Two individuals formed a defense company. A few years later, in 2008, one of the individuals (the “seller”) decided to sell his interest in the company to his partner, making the buyer the sole owner. In conducting the sale, the parties signed four documents: the purchase agreement, a note, a pledge agreement, and an indemnity agreement for post-closing events (the “indemnity agreement”). The purchase agreement outlined a five-year plan in which the company would buy out the seller’s interest in equal payments. However, in 2011, the company had made enough advance payments to finalize the deal early. At that time, the parties executed the fifth and final document: the accord and satisfaction and general release. These contracts included indemnity clauses that seemed to protect the seller from responsibility (financial and legal) regarding company matters arising post-closing but held him 50% responsible for any issues that arose pre-closing. Twelve years after the sale, in 2020, the company paid the government upwards of $450,000, which it owed because of an audit completed by the government in 2014. The audit concerned the company's business between 2005 and 2008. As such, the buyer attempted to recover half the cost from the seller, arguing it was a pre-closing company matter. The seller sued, arguing he was indemnified from responsibility because the audit had been conducted in 2014, 3 years post-closing. The company counter-sued for breach of contract. The district court granted summary judgment in favor of the seller; this appeal followed.
In Rafuse v. Advanced Concepts & Technologies Int’l, L.L.C., No. 22-51126, 2024 WL 4284932, 2024 U.S. App. LEXIS 24374 (5th Cir. Sept. 25, 2024) (unpublished opinion), the United States Court of Appeals for the Fifth Circuit vacated the district court’s judgment that the seller owed no indemnity obligation to the company, finding that the contracts were ambiguous on their face, and as such, summary judgment could not be granted as a matter of law. Instead, because the contracts (specifically the indemnity clauses) could have been read in more than one way, the court reasoned that the case should proceed to trial where the fact finder could consider parol evidence to determine the parties’ intent. The accord and satisfaction and general release appeared to release the seller from any liability created in the original four documents (meaning the fact finder could read the document to release the seller from his pre-closing obligations). Still, the court explained that there was a “carve-out” provision in that same document that possibly could preserve liability for pre-closing issues. Because this clause was unclear, the court determined that, as a matter of law, the contract did not demonstrate the parties’ intentions regarding the seller’s pre-closing obligations, and summary judgment was improper. The court noted that the district court’s ultimate conclusion in its reading of the carve-out clause is not implausible; however, it clarified that it is an issue for the fact finder to determine with more evidence, not one for the court to determine as a matter of law.
By Maycee Redfearn: [email protected]
Edited By Kristin Meurer: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]