Cyber Holding LLC v. CyberCore Holding, Inc. ( 2015 )

EFiled: Jul 09 2015 03:46PM EDT
Transaction ID 57527989
Case No. 7369-VCN
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
417 SOUTH STATE STREET
JOHN W. NOBLE DOVER, DELAWARE 19901
VICE CHANCELLOR TELEPHONE: (302) 739-4397
FACSIMILE: (302) 739-6179
July 9, 2015
R. Judson Scaggs, Jr., Esquire Kevin M. Gallagher, Esquire
Morris, Nichols, Arsht & Tunnell LLP Richards, Layton & Finger, P.A.
1201 North Market Street 920 North King Street
Wilmington, DE 19801 Wilmington, DE 19801
Re: Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
Date Submitted: April 28, 2015
Dear Counsel:
Plaintiff Cyber Holding LLC (“Seller”)1 brings claims seeking tax-related
payments under the agreement governing the sale of CyberCore Corporation (the
“Company”) to Defendant CyberCore Holding, Inc. (“Buyer”) which has moved
for summary judgment.
*****
Buyer and Seller executed the Redemption and Stock Purchase Agreement
By and Among CyberCore Corporation, CyberCore Holding, Inc. and the
1
There were other sellers, but Cyber Holding LLC is the named plaintiff.
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 2
Stockholders of CyberCore Corporation (the “Agreement”) on June 8, 2011.2 The
Company claimed deductions for transaction-related expenses (the “Transaction
Deductions”) for the tax year from January 1, 2011, to July 8, 2011 (the “Stub
Year”). Because of the deductions, the Company reported a net operating loss for
the Stub Year, escaped over $1 million in 2011 income tax liability, received a
$214,166 refund for prepaid estimated 2011 taxes, and obtained over $3 million in
income tax refunds for 2009 and 2010 by carrying back the net operating loss.3
Buyer has remitted to Seller refunds for the estimated prepaid taxes and the 2009
and 2010 taxes. Seller brings this action to recover $1,557,171 (the “Avoided
Tax”) pursuant to Section 6.5(f)(z) of the Agreement.4 On this motion, the parties
have framed a dispute over contract interpretation.
2
Verified Compl. Ex. A (“SPA”). The sale of the Company closed in July 2011.
3
There is no active dispute over these basic facts. See Def.’s Opening Br. in Supp.
of Its Mot. for Summ. J. (Def.’s Opening Br.”) 5, 7-8; Pl.’s Opp’n to Def.
CyberCore Holding, Inc.’s Mot. for Summ. J. (“Pl.’s Opp’n Br.”) 11-12.
4
The Avoided Tax represents “the amount by which the Transaction Deductions
reduced the Company’s 2011 taxes beyond the amount of the 2011 refund.” Pl.’s
Opp’n Br. 2. The amount of the Avoided Tax has been revised in pre-trial
discussions.
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 3
*****
Summary judgment on an issue of contract interpretation is appropriate only
where the moving party can show that its interpretation “is the only reasonable
interpretation.”5 When interpreting a contract, the Court first looks for the
objective meaning of the parties’ agreement, “giving effect to all provisions
therein.”6 However, “an ambiguity exists when the provisions in controversy are
fairly susceptible of different interpretations or may have two or more different
meanings.”7
*****
The key inquiry on this motion is whether the parties’ negotiated agreement
is ambiguous. The parties direct the Court’s attention to a few key provisions.
First and foremost, Section 6.5(f), and subsection 6.5(f)(z) in particular, is the
source for the claimed right to taxes avoided in the Stub Year:
5
United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007).
The Court will not examine arguments on subjects beyond the ambiguity of the
text of the Agreement.
6
GMG Capital Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del.
2012) (internal quotation marks omitted).
7
Id. at 780 (alteration and internal quotation marks omitted).
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
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(f) To the extent (x) any Transaction Deductions are not properly
deductible in the Tax year that ends on or includes the Closing Date
and are properly deductible in a Tax year beginning after the Closing
Date . . . by the Buyer . . . , (y) after the application of Sections 6.5(d)
and (e) the Company or any Company Subsidiaries has a net operating
loss carryforward that is attributable to the Transaction
Deductions . . . , or (z) Transaction Deductions claimed in the Tax
year ending on or including the Closing Date result in a reduction of
Taxes for that Tax year in excess of the amount paid to Sellers
pursuant to Sections 6.5(d) and (e), then Buyer . . . shall pay to the
Sellers’ Representative . . . an amount equal to the amount by which
(i) the amount of Taxes that the Buyer, the Company and its
Subsidiaries . . . would have been required to pay in the Tax year in
question but for the deduction or the Carryforward of the Transaction
Deductions . . . exceeds (ii) the amount of Taxes actually payable by
the Buyer, the Company and its Subsidiaries . . . with respect to such
Tax years (and in the case of payments pursuant to clause (z) above,
solely to the extent such amount is in excess of the amount paid to
Sellers pursuant to Sections 6.5(d) and (e)).8
The dispute boils down to whether the references to an amount “in excess of
the amount paid to Sellers pursuant to Sections 6.5(d) and (e)” mean in excess of
(1) the total amount paid pursuant to those sections (including the remittances for
2009 and 2010) or (2) the amount paid pursuant to those sections with respect to
the Stub Year alone. If the first interpretation is correct, as Buyer posits, Buyer has
already paid Seller over $3 million, which exceeds the amount of the Avoided Tax
8
SPA § 6.5(f) (emphases omitted).
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
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(approximately $1.56 million). If the second, or Seller’s, interpretation is correct,
Buyer owes Seller the amount of the Avoided Tax.
Sections 6.5(d) and 6.5(e), to which the parties also ascribe different
meanings,9 state (in relevant part):
(d) To the extent that the Company has paid estimated income Taxes
for the Tax year ending on or including the Closing Date and the
amount of the estimated income Taxes which were paid prior to the
Closing Date exceeds the amount of the income Tax liability with
respect to such Tax year (taking into account the Transaction
Deductions, to the extent permitted by law, for which such estimated
income Taxes were paid, Buyer shall . . . prepare . . . [state and federal
forms for refunds of overpayment of estimated taxes] with respect to
such Tax year. . . . Within five Business Days of the receipt . . . of a
refund . . . , Buyer shall pay an amount equal to such refund . . . to the
Sellers’ Representative . . . .10
(e) To the extent that the Company would have a net operating loss
for the Tax year ending on or including the Closing Date, Buyer shall
prepare . . . any claim for refund of Taxes . . . with respect to such Tax
year, including a claim for refund or amended Tax Return to effect a
carryback to a prior year of any loss generated or otherwise
attributable to the Tax year ending on or including the Closing
Date . . . to the fullest extent permitted by Law. . . . Within five
Business Days of the receipt . . . of a refund as a result of such a
refund claim, Buyer shall pay to the Sellers’ Representative . . . an
amount equal to (i) the amount by which (A) the amount of the refund
actually received exceeds (B) the amount of the refund that would
9
See, e.g., Oral Arg. Def.’s Mot. for Summ. J. Tr. (“Oral Arg. Tr.”) 23, 40-41.
10
SPA § 6.5(d).
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
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have been received had the refund been determined without taking
into account any Deductible Expense Carrybacks; minus (ii) the
income Taxes actually payable by the Company as a result of the
receipt of such refunds for the year of receipt.11
Buyer argues that Seller’s year-by-year interpretation is not supported by the
text and cannot be correct because the net operating loss taken in the Stub Year
cannot be “carried back” to the same year—essentially nullifying the reference
to 6.5(e).12 Seller counters that Section 6.5(f)(z)’s references to the “Tax Year
ending on or including the Closing Date”;13 references to an “amount paid” rather
than amounts paid;14 logic;15 and the totality of Sections 6.5(d), (e), and (f)
(ensuring it benefits from the Transaction Deductions for the periods preceding,
during, and after the Stub Year)16 support its reading. Seller further alleges
(although not purely a contractual argument) that the Transaction Deductions were
11
SPA § 6.5(e) (emphasis omitted).
12
Def.’s Opening Br. 14-16. Seller responds that Section 6.5(e) also applies “to
refunds of prepaid estimated taxes for the 2011 tax year.” Pl.’s Opp’n Br. 20-21.
13
Pl.’s Opp’n Br. 15-16 (internal quotation marks omitted).
14
Id. at 20 n. 3.
15
Id. at 19-20.
16
Id. at 17. On the other hand, Buyer claims that “Section 6.5(f)(z) operated to
provide Sellers with a minimum benefit from the Transaction Deductions . . . .”
Def.’s Opening Br. 13.
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
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known to be so large that Section 6.5(f)(z) would never be triggered under Buyer’s
interpretation.17
The parties also cite Sections 6.5(a) and 10.1(a)(iii). Section 10.1(a), in the
article outlining indemnification rights and obligations, generally explains that
the Company Equity Holders shall . . . indemnify and hold
harmless . . . each of the Buyer Indemnified Parties from, against and
in respect of any and all Losses arising out of:
...
(iii) any Taxes assessed or imposed upon the Company or any
Company Subsidiary that are allocable or attributable to taxable years
or periods ending on or prior to the Closing Date or to the portion of
any Straddle Period through and including the Closing Date . . . .18
Section 6.5(a), within the article outlining covenants, specifies that
Buyer shall, at its own expense, prepare . . . and timely file . . . all Tax
Returns of the Company and the Company Subsidiaries for all periods
beginning on or after January 1, 2010 that have not yet been filed and
are required to be filed after the Closing Date. . . . Buyer shall cause
any amounts shown to be due on such Tax Returns (other than
17
Pl.’s Opp’n Br. 16-17. In other words, the payments pursuant to Sections 6.5(d)
and (e) would necessarily cancel out the Section 6.5(f)(z) obligation.
Of course, Buyer disagrees with Seller’s interpretation, citing mixed references
to time periods, emphasis on Sections 6.5(d) and (e), and the possibility that
Section 6.5(f)(z) could result in payments under fact patterns not present here—
among other reasons to adopt its interpretation. See, e.g., Def.’s Reply Br. in
Further Supp. of Its Mot. for Summ. J. 9-10. Buyer also asks the Court to apply
contra proferentem. Id. at 10.
18
SPA § 10.1(a).
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
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estimated tax payments due prior to the Closing Date) to be timely
remitted to the applicable Governmental Entity no later than the date
on which such Taxes are due (including extensions).19
Buyer claims that Section 10.1(a)(iii) already gives Seller the benefit of the
Avoided Tax through indemnification and that a double benefit by
Section 6.5(f)(z) does not make sense.20 Buyer views Section 6.5(a) as simply
governing “logistical” matters.21 Seller, on the other hand, explains that Section
10.1(a)(iii) indemnifies Buyer for “after-the-fact” assessments (such as after an
audit), while Section 6.5(a) is a covenant governing the broader division of
responsibilities.22
A review of the plain language of the Agreement does not lend a clear
answer. Seller argues (more generally) that the Agreement’s tax provisions were
designed to “ensure that Sellers receive the full benefit of the Transaction
Deductions.”23 Buyer argues that “[t]he sellers [we]re obligated to pay the pre-
19
SPA § 6.5(a).
20
Def.’s Opening Br. 16-17.
21
Oral Arg. Tr. 14-15, 58.
22
Pl.’s Opp’n Br. 21-22 & n.4. Seller adds that Buyer’s interpretation would mean
that any payment under Section 6.5(f)(z) would result in a double payment. Id.
at 23.
23
Id. at 17.
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
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closing [taxes], and the buyers [we]re only obligated to pay the post-closing
[taxes].”24 The Agreement is reasonably susceptible to more than one reading at
this point and, thus, is ambiguous. Additionally, communication between counsel
for Buyer and Seller might prove informative. However skeptical the Court may
be that trial will unearth any new evidence, it cannot choose between two
interpretations that appear reasonable at this stage.
*****
For the reasons above, the motion for summary judgment is denied.
IT IS SO ORDERED.
Very truly yours,
/s/ John W. Noble
JWN/cap
cc: Register in Chancery-K
24
Oral Arg. Tr. 57-58.