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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.)