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denying plaintiff's request for declaration that it could offset tax indemnification payments owed defendant against post-closing adjustments that defendant owed to plaintiff where the sum of the post-closing adjustments was a matter of ongoing dispute
Summary of this case from Hack v. StangOpinion
14-cv-1561 (PKC)
05-15-2015
CYTEC INDUSTRIES, INC., Plaintiff, v. ALLNEX (LUXEMBOURG) & CY S.C.A., Defendant.
MEMORANDUM AND ORDER
Plaintiff Cytec Industries, Inc. ("Cytec") sold its coating resins business to the predecessor of defendant Allnex (Luxembourg) & Cy S.C.A. ("Allnex"). The parties have had a series of disagreements since the 2013 closing, including disputes over the final purchase price, environmental liabilities and workers' compensation claims. Cytec's Amended Complaint (the "Complaint") brings eight claims directed to these disputes. Allnex now moves to dismiss the Complaint pursuant to Rule 12(b)(6), Fed. R. Civ. P. The Court heard argument from the parties on May 6, 2015.
For the reasons explained, Allnex's motion is denied as to Count One through Count Seven, but granted as to Count Eight. BACKGROUND
I. The Parties.
The Complaint brings claims related to the October 8, 2012 Stock and Asset Purchase Agreement (the "Agreement") entered into by Cytec, AI Chem & Cy S.C.A. ("AI Chem") and non-party WP Invest GmbH. (Compl't ¶ 1.) After the transaction closed, AI Chem changed its corporate name, and is now known as Allnex. (Compl't ¶ 2.)
Cytec is a Delaware corporation with its principal place of business in New Jersey. (Compl't ¶ 24.) Allnex is organized under the laws of Luxembourg with its principal place of business in Luxembourg. (Compl't ¶ 25.) Subject matter jurisdiction is premised on diversity of citizenship. 28 U.S.C. § 1332(a). (Compl't ¶ 26.) The Agreement provides that any claims relating to the Agreement must be brought either in this District or in a New York state court sitting in Manhattan. (Compl't ¶ 27.) It is governed by New York law, and provides that the parties have "irrevocably" waived their right to trial by jury. (Agrmt. § 8.8(c).)
II. The Transaction and the Agreement.
In the Agreement, Allnex agreed to pay a base purchase price of $1.04 billion for Cytec's coating resins business (the "Business"). (Compl't ¶ 3.) As described in the Complaint, "[t]he Business supplies resins, additives, and specialty materials used for architectural, industrial, protective, and automotive applications." (Compl't ¶ 3.)
The Agreement set forth a series of representations and warranties by the parties. It also provided that, at closing, Allnex would pay an amount based on Cytec's good-faith estimate of the Business's net working capital, minus indebtedness and plus necessary operating cash. (Compl't ¶ 9.) The Agreement provided that if the parties could not reach an agreement on the final purchase price calculation, any unresolved adjustments would be decided by a CPA firm, acting as experts and not arbitrators. (Compl't ¶ 9.)
As characterized in the Complaint, "[t]he majority of the provisions in the Agreement consist of representations and warranties by the buyer or seller; covenants between the parties; and the provisions governing any breaches thereof." (Compl't ¶ 32.) Article VI of the Agreement contains a series of indemnification provisions, which constitute the exclusive remedy for any breaches of representations, warranties or covenants. (Compl't ¶ 36, 38.)
The transaction closed on April 3, 2013. (Compl't ¶ 31.) Prior to the closing, Cytec adjusted the purchase price downward by approximately $21 million, from a base price of $1.04 billion to $1.019 billion. (Compl't ¶ 44.) Since the closing, the parties have engaged in a series of disputes about their respective obligations under the Agreement. (Compl't ¶ 4.) According to the Complaint, Allnex "has not yet" paid the full purchase price. (Compl't ¶ 121.) The Complaint brings claims involving whether the Agreement transferred environmental liabilities to Allnex for a site in Kalamazoo, Michigan, and whether Allnex is responsible for outstanding workers' compensation claims. (Compl't ¶¶ 130-42.)
The So-Called Purchase Price Dispute.
Count One of the Complaint seeks a declaratory judgment that the parties' disputes are not "arbitrable" before an expert CPA firm selected by the parties. (Compl't ¶¶ 113-18.) Count Two seeks declaratory judgment resolving the disputes in Cytec's favor. (Compl't ¶¶ 119-23.) Count Three seeks damages in an amount of $36,676,279, the total it claims as so-called "Disputed Purchase Price Claims." (Compl't ¶¶ 124-25.)
Although Count One seeks declaratory judgment "that the unresolved items are not arbitrable," the Agreement provides that "any disagreements with respect to the proposed [post-closing] adjustments" is to be determined by a "CPA Firm . . . acting as experts and not as arbitrators . . . ." (Agrmn't § 1.6(c).) To the extent that the Complaint uses the language of arbitrability, the Court treats it as shorthand for the act of referring post-closing purchase price adjustments to an expert CPA Firm.
Sections 1.5 and 1.6 of the Agreement set forth the procedure for calculating and adjusting the base purchase price of the Business. (Compl't ¶ 40.) The Agreement provided that, at closing, the base purchase price would be subject to adjustment using three components: net working capital, necessary operating cash, and aggregate indebtedness. (Compl't ¶ 40.) Under section 1.5(b), Cytec was to provide Allnex, within five days of the transaction closing, a "Purchase Price Certificate" that contained Cytec's estimates of the Business's closing net working capital, necessary operating cash and aggregate indebtedness. (Compl't ¶ 44 & Ex. A § 1.5(b).) The Purchase Price Certificate provided by Cytec adjusted the purchase price downward, from $1.04 billion to $1.019 billion. (Compl't ¶ 44.) It estimated the Business's net working capital to be $198.8 million and its cash to be $12 million. (Compl't ¶ 51.) Both parties have since agreed that net working capital should be adjusted upward and cash should be adjusted downward, but they disagree as to the amount for each. (Compl't ¶ 51.)
Under section 1.6 of the Agreement, the price adjustment reflected in the Purchase Price Certificate may thereafter be revised, pursuant to a five-step process:
Step One: Within 90 days of the closing, Allnex was to prepare a "Closing Date Net Working Capital Statement." (Compl't ¶ 45 & Agrmt. § 1.6(a).) On July 2, 2013, Allnex submitted such a statement, which calculated final closing net capital of $204.3 million, actual cash of $3.8 million and actual indebtedness of $3.9 million. (Compl't ¶ 52 & Ex. C.)
Step Two: Cytec then had 60 days to review the "Closing Date Net Working Capital Statement" and determine whether it was prepared in accordance with section 1.6(a). (Compl't ¶ 46 & Agrmt. § 1.6(b).) Cytec was permitted to object if it concluded that Allnex did not accurately calculate these figures. (Id.) On August 30, 2013, Cytec objected to Allnex's calculations, and concluded that final closing net working capital totaled more than $240 million, actual cash to be $13.8 million (which Cytec later adjusted to $7.5 million) and actual indebtedness to total $3.9 million. (Compl't ¶ 53 & Ex. D.) According to Cytec's figures, Allnex underpaid Cytec by $36,676,279. (Compl't ¶ 53.)
Step Three: Allnex had 30 days to review Cytec's objections. (Compl't ¶ 47 & Agrmt. § 1.6(b).) On September 27, 2013, Allnex responded to Cytec's objection with revised calculations that set final closing net working capital value at $208.9 million, actual cash at $3.8 million and actual indebtedness at $3.9 million. (Compl't ¶ 54 & Ex. E.) According to Allnex's figures, Allnex underpaid Cytec by $1,896,438. (Compl't ¶ 54.)
Step Four: The Agreement required the parties to use "reasonable best efforts to resolve any disagreements with respect to the proposed adjustments set forth in Seller's Objection." (Compl't ¶ 48 & Agrmt. § 1.6(c).)
Step Five: If the parties could not resolve their remaining disagreements, they were required to refer the disputes over adjustments to an accounting firm. (Compl't ¶ 49 & Agrmt. § 1.6(c).) Allnex's motion turns in large part on the breadth of section 1.6(c) and whether it governs the dispute over the post-closing adjustments. Section 1.6(c) states in part: "If [Allnex] and [Cytec] are unable to resolve such disagreements within thirty (30) days following the completion of Buyer's review of Seller's Objection, they shall refer any remaining disagreements (the 'Unresolved Items') to the CPA Firm that, acting as experts and not as arbitrators, shall determine, on the basis set forth in and in accordance with Section 1.6(a), and only with respect to the Unresolved Items, whether and to what extent, if any, the Closing Date Net Working Capital Statement and the Final Closing Net Working Capital Value and/or Buyer's calculations of the Actual Cash Amount and/or the Actual Indebtedness Amount require or requires adjustment."
Allnex maintains that a CPA firm must decide the parties' differences, while Cytec alleges that the disputes arise under the Agreement's representations, warranties and covenants, and fall outside of the CPA provision that governs post-closing adjustments. The Complaint describes three areas of disagreement over the purchase price. (Compl't ¶¶ 55-86.) First, Cytec claims that in March 2013, prior to the then-scheduled March 31 closing date, it paid to vendors $33.7 million in accounts payable. (Compl't ¶ 56.) Cytec alleges that these payments were consistent with the Agreement's terms and Cytec's historic practices, and were justified based on the Business's operational needs. (Compl't ¶¶ 56-66.) According to Cytec, section 1.6(c) of the Agreement does not recognize this dispute as a matter to be determined by a CPA firm, and instead turns on whether Cytec has breached the Agreement's covenant to conduct business "in the ordinary course" set forth at section 4.3, and the exceptions thereto set forth at schedule 4.3. (Compl't ¶ 66 & Agrmt. § 4.3.) According to Cytec, the dispute over vendor payment turns entirely on compliance with the Agreement's representations, warranties and covenants, and is to be resolved under the indemnification provision rather than by a CPA firm. (Compl't ¶¶ 65-66.)
Second, the parties dispute the role of canceled Account Receivable Purchase Agreements ("ARPAs") between Cytec and Citibank, which Cytec claims has resulted in the underpayment of $11.7 million. (Compl't ¶¶ 67-76.) Under the ARPAs, Citigroup purchased certain accounts receivable regularly owed to Cytec by DuPont's performance coatings business. (Compl't ¶ 67.) Cytec received a discounted payment from Citibank at an earlier date than it was to have received payment from DuPont. (Compl't ¶ 67.) Citibank terminated the practice in January 2013, after DuPont announced the sale of its performance coatings business. (Compl't ¶ 68.) In its closing date net working capital statement of July 2, 2013, Allnex excluded $11.77 million in DuPont's accounts receivable from its net working capital, which Allnex claimed as a downward adjustment. (Compl't ¶¶ 69-70.) Allnex stated that Citigroup's decision to stop purchasing the DuPont receivables resulted in a permanent change to working capital, specifically as calculated in schedule A-3 to the Agreement. (Compl't ¶¶ 70, 72.) Allnex also has stated that Cytec failed to disclose this development during due diligence. (Compl't ¶ 73.) Cytec alleges that even if it had breached the Agreement, Allnex has not suffered any loss because it would still receive payment for these accounts receivable, but not on an accelerated and discounted basis. (Compl't ¶ 74.) Cytec claims that its disclosure of the ARPAs turns on section 2.17(a)(ii) and schedule 2.17(a)(ii) of the Agreement, which warrant that Cytec has provided a complete and correct list of contracts worth more than $1 million a year, and does not fall within the subject matter to be decided by the CPA firm. (Compl't ¶ 73.)
Third, according to the Complaint, the parties agreed during negotiations that, in calculating the purchase price, Allnex would pay up to $10 million for the value of cash deposited in Chinese bank accounts. (Compl't ¶ 77.) The Complaint alleges that this understanding was ratified at a meeting held on or around October 3, 2012, and was re-affirmed when the Agreement was signed. (Compl't ¶ 77.) Cytec alleges that the parties' mutual understanding was further reflected in the Agreement's definition of "Necessary Operating Cash," which is defined to mean, "Cash that is capable of being freely transferred among the Transferred Subsidiaries in an amount up to the dollar amount set forth next to such Transferred Subsidiary's name as set forth on schedule 4.21 in the aggregate not in excess of $20 million." (Compl't ¶ 78.) The Complaint alleges that, through "inadvertent error," schedule 4.21 was omitted from the final version of the Agreement. (Compl't ¶ 81.) Allnex's Closing Date Net Working Capital Statements omitted $3.7 million in Chinese cash that was held in an account owned by the Business. (Compl't ¶¶ 10, 84.) According to the Complaint, Allnex now disputes whether the $3.7 million in Chinese cash should be included in the calculations of "Necessary Operating Cash." (Compl't ¶¶ 84, 86.)
III. Tax Offsets.
In Count Eight, Cytec seeks a declaratory judgment that it may offset any tax-indemnification payments that it owes to Allnex against the amount that Allnex may owe to Cytec for post-closing adjustments. (Compl't ¶¶108-12, 143-47.) According to the Complaint, Allnex has sought tax indemnifications from Cytec in an amount totaling $23,271,334.82. (Compl't ¶ 108.) Cytec does not appear to dispute that it owes such an indemnification, although the parties differ on the precise amount. However, Cytec contends that because "Allnex presently owes Cytec $36,676,279," the "settled principles of recoupment and setoff" should "excuse[ ]" Cytec from making any tax indemnification payment. (Compl't ¶ 109.)
IV. Environmental Liabilities.
Count Five seeks a declaratory judgment that Allnex has assumed all environmental liabilities at the Kalamazoo, Michigan site. Section 1.3 of the Agreement provides that Allnex agreed to "discharge or perform when due all the Assumed Liabilities." (Compl't ¶ 90.) "Assumed Liabilities" is a defined term set forth in Annex I-5 of the Agreement. (Compl't ¶ 90.) It is defined in part as "all Liabilities . . . to the extent related to, or used or held in connection with, the Business as conducted at any time by [Cytec] and its Affiliates, including, for the avoidance of doubt, all such Liabilities to the extent relating to Environmental Laws with respect to any facilities located in the United States . . . ." (Compl't ¶ 90 & Agrmt. Annex I-5.) Allnex has maintained that Cytec is responsible for environmental liabilities at a Kalamazoo, Michigan facility, which have arisen pursuant to a consent order entered with the State of Michigan. Allnex has argued that this liability does not relate to the Business, and that Cytec is responsible for most liabilities associated with the site. (Compl't ¶ 90-92.)
V. Workers' Compensation.
Count Six asserts a breach of contract claim directed toward Allnex's workers' compensation obligations and Count Seven seeks declaratory judgment that Allnex must indemnify Cytec for all workers' compensation claims. In a letter dated April 7, 2014, Cytec demanded reimbursement from Allnex for workers' compensation claims totaling $179,596.98. (Compl't ¶ 101 & Ex. G.) Section 1.3 of the Agreement states that Allnex would "discharge or perform when due all the Assumed Liabilities," including "all Liabilities of [Cytec] to the extent related to, or used or held in connection with, the Business as conducted at any time by [Cytec]." (Compl't ¶ 100.) In a letter dated April 11, 2014, Allnex stated that it would not indemnify Cytec for workers' compensation claims, and stated that such liabilities were excluded under the Agreement. (Compl't ¶ 102 & Ex. H.) Allnex's letter observed that the Agreement's definition of "Excluded Liabilities" included liabilities associated with U.S. benefit plans and any other benefit and compensation plans associated with the Business. (Compl't ¶ 102 & Ex. H.) The Complaint asserts that Allnex has breached the Agreement, because workers' compensation liability does not arise from benefit or compensation plans, but from state law. (Compl't ¶¶ 103, 105.) RULE 12(b)(6) STANDARD.
To survive a motion to dismiss under Rule 12(b)(6), Fed. R. Civ. P., "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Legal conclusions are not entitled to the presumption of truth, and a court assessing the sufficiency of a complaint disregards them. Id. Instead, the Court must examine only the well-pleaded factual allegations, if any, "and then determine whether they plausibly give rise to an entitlement to relief." Id. at 679. "Dismissal is appropriate when 'it is clear from the face of the complaint, and matters of which the court may take judicial notice, that the plaintiff's claims are barred as a matter of law.'" Parkcentral Global Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198, 208-09 (2d Cir. 2014) (quoting Conopco, Inc. v. Roll Int'l, 231 F.3d 82, 86 (2d Cir. 2000)).
When reviewing a motion to dismiss pursuant to Rule 12(b)(6), a court may "consider 'any written instrument attached to [the complaint] as an exhibit or any statements or documents incorporated in it by reference . . . and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit.'" Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 100 (2d Cir. 2015) (quoting Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000)). However, "[i]f the court considers matters outside of the complaint, it must treat the motion as one for summary judgment and proceed under Fed. R .Civ. P. 56, giving the party opposing the motion notice, an opportunity to submit pertinent material and, if need be, conduct discovery." Ryder Energy Distrib. Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984). DISCUSSION
I. Allnex's Motion Is Denied as to the Purchase Price Claims.
A. The Parties Drafted a Narrow Dispute-Resolution Clause that Limits Accountants' Authority to Calculating Post-Closing Adjustments.
Under New York law, "[c]ourts will not rewrite contracts that have been negotiated between sophisticated, counseled commercial entities . . . ." Flag Wharf, Inc. v. Merrill Lynch Capital Corp., 40 A.D.3d 506, 507 (1st Dep't 2007). "Courts will give effect to the contract's language and the parties must live with the consequences of their agreement." Eujoy Realty Corp. v. Van Wagner Commc'ns, LLC, 22 N.Y.3d 413, 424 (2013). "'The best evidence of what parties to a written agreement intend is what they say in their writing.'" Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc., 117 A.D.3d 450, 450 (1st Dep't 2014) (quoting Slamow v. Del Col, 79 N.Y.2d 1016, 1018 (1992)). "A written contract 'will be read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose.' . . . The meaning of a writing may be distorted where undue force is given to single words or phrases." Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358 (2003) (quoting Empire Prop. Corp. v. Mfrs. Trust Co., 288 N.Y. 242, 248 (1942)).
Courts enforce arbitration and similar dispute-resolution clauses based on the parties' intent, as manifested in the language of the contract. See, e.g., McDonnell Douglas Finance Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825, 831 (2d Cir. 1988). Narrow clauses that are limited "to specific types of disputes" must be construed differently than broad arbitration clauses. Id. at 832. When a narrow provision is at issue, courts "must be careful to carry out the specific and limited intent of the parties." Id. "[I]f reviewing a narrow clause, the court must determine whether the dispute is over an issue that 'is on its face within the purview of the clause,' or over a collateral issue that is somehow connected to the main agreement that contains the arbitration clause." Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d Cir. 2001). "Where the arbitration clause is narrow, a collateral matter will generally be ruled beyond its purview." Id.; accord Zachariou v. Manios, 68 A.D.3d 539, 539-40 (1st Dep't 2009) ("When reviewing a narrow arbitration clause, the court must determine whether the subject of the parties' dispute is on its face within the purview of the clause or is a collateral matter connected to the main contract."); Eiseman Levine Lehrhaupt & Kakoyiannis, P.C. v. Torino Jewelers, Ltd., 44 A.D.3d 581, 583 (1st Dep't 2007) (same).
Here, the parties drafted a narrow clause that designates a CPA firm to "act[ ] as experts and not as arbitrators," and assigns the CPA firm authority to resolve "any remaining disagreements" at the conclusion of the five-step process for determining post-closing adjustments to purchase price. (Agrmt. § 1.6(c).) The CPA firm is to make its determinations pursuant to GAAP, and "only with respect to the Unresolved Items, whether and to what extent, if any, the Closing Date calculations of the Actual Cash Amount and/or the Actual Indebtedness Amount require or requires adjustment." (Agrmt. §§ 1.6(a), (c).)
The Agreement separately establishes an "exclusive" indemnification remedy for any breach of representation, warranty or covenant:
The rights and remedies of Buyer and Seller under . . . this Article VI are exclusive and in lieu of any and all other rights and remedies that Buyer and Seller may have after the Closing (under this Agreement or otherwise) against each other with respect to the transactions contemplated hereby for monetary relief with respect to (a) any breach of any representation or warranty or any failure to perform any covenant or agreement set forth in this Agreement, other than those which are intentional or willful and other than in respect of any common law fraud . . . .(Agrmt. § 6.8.) Article VI sets forth the parties' rights to receive indemnification for any loss caused by a breach of representation, warranty or covenant. As quoted in the Complaint:
Section 6.2 provides for indemnification by Cytec for any "Losses[ ] imposed on, sustained, incurred or suffered by . . . [Allnex] to the extent directly or indirectly relating to or arising out of: (i) [a]ny actual or alleged breach of any representation or warranty made by [Cytec] contained in this Agreement or . . . (ii) any breach of any covenant or agreement of [Cytec] contained in this Agreement." For breaches of warranties or representations, Cytec is only liable for "Losses [that] exceed an aggregate amount equal to $13,000,000 (the 'Deductible'), . . . up to an aggregate amount of Losses . . . equal to $104,000,000 (the 'Cap')."(Compl't ¶ 37 (quoting Agrmt. § 6.2(a).) Section 6.4(c) express recognizes that Allnex may seek indemnification for any loss caused by Cytec, and that no third-party claim is required to seek indemnification.
This same provision lists sections 1.10 and 4.5, along with Article VI, as "exclusive" remedies. (Agrmt. § 6.8.) Section 1.10 governs the assignability of assets and section 4.5 governs tax liabilities.
Cytec's quotation from section 6.2(a) omits language that appears to limit Allnex's indemnification remedy against Cytec to circumstances in which a third party has asserted claims against Allnex. However, sections 6.4(a) and 6.4(c) discuss the separate notice requirements when indemnification is sought due to a third-party claim, as opposed to indemnification that "does not involve a Third-Party Claim being asserted against or sought to be collected from such Indemnified Party . . . ." (Agrmt. § 6.4(c).) Allnex does not dispute that Article VI indemnification is the appropriate remedy for a breach of representation, warranty or covenant, but argues that the disputes here implicate post-closing adjustments to be decided by a CPA firm. (See Allnex Reply at 6 ("Allnex has never claimed that Cytec's non-purchase price adjustment claims should be determined by the CPA Firm; it has instead argued that those claims are subject to dismissal by this Court.").)
The decision of the New York Court of Appeals in Westmoreland is instructive in construing the CPA provision. In Westmoreland, the parties executed a stock purchase agreement, after which they offered competing calculations for the transaction's post-closing adjustments, specifically as related to interim financial statements that the seller represented as having been GAAP-compliant. 100 N.Y.2d at 354-56. The underlying agreement included a provision requiring that if the parties could not resolve their disagreements over post-closing adjustments, they would refer the disputes to an independent accountant. Id. at 356. Their agreement separately provided that if the seller breached its representations and warranties, the purchaser was entitled to indemnification, with indemnification-related disputes to be resolved through litigation. Id. at 356-57.
In the agreement, seller "specifically represented and warranted" that its interim financial statements complied with GAAP. Id. at 359. When the purchaser challenged the interim financial statements during the post-closing adjustment process, the seller refused to submit the dispute to the independent accountant, arguing that the issue fell under the representations and warranties and must be resolved through litigation. Id. at 355-56. The trial court and Appellate Division both concluded that the matter should be determined by an independent accountant, but the Court of Appeals reversed, concluding that the "indemnification provisions afford a complete, comprehensive remedy for any and all claims for breach of a representation or warranty." Id. at 359. "These sophisticated commercial parties surely could not have intended to consign a significant portion of the purchase price to ADR, and, in fact, they did not: [the purchaser's] objections related to noncompliance with GAAP are, in fact, claims for breach of a representation or warranty." Id. at 360.
As courts have noted, Westmoreland does "not prohibit sophisticated business parties from agreeing to varying means of resolving disputes over adjustments to purchase price." McGraw-Hill Cos. v. School Specialty, Inc., 42 A.D.3d 360, 361 (1st Dep't 2007); see also Severstal U.S. Holdings, LLC v. RG Steel, LLC, 865 F. Supp. 2d 430, 439-44 (S.D.N.Y. 2012) (disputes were to be decided by accountants because they were "a function of the agreed-upon calculation methodology," as opposed to compliance with contractual representations); E*Trade Fin. Corp. v. Deutsche Bank AG, 631 F. Supp. 2d 313, 378-79 (S.D.N.Y. 2009) (distinguishing breach of contract claims from "narrow disagreements over discrete accounting issues susceptible to resolution by an independent accounting authority."). The Agreement in this case, like the one in Westmoreland, has a narrow provision that requires an accountant to resolve disputes over post-closing adjustments to the purchase price, while also setting forth a separate remedy for breaches of representations, warranties and covenants.
In this case, Cytec plausibly alleges that the parties' disagreements go to the interpretation and enforcement of the Agreement, including its representations, warranties and covenants, and do not fall within the narrow accounting provision that governs post-closing adjustments. The Court reviews each area of dispute.
1. Cytec's Payment to Vendors.
The Complaint alleges that the dispute concerning Cytec's payment to vendors of $33.7 million arises under a covenant set forth at section 4.3 of the Agreement, which provides that Cytec would "conduct[ ] the business in the ordinary course" during the period prior to the transaction's closing. It alleges that Allnex has implicitly acknowledged that this dispute arises under the Agreement because, in a letter to Cytec of July 2, 2013, it asserted that Cytec had "fail[ed] to settle accounts payable in the ordinary course of business consistent with past practices . . . ." (Compl't ¶ 58 & Ex. C.) Cytec acknowledges that it paid $33.7 million in accounts payable prior to the effective closing date of March 31, 2013, even though the amounts did not become due until after March 31. (Compl't ¶ 56-57.) According to Cytec, these early payments had the effect of increasing the Business's net working capital because they decreased trade payables, which are liabilities. (Compl't ¶ 57.)
Cytec also alleges that schedule 4.3 to the Agreement, which lists "Exceptions to Conduct in Ordinary Course," permits the vendor payments. (Compl't ¶ 57.) Schedule 4.3 provides as one such exception "[a]ny actions by [Cytec] taken in order to reduce operating cash of the Business below $10,000,000 in the aggregate, exclusive of any cash in China." (Compl't ¶ 61 & Agrmt. Sched. 4.3.) According to the Complaint, "[b]ecause Cytec's early payments were designed to (and had the effect of) reducing cash below the $10 million cap, they are expressly permitted under the Agreement." (Compl't ¶ 61.)
Additionally, Cytec alleges that the early payments to vendors were consistent with its historic practices. (Compl't ¶ 62.) It states that it has had a practice of paying vendors "prior to the final date on which invoices are due, particularly towards the end of a quarter and before holidays, to avoid delays." (Compl't ¶ 62.)
The Complaint plausibly alleges that the vendor dispute arises under the Agreement's representations and warranties, and does not require resolution by an accountant. To determine Cytec's obligations to Allnex, a court must determine whether Cytec's payments to vendors was permissible in the ordinary course, and therefore consistent with the Agreement's representation and warranty. A court also must consider the payments in light of the provision at schedule 4.3 that Cytec was to take action in order to reduce the Business's operating cash below $10,000,000. Such issues fall squarely within the contract, and not the accounting provision. See, e.g., Zachariou, 68 A.D.3d at 539-40.
2. The Termination of the Citibank Arrangement.
Allnex has excluded $11.77 million from its calculation of net working capital based on Citibank's termination of the ARPAs. (Compl't ¶ 69.) Cytec contends that the exclusion turns on section 2.17(a)(ii) and schedule 2.17(a) of the Agreement, and that the dispute must be determined by a court and not an accountant. (Compl't ¶ 73.) Section 2.17(a)(ii) provides that schedule 2.17(a) contains a "complete and correct list" of each contract involving an "aggregate consideration (whether in cash or in the value of goods and/or services) to be paid or received by [Cytec] . . . in excess of $1,000,000 per year." (Compl't ¶ 73.)
According to the Complaint, Allnex's "sole justification" for excluding the $11.77 million is that "consistent with [Cytec's] due diligence report to [Allnex]," Citibank's termination of the arrangement "resulted in a permanent change to working capital that is not accounted for in either the Base Net Working Capital Value or the illustrative working capital statement in Schedule A-3." (Compl't ¶ 70.) Cytec acknowledges that the accounts receivable figure at closing varied from that set forth in schedule A-3, but states that in the Agreement, the schedule "was expressly stated to be merely an 'illustrative example of the net working capital statement' that was based on 'hypothetical' numbers." (Compl't ¶ 72 (quoting definition of "Closing Date Net Working Capital Statement" at Agrmt. Annex I-7).)
This dispute centers upon whether Cytec's due diligence report to Allnex complied with the representation and warranty at section 2.17(a)(ii), which, in turn, formed the basis of the information reflected in the "hypothetical" numbers of the "illustrative example of net working capital" at schedule A-3. (Compl't Ex. C & Agrmt. Annex I-7.) It cannot be decided without determining Cytec's obligations under section 2.17, and the consequence, if any, of this alleged breach on the figures set forth in schedule A-3. Cytec also has plausibly alleged that schedule A-3 provides only a model for determining the calculations for net working capital, and not an actual calculation of net working capital.
Because this dispute turns on an alleged breach of section 2.17(a)(ii) and the weight to be afforded to schedule A-3, it raises issues of contract interpretation and enforcement beyond the CPA dispute-resolution clause.
3. Chinese Cash and the Omitted Schedule.
As to the dispute concerning the $3.7 million in Chinese Cash, Cytec claims that the parties inadvertently omitted schedule 4.21, in which Allnex agreed to pay Cytec up to $10 million for any cash located in Chinese bank accounts. (Compl't ¶¶ 77, 81.) Cytec alleges that this understanding was reflected in drafts exchanged between the parties, and that Allnex has admitted in a meeting that the omission of schedule 4.21 was an oversight. (Compl't ¶¶ 79, 83.) The Complaint alleges that prior to the Agreement's execution, Allnex never indicated that it would refuse to pay up to $10 million for the Chinese cash. (Compl't ¶ 82.) At argument, counsel to Allnex stated that he expected any CPA firm reviewing the post-closing adjustments to do so without considering whether the omission was a product of mutual mistake that required reformation of the contract. (May 6 Tr. at 5.)
According to the Complaint, Chinese cash was treated differently than cash in other locations because of the lengthier government approvals to transmit cash outside of China. (Compl't ¶ 80.) --------
The parties' disputes concerning the value of Chinese cash and the claimed omission of schedule 4.21 appear to turn on principles of law governing the reformation of a contract based on mutual mistake, and do not fall within the CPA dispute-resolution clause. A court must determine the intent of the parties and whether the schedule's omission was a product of mutual mistake. See, e.g., Friedland Realty, Inc. v. 416 W, LLC, 120 A.D.3d 1185, 1186-87 (2d Dep't 2014). Cytec has plausibly alleged that the parties' dispute over Chinese cash does not fall within section 1.6(c), and instead is "connected to the main contract." See, e.g., Zachariou, 68 A.D.3d at 539-40.
B. Allnex's Motion Relies on Materials Outside of the Pleadings.
Allnex's motion is denied to the extent that it relies on materials outside the four corners of the pleadings and the documents integral thereto. Though not explicitly labeled as such, Allnex relies heavily on an estoppel-type argument based on Cytec's conduct after the transaction closed. It argues that Cytec followed the five-step procedures set forth in section 1.6, including discussions of retaining a CPA firm to resolve the disputes. Allnex submits the declaration of Duncan Taylor, Allnex's CFO. Taylor's declaration annexes e-mails between Cytec and Allnex with the subject line "PP adjustment // choice of independent expert." (Taylor Dec. Ex. 1.) The e-mails discuss which CPA firms the parties might retain to resolve the disputes. (Id.) The Taylor Declaration also annexes draft engagement letters from BDO USA LLP and Grant Thornton UK LLP, which were sent to e-mail addresses that appear to belong to employees of both Cytec and Allnex. (Taylor Dec. Exs. 2-3.)
According to Allnex, these submissions establish that "Cytec voluntarily participated in negotiations with Allnex to select an appropriate independent CPA Firm to resolve the parties' post-closing purchase price adjustment disputes." (Def. Mem. at 9; emphasis in original.) Allnex argues that Cytec "willingly participated" in the section 1.6 process and "voluntarily engaged in the search for a CPA Firm," until it abruptly asserted that the parties' differences implicated the breach of representations, warranties and covenants rather than accounting-based determinations. (Def. Reply at 3, 4; emphasis in original.)
It would be inappropriate for the Court to consider this evidence, which is not integral to the Complaint's allegations, or annexed thereto, on a Rule 12(b)(6) motion. See Ryder Energy, 748 F.2d at 779. At the motion to dismiss stage, the Court cannot weigh the relevance of these communications, and it declines to convert this motion to dismiss into a motion for summary judgment.
II. Allnex's Motion to Dismiss Cytec's Claim for Breach of the Covenant of Good Faith and Fair Dealing Is Denied.
Count Four alleges that Allnex breached the Agreement's implied covenant of good faith and fair dealing. It contends that Allnex acted in bad faith by preparing statements that "artificially minimize[d] the amount of net working capital and Cash in the Business . . . ." (Compl't ¶¶ 126-29.) Cytec specifically cites Allnex's refusal to remit payment for the Chinese cash, and for "reneging" on the parties' agreements regarding environmental liabilities and workers' compensation claims. (Compl't ¶¶ 127-28.)
"For a complaint to state a cause of action alleging breach of an implied covenant of good faith and fair dealing, the plaintiff must allege facts which tend to show that the defendant sought to prevent performance of the contract or to withhold its benefits from the plaintiff." Aventine Inv. Mgt. v. Canadian Imperial Bank of Commerce, 265 A.D.2d 513, 514 (2d Dep't 1999). Allnex argues that the claim is "duplicative of Cytec's claims under the [Agreement]," and also should be dismissed because a claim for breach of the implied covenant "may not be used as a substitute for a nonviable claim of breach of contract." Sheth v. New York Life Ins. Co., 273 A.D.2d 72, 73 (1st Dep't 2000).
At the motion to dismiss stage, the Complaint plausibly alleges facts "which tend to show" that Allnex "sought . . . to withhold" benefits under the Agreement. Aventine, 265 A.D.2d at 514. Among other things, it has plausibly alleged that Allnex withheld payment for Chinese cash based on the omission of the agreed-upon terms of schedule 4.21. (Compl't ¶ 127.) To the extent that Allnex argues that the claims is duplicative of other, non-viable claims arising from the Agreement, because the Court concludes that the Complaint has alleged those claims consistent with Twombly and Iqbal, the motion is denied.
III. Allnex's Motion Is Granted as to Cytec's Tax Offset Claim.
Count Eight seeks a declaratory judgment that Cytec is permitted to offset $23,271,334.82 that it owes to Allnex for tax indemnification payments against the alleged $36,676,279 that Allnex allegedly owes Cytec in post-closing adjustments. (Compl't ¶¶ 108-12, 143-47.) The parties' tax-related obligations are set forth in section 4.5 of the Agreement. Section 4.5(g) states in part:
Any amount properly due under this Section 4.5 shall be paid, as applicable, within ten (10) Business Days after the indemnified party makes written demand on the indemnifying party . . . . [A]ny payment by Buyer or Seller under this Section 4.5 and all payments made by an Indemnifying Party to an Indemnified Party pursuant to Article VI shall be treated by Buyer and Seller as an adjustment to the Purchase Price and allocated according to Section 1.2.The Agreement also states that "the obligations of the parties set forth in this Section 4.5 shall be unconditional and absolute . . . ." (Agrmt. § 4.5(m).)
"The common law doctrine of setoff 'allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A.'" Cohen v. Elephant Wireless, Inc., 2004 WL 1872421, at *3 (S.D.N.Y. Aug. 19, 2004) (Motley, J.) (quoting In re Malinowski, 156 F.3d 131 (2d Cir. 1998)). Under New York law, "'there is no right to set off a possible, unliquidated liability against a liquidated claim that is due and payable.'" Willett v. Lincolnshire Mgmt., Inc., 302 A.D.2d 271, 271 (1st Dep't 2003) (quoting Spodek v. Park Prop. Dev. Assocs., 263 A.D.2d 478, 478-79 (2d Dep't 1999)); accord New Haven Props. Ltd. v. Grinberg, 293 A.D.2d 386, 387 (1st Dep't 2002) ("defendants cannot offset the subject liquidated, past due liability against the disputed, unliquidated liability it claims against plaintiff's customer.").
Cytec's claim that it is owed more than $36 million in post-closing adjustments is currently contingent and hypothetical. Cytec also appears to dispute the precise amount in tax indemnification that it owes to Allnex. (See Opp. Mem. at 24 & n. 20.) At this point in time, a claim for declaratory judgment directed toward the use of offsets would be based "upon a hypothetical state of facts," and is not a "real and substantial" controversy that can be resolved "through a decree of a conclusive character . . . ." MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007).
Cytec argues that the offset is proper because the amount of claimed underpayment by Allnex is liquidated in the sense that it is readily ascertainable, even if disputed. (Pl. Mem. at 24 (citing In re Mazzeo, 131 F.3d 295, 305 (2d Cir. 1997) (interpreting Chapter 13 of the Bankruptcy Code).) Courts have declined to permit offsets directed toward damages in a pending litigation, however. In Correspondent Services Corp. v. J.V.W. Investment Ltd., 524 F. Supp.2d 412, 424-25 (S.D.N.Y. 2007), Judge Sweet concluded that a party "has no right to 'set-off' its pending disputed and unliquidated claim" against an adversary's "present entitlement to damages." Accord Dunn v. Uvalde Asphalt Paving Co., 175 N.Y. 214, 219 (1903) ("[T]here can be no such thing as a right to 'set off' a possible but unestablished liability unliquidated in amount, against a liquidated legal claim that is due and payable. This is as obviously impracticable in equity as in law."); Maglich v. Saxe, Bacon & Bolan, P.C., 97 A.D.2d 19, 23-24 (1st Dep't 1983) (law firm could not seek offsets for disputed legal bills); Diamond Servs. Mgmt., LLC v. Fable Jewelry Co., 2012 WL 5871616, at *5 (S.D.N.Y. Nov. 20, 2012) ("unliquidated and disputed" claims "cannot as a matter of law set off [plaintiff's] liquidated contract claim."); Ferguson v. Lion Holdings, Inc., 312 F. Supp. 2d 484, 505 (S.D.N.Y. 2004) ("Obligations . . . must be due for setoff to apply. Here, no payments for indemnity to defendants are due from plaintiffs.").
Cytec's affirmative claims asserted in the Complaint may be liquidated in the sense that they are calculable, but they are vigorously dispute. Cytec, therefore, is not entitled to offset the tax indemnifications that it undisputedly owes Allnex. Count Eight is therefore dismissed.
IV. The Complaint Plausibly Alleges a Declaratory Judgment Claim Directed to Environmental Liabilities at the Kalamazoo, Michigan Site.
Count Five seeks declaratory judgment "that Allnex is responsible for all environmental liabilities at the Kalamazoo, Michigan site as Assumed Liabilities under the Agreement." (Compl't ¶ 134.) Allnex argues that this claim is not yet ripe for adjudication under the Declaratory Judgment Act, 28 U.S.C. § 2201, and that, in any event, Cytec's claim is not supported by the Agreement.
"The Declaratory Judgment Act confers on federal courts 'unique and substantial discretion in deciding whether to declare the rights of litigants.'" Peconic Baykeeper, Inc. v. Suffolk County, 600 F.3d 180, 187 (2d Cir. 2010) (quoting Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995)). To qualify as "a case of actual controversy" under the Declaratory Judgment Act, the Supreme Court has "required that the dispute be 'definite and concrete, touching the legal relations of parties having adverse legal interests'; that it be 'real and substantial' and 'admi[t] of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.'" MedImmune, 549 U.S. at 127 (quoting Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240-41 (1937)). There must be "'a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.'" Id. (quoting Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (2d Cir. 1941)). The grant of declaratory relief by a district court is discretionary and, "[i]n order to decide whether to entertain an action for declaratory judgment," the Court asks two questions: "(1) whether the judgment will serve a useful purpose in clarifying or settling the legal issues involved; and (2) whether a judgment would finalize the controversy and offer relief from uncertainty." Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384, 389 (2d Cir. 2005).
First, Allnex argues that Cytec's claim is not yet ripe for adjudication. But according to the Complaint, Allnex has "disclaimed any responsibilities for remediation" of certain units at the Kalamazoo site, and "demanded that Cytec assume responsibility" for the costs of implementing a consent order reached with state regulators. (Compl't ¶ 91.) The Complaint attaches, at Exhibit F, a March 26, 2014 letter from Allnex's counsel to Cytec. In it, Allnex asserts that it is partially responsible for remediation expenses at two of fourteen waste management units at the Kalamazoo site, and that Cytec alone is responsible for the other twelve. (Compl't Ex. F.) The letter states in part:
Until the parties and the [Michigan Department of Environmental Quality] formally agree on the same allocation of responsibilities under the Consent Order Allnex reserves all rights with regard to those costs going forward. Regardless of whether Allnex will continue to carry the costs related to all [waste management units] for a limited period of time in the near future: (1) Allnex will seek reimbursement for all costs incurred related to the WMUs that are Cytec's responsibility and (2) Cytec will need to engage its own consultant.(Compl't Ex. F at 2.) Allnex argues that this letter did not make any demands upon Cytec, and that its reservation of rights shows that any such demands would "be contingent on a future allocation of responsibilities . . . ." (Def. Mem. at 20.) However, the letter states that "Allnex will seek reimbursement for all costs incurred related to the [waste management units] that are Cytec's responsibility . . . ." (Compl't Ex. F at 2.) Elsewhere, the letter demanded that Cytec take title to a portion of the site, and pursue a revised consent decree with Michigan authorities to limit Allnex's responsibility over the site. (Compl't Ex. F at 2.)
Based on the Complaint's allegations and the contents of Exhibit F, this Court concludes that the Complaint has plausibly alleged "a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." MedImmune, 529 U.S. at 127 (quotation marks omitted). It also concludes that declaratory judgment will clarify or settle the legal issues involved, and offer relief from uncertainty. Duane Reade, Inc., 411 F.3d at 389.
Separately, to the extent that Allnex argues that this claim is contrary to the terms of the Agreement, the motion is denied. Annex I-5 of the Agreement defines the phrase "Assumed Liabilities," and provides that Allnex will assume "all such Liabilities to the extent relating to Environmental Laws with respect to any facilities located in the United States," with the exception of certain excluded facilities not including the Kalamazoo site. The same provision also states that Allnex assume "Liabilities . . . to the extent related to, or used or held in connection with, the Business . . . ." (Agrmt. Annex I-5.) Allnex argues that the Agreement recognizes that Cytec's operations may have included commercial activities not related to the business, and contends that the disputed liabilities at the Kalamazoo site are unrelated to the Business. (Def. Mem. at 21-22.) It appears that Allnex is correct that the Agreement limits its responsibility to liabilities "related to, or used or held in connection with, the Business . . . ." (Agrmt. Annex I-5.) However, the Court is unable to determine, at the Rule 12(b)(6) stage, which portions of the disputed liabilities at the Kalamazoo site are so related.
Count Five plausibly alleges a declaratory judgment claim directed to the Kalamazoo site, and Allnex's motion is denied.
V. Allnex's Motion to Dismiss Cytec's Workers' Compensation-Related Claims Is Denied.
Count Six of the Complaint asserts a breach of contract claim directed to Allnex's alleged refusal to indemnify Cytec for workers' compensation claims, and Count Seven seeks a declaratory judgment that Allnex must indemnify Cytec for all such claims. Allnex moves to dismiss these claims, arguing that under the Agreement's definition of "Excluded Liabilities," the parties agreed that Allnex was not responsible for "Liabilities associated with the U.S. Benefit Plans and any other benefit and compensation plans, contracts, policies, agreements or arrangements benefiting current or former employees or directors associated with the Business as conducted at any time by Seller and its Affiliates." (Agrmt. Annex I-9.) Allnex argues that Cytec fails to state a claim because the Agreement expressly excludes liability for benefits and compensation associated with the Business, which, Allnex argues, includes workers' compensation. (Def. Mem. at 22-23.)
Allnex's motion is denied. Workers' compensation claims do not appear to fall within the definition of "U.S. Benefit Plans and any other benefit and compensation plans . . . ." (Agrmt. Annex I-9.) The Agreement sets forth the parties' obligations concerning "Employee Benefits," including "U.S. Benefit Plans." (Agrmt. § 2.15.) It defines U.S. Benefit Plans to include "deferred compensation, stock option, stock purchase, stock appreciation rights, stock-based, incentive and bonus plans . . . ." (Agrmt. § 2.15(e)(i).) This definition does not appear to encompass workers' compensation claims, which establish remedies for injured workers pursuant to state-law regimes. See, e.g., N.Y. Workers' Compensation L. § 11. Moreover, Allnex also has not offered definitional support that would place workers' compensation claims within the "compensation plans, contracts, policies, agreements or arrangements" that are listed as "Excluded Liabilities." (Agrmt. Annex I-9.)
Allnex's motion is therefore denied as to Cytec's claims related to workers' compensation liability. CONCLUSION
For the foregoing reasons, the motion to dismiss is DENIED as to Counts One through Seven, but GRANTED as to Count Eight. The Clerk is directed to terminate the motion. (Docket # 24.)
SO ORDERED.
/s/_________
P. Kevin Castel
United States District Judge
Dated: New York, New York
May 15, 2015