alliance Industries, Inc. v. Longyear Holding, Inc.

Filing 127

DECISION AND ORDER ADOPTING in part and SETTING ASIDE in part Judge Scott's 112 Report and Recommendation; GRANTING Defendant's 95 Motion for Summary Judgment with respect to its first, fourth, and tenth counterclaims and with respect t o each of Plaintiff's claims and DENYING it in all other respects; DENYING as moot Plaintiff's 84 Motion for Summary Judgment; DENYING Plaintiff's 88 Amended Motion for Summary Judgment with respect to its claims and GRANTING it wi th respect to Defendant's counterclaims except for Defendant's first, second, fourth, and sixth counterclaims, which are DENIED; SETTING a schedule for Defendant's motion detailing its requested fees, with accompanying memorandum if necessary, if it chooses to so file; Motion is due by 4/23/2012; Plaintiff's response is due 5/10/2012; Defendant's reply is due 5/21/2012. Signed by William M. Skretny, Chief Judge U.S.D.C. on 2/26/2012. (MEAL)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
ALLIANCE INDUSTRIES, INC.,

Plaintiff / Counter-Defendant,
v.

DECISION AND ORDER
08-CV-490S

LONGYEAR HOLDINGS, INC.,
Defendant / Counter-Plaintiff

I. INTRODUCTION
Plaintiff, Alliance Industries, Inc. (“Alliance”) commenced this diversity action on July
2, 2008 alleging, inter alia, that Defendant Longyear Holdings, Inc., (“Longyear”) unlawfully
withheld funds from an escrow account pursuant to the sale of Alliance’s subsidiary,
Prosonic Corp. (“Prosonic”). Longyear answered and asserted eleven counterclaims,
alleging that it withheld the funds because Alliance breached the Stock Purchase
Agreement (“Agreement”), which memorialized the sale. Each party eventually moved for
summary judgment. (Docket Nos. 88, 95.) The Honorable Hugh B. Scott, United States
Magistrate Judge, entered a Report and Recommendation advising this Court to grant in
part and deny in part Alliance’s motion for summary judgment and to deny in full
Longyear’s motion. (Docket No. 112.) Presently before this Court are each party’s timely
objections to that Report and Recommendation. (Docket Nos. 116, 121.) For the following
reasons, the Report and Recommendation is set aside in part and adopted in part.

1

II. BACKGROUND
A.

Facts
This action arises from complications surrounding Longyear’s full stock purchase

of Alliance’s subsidiary, Prosonic Corp., for $72.5 million. (Plaintiff’s Statement of Facts
(“Pl.’s State.,” ¶ 1; Docket No. 91.)1 That purchase was finalized December 6, 2006 by the
Agreement. (Id., ¶ 5.)
1.

Infant’s Medical Claim

In the Agreement, each party agreed that upon the completion of the stock transfer,
Prosonic’s employees and their accompanying health coverage would also transfer to
Longyear. (Defendant's Statement of Facts ("Def.'s State."), ¶ 141.) Longyear self-funded
its employees’ health insurance, meaning that it provided health coverage directly to its
employees with its own funds. ((Pl.’s State.¶ 22.) Alliance did have a “stop-loss” insurance
policy, however. (Id., ¶ 25. ) Under its stop-loss policy, Alliance was responsible for the first
$50,000 of any health insurance claim, while its insurance provider was responsible for the
remainder, up to $1 million.2 (Id.)
In September of 2006, a Prosonic employee, covered by Alliance’s health insurance,
had a child who was born with serious medical ailments.3 (Id., ¶ 30.) Tragically, the child

1

This Court has accepted facts in each party’s statem ent of facts to the extent that they have not
been controverted by the opposing party. See Local Rule 56(a)(2) (statem ents not specifically
controverted are deem ed adm itted).
2

After an em ployee am assed over $1 m illion in claim s, his health coverage ceased. (Pl.’s State., ¶
23.) In other words, $1 m illion was the m axim um am ount of coverage for an Alliance em ployee and his
fam ily.
3

For privacy reasons, this Court will refer to the child sim ply as the “child” or “infant.”

2

never recovered from these birth defects, and after several months in the hospital, died in
December of 2007. (Id.; Def.'s State., ¶ 150.)4 According to Longyear, the total medical
costs, which ultimately became it’s responsibility, amounted to nearly $3 million.5 (Def.’s
State., ¶¶ 142, 149). Longyear had its own insurance policy for these employees, which
became effective January 1, 2007. (Id., ¶ 146.) But this policy did not cover the infant’s
claim because it excluded any dependant of an employee who was already hospitalized
at the time the policy began. (Id., ¶ 146-147.)
Alliance learned of the child’s birth in October of 2006 and by November, it was
aware that the medical costs had exceeded $400,000. (Pl.’s State., ¶¶ 33, 37; Def.’s State.,
¶ 107.) However, it did not affirmatively disclose this event as a liability during the purchase
negotiations or due diligence period because it was covered by its stop-loss insurance.
(Pl’s State., ¶ 25.) Pursuant to Alliance’s standard accounting practice, health benefit
related costs were not booked until the expense was actually incurred. (Id., ¶ 29.) In this
case it booked $50,000, but nothing over that amount because its insurance provider
covered the remainder. (Id., ¶¶ 28, 41, 42.) Alliance, however, did disclose a 2006
aggregate report of health care related liabilities, in addition to a description of the plan with
its $50,000 initial liability, as outlined above. (Id., ¶¶ 48-51.) Alliance further provided
access to an Internet-based “data room,” containing over 17,000 pages of documents, and
further advised Longyear that it could contact Alliance’s health insurance broker and its

4

Defendant’s Statem ent is not docketed on CM/ECF. It is m aintained in paper form only in the
Clerk’s Office at the W estern District of New York.
5

Alliance objects to this figure on hearsay grounds. But because this allegation serves as the
basis for the litigation, it is included for inform ational purposes.

3

health benefit plan’s third-party administrator with questions. (Id., ¶ 64; Def’s State., ¶ 9.)
However, believing that Alliance’s failure to disclose the infant’s medical claim
violated the Agreement, on April 25, 2008, four months after the deal closed, Longyear
notified Alliance that it breached the Agreement and instructed the escrow agent to
withhold $3.4 million of the deposit. (Def’s State., ¶ 92) According to Longyear, $2.9 million
of this accounted for medical costs relating to the infant. (Id., ¶ 95).
Alliance contends that it did not breach the Agreement and brought this action to
recover the withheld funds. Longyear then asserted several breach-of-contract and tort
counterclaims.
2.

Tax Claim

Unrelatedly, on April 17, 2007, Alliance received notice that the State of Florida
intended to audit Prosonic’s books for the period ranging from January 1, 2004 to
December 31, 2006. (Def’s State., ¶ 151.) Alliance then forwarded this letter to Longyear.
(Id., ¶ 154.) Florida ultimately assessed Prosonic $513,787.53 in taxes for the
aforementioned period. (Id., ¶ 157.) According to the Agreement, all pre-closing tax
liabilities were Alliance’s responsibility. (Agreement, § 8.1(a); Docket No.1-2.) Yet, claiming
it was prejudiced by a delay in notice, Alliance refused to pay this tax liability. (Id., ¶ 177.)
This presumably accounts for the remainder of the withheld funds in escrow.
B.

The Agreement
Longyear’s counterclaims allege several violations of the Agreement, specifically

Sections 2.1(f)(ii), 2.1(h), 2.1(j)(i)-(vi), 2.1(x), 3.3, and 8.1(a). It also relies on Sections 6.1
and 6.4(d) to support its arguments. Those sections, in relevant part, are set forth below.

4

§ 2.1(f)(ii):
There are no liabilities of [Prosonic] or any [Prosonic]
Subsidiary, except: . . . (B) those arising subsequent to
September 30 2006, in the ordinary course of business
consistent with past practice.
§ 2.1(h):
During the period commencing January, 1, 2006 to and
including the Closing Date [December 6, 2006], (i) there has
not occurred any event or series of events, and there are not
facts or circumstances in existence which would have a
Material Adverse Effect on the Company.
§ 2.1(j)(i)-(vi):
[Alliance disclosed a] current, correct and complete list of all .
. . employee benefit plans . . . [and] the most recent annual
financial report. . .[and] . . . actuarial report, if any.”
§ 2.1(x):
None of the representations and warranties of [Alliance] set
forth in this Agreement, including the [Pronsic] Disclosure
Letter . . . contains or will contain any untrue statement of
material fact required to be stated therein in order to make
such representations and warranties not misleading.
§ 3.3:
Subject to the terms and conditions herein provided, each of
the Parties shall use its commercially reasonable efforts to
take, or cause to be taken, such action, to execute and deliver,
or cause to be executed and delivered, such additional
documents and instruments, and to do, or cause to be done,
all things necessary, proper, or advisable under the provisions
of this Agreement and under applicable law to consummate
and make effective the transactions contemplated hereby and
by the other documents executed and delivered in connection
herewith.
§ 6.1:
After the Closing Date [December 6, 2012] and subject to
limitations . . . [Alliance] . . . shall indemnify and hold harmless
[Longyear] . . . against any and all damages resulting from . .
. any breach . . . by [Alliance].

5

§ 6.4(d):
[T]his Agreement shall be read and interpreted as if the terms
“material” and “Material Adverse Effect” and words of similar
meaning were not contained, set forth, or otherwise included,
directly or indirectly, in such representations, warranties and
covenants.

§ 8.1(a):
Alliance shall be responsible for the payment of all Taxes of
[Prosonic] . . . that are owned [sic] with respect to the PreClosing Tax Period.

C.

Procedural History
Alliance commenced this action on July 2, 2008 by filing a complaint in this Court.

(Docket No. 1.) Defendant answered and asserted counterclaims on August 22, 2008.
(Docket No. 12.) This matter was referred to Judge Scott for pretrial matters on September
4, 2008 (Docket No. 16) and later this Court designated him to report on all dispositive
motions (Docket No. 92).
Alliance initially moved for summary judgment on December 20, 2010 (amending
the motion later that day) and Defendant moved likewise on December 29, 2010. (Docket
Nos. 84, 88 (amended motion), 95.) On August 3, 2011, Judge Scott issued a Report and
Recommendation advising that Alliance’s motion for summary judgment be granted in part
and denied in part and that Longyear’s motion be denied in full. (Docket No. 112.) After
receiving leave to extend the time to file objections (Docket No. 114), Alliance filed
objections on September 14, 2011. (Docket No. 116.) Longyear filed its objections on
September 28, 2011. (Docket No. 121.)

6

III. DISCUSSION
A.

Standard of Review
This Court reviews specific objections to reports and recommendations de novo.

28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b). When only a general objection is made to a
portion of a magistrate judge's report and recommendation, district courts subject that
portion of the report and recommendation to a clear error review. Fed. R. Civ. P. 72(b)(2)(3). District courts, however, are not required to review the factual findings or legal
conclusions of the magistrate judge as to which no proper objections are interposed.
Ianniello v. Hartford Life & Acc. Ins. Co., No. 10-CV-370, 2012 WL 314872, at *1 (E.D.N.Y.
Feb. 1, 2012) (citing Thomas v. Arn, 474 U.S. 140, 150, 106 S. Ct. 466, 88 L. Ed. 2d 435
(1985). Ultimately, this Court may accept, reject, or modify any of the Magistrate’s findings
or recommendations. 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b).
B.

Summary Judgment Standard
Rule 56 of the Federal Rules of Civil Procedure provides that “[t]he court shall grant

summary judgment if the movant shows that there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.” A fact is “material” only if
it “might affect the outcome of the suit under governing law.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). A “genuine”
dispute exists “if the evidence is such that a reasonable jury could return a verdict for the
non-moving party.” Id. In determining whether a genuine dispute regarding a material fact
exists, the evidence and the inferences drawn from the evidence “must be viewed in the
light most favorable to the party opposing the motion.” Adickes v. S. H. Kress & Co., 398
U.S. 144, 158–59, 90 S. Ct.1598, 1609, 26 L. Ed. 2d 142 (1970) (internal quotations and
7

citation omitted).
“Only when reasonable minds could not differ as to the import of evidence is
summary judgment proper.” Bryant v. Maffucci, 923 F.2d 979, 982 (2d Cir. 1991) (citation
omitted). Indeed, “[i]f, as to the issue on which summary judgment is sought, there is any
evidence in the record from which a reasonable inference could be drawn in favor of the
opposing party, summary judgment is improper.” Sec. Ins. Co. of Hartford v. Old Dominion
Freight Line, Inc., 391 F.3d 77, 82-83 (2d Cir. 2004) (citations omitted). The function of the
court is not “to weigh the evidence and determine the truth of the matter but to determine
whether there is a genuine issue for trial.” Anderson, 477 U.S. at 249.
When the parties cross-move for summary judgment, “the standard is the same as
that for individual motions for summary judgment.” Natural Res. Def. Council v. Evans, 254
F. Supp. 2d 434, 438 (S.D.N.Y.2003). “The court must consider each motion independently
of the other and, when evaluating each, the court must consider the facts in the light most
favorable to the non-moving party.” Id. (citing Morales v. Quintel Entm't, Inc., 249 F.3d 115,
121 (2d Cir. 2001)).
C.

Review of the Report and Recommendation: Breach of Contract – Infant’s
Medical Expenses6
As noted by Judge Scott, the heart of this dispute is the parties differing views

regarding the calculation of liabilities – a term which is undefined in the Agreement.
Alliance asserts that it had no liabilities and thus it did not breach the Agreement. Longyear

6

Because the Agreem ent’s choice-of-law provision calls for the application of New York law for all
contract claim s, that state’s law will be applied by this Court. See LaSalle Bank Nat'l Ass'n v. Nom ura
Asset Capital Corp., 424 F.3d 195, 205 n. 7 (2d Cir. 2005) (“New York law gives full effect to parties'
choice-of-law provisions.”) (Internal citation and quotation m arks om itted.)

8

disagrees and argues that Alliance, by representing that it had no liabilities, breached the
Agreement.
Judge Scott found that (1) the adequacy of Alliance’s disclosure and (2) the
accuracy of its representation that it had no liabilities were questions of fact that should be
left to the jury. (See Report and Recommendation, p. 15; Docket No. 112.) Bolstering this
finding, he concluded that “there is an added material issue of fact of what documents, if
any, Alliance provided regarding the [infant’s] medical expenses as Alliance learned of
them.” (Id., p. 17.)
Alliance filed objections, contending that Judge Scott (1) failed to address its
argument that there was no causal relationship between the alleged breach and the
claimed damages; (2) failed to address whether Alliance had a duty to disclose at all,
rendering any discussion about the scope of its disclosure premature; and (3) erred in
finding issues of fact regarding the sufficiency of disclosure.
Longyear also filed objections. It argues that Judge Scott (1) failed to apply settled
law relating to “liabilities”; (2) improperly conflated contractual representations with precontract disclosures; (3) incorrectly applied the law relating to a buyer’s duty to investigate
the seller’s representations; (4) misstated certain undisputed facts; and (5) made incorrect
findings of fact.
Both parties object on the ground that Judge Scott did not specifically address
Longyear’s allegations that Alliance breached several other Agreement provisions,
including Sections 2.1(h), 2.1(j)(i)-(vi), 2.1(x), and 3.3.7
7

Longyear also objects to the Report and Recom m endation because Judge Scott did not address
its counterclaim asserting a breach of Section 2.1(v). But neither this claim , nor any factual foundation
supporting the claim , is found in Longyear’s pleadings. As such, it will not be considered by this Court.

9

Each of these objections is discussed below.
1.

§ 2.1(f)(i)

Judge Scott found issues of fact regarding the sufficiency of Alliance’s disclosure.
But whether the infant claim should be considered a liability at all is a threshold question
that must be addressed first. See Jim Ball Chrysler LLC v. Marong Chrysler-Plymouth Inc.,
17 A.D.3d 1113, 1113-14, 794 N.Y.S.2d 545 (4th Dep’t 2005) (“Where there is no duty to
perform, there can be no breach of contract.”). If Alliance had no duty to disclose the infant
claim, it is inconsequential whether it disclosed it adequately.
This is precisely what Alliance contends: it did not breach the contract because it
incurred no liabilities regarding the infant’s health claim. Relying on CBS Corp., v. United
States, it notes that the term liability refers to a present obligation to pay either now or in
the future. 90 Fed. Cl. 456, 465 (Fed. Cl. 2009). Because its stop-loss insurer paid for the
infant’s health claim in amounts over $50,000, Alliance argues, it had no outstanding
obligation to pay either “now or in the future” – it therefore never incurred any liability and
Longyear’s claim should be dismissed.
Longyear contends that the infant’s claim remained Alliance’s liability despite
Alliance’s insurance coverage. It cites cases from the Third and Fourth Circuits, in the
Employee Retirement Income Security Act (“ERISA”) context, holding that an employer
retains liability for the benefits provided in its health plan even if it purchases stop-loss
insurance. See Bill Gray Enters, Inc., v. Gourley, 248 F.3d 206, 214 (3d Cir. 2001) (“By

(continued from previous page) See, e.g., Beckm an v. U.S. Postal Serv., 79 F. Supp. 2d 394, 407
(S.D.N.Y. 2000) (“Although a com plaint need not correctly plead every legal theory supporting the claim , at
the very least, plaintiff m ust set forth facts that will allow each party to tailor its discovery to prepare an
appropriate defense.”).

10

purchasing stop-loss insurance, the plan does not delegate its fiscal liabilities . . . to the
insurance company”); Thompson v. Talquin Bldg. Prods., Co., 928 F.2d 649, 653 (4th Cir.
1991) (“Instead of covering employees directly, the stop-loss insurance covers the Plan
itself.”).
The parties’ dispute essentially requires this Court to engage in contract
interpretation. A court tasked with interpreting a contract should seek “to give effect to the
intent of the parties as revealed by the language of their agreement.” Compagnie
Financiere de CIC et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc.,
232 F.3d 153, 157 (2d Cir. 2000) (Sotomayor, J.). In a breach-of-contract action, summary
judgment is appropriate where the language of the contract is unambiguous. Photopaint
Techs., LLC v. Smartlens Corp., 335 F.3d 152, 160 (2d Cir. 2003). Whether a contract is
clear or ambiguous “is to be decided by the court as a matter of law.” Mellon Bank, N.A.
v. United Bank Corp. of N.Y., 31 F.3d 113, 115 (2d Cir. 1994). A court is justified in finding
a contractual term to be ambiguous “where it may be ascribed ‘conflicting reasonable
interpretations.’” Rogath v. Siebenmann, 129 F.3d 261, 267 (2d Cir. 1997) (quoting Mellon
Bank, N.A., 31 F.3d at 116). But it is well-settled that “[w]here . . . the meaning of an
agreement among sophisticated parties is unambiguous on its face, the agreement does
not become ambiguous simply because one of the parties later asserts that it intended a
different interpretation.” New Bank of New England, N.A. v. Toronto-Dominion Bank, 768
F. Supp. 1017, 1022 (S.D.N.Y. 1991). Further, no ambiguity exists when contract language
has “a definite and precise meaning, unattended by danger of misconception in the purport
of the [contract] itself.” Breed v. Ins. Co. of North Am., 46 N.Y.2d 351, 355, 413 N.Y.S.2d
352, 385 N.E.2d 1280 (1978); accord Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d
11

425, 428 (2d Cir. 1992).
While the parties dispute the meaning of the term liability, the contract is clear that
financial statements were to be prepared in accordance with Generally Accepted
Accounting Principles (“GAAP”). In Section 2.1(f)(i) entitled “Financial Statements; No
Undisclosed Liabilities,” the Agreement states that “[t]he Financial Statements have been
prepared from the books and records of [Prosonic] and [Prosonic] Subsidiaries in
accordance with GAAP.” The term “liability” has a well-defined meaning within GAAP. As
explained by the court in CBS Corp.:
The concept of ‘liability’ is spelled out in Statement of Financial
Accounting Concepts (‘SFAC’) No. 6 which is published by the
Financial Accounting Standards Board, which in turn
establishes GAAP. SFAC No. 6 defines ‘liability’ to mean the
‘legal, equitable, or constructive duty or responsibility’ to pay
an obligation. Under SFAC No. 6, liabilities are defined as
‘probable future sacrifices of economic benefits arising from
present obligations of a particular entity to transfer assets or
provide services to other entities in the future as a result of
past transactions or events.’
90 Fed. Cl at 465 (internal citations omitted).8
Because the term “liability” has "a definite and precise meaning,” no ambiguity exists
and summary judgment may be appropriate. See Breed, 46 N.Y.2d at 355; see also Sayers
v. Rochester Tel. Corp. Supplemental Mgmt. Pension Plan, 7 F.3d 1091, 889 (2d Cir.
1993) (summary judgment in contract dispute may be granted where the agreement's
language is unambiguous).9 Longyear, however, continues to argue that regardless of

8

In its own footnote, the court notes that SFAC standards are considered to be a com ponent of
GAAP. CBS Corp., 90 Fed. Cl. at 645 n. 12.
9

Both parties agree that no am biguity exists in the Agreem ent.

12

whatever insurance Alliance might have had in place, the original and final obligation to pay
for its employees’ healthcare remained with Alliance. Alliance, for its part, continues to
assert that it was never under an obligation to pay the infant’s claim; rather, it was
exclusively its insurer’s duty.
Yet, Alliance’s argument fails in light of its healthcare employee agreement. In its
binding Summary Plan Description (“SPD”), Alliance contracted to provide health coverage
to those employees who chose to enroll in the plan. (See Summary Plan Description,
Docket No. 91-10); Heidgerd v. Olin Corp., 906 F.2d 903, 908 (2d Cir. 1990) (terms of SPD
are controlling). The SPD explicitly states that the plan is self-funded by Alliance and that
“the sole risk of loss belongs to Alliance Industries Inc.” (Id., p. 1.) Thus, according to its
own terms, it had the sole obligation to pay for health related claims up to $1 million. It
decided to fulfill that obligation, in part, by contracting with a third-party insurer, but
according to its own SPD, the obligation to pay its enrolled employees’ health claims
remained, primarily and finally, with Alliance.
This conclusion accords with the holdings from other courts, including the Third and
Fourth Circuit. Those courts found that liability ultimately remains with the self-funded plan
even if the plan chooses to cover itself with stop-loss insurance. Bill Gray Enters, Inc., 248
F.3d at 214; Talquin Bldg. Prods., Co., 928 F.2d at 653; see also In re Express Scripts Inc.,
PBM Litig., No. 4:02-CV-01503, 2009 WL 2952787, at *16 (E.D. Mo. July 30, 2008) (“[T]he
distinction between an ‘insured’ plan and a ‘self-funded’ plan turns on liability.”). These
courts correctly reason that self-funded plans retain an ever-present obligation because
if the insurance provider becomes insolvent, the self-funded plan must pay all heathrelated costs. Accordingly, despite Alliance’s stop-loss insurance, the infant’s claim was
13

its obligation and it breached the Agreement when it represented that it had no such
liability.
Despite this result, Alliance argues that the claim arose “subsequent to September
30, 2006 in the ordinary course of business, consistent with past practices,” and thus falls
into an exception in Section 2.1(f)(ii). But the infant was born on September 6, 2006 and
although he was not enrolled in Alliance's health insurance plan until November 3, 2006,
it is undisputed that the policy would be retroactive to the child’s birth.
Alliance notes that it kept its books in such a manner that no expense was listed
until it was incurred and that it did not incur any undocumented expense before September
30, 2006 (because the insurance policy covered all expenses over $50,000). But the
manner in which they kept their books has no bearing on the date that the liability arose.
According to the SPD, Alliance incurred the obligation to pay for the child’s healthcare the
day that the infant was born. Because that occurred before September 30, 2006, Alliance’s
motion on this ground is denied.
Alliance further objects to the Report and Recommendation by arguing that the
Magistrate Judge failed to address its position that its motion for summary judgment should
be granted because Longyear failed to establish that the alleged breach caused
Defendants’ damages.
Causation is an essential element in any breach-of-contract claim. Merrill Lynch &
Co., Inc. v. Allegheny Energy, Inc., No. 02 Civ. 7689, 2005 WL 832050, at *4 (S.D.N.Y.
Apr. 12, 2005). Alliance argues that Longyear has not demonstrated this element because
Longyear incurred the infant’s medical expenses only because it negotiated an insurance
policy that excluded employee dependants who, at the time the policy began, were
14

hospitalized. Such a policy, it argues, breaks the causal link between its breach and
Longyear’s damages because even if it knew the amount of liability incurred by Prosonic,
it would not have known that the infant was in the hospital. It further argues that the link is
broken by Longyear’s failure to inquire as to how many, if any, Prosonic dependants were
hospitalized on January 1, 2007. Thus, it concludes, the result would have been the same
(i.e., Longyear would be liable for the infant’s claim) regardless of the alleged breach.
But this argument is also without merit. As noted by Longyear, if it knew about the
infant’s claim it may have lowered the purchase price or cancelled the deal altogether. It
may have inquired about the status of the infant and his whereabouts or well-being. This
sufficiently demonstrates the causal link between Alliance’s undisclosed liability and the
infant’s medical costs, which were unwittingly taken on by Longyear as the “natural and
direct consequences of the breach.” See Bennet v. U.S. Trust Co., 770 F.2d 308, 316 (2d
Cir. 1986). As discussed above, the liabilities transferred from Alliance to Longyear – that
the two companies had different insurance policies to cover those liabilities is of no
consequence in demonstrating causality.
Next, Alliance argues it did not breach Section 2.1(f)(ii) (and that the Magistrate
erred in finding issues of fact) because it provided unrestricted access to its third-party
insurer – the entity that it claims possessed all the relevant documents regarding health
expenses over $50,000. But this fact does not save it from Longyear’s breach-of-contract
claim. In the Agreement, Alliance affirmatively represented that, with several inapplicable
exceptions, it had no liabilities. Therefore, Longyear’s breach of contract claim is valid
regardless of the amount of access Alliance provided Longyear. It made a promise,
breached that promise, and thereby caused Longyear damages. This is all that is required
15

in a breach-of-contract claim. See Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996);
see also Joseph Martin, Jr., Deli., Inc. v. Schumacher, 52 N.Y.2d 105, 109, 436 N.Y.S.2d
247, 417 N.E.2d 541 (1981) (redress available when promisee assented to an obligation
and failed to perform).
For those reasons – regarding the alleged breach of Section 2.1(f)(ii) – Alliance’s
motion for summary judgment is denied and Longyear’s motion is granted. The Magistrate
Judge’s recommendation to deny both motions is set aside.
2.

§ 2.1(h)

In Section 2.1(h), Alliance represented that there was no event, occurring between
Janurary 1, 2006 and December 6, 2006, that would have a material adverse effect on
Prosonic. Longyear argues that the infant’s claim is such a material adverse effect. But the
Agreement is written such that the material adverse effect must be felt by Prosonic, not
Longyear. In that sense, Alliance argues, it did not breach the Agreement because the
maximum amount of liability it was subject to cannot be considered material.
Alliance’s health coverage ended after an employee (and/or his dependant) reached
$1 million in health claims. Because the infant had already amassed $520,000 in claims
in 2006, Alliance notes that the most it could be responsible for is the remaining $480,000.
It argues that such a figure is well below the Second Circuit’s standard defining materiality
at 5% of a company’s assets. See ECA, Local 134 IBEW Joint Pension Trust of Chi. v. JP
Morgan Chase Co., 553 F.3d 187, 204 (2d Cir. 1999) (“ECA, Local 134"). Prosonic’s value,
according to the sale, was $72.5 million. Measured from the $50,000 that Prosonic actually
had to pay, the infant’s claim equals .069% of Prosonic’s value. Measured from the full
$480,000, the claim still accounts for less than 1% of the company’s value.
16

Longyear’s response is twofold. First, it argues that, per the Agreement’s “materiality
scrape,” the words “material adverse effect” must be read out of the contract. (See
Agreement, § 6.4(d).) Alternatively, it argues the claim is material because, measured from
Prosonic’s 2007 net income ($3,473,836) and using the total amount of the infant’s claim
($2.9 million), the claim amounted to 83.5% of Prosonic’s income. Using the $480,000
figure, the claim still represents 14% of the projected income.
Regarding Longyear first response, reading the Agreement as it is written renders
§ 2.1 unintelligible. Removing the words “material adverse effect” from that Section leaves
only this language: “there has not occurred any event or series of events, and there are not
facts or circumstances in existence which would have [ ] on the Company.” As noted by
Alliance, it is impossible to give meaning to both Section 2.1(h) and Section 6.4. Because
it is undisputed that this language was drafted by Longyear, the ambiguity created by this
clause should be construed against it. See Mastrobuono v. Shearson Lehman Hutton, 514
U.S. 52, 62-63, 115 S. Ct. 1212, 131 L. Ed. 2d 76 (1995) (elaborating on common-law rule
of contract interpretation that a court should construe ambiguous language against the
interest of the party that drafted it); see also Restatement (Second) of Contracts § 206
(1979). As such, this Court will read Section 2.1(h) as it is written and disregard the
“materiality scrape” in Section 6.4.
So construed, it is still unclear whether the infant’s claim had a material adverse
effect on Prosonic. Alliance argues that the Second Circuit has set forth a 5% threshold for
determining materiality. See ECA, Local 134, 553 F.3d at 204 (discussing the 5%
numerical threshold as a good starting place for assessing the materiality of the alleged
misstatement in a securities fraud suit); see also Ganino v. Citizens Utils. Co., 228 F.3d
17

154 (2d Cir. 2000). But those cases were decided in the context of a securities fraud claim,
not a breach-of-contract claim.
These cases are further distinguishable. In ECA, Local 134, the Second Circuit
noted that “this preliminary inquiry under the quantitative factor must be supplemented”
with a qualitative inquiry. 553 F.3d at 204 (emphasis added). But the parties make no
argument concerning “qualitative” factors, perhaps because these factors derive from the
inapplicable Securities and Exchange Commission’s Rules and Regulations. See Ganino,
228 F.3d at 16 (referencing the factors’ origin).
Even assuming, arguendo, that these cases are controlling in this context, neither
party applies them properly. In ECA, Local 134, the court found that a misrepresentation
affecting less than one-third of a percent of a company’s total business assets was not
material. 553 F.3d at 204. Here, neither party has presented a calculation using Prosonic’s
“total assets” as the benchmark from which to compare the financial effect of the infant’s
claim. Instead, providing no authority for their preferred calculations, Longyear uses
Prosonic’s projected 2007 income as the benchmark for its calculations. It finds that the
effect of the infant’s claim is far greater than 5% of the projected income. Meanwhile, using
Prosonic’s “Enterprise Value” or purchase price as the comparison point, Alliance finds that
Prosonic’s liability would be far below 5% of $72.5 million (the Prosonic purchase price).
Without persuasive authority and relevant argument on point, this Court will not rule
as a matter of law, in either parties’ favor, that the effect of the infant’s claim was
“materially adverse” to Prosonic’s bottom line. Accordingly, both motions are denied on
this claim.

18

3.

§ 2.1(j)(i)-(vi)

Longyear argues that Alliance failed to disclose actuarial reports, audit reports, and
benefit plans in violation of Section 2.1(j)(i)-(vi). Longyear attempts to demonstrate that
Alliance violated this clause simply because it had information pertaining to the infant’s
claim. But the plain language of the Agreement limits Alliance’s duty to provide “the most
recent financial annual report, if any, and audit report, if any . . . [and] benefit plans.”
(Agreement, § 2.1(j)(i)-(vi). Longyear does not demonstrate that any undisclosed reports
existed and the evidence establishes that Alliance provided Longyear with the health
benefit plan. As such, Alliance’s motion on this counterclaim is granted and Longyear’s
motion is denied.
4.

§ 2.1(x)

In Section 2.1(x), Alliance covenanted that none of its representations and
warranties contained any untrue statement of material fact. Because this Court has found
that Alliance breached Section 2.1(f)(ii), which is categorized as a “Representation and
Warranty,” it follows that Alliance breached Section 2.1(x). Longyear’s motion on this
counterclaim is therefore granted and Alliance’s is denied.
5.

§ 3.3

Longyear alleges that Alliance breached Section 3.3. Judge Scott did not specifically
address this allegation and Longyear did not object to that omission. However, Judge Scott
generally denied both motions for summary judgment regarding all breach of contract
claims. (See Report and Recommendation, p. 19.) To the extent the Magistrate denied
Alliance’s motion regarding this claim, that recommendation is set aside.

19

Section 3.3 is a “further assurances” clause, essentially requiring each party to
execute the documents necessary to consummate the transaction. See In re Exide
Tech., 607 F.3d 957, 964 (3d Cir. 2010) (applying New York law); Pan Am. World Airways,
Inc. v. Eclipse Holdings, Inc., No. 95 Civ. 2763, 1998 WL 205313, at *3-*4, (S.D.N.Y Apr.
27, 1998). Because Longyear has made no allegation that Alliance failed to execute any
necessary documents to consummate the acquisition (which was effectuated), Alliance’s
motion is granted regarding this counterclaim.10
D.

Review of the Report and Recommendation: Breach of Contract – Tax Counter
claims
Longyear moves for summary judgment regarding its claim that Alliance breached

the Agreement by failing to pay for Prosonic’s pre-closing tax liabilities as set out in the
Agreement. Alliance opposes this motion (but does not separately move for summary
judgment), arguing that factual issues preclude summary judgment.
Section 8.1 of the Agreement requires Alliance to pay for Prosonic’s pre-closing tax
liability. Section 8.4 of the Agreement indicates that no delay on the part of Longyear to
notify Alliance of a tax claim will relieve Alliance of its duty to pay unless it results in a
prejudice to Alliance. Thus, even if there were a notice delay (which is disputed), if Alliance
suffered no prejudice, the tax claim would still be its responsibility. It opposes summary
judgment, however, by arguing that Longyear has not demonstrated that it was not
prejudiced.
Judge Scott denied Longyear’s motion, finding questions of fact regarding notice

10

Longyear does not even raise any argum ents that Alliance breached Section 3.3 in its
Mem orandum in Support of its Motion for Sum m ary Judgm ent. (Undocketed; m aintained in paper form
only.)

20

and prejudice. (See Report and Recommendation, p. 22.) For the following reasons, that
recommendation is set aside.
As noted, in its memorandum opposing Longyear’s motion for summary judgment
(Docket No. 101), Alliance rests its opposition on its proposition that Longyear has not
proven that Alliance suffered no prejudice. But Longyear did make such a showing. Initially
Longyear notes that John Walsh, as Alliance’s corporate designee, could point to only two
possible causes of prejudice due to Longyear’s delay in notifying it of a tax audit: (1) the
accrual of interest and (2) the expiration of the time period allowing Alliance to intervene
in the audit. This is undisputed by Alliance. But in response, Longyear presents evidence
that Alliance could not have been prejudiced due to either of these proffered reasons. It
notes that it paid an initial sum of $376,207.76 to the State of Florida, precisely to avoid
interest and penalties. It also notes that it is undisputed that at the time Longyear notified
Alliance about the tax audit, the audit remained contestable and Alliance chose not to
defend the charges therein. (Def’s State., ¶ 165.)
Alliance offers no argument, nor points to any facts to refute these claims; instead
it simply relies on case law indicating that prejudice is “generally” a question of fact. But
once the moving party has met its burden, the opposing party “must do more than simply
show that there is some metaphysical doubt as to the material facts. [T]he nonmoving party
must come forward with specific facts showing that there is a genuine issue for trial.”
Caldarola v. Calabrese, 298 F.3d 156, 160 (2d Cir. 2002) (internal citations omitted).
Moreover, while “weighing evidence and drawing legitimate inferences from facts are
functions that the court must leave to the jury, if the nonmoving party does not present
evidence from which a reasonable jury could return a favorable verdict, then summary
21

judgment is appropriate.” Phoenix Warehouse of Cal., LLC v. Townley, Inc., No. 8 Civ.
2856, 2011 WL 2421295, at *3 (S.D.N.Y. June 7, 2011); see also Anderson, 477 U.S. at
249 (summary judgment appropriate unless “there is sufficient evidence favoring the
nonmoving party for a jury to return a verdict for that party”). Accordingly, without evidence
demonstrating that it was prejudiced, and in light of Longyear’s evidence to the contrary,
Alliance cannot withstand summary judgment. See BellSouth Telecomms., Inc. v. W.R.
Grace & Co., 77 F.3d 603, 615 (2d Cir. 1996) (“The party opposing the motion for summary
judgment must set forth concrete particulars. It is not sufficient merely to assert a
conclusion without supplying supporting arguments or facts.”) (Internal citations and
modifications omitted). Longyear’s motion on this counterclaim is therefore granted and the
Report and Recommendation is set aside.
E.

Review of the Report and Recommendation: Tort Counterclaims11
Longyear also brings fraudulent concealment, fraudulent misrepresentation, and

negligent misrepresentation claims.
New York law recognizes a tort duty to disclose by a party in a business transaction
in three situations: (1) where a fiduciary relationship exists; (2) where one party has made
a partial or ambiguous statement; and (3) where a party possess superior knowledge, not
readily available to the other, and knows that the other is acting on the basis of mistaken
knowledge. See Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993). The last
situation is sometimes referred to as the “special facts” doctrine. Swersky v. Dreyer &
11

W hile the Agreem ent specifies that contract claim s will be governed by New York law, no sim ilar
provision exists for tort claim s. The Magistrate Judge found that either New York or Ohio law should apply
– that finding was not objected to and therefore this issue will not be revisited here. See Ianniello, 2012
W L 314872, at *1. Ohio law is sim ilar to New York law in this regard, except that Ohio law does not
recognize the “special facts” doctrine.

22

Traub, 219 A.D.2d 321, 327, 643 N.Y.S.2d 33 (1st Dep’t 1996).
Judge Scott found that no fiduciary or special relationship existed between the
parties and that any alleged non-disclosure was “not necessarily material.” (Report and
Recommendation, p. 20.) As such, under either New York or Ohio law, the Magistrate
Judge recommended that Alliance’s motion for summary judgment be granted on these
claims.
Longyear does not object to the finding that no fiduciary relationship existed,12 but
finds fault with Judge Scott’s conclusion regarding the second and third factors listed
above. Although this Court takes no position on the materiality of the alleged nondisclosure, it concurs with Judge Scott’s conclusion.
Longyear has failed to establish that either of these grounds should be invoked or
that, even if Alliance had a tort duty, it acted fraudulently. The “partial statement” doctrine
rests on the theory that once a party has undertaken to mention a relevant fact to the other
party it cannot give only half of the truth. See Brass, 987 F.2d at 150 (citing Junius Const.
Co. v. Cohen, 257 N.Y. 393, 178 N.E. 672 (1931)). Longyear argues that this rarelyemployed doctrine is applicable because Alliance disclosed some claims over $50,000, but
not the infant’s. Yet, simply put, this is not a case where a party disclosed only part of a
relevant fact. Further, Longyear points to no evidence suggesting that Alliance intended
to defraud Longyear. Contrarily, it is undisputed that Alliance provided unfettered access
to its insurer’s records, where details on the infant’s claim could have been found. This fact

12

This type of relationship m ust exist to sustain a negligent representation claim in the context of a
com m ercial transaction. See Kim m ell v. Schaefer, 89 N.Y.2d 257, 263, 675 N.E.2d 450, 652 N.Y.S.2d 715
(1996). This Court therefore adopts the Magistrate Judge’s recom m endation dism issing the negligent
m isrepresentation claim .

23

also precludes Longyear’s reliance on the “special facts” doctrine because the information
was readily available to Longyear. See Brass, 987 F.2d at 150.
Having failed to establish that Alliance owed Longyear an independent tort duty and
having provided no evidence that Alliance acted fraudulently, Alliance’s motion for
summary judgment seeking dismissal of Longyear’s tort claims is granted. The Report and
Recommendation is therefore adopted as to its conclusion that the tort and associated
punitive damages counterclaims should be dismissed.
F.

Attorney Fees
Longyear seeks attorney fees for prosecuting this action and the tax audit. If it

chooses to proceed with this claim, it shall file a motion detailing its request, thereby
allowing Alliance to respond.
IV. CONCLUSION
For the reasons discussed above, the Report and Recommendation is set aside in
part and adopted in part. Each party’s motions for summary judgment are also denied in
part and granted in part.
V. ORDERS
IT HEREBY IS ORDERED, that Judge Scott’s Report and Recommendation (Docket
No. 112) is ADOPTED in part and SET ASIDE in part.
FURTHER, that Defendant’s Motion for Summary Judgment (Docket No. 95) is
GRANTED with respect to its first, fourth, and tenth counterclaims and with respect to each
of Plaintiff’s claims. It is DENIED in all other respects.
FURTHER, that Plaintiff’s Motion for Summary Judgment (Docket No. 84) is

24

DENIED as moot.
FURTHER, that Plaintiff's Amended Motion for Summary Judgment (Docket No. 88)
is DENIED with respect to its claims and GRANTED with respect to Defendant’s
counterclaims except for Defendant’s first, second, fourth, and sixth counterclaims, for
which the Motion is DENIED.13
FURTHER, that Defendant’s motion detailing its requested fees, with accompanying
memorandum if necessary, if it chooses to so file, must be filed by April 23, 2012. Plaintiff’s
response is due May 10, 2012. Defendant’s reply is due May 21, 2012.

SO ORDERED.
Dated:

February 26, 2012
Buffalo, New York

/s/William M. Skretny
WILLIAM M. SKRETNY
Chief Judge
United States District Court

13

Alliance did not m ove for sum m ary judgm ent regarding the tax dispute, reflected in
counterclaim s ten and eleven.

25