United States District Court, W.D. New York
PAUL H. SCHWEIZER, W. STUART SCHWEIZER, LESLIE E. SCHWEIZER and KAWADA INDUSTRIES, INC., DECISION and Plaintiffs,
SIKORSKY AIRCRAFT CORPORATION, Defendant.
MICHAEL A. TELESCA, District Judge.
Paul H. Schweizer, W. Stuart Schweizer, and Leslie E. Schweizer, along with Kawada Industries, Inc. (collectively, "Plaintiffs") instituted this action against Sikorsky Aircraft Corporation alleging claims of breach of contract and breach of the implied duty of good faith and fair dealing. Presently before the Court are the parties' cross-motions for summary judgment.
II. Factual Background
Plaintiffs are former shareholders of Schweizer Aircraft, a closely-held aircraft manufacturer based in Elmira, New York. After extensive negotiation regarding terms, Plaintiffs and Defendant executed a Stock Purchase Agreement ("SPA") [#50-1] on August 26, 2004, pursuant to which Plaintiffs sold, and Sikorsky purchased, all of the outstanding capital stock of Schweizer Aircraft. On September 23, 2004, the Closing Date, Sikorsky paid Plaintiffs $12 million. In 2007, Plaintiffs received a supplemental payment from Sikorsky of $1, 159, 152, plus interest.
In the SPA, the parties had agreed that a substantial portion of the purchase price would be deferred and contingent in order to provide Sikorsky with security to support certain contractual indemnity obligations owed by Plaintiffs, including those related to then-pending product liability claims and to the completion costs for development of the RU-38B, a fixed wing surveillance aircraft ("the RU-38B Program"). Plaintiffs' obligations under the SPA included their fulfillment of certain warranties, namely, that Schweizer Aircraft had adequate financial reserves to cover the product liability lawsuits and to complete the RU-38B Program. However, the product liability claims ultimately settled for more than the amount reserved by the Company, and the RU-38B program ran over budget. Sikorsky determined that Plaintiffs were in breach of their representational warranties, and accordingly reduced the deferred and contingent payment amounts payable to Plaintiffs. Believing that Defendant had incorrectly calculated the deferred and contingent payments, Plaintiffs instituted this action.
III. Procedural History
On February 8, 2011, this Court issued a Decision and Order [#16] granting Defendant's Motion to Dismiss the Third Cause of Action and denying Defendant's motion to dismiss the Second and Fourth Causes of Action. After extensive discovery, Plaintiffs filed an Amended Complaint [#38] on September 19, 2012. In their first cause of action, Plaintiffs allege that Sikorsky breached the SPA by failing to provide timely written notice before deducting the costs of defending and settling the product liability claims from the Contingent Payment Amount. In their second cause of action, Plaintiffs claim that Sikorsky failed to work together with Plaintiffs in the defense of the two product liability claims and greatly overpaid when settling those cases, to Plaintiffs' financial detriment. Plaintiffs' fourth cause of action alleges that Sikorsky breached the implied covenant of good faith by failing to complete the RU-38B Program within the amount that the Plaintiffs represented would be required to complete the program on a breakeven basis. Plaintiffs' fifth cause of action asserts that, before deducting the RU-38B Program cost overruns from the Deferred Payment Amount, Sikorsky failed to provide sufficiently detailed notice regarding the basis for these overruns. Finally, Plaintiffs' sixth cause of action alleges that Sikorsky improperly calculated the total costs of the RU-38B Program and deducted too large a sum from the Deferred Payment Amount owed to Plaintiffs.
On December 12, 2013, Defendant filed a Motion for Summary Judgment [#47] and supporting Memorandum of Law ("Def's MOL") [#47-1]. On January 29, 2014, Plaintiffs filed a Cross-Motion for Partial Summary Judgment [#55, #73] with exhibits and a supporting Memorandum of Law ("Pl's MOL") [#72]. Defendant filed a reply brief ("Def's Reply") [#76] on February 28, 2014. Plaintiffs filed a reply brief ("Pls' Reply") [#77] on March 14, 2014.
For the reasons discussed below, Defendant's Motion for Summary Judgment is granted, Plaintiffs' Cross-Motion for Partial Summary Judgment is denied, and the Amended Complaint is dismissed.
III. General Legal Principles
A. Summary Judgment Standard
Summary judgment may be granted when "there is no issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c); see also, e.g., Celotex Corp. v. Catrett , 477 U.S. 317, 322-23 (1986). A court reviewing a request for summary judgment is required to resolve all ambiguities and draw all inferences in favor of the non-moving party, and must view any inferences to be drawn from the underlying facts revealed in materials such as affidavits, exhibits, interrogatory answers, and depositions in the light most favorable to the nonmoving party. Nationwide Life Ins. Co. v. Bankers Leasing Ass'n, Inc. , 182 F.3d 157, 160 (2d Cir. 1999) (citing Cronin v. Aetna Life Ins. Co. , 46 F.3d 196, 202 (2d Cir. 1995); further citations omitted)).
The mere existence of disputed factual issues is insufficient to defeat a motion for summary judgment. Knight v. United States Fire Ins. Co. , 804 F.2d 9, 11-12 (2d Cir. 1986). Rather, the disputed issues of fact must be "material to the outcome of the litigation, " Knight , 804 F.2d at 11, and must be underpinned by evidence that would allow "a rational trier of fact to find for the non-moving party." Matsushita Electrical Industrial Co. v. Zenith Radio Corp. , 475 U.S. 574, 587 (1986). With respect to materiality, "the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248 (1986).
B. Contract Interpretation
The SPA specifies that New York law applies, and the parties do not dispute this. In reviewing a written contract, the court's "primary objective is to give effect to the intent of the parties as revealed by the language they chose to use." Seiden Assocs., Inc. v. ANC Holdings, Inc. , 959 F.2d 425, 428 (2d Cir. 1992) (citation omitted). The court "must give unambiguous provisions of an insurance contract... their plain and ordinary meaning.'" 10 Ellicott Square Court Corp. v. Mountain Valley Indem. Co. , 634 F.3d 112, 119 (2d Cir. 2011) (quotation omitted). When interpreting disputed language, the court must consider all pertinent provisions in the contract and seek to harmonize them, if possible. Terwilliger v. Terwilliger , 206 F.3d 240, 245 (2d Cir. 2000) (citing Reda v. Eastman Kodak Co. , 233 A.D.2d 914, 915 (4th Dep't 1996)).
"If the court finds that the contract is not ambiguous it should assign the plain and ordinary meaning to each term and interpret the contract without the aid of extrinsic evidence and it may then award summary judgment." International Multifoods Corp. v. Commercial Union Ins. Co. , 309 F.3d 76, 83 (2d Cir. 2002) (citations and quotation marks omitted). If, however, "the resolution of a dispute turns on the meaning of an ambiguous term or phrase[, ]" Federal Ins. Co. v. American Home Assur. Co. , 639 F.3d 557, 567 (2d Cir. 2011) (citations omitted), summary judgment is not appropriate. Id . "Language whose meaning is otherwise plain is not ambiguous merely because the parties urge different interpretations in the litigation." Metropolitan Life Ins. Co. v. RJR Nabisco, Inc. , 906 F.2d 884, 889 (2d Cir. 1990).
A. First Cause of Action: Failure to Provide Written Notice of the Deduction of the PL Litigations from the CPA
Plaintiffs' first cause of action involves Section 1.3(b), which allows for a reduction in the CPA due to Plaintiffs' breach of the representational warranty in Section 4.19(a) and Schedule 4.19(a) for "Damages paid by [Defendant] for product liability claims for accidents occurring prior to Closing". In Section 4.19(a) and Schedule 4.19(a), Plaintiffs warrantied that Sikorsky would not be liable for pre-Closing product liability exceeding the amount Schweizer Aircraft had reserved on its Balance Sheet (i.e., $1 million). See SPA, § 4.19(a), Schedule 4.19(a). Two significant product liability lawsuits were pending against Schweizer Aircraft as of the Closing Date, "the Remcho Litigation" and "the Kelly/Landy Litigation" (collectively, "the PL Litigations"). The CPA, set forth in Section 1.3(b), was the indemnification mechanism for the costs of the PL Litigations and provided in pertinent part as follows:
Any earned [CPA] and any applicable Interest payable to the Sellers shall be held by the Buyer until all pending or potential product liability claims for accidents occurring prior to the Closing Date are finally resolved....
Any Damages under Section 4.19(a) paid by Buyer on account of any product liability claim as described in Section 4.19(a) for accidents occurring prior to the Closing Date [the PL Litigations] shall be debited from the earned [CPA] and any earned Interest....
SPA, § 1.3(b) [#50-1].
In December of 2007, Defendant settled the Remcho Litigation for approximately $4.5 million, and in June of 2008, Defendant settled the Kelly/Landy Litigation for $4.03 million. Because the settlement of and expenses related to the Remcho Litigation consumed about $4.47 million of the $5.5 million CPA earned by Plaintiffs, Defendant deducted only about $1.03 million of the Kelly/Landy Litigation settlement amount and expenses from the CPA. The remaining, approximately $4.46 million was absorbed by Schweizer Aircraft.
Plaintiffs assert that these "Damages" are "claims for Buyer Damages", and they therefore fall within subsection (2) of Section 6.4(b)'s requirement of 60 days written notice. Section 6.4(b) provides in relevant part as follows:
(b) Time Period. Any claim for Buyer Damages sustained by reason of a breach or inaccuracy of any representation or warranty, shall be limited to claims made in a written notice delivered to Sellers' Agent prior to (1) for matters other than matters related to product liability under Section 4.19(a), the third anniversary of the Closing Date and (2) for matters related to products liability under Section 4.19(a), the date sixty (60) days after any such claims are finally resolved or the applicable statutes of limitations have expired for such matters if no claim has been made....
SPA [#50-1], § 6.4(b)(1)-(2).
Plaintiffs argue that the product liability claims referenced in Section 1.3(b), which sets forth the method for calculating the CPA, are "Buyer Damages" to which the notice provision in Section 6.4(b)(2) applies; that Section 6.4(b)(2) requires, as a condition precedent to a request by Sikorsky for indemnification of the product liability claims, 60 days written notice; and that Sikorsky failed to comply with that condition precedent by "fail[ing] to timely deliver to Plaintiffs' Sellers' Agent... written notice", pursuant to Section 6.4(b)(2), of the product liability claims by which the CPA was reduced, "within sixty (60) days after [such] claims were settled." Amended Complaint ("Am. Compl."), ¶ 60. The parties have cross-moved for summary judgment on this claim.
As noted above, Section 1.3(b) refers to "Damages under Section 4.19(a) paid by Buyer on account of any product liability claim as described in Section 4.19(a) for accidents occurring prior to the Closing Date[.]" SPA, § 1.3(b). Section 6.4(b)(2), on the other hand, refers to "Buyer Damages", which is defined separately from "Damages, " compare SPA, § 6.2 with id., pp. 52-53. Plaintiffs argue that the Damages mentioned in Section 1.3(b) are "Buyer Damages" and reason that they fall within Section 6.4(b)(2)'s requirement of 60 days written notice.
As Defendant observes, Section 1.3(b) uses the phrase "Damages", rather than "Buyer Damages", and there is no basis to infer that the drafters intended otherwise. Accordingly, Defendant argues, Section 6.4(b)(2) does not apply. Defendant also points out that Section 1.3(b) does not contain a notice requirement, and therefore no notice was required before deducting the PL Litigations' costs from the CPA. Even if notice were required, Defendant contends, Plaintiffs had actual notice of the settlement of the PL Litigations, and accordingly were not prejudiced by the lack of notice.
Defendant is correct that Section 1.3(b) does not refer to "Buyer Damages", which is defined separately in Section 6.2, and "Buyer Damages" are not referenced in Section 4.19(a). Also, Section 1.3(b) does not require that notice must be given before the "Damages under Section 4.19(a)" paid with regard to pre-Closing product liability claims are debited from the earned CPA and any earned interest. See id. ("[D]amages under Section 4.19(a) paid by Buyer... shall be debited. ...") (emphasis supplied). Thus, Defendant's argument-that it was not required to give written notice before it deducted the "Damages under Section 4.19(a) paid by Buyer on account of any product liability claim as described in Section 4.19(a) for accidents occurring prior to the Closing Date"-is consistent with the express terms of the SPA. It also comports with common sense, as claims for "Buyer Damages" (claims "asserted against, imposed upon, resulting to, or incurred or required to be paid by" Sikorsky and its affiliates) would not necessarily have been in existence at the time of Closing and thus would not be known to Plaintiffs; hence, notice of such claims would be required.
Plaintiffs' construction of Section 1.3(b) and Section 6.4(b)(2), however, requires the Court to look outside the language of these sections and interpret terms not expressly or implicitly used in them. First, the Court must find that Section 6.4(b)(2) and Section 1.3(b)-although the former refers to "Buyer Damages" and the latter refers to "Damages paid by Buyer on account of any product liability claim as described in Section 4.19(a)"-are talking about the same thing. Section 6.2 defines "Buyer Damages" as "all Damages... directly or indirectly asserted against, ...