The opinion of the court was delivered by: LEWIS A. KAPLAN
American purchased the shares of TDI pursuant to an agreement dated September 29, 1986 (the "Stock Purchase Agreement"). (Cpt P 9) Section 10.1 of the Stock Purchase Agreement provided in relevant pan that the defendants and the other selling shareholders would indemnify, and hold harmless American and its assignees from, inter alia, tax liabilities "as of December 31, 1985." (Id PP 9-10, Levander Aff. Ex. A)
At some point, the Internal Revenue Service commenced an audit of TDI for the years 1980 through 1985. Litigation among the parties to this action broke out in 1989, but was settled in 1991. As part of the settlement, the defendants and two other selling shareholders (the "Indemnitors") reaffirmed the tax indemnity contained in the Stock Purchase Agreement and assumed control of the IRS audit. (Cpt PP 12-15. Levander Aff. Ex. B)
In March 1993, a tentative settlement of the IRS audit was reached for the tax years 1977 through 1983. TDI consented to the assessment of taxes as proposed by the IRS and agreed to by the Indemnitors. The Indemnitors thereupon paid the IRS $ 1,875,049 in payment of the agreed upon $ 468,049 liability for taxes as well as interest calculated by the Indemnitors of $ 1,407,000. (Cpt P 16)
The settlement was not finally approved by the IRS until May 1994, at which point it calculated the interest due. Evidently concluding that too much interest had been paid, the IRS issued a series of refund checks to TDI (the tax filer) in the aggregate amount of $ 620,890.71. (Id P 17) TDI thereupon put the money received as a result of the Indemnitors' payment into its own, albeit allegedly separate, bank account (Id P 18) It is this money that defendants seek to recover.
TDI argues that it is entitled to hold onto this money, principally on the theory that defendants may have future obligations to indemnify TDI for tax liabilities:
. TDI points out that the IRS has issued a deficiency in tax in the amount of $ 933,721, subsequently reduced to $ 750,000, and certain additions thereto in respect of TDI's taxable year ended December 30, 1986 (the "1986 Federal Tax Exposure"), although it concedes that TDI is contesting that assessment in the United States Tax Court. (Cpt P 21; Rudenstein Aff. P 27) If TDI fails to overturn the deficiency creating the 1986 Federal Tax Exposure, defendants may be obliged to indemnify them. Defendants deny any liability with respect to this claim.
. TDI "has been billed approximately $ 63,000 in allegedly indemnifiable legal and accounting fees in connection with the 1986 Federal Tax Exposure." (Rudenstein Aff. P 31) If TDI pays those fees,
and if plaintiffs prevail on their argument with respect to defendants' alleged liability for the 1986 Federal Tax Exposure, defendants would be obliged to indemnify plaintiffs for those expenses.
. The IRS has indicated that there will be certain restricted interest payable with respect to 1984, but the amount of the charge is now unknown.
Thus, even plaintiffs do not claim that there was any debt due and owing from the defendants to the plaintiffs at the time this motion was brought except perhaps some legal fees with respect to the disputed 1986 Federal Tax Exposure. So plaintiffs -- faced with the temptation placed in their path by the fortuity of the refund checks being directed to TDI -- resorted to self-help in order to create a fund to secure defendants future performance of their indemnity obligations.