Appeal from the District Court of the United States for the Southern District of New York.
Before L. HAND, SWAN, and CHASE, Circuit Judges.
In the autumn of 1922 the plaintiff negotiated with the defendants for the purchase of a coal mine. The transaction agreed upon took the form of a transfer by the defendants to the plaintiff of the entire capital stock of Dexcar Pocahontas Coal Company. Several years later deficiencies in federal income and excess profits taxes were assessed against said coal company for the years 1920 and 1921. The deficiencies were finally determined in 1926 and 1927, respectively, in the amounts, including interest, of $37,088.81 for the year 1920, and $129,583.05 for the year 1921. These sums the plaintiff paid to the United States and sought to recover from the defendants by the present suit, which is grounded upon the premise that the sellers of the coal company's stock agreed to hold the buyer harmless against these corporate liabilities.
The contract between the parties was closed on November 1, 1922, and was embodied in a written agreement of that date. It is obvious that a purchaser of corporate stock takes the risk of all outstanding corporate liabilities, except in so far as the contract of purchase may provide otherwise. The provisions of the agreement of November 1, 1922, were very carefully limited in this regard; the defendants agreed to hold the plaintiff harmless against the following described liabilities only: "* * * Any claim presented against the Dexcar Pocahontas Coal Company within six months from November 1st, 1922, for any liabilities arising because of mine accidents, torts, or contracts which do not appear on the books of said Company on October 31st, 1922, and which are not for current merchandise, supplies and labor; and except contract and sales set forth on Exhibit B hereto attached."
Hence it is apparent that, were the rights and obligations of the parties to be determined under this contract alone, the risk of any correction in assessments for corporate taxes for the years 1920 and 1921 would have to be borne by the plaintiff, for the defendants had warranted nothing as to tax liabilities even if the claims were presented within six months. But on November 2, 1922, the parties made a supplemental agreement evidenced by the following letter:
"New York City, November 2nd, 1922.
Ford Motor Company, Detroit, Mich.
Gentlemen: Attention: Mr. W. B. Mayo. It is understood between us that the price is $1,250,000.00 for our physical assets and leaseholds at Twin Branch, West Virginia, that we are to assume the payment of the outstanding bonds amounting to $40,000.00, which amount we will deduct from your price of $1,250,000.00 and you assume the payment thereof, leaving a net balance of $1,210,000.00.
The inventory of supplies and store merchandise has been fixed at $90,000.00, which, added to the $1,210,000.00, makes a total of $1,300,000.00 for all the physical assets and leaseholds and the store and mine supplies; the Ford Motor Company to pay the bonds.
In addition to the above, the net current assets, as of October 31st, 1922, were fixed at $100,000.00, which, added to the amount of $1,300,000.00, makes a sum of $1,400,000.00, and it is understood and agreed that if the net current assets do not equal $100,000.00, as shown on attached statement, we are to refund to you any such difference, and in the event of the net current assets totaling more than $100,000.00 shown the Ford Motor Company will pay to us such difference.
Attached hereto is a balance sheet as of October 1st, 1922, which we believe to be substantially correct.