Vaughan v. Recall Total Information Management., Inc.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 05-1491
THEDA L. VAUGHAN; JAMES RICKY VAUGHAN,
Plaintiffs - Appellees,
versus
RECALL TOTAL INFORMATION MANAGEMENT,
INCORPORATED, a Delaware corporation; BRAMBLES
USA, INCORPORATED, a Delaware corporation,
Defendants - Appellants.
Appeal from the United States District Court for the District of
South Carolina, at Greenville. Henry F. Floyd, District Judge.
(CA-02-402-6-HFF)
Argued: September 20, 2006 Decided: February 14, 2007
Before MOTZ and GREGORY, Circuit Judges, and Richard L. VOORHEES,
United States District Judge for the Western District of North
Carolina, sitting by designation.
Affirmed in part, reversed in part, and remanded by unpublished per
curiam opinion.
ARGUED: Michele L. Odorizzi, MAYER, BROWN, ROWE & MAW, L.L.P.,
Chicago, Illinois, for Appellants. Ellis Murray Johnston, II,
HAYNSWORTH, SINKLER & BOYD, P.A., Greenville, South Carolina, for
Appellees. ON BRIEF: Maggie J. Schneider, MAYER, BROWN, ROWE &
MAW, L.L.P., Chicago, Illinois, for Appellants. Theodore Sanders
Stern, Jr., COVINGTON, PATRICK, HAGINS, STERN & LEWIS, P.A.,
Greenville, South Carolina, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
This dispute involves interpretation of a Stock Purchase
Agreement (“SPA” or “Agreement”) entered into by the parties. The
Agreement governs the terms of sale of a document shredding
business previously owned and operated by Appellees Theda L.
Vaughan (“Theda”) and James Ricky Vaughan and purchased by
Appellants Recall Total Information Management, Inc. (“Recall”),
and Brambles USA, Inc ( “Brambles”). The Agreement provides that
the purchase price is to be paid as follows: 1) a lump sum payment
upon closing; and 2) a percentage of the business’s “Sales
Revenues” for the following year (“Earnout” payment). The parties
disagree on what constitutes “Sales Revenues” under the terms of
the contract as well as the proper method of calculation of the
Vaughans’ Earnout. Recall also asserts a Counterclaim that seeks
to recover a portion of the Earnout monies already paid to the
Vaughans or a set-off against any award the Vaughans receive.
Appellant Recall challenges the trial court’s interpretation of
certain portions of the Agreement and the dismissal of its
Counterclaim.
I.
The Vaughans are former shareholders of Secured Data of
America, Inc. (“SDA”), a Tennessee corporation. SDA was a document
destruction company that specialized in the destruction of
2
confidential documents and data. SDA was headquartered in
Greenville, South Carolina, and maintained operating facilities
located primarily on the East Coast. SDA also had a facility in
Texas.
Recall is an information management company incorporated in
Delaware with its principal place of business in Atlanta, Georgia.
Recall provides services such as physical and electronic document
storage and retrieval, protection of computer backup data, and
destruction of sensitive documents. Brambles is the parent company
of Recall, which likewise has its principal place of business in
Atlanta, Georgia.1
In November 1999, the Vaughans had an offering memorandum
prepared for the purpose of determining the estimated market value
of SDA. Among other things, the offering memorandum boasted SDA’s
existing client base, operating capacity figures demonstrating an
ability to expand, and the potential for significant growth in
sales. The offering memorandum generated interest in SDA by other
companies.
On August 2, 2000, the Vaughans contracted to sell SDA to
Recall pursuant to a Stock Purchase Agreement. (J.A. at 530-83;
Pl.’s Exh. 1) Theda Vaughan was the general manager of SDA and
James Ricky Vaughan was Chief Executive Officer. The Agreement
1
Brambles is a party to the SPA and is jointly and severally
liable with Recall.
3
provided that Theda would remain employed at SDA as Executive Vice
President and be responsible for company sales. In addition to
retaining Theda, Recall entered into employment agreements with two
other SDA employees, one of whom was Christopher Lupo (“Lupo”).2
Recall agreed that if it materially changed the job positions of
these employees, it would provide Theda with comparable or better
support. Mr. Vaughan was to stay on as a consultant for up to six
months after closing.
At closing, the Vaughans were paid $15,522,960. The Vaughans
also had the potential to receive up to an additional $11,750,000
based on an Earnout formula contained in the Agreement. The
parties agreed to the Earnout as a means for providing additional
compensation to the Vaughans as the projected sales numbers
approached their targets.3 The Earnout was payable in two
2
Under the terms of his employment agreement, Lupo was to
“assist with sales” but “be responsible for” other areas of the
business. (J.A. at 1112, ¶39) Lupo was later reassigned with
Theda’s blessing and Theda hired a national sales manager and three
other regional sales representatives to assist her with sales.
Theda asserted at trial that Lupo’s reassignment was one of the
events that hindered SDA’s ability to reach its sales potential.
3
During negotiations, Theda represented to Recall that SDA was
worth more than its past revenue figures suggested. Theda
projected significant growth in sales for 2000 and 2001, based in
large part on anticipated increased sales from existing customers
such as Bank of America and First Union National Bank. Theda
testified at trial that projected sales revenue from Bank of
America calculated as of the time the SPA was executed had proven
to be inaccurate when compared with actual sales.
4
installments: 1) the Vaughans were entitled to a partial Earnout
after six months if sales revenues exceeded $6,150,000; and 2) the
Vaughans were entitled to a final Earnout after 12 months if sales
revenues exceeded $12,300,000. To maximize that final Earnout
payment, SDA needed to achieve sales revenues in the amount of
$17,950,000 for the year following execution of the SDA - the
period August 2, 2000 through August 1, 2001 (“Earnout period”).
If accomplished, this gain in sales would represent a growth of
nearly 50%.
During the Earnout period, Recall acquired several other
document shredding businesses, including InstaShred, DocuShred(PA),
DocuShred (TN), SecureShred (Greenville) and MobilShred. With the
exception of MobilShred, Recall was entirely responsible for these
acquisitions. Although Recall financed the purchase of MobilShred,
Theda and Chris Lupo are credited with helping to facilitate the
MobilShred acquisition.
In May 2001, after Recall acquired InstaShred, Recall
reorganized its document destruction operations into two separate
companies - “SDS West” and “SDS East” (or SDA). InstaShred was
primarily serving the West Coast or western United States and SDA
was primarily serving the East Coast plus Texas. Recall elected to
divide the businesses geographically, placing SDA’s Texas
operations under SDS West and all operations east of Texas under
SDS East.
5
After acquisition, DocuShred (PA and TN) and SecureShred
ceased to operate. The accounts previously serviced by these
businesses were absorbed and serviced by SDS East (SDA).4 SDA’s
servicing of these accounts means SDA picked up, shredded, and
baled the trash in addition to selling the paper and billing the
client. SDA also took over former InstaShred operations in
Virginia and Florida. The rest of InstaShred’s business made up
Recall’s SDS West operations. MobilShred’s operations were placed
under SDS West since its operations were centered in Vancouver and
Calgary.
SDA did not meet its sales goals for the Earnout period.
Instead, based upon estimated sales revenues of $15,706,000, the
Appellees were paid $1,236,000 after the first six months and an
additional $5,847,000 at the end of the Earnout period, for a total
Earnout payment of $7,083,000.5 Thus, the total payout for the
sale of SDA was $22,305,960.
In February 2002, the Vaughans commenced the underlying civil
action alleging breach of contract. Specifically, the Vaughans
complained that 1) Recall wrongfully excluded $522,649 of sales
revenues generated by SDA during the Earnout period; and 2) Recall,
4
The sales revenues earned or generated as a result of
subsequently acquired entities’ accounts are referred to by the
parties as “acquisition revenues.”
5
The total Earnout payment of $7,083,000 was $4,667,000 less
than the maximum Earnout.
6
in violation of the “good faith” (express and implied) provisions
of the SPA, prevented Theda from maximizing her Earnout.
In May 2003, Recall amended its Answer to include a
counterclaim, the gist of which was that Recall had overpaid
rather than underpaid Theda. According to Recall, the Earnout was
not calculated properly because SDA had been over billing one of
its clients - Bank of America. Following the Earnout period,
Recall reached an agreement with Bank of America whereby Recall
repaid a portion of the overcharge and negotiated a new contract.
The district court presided over a three-day bench trial. At
the conclusion of the trial, the district court rejected the
Vaughans’ allegation that Recall, in bad faith, prevented SDA from
reaching its projected sales goal.6 (J.A. at 1111-20, ¶¶21-84, and
1128, ¶1) However, the district court ruled in favor of the
Vaughans on the acquisition revenue issue, finding that SDA
performed the actual services and “generated” the revenue
previously attributable to the acquired entities. (J.A. at 1121-23,
¶¶86-92) In essence, the district court found that SDA helped
Recall absorb the newly acquired businesses by assuming
responsibility for some, if not all, of the work. The district
court expressly noted that the Vaughans’ evidence was more credible
on this claim. (J.A. at 1127 , ¶116) Alternatively, the district
6
Although not entirely successful on their claims in the
district court, Appellees did not cross-appeal.
7
court found that Recall was estopped from contesting this claim in
that Recall had waived its right to challenge the calculation of
Theda’s Earnout payment. (J.A. at 1121, ¶86) With respect to the
MobilShred acquisition, the trial judge found that the good faith
provision within the Agreement required Recall to credit MobilShred
revenues to SDA because Theda and Chris Lupo were largely
responsible for the acquisition. (J.A. at 1123, ¶¶93-5) The
district court treated Recall’s counterclaim as an indemnification
or breach of warranty action and deemed it untimely pursuant to the
terms of the Agreement. (J.A. at 1124-1128, ¶¶106-11)
The district court’s rulings were based on its interpretation
of the Stock Purchase Agreement as a matter of law. Finding the
Agreement unambiguous, the district court did not consider
extrinsic evidence.
II.
On appeal, the trial court’s judgment following a bench trial
is subject to a “mixed standard of review – factual findings may be
reversed only if clearly erroneous, while conclusions of law,
including contract construction, are examined de novo.” Roanoke
Cement Co., LLC v. Falk Corp., 413 F.3d 431, 433 (4th Cir.2005).
III.
Recall raises the following issues on appeal: 1) Whether the
trial court erred as a matter of law by construing the SPA’s “Sales
8
Revenue” definition to include acquisition revenues of document
shredding operations serviced by SDA during the Earnout period; 2)
Whether the trial court’s factual findings with respect to estoppel
or waiver of Recall’s right to challenge calculation of the Earnout
payment are clearly erroneous; 3) Whether the trial court erred as
a matter of law by construing the SPA’s good faith and sales
revenue provisions as requiring Recall to credit SDA for the
MobilShred acquisition revenues; and 4) Whether the trial court
erred as a matter of law by dismissing Recall’s counterclaim as
untimely pursuant to the 18-month limitations period within the
SPA. Each of these issues is addressed in turn.
For the reasons set forth, we AFFIRM in part, REVERSE in part,
and REMAND for further proceedings consistent with this opinion.
IV.
A. Acquisition Revenues / “Sales Revenues” Under The SPA
Recall contends that the district court erred as a matter of
law in construing the SPA. Recall claims that the SPA’s definition
of “Sales Revenues” should not have been interpreted to include
SDA’s sales from contracts acquired by SDA as a result of Recall’s
business acquisitions during the Earnout Period.7 In the
alternative, Recall argues that the Agreement is ambiguous,
7
Recall suggests that a construction of the SPA consistent
with their argument would result in a finding that the Vaughans’
Earnout payment must be reduced by approximately $1,068,923.
9
requiring the consideration of extrinsic evidence. We disagree
with both propositions.
i. Applicable Rules Of Contract Construction Under South
Carolina Law8
In construing the SPA, it is our function “to ascertain and
give effect to the intention of the parties, looking first to the
written instrument itself.” Campbell v. Bi-Lo, Inc., 301 S.C. 448,
392 S.E.2d 477, 479 (Ct. App.1990).
The Court must first determine, as a matter of law, whether or
not the Agreement is ambiguous. South Carolina Dep’t of Natural
Ress. v. Town of McClellanville, 345 S.C. 617, 550 S.E.2d 299, 302-
303 (2001). “[A] contract is ambiguous only when it may fairly and
reasonably be understood in more ways than one.” Goldston v. State
Farm Mut. Auto. Ins. Co., 358 S.C. 157, 594 S.E.2d 511, 519 (Ct.
App.2004) (emphasis added); South Carolina Dep’t of Natural Ress.,
550 S.E.2d at 302.
Our construction of the Agreement is guided by common sense
and good faith. See C.A.N. Enters., Inc. v. South Carolina Health
and Human Servs. Fin. Comm’n, 296 S.C. 373, 373 S.E.2d 584, 586
(1988). In other words, “where one construction makes the
provisions unusual or extraordinary and another construction which
is equally consistent with the language employed, would make it
8
South Carolina contract law governs construction of the Stock
Purchase Agreement. (J.A. at 579, Pl.’s Ex. 1 at §9.6)
10
reasonable, fair and just, the latter construction must prevail.”
Id. (citing Farr v. Duke Power Co., 265 S.C. 356, 218 S.E.2d 431,
434 (1975)).
In determining the question of ambiguity, the Court considers
the Agreement in its entirety. See Yarborough v. Phoenix Mut. Life
Ins. Co., 266 S.C. 584, 225 S.E.2d 344, 349 (1976)(“As a rule of
construction, the Court must consider the entire contract between
the parties to determine the meaning of its provisions.”)
“If the contract’s language is clear and unambiguous, the
language alone determines the contract’s force and effect.”
Goldston, 594 S.E.2d at 518.
ii. The SPA , Taken As A Whole, Can Reasonably Be Construed
Only As Encompassing Acquisition Revenues Earned and Billed
(Or Generated) By SDA
According to Recall, acquisition revenues do not fall within
the scope of SDA’s “Sales Revenues” as defined by the SPA.
Specifically, Recall contends that subsection (2) – “All gross
revenue generated by the Company from new contracts or agreements
from any source” - does not include new contracts or agreements
obtained via a subsequent acquisition. As explained below,
Recall’s argument is contrary to the plain language of SPA.
Recall’s first two arguments hinge upon interpretation of the
SPA provisions addressing sales revenues, good faith, and the
restrictions on competition during the Earnout period. We turn now
to the relevant language in the SPA.
11
Section 1.4 of the SPA, entitled “Earnout Payments,” sets
forth how the Vaughans’ Earnout is to be calculated, beginning with
the “good faith” provision in Section 1.4(a). Section 1.4(a)
provides insight as to the significance of the Earnout Payments as
well as the parties’ intent. See Goldston, 594 S.E.2d at 518 (“The
primary purpose of all rules of contract construction is to
determine the intent of the parties.”) Section 1.4(a) reads in
pertinent part:
It is the parties’ intention that a significant part of
the Purchase Price will be paid pursuant to this Section
1.4, and Purchaser agrees to act reasonably in good faith
to allow Theda to have a fair opportunity to qualify for
the maximum payments provided for by this Section 1.4.
The previous sentence shall also apply to Purchasers’
Affiliates9, except as provided below. Neither the
foregoing nor anything in this agreement shall affect or
apply to the current or subsequent operations of . . .
any business subsequently acquired by [Recall] . . .
engaged in document shredding services, including,
without limitation, any current business . . . or any
business subsequently acquired by Purchaser or its
Affiliates and engaged in document shredding services
(all such current and subsequent businesses being
collectively referred to as “Purchaser / Affiliate
Shredding Businesses”). The sole obligation of Purchaser
/ Affiliate Shredding Businesses shall be as set forth in
this Section 1.4(f)(7) . . .
(J.A. at 545-46; §1.4(a))(emphasis added). Thus, Section 1.4(a)
imposes a good faith obligation on Recall and its Purchasers’
9
The “Affiliate” of any Person means “any other Person
directly or indirectly controlling, controlled by or under common
control with such Person.” (J.A. at 538.)
12
Affiliates “to act reasonably in good faith” such that Theda would
have a “fair opportunity” to maximize her Earnout Payment.
“Sales Revenue” is defined broadly in the Stock Purchase
Agreement as:
“[T]he aggregate of all the Company’s10 gross
revenue earned and billed for the Earnout Period . . .
and consisting of the following:
***
(2) All gross revenue generated by the Company
from new contracts11 or agreements from any
source for document shredding services . . .
(J.A. at 546; §1.4(e))(emphasis added). The terms “earned,” and
“generated” are not expressly defined within the SPA. Likewise,
the SPA does not clarify what is meant by “new contracts or
agreements.”
The SPA also includes a non-competition clause stating Recall’s
policy of preventing a “Purchased Business” from competing with SDA
under certain circumstances. (J.A. at 549-50, ¶¶1.4(f)(7)(A) and
(B)) The non-competition clause within Section 1.4(f)(7) speaks
most directly to the intended relationship between SDA and
subsequent acquisitions during the Earnout period:
If Purchaser or Parent (or any of their
Affiliates) purchase any business in North
10
“Company” means Secured Data of America, Inc. (J.A. at 538.)
11
“Contract” means “any contract, lease, commitment, sales
order, purchase order, indenture, mortgage, note, bond, instrument,
license or other agreement.” (J.A. at 539.)
13
America during the Earnout Period . . . (each
such business being a “Purchased Business”),
then with respect to each Purchased
Business:
(A) Purchaser and Parent will not
institute a corporate policy preventing the
Company from competing against the Purchased
Business for new business (being business not
previously serviced by the Purchased Business);
and
(B) Purchaser and Parent will not permit
the Purchased Business to compete against the
Company for the services and locations (1)
covered by the written customer contracts
listed on item 5 to Schedule 2.16 and the
contract resulting from rfp number 64960-001-
001 dated April, 2000, and any subsequent
variation thereof and (2) previously provided
to Current Customers and serviced by the
Company within the two year period prior to
Closing; provided that the foregoing shall not
restrict any service to any location of a
Current Customer . . .
Purchaser / Affiliate Shredding Businesses in North
America shall be subject to the requirements of (A) and
(B) above during the Earnout Period. The sole obligation
of Purchaser / Affiliate Shredding Businesses shall be as
set forth in this Section 1.4(f)(7). . .
(J.A. at 549-50.) (emphasis added) Section 1.4(f)(7) may be said to
provide for a level playing field for SDA and Recall and its
Purchaser / Affiliate Shredding Businesses during the Earnout
period. SDA is free to compete with any Purchaser Affiliates for
“new business,” while its existing contracts and locations are
protected.
Viewed as a whole, the SPA is not ambiguous. Pursuant to the
Agreement, for revenues to fall within SDA’s “Sales Revenue”
14
provision, SDA had to (1) generate or earn and bill the revenue, (2)
as a result of new contracts or agreements from any source (3) for
document shredding services.12 The district court found that SDA
“earned and billed,” or “generated” the acquisition revenue at
issue. In construing the introductory language of §1.4(e), the
district court applied an ordinary, every day meaning of the word
“earned” - “to acquire by labor, service, or performance.” (J.A.
at 1121, ¶87) Based upon undisputed facts, the district court then
found that SDA performed under the contracts at issue by providing
the actual document shredding services and that SDA billed said
accounts. The district court found that SDA, in fact, “generated”
the revenue. (J.A. at 1121-22, ¶88)
The district court also found that the acquisition revenues
resulted from “new contracts or agreements” because SDA had never
serviced these customers before.13 While the word “new” hardly
needs defining, its ordinary meaning is “having been made or come
into being only a short time ago; recent” or “recently arrived or
established in a place, position, or relationship.” See, e.g.,
American Heritage Dictionary of the English Language, Fourth (2000).
12
All of the revenues were derived from the performance of
document shredding services so the third criteria noted above is
not contested.
13
The SPA does not specify whether contracts coming under the
umbrella of SDA for service due to a subsequent acquisition by
Recall are to be treated as “new.”
15
In addition to its ordinary meaning, the Court looks to Section
1.4(f)(7)(A), which defines “new business” as “business not
previously serviced by the Purchased Business.” (J.A. at 549.)
Applying the same definition to SDA, we find that any contract not
previously serviced by SDA, whether obtained via acquisition or
otherwise, fits squarely within the language of the Agreement.
Furthermore, because SDA’s sales revenues can be “from any
source,” the fact that the contracts resulted from Recall acquiring
and dissolving another document shredding business makes no
difference. In short, the language “from any source” can reasonably
be interpreted only as inclusive of acquisition revenues.
According to Recall, the language within Section 1.4(a)
referring to the non-competition clause as the Purchaser /
Affiliates’ “sole obligation” means that Recall owes Theda and SDA
nothing for the services SDA performed in connection with
acquisitions during the Earnout period. Read together, Sections
1.4(a) and (f)(7), undermine Recall’s argument. Section 1.4(a)
speaks in terms of continuing document shredding “operations” of
a business subsequently acquired by Recall and contemplates that
“any business subsequently acquired . . . and engaged in document
shredding services” is subject to the anti-competition clause.
(J.A. at 549-50.) As already noted, several of the acquired
entities ceased operations entirely or at least at certain
facilities. The anti-competition clause within §1.4(f)(7) only makes
16
sense if the integrity of the acquired entity is maintained and the
entity continues to be viable. A dissolved entity simply poses no
competitive threat to SDA. For this reason, it makes little sense
to construe the language as Recall suggests. Given the plain
language of the Agreement, a more reasonable construction would
provide that Recall could acquire and operate other document
destruction businesses without the need to credit SDA with the
revenue as long as, once acquired, the companies were operated
independently of SDA.
It is also clear from Section 1.4(f)(7) that the parties
contemplated future acquisitions of document shredding businesses
by Recall when the SPA was drafted. The Agreement expressly
addressed the treatment of acquisition revenues from Southland
Information Destruction (“Southland”). The parties made their
intent clear regarding the revenues generated by SDA as a result of
the Southland acquisition. The Agreement provided that “[a]ll gross
revenues from customers acquired in the Southland Acquisition” would
be included within SDA’s sales revenues. (J.A. at 547.) At the
inception of the SPA, Southland was the only acquisition the parties
knew was a certainty.14 Southland was also the only acquisition
financed entirely by SDA rather than Recall. However, the fact that
Southland’s subsequently acquired revenues are expressly addressed
14
SDA and Southland entered into an Asset Purchase Agreement
on June 30, 2000. (J.A. at 542.) The SDA / Southland transaction
closed simultaneously with Recall’s purchase of SDA.
17
within the SPA is instructive on at least three points. First, this
provision tells us that the parties knew how to include (or exclude)
acquisition revenues from sales revenues. Secondly, it distinguishes
between “customers acquired” from Southland and Southland itself -
a distinction not made in the SPA with respect to Recall’s
Purchasers’ Affiliates or Purchased Businesses. Finally, it
demonstrates the parties’ recognition that issues surrounding
calculation of Theda’s Earnout might arise post-merger with respect
to subsequent acquisitions. While it is conceivable that the
parties’ failure to be more explicit concerning Recall’s subsequent
acquisition revenue was due to poor drafting rather than the actual
intent of the parties, it is not the role of the court to speculate
or rewrite the terms of the Agreement where the language actually
used leaves no plausible room for Recall’s interpretation.
Considering the Stock Purchase Agreement as a whole, the Court
finds there is only one reasonable interpretation of the Sales
Revenue provision. See C.A.N. Enters., 373 S.E.2d at 586 (noting
that an unambiguous contract “must be construed according to the
terms the parties have used, to be taken and understood in their
plain, ordinary and popular sense”). For these reasons, we find the
SPA and its definition of “Sales Revenues” unambiguous.
Accordingly, the district court properly relied on the plain
language of the SPA in construing the Agreement.
18
B. The District Court’s Factual Findings Related To Waiver &
Estoppel By Recall Are Not Clearly Erroneous
Recall also challenges the district court’s alternative finding
of waiver and estoppel. Section 1.4(g) of the SPA states:
“Within twenty (20) days after the end of each
calendar month, Purchaser shall furnish to Theda a report
describing the amount of Sales Revenues for such month,
the sources thereof for such month, and any revenues of
the Company for such month which Purchaser believes do
not qualify as Sales Revenues.”
(J.A. at 550.)(emphasis added) The district court found that Recall
never submitted any such monthly report as contemplated by the SPA.
(J.A. at 1123, ¶91) While the Agreement does not expressly identify
the purpose of this provision, the parties’ manifest intent was to
provide an avenue for contemporaneous identification and resolution
of any dispute about sources and calculation of sales revenues.
Significantly, the onus in this regard was on Recall - not SDA or
Theda.
Nevertheless, Recall blames Theda for its own failure to act.
Recall points to two monthly reports reflecting revenue trends
submitted by Theda during the Earnout period. In both, the
acquisition revenues are identified as such and placed under a
heading separate from other SDA accounts. (J.A. at 854-55.) Recall
contends there is nothing expressly stating that Theda considered
these acquisition revenues as SDA’s “Sales Revenues” for purposes
of calculating her Earnout payment. Thus, according to Recall,
there was nothing for Recall to object to. Recall’s argument is
19
specious. The inclusion of these revenues in the report purporting
to represent SDA’s monthly “revenue trends,” and the fact that the
acquisition revenue figures are included in SDA’s monthly revenue
totals, at least put Recall on inquiry notice. Recall took no
action. Furthermore, the language of §1.4(g) makes clear that the
mandatory report from Recall is not contingent upon receipt of any
monthly report from Theda or SDA. Rather, the 20-day notice and
report requirement incumbent upon Recall is triggered by “the end
of each calendar month.” In light of Recall’s failure to inquire
or contest SDA’s monthly revenue totals in any way, its protest in
this regard is unavailing. The district court’s reliance on estoppel
and waiver principles was appropriate and supports its ruling on
this issue.
C. The District Court Erred In Construing The SPA To Credit
MobilShred Sales Revenues To SDA
Recall also contends that the district court erred in
concluding SDA was entitled to credit for MobilShred’s revenues
earned and billed (or generated) during the Earnout period. We
agree. The district court found that revenues resulting from
Recall’s acquisition of MobilShred, whose accounts were ultimately
assigned to SDS West for service, should have been included in SDA’s
aggregate sales revenues figure and the Earnout calculation. The
district court relied heavily on the good faith language within
§1.4(a) in support of this interpretation of the Agreement. The
20
trial judge found that Theda and Lupo were “principally responsible”
for the acquisition of Mobil Shred. (J.A. at 1123, ¶93) Despite
its own findings regarding the absence of bad faith on the part of
Recall, the trial judge was troubled by the fact that Recall
utilized Theda and Lupo to make the acquisition, which purportedly
eliminated potential SDA customers, and then assigned the contracts
to SDS West. (J.A. at 1123, ¶94) Although SDA did not actually
perform the document shredding services - said performance having
been previously equated by the lower court with the generation of
revenue - the district court found that good faith required Recall
to credit SDA with these revenues. (J.A. at 1123, ¶95)
This aspect of the district court’s ruling cannot be reconciled
with the rationale correctly employed to construe Section 1.4(e).
Even if we found that Theda and Lupo “earned” the revenues as a
result of their pre-acquisition contributions, SDA did not “bill”
any of the MobilShred revenues. The definition applied earlier
requires both - to earn and bill. Therefore, we cannot find that
SDA generated the MobilShred revenues. Further, the good faith
language within §1.4(a) should not be read effectively to impair the
SPA’s explicit definition of “Sales Revenues.” Hardee v. Hardee,
355 S.C. 382, 558 S.E. 2d 264, 267 (Ct. App.2001) (court should
employ a construction that gives effect “to the whole instrument and
each of its various parts and provisions”). Finally, we are unable
21
to find any other language within the SPA to support the lower
court’s finding on this issue.
D. Recall’s Counterclaim Is Not Subject To The 18-Month
Limitations Period Within §8.1 Of The SPA Applicable To
Representations Or Warranties Prior To Closing
Recall also challenges the district court’s legal conclusion
that its counterclaim was barred by Section 8.1 of the SPA. We
agree with Recall on this issue.
As already noted, Bank of America was one of SDA’s largest
customers when Recall purchased SDA. After the Earnout period,
Recall discovered that SDA had been over-billing Bank of America.
Without any contractual authority, SDA began to use an average
weight (versus actual weight) of bins from the bank’s high rise
offices to determine the billing amount. The parties refer to this
as the “274 pound convention” or a “fixed weight billing practice.”
In September 2002, Bank of America learned of the mistake and
demanded repayment. Recall eventually paid Bank of America a sum of
approximately $1.5 million and negotiated a new contract.15 (J.A. at
819-24.)
15
The Vaughans question how much money was actually repaid to
Bank of America as a result of SDA’s actions. Recall admits that
even after learning of the over-billing, Recall continued to employ
the “274 pound convention.” The new contract with Bank of America
may also have some bearing on this issue in that Recall contends
that the renegotiated contract provided for “discounted” services
or a “preferential rate”(a value of $1.8 million) negotiated in
connection with the settlement between Recall and Bank of America.
22
Recall’s Amended Answer & Counterclaim originally alleged two
claims for relief complaining of SDA’s over-billing of Bank of
America - Fraudulent Inducement (Count I) and Breach of Stock
Purchase Agreement (Count II).16 However, Recall ultimately
abandoned its fraudulent inducement claim. Count II, labeled by
Recall as “The Breach of Stock Purchase Agreement” alleges that Bank
of America “rejected the invoices for the amounts that it was
overbilled” and “demanded repayment of those overbillings.” It
further alleges that Recall, as Counter-plaintiff, is “entitled
under the SPA to a refund of the earn-out amounts paid to Counter-
Defendants which were attributable to the overbillings to BoA.”
(J.A. at 32-3, ¶¶26-8)
The Vaughans do not dispute the fact that Recall incurred a
liability to Bank of America as a result of SDA’s prior practice.
It is also undisputed that Theda’s Earnout included Bank of America
16
The fraudulent inducement claim within Count I alleged that
SDA was intentionally manipulating the billing of its Bank of
America accounts to artificially inflate its sales figures; that
SDA’s 1999 financial statements reflecting the alleged inflated
sales figures constituted a misrepresentation; and that Recall
reasonably relied on SDA’s 1999 financial statements in agreeing to
the terms of the SPA. Recall’s appellate filings note its decision
not to pursue an action alleging that the Vaughans misrepresented
material facts or breached any warranties based on the over-billing
of Bank of America or any other pre Closing obligation. Recall’s
Post-Trial Proposed Findings Of Fact & Conclusions Of Law refers to
a single counterclaim based upon a breach of contract theory
limited to the post Closing conduct. (J.A. at 1102-03, ¶¶226-27)
23
sales revenues given the overlap between the contract terms and the
Earnout period.17
The district court rejected Recall’s contract theory, finding
that Section 1.4 of the Agreement created no contractual duty on the
part of the Vaughans. Instead, the district court characterized
Recall’s counterclaim as one for indemnification based upon an
alleged misrepresentation or breach of warranty prior to closing and
found that Recall did not provide timely notice of its claim under
Section 8.2 of the Agreement. (J.A. at 1127, ¶112) The district
court also found that any breach of warranty claim Recall could have
brought against the Vaughans was now time-barred as a result of the
18-month limitations period within Section 8.1 of the SPA. (J.A.
at 1125-27, ¶¶106-11) On appeal, Recall asserts, for the first
time, that its counterclaim alleging breach of contract should be
characterized as an action for “set-off,” or merely a defense to any
damages the Vaughans may be awarded.
Before addressing the merits of Recall’s claim, we first
determine whether it is properly before the Court. We have often
held that an issue raised for the first time on appeal ordinarily
will not be considered. See Muth v. United States, 1 F.3d 246, 250
(4th Cir.1993)(citing Nat’l Wildlife Fed. v. Hanson, 859 F.2d 313,
318 (4th Cir.1988); Stewart v. Hall, 770 F.2d 1267, 1271 (4th
17
SDA’s contract with Bank of America was effective July 1,
1999, through June 30, 2002. The Earnout period was from August 2,
2000, through August 1, 2001.
24
Cir.1985); Maynard v. General Elec. Co.,486 F.2d 538, 539 (4th
Cir.1973). Nonetheless, we have made exceptions to this rule and
recognized new arguments on appeal where the error is “plain” or
failure to do so otherwise would result in a miscarriage of justice.
Id. (citing Nat’l Wildlife, 859 F.2d at 318 (remanding to district
court for recalculation of attorneys’ fees under historic rather
than current rate)). Such is the case here. Because this action
seeks to ensure that the Earnout payment was calculated properly
under the terms of the Agreement, failure to consider Recall’s
counterclaim would constitute a miscarriage of justice.
Although Recall pled a breach of contract claim, we find
Recall’s pleading more akin to an action for equitable recoupment.
“Recoupment is the right of the defendant to have the plaintiff’s
monetary claim reduced by reason of some claim the defendant has
against the plaintiff arising out of the very contract giving rise
to the plaintiff’s claim.” See FDIC v. Marine Midland Realty, Credit
Corp., 17 F.3d 715, 722 (4th Cir.1994)(the “doctrines of setoff and
recoupment are often confused”)(citing First Nat’l Bank of
Louisville v. Master Auto Serv. Corp.,693 F.2d 308, 310 n.1(4th
Cir.1982)); Tuloka Affiliates, Inc. v. Moore, 275 S.C. 199, 268
S.E.2d 293, 295 (1980)(noting that recoupment only reduces the
plaintiff’s claim and construing what appellant described as his
“second defense and counterclaim” as a recoupment defense)(citing
Mullins Hosp. v. Squires, 233 S.C. 186, 104 S.E.2d 161 (1958); See
25
generally, Para-Chem Southern, Inc. v. M. Lowenstein Corp., 715 F.2d
128, 131 (4th Cir.1983). In its counterclaim, Recall asks for “a
reduction in the amount of the Sales Revenues subject to the earn-
out and a corresponding reduction in the amount of the earn-out due
to Counter-defendants.” (J.A. at 33, ¶27)
Recall’s recoupment claim may also be considered a compulsory
counterclaim.18 Fraser v. Astra Steamship Corp., 18 F.R.D. 240,
241-42 (S.D. N.Y. 1955) (Under Rule 13 of the Federal Rules of Civil
Procedure, “a counterclaim now encompasses both set-off and
recoupment.”) A compulsory counterclaim “arises out of the
transaction or occurrence that is the subject of the opposing
party’s claim.” FED. R. CIV. P. 13(a); Painter v. Harvey, 863 F.2d
329, 332 (4th Cir.1988). The following four inquiries may be
relevant in determining whether a counterclaim is compulsory: 1)
whether the issues of fact and law raised in the claim and
counterclaim are largely the same; 2) whether res judicata would bar
a subsequent suit on the party’s counterclaim; 3) whether
substantially the same evidence supports or refutes the claim as
well as the counterclaim; and 4) whether there is any logical
relationship between the claim and counterclaim. Painter, 863 F.2d
18A compulsory counterclaim does not require an independent
basis for federal subject matter jurisdiction because the
counterclaim arises out of the original action, as to which subject
matter jurisdiction has already been established. See Fraser, 18
F.R.D. at 241-42 (“jurisdiction to entertain a permissive
counterclaim must be affirmatively alleged and proved”)(emphasis
added).
26
at 331 (indicating it is not necessary for all of the four inquiries
to be answered in the affirmative) (citing Sue & Sam Mfg. Co. v. B-
L-S Constr. Co., 538 F.2d 1048 (4th Cir.1976)). Here, accurate
calculation of the Earnout under the SPA is at the heart of the
Vaughans’ action as well as Recall’s counterclaim. Therefore, the
issues of fact and law are similar, the evidence will overlap, and
there is a logical relationship between the two actions. Applying
these criteria, we treat Recall’s counterclaim as compulsory.
Notwithstanding Recall’s inartful pleading, the objectives of Rule
13 are also best served by our entertaining Recall’s recoupment
defense. Painter, 863 F.2d at 332(noting the purposes of Rule
13(a), including “to prevent the relitigation of the same set of
facts” and to dispose of all the disputes between the parties in one
action). We now turn to the merits of Recall’s claim.
As an initial matter, the district court mischaracterized
Recall’s counterclaim as an action arising out of an alleged
misrepresentation or breach of warranty prior to closing. Indeed,
Appellees’ counsel conceded as much during oral argument. Section
8.1 of the Stock Purchase Agreement is entitled “Survival /
Indemnification,” and provides in part:
“[N]o party will have any liability (for indemnification
or otherwise) with respect to any representation or
warranty, or covenant or obligation to be performed and
complied with on or prior to the Closing, unless on or
before eighteen (18) months after the Closing the
complaining party notifies the other party in writing of
a claim specifying the factual basis of that claim in
reasonable detail. Notwithstanding the foregoing, (x)
27
the representations and warranties set forth at Sections
2.1, 2.2, 2.3, 2.4, 2.19, 3.1 and 3.2 [Representations
And Warranties Of Sellers] shall survive indefinitely
and (y) the representations and warranties at Section
2.17 [Employee Benefit Plans] and Section 2.21 [Taxes]
shall survive . . . until the 90th day after the
expiration of the applicable statute of limitations.
Notwithstanding anything in this Agreement to the
contrary, the limitations set forth in this Section 8.1
shall apply to any claims brought by Purchaser . . .
based on any fact or circumstance which is alleged to be
a breach of or inaccuracy in any representation or
warranty or a failure to perform a covenant or
obligation to be performed and complied with on or prior
to the Closing regardless of whether the claim is
brought pursuant to this agreement or otherwise and
regardless of the theory upon which the claim may be
based, whether contract, tort, warranty, strict
liability, Federal and State Securities Laws or any other
theory of liability.
(J.A. at 571-72; Pl.’s Exh. 1, §8.1) (emphasis added). Section 8.1,
which focuses entirely on 1) representations and warranties prior
to Closing, or 2) covenants or obligations to be performed and
complied with on or prior to Closing, does not control. Even if
Recall’s counterclaim were based upon a representation or warranty,
the conduct Recall complains of did not occur prior to Closing. In
fact, neither Recall nor Bank of America learned of SDA’s 274 pound
convention until well after the Closing.
The district court also erred in finding that Recall failed to
comply with the 20-day notice provision described in Section 1.4(g)
and the prescribed procedures for seeking indemnification contained
28
within Sections 8.2 and 8.4.19 The §1.4(g) notice could not bar
Recall’s counterclaim given that Recall couldn’t have possibly
challenged SDA’s sales figures for the Bank of America accounts
until after it discovered the over-billing.20 Similarly, because
Recall’s counterclaim is not properly construed as an
indemnification action within the purview of Section 8.1, Sections
8.2 and 8.4 do not apply.
Although the SPA does not expressly provide a defined remedy21,
the implicit mutual obligation to calculate the Earnout payments
accurately encompasses Recall’s right to contest the amount of
damages Theda is entitled to collect based upon inaccurate
calculations or “unearned” sales revenues arising from Bank of
America contracts. Recall contends that the over-billing resulted
19
Section 8.2 identifies the circumstances under which the
Purchaser (Recall) may be entitled to indemnification by the Seller
(Vaughans). Section 8.4 governs the notice of claims of
indemnification and requires that the party seeking indemnification
give timely notice of the dispute, tender the defense, and give
advance notice of any proposed settlement. The district court
found that Recall did not observe any of these requirements. (J.A.
at 1125-27, ¶¶112-13)
20
The district court recognized the problem with relying on
§1.4(g)but still found Recall’s notice untimely because Recall
failed to notify Theda of the potential claim until Fall of 2002
(more than 20 days past its discovery).
21
There is nothing within the language of the SPA expressly
providing for either of the remedies sought by the parties -
recalculation of the Earnout if 1) an error is made by Recall in
determining Theda’s Earnout; or 2) an error is discovered after a
customer has paid the invoice and corrected it beyond the one-year
Earnout period.
29
in payment of Earnout monies not actually “earned.” In addition to
Section 1.4(e)’s requirement that Sales Revenues be “earned and
billed” by SDA, Recall points to language within §1.4(e)(5), which
sets forth specifically how Bank of America accounts are to be
treated for purposes of determining Sales Revenues. Section
1.4(e)(5)provides that:
“No bill or invoice rejected by the customer shall
be considered “earned” or included in Sales Revenues for
purposes of this Section 1.4, except to the extent
subsequently paid by the customer.”
(J.A. at 548.) Here, the invoices were paid by Bank of America
prior to the discovery of the 274 pound convention. Recall posits
that had Bank of America known of the overcharge prior to the end
of the Earnout period, the bank would have rejected the charges and
not submitted payment. In any event, we find that SDA did not
actually earn the portion of Sales Revenues attributable to the
over-billing of Bank of America.
Recall’s counterclaim, an equitable recoupment action, will be
remanded to the district court for further proceedings consistent
with this opinion. In its ruling below, the district court noted
that it did not need to consider the defenses to Recall’s
counterclaim asserted by the Vaughans, namely, volunteer and
ratification. (J.A. at 1127, ¶113) For this reason, remand is
required to determine if these defenses preclude Recall’s recovery
and, if not, the extent to which Recall may be entitled to
recoupment.
30
V.
The district court noted that Recall conceded at trial it may
have inadvertently omitted from its Earnout calculation Sales
Revenues generated by SDA’s Texas facility in July 2001. (J.A. at
1124, ¶99) The district court stated that the July 2001 Sales
Revenues for SDA Texas were estimated at $25,000, and found that,
if included, the July 2001 Sales Revenues would increase the amount
due under the Earnout to approximately $7,070,191. Id. However, the
district court did not expressly address this adjustment to the
Earnout within its Conclusions Of Law. In addition, the Judgment
does not reflect the judge’s factual finding on this issue. (J.A.
at 1107.) Upon remand, the trial judge should consider this
omission in recalculating the Vaughans’ Earnout Payment.
VI.
For the reasons stated herein, we AFFIRM in part, REVERSE in
part, and REMAND to the district court for further proceedings
consistent with this opinion.
AFFIRMED IN PART,
REVERSED IN PART,
AND REMANDED
31