Mercury Sys., Inc. v. S’holder Representative Servs., Inc., No. 14-2156 (1st Cir. 2016)Annotate this Case
Pursuant to a merger agreement, Sellers agreed to indemnity Buyer for the tax liabilities of the company being sold. The tax bills for indemnification purposes, however, were to be calculated as if certain deductions were not going be taken when both parties knew they would be. These deductions reduced the company’s tax liability to zero. After the merger, the company’s tax prepayments and credits were refunded in their entirety, thus benefitting Buyer. Because the calculation of the indemnity obligation was based on a counterfactual measure of tax liability, that calculation resulted in Sellers’ owing Buyer a substantial amount of liability. Buyer filed this complaint asserting claims for declaratory relief and breach of contract. At issue in this case was whether the prepayments and credits affected the tax indemnification obligation of Sellers. The district court entered judgment on the pleadings in favor of Sellers, concluding that the indemnification provision unambiguously required that the indemnity obligation be offset by the amount of the refunded prepayments and credits. The First Circuit vacated the judgment of the district court, holding that the indemnification provision was ambiguous as to how the tax refunds affect the indemnification obligation of Sellers. Remanded.