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Alliance Industries, Inc v. Longyear Holdings

February 26, 2012

ALLIANCE INDUSTRIES, INC., PLAINTIFF / COUNTER-DEFENDANT,
v.
LONGYEAR HOLDINGS, INC., DEFENDANT / COUNTER-PLAINTIFF



The opinion of the court was delivered by: William M. Skretny Chief Judge United States District Court

DECISION AND ORDER

I. INTRODUCTION

Plaintiff, Alliance Industries, Inc. ("Alliance") commenced this diversity action on July 2, 2008 alleging, inter alia, that Defendant Longyear Holdings, Inc., ("Longyear") unlawfully withheld funds from an escrow account pursuant to the sale of Alliance's subsidiary, Prosonic Corp. ("Prosonic"). Longyear answered and asserted eleven counterclaims, alleging that it withheld the funds because Alliance breached the Stock Purchase Agreement ("Agreement"), which memorialized the sale. Each party eventually moved for summary judgment. (Docket Nos. 88, 95.) The Honorable Hugh B. Scott, United States Magistrate Judge, entered a Report and Recommendation advising this Court to grant in part and deny in part Alliance's motion for summary judgment and to deny in full Longyear's motion. (Docket No. 112.) Presently before this Court are each party's timely objections to that Report and Recommendation. (Docket Nos. 116, 121.) For the following reasons, the Report and Recommendation is set aside in part and adopted in part.

II. BACKGROUND

A. Facts

This action arises from complications surrounding Longyear's full stock purchase of Alliance's subsidiary, Prosonic Corp., for $72.5 million. (Plaintiff's Statement of Facts ("Pl.'s State.," ¶ 1; Docket No. 91.)*fn1 That purchase was finalized December 6, 2006 by the Agreement. (Id., ¶ 5.)

1. Infant's Medical Claim

In the Agreement, each party agreed that upon the completion of the stock transfer, Prosonic's employees and their accompanying health coverage would also transfer to Longyear. (Defendant's Statement of Facts ("Def.'s State."), ¶ 141.) Longyear self-funded its employees' health insurance, meaning that it provided health coverage directly to its employees with its own funds. ((Pl.'s State.¶ 22.) Alliance did have a "stop-loss" insurance policy, however. (Id., ¶ 25. ) Under its stop-loss policy, Alliance was responsible for the first $50,000 of any health insurance claim, while its insurance provider was responsible for the remainder, up to $1 million.*fn2 (Id.)

In September of 2006, a Prosonic employee, covered by Alliance's health insurance, had a child who was born with serious medical ailments.*fn3 (Id., ¶ 30.) Tragically, the child never recovered from these birth defects, and after several months in the hospital, died in December of 2007. (Id.; Def.'s State., ¶ 150.)*fn4 According to Longyear, the total medical costs, which ultimately became it's responsibility, amounted to nearly $3 million.*fn5 (Def.'s State., ¶¶ 142, 149). Longyear had its own insurance policy for these employees, which became effective January 1, 2007. (Id., ¶ 146.) But this policy did not cover the infant's claim because it excluded any dependant of an employee who was already hospitalized at the time the policy began. (Id., ¶ 146-147.)

Alliance learned of the child's birth in October of 2006 and by November, it was aware that the medical costs had exceeded $400,000. (Pl.'s State., ¶¶ 33, 37; Def.'s State., ¶ 107.) However, it did not affirmatively disclose this event as a liability during the purchase negotiations or due diligence period because it was covered by its stop-loss insurance. (Pl's State., ¶ 25.) Pursuant to Alliance's standard accounting practice, health benefit related costs were not booked until the expense was actually incurred. (Id., ¶ 29.) In this case it booked $50,000, but nothing over that amount because its insurance provider covered the remainder. (Id., ¶¶ 28, 41, 42.) Alliance, however, did disclose a 2006 aggregate report of health care related liabilities, in addition to a description of the plan with its $50,000 initial liability, as outlined above. (Id., ¶¶ 48-51.) Alliance further provided access to an Internet-based "data room," containing over 17,000 pages of documents, and further advised Longyear that it could contact Alliance's health insurance broker and its health benefit plan's third-party administrator with questions. (Id., ¶ 64; Def's State., ¶ 9.)

However, believing that Alliance's failure to disclose the infant's medical claim violated the Agreement, on April 25, 2008, four months after the deal closed, Longyear notified Alliance that it breached the Agreement and instructed the escrow agent to withhold $3.4 million of the deposit. (Def's State., ¶ 92) According to Longyear, $2.9 million of this accounted for medical costs relating to the infant. (Id., ¶ 95).

Alliance contends that it did not breach the Agreement and brought this action to recover the withheld funds. Longyear then asserted several breach-of-contract and tort counterclaims.

2. Tax Claim

Unrelatedly, on April 17, 2007, Alliance received notice that the State of Florida intended to audit Prosonic's books for the period ranging from January 1, 2004 to December 31, 2006. (Def's State., ¶ 151.) Alliance then forwarded this letter to Longyear. (Id., ¶ 154.) Florida ultimately assessed Prosonic $513,787.53 in taxes for the aforementioned period. (Id., ¶ 157.) According to the Agreement, all pre-closing tax liabilities were Alliance's responsibility. (Agreement, § 8.1(a); Docket No.1-2.) Yet, claiming it was prejudiced by a delay in notice, Alliance refused to pay this tax liability. (Id., ¶ 177.) This presumably accounts for the remainder of the withheld funds in escrow.

B. The Agreement

Longyear's counterclaims allege several violations of the Agreement, specifically Sections 2.1(f)(ii), 2.1(h), 2.1(j)(i)-(vi), 2.1(x), 3.3, and 8.1(a). It also relies on Sections 6.1 and 6.4(d) to support its arguments. Those sections, in relevant part, are set forth below.

§ 2.1(f)(ii): There are no liabilities of [Prosonic] or any [Prosonic] Subsidiary, except: . . . (B) those arising subsequent to September 30 2006, in the ordinary course of business consistent with past practice. § 2.1(h): During the period commencing January, 1, 2006 to and including the Closing Date [December 6, 2006], (i) there has not occurred any event or series of events, and there are not facts or circumstances in existence which would have a Material Adverse Effect on the Company. § 2.1(j)(i)-(vi): [Alliance disclosed a] current, correct and complete list of all . . . employee benefit plans . . . [and] the most recent annual financial report. . .[and] . . . actuarial report, if any." § 2.1(x): None of the representations and warranties of [Alliance] set forth in this Agreement, including the [Pronsic] Disclosure Letter . . . contains or will contain any untrue statement of material fact required to be stated therein in order to make such representations and warranties not misleading. § 3.3: Subject to the terms and conditions herein provided, each of the Parties shall use its commercially reasonable efforts to take, or cause to be taken, such action, to execute and deliver, or cause to be executed and delivered, such additional documents and instruments, and to do, or cause to be done, all things necessary, proper, or advisable under the provisions of this Agreement and under applicable law to consummate and make effective the transactions contemplated hereby and by the other documents executed and delivered in connection herewith. § 6.1: After the Closing Date [December 6, 2012] and subject to limitations . . . [Alliance] . . . shall indemnify and hold harmless [Longyear] . . . against any and all damages resulting from . . . any breach . . . by [Alliance].

§ 6.4(d):

[T]his Agreement shall be read and interpreted as if the terms "material" and "Material Adverse Effect" and words of similar meaning were not contained, set forth, or otherwise included, directly or indirectly, in such representations, warranties and covenants.

§ 8.1(a):

Alliance shall be responsible for the payment of all Taxes of [Prosonic] . . . that are owned [sic] with respect to the Pre-Closing Tax Period.

C. Procedural History

Alliance commenced this action on July 2, 2008 by filing a complaint in this Court. (Docket No. 1.) Defendant answered and asserted counterclaims on August 22, 2008. (Docket No. 12.) This matter was referred to Judge Scott for pretrial matters on September 4, 2008 (Docket No. 16) and later this Court designated him to report on all dispositive motions (Docket No. 92).

Alliance initially moved for summary judgment on December 20, 2010 (amending the motion later that day) and Defendant moved likewise on December 29, 2010. (Docket Nos. 84, 88 (amended motion), 95.) On August 3, 2011, Judge Scott issued a Report and Recommendation advising that Alliance's motion for summary judgment be granted in part and denied in part and that Longyear's motion be denied in full. (Docket No. 112.) After receiving leave to extend the time to file objections (Docket No. 114), Alliance filed objections on September 14, 2011. (Docket No. 116.) Longyear filed its objections on September 28, 2011. (Docket No. 121.)

III. DISCUSSION

A. Standard of Review

This Court reviews specific objections to reports and recommendations de novo. 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b). When only a general objection is made to a portion of a magistrate judge's report and recommendation, district courts subject that portion of the report and recommendation to a clear error review. Fed. R. Civ. P. 72(b)(2)-(3). District courts, however, are not required to review the factual findings or legal conclusions of the magistrate judge as to which no proper objections are interposed. Ianniello v. Hartford Life & Acc. Ins. Co., No. 10-CV-370, 2012 WL 314872, at *1 (E.D.N.Y. Feb. 1, 2012) (citing Thomas v. Arn, 474 U.S. 140, 150, 106 S. Ct. 466, 88 L. ...


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