest in the income earned on
fund investments and their reversionary interest in the
principal. See id. Here, we term the interest in the
investment income plus the reversionary interest an “escrow
release.”
For tax purposes, S & M’s escrow accounts are classified as
Qualified Settlement Funds (QSF). A QSF has two primary
characteristics: (1) it is established via court order to
“resolve or satisfy,” inter alia, claims “[a]rising out of a
tort, breach of contract, or violation of law,” and (2) it
operates as a trust such that “its assets are . . . segregated
from other assets of the transferor.” 26 C.F.R. § 1.468B-1(c).
Additionally, in the eyes of the Internal Revenue Service (IRS),
a QSF is a person. Id. § 1.468B-2(a). Thus, its modified gross
income, such as the income generated by investment of escrowed
funds, is taxed. Id. The impact of this policy is significant
because it effectively subjects the income earned on investments
of escrowed funds to a double layer of taxation—not only does
the owner of the income pay taxes on what is earned, but the
QSF, as a person created via regulation, does as well.
Moreover, because use of the QSF principal is limited to
4
satisfaction of tobacco-related claims, the taxes must be paid
from the repository of income earned. It goes without saying
that these tax regulations somewhat inhibit the sale of escrow
releases associated with QSF-classified accounts.
B.
In 2009, S & M began negotiating with Appellant Kelly
Capital, LLC, a private equity firm based in California, to sell
its escrow releases. From the outset, S & M communicated that
the escrow accounts’ QSF status subjected their income to a
double layer of taxation, and Kelly Capital pursued various
routes to avoid the double tax. Most notably, it posited that
because S & M would pay taxes on its income from the
sale of its escrow releases and because Kelly would
thereafter own all ‘income’ generated by the escrowed
funds, the QSF-status of the funds (and hence the QSF-
level taxes) would be eliminated upon the completion
of its transaction with S & M.
Kelly Capital, LLC v. S & M Brands, Inc., 873 F. Supp. 2d 659,
666 (E.D. Va. 2012). The idea was novel, but it gained little
traction. Indeed, early in the negotiation process, Kelly’s
lawyers advised it of the theory’s deficiency: “[S]ince the
ownership of the account is still in the name of S & M Brands,
and the QSF is a separate tax entity, the QSF should [continue
to] pay taxes on earnings and transfer the remainder to Kelly
5
Capital.” Id. (alterations in original) (internal quotation
marks omitted).
1.
On January 21, 2010, S & M provided the first draft of an
Escrow Release Transfer Agreement (ERTA) to Kelly Capital.
Relevant here, section 5.02(a) required Kelly to “pay all
applicable federal and state taxes, if any, required to be paid
by the Purchaser with respect to the Assigned Escrow Releases,
including the taxes for a Qualified Settlement Fund under the
Internal Revenue Code.”
On March 5, 2010, Kelly responded with a revised ERTA in
which the phrase, “including the taxes for a Qualified
Settlement Fund under the Internal Revenue Code” had been
stricken from section 5.02(a), and an additional paragraph,
section 5.01(m), had been added. Section 5.01(m) required S & M
to “pay all applicable federal and state taxes, if any, required
to be paid by the Seller and the Qualified Settlement Funds,
including any taxes owed with respect to the Assigned Escrow
Releases prior to their receipt by the Purchaser.” It also
provided that S & M would
indemnify the Purchaser and its Assignees for any loss
of Assigned Escrow Releases or Related Escrow Funds
proximately caused by the Seller’s or the Qualified
Settlement Funds’ failure to pay such liability and
breach of this Section 5.01(m) [and that S & M Brands
6
would] promptly pay all reasonable legal and other
directly related expenses incurred by the Purchaser or
its Assignees in connection with any such dispute.
S & M responded on March 18, 2010, with a draft that rejected
Kelly’s amendments and provided instead that as to the QSF-level
taxes, S & M would pay only those taxes that had “accrued on or
prior to the Closing Date.” It further agreed to indemnify
Kelly with respect to any legal action taken in the event that
S & M failed to pay such pre-closing taxes. Kelly accepted
these revisions and sent an amended ERTA to S & M. The amended
ERTA included the following addition to section 5.01(m):
In the event that the Internal Revenue Service or any
state taxing authority makes any claim that the Seller
or the Qualified Settlement Funds owe any federal or
state tax liability (including any penalties or fines)
with respect to the Assigned Escrow Releases or
Related Escrow Funds accrued after the Closing Date,
the Seller shall use its best efforts to cooperate
with the Purchaser or its Assignee to defend such
claim . . . . The Seller shall promptly pay all
reasonable legal and other directly related expenses
incurred by the Purchaser or its Assignees in
connection with any such dispute as invoiced by the
Purchaser or its Assignee to the Seller.
S & M rejected this addition, responding with a version that
reversed the obligations of the section 5.01(m) language that
Kelly had proffered. The new version replaced the last sentence
of Kelly’s proposed addition with a sentence requiring that “the
Purchaser or its Assignee . . . promptly pay all reasonable
legal and other directly related expenses incurred by the Seller
as invoiced by the Seller to the Purchaser or its Assignee.”
7
2.
The parties eventually finalized the deal in April 2010
with an ERTA that gave Kelly Capital or its assignees the right
to purchase certain releases for thirty-four cents per dollar of
principal. Relevant here, the final ERTA included the following
definitions:
“Escrow Release(s)” means all right, title and
interest in and to and all rights under the Escrow
Agreement and the Tobacco Escrow Statutes with respect
to (i) release of Escrowed Funds on or after twenty-
five (25) years after the original deposit of each of
such Escrowed Funds, (ii) interest or other
appreciation earned on such Escrowed Funds, (iii)
refund due to overpayment into such Escrowed Funds,
and (iv) other release of all or any portion of such
Escrowed Funds . . . or any earnings with respect
thereto or any securities or instruments in which such
Escrowed Funds are invested, together with each of the
following rights which are essential for the
protection and enjoyment of the foregoing: (1) the
right to co-control the defense against any claims,
allegations or proceedings that could result in the
forfeiture, disgorgement or release of the Escrowed
Funds, in whole or in part, and (b) the right to give
instructions to the Escrow Agent with respect to the
investment of the Escrowed Funds (provided that such
investments are consistent with the Tobacco Escrow
Statutes, Escrow Rules and Regulations and the Escrow
Agreement) and any release of the Escrowed Funds only
as described in (i) through (iv) above.
. . . .
“Qualified Settlement Fund” shall have the meaning set
forth in the applicable Tobacco Escrow Statutes.
“Qualified Settlement Funds” means the Qualified
Escrow Funds (comprised of the Escrowed Funds
(including the Related Escrow Funds)) each as
classified for tax reporting purposes as a qualified
settlement fund by the Internal Revenue Service
8
pursuant to a Private Letter Ruling dated January 11,
2007.
The ERTA’s relevant provisions read,
Section 2.01. Purchase and Conveyance.
(a) Conveyance of Escrow Releases. The Seller
does hereby agree to sell, transfer, assign, set over
and otherwise convey to the Purchaser . . . , without
recourse, all its right, title and interest in, to and
under each and every Escrow Release with respect to
the related Escrowed Funds described on Schedule B to
this Agreement and all amounts received with respect
thereto and all proceeds thereof from and after the
Closing Date . . . .
(b) Compliance with Tobacco Escrow Statutes;
Escrow Agreement. The Seller and the Purchaser hereby
acknowledge and agree that notwithstanding anything
contained herein to the contrary, the Related Escrowed
Funds shall remain deposited with the applicable
Escrow Agent . . . in the name of the Seller and be
available to satisfy Released Claims in accordance
with the terms and conditions of the applicable Escrow
Agreement and the Tobacco Escrow Statutes.
(c) Ownership. As of the Closing Date . . . the
Purchaser shall become the legal and equitable owner
of the Assigned Escrow Releases, and shall be entitled
to all of the rights, privileges, duties and remedies
applicable to said ownership. . . .
. . . .
Section 3.03. Related Documents. Concurrently
herewith and as a condition for closing the
transaction, the parties shall execute and deliver the
Indemnity Agreement and Acknowledgement Agreement.
. . . .
Section 5.01. . . .
. . . .
9
(m) Qualified Settlement Funds. The Seller
shall pay all applicable federal and state taxes, if
any, required to be paid by the Seller and the
Qualified Settlement Funds accrued on or prior to the
Closing Date with respect to the Escrowed Funds. . . .
In the event that a final determination, judgment or
settlement of any dispute between the Internal Revenue
Service, any state taxing authority, the Seller and/or
the Qualified Settlement Funds and the Purchaser, if
applicable, with respect to any federal or state tax
liability (including any penalties or fines) owed by
the Seller and/or the Qualified Settlement Funds
accrued on or prior to the Closing Date, the Seller
shall indemnify the Purchaser and its Assignees for
any loss of Assigned Escrow Releases or Related Escrow
Funds proximately caused bye the Seller’s or the
Qualified Settlement Funds’ failure to pay such
liability and breach of this Section 5.01(m). In
addition, the Seller shall also promptly pay all
reasonable legal and other directly related expenses
incurred by the Purchaser or its Assignees in
connection with any such dispute as invoiced by the
Purchaser or its Assignees to the Seller. . . . The
Seller shall use its best efforts to cause the Escrow
Agent to annually deliver to the Purchaser or its
Assignee a Form 1099–INT with respect to the Assigned
Escrow Releases. In the event that the Internal
Revenue Service or any state taxing authority makes
any claim that the Seller or the Qualified Settlement
Funds owe any federal or state tax liability
(including any penalties or fines) with respect to the
Assigned Escrow Releases or Related Escrow Funds
accrued after the Closing Date, the Seller shall use
its best efforts to cooperate with the Purchaser or
its Assignee to defend such claim, subject to Section
5.01(e). For such disputes, the Purchaser or its
Assignee shall promptly pay all reasonable legal and
directly related expenses incurred by the Seller as
invoiced by the Seller to the Purchaser or its
Assignee.
. . . .
Section 5.02. . . .
(a) Taxes and Fees. The Purchaser shall pay all
applicable federal and state taxes, if any, required
10
to be paid by the Purchaser with respect to the
Assigned Escrow Releases or Related Escrow Funds
received by it. The Purchaser shall pay all fees and
expenses of the Escrow Agent related to the
maintenance of the Related Escrowed Funds.
. . . .
Section 8.12. Schedules, Annexes and Exhibits. The
schedules, annexes and exhibits attached hereto and
referred to herein, as the same may be supplemented
and amended from time to time as contemplated herein,
shall constitute a part of this Agreement and are
incorporated into this Agreement for all purposes.
In addition, the ERTA provided options to purchase escrow
releases in the future, subject to certain timing requirements.
Finally, as noted above, section 2.01(b) requires that the
Purchaser of the escrow releases comply with “the applicable
Escrow Agreement and the Tobacco Escrow Statutes.” Relevant
here, the Escrow Agreement includes a provision that requires
the Escrow Agent to “comply with all applicable tax filing,
payment and reporting requirements, including, without
limitation, those imposed under Treas. Reg.
[section] 1.468B . . . .” As we already observed, Treasury
Regulation section 1.468B stipulates that a QSF is a person
subject to a tax on its modified gross income. 26 C.F.R.
§ 1.468B-2(a).
11
3.
Following the ERTA’s execution, Kelly Capital assigned a
portion of its immediate purchasing rights to Appellant SEI
Private Trust Company (SEI), which purchased $30 million of
escrow releases for $10.2 million. SEI is the “directed
trustee” of a pension fund, and its purchases of the releases
were directed by its Investment Committee, comprised only of
Michael Kelly, the Chief Executive Officer of Kelly Capital, and
Nick Spriggs, the former President of Kelly Capital. Kelly
Capital assigned the remainder of its immediate purchasing
rights to Appellant Kelly Escrow Fund V, LLC (Kelly Escrow), a
special purpose vehicle that Kelly Capital had formed to
purchase escrow releases. Kelly Escrow purchased $40 million of
escrow releases for $13.6 million.
Soon thereafter, problems arose. “Kelly Capital sought to
put together a securitization of the escrow release[s] already
purchased by [Kelly Escrow] and SEI to sell interest in the
package of escrow release[s] to third party purchasers.” But
Kelly Capital’s investment bankers communicated that “the
prospectus for the transaction would have to make a clear
disclosure regarding the payment of the QSF taxes on the
purchased escrow releases.” As a result, the securitization did
not move forward. Of course, such struggles motivated Kelly to
continue researching options for avoiding the QSF-level taxes,
12
and it did just that, asking two different law firms to research
the issue. Ultimately, however, these efforts proved
unavailing.
On September 9, 2010, Kelly Capital “took the position that
it was not liable for the QSF[] taxes” and communicated its view
to S & M. S & M disagreed, maintaining that Kelly had “assumed
the risk of the QSF-level taxation in the ERTA.” On September
13, 2010, Kelly Capital sought to extend its option to purchase
additional releases; thus, it sent S & M a notice to that
effect. S & M communicated that it would not extend the option
period unless Kelly Capital provided assurance in writing that
it would pay the QSF-level taxes. Kelly Capital responded by
instituting this action, together with Kelly Escrow. The
complaint asked the district court to, inter alia, (1)
“[d]eclar[e] that [it] ha[d] not assumed in the ERTA or the
amendments to the ERTA liability or responsibility for paying
the QSF-related taxes, and that such liability was not
transferred by S & M under the ERTA, as amended, or otherwise”;
(2) “[o]rder[] S & M to specifically perform the ERTA . . . by
selling to Kelly [Escrow] the additional income and remainder
interests as to which it ha[d] indicated its intention to
purchase”; (3) “preserv[e] Kelly [Escrow’s] options to purchase
additional income and remainder interests in the future in
accordance with the ERTA”; and (4) “enjoin[] S & M from selling
13
the additional interests to another buyer without first allowing
Kelly [Escrow] to do so in accordance with the ERTA . . . .”
S & M responded with counterclaims against Kelly Capital
and Kelly Escrow, also naming SEI as a defendant to these
claims. S & M sought, inter alia,
a declaratory judgment that Kelly Capital’s . . .
interpretation of the ERTA, the Escrow Agreement and
associated documents [was] incorrect, that Kelly
Capital . . . [was] obligated to pay, or to allow to
be paid, all federal and state income taxes on the
assigned Escrow Release(s), and that S & M Brands
ha[d] no obligation to pay such taxes; [and]
a declaratory judgment that it [was] not in default
under the ERTA, the Escrow Agreement[,] and associated
documents, and that Kelly Capital . . . committed a
material anticipatory breach of its ERTA, the Escrow
Agreement and associated documents, thereby releasing
S & M Brands from any remaining obligations under the
ERTA, including as to the transfer of additional
Escrow Release(s) pursuant to the Option.
The parties conducted discovery and filed cross-motions for
summary judgment. The district court denied the motions and, in
so doing, concluded that the ERTA was ambiguous. Therefore,
during a three-day bench trial, the court consulted parol
evidence and determined that Kelly Capital had obligated itself
to pay the QSF-level taxes. The court also concluded that when
Kelly Capital communicated to S & M that it “was not liable for
the QSF[] taxes,” it committed a material anticipatory breach.
Accordingly, the court released S & M from “all further
obligation[] . . . to transfer additional escrow releases
14
pursuant to the option provision of the [ERTA].” Kelly Capital,
873 F. Supp. 2d at 680.
Kelly Capital, Kelly Escrow, and SEI (collectively, “Kelly
Capital” or “Kelly”) appeal the district court’s order,
contending that it erred in concluding that Kelly Capital (1)
obligated itself to pay the post-closing QSF-level taxes and (2)
anticipatorily breached the ERTA. For the reasons that follow,
we affirm the district court’s decision.
II.
Per the terms of the ERTA, New York law applies in this
case. Under New York law, “whether or not a writing is
ambiguous is a question of law to be resolved by the court,”
W.W.W. Assocs., Inc. v. Giancontieri, 566 N.E.2d 639, 642 (N.Y.
1990).
“A contract is unambiguous if the language it uses has ‘a
definite and precise meaning, unattended by danger of
misconception in the purport of the [agreement] itself, and
concerning which there is no reasonable basis for a difference
of opinion.’” Greenfield v. Philles Records, Inc., 780 N.E.2d
166, 170–71 (N.Y. 2002) (alteration in original) (quoting Breed
v. Ins. Co. of N. Am., 385 N.E.2d 1280, 1282 (N.Y. 1978)). Said
differently, “If the agreement on its face is reasonably
susceptible of only one meaning, a court is not free to alter
15
the contract to reflect its personal notions of fairness and
equity.” Id. at 171; cf. US Oncology, Inc. v. Wilmington Trust
FSB, 958 N.Y.S.2d 47, 48 (N.Y. App. Div. 2013) (“A contract is
ambiguous when ‘on its face [it] is reasonably susceptible of
more than one interpretation’” (alteration in original) (quoting
Chimart Assoc. v. Paul, 489 N.E.2d 231, 233 (N.Y. 1986))).
Furthermore, “[e]xtrinsic evidence of the parties’ intent may be
considered only if the agreement is ambiguous.” Greenfield, 780
N.E.2d at 170.
Both parties assert that the ERTA unambiguously supports
their respective positions. Kelly maintains that the ERTA
reflects no “affirmative assumption” on its part of a duty to
pay the QSF-level taxes. S & M counters by citing portions of
the ERTA that in its view “make[] clear . . . that Kelly assumed
the burden of all QSF-level taxes after closing.” We agree with
S & M.
A.
As is evident from our recounting above, the
correspondence, ERTA drafts, and other documentation associated
with negotiation of the final contract is extensive. Even a
cursory review reveals that much wrangling occurred regarding
which party would pay the post-closing QSF-level taxes. Thus,
it is somewhat surprising that, as the district court
16
recognized, “[N]owhere in any of the[] [ERTA] provisions does
either party agree expressly to pay the QSF-level taxes.” Kelly
Capital, LLC, 873 F. Supp. 2d at 671. Such absence tempts us to
immediately rule the ERTA ambiguous as to this issue and resort
to parol evidence. But our initial focus in determining
ambiguity must concern the contractual language that exists, not
the language that is absent. And if the language is “reasonably
susceptible of only one meaning,” we must accord it such
meaning. See W.W.W. Assocs., Inc., 566 N.E.2d at 642
(“[E]xtrinsic and parol evidence is not admissible to create an
ambiguity in a written agreement which is . . . unambiguous upon
its face.” (quoting Intercontinental Planning v. Daystrom, Inc.,
248 N.E.2d 576, 580 (N.Y. 1969)) (internal quotation marks
omitted)). Thus, despite the ERTA’s failure to assign
responsibility for the QSF-level taxes by actually using the
term “Qualified Settlement Fund” in that context, we believe
that it unambiguously places the responsibility for payment of
these taxes with Kelly Capital.
According to section 2.01(c), when Kelly Capital signed the
ERTA, it “bec[a]me the legal and equitable owner of the Assigned
Escrow Releases” and, as such, became “entitled to all of the
rights, privileges, duties and remedies applicable to said
ownership.” One duty, as outlined in section 2.01(b), is
compliance with the “terms and conditions of the applicable
17
Escrow Agreement.” And the Escrow Agreement requires the Escrow
Agent to “comply with all applicable tax filing, payment and
reporting requirements, including, without limitation, those
imposed under Treas. Reg. [section] 1.468B.” It seems to us
that as to the issue here, these sections are “reasonably
susceptible of only one meaning”—namely, that purchasing the
escrow releases includes an assumption of the duty to pay the
QSF-level taxes—i.e., the taxes “imposed under Treas. Reg.
[section] 1.468B.” But if these sections leave doubt as to such
a conclusion, sections 5.01(m) and 5.02(a) provide
clarification.
Section 5.01(m) states, “The Seller shall pay all
applicable federal and state taxes, if any, required to be paid
by the Seller and the Qualified Settlement Funds accrued on or
prior to the Closing Date with respect to the Escrowed Funds.”
Thus, it implies that S & M will not pay the required taxes
after closing and begs the question of which party will.
Section 5.02(a) answers that question: “The Purchaser shall pay
all applicable federal and state taxes, if any, required to be
paid by the Purchaser with respect to the Assigned Escrow
Releases or Related Escrow Funds received by it.” It is true
that section 5.02(a) omits the term “Qualified Settlement Funds”
while section 5.01(m) includes it. Although we find this
curious, we do not think that it renders the contract ambiguous
18
as to the payment of the QSF-level taxes. Section 5.02(a) makes
clear that the purchaser must pay all required “applicable
federal and state taxes,” and as stated earlier, the Escrow
Agreement, with which the purchaser must comply, requires
payment of taxes “imposed under Treas. Reg. [section] 1.46B.”
In short, although we recognize that the contract does not
assign responsibility for the QSF-level taxes by explicit use of
the term, we do not think that read as a whole it is susceptible
to more than one meaning on this point.
B.
In spite of our conclusion that the ERTA unambiguously
assigns responsibility for the QSF-level taxes to Kelly Capital,
we note for the sake of argument that even if we were to find
the contract ambiguous, Kelly would fare no better. “When a
term or clause is ambiguous, ‘the parties may submit extrinsic
evidence as an aid in construction, and the resolution of the
ambiguity is for the trier of fact.’” Geothermal Energy Corp.
v. Caithness Corp., 825 N.Y.S.2d 485, 489 (N.Y. App. Div. 2006)
(quoting Pellot v. Pellot, 759 N.Y.S.2d 494, 497 (N.Y. App. Div.
2003)). Here, the extrinsic evidence indicates the parties’
intent that Kelly assume the QSF-level tax obligations upon
closing.
19
From the beginning of the negotiations, Kelly understood
that it would be responsible for the QSF-level taxes. Indeed,
the record indicates that S & M communicated that fact early in
the process, such that Kelly was compelled to seek legal advice
regarding avoidance options. Furthermore, section 5.01(m) of
the ERTA indicates S & M’s intent to assist Kelly practically,
by “caus[ing] the Escrow Agent to annually deliver” tax forms,
should the IRS pursue it regarding the tax obligations. It also
delineates Kelly’s agreement to reimburse S & M for expenses
incurred as a result of such assistance. As the district court
aptly noted, “If Kelly did not believe that it, not S & M, was
responsible for the QSF-level taxes, why would it agree to
indemnify S & M for its ‘cooperation’ in opposing efforts by the
IRS to collect those taxes from Kelly?” Kelly Capital, LLC, 873
F. Supp. 2d at 674. Finally, Kelly’s post-closing conduct
reveals that it believed it was responsible for the taxes. Not
only did it continue researching methods of avoiding the QSF-
level taxes; it failed to communicate to potential investors the
point it so adamantly argues here—namely, that S & M would pay
the taxes. “If Kelly had believed that S & M was obligated by
the ERTA to pay the QSF-level taxes, it simply could have so
said in its disclosure to investors.” Id. at 675. But it did
not. And its decision not to do so belies its claim against
responsibility here.
20
Because the district court rested its decision on a finding
of ambiguity, it addressed the intricacies of the parol evidence
in much greater depth than we do here. We think it of some
import to note, however, that in its brief to this Court, Kelly
Capital does not contest the evidence on which the district
court relied. Rather, it simply contests the district court’s
determination of ambiguity and the methods by which it made that
determination. Because our discussion of this issue rests on an
assumption of ambiguity for the sake of argument only, we need
not address Kelly’s allegations in this regard.
III.
Kelly also takes issue with the district court’s
determination that it committed a material anticipatory breach
of the ERTA when it communicated to S & M that “it was not
liable for the QSF[] taxes.” “Anticipatory repudiation occurs
when, before the time for performance has arisen, a party to a
contract declares his intention not to fulfill a contractual
duty.” Lucente v. Int’l Bus. Mach. Corp., 310 F.3d 243, 258 (2d
Cir. 2002) (applying New York law); see also De Lorenzo v. Bac
Agency Inc., 681 N.Y.S.2d 846, 908 (N.Y. App. Div. 1998)
(indicating that repudiation occurs when one party “has
indicated an unqualified and clear refusal to perform with
respect to the entire contract.”). “The doctrine of
21
anticipatory repudiation entitles the nonrepudiating party to
immediately claim damages for a breach of contract where there
is a renunciation of the contract in which the repudiating party
has indicated an unqualified and clear refusal to perform with
respect to the entire contract.” De Lorenzo, 681 N.Y.S.2d at
907–08.
Here, Kelly’s indication that “it was not liable for the
QSF[] taxes” constituted repudiation of the contract. Kelly
maintains otherwise, averring that it “indicated its readiness
to perform the entire contract, subject only to a judicial
declaration of a particular element of the parties’
obligations.” We disagree. Regardless of whether Kelly was
ready to “perform the entire contract,” its determination not to
pay the QSF-level taxes was a declination of material
consequence. “[A] ‘material breach’ is a failure to do
something that is so fundamental to a contract that the failure
to perform that obligation defeats the essential purpose of the
contract or makes it impossible for the other party to perform
under the contract.” 23 Richard A. Lord, Williston on Contracts
§ 63:3 (4th ed. 2007) (footnotes omitted); see also Callanan v.
Powers, 92 N.E. 747, 752 (N.Y. 1910) (counseling that rescission
of a contract in the context of repudiation is reserved for
breaches that are willful or “so substantial and fundamental as
to strongly tend to defeat the object of the parties in making
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the contract”). S & M testified at trial that Kelly knew it was
responsible for the QSF-level taxes and that S & M would not
have entered into the ERTA unless it believed Kelly had assumed
the QSF tax burden. The district court found this testimony
credible, and we find no reason to conclude otherwise.
Accordingly, Kelly’s failure in this regard was material and
constituted a repudiation of the contract. Given such
repudiation, S & M was entitled to terminate its own
performance. Consequently, we affirm the district court’s
decision as to this point.
IV.
For the reasons above, we affirm the decision of the
district court.
AFFIRMED
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