Notice: Fourth Circuit I.o.p. 36.6 States That Citation of Unpublished Dispositions is Disfavored Except for Establishing Res Judicata, Estoppel, or the Law of the Case and Requires Service of Copies of Cited Unpublished Dispositions of the Fourth Circuit, 983 F.2d 1057 (4th Cir. 1993)

OPINION

In 1986, the Lane Processing Trust¹  executed a Stock Purchase Agreement with Tyson Foods, Inc., in which the Trust agreed to sell all of the stock of Lane Processing, Inc., several related companies, and their respective subsidiaries (collectively, the Companies). Under the Agreement, the Trust submitted several financial statements and warranted their accuracy. Tyson later determined that the statements failed to disclose significant liabilities, and asserted a claim for indemnification for the amounts paid to satisfy those liabilities. Tyson asserted its indemnity rights under the Agreement by withholding sums from installment payments owed to the Trust.

The Trust contested its obligation to indemnify Tyson, and filed this diversity action in federal court seeking to recover those sums from either Tyson or Frost & Company, the accounting firm that prepared the financial statements. All parties filed motions for summary judgment. The district court determined that Tyson was not entitled to indemnification, and granted summary judgment for the Trust against Tyson. Because this determination mooted the Trust's claims against Frost, the district court also granted summary judgment for Frost. Tyson appeals,²  and the Trust cross-appeals in order to preserve its rights against Frost. Because the district court did not consider all of Tyson's claims for indemnification and because genuine issues of material fact are present, we reverse both grants of summary judgment and remand for further proceedings.

On April 14, 1986, Tyson entered into the Stock Purchase Agreement with the Trust to acquire the Companies. At its core, the Agreement provided that the Trust would sell the capital stock of the Companies to Tyson for $35 million. Tyson agreed to pay the Trust $15 million at closing and to provide to the Trust a $20 million noninterest bearing promissory note, with installments of $2 million due each year for the next ten years.³  The Agreement contained numerous covenants, representations, and warranties. In § 2(f), the Trust warranted to Tyson that the "Combined Reports present fairly as of their dates the financial position and assets and liabilities" of the Companies. (J.A. at 615.) The "Combined Reports" referred to certain audited and unaudited financial statements of the Companies attached as an exhibit to the Agreement.⁴  The attachments included several unaudited statements dated March 1, 1986, which provided the most current information on the financial condition of the Companies.

The Agreement contained three other warranties relevant to this appeal. First, the Trust warranted that the Combined Reports disclosed all material liabilities of the Companies that would customarily be reflected on such statements in accordance with generally accepted accounting principles.⁵  Second, the Trust agreed to deliver to Tyson a set of audited financial statements reflecting the financial condition of the Companies as of April 26, 1986,⁶  and warranted that those financial statements would show "no material, adverse change in the financial condition of the [Companies] from their financial condition as set forth in the March 1, 1986 combined balance sheet." (J.A. at 615-16.) Finally, Tyson obtained a specific warranty from the Trust regarding reserves or provisions for accrued taxes. Section 2(g) of the Agreement provided that the March 1 statements reserved sufficient amounts for the payment of all material unpaid taxes as of that date.⁷ 

The Agreement also included an indemnification clause that is the focus of this appeal. Section 10(a) of the Agreement provided that:

Each party (the "Indemnitor") agrees to indemnify and hold harmless the others (the "Indemnitee") from any damage, claim, liability, cost, loss, interest, penalty, deficiency or expense, including without limitation, reasonable attorneys' fees, for amounts actually incurred and paid by the Indem nitee after the Closing, and arising out of or resulting from the breach by the Indemnitor of any covenant set out herein, the material inaccuracy of any representation or warranty made by the Indemnitor herein, [or] the failure of the Indemnitor to disclose fully to the Indemnitee any material matter required by this Agreement....

(J.A. at 656 (emphasis added).) Section 10(a) nevertheless limits a party's right to indemnification to damages exceeding $300,000 in the aggregate.⁸ 

The sale closed on May 8, 1986. Tyson transferred to the Trust $15 million and a non-interest bearing promissory note in the amount of $20 million, and the Trust transferred to Tyson all of the issued and outstanding capital stock of the Companies. On August 7, 1986, pursuant to § 2(f), the Trust delivered to Tyson a set of financial statements of the Companies audited by Frost & Company and representing the financial condition of the Companies as of April 26, 1986.

Some time after closing, Tyson determined that the financial statements contained three inaccuracies. First, Tyson's outside accountant, Harry C. Erwin, III, determined that the financial statements submitted pursuant to the Agreement accrued only $40,000.00⁹  for income taxes for the period ending May 8, 1986, and that Tyson actually paid $464,371.00 in income taxes for that period. Tyson thus contends that the financial statements were inaccurate by $424,371.00.

Second, Tyson's accountant determined that the financial statements failed to disclose a substantial tax liability that accrued in the fiscal year ending August 3, 1985. On June 11, 1987, the State of Alabama determined that the Companies owed $338,006.00 in income taxes for the year ending August 3, 1985, and later assessed a total of $453,567.00 in taxes and interest against the Companies. Tyson paid that assessment on March 22, 1989. In the accountant's opinion, the financial statements accompanying the Stock Purchase Agreement made no provision for the accrual of such tax liability.

Third, Tyson claimed that the April 26 financial statements understated the Companies' accounts payable. Tyson's financial analyst, Michael R. Jones, stated in an affidavit that he reviewed the accounts payable of the Companies as of April 26, 1986. He determined that as of that date, the financial statements understated the actual amounts owed to creditors by $258,070.53.¹⁰ 

Because Tyson paid significant liabilities in addition to those disclosed in the Combined Reports, Tyson believed that several warranties and representations were materially inaccurate. Tyson determined that it had been damaged in the amount of $682,441.53 based on the errors in the accounts payable and the taxes due for the period ending May 8, 1986. On March 4, 1988, Tyson gave notice to the Trust that it intended to withhold a portion of its $2 million installment payment under the promissory note. After excluding the $300,000 deductible under § 10(a), Tyson withheld $382,441.53 from its 1988 installment payment.¹¹  The following year Tyson claimed a right to further indemnification in the amount of $453,567.00 based on the undisclosed 1985 Alabama state income tax liability. Tyson withheld the amount it paid in taxes from its 1989 installment payment. In total, Tyson claimed damages in the amount of $1,136,008.53 and asserted a right to indemnification in the amount of $836,008.53.

On July 25, 1989, John E. Peterson, Jr. brought this action on behalf of the Trust against both Tyson and Frost, alleging that Tyson was not entitled to indemnification under the Agreement, and that its withholding of payments from the Trust therefore breached the Agreement. The complaint further alleged that if Tyson prevailed, Frost had committed professional malpractice by failing to render its services with the degree of care and skill exercised by members of the accounting profession.¹² 

All parties filed motions for summary judgment. After discovery, the district court granted summary judgment for the Trust against Tyson. In its Memorandum Opinion, the district court focused exclusively on the "no material, adverse change" warranty in § 2(f).¹³  The court noted that the March 1 statements revealed a net worth of $3,149,013.00, and the April 26 statements revealed a net worth of $4,574,574.00, or an improvement in net worth of approximately $1.4 million. Even after correcting for the errors alleged by Tyson, the court found that " [a] material advantageous change in the financial health of the Lane Companies" occurred between March 1 and April 26, and reasoned that " [s]ince the financial condition of the Lane Companies actually improved, plaintiff did not breach the warranty. Tyson is not entitled to indemnification." (J.A. at 283.) Consequently, the district court awarded the Trust judgment against Tyson in the amount of $836,008.53 plus interest and attorney's fees.

Tyson appeals the district court's grant of summary judgment for the Trust, arguing that nothing in the Agreement supports the district court's focus on the improvement in the "net worth" of the Companies to determine whether Tyson was entitled to indemnification under the Agreement. Rather, Tyson argues that under the plain language of the Agreement, it is clearly entitled to indemnification.

The Trust cross-appeals the grant of summary judgment for Frost. In the proceedings below, the district court initially determined that the summary judgment motions of Frost and Tyson were moot, and declined to address them. The court later amended its Memorandum Opinion without explanation to grant Frost's motion for summary judgment, and declared in its Final Judgment that the Trust's claims against Frost were dismissed with prejudice. The Trust argues that if we reverse summary judgment in its favor, we should also reverse summary judgment in Frost's favor in order to permit it to pursue whatever remedies it may have against Frost.

Under Rule 56(c), a district court must render judgment for a party "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). A genuine issue of material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Inferences from the facts are to be drawn in the light most favorable to the nonmoving party, which in this case is Tyson. Magill v. Gulf & Western Indus., Inc., 736 F.2d 976, 979 (4th Cir. 1984). On appeal, we review a district court's grant of summary judgment de novo, applying the same standards as the district court. Farwell v. Un, 902 F.2d 282, 287 (4th Cir. 1990).

The critical issue in this case is Tyson's affirmative defense of indemnity. The Trust sued Tyson for failing to tender the full amount of payments due to the Trust under the Agreement. The parties do not dispute that the Agreement required Tyson to pay the Trust the sum of $2 million on both May 8, 1988, and May 8, 1989, see Stock Pur-chase Agreement, § 1(b) (i), and that Tyson did not do so. Consequently, the Trust is entitled to recover sums not paid to it unless Tyson can successfully assert a defense to the Trust's claims. Tyson has asserted as a defense that its decision to withhold sums was permitted by the Agreement's indemnification clause. Stock Purchase Agreement, §§ 10(a) & (c). Tyson will ultimately bear the burden of proving its affirmative defense at trial. Therefore, in order to defeat the Trust's motion for summary judgment, Tyson must make a showing sufficient to establish each essential element of its defense. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

To assess the adequacy of Tyson's defense, we must examine Tyson's indemnification rights under the Agreement. Under § 24 of the Agreement, Arkansas law governs the interpretation of the Agreement. See N.C. Gen. Stat. § 25-1-105(1) (1986) (parties' agreement as to governing law controls if reasonable); Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941) (apply choice of law rules of forum state). In Arkansas, "the first rule of interpretation of a contract is to give to the language employed the meaning which the parties intended." First Nat'l Bank v. Griffin, 832 S.W.2d 816, 819 (Ark. 1992); see Sutton v. Sutton, 771 S.W.2d 791, 792 (Ark. Ct. App. 1989). If the language is clear and unambiguous, we must construe it in accordance with its plain meaning. Green v. Ferguson, 567 S.W.2d 89, 91 (Ark. 1978). If the language is ambiguous, extrinsic evidence is admissible to explain it. C. & A. Constr. Co. v. Benning Constr. Co., 509 S.W.2d 302, 303 (Ark. 1974).

We first examine the language of the indemnification clause in § 10(a).¹⁴  That section specifically provides that the Trust will indemnify Tyson from "any damage, claim, liability, cost, loss, interest, penalty, deficiency or expense ... for amounts actually incurred and paid by [Tyson] after the Closing, and arising out of or resulting from ... the material inaccuracy of any representation or warranty." (J.A. at 656 (emphasis added).) Thus, under the clear language of the Agreement, the essential elements of Tyson's claim for indemnification are (1) that one of the Trust's representations or warranties in the Agreement is "materially inaccurate," (2) that expenses or other liabilities arose out of or resulted from the material inaccuracy of such representation or warranty, and (3) that Tyson incurred and paid the expenses or liabilities.

The district court addressed only the first element of Tyson's claim to indemnification. It determined that Tyson was not entitled to indemnification because the Trust had fulfilled its warranty in § 2(f) that there would be "no material, adverse change in the financial condition" of the Companies. Tyson, however, has never alleged, in either its answer or its briefs, that this warranty was inaccurate. In other words, Tyson never asserted the inaccuracy of this particular warranty as a defense to the Trust's claims.¹⁵  Rather, Tyson asserted that other warranties in the Agreement were not accurate. Specifically, Tyson contended that (1) the March 1, 1986, financial statements did not make adequate provisions or reserves for all applicable tax liabilities, contrary to § 2(g) of the Agreement, (2) the Combined Reports did not present fairly as of their dates the financial position and assets and liabilities of the Companies, contrary to § 2(f) of the Agreement, and (3) the Combined Reports did not disclose all material liabilities of the Companies, also contrary tos 2(f) of the Agreement. Tyson asserted that each of these warranties could serve as the basis for its claim of indemnification. The district court erred in not considering these other warranties in evaluating Tyson's claim to indemnification.

Nonetheless, the Trust urges us to affirm summary judgment. See Keith v. Aldridge, 900 F.2d 736, 739 (4th Cir.) (grant of summary judgment may be affirmed on alternative grounds), cert. denied, 111 S. Ct. 257 (1990). In arguing for an affirmance, the Trust does not argue that there are no genuine issues of material fact. The Trust admits that several elements of Tyson's claim for indemnification are in dispute, namely: (1) whether the financial statements were inaccurate,¹⁶  (2) whether any inaccuracies were "material,"¹⁷ (3) whether the March 1 statements provided inadequate reserves for taxes,¹⁸  and (4) whether any expenses or other liabilities "arose out of or resulted from" any materially inaccurate warranties.¹⁹  Moreover, the Trust admits that Tyson "incurred and paid" both the tax liabilities and the accounts payable. Although the Trust recognizes the substantial factual disputes on these issues, the Trust asks us to affirm summary judgment in its favor because, it claims, Tyson cannot establish an element essential to its claim for indemnification: damages. Cf. Woods v. Hopmann Machinery, Inc., 782 S.W.2d 363, 364-65 (Ark. 1990) (must show damages to recover for breach of warranty in sale of goods).

The Trust argues that Tyson cannot prove that it was damaged because it received the Companies in better overall financial shape than it expected. According to the Trust, even if it concedes the alleged errors in the financial statements, Tyson still received the Companies with a net worth of $3,438,565 and liabilities of only $73,429,517, whereas Tyson expected to receive the Companies with a net worth of only $3,149,013 and liabilities as high as $74,353,639. Under either measure, the Trust contends Tyson received the Companies in better "financial condition" than warranted and therefore has not been "damaged."

We reject this theory of damages because it is incompatible with the Agreement. First, it conflicts with the clear language of the indemnification clause. Section 10(a) requires the Trust to indemnify Tyson for "any damage, claim, liability, cost, loss, interest, penalty, deficiency or expense ... arising out of or resulting from ... the material inaccuracy of any representation or warranty." If a warranty or representation is materially inaccurate and Tyson suffers damages as a result, the literal language of § 10(a) compels indemnification for that amount, subject to the $300,000 deductible. Moreover, we see nothing in § 10(a), or elsewhere in the Agreement, that permits the Trust to offset improvements in the financial condition of the Companies against damages from the breach of a specifically negotiated warranty. See Muex v. Hawkins, 204 S.W.2d 171, 173 (Ark. 1947) (Courts "can neither eliminate nor supply nor rearrange the words and sentences in the unambiguous contract, but must construe it as the parties have made it." (internal quotation and citation omitted)); Consolidated Gas Supply Corp. v. Federal Energy Regulatory Com., 745 F.2d 281, 291 (4th Cir. 1984) ("It is a reasonable interpretation device to conclude that what someone has not said, someone has not meant."), cert. denied, 472 U.S. 1008 (1985).

Second, the Trust's theory would effectively render meaningless the separate warranty in § 2(g) with respect to taxes. In § 2(g), Tyson specifically negotiated for a warranty that the amounts reserved for taxes in the March 1 statements were sufficient for the payment of all material unpaid taxes. If, as Tyson argues, it incurred and paid $877,369.00 in taxes as a result of the material inaccuracy of that warranty, the Trust should indemnify it for that loss. Under the Trust's theory, even if the amounts reserved for taxes were clearly insufficient to pay all material unpaid taxes, Tyson should not recover because it received offsetting benefits. This interpretation effectively elevates the "no material, adverse change" warranty in § 2(f) above all others: as long as the Trust satisfied the warranty that there would be no material, adverse change in the financial condition of the Companies, no other warranty could serve as the basis for a claim of indemnification because Tyson could never show damages.²⁰ 

This construction of the Agreement is at odds with the principles of contract interpretation under Arkansas law. We should not give effect to one section of the contract to the exclusion of others. Rather, we should attempt, if at all possible, to reconcile them, Continental Casualty Co. v. Davidson, 463 S.W.2d 652, 655 (Ark. 1971), and should not allow any section to perish by construction, First Nat'l Bank, 832 S.W.2d at 819. Here, we have a sixty-five page document negotiated between sophisticated parties represented by counsel. We should avoid, if at all possible, a construction that renders superfluous any language in the Agreement.

The Trust's theory of damages also contradicts § 1(a) (ii) of the²¹  Agreement. In that section, Tyson agreed to increase the purchase price if the Trust reduced a certain limited class of liabilities.²²  The agreement to increase the purchase price, however, did not extend to the remaining liabilities of the Companies. Thus, if the Trust reduced any liabilities outside the limited class designated in § 1(a) (ii), Tyson would not have to compensate the Trust for that reduction. That reduction inures to the benefit of Tyson.

To permit the Trust to offset damages with reductions in liabilities would expand § 1(a) (ii) beyond its terms. If, for example, the longterm debt of the Companies were reduced by $500,000,s 1(a) (ii) does not require Tyson to compensate the Trust for that reduction. Tyson would be entitled to retain the full measure of that reduction. If it later appeared that the Trust breached a warranty and thereby caused Tyson to incur damages in the amount of $400,000, then under the Trust's theory of damage, Tyson could not claim a right to indemnification because the net worth of the Companies improved by $100,000. Such an offset deprives Tyson of benefits that it would otherwise retain.

For the foregoing reasons, we reject the Trust's"net worth" theory of damages. Because there is a genuine issue of material fact with respect to each element of Tyson's claim to indemnification, we reverse the district court's grant of summary judgment for the Trust and remand for further proceedings.

Because we reverse summary judgment for the Trust, we address the issues raised on cross-appeal. Frost maintains that we should affirm the district court's grant of summary judgment in its favor even if we reverse the district court's grant of summary judgment for the Trust. The record indicates, however, that the district court did not consider the merits of Frost's claims, but rather granted summary judgment for Frost solely on the ground that the Trust obtained a full recovery from Tyson. Because we reverse the grant of summary judgment for the Trust, we also reverse the grant of summary judgment for Frost to enable the district court to address the issue of Frost's liability on the merits.

In conclusion, we hold that there are genuine issues of material fact regarding each element of Tyson's claim for indemnification. We therefore reverse summary judgment for the Trust. Because the Trust's claims against Frost are no longer moot and should be heard first in the district court, we also reverse summary judgment for Frost.

REVERSED AND REMANDED