Case Title: Borgen v. Klemm

Citation: 391 N.W.2d 252

Docket Number: 85-1437

State: iowa

Court: Iowa Supreme Court

Date: 1986-07-23T00:00:00Z

Document:
391 N.W.2d 252 (1986) Arden L. BORGEN and CassadayBorgen Technologies, Ltd., Appellees, v. Virginia KLEMM and John Klemm, Appellants. No. 85-1437. Supreme Court of Iowa. July 23, 1986. Rehearing Denied August 20, 1986. *253 Paul R. Huscher, Des Moines, for appellants. Larry Seckington and Mark R. Schuling, of Brick, Seckington, Bowers, Swartz & Gentry, P.C., Des Moines, for appellees. Considered by McGIVERIN, P.J., SCHULTZ, CARTER, WOLLE, and LAVORATO, JJ. CARTER, Justice. Defendants, Virginia Klemm and John Klemm, who are the parties or beneficiaries under a written agreement wherein Virginia Klemm sold all the stock of a closely held corporation to plaintiff, Arden L. Borgen, appeal from a declaratory judgment requiring indemnification of the buyers and the corporation for certain federal income tax liabilities of the corporation antedating the sale. Upon our review of the record, we affirm the judgment of the district court. Under a written agreement dated November 20, 1981, defendant, Virginia Klemm, sold all the stock of H.V. Cassaday Refrigeration, Inc., a closely held Iowa corporation, to plaintiff, Arden L. Borgen. Defendant John Klemm is Virginia Klemm's husband. Although he was not a signatory to the written agreement of sale, he was a beneficiary thereof with respect to certain provisions involving his continued employment by the corporation. The November 20, 1981 agreement contained the following provisions: (Emphasis added.) Subsequent to the execution of this stock purchase agreement, certain problems arose between the parties concerning their respective rights and obligations thereunder. Except as recited in the agreements which are set forth later in this opinion, the nature of these disputes cannot be ascertained with particularity from the record. It does appear, however, that none of these disputes involved the seller's duty to indemnify the buyer and the corporation for federal income tax liabilities of the corporation. In settlement of the disputes which did exist, the parties on November 3, 1983, executed another written agreement denominated "settlement agreement." The latter agreement provided, in part: (Emphasis added.) This settlement agreement was signed by the corporation and plaintiff, Arden L. Borgen, as its president. It was also signed by both of the defendants. At the time the November 3, 1983 settlement agreement was executed, the plaintiffs and defendants were aware that, in an audit of the corporation's 1979 and 1980 federal income tax returns by the Internal Revenue Service, a deficiency in tax owed of $3876.64 had been established for 1979 and a deficiency of $10,988.26 had been established for 1980. The source of this information was a report of proposed adjustments issued by the internal revenue service on May 11, 1983, and received by the corporation. It is agreed that the parties at this time had not been made aware of the potential interest and penalty to be assessed as a result of that deficiency. The present dispute arose after the assessment of interest and penalty on the $14,864.90 federal tax arrearages for 1979 and 1980 increased the corporation's liability for these taxable years to $23,289.11. The corporation paid the latter sum, and plaintiffs then brought the present declaratory judgment action. They seek a declaration that the buyer may deduct from amounts owed to the seller on the sale of stock the difference between $23,289.11 and $14,864.90. The district court granted the declaratory judgment in substantially the same manner as requested by the plaintiffs. In addition to offering the contract documents and the IRS notice of proposed adjustments as evidence at the trial, each side presented the stipulated testimony of three witnesses. The substance of this stipulated testimony is conflicting with respect to the interpretation of the November 3, 1983 agreement. Plaintiff, Arden L. Borgen, testified that the 1983 agreement was intended to supersede the 1981 agreement with respect to the obligations imposed on the parties. He testified that, although the federal income tax liabilities at issue fall by law upon the corporation, the buyers and sellers negotiated the payment of such liabilities as among themselves in entering into the 1983 settlement agreement. These negotiations culminated, according to Borgen's testimony, in an agreement evidenced by Paragraph 4 of the settlement agreement limiting the obligation of the buyers and the corporation to no more than $15,000 in total for 1979 and 1980 federal income tax liabilities. Any additional amounts owed could, under Borgen's interpretation of the agreement, be deducted from the purchase price owed to the sellers by the buyers. Ron Briese, a certified public accountant, testified that he had participated in the drafting of the settlement agreement on behalf of the buyers, and his interpretation of the intent of the language employed was the same as Arden L. Borgen's. David Nelson, who is identified in the stipulated testimony of plaintiffs only as a "financial advisor," stated that he too participated in the negotiations of the November 3, 1983 agreement and its intention was as testified to by Borgen and Briese. For the plaintiffs, Virginia Klemm testified that the November 3, 1983 agreement was intended to supersede the November 20, 1981 contract. She stated that, at the time the latter agreement was executed, the parties were aware of proposed federal income tax deficiencies of the corporation of $3876.64 for 1979 and $10,988.26 for 1980. She testified, however, that no assessment of interest or penalty was anticipated by the parties in negotiating the settlement *256 agreement. She indicated that in negotiations the plaintiffs agreed to assume all obligation for 1979 and 1980 federal income tax liabilities of the corporation in exchange for her agreement to indemnify the corporation against potential state income tax liabilities for the years 1979, 1980 and 1981 and any potential federal income tax liability for the year 1981. She testified that at no time had the defendants agreed to indemnify the corporation or Arden L. Borgen for penalty or interest on any federal income tax deficiencies for 1979 or 1980. Dennis Shull, a certified public accountant, testified that he participated on behalf of the defendants in the negotiation of the November 3, 1983 agreement and that it was his understanding that the agreement operated to remove any and all liability of the defendants to indemnify the corporation for 1979 or 1980 federal income tax liabilities. Defendant, John Klemm, testified that the testimony of his wife, Virginia, and Dennis Shull correctly set forth the agreement which had been negotiated with the plaintiffs. The defendants' argument on appeal is a straightforward and simple one. The basic premise of this argument is that the burden of the federal income taxes, interest, and penalties assessed for the years 1979 and 1980 fall by law on the corporation. Accordingly, defendants urge that the sellers of the stock of the corporation have no obligation for the payment of these taxes or any interest or penalties thereon except as may have been assumed by contract. They argue that, even if the November 20, 1981 contract placed some burden of indemnification on the sellers for the corporation's tax deficiencies at issue here, that obligation was released in the November 3, 1983 settlement agreement. In support of the latter conclusion, they point to the language contained in Paragraph 4 of the settlement agreement which recites that it is "a compromise and settlement of any all claims arising prior to the date of this agreement ... and [in] complete settlement of any and all claims, allegations, causes of action, whether or not known and whether contingent or liquidated." In addition, they urge that the demise of the covenants under the earlier contract are to be found in the language of Subparagraph J of Paragraph 4 which indicates that As further amplification on the argument thus made, defendants note that the matter of federal income tax liabilities for which they have agreed to indemnify the plaintiffs is dealt with in Subparagraph D of Paragraph 4 of the settlement agreement, a clause which makes no mention of federal income tax liabilities for the years 1979 and 1980. They note that the subject of 1979 and 1980 federal income tax liabilities is contained in Subparagraph A of Paragraph 4, which they interpret as placing the obligation for payment of those liabilities entirely upon the corporation. However plausible defendants' arguments may be, they are entitled to prevail only if those arguments carry the day as a matter of law. In several cases, we have applied the standard of interpretation contained in Restatement (Second) of Contracts § 212(2) (1979) which provides: See First National Bank of Creston v. Creston Implement Co., 340 N.W.2d 777, 782 (Iowa 1983); Farm Bureau Mutual *257 Insurance Co. v. Sandbulte, 302 N.W.2d 104, 107-08 (Iowa 1981); Connie's Construction Co. v. Fireman's Fund Insurance Co., 227 N.W.2d 207, 210 (Iowa 1975). For purposes of applying the foregoing rule in the present case, we will assume, because the primary witnesses for each side have so testified, that the settlement agreement is an integrated agreement intended to completely supersede the contract of November 20, 1981. In determining the meaning to be ascribed to the settlement agreement, however, we apply the rule that First National Bank of Creston, 340 N.W.2d at 781 (quoting Restatement (Second) of Contracts § 212 comment b (1979) ). Accord First National Bank in Creston v. Smith, 331 N.W.2d 120, 122 (Iowa 1983); Bare v. Cole, 220 Iowa 338, 342-43, 260 N.W. 338, 340 (1935). In the application of this standard, we believe that different inferences may reasonably be drawn regarding the intention of the parties concerning the disputed federal income tax liabilities of the corporation. The very presence of the language employed in Paragraph 4A lends credence to the interpretation which plaintiffs propose and the trial court adopted. The language which is employed in that clause clearly connotes an intention by the contracting parties to make some special arrangement between themselves concerning ultimate responsibility for payment of the 1979 and 1980 federal tax liabilities. Under defendant's theorythat the intent of the parties was simply to remain in the position in which the federal revenue laws placed themthis clause would not have been necessary. Also supporting the trial court's ultimate findings and conclusions on the issue of the intention of the parties is the language of Paragraph 4A recognizing the existence of taxes due "by Virginia Klemm" as a result of the 1979 and 1980 federal tax audit and expressly limiting plaintiffs' responsibility for such liabilities to a stated sum. Although the November 20, 1981 agreement was superseded by the 1983 agreement, its provisions cast additional light on the intention of the parties in negotiating the settlement of unknown tax liabilities. Under that agreement, we believe plaintiffs' interpretation would clearly prevail with respect to all unknown tax liabilities stated therein, including interest and penalties. Defendants have not suggested any reason why the 1979 and 1980 federal income tax liabilities were to be treated differently from the other unknown tax liabilities listed in Paragraph 4D of the 1983 agreement. Under this clause, the sellers were to indemnify the buyers and the corporation as to all unknown tax liabilities listed therein including interest and penalties. The trial court could easily have found that the 1979 and 1980 federal tax liabilities were dealt with in a separate paragraph of the agreement because, unlike the other unknown tax liabilities, the buyers were to assume the first $15,000 of these obligations. On our review of the entire record, we conclude that the issue presented was one of fact to be resolved by the trial court. The findings of that court concerning the ultimate intention of the parties are supported by substantial evidence. Accordingly, the trial court's ultimate finding may not properly be disturbed on appeal. See, e.g., Hamilton v. Wosepka, 261 Iowa 299, 314, 154 N.W.2d 164, 172 (1967). AFFIRMED.