Virginia Lawyers Weekly//August 30, 2021
Virginia Lawyers Weekly//August 30, 2021//
Where a buyer paid the seller an estimated amount of the seller’s tax liability arising from the sale, and the contract provided that either party would pay the other the difference between the estimate and the actual tax liability as applicable, the sellers cannot sue for breach of contract when the buy refused to pay an additional amount.
Defendant Perspecta entered an equity purchase agreement to acquire membership interests in Knight Point Systems. Eisiminger represents multiple sellers in the transaction. “[B]oth parties agreed that Perspecta would take a tax election … resulting in a multi-million dollar benefit for Perspecta and a large income tax liability for the Sellers.”
The contract provided that the sellers’ increased tax liability would be offset by adjusting Perspecta’s purchase price. Because some financial data was not available at closing, Perspecta paid the sellers $4.2 million, the estimated amount of their tax liability, the day after closing.
Later, the sellers calculated the remaining liability was $3 million. Perspecta refused to pay. The sellers, through their representative, Eisiminger, sued for breach of contract, seeking the $3 million, costs, fees, expenses and interest.
“Perspecta demurs to Mr. Eisiminger’s breach of contract claim and requests that this Court dismiss the case. Specifically, defendant alleges that the cause of action fails because the plaintiff has not alleged the satisfaction of a condition precedent, viz., actual payment of the tax liability.”
“‘A condition precedent calls for the performance of some act or the happening of some event after the terms of the contract have been agreed upon, before the contract shall take effect; that is to say, the contract is made in form, but does not become operative as a contract until some future specified act is performed, or some subsequent event occurs.’ …
“Virginia law interprets conditions precedent through the ‘plain meaning of the language the parties used in the documents.’”
No condition precedent
“Perspecta avers the Agreement contains a specific condition precedent in § 10.7(b) of the Agreement ‘that the Sellers incur income taxes after closing that would be reconciled against an amount estimated by the parties in the Agreement.’ … The relevant portion of § 10.7(b) follows:
“‘Within ten (10) calendar days after the Parties have agreed to the Final Incremental Section 338 Liability (or such amount has been determined in accordance with the procedures outlined below), Buyer shall pay to the Sellers, or the Sellers shall pay to Buyer, as applicable, the difference between (i) the amount of the Incremental Section 338 Liability based upon the final Allocations … and (ii) the estimated amount previously paid to the Sellers by Buyer[.]’ … pursuant to this Section 10.7(b) and Section 1.2(c)(vi)…
“Here, based on a ‘plain reading’ of the language, there is no phrase in this section where an action is dependent upon the satisfaction of an event. It does not … ‘call for the performance of some act or the happening of some event … before the contract shall take effect.’ …
“The section merely states that after a period of ten days, either party shall pay the other party the difference between the Final and Incremental Section 338 Liabilities. Neither does the section include any language typical of a condition precedent; this section directs, rather than conditions, the payment of the difference of the Final and Incremental Section 338 Liabilities.
“Clearly, the contract makes no mention of actually paying the tax liability, only calculating the tax liability. …
“[T]his Court does not see the plain language in § 10.7(b) that is consistent with a condition precedent. If Perspecta wanted such a provision, it should have worked with the Sellers to insert the requisite language during negotiations.
“Additionally, considering the exhaustive detail that is already included in this contract, the absence of the alleged condition precedent in the contract appears to have been intentional.
“This Court is not inclined to infer that a condition precedent exists from language that clearly does not specify the existence of such a provision.
“Additionally, given that the asserted condition precedent is not in the contract, recognizing such a provision through inference would be an inappropriate case of the Court rewriting a contract between parties. Therefore, the demurrer is overruled.”
“Perspecta also seeks to dismiss this action based on the standing of the parties. Perspecta asserts that Mr. Eisiminger does not have the capacity to represent the Sellers since he has no ‘property interest’ through which he could assert his rights.
“Perspecta also states that the matter is not ripe before this court given the fact that the Sellers have not been joined in this action; as the Sellers as indispensable parties, the Court must otherwise dismiss the case. …
“Mr. Eisiminger claims that his rights will be affected since he is one of the Sellers in this transaction. … Mr. Eisiminger’s individual rights, therefore, would be affected by the outcome of the proceedings and he has a justiciable interest.” Further the parties’ agreement gives him the right to litigate on the other sellers behalf.
“Perspecta is correct, however, that the Sellers must be joined in this matter given that they are ‘necessary parties’ to the action. … Plaintiff represents a party of sellers from an LLC. While it may be true that other states permit a representative to commence legal action on behalf of sellers in a securities matter, there is no identical Virginia precedent. Therefore, the Sellers are necessary parties who must be joined. …
“[T]he demurrer is overruled. The motion to dismiss is denied, and parties are granted leave to amend in order to join necessary parties.”
Re: Robert Eisiminger, Seller’s Representative v. Perspecta, Inc., Case No. CL 2021-3525, July 21, 2021, Fairfax County Circuit Court (Smith). Matthew J. MacLean, Michael A. Warley, Attison L. Barnes, Rebecca Sattia, Stacey La Riviere for the parties. VLW 021-8-094, 7 pp.