American Data Guard, Llc v. Northwest Center, Inc. ( 2019 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
AMERICAN DATA GUARD, LLC, a
Delaware limited liability company, DIVISION ONE
Appellant, No. 78375-1-I
v. UNPUBLISHED OPINION
NORTHWEST CENTER, INC., dlbla
AMERICAN DATA GUARD, a
Washington nonprofit corporation.
FILED: June 3, 2019
Respondent.
DwYER, J. — Northwest Center, Inc. (NWC) sold its shredding business,
including its equipment, to American Data Guard, LLC (ADG). ADG
subsequently sued NWC for breach of contract, asserting that the shredding
equipment did not function consistent with industry standards and thus breached
the equipment warranty term in the Asset Purchase Agreement (the Agreement).
NWC successfully moved for summary judgment, seeking dismissal of ADG’s
claim, contending that the equipment warranty did not guarantee that the
equipment would meet industry standards and that the equipment functioned as
warrantied. The trial court granted NWC’s motion and dismissed ADG’s claim for
breach of contract. On appeal, ADG asserts that a factual dispute existed as to
whether the shredding equipment functioned as warrantied and that the trial court
improperly dismissed its breach of contract claim. Because ADG does not
establish that there is a genuine issue as to any material fact with regard to
NWC’s alleged breach of warranty, we affirm.
No. 78375-1-112
On December 13, 2013, NWC, a Seattle-based nonprofit organization,
decided to sell its shredding business. NWC engaged Chris Howard of
Waterfront Capital to assist with the sale.
Throughout 2014, Howard tried to broker a deal between NWC and
various potential buyers, but all of the deals fell through. Subsequently, Howard
formed ADG and negotiated his own deal to purchase the shredding business.
Throughout the negotiation process, NWC repeatedly informed Howard and ADG
that the value of the business stemmed from its goodwill and customers, not the
aging equipment. NWC suggested that the equipment was worth at most
$375,000.
When NWC presented Howard with a proposed draft of an asset purchase
agreement, it provided that the equipment would be purchased ‘as is.” Howard
insisted on different language, suggesting that NWC “[a]t least rep to the assets
being adequate and in good enough condition to operate the business.”
Accepting Howard’s proposal, the final Agreement stated:
3.5 Condition of the Acquired Assets. All of the Acquired
Assets that are tangible, and each item thereof, are adequate and
in sufficient condition to operate the Business on an ongoing basis.
Buyer understands that the shredders and certain of the trucks
have normal wear and tear for their age, and that certain assets not
necessary for the operation of the Business are idle as of the
Closing Date. The Acquired Assets constitute all of the assets
owned by Seller that are used or necessary to conduct and operate
the Business as it is presently conducted and operated, and none
of the Excluded Assets used in the Excluded Businesses are
necessary to conduct the Business.
The Agreement also included a bilateral attorney fee provision and a
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No. 78375-1-113
Delaware choice of law provision. Additionally, the financial schedules attached
in section 3.11 of the Disclosure Schedule in the Agreement showed that the
yearly cost of equipment maintenance for the four years preceding the sale
totaled more than the value of the equipment.1
ADG and NWC executed the Agreement on December 31, 2014. ADG
took over the business in January 2015. Initially, ADG continued to run the
business in NWC’s facility. ADG made repairs to the shredders and certain parts
of the shredding trucks in order to keep them running. After completing the
repairs and moving out of the space it had been renting from NWC, ADG decided
to pursue an indemnity claim against NWC. ADG then filed a lawsuit against
NWC, claiming breach of contract and alleging that the shredding equipment did
not function as warrantied.
NWC moved for summary judgment seeking dismissal of ADG’s claim. In
support of its motion, NWC presented the deposition of Nathan Amouroux, who
managed the shredding business for NWC prior to the sale and continued with
ADG after the sale as ADG’s general manager. Amouroux testified that “the
equipment was running at a certain condition before the sale. It continued to run
in the same condition after the sale.”
At the hearing on NWC’s motion, NWC contended that it warrantied only
that the equipment would continue to function after the sale as it had before the
sale, and that the equipment functioned as warrantied. NWC also contended
1 NWC’s yearly cost of equipment maintenance prior to the sale was $102,719 for 2014,
$96,607 for 2013, $76,734 for 2012 and $90,076 for 2011.
3
No. 78375-1 -114
that even if there was a breach of a contract provision, section 8.4 of the
Agreement (the “anti-sandbagging” provision) specifically limited the seller’s
liability if the buyer had knowledge of such breach prior to the closing date, and
that ADG had knowledge of the condition of the equipment. Thus, NWC
contended that ADG had no basis for its breach of contract claim and that the
claim should be dismissed as a matter of law. In reply, ADG asserted that there
was a dispute of material fact with regard to ADG’s knowledge of NWC’s
equipment and that NWC’s “continuing operation” argument lacked evidentiary
support and was irrelevant to the condition of the equipment at the time of the
sale. The trial court granted NWC’s motion for summary judgment. ADG
appeals.
ADG contends that the trial court erred by granting summary judgment in
favor of NWC on ADG’s breach of contract claim. This is so, ADG asserts,
because the equipment warranty in the Agreement unambiguously requires that
the shredding equipment properly shred paper consistent with industry standards
and the equipment did not perform consistent with such standards. In reply,
NWC avers that the equipment warranty promises only that the equipment will
continue to function after the sale as it had before the sale. NWC has the better
argument.
A
We “review a summary judgment ruling de novo and consider the same
evidence heard by the trial court, viewing that evidence in a light most favorable
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No. 78375-1-1/5
to the party responding to the summary judgment [motion].” Slack v. Luke, 1 92
Wash. App. 909, 915, 370 P.3d 49 (2016) (citing Lybbert v. Grant County, 141
Wash. 2d 29, 34, 1 P.3d 1124 (2000)). “A court may grant summary judgment if the
pleadings, affidavits, and depositions establish that there is no genuine issue as
to any material fact and the moving party is entitled to judgment as a matter of
law.” Lybbert, 141 Wash. 2d at 34. The facts and all reasonable inferences drawn
therefrom are construed in the light most favorable to the nonmoving party. In re
Estates of Jones, 170 Wash. App. 594, 603, 287 P.3d 610 (2012). “A material fact
is one that affects the outcome of the litigation.” Owen v. Burlington N. Santa Fe
R.R., 153 Wash. 2d 780, 789, 108 P.3d 1220 (2005). “While questions of fact
typically are left to the trial process, they may be treated as a matter of law if
‘reasonable minds could reach but one conclusion’ from the facts.” Slack, 192
Wash. App. at 916 (quoting Hartley v. State, 103 Wash. 2d 768, 775, 698 P.2d 77
(1985)).
B
Both of the parties assert that substantive Delaware law governs the
Agreement and its interpretation because the parties agreed that their contract
was to be construed under Delaware law. We agree.
Washington courts generally enforce contract choice of law provisions with
certain exceptions. Erwin v. Cotter Health Ctrs., Inc., 161 Wash. 2d 676, 695-96,
167 P.3d 1112 (2007). Washington courts disregard the contract provision and
apply Washington law when (1) without the provision, Washington law would
apply, (2) the chosen state’s law violates a fundamental public policy of
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No. 78375-1-1/6
Washington, and (3) Washington’s interest in the determination of the issue
materially outweighs the chosen state’s interest. Erwin, 161 Wash. 2d at 694-95
(citing O’Brien v. Shearson Hayden Stone, Inc., 90 Wash. 2d 680, 685, 586 P.2d
830, 605 P.2d 779 (1978) and quoting RESTATEMENT (SECOND) OF CONFLICT OF
LAWS § 187 (1971)). Washington will enforce a choice of law provision unless all
three of these Conditions are met. See McKee v. AT&T Corp., 164 Wash. 2d 372,
384, 191 P.3d 845 (2008) (citing Erwin, 161 Wash. 2d at 695-96).
Section 10.6 of the Agreement provides that “[t}his Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware
without regard to its conflict of laws provisions.” Although the equipment is
located in Washington, Delaware is ADG’s home state. This case involves a
freely negotiated contract between ADG and NWC, two sophisticated companies
that explicitly selected Delaware law to govern their contract. Both parties agree
that Delaware law applies. There are no severe unbalanced interests in this
case. Application of the contract law of Delaware will not be contrary to a
fundamental policy of Washington and Washington does not have a materially
greater interest in the determination of this particular issue. We therefore apply
Delaware law.
C
ADG contends that the equipment warranty unambiguously requires that
the equipment properly shred paper consistent with industry standards.
Furthermore, during oral argument, ADG explicitly asserted that NWC warrantied
that the shredding equipment would function better after the sale than it had
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No. 78375-1-1/7
before the sale. In reply, NWC asserts that the equipment warranty requires that
the equipment continue to function after the sale as it had before the sale.
NWC’s analysis is superior.
I
Delaware courts have “long upheld awards of summary judgment in
contract disputes where the language at issue is clear and unambiguous.” GMG
Capital Invs., LLC v. Athenian Venture Partners I, LP, 36 A.3d 776, 783 (Del.
2012). “[W]here reasonable minds could differ as to the contract’s meaning,’
however, ‘a factual dispute results and the fact-finder must consider admissible
extrinsic evidence,’ making summary judgment improper.” Riverbend Cmty., LLC
v. Green Stone Enq’q, LLC, 55 A.3d 330, 334 (Del. 2012) (alteration in original)
(quoting GMG Capital lnvs., 36 A.3d at 783). Thus, the first step in the analysis
requires a court to decide whether the language of a contract is ambiguous.
Riverbend Cmty., 55 A.3d at 334.
When interpreting a contract, Delaware courts will give priority to the
parties’ intentions as reflected in the four corners of the agreement. GMG
Capital Invs., 36 A.3d at 779. “In upholding the intentions of the parties, a court
must construe the agreement as a whole, giving effect to all provisions therein.”
GMG Capital lnvs., 36 A.3d at 779 (quoting El. du Pont de Nemours & Co. v.
Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985)).
“Delaware adheres to the “objective” theory of contracts, i.e. a contract’s
construction should be that which would be understood by an objective,
reasonable third party.” Estate of Osborn ex rel. Osborn v. Kemp, 991 A.2d
7
No. 78375-1-1/8
1153, 1159 (Del. 2010) (quoting NBC Universal v. Paxson Commc’ns, 2005 WL
1038997, at *5 (Del.Ch. 2005)). “‘The true test is not what the parties to the
contract intended it to mean, but what a reasonable person in the position of the
parties would have thought it meant.” Lorillard Tobacco Co. v. Am. Legacy
Found., 903 A.2d 728, 739 (Del. 2006) (quoting Rhone—Poulenc Basic Chems.
Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.1992)). “Underwell
settled case law, Delaware courts look to dictionaries for assistance in
determining the plain meaning of terms which are not defined in a contract.”
Lorillard Tobacco Co., 903 A.2d at 738.
“A contract is not rendered ambiguous simply because the parties do not
agree upon its proper construction.” GMG Capital Invs., 36 A.3d at 780 (quoting
Rhone—Poulenc Basic Chems. Co., 616 A.2d at 1195). “Rather, an ambiguity
exists ‘[wjhen the provisions in controversy are fairly susceptible of different
interpretations or may have two or more different meanings.” GMG Capital
lnvs., 36 A.3d at 780 (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc.,
702 A.2d 1228, 1232 (Del.1997)). “An unreasonable interpretation produces an
absurd result or one that no reasonable person would have accepted when
entering the contract.” Osborn, 991 A.2d at 1160.
When a contract’s meaning is plain and unambiguous, it will be given
effect. Osborn, 991 A.2d at 1159-60. “[T]he parol evidence rule bars the
admission of evidence from outside the contract’s four corners to vary or
contradict that unambiguous language.” GMG Capital lnvs., 36 A.3d at 783
(citing Eagle Indus., Inc., 702 A.2d at 1232).
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No. 78375-1 -119
2
We look at the plain language of the equipment warranty provision in
controversy to decide whether it is fairly susceptible to different interpretations or
whether it may have two or more reasonable meanings. The warranty provision
states:
3.5 Condition of the Acquired Assets. All of the Acquired
Assets that are tangible, and each item thereof, are adequate and
in sufficient condition to operate the Business on an ongoing basis.
Buyer understands that the shredders and certain of the trucks
have normal wear and tear for their age, and that certain assets not
necessary for the operation of the Business are idle as of the
Closing Date. The Acquired Assets constitute all of the assets
owned by Seller that are used or necessary to conduct and operate
the Business as it is presently conducted and operated, and none
of the Excluded Assets used in the Excluded Businesses are
necessary to conduct the Business.
ADG contends that NWC warrantied that the equipment would properly
shred paper consistent with industry standards on an ongoing basis.
Furthermore, ADG asserts that NWC warrantied that the shredding equipment
would function better after the sale than it had before the sale. We disagree.
ADG’s interpretation adds words to the original text by demanding that the
shredding equipment meet industry standards. Nowhere in section 3.5 is there a
promise that the equipment will operate to shred paper consistent with industry
standards. Indeed, nowhere in section 3.5, nor in any other provision of the
Agreement, do the words “industry standards” even appear. The warranty states
only that the shredding equipment is “adequate and in sufficient condition to
operate the Business on an ongoing basis.”
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No. 78375-1-1/10
Furthermore, the cost of a very limited warranty term was reflected in the
low value NWC attributed to the equipment. NWC suggested that the equipment
was worth at most $375,000. The financial schedules attached in section 3.11 of
the Disclosure Schedule in the Agreement showed that the yearly cost of
equipment maintenance for the four years preceding the sale totaled more than
that claimed value. Given the value of the equipment and the disclosed yearly
costs of equipment maintenance, no reasonable seller would have accepted
ADG’s interpretation of the warranty when entering the contract.
In contrast to ADG, NWC asserts that it warrantied only that the
equipment was sufficient to continue existing operations. We agree.
We look to dictionaries for assistance in determining the plain meaning of
terms which are not defined in a contract. “This is because dictionaries are the
customary reference source that a reasonable person in the position of a party to
a contract would use to ascertain the ordinary meaning of words not defined in
the contract.” Lorillard Tobacco Co., 903 A.2d at 738.
The pertinent provision in the Agreement states that “[ajIl of the Acquired
Assets . . . are adequate and in sufficient condition to operate the Business on an
ongoing basis.” “Operate” and “ongoing” are not defined in the Agreement.
Thus, we look to dictionaries for assistance in determining their plain meaning.
Webster’s Third New International Dictionary provides, in pertinent part,
that “operate” means “to manage and put or keep in operation whether with
personal effort or not < operated a grocery store >.“ WEBSTER’S THIRD NEW
INTERNATIONAL DICTIONARY 1581 (2002). Furthermore, it provides that “operation”
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No. 78375-1-I/li
means “capacity for action or functioning” and that “ongoing” means
“continuously moving forward.” WEBsTER’s, supra, at 1581, 1576. Thus, we
conclude that section 3.5 of the Agreement warrantied only that the equipment
was adequate and in sufficient condition to perform the functions necessary for a
shredding business to continuously move forward.
Review of the contract as a whole supports our reading of the warranty
provision. There is no language in the Agreement warrantying that the shredding
quality would be any different than it was before the sale, and no language in the
Agreement warrantying that the shredding equipment would perform better or
differently than it had before the sale. Section 3.5 is the only warranty provision
in the Agreement referencing the condition of the shredding equipment.
Following the first sentence in section 3.5, the contract provides that ‘[t]he
Acquired Assets constitute all of the assets owned by Seller that are used or
necessary to conduct and operate the Business as it/s presently conducted and
operated.” (Emphasis added.) Read as a whole, the equipment warranty
provision required only that the equipment operate in the same manner before
and after the sale. The warranty term is not ambiguous.
3
ADG next contends that NWC’s interpretation of the warranty is simply
another way of articulating a materially lesser “as is” provision, and that he
specifically rejected such a provision when negotiating the purchase. We
disagree.
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No. 78375-1-1/12
Under Delaware law, an “as is” provision indicates that there is no
warranty. 5A Del. Code 1953 § 2-316(3)(a). Delaware Code § 2-316 (3)(a)
states that unless the circumstances indicate otherwise, all implied warranties
are excluded by expressions like “as is,” “with all faults,” or other language which
in common understanding calls the buyer’s attention to the exclusion of
warranties and makes plain that there is no implied warranty. The warranty
provision in this Agreement is distinguishable from an “as is” provision under
Delaware law. NWC warrantied that the shredding equipment would operate in
the same manner after the sale as it had operated before the sale. This
warranty, though limited, is clearly different from the complete absence of any
warranty implied by an “as is” provision. ADG is wrong in claiming that an “as is”
provision was foisted upon it even after it had rejected such a limitation.
4
NWC contends that there is no genuine dispute as to any material fact
with regard to whether NWC breached the equipment warranty provision. This is
so, NWC asserts, because the record establishes that the equipment operated in
the same manner before and after the sale. We agree.
The record is clear that the equipment continued to operate and the
business continued to run in the same manner after the sale as it had prior to the
sale. Amouroux, who managed the shredding business for NWC prior to the sale
and continued with ADG after the sale as ADG’s general manager, conceded
that “the equipment was running at a certain condition before the sale. It
continued to run in the same condition after the sale.” ADG presented no
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No. 78375-1 -1/13
evidence to the contrary. Thus, there was no breach and no dispute as to any
material fact.
Because there is no genuine dispute as to any material fact regarding
whether NWC breached the contract, we affirm the grant of summary judgment in
favor of NWC on ADG’s breach of contract claim.2
Ill
NWC requests an award of attorney fees on appeal. Because ADG’s
contract with NWC provides for an award of attorney fees to the prevailing party,
and because NWC is the prevailing party, NWC is entitled to an award of fees.
Despite the presence of a choice of law provision, the forum state usually
applies its procedural law. Parrott Mech., Inc. v. Rude, 118 Wash. App. 859, 864,
78 P.3d 1026 (2003). Notably, Delaware follows this rule. Tumlinson v.
Advanced Micro Devices, Inc., 106 A.3d 983, 987 (Del. 2013). Accordingly, we
apply Washington procedural law to award attorney fees on appeal, even though
we determine whether NWC is entitled to an award of attorney fees based on the
substantive law of Delaware.
Delaware follows the American rule that “litigants are normally responsible
for paying their own litigation costs. An exception to this rule is found in contract
litigation that involves a fee shifting provision. In these cases, a trial judge may
2 Additionally, ADG, relying on an anti-sandbagging provision in the contract, asserts that,
summary judgment was improper because there is a genuine issue of material fact as to ADG’s
knowledge of the state of the equipment at the time the Agreement closed. By its terms,
however~ the anti-sandbagging provision in this Agreement applies only if there is an inaccuracy
in NWC’s representations or warranties as set forth in the Agreement or if NWC breaches the
agreement. However, there was no breach. Furthermore, NWC’s representations and
warranties, as set forth in the Agreement, were accurate. Thus, the anti-sandbagging provision
does not apply.
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No. 78375-1-1/14
award the prevailing party all of the costs it incurred during litigation.” Sternberg
v. Nanticoke Mem’l Hosri, Inc., 62A.3d 1212, 1220 (Del. 2013) (quoting Mahani
v. Edix Media Grn., Inc., 935 A.2d 242, 245 (Del. 2007)). Furthermore, “the
contractual prevailing-party provision continue[s] to operate and entitle[s] the
[prevailing] party to recover expenses for prevailing on appeal.” Marilyn Abrams
Living Tr. v. Pore lnvs., LLC, 188 A.3d 829, 834 (Del. Ch. 2018) (citing Council
of Wilmington Condo. v. Wilmington Ave. Assocs., L.P, No. CIV.A.94C-09-004,
1999 WL 1223792, at *2 (Del. Super. Ct. Nov. 3, 1999); accord New Castle Auto
Auction & Consignments, Inc. v. Riley, 2017 WL 2676966, at *2 (Del. Com. P1.
Apr. 17, 2017)).
NWC is the prevailing party. The contract provides for an award of fees.
Thus, the trial court correctly awarded attorney fees to NWC. We do the same.
Upon compliance with the applicable rule, a commissioner of our court will enter
a suitable order.
Affirmed.
~—- -
We concur:
Ld/
/
14