did "not express an opinion" and that it made "no representations regarding the sufficiency of the foregoing procedures for [defendants'] purposes (id. at 2-3)." There is no suggestion that the data and assumptions to which defendants' procedures were applied were complete, accurate or reliable. The only reasonable construction of this language is that Moret was not prepared to say that, in its opinion, the result of management's calculations was a fair approximation of the equity values of the subsidiaries as of the relevant date.
Both the accuracy of this construction and the reasons for it are crystal clear from Moret's second report. Moret there said, among other things, that (1) its work was "designed to be responsive to management's objectives...," (2) it had "no opinion" as to whether its procedures were adequate for management's purposes, which were in relevant part to establish the equity value of the Russian subsidiaries at the relevant date, (3) it would " not express an opinion on the completeness and correctness of the calculation underlying the draft settlement," which set forth these figures, and (4) it did "not express an audit opinion" as to the figure used for the negative equity value of AOZT.
(Id. Ex. O) (emphasis added) Hence, whatever the meaning of the word "acceptable" in Moret's report, which in any case applied only to the procedures used and not to the end result, nowhere in the record on the original motion was there any opinion -- by a competent witness in admissible form as required by FED. R. CIV. P. 56 -- as to the dollar amount, if any, by which the Balance Sheet overstated the book value of the relevant assets or the purchase price.
The submissions in support of the Rule 60(b) motion, all of which could have been made before the summary judgment motion was decided,
do add a bit -- but only a bit -- to the defendants' position.
They include another affidavit from Mr. Goedkoop, the Moret accountant, which conspicuously fails to give any opinion as to what the purchase price, computed in accordance with the contract, should have been. And they undercut defendants in another, most important respect.
Whereas the calculation prepared by defendants and reviewed by Moret attributed a total negative equity value to AOZT of $ 4,120,370 ($ 827,090 plus the $ 3,293,280 addition attributed to the allegedly worthless account payable to the Buyer), Price Waterhouse came up with a total figure of $ 826,800, none of it attributable to the allegedly uncollectible account. (Piantidosi Reply Decl. Ex. A, at 5-9) The result of this and other, far less significant, differences between Price Waterhouse and the defendants' figures that were reviewed by Moret is that the total alleged overstatement, according to Price Waterhouse, was $ 5.4 million -- $ 3.3 million less than defendants originally claimed in this action. And this difference is extremely important.
It must be borne in mind that defendants' fraud theory is not simply that the Balance Sheet in some sense was incorrect or, indeed, that it was off by an amount that would be significant to most people. While such an error might well give defendants a claim for a refund of part of the purchase price, the Guarantors can avoid their guarantees of the notes only if they can establish that they would not have signed the guarantees if they had known the true state of affairs.
And on this point, the structure of the contract is critical.
The purchase agreement, dated January 4, 1994, provided for the purchase of the company for Book Value less $ 900,000,
the price payable in the form of (1) guaranteed notes aggregating $ 5 million, and (2) cash for the difference. Any variation in the Book Value thus would have resulted in a change only in the cash paid at the closing, the Estimated Cash Purchase Price not in the amount of the notes. The notes and guarantees could have been affected only in one way: the purchase agreement gave both sides the right to call off the deal before the notes and guarantees were signed if the Estimated Cash Purchase Price -- the book value shown on the Preliminary Balance Sheet less the $ 900,000 contractual discount less the $ 5 million in notes -- varied by more than 10 percent from $ 67.8 million. Frankel I, 930 F. Supp. at 56-57. Thus, if the book value shown on the Preliminary Balance Sheet minus $ 5.9 million was less than $ 61.02 million or greater than $ 74.58 million, the Buyers could have walked away. Otherwise, Holdings was obliged to sign the notes and the Guarantors to sign the guarantees. Hence, any overstatement of less than $ 6.78 million would have been immaterial to the contractual obligations of Holders and the Guarantors to execute and guarantee the notes, respectively.
This is confirmed by Mr. De Geus in his original papers in opposition to the motion for summary judgment. He there asserted that the importance of the alleged overstatement of the book value lay in Buyers' ability to cancel the deal if the Estimated Cash Purchase Price dropped beneath the contractual floor. Because the defendants' calculation at that time purported to show an $ 8.7 million overstatement, which was well over 10 percent of $ 67.8 million, Mr. De Geus argued that disclosure of the true state of affairs would have resulted in the defendants declining to proceed and thus declining to execute the notes and guarantees. (De Geus Aff., Mar. 13, 1996, PP 11, 16-17, 22, 26; De Geus Reply Aff., Apr. 4, 1996, PP 3-4)
The foregoing demonstrates that plaintiffs would be entitled to summary judgment even if the Price Waterhouse report were properly considered "newly discovered evidence" under Rule 60(b)(2) and is competent and admissible for summary judgment purposes. The amount of the overstatement Price Waterhouse alleges is too low to have been material to the notes and guarantees.
This, of course, is not to say that the Guarantors have no forum or remedy for the alleged overpayment. They already have brought an independent action seeking to recover the alleged overpayment.
And it is important to emphasize that there is no inequity in enforcing the guarantees and thereby requiring the payment of disputed sums pending the outcome of the defendants' affirmative claim.
As the Court has commented previously, acquisitions and dispositions of businesses for prices that depend on the results of accounting procedures are fraught with the risk of post-closing disagreements about accounting matters. Where part of the price is to be paid after the closing, the seller almost invariably must contemplate the risk that the buyer will claim that the price should be adjusted and seek to withhold any unpaid portion. The buyer, for exactly the same reason, must contemplate the possibility that the seller will demand payment of any unpaid portion of the purchase price notwithstanding the buyer's view that it has paid too much already or, at any rate, that the seller is not entitled to the balance.
Attorneys who represent parties to such transactions have a variety of means at their disposal to protect the conflicting interests of buyers and sellers in this respect, assuming of course that their respective clients are successful in securing the agreement of their opposite numbers. At one end of the spectrum, a contract may provide that the buyer's obligation to pay any balance due after closing arises only after authoritative resolution of any dispute as to the price, whether by litigation or arbitration. At the other end of the spectrum would be a contract that provided that the buyer would pay all amounts claimed by the seller immediately, subject to the buyer's right to sue for a refund. See Frankel I, 930 F. Supp. at 61 & n.7 (citing cases). There is a myriad of techniques that fall between these poles, including the method agreed upon here -- guaranteed promissory notes in which the maker, but not the guarantors, waived substantially all defenses.
The effect of the maker's waiver, as the Court held in Frankel I, was unequivocally to require that Holdings pay the $ 5 million principal amount of the notes irrespective of any dispute as to the price. While the Guarantors did not waive defenses, the very fact that they guaranteed notes for liquidated amounts materially affected their right to withhold payment pending resolution of this dispute. The plaintiffs, as holders of the notes, were able to make out their case in chief by proving the notes, the guarantees, and the fact of non-payment. At that point, the burden shifted to the Guarantors, for reasons explained in Frankel I, to adduce competent and admissible evidence raising a genuine issue of fact as to a material misrepresentation, a burden they did not carry.
The situation of course would have been quite different if the deal had been structured otherwise. The contract might have provided that the buyers would pay a fixed sum at closing and make a post-closing payment equal to the difference between the purchase price and the amount paid at the closing. In those circumstances, the plaintiffs would have borne the burden of proving the purchase price as that term was defined in the contract. The defendants' ability to demonstrate the existence of genuine issues of material fact as to the purchase price would have been appreciably greater than their ability to defeat a summary judgment motion on the guarantees. But that is not the deal the parties made. It would be entirely inappropriate for the Court to rewrite the bargain -- particularly where, as here, the transaction involved a $ 400 million a year business and the parties were sophisticated and had access to competent counsel.
For the foregoing reasons, the motions are denied in all respects. Moreover, in view of the protean nature of defendants' claims as to the extent of the alleged overstatement, the fact that the Guarantors were involved intimately in this business prior to the buy out, the fact that the Guarantors are foreign nationals whose assets are not readily reachable to satisfy a judgment in the event plaintiffs ultimately prevail, the dependence of all of defendants' accountants on subjective representations of the defendants as to matters affecting the amount of any claimed overstatement,
and that Price Waterhouse's work depends upon the parent company's "shadow bookkeeping," the Court would exercise its power under Rule 60(b) to impose conditions on any exercise of its power to vacate the judgment. Specifically, it would condition vacatur of the judgment as to the Guarantors upon the Guarantors posting a bond or giving other security approved by the Court in the principal amount of the Notes plus all interest accrued thereon to date plus an additional 15 percent. See First Fidelity Bank, N.A. v. The Government of Antigua and Barbuda - Permanent Mission, 877 F.2d 189 (2d Cir. 1989) (conditioning vacatur of judgment on posting security); Sales v. Republic of Uganda, 828 F. Supp. 1032 (S.D.N.Y. 1993) (same).
Dated: September 30, 1996
Lewis A. Kaplan
United States District Judge