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Minatec Finance S.à.r.l. v. SI Group Inc.

August 18, 2008

IN THE MATTER OF THE APPLICATION OF MINATEC FINANCE S.À.R.L., PETITIONER,
v.
SI GROUP INC., RESPONDENT.



The opinion of the court was delivered by: Randolph F. Treece United States Magistrate Judge

MEMORANDUM-DECISION and ORDER

Petitioner Minatec Finance S.à.r.l. (hereinafter "Minatec"), a corporation organized under the laws of Luxembourg, makes an application, pursuant to 28 U.S.C. § 1782(a), to conduct discovery of SI Group Inc. (hereinafter "SI Group"), a United States corporation located in the Northern District of New York, for use in currently pending proceedings in Germany.*fn1 SI Group opposes this Application.*fn2 As permitted, Minatec files a Reply to SI Group's Opposition.*fn3

I. BACKGROUND*fn4

A. The Relationship of the Parties

On August 17, 2006, pursuant to a Share Purchase Agreement, SI Group and Schenectady Luxembourg S.à.r.l sold 100% of their shareholdings in Chemtec and SGH to Minatec. Dkt. No. 1, Ex. A, Agreement. The following day, Chemtec's and SGH's assets, books and records were transferred to Minatec. Relevant provisions of the Share Purchase Agreement are summarized as follows:

§ 3 set forth the representation and warranties of the parties, particularly SI Group. Noting that there is a net operating loss, § 3.12 states that SI Group Companies have not "wilfully taken any action in order to reduce the amount of such net operating losses or to impede Company's ability to use such loss carry forward[.]" § 12.9 The Agreement would be governed by German Law. § 12.10 Frankfurt au Main would be the exclusive venue for all disputes between the parties arising under the Agreement.

Id.

Minatec contends that after the closing and assuming control of the businesses and assets, it discovered that SI Group concealed critical information regarding the likelihood of a substantial post-closing tax liability of Chemtec and SGH and intentionally mislabeled highly toxic material it produced called "DiBoc." Dkt. No. 1 at ¶¶ 5-11. In particular, Minatec asserts that SGH concealed certain information that should have been disclosed to Minatec when SGH wrote down the value of its shares in 2004, thus violating the warranties and representations in the Agreement. This assertion includes a charge that SI Group made such a write down "in an attempt to make up for the loss of unusable net operating losses caused by SI Group's failure to properly register in Germany a profit pooling agreement entered into by Chemtec." Id. at ¶ 5. In August 2006, the German tax authorities began an audit of the "tax transaction," which, Minatec submits, may have substantial tax consequences for it. As to the alleged mislabeling of DiBoc accusation, Minatec complains that this highly toxic material was improperly labeled with a far less hazardous designation "Xn" when it should have been designated T, for very toxic, and this improper labeling, discovered after the closing, may have or will place employees and customers in peril. Id. at ¶¶ 7-9. Minatec claims that SI Group purposely failed to disclose its knowledge of the mislabeling of this product, thereby, violating the warranties and representations of the Share Purchase Agreement.

On January 11, 2008, Minatec placed SI Group on notice of its belief that SI concealed material facts and information pertaining to the tax audit which was reviewing Chemtec and SGH's handling of a profit pooling agreement. Dkt. No. 1, Ex. C., Pet'r. Lt., dated Jan. 11, 2008.

Minatec's Letter sought documents relevant to the German tax audit and the opportunity to depose Adam Jameson and Rick Barlow, officers of SI Group, whom Minatec believes have personal knowledge of this tax transaction. Id. Within two weeks of the January 11th Letter, on January 25, 2008, Minatec sent another letter, but this time discussed SI Group's purported mislabeling of the toxic chemical, DiBoc, requesting again the opportunity to interview Messrs. Jameson, Barlow, and anyone else who would have knowledge of these events, and the production of all documents pertaining to this subject matter. Id. Ex. D., Pet'r. Lt., dated Jan. 25, 2008. Both letters evince an implied threat to seek § 1782(a) discovery if SI Group resisted Minatec's requests for discovery. Rather than responding to Minatec's correspondence, SI Group initiated a lawsuit in Germany.

B. German Litigation

On February 1, 2008, SI Group sued Minatec in the Regional Court in Frankfurt, Germany in the case entitled SI Group Inc. and Schenectady Luxembourg S.à.r.l v. Minatec Finance S.à.r.l. (hereinafter the "German Action") seeking declaratory relief that would establish that Minatec is not entitled to pecuniary relief under the Share Purchase Agreement for possible losses that may result from the German tax audit and the alleged mislabeling of DiBoc. Dkt. No. 1, Ex. B, German Compl. at ¶¶ 1 & 2. On March 13, 2008, the German court issued an order which initiated the service of the German Complaint upon Minatec and gave Minatec more than a month to respond to the Complaint. Dkt. No. 15, Kroeker Decl. at ¶ 3. This Court is unaware of any subsequent rulings by the German Court rendered after the filing of this Motion and, as far as we know, no motion for discovery has been submitted to the German Court.

As stated above, in August 2006, German tax authorities commenced a review of Chemtec's and SGH's taxes for the period of 2001 to 2004, which included a tax transaction related to a write down of the value of shareholding of Chemtec. Dkt. No. 1, Mortiz Decl. at ¶ 5. The audit was completed in November 2007. Id. Minatec expects that the audit will result in a disallowance of previous deductions and, thus, a substantial liability to Chemtec, which will be imposed upon its current owner, Minatec. Id. German local tax authorities are empowered to collect taxes and initiate investigations into violations of the German tax code. Dkt. No. 16, Brodersen Decl. at ¶¶ 3-4.

Ultimately, the investigating arm of the tax agency can render a finding which may be conveyed to the assessment branch that has the authority to issue a tax assessment notice. Id. at ¶¶ 12-13. An appeal can be taken from that assessment and that appeal can be subsequently challenged in a separate action in German Tax Court. Id. at ¶¶ 13 & 15. Throughout this audit process, SI Group has been permitted to be an observer of the proceedings. Dkt. No. 14, Kleinhesterkamp Decl. at ¶¶ 4-7.

C. The Nature of the Petition

By this Petition, Minatec seeks an order directing SI Group to disclose and produce (1) all documents, whether written or in electronic format, concerning or relating to matters which are the subject of the German tax audit, including all correspondence, (2) all documents related to the handling of the profit pooling agreement and tax losses, (3) Adam Jameson and Rick Barlow, SI Group executives, and the author of the "concealed tax memo" for deposition as to the tax matter, (4) all documents, no matter the format, concerning and related to DiBoc and its labeling in Europe and the United States, including all internal correspondence to which SI Group and Chemtec is a party, and (5) executives Jameson and Barlow or any other person with knowledge of the labeling of DiBoc for deposition. Dkt. No. 1, at ¶¶ 14-19.

Discovery in Germany cannot be initiated by the parties without an edict from the German court. Dkt. No. 12, Mueller Decl., Ex A, German Tax Code (ZPO) at §§ 142, 143, & 363.*fn5 Minatec argues that this discovery would be relevant to the pending German Action, the German tax audit, and conceivably, any subsequent litigation related to the highly toxic DiBoc.

II. DISCUSSION

A. General Legal Principles

A district court is authorized, but not required, to grant a ยง 1782(a) discovery request when the following three ...


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