September 10, 2008

No Shelter From The Ninth Circuit

Bob Dylan, genius poet and songwriter that he is, had a terrific line in the song Shelter From The Storm. Well, actually, the whole song is downright terrific but I want to focus in on this one particular line. (The song was from Dylan’s masterpiece album Blood On The Tracks.) The line I refer to goes as follows:

“I bargained for salvation an’ they gave me lethal dose.”

(To get the full effect, you have to wail out the line with squinting eyes and keening voice.)

I suspect the lawyers who put together the Stock Purchase Agreement that Argan, Inc. used in selling to Western Filter Corporation have a similar view of the United States Court of Appeals for the Ninth Circuit. Those lawyers bargained for a time limit on their client’s obligations under the agreement. The Ninth Circuit took their time limit and gave them a karate chop in the throat with it.

The case I’m talking about is Western Filter Corp. v. Argan, Inc., decided on August 25, 2008. The case stems from Western Filter’s purchase of the corporate stock of a competitor in the filter business, Puroflow, Inc., an Argan subsidiary. The Stock Purchase Agreement used in the transaction contained the usual representations and warranties on the seller’s part. The Agreement went on to say that some of the representations and warranties “shall survive the Closing for a period of one year.”

Within the one year period, Western Filter discovered what it said was a breach of the representation and warranty on the accuracy of Puroflow’s financials. (The specific issue was overvalued inventory.) Western Filter figured it had been gypped to the tune of about $2 million. But Western Filter did not actually bring suit against Argan until more than one year after the deal closed. Argan defended by saying the one year survival period in the contract ran out. The trial judge agreed and tossed the claim.

The Ninth Circuit reversed. Going out of its way to avoid applying the terms of the contract as any normal person would, the Ninth Circuit panel said the survival clause in the agreement did not unambiguously change the California period of limitations for bringing suit. The court therefore ruled that Western Filter had the right to maintain its claim.

The Ninth Circuit’s interpretation of the survival clause makes little sense in the real world. In essence, the court said the one-year “survival” period only set out the time period for discovering a breach of a representation and warranty; it did not establish any limit for asserting a claim for breach. But I can tell you from firsthand experience that absolutely no one in a deal of this nature would ever negotiate over the “discovery” period for bringing a claim. The negotiations are all about how long there is to make a claim for a violation.

What the Ninth Circuit actually said was that the one-year period established the time within which a breach could occur. But that is completely impossible. A breach of a representation and warranty as to financial condition has to occur, if at all, no later than the date of closing. On this point, the Ninth Circuit's opinion betrayed a less than clear understanding of merger and acquisition transactions. What the Ninth Circuit's decision has to be understood to really mean, and what it sort of said elsewhere, was that the one-year period was for discovering a breach had occurred.

Hey, I readily concede that the survival clause in the Stock Purchase Agreement could have been better worded. The agreement could have expressly defined the word “survival” to mean the time within which to assert a claim for breach. I also might have added my favorite phrase: “And we really, really mean it here, judge.” (In Alaska, though, even this might not have done any good.)

Yet, the Ninth Circuit’s interpretation of the clause is screwy. It would have been far better if the court had just fessed up, saying that it knew what the clause really meant, but that it disliked these kinds of limitations so it wasn't going to apply the clause. That would have been an honest and still lethal dose, although not really in accordance with California law.

By the way, I want to be on the record as saying that I think almost everyone out there is wrongly reporting the lyrics for Shelter From The Storm. Most sources give this line for the song:

“And the one-eyed undertaker, he blows a futile horn.”

I am sure that the correct phrase is “feudal horn.” Horns can be “feudal” (old) but they can’t really be “futile.” Horn.jpg(That is, I guess, unless they don't make any sound, in which case they cannot be "blown.") I realize its poetry and literal meaning is not required. But I’m sticking with my interpretation of the song. At least, I'm sticking with it until the day old Robert Zimmerman hisownself comes into my office and shows me his notebook from 1974 to prove me wrong.

(I’m offering up my innocence here. Please don’t repay me with scorn.)

September 3, 2008

Miss Cleo's Apprentice

I hate to be one of those guys who says “I told you so!” So as I read the latest opinions from the Alaska Supreme Court, I started sweating. Then my mouth hung open. Just before my jaw hit the desk, I exclaimed: “Holy white socks ‘neath black robes, Batman! I was right!”

You see, I recently wrote about the Alaska Supreme Court’s decision in Edenshaw v. Safeway, Inc. I boldly predicted Edenshaw would be distinguished away into near oblivion. Well, the distinguishing away has slyly begun. The Alaska Supreme Court just ruled this past Friday that no jury question is presented in a premises liability case unless there is at least some minimally adequate proof of negligence. This undercuts the broad language of Edenshaw, which said exactly the opposite.

The case just decided is Burnett v. Covell. Mr. Burnett reportedly weighed about 330 pounds. He visited Ken Covell's office to attend a meeting. Ken Covell is a Fairbanks lawyer. (I met Ken hiking the Chilkoot Trail this summer.) Mr. Burnett had visited Ken’s office previously without problem. But on this occasion the chair Mr. Burnett attempted to sit in collapsed underneath him. Mr. Burnett sued Ken for his injuries. (Egad, a lawyer being sued!?)

One of Mr. Burnett’s theories was negligence. Ken defended himself by saying that he had no knowledge there was anything wrong with the furniture in his office. Mr. Burnett’s attorney conceded that this was undoubtedly true. Nonetheless, the Alaska Supreme Court said it did not matter. Prior notice or knowledge of the defective condition of the premises was not required, according to the Court. This statement at least was consistent with Edenshaw.

The Court went on to say, however, that the plaintiff had to provide some sort of specific evidence to raise a jury question as to negligence. “In the absence of such concrete evidence,” the Court stated, “Burnett’s unsupported assertions” about what Ken might have done differently to ensure the safe condition of his furniture were not enough to present a jury question. The Court reached this conclusion even though in Edenshaw it said in nearly the same situation that the matter should be given to the jury. The exact language of Edenshaw was: “we continue to trust that factfinders can best ascertain whether the proprietor of a grocery store acted reasonably in maintaining the store’s premises considering all of the circumstances.”

The Court in Burnett made only one reference to Edenshaw. That came in a footnote at the end. The footnote explained nothing about how the decision in Burnett could be squared with Edenshaw. The fact that Justice Carpeneti authored both opinions a little over one month apart would make one think he had Edenshaw in mind when Burnett was decided. Still, no attempt at reconciling the two was made.

In light of Burnett, I think the conclusion is inescapable that the plain words of Edenshaw cannot be taken at face value. Whatever the opinion in Edenshaw actually says, the only logical way to read Edenshaw after Burnett is exactly what I wrote back in July:

The Court's Edenshaw decision only makes sense if you assume they really meant to say advance notice of a dangerous condition is not the only way to prove negligence; a myriad of other ways are permitted. Nevertheless, some sort of minimally adequate proof of negligence still has to be provided to get to the jury (reasonable minds differing and all that). The trial judge can be asked to verify this through a summary judgment or directed verdict motion. I have to admit, though, that the Edenshaw opinion does not come close to expressly stating this. But in my view this is what the opinion should have said.

The Court in Burnett sidestepped the broad language of Edenshaw and did exactly what I said it should do. So, there! I told you so!

(I might have to join up with Miss Cleo and start charging you people for predicting the future. “Get a free reading of the legal future for only 99¢ per minute! For your free reading, have your credit card ready and call 1-900-PSYCLAW now! Legal psychics are standing by!”)