Mercury Systems, Inc. v. Shareholder Representative Services, LLC , 820 F.3d 46 ( 2016 )


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  •           United States Court of Appeals
    For the First Circuit
    No. 14-2156
    MERCURY SYSTEMS, INC.,
    Plaintiff, Appellant,
    v.
    SHAREHOLDER REPRESENTATIVE SERVICES, LLC,
    Defendant, Appellee.
    APPEAL FROM THE UNITED STATES DISTRICT COURT
    FOR THE DISTRICT OF MASSACHUSETTS
    [Hon. Richard G. Stearns, U.S. District Judge]
    Before
    Thompson, Lipez, and Barron,
    Circuit Judges.
    Christopher H.M. Carter, with whom Hinckley, Allen & Snyder
    LLP was on brief, for appellant.
    Roger A. Lane, with whom Courtney Worcester and Foley &
    Lardner LLP were on brief, for appellee.
    April 26, 2016
    LIPEZ,   Circuit       Judge.     We    must   interpret   a   merger
    agreement in which one party agreed to indemnify the other against
    a purely hypothetical tax loss.              The sellers agreed to indemnify
    the buyer for the tax liabilities of the company being sold, except
    that   the   tax    bills     for   indemnification     purposes    were    to   be
    calculated as if certain deductions would not be taken, when both
    parties knew they would be.           Given that these deductions, perhaps
    in combination with other deductions, reduced the company's tax
    liability to zero, the company's tax prepayments and credits were
    refunded in their entirety, benefitting the buyer as the company's
    new    owner.      Yet,     because   the    calculation     of   the   indemnity
    obligation was based on a counterfactual measure of tax liability,
    that calculation resulted in the sellers' nonetheless owing the
    buyer a substantial amount of money.                The issue that divides the
    parties is whether the prepayments and credits, and resulting tax
    refunds, affect the tax indemnification obligation of the sellers.
    The district court concluded that the indemnification
    provision, by its terms, unambiguously required that the indemnity
    obligation be offset by the amount of the refunded prepayments and
    credits.     It therefore entered judgment on the pleadings in favor
    of the seller.
    We    conclude    that    the    indemnification      provision     is
    ambiguous as to how the tax refunds affect the indemnification
    obligation of the sellers.             Though these sophisticated parties
    - 2 -
    knew of the tax prepayments and credits, and expected substantial
    tax refunds, they failed to specify how those refunds should be
    treated.   This critical omission renders their contract ambiguous
    on the issue before us.      The plain language arguments of the
    parties are not fully convincing; reasonable interpretations of
    the text support both positions. Their arguments about the purpose
    and negotiating history of the provision cannot be resolved without
    the aid of a fact-finder.    Indeed, the parties dispute key facts
    about the company's tax refunds.     Hence, we vacate the judgment of
    the district court and remand for further proceedings.
    I.
    A. Background
    The indemnity provision at issue is part of a 2011 merger
    agreement by which Mercury Systems, Inc.1 ("Mercury") purchased
    KOR Electronics ("KOR") from KOR's stockholders and optionholders
    ("securityholders,"    represented     on   appeal   by   Shareholder
    Representative Services, Inc., "SRS").      Consistent with the terms
    of the agreement, Mercury created a merger subsidiary (King Merger
    Inc.) and merged it with and into KOR, which thus became a wholly-
    owned subsidiary of Mercury.
    Mercury agreed to pay KOR's securityholders $70 million
    for the company, with adjustments for, inter alia, merger-related
    1    At the time of the transaction, Mercury was called "Mercury
    Computer Systems, Inc."
    - 3 -
    expenses and the amount of cash and debt on KOR's books as of the
    closing date.     Merger Agreement ["MA"] § 3.02.   These adjustments
    would be based on a balance sheet reflecting estimates of KOR's
    2011 assets and liabilities, which KOR promised to provide.        MA
    § 3.05(a).     Of the purchase amount of $70 million, $10.65 million
    would be paid into an escrow account to cover various obligations
    of the securityholders.     MA § 3.03(b).
    The indemnity arrangement relevant to this appeal is set
    forth in detail in Article X, section 10.02(a), and referenced in
    sections 10.01 and 10.05(a) and (b).        Section 10.02(a) provides
    that SRS will prepare KOR's 2011 federal and state tax returns.
    Then, SRS, on behalf of the former securityholders, must release
    money from the escrow account to pay Mercury "the amount of the
    aggregate Tax liabilities due, if any."     App. 31-32.2   The unusual
    feature of the arrangement is how the obligation to pay Mercury
    was to be measured.      When preparing KOR's 2011 tax returns, SRS
    was required to claim two types of merger-related expenses as tax
    deductions.     This requirement is stated in section 10.02(a) and
    echoed in sections 10.05(a) and (b).     App. 41-42 (requiring SRS to
    "giv[e] effect to any deductions described in Section 10.[0]5");
    
    id. at 54-55
    (specifying that the merger-related deductions "shall
    2    The relevant text of the merger agreement, including section
    10.02, is set out in the Appendix ("App.").     Citations to the
    appendix refer to particular line numbers therein.
    - 4 -
    be claimed"); 
    id. 61-62 (same).
               However, the securityholders'
    obligation to pay Mercury was to be calculated without claiming
    those deductions.   MA § 10.02(a).     The arrangement is set forth as
    follows:
    [F]or purposes of determining the Tax liability due
    with respect to such Tax Return for purposes of
    calculating the Securityholders' indemnification
    obligations, the determination of the Tax liability
    for any such Pre-Closing Tax Period will be
    calculated and determined excluding any deductions
    described in Section 10.05 below.      The amounts
    actually due on the Tax Return (after giving effect
    to any deductions described in Section 10.[0]53
    below) shall promptly be paid by [Mercury] to the
    appropriate Governmental Authority.
    
    Id. (App. 34-46)
    (emphasis in original).          In other words, Mercury
    would receive, in payment of the indemnity obligation, an amount
    from escrow equal to KOR's tax liabilities as calculated without
    the deductions, but pay KOR's actual taxes (if any were still owed)
    computed with the deductions.        Because KOR was required to claim
    the   section   10.05   deductions    on    its   2011   tax   return,   the
    calculation of taxes without those deductions was necessarily
    greater than KOR's actual taxes owed. SRS conceded in the district
    court that this arrangement could require it to pay Mercury for "a
    3    The text refers to "Section 10.5 below," though no such
    section exists. The parties clearly intended to reference section
    10.05.
    - 5 -
    phantom   'liability'   for   indemnification   purposes   that   is   not
    actually due to the government."
    Section 10.02(a) creates an obligation specific to one
    tax year, the year to which the merger-related tax deductions
    apply: 2011.   Further, by its terms, section 10.02(a) applies only
    to taxes related to returns "due after the Closing Date."              App.
    25. The parties identify no tax period, other than 2011, for which
    returns had yet to be filed as of December 30, 2011.                   This
    obligation -- specific to 2011 -- is distinct from the conventional
    tax indemnification provision in section 10.01, which applies more
    generally to all pre-closing time periods:
    [E]ach Securityholder shall . . . indemnify and
    hold harmless [Mercury] from, against and in
    respect of any and all Losses4 that constitute or
    that result from, arise out of or relate to,
    directly or indirectly [] Taxes (or the non-payment
    thereof) of [KOR] for all Pre-Closing Tax Periods
    . . . .5
    4    "Losses" are defined to include, among other things,
    "assessments, fines, penalties, [and] Taxes."      MA § 9.01(a).
    "Taxes," in turn, includes "any and all federal, state, local, or
    foreign taxes . . . including any interest, penalty, or addition
    thereto." MA § 1.01.
    5 "Pre-Closing Tax Periods" is defined to include the 2011
    tax year, although the merger closed on the last day of that tax
    year. MA § 1.01.
    - 6 -
    MA § 10.01 (App. 6-11.).    Section 10.01 clarifies, however, that
    this general tax indemnification provision does not override the
    specific arrangement for 2011:
    Notwithstanding any other provision of this
    Agreement, the determination of the Taxes with
    respect to this Section 10.01 will be calculated
    without   taking  into   account  any deductions
    described in Section 10.05 below.
    MA § 10.01 (App. 12-15).   In other words, section 10.01 recognizes
    that the former securityholders are required to indemnify Mercury
    for more than its actual tax losses for 2011, consistent with
    section 10.02(a).
    Despite the detailed treatment of tax matters in Article
    X, and though the parties anticipated that KOR would receive tax
    refunds for 2011, the merger agreement does not explicitly address
    KOR's expected tax refunds or mention any offset.
    Mercury, its subsidiary King Merger, KOR, and SRS (for
    KOR's securityholders) signed the merger agreement on December 22,
    2011.   In connection with the agreement, KOR furnished Mercury
    with a Company Disclosure Schedule, including its consolidated
    financial statements.6 The statements contained tax data for prior
    6    These statements are fairly incorporated into the First
    Amended Complaint. See Beddall v. State St. Bank and Tr. Co., 
    137 F.3d 12
    , 17 (1st Cir. 1998).
    - 7 -
    years and year-to-date tax figures for 2011.   The merger closed on
    December 30, the last day of KOR's federal tax year.
    To determine KOR's actual 2011 tax obligations, SRS took
    advantage of the merger-related deductions specified in section
    10.05, as section 10.02 required.      With those deductions taken
    into account, KOR operated at a loss for federal tax purposes and,
    consequently, had no federal tax liability.    Having prepaid $1.42
    million in federal taxes and owing no federal income tax, KOR was
    refunded all $1.42 million.7      Similarly, after deducting the
    merger-related expenses, KOR was left with no income taxable by
    various states.8   As a result, KOR's state tax prepayments and
    credits exceeded what it actually owed, and it accordingly received
    $340,000 in state tax refunds.   SRS asserts that the federal and
    state refunds were the result of the merger-related tax deductions.
    Mercury disagrees, claiming that the parties "expected" that $1.76
    million "in Tax pre-payments and over-payments would be refunded
    to KOR for the benefit of Mercury, irrespective of the Section
    7    For the convenience of the reader, we round these figures to
    the nearest $10,000.
    8    Mercury claims that KOR had no taxable income for state tax
    purposes, and, accordingly, its $340,000 in state tax prepayments
    were entirely refunded. SRS claims that KOR did owe some state
    taxes even after the deductions were taken into account.        SRS
    claims that KOR prepaid $410,000 in state taxes, of which only
    $340,000 was refunded. Given our holding that the agreement is
    ambiguous, we need not determine whether SRS is correct that KOR's
    state tax prepayments must be offset, and, hence, need not consider
    whether those prepayments amount to $410,000 or $340,000.
    - 8 -
    10.05 Deductions."     Whether or not the merger-related deductions
    were the cause, it is undisputed that KOR was refunded a total of
    $1.76 million by federal and state tax authorities for 2011,
    benefitting Mercury as KOR's new owner.
    To    determine   the    securityholders'   tax   indemnity
    obligation, Mercury recalculated KOR's tax liabilities without the
    deductions.     In that calculation, KOR had a taxable income of over
    $6 million in 2011, resulting in substantial (though hypothetical)
    state and federal tax obligations.         Mercury asserts that the
    correct measure of KOR's 2011 tax liabilities for indemnification
    purposes is $2.4 million.     Because SRS already has paid $570,000
    of the indemnity obligation,9 Mercury now seeks $1.83 million from
    SRS.   SRS agrees that $2.4 million is the correct measure of KOR's
    2011 tax indemnification obligation, not counting prepayments and
    credits, but asserts that after the offset for the $1.76 million
    in prepayments and credits, only $640,000 was owed.          Since SRS
    9    On   August   31,   2012,   Mercury   claimed   $620,000   for
    indemnification of KOR's (hypothetical) 2011 federal tax
    liability, calculated pursuant to section 10.02 of the merger
    agreement, including an offset for tax refunds. Mercury's claim
    certificate did not purport to discharge its tax indemnity claims
    entirely.   SRS consented to release $570,000 from escrow, but
    contested $50,000 of the claimed amount. SRS did not state that
    it considered its tax indemnity obligations to be fully discharged.
    Then, on January 28, 2013, Mercury claimed the right to additional
    indemnification payments. Mercury had recalculated what it was
    owed under section 10.02(a), this time without offsetting the tax
    refunds. Mercury ultimately asked for $1.83 million ($2.4 million
    less the earlier payment of $570,000.)
    - 9 -
    previously paid $570,000, it argues that Mercury is now owed only
    $70,000.
    B.   Procedural History
    The   operative     complaint    here     is   the   First   Amended
    Complaint, which Mercury filed against SRS and various former
    securityholders on October 21, 2013.                In it, Mercury asserted
    claims for, inter alia, declaratory relief and breach of contract.
    In Count I, Mercury sought a declaration that it was entitled to
    $1.83   million    from   the    escrow     account    pursuant    to    section
    10.02(a)'s indemnification calculation.               In Count IV, Mercury
    asserted that SRS had breached the merger agreement by failing to
    release those funds from escrow, and sought damages.
    SRS moved for partial judgment on the pleadings on Counts
    I and IV.   Mercury opposed the motion and filed a cross motion for
    partial judgment on the pleadings.            The district court granted
    SRS's motion for judgment on the pleadings, denied Mercury's
    motion, and entered judgment for SRS.           Mercury timely filed this
    appeal.10
    10   The parties reached a partial settlement that resolved the
    remaining issues in the case, though preserving Mercury's claim
    under Count III for indemnification of attorney's fees and costs
    related to this action concerning Counts I and IV.
    - 10 -
    II.
    A. Standard of Review
    We review cross-motions for judgment on the pleadings de
    novo, viewing the pleadings in the light most favorable to the
    party opposing the motion.      Curran v. Cousins, 
    509 F.3d 36
    , 43
    (1st Cir. 2007).     "Cross motions simply require us to determine
    whether either of the parties deserves judgment as a matter of law
    on facts that are not disputed." Barnes v. Fleet Nat'l Bank, N.A.,
    
    370 F.3d 164
    , 170 (1st Cir. 2004) (quoting Wightman v. Springfield
    Terminal Ry., 
    100 F.3d 228
    , 230 (1st Cir. 1996)).         This analysis
    is similar to that used for cross-motions for summary judgment,
    
    Curran, 509 F.3d at 44
    , though for the purposes of judgment on the
    pleadings the court ordinarily may consider only facts contained
    in the pleadings and documents fairly incorporated therein, and
    those susceptible to judicial notice, R.G. Fin. Corp. v. Vergara-
    Nuñez, 
    446 F.3d 178
    , 182 (1st Cir. 2006).
    B. Massachusetts Law
    Under Massachusetts law, contract terms are ambiguous
    when they are "inconsistent on their face or where the phraseology
    can support reasonable difference of opinion as to the meaning of
    the words employed and obligations undertaken."          Fashion House,
    Inc. v. K Mart Corp., 
    892 F.2d 1076
    , 1083 (1st Cir. 1989)).
    Ambiguity   exists   where   "reasonably   intelligent   persons   would
    differ as to which meaning is the proper one."            
    Id. (quoting -
    11 -
    Citation Ins. Co. v. Gomez, 
    688 N.E.2d 951
    , 953 (Mass. 1998)); see
    also Caldwell Tanks, Inc. v. Haley & Ward, Inc., 
    471 F.3d 210
    , 215
    (1st Cir. 2006).        Where more than one interpretation fits the
    literal meaning of the text and is compatible with common sense
    and practical economic reality, a court may find a provision to be
    ambiguous as a matter of law.          See Den Norske Bank AS v. First
    Nat'l Bank of Boston, 
    75 F.3d 49
    , 54-55 (1st Cir. 1996).
    Where "the contract language is ambiguous, on its face
    or   as   applied,"     contract    interpretation     normally      becomes   a
    question    of   fact   to   be   decided    with   reference   to   extrinsic
    evidence.    Den Norske 
    Bank, 75 F.3d at 52
    (citing Freelander v. G.
    & K. Realty Corp., 
    258 N.E.2d 786
    , 788 (Mass. 1970); Robert Indus.,
    Inc. v. Spence, 
    291 N.E.2d 407
    , 410 (Mass. 1973)).                   Extrinsic
    evidence may include the parties' negotiations during contracting,
    their course of performance under the contract, their course of
    dealing prior to the contract, and trade usage in the relevant
    industry.    
    Id. at 52-53.
    III.
    As described above, this case involves three provisions
    of the merger agreement: sections 10.01, 10.02(a), and 10.05.              The
    last of those, 10.05, simply obliges Mercury to take the applicable
    merger-related deductions when filing returns for "the Pre-Closing
    Tax Period," and it is not in dispute.              The controversy centers
    primarily on section 10.02(a) and the indemnification amount it
    - 12 -
    requires SRS to pay Mercury.           Although the parties agree that the
    provision's purpose was to pay Mercury the value of the merger-
    related tax deductions, they disagree on the magnitude of that
    benefit.      The relationship between section 10.01, the general
    indemnification provision, and section 10.02(a) is one of the
    questions    that    must   be   considered     in   construing   the    latter
    provision.
    SRS accepts that Mercury was owed the $2.4 million
    attributable to the merger-related deductions, but it insists that
    the parties understood that part of that amount -- $1.76 million
    -- had already been paid in the form of KOR's tax refunds.                   SRS
    draws support for its interpretation from the text of section
    10.01,     which    imposes      an     indemnification    burden       on   the
    securityholders for "losses," while instructing that the 10.05
    deductions must be treated differently.               Mercury, on the other
    hand, contends that SRS must pay the full $2.4 million from the
    escrow account.       Mercury argues that, because KOR was in a tax
    loss position for 2011 and thus had no tax debt, KOR would have
    received full refunds of its tax prepayments even without the
    merger-related deductions.            Hence, the refunds were unrelated to
    the payment required by section 10.02(a), and, under Mercury's
    reading, section 10.02(a) in effect amounted to a price adjustment.
    We first review the pertinent terms of the agreement and
    then     briefly    consider     the    parties'     additional   contentions
    - 13 -
    regarding its construction.        See Den Norske 
    Bank, 75 F.3d at 52
    -
    53.
    A. Plain Language
    We begin our examination of the agreement's language with
    section 10.02(a), the provision that details the indemnification
    benefit    to   Mercury,    and   then   consider   whether   the   general
    indemnification provision, section 10.01, sheds light on how that
    benefit is to be calculated.
    1.   Section 10.02(a)
    This section, labeled "Tax Return Preparation," appears to
    have three primary purposes.       First, it states SRS's obligation to
    prepare, and Mercury's obligation to file, any KOR tax returns
    covering pre-closing time periods that are due after the merger's
    closing    date.     App.    19-25.      That   obligation,   of    course,
    incorporates the requirement of section 10.05 that Mercury take
    advantage of available merger-related deductions.             App. 40-44.
    Second, section 10.02(a) provides for a transfer of funds from the
    escrow account to Mercury to cover payment of the taxes due for
    the pre-closing period, but with the amount calculated as if the
    merger-related deductions had not been taken.         App. 33-40.    Third,
    section 10.02(a) requires Mercury to promptly pay "[t]he amounts
    actually due on the Tax Return."            App. 40-41.   Thus, the text
    plainly requires payment to Mercury of an amount in excess of the
    - 14 -
    actual tax debt, leaving Mercury with a cash payment that appears
    to be, in effect, a purchase price adjustment.
    Strikingly, section 10.02(a) does not in explicit terms
    address the fact -- known to both parties -- that KOR had made
    substantial prepayments of its tax obligations and, accordingly,
    expected refunds.11           Mercury argues that this omission itself
    reveals that the parties did not intend to offset SRS's indemnity
    obligation by the amount of the anticipated refunds.                    It insists
    that   a   deduction     of    that   magnitude   from    the     tax    liability
    calculation cannot be presumed from silence, and it asserts that
    implying an offset into the agreement is tantamount to rewriting
    the contract.         See Paterson-Leitch Co. v. Mass. Mun. Wholesale
    Elec. Co., 
    840 F.2d 985
    , 991 (1st Cir. 1988) (warning that courts
    should     not   "rewrite      contracts     freely    entered    into     between
    sophisticated business entities" (quoting RCI Ne. Servs. Div. v.
    Bos. Edison Co., 
    822 F.2d 199
    , 205 (1st Cir. 1987))).
    SRS, however, draws meaning from the fact that section
    10.02(a)    addresses       both   preparation    of   tax   returns      and   the
    calculation      of   the   indemnity      obligation.       It   sees    a   plain
    recognition of the tax-refund offset in the relationship between
    11   KOR's tax prepayments and credits were among KOR's assets, as
    reflected on the balance sheet exchanged by the parties during
    negotiations.      In  addition,   KOR's   pre-closing   financial
    disclosures informed the parties that the prepayments and credits
    would result in refunds.
    - 15 -
    the provision's requirements, emphasizing that SRS's obligation to
    make indemnification payments from the escrow account is expressly
    linked to the preparation of tax returns through the phrases
    "[w]ith respect to any such Tax Return," App. 25-26, and "with
    respect to such Tax Return."    App. 34-35.    Thus, SRS argues, the
    indemnification must be calculated "on the same basis as the 'real'
    tax calculation -- that is, on the basis of KOR's tax return --
    with the only departure . . . being the exclusion of two deductions
    specified in Section 10.05."     The "real" tax calculation would
    include deducting the amount of any prepayments and refundable
    credits to arrive at the amount owed at the time the return is
    filed.   SRS thus reads section 10.02(a), in context, to include an
    offset for the amount of prepayments and refundable credits.
    We conclude that the language of section 10.02(a) is
    reasonably susceptible to both of these interpretations.     On the
    one hand, as Mercury argues, it is difficult to imagine the parties
    intending, but not expressly addressing, the substantial reduction
    in the indemnification obligation that would occur through an
    offset for the tax prepayments.         Contrary to SRS's view, the
    language linking the indemnification amount to "such Tax Return"
    does not inevitably refer to the routine mechanics of calculating
    taxes -- with an offset for prepayments and credits -- but may be
    a simple reference back to the provision's subject-matter, i.e.,
    a tax return due after the closing date for a pre-closing period.
    - 16 -
    If, as Mercury argues, the tax calculation was intended to define
    an appropriate "rebate" for Mercury -- rather than a classic
    "indemnification" -- it would be reasonable to conclude, absent
    explicit instruction to the contrary, that the agreement does not
    call for deducting the prepayments and credits. On the other hand,
    as described above, the focus in section 10.02(a) on both tax
    return preparation and indemnification makes plausible SRS's view
    that the required payment was intended to be a net amount.
    Hence, the language of section 10.02(a), on its own,
    leaves    us   uncertain      about      what    the     parties       intended.
    Notwithstanding     its   view    that   the    section's      plain    language
    requires an offset for the tax refunds, SRS asserts that the text
    of section 10.01 clarifies any possible ambiguity and reinforces
    its contention that the amount owed to Mercury is the difference
    between the total merger-related tax savings and the refund amount.
    We thus consider whether the ambiguity we discern in section 10.02
    is resolved by section 10.01's plain language.
    2. Section 10.01
    The conventional tax indemnification language of section
    10.01    protects   Mercury      against,    inter     alia,   "any     and   all
    Losses . . . relate[d] to . . . Taxes (or the non-payment thereof)
    . . . for all Pre-Closing Tax Periods."              App. 8-10.        SRS avers
    that this language, notwithstanding its generality, is susceptible
    to only one meaning.      It asserts that the term "Losses," App. 8,
    - 17 -
    read in its "usual and ordinary sense," S. Union 
    Co., 941 N.E.2d at 640
    , requires an offset for tax prepayments to be read into the
    agreement.    In SRS's words, there can be no indemnifiable "Losses"
    arising from KOR's taxes if KOR has already "actually paid, and
    thereby discharged, all or part of any such Taxes."12
    SRS   may   be    correct   that,    once   KOR's    fictional   tax
    liability for 2011 is determined, the fictional part of the
    calculation is complete and the amount owed to Mercury is intended
    to be determined as it would be in a typical indemnification
    scenario.    Ordinarily, KOR's tax debt and, in turn, Mercury's out-
    of-pocket "loss," would be reduced by the amount of the prepayments
    and credits.       However, it may be that the parties did not intend
    the word to be read in this way. In fact, supporting the conclusion
    that they intended the word to be read without regard to offsetting
    prepayments, the language in section 10.01 on which SRS relies is
    followed by the "Notwithstanding" proviso, which instructs that,
    regardless    of    "any      other   provision    of    this    Agreement,   the
    determination of the Taxes with respect to this Section 10.01 will
    be calculated without taking into account any deductions described
    12   The district court generally agreed with this construction,
    though   it   emphasized   the   plain   meaning   of   the   word
    "indemnification." In the court's view, the dictionary definition
    of the term shows that indemnification requires a pre-existing
    loss. Because it believed Mercury's loss was reduced by the amount
    of the tax refunds, the court reasoned that $1.76 million must be
    offset.
    - 18 -
    in Section 10.05 below." This sentence appears to say that neither
    the   general     indemnity   obligation     just    stated,   nor       any   other
    provision    in    the   agreement,    negates      the   unusual    arrangement
    specified in section 10.02(a), i.e., that Mercury is owed an amount
    to be calculated by reference to a fictional tax liability.
    Of course, the "Notwithstanding" sentence does not by
    its terms exclude the possibility that the ordinary concept of
    loss was intended in section 10.01 and thus was meant to be applied
    to    the   fictional     liability,   requiring      a   deduction       for    the
    prepayments     and    credits.   It    is   also    plausible      to    read   the
    "Notwithstanding" caveat as recognizing and reinforcing a distinct
    method of calculating the "indemnification" obligation for the
    not-yet-completed 2011 taxes due, disregarding the usual method of
    determining a "loss."          Indeed, as we have described, section
    10.02(a) creates both a tax liability and thus an indemnification
    obligation where none in fact existed because of KOR's financial
    circumstances.        That explicit fiction belies the inevitability of
    the parties' intention to apply a literal concept of "loss" to
    calculate the 2011 tax indemnification amount.                 See Mass. Mun.
    Wholesale Elec. Co. v. Town of Danvers, 
    577 N.E.2d 283
    , 294-95
    (Mass. 1991) (recognizing that plain meaning does not control where
    context shows that the parties have assigned an unusual meaning to
    a term).
    - 19 -
    To the contrary, while section 10.01 as a general matter
    imposes responsibility on the securityholders for possible tax
    "Losses" resulting from future IRS audits, including for 2011, the
    section can reasonably be read to identify SRS's "indemnification"
    obligation at the time of the merger as the amount specified in
    section 10.02(a) -- without accounting for the prepayments and
    credits.       The parties' sophistication and the obviousness of the
    refund issue makes it unlikely that, given the section 10.02(a)
    fiction, they would have hidden the answer to the refund question
    between the lines of section 10.01. Again, the absence of explicit
    reference to the anticipated refunds leaves the parties' intent
    unclear.
    In sum, given that section 10.02(a) appears to use the
    tax liability context as a way to define a price adjustment -- and
    calls    for    a   transfer   of    funds   that   ordinarily    would     not   be
    described as an "indemnification" -- we have no confidence that
    the parties intended the ordinary calculation of "loss" to apply.
    We thus find no decisive guidance on the meaning of section
    10.02(a) in the plain language of section 10.01.
    B. Other Arguments
    The    parties   offer      multiple    theories     to   support    their
    competing       contentions    that    the     intent   of   section   10.02      is
    discernible from the provision's plain language.                  These theories
    - 20 -
    are largely fact-dependent and, hence, require judgments based on
    fact-finding that we cannot do.
    SRS, for example, argues that KOR's tax refund must offset
    Mercury's recovery lest Mercury receive what it calls a double
    recovery, or a "windfall by recovering some amounts twice."      As
    noted above, SRS believes that no refunds would have been paid
    absent the deductions.   Because KOR's 2011 tax refunds are part of
    the benefit of the merger-related tax deductions, SRS argues, they
    must be counted against the former securityholders' indemnity
    obligation.    To allow Mercury to claim KOR's 2011 tax refunds
    (worth $1.76 million), and the full $2.4 million value of the tax
    deductions without an offset, would give Mercury $1.76 million
    twice.13   However, whether the refunds are solely attributable to
    the merger is a disputed fact that cannot be determined on the
    limited record before us.   Moreover, this argument has force only
    if the parties in fact intended to define the total amount due to
    Mercury by the net benefit from the merger-related deductions.   As
    we have explained, the agreement does not plainly limit the
    "indemnification" payment to that amount.
    13   The district court found this argument persuasive.         It
    reasoned that Mercury "received the economic benefit it bargained
    for -- which is the 'benefit of the 10.05 deductions.'" It further
    observed that "[t]he 'benefit' of the tax refunds resulting from
    10.05 deductions" and the "'economic benefit of the 10.05
    deductions,' . . . are, in financial reality, overlapping."
    - 21 -
    Mercury, meanwhile, asserts that it bargained separately for
    the tax refunds and the tax indemnification provisions.                     It
    supports this assertion with drafts of the merger agreement and
    associated   correspondence       to    and    from   its     counsel   during
    negotiations.   [Mercury Br. 6-7.]            However, we may not consider
    such evidence in our review of a judgment on the pleadings, as
    these materials are not fairly incorporated in the pleadings or
    susceptible to judicial notice, see R.G. Fin. 
    Corp., 446 F.3d at 182
    , and Mercury cites no other basis on which they may be
    considered.14
    IV.
    Although there are elements of reasonableness in both
    parties'   arguments,   neither    party      succeeds   in   clarifying   the
    14   Mercury also makes another argument based on negotiating
    history. According to Mercury, KOR had substantial net operating
    losses (NOLs) from past years, which it had carried forward in the
    hope of reducing its taxable income in a future year. However,
    the NOLs could not be carried forward post-merger because section
    382 of the Internal Revenue Code ("I.R.C.") does not allow Mercury
    as KOR's new owner to take advantage of them. To compensate for
    the lost value of KOR's NOLs, according to Mercury, "the parties
    negotiated for a cash payment to Mercury in an amount equal to the
    Tax benefit Mercury would have received had there been no
    limitation on the use of accumulated NOLs." Mercury claims that
    this amount is $2.4 million, and that if KOR's prepayments and
    credits are offset, it will get less than the tax benefit of the
    accumulated NOLs, and thus less than it bargained for.       Again,
    however, Mercury's claims are not reflected in the text of the
    merger agreement. Nor does Mercury explain how it calculates the
    tax benefit it would have received if it had been permitted to use
    KOR's accumulated NOLs. We are left with no explanation to connect
    the NOLs -- allegedly made useless by I.R.C. § 382 -- to the
    conclusion that Mercury was owed $2.4 million rather than $640,000.
    - 22 -
    meaning of the merger agreement with respect to the offset issue.
    On this point, sections 10.01 and 10.02 are inescapably ambiguous;
    "reasonably intelligent persons would differ as to which meaning
    is the proper one."    S. Union 
    Co., 941 N.E.2d at 640
    (quoting
    Citation Ins. 
    Co., 688 N.E.2d at 953
    ).
    This ambiguity is remarkable given the sophistication of
    the parties.   Mercury and the former owners of KOR agreed to a
    seemingly novel contract provision, incorporating elements of an
    indemnity and a purchase price adjustment.   Although the parties
    knew that KOR had tax prepayments and credits and anticipated a
    2011 tax refund, they failed to clarify how these prepayments and
    credits would affect the indemnification provision.   Indeed, the
    failure to speak expressly to the issue suggests that the parties,
    inexplicably, may have neglected to address how the refunds would
    be handled.    Having thus agreed to an ambiguous contract, the
    parties now must shoulder the costs of additional litigation in
    the district court to clarify its meaning, through consideration
    of negotiating history and other extrinsic evidence probative of
    the intentions of the parties, consistent with Massachusetts law.
    See Den Norske Bank 
    AS, 75 F.3d at 52-53
    .
    We vacate judgment in favor of SRS, affirm the denial of
    judgment to Mercury, and remand to the district court for further
    - 23 -
    proceedings consistent with this opinion.15   Each party shall bear
    its own costs.
    So ordered.
    15   Of course, these additional proceedings could be avoided if
    the parties settle this case. We urge them to seriously explore
    that possibility. Settlement counsel of the First Circuit stands
    ready to assist them in this effort.
    - 24 -
    Appendix
    Excerpts from the Agreement and Plan of Merger:
    Section 10.01. Tax Indemnification. From and after
    the Closing Date, each Securityholder shall . . .
    indemnify and hold harmless [Mercury] from, against and
    in respect of any and all Losses that constitute or that
    result from, arise out of or relate to, directly or
    indirectly [] Taxes (or the non-payment thereof) of
    [KOR] for all Pre-Closing Tax Periods . . . .
    Notwithstanding any other provision of this Agreement,
    the determination of the Taxes with respect to this
    Section 10.01 will be calculated without taking into
    account any deductions described in Section 10.05 below.
    Section 10.02. Tax Return Preparation.
    (a) [SRS] shall cause to be prepared
    (and [Mercury] shall cause to be subsequently
    filed) in a timely manner all Tax Returns related
    to Pre-Closing Tax Periods (other than Tax Returns
    for a Straddle Period) which are required to be
    filed by [KOR], to the extent such Tax Returns are
    due after the Closing Date. . . . With respect to
    any such Tax Return filed after the Closing Date
    that relates to any Pre-Closing Tax Period and upon
    the request of [SRS], the Escrow Agent shall make
    a distribution from the Escrow Amount to [Mercury]
    three (3) days prior to the filing of such Tax
    Returns the amount of the aggregate Tax liabilities
    due, if any, with respect to such Pre-Closing Tax
    Periods; provided, however, that for purposes of
    determining the Tax liability due with respect to
    such Tax Return for purposes of calculating the
    Securityholders' indemnification obligations, the
    determination of the Tax liability for any such
    Pre-Closing Tax Period will be calculated and
    determined excluding any deductions described in
    Section 10.05 below. The amounts actually due on
    the Tax Return (after giving effect to any
    deductions described in Section 10.[0]5 below)
    shall promptly be paid by [Mercury] to the
    appropriate Governmental Authority. . . .
    . . .
    - 25 -
    Section 10.05. Allocation of Certain Expenses
    (a) Any Company Transaction Expenses,
    to the extent not required to be capitalized and
    included in [Mercury's] tax basis of the [KOR]
    stock and to the extent otherwise permitted by
    applicable Legal Requirements . . . shall be
    claimed as deductions for the Pre-Closing Tax
    Period ending on the Closing Date; and
    (b) To     the   extent   permitted    by
    applicable Legal Requirements . . . any income tax
    deductions attributable to payments due at Closing
    to holders of Vested Options shall be claimed as
    deductions for the Pre-Closing Tax Period ending on
    the Closing Date.
    - 26 -