UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 12-1819

KELLY CAPITAL, LLC; KELLY ESCROW FUND V, LLC,

Plaintiffs - Appellants,

v.

S&M BRANDS, INCORPORATED,

Defendant – Appellee,

v.

SEI PRIVATE TRUST COMPANY, as Trustee of the SEI Private 

Trust,

Third Party Defendant - Appellant. 

Appeal from the United States District Court for the Eastern 

District of Virginia, at Richmond. Robert E. Payne, Senior

District Judge. (3:10-cv-00728-REP)

Argued: May 14, 2013 Decided: July 15, 2013

Before NIEMEYER, MOTZ, and FLOYD, Circuit Judges.

Affirmed by unpublished per curiam opinion.

ARGUED: David Barmak, MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND 

POPEO, P.C., Washington, D.C., for Appellants. Bryan Michael 

Haynes, TROUTMAN SANDERS LLP, Richmond, Virginia, for Appellee. 

ON BRIEF: Andrew Nathanson, Bridget Moorhead, Matthew Cohen, 

MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C., Washington, 
2

D.C., for Appellants. Alan D. Wingfield, Timothy J. St. George, 

TROUTMAN SANDERS LLP, Richmond, Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.
3

PER CURIAM:

I.

In 1998, the Attorneys General of forty-six states entered 

into a Master Settlement Agreement (MSA) with four major tobacco 

companies to resolve class actions that certain states had 

initiated against the manufacturers. See Grand River Enter. Six 

Nations, Ltd. v. Pryor, 481 F.3d 60, 63 (2d Cir. 2007) (per 

curiam). Later, to broaden the reach of the MSA, states adopted 

legislation, commonly known as Tobacco Escrow Statutes,

requiring all tobacco manufacturers either to (1) join the MSA 

or (2) make annual contributions to escrow accounts for the 

purpose of paying tobacco-related claims. VIBO Corp. v. Conway, 

669 F.3d 675, 681 (6th Cir. 2012). In this case, we deal with a

Virginia-based tobacco manufacturer, Appellee S & M Brands, Inc.

(S & M), and the contributions it made to escrow accounts. 

Specifically, we consider the terms of a contract through which 

it sold certain interests in those contributions.

A.

Virginia law mandates that escrow contributions remain in 

escrow for twenty-five years and be used only to pay judgments 

or settlements on tobacco-related claims. Va. Code Ann. § 3.2-

4201(B). Unused principal that remains in an account after 

twenty-five years reverts back to the manufacturer that placed 
4

it in escrow. Id. Although manufacturers may invest the funds 

and pocket any income generated from such investments, they may 

not sell or transfer the fund principal. Id. Importantly, 

however, they may sell their interest in the income earned on 

fund investments and their reversionary interest in the 

principal. See id. Here, we term the interest in the 

investment income plus the reversionary interest an “escrow 

release.”

For tax purposes, S & M’s escrow accounts are classified as 

Qualified Settlement Funds (QSF). A QSF has two primary 

characteristics: (1) it is established via court order to 

“resolve or satisfy,” inter alia, claims “[a]rising out of a 

tort, breach of contract, or violation of law,” and (2) it 

operates as a trust such that “its assets are . . . segregated 

from other assets of the transferor.” 26 C.F.R. § 1.468B-1(c). 

Additionally, in the eyes of the Internal Revenue Service (IRS), 

a QSF is a person. Id. § 1.468B-2(a). Thus, its modified gross 

income, such as the income generated by investment of escrowed 

funds, is taxed. Id. The impact of this policy is significant 

because it effectively subjects the income earned on investments 

of escrowed funds to a double layer of taxation—not only does 

the owner of the income pay taxes on what is earned, but the 

QSF, as a person created via regulation, does as well. 

Moreover, because use of the QSF principal is limited to 
5

satisfaction of tobacco-related claims, the taxes must be paid 

from the repository of income earned. It goes without saying 

that these tax regulations somewhat inhibit the sale of escrow 

releases associated with QSF-classified accounts.

B.

In 2009, S & M began negotiating with Appellant Kelly 

Capital, LLC, a private equity firm based in California, to sell 

its escrow releases. From the outset, S & M communicated that 

the escrow accounts’ QSF status subjected their income to a 

double layer of taxation, and Kelly Capital pursued various 

routes to avoid the double tax. Most notably, it posited that 

because S & M would pay taxes on its income from the 

sale of its escrow releases and because Kelly would 

thereafter own all ‘income’ generated by the escrowed 

funds, the QSF-status of the funds (and hence the QSFlevel taxes) would be eliminated upon the completion 

of its transaction with S & M. 

Kelly Capital, LLC v. S & M Brands, Inc., 873 F. Supp. 2d 659, 

666 (E.D. Va. 2012). The idea was novel, but it gained little 

traction. Indeed, early in the negotiation process, Kelly’s 

lawyers advised it of the theory’s deficiency: “[S]ince the 

ownership of the account is still in the name of S & M Brands, 

and the QSF is a separate tax entity, the QSF should [continue 

to] pay taxes on earnings and transfer the remainder to Kelly 
6

Capital.” Id. (alterations in original) (internal quotation 

marks omitted).

1.

On January 21, 2010, S & M provided the first draft of an

Escrow Release Transfer Agreement (ERTA) to Kelly Capital. 

Relevant here, section 5.02(a) required Kelly to “pay all 

applicable federal and state taxes, if any, required to be paid 

by the Purchaser with respect to the Assigned Escrow Releases, 

including the taxes for a Qualified Settlement Fund under the 

Internal Revenue Code.”

On March 5, 2010, Kelly responded with a revised ERTA in 

which the phrase, “including the taxes for a Qualified 

Settlement Fund under the Internal Revenue Code” had been 

stricken from section 5.02(a), and an additional paragraph, 

section 5.01(m), had been added. Section 5.01(m) required S & M 

to “pay all applicable federal and state taxes, if any, required 

to be paid by the Seller and the Qualified Settlement Funds, 

including any taxes owed with respect to the Assigned Escrow 

Releases prior to their receipt by the Purchaser.” It also 

provided that S & M would 

indemnify the Purchaser and its Assignees for any loss 

of Assigned Escrow Releases or Related Escrow Funds 

proximately caused by the Seller’s or the Qualified 

Settlement Funds’ failure to pay such liability and 

breach of this Section 5.01(m) [and that S & M Brands 
7

would] promptly pay all reasonable legal and other 

directly related expenses incurred by the Purchaser or 

its Assignees in connection with any such dispute.

S & M responded on March 18, 2010, with a draft that rejected 

Kelly’s amendments and provided instead that as to the QSF-level 

taxes, S & M would pay only those taxes that had “accrued on or 

prior to the Closing Date.” It further agreed to indemnify 

Kelly with respect to any legal action taken in the event that 

S & M failed to pay such pre-closing taxes. Kelly accepted 

these revisions and sent an amended ERTA to S & M. The amended

ERTA included the following addition to section 5.01(m):

In the event that the Internal Revenue Service or any 

state taxing authority makes any claim that the Seller 

or the Qualified Settlement Funds owe any federal or 

state tax liability (including any penalties or fines) 

with respect to the Assigned Escrow Releases or 

Related Escrow Funds accrued after the Closing Date, 

the Seller shall use its best efforts to cooperate 

with the Purchaser or its Assignee to defend such

claim . . . . The Seller shall promptly pay all 

reasonable legal and other directly related expenses 

incurred by the Purchaser or its Assignees in 

connection with any such dispute as invoiced by the 

Purchaser or its Assignee to the Seller.

S & M rejected this addition, responding with a version that 

reversed the obligations of the section 5.01(m) language that 

Kelly had proffered. The new version replaced the last sentence 

of Kelly’s proposed addition with a sentence requiring that “the 

Purchaser or its Assignee . . . promptly pay all reasonable 

legal and other directly related expenses incurred by the Seller 

as invoiced by the Seller to the Purchaser or its Assignee.”
8

2.

The parties eventually finalized the deal in April 2010

with an ERTA that gave Kelly Capital or its assignees the right 

to purchase certain releases for thirty-four cents per dollar of 

principal. Relevant here, the final ERTA included the following 

definitions:

“Escrow Release(s)” means all right, title and 

interest in and to and all rights under the Escrow 

Agreement and the Tobacco Escrow Statutes with respect 

to (i) release of Escrowed Funds on or after twentyfive (25) years after the original deposit of each of 

such Escrowed Funds, (ii) interest or other 

appreciation earned on such Escrowed Funds, (iii) 

refund due to overpayment into such Escrowed Funds, 

and (iv) other release of all or any portion of such 

Escrowed Funds . . . or any earnings with respect 

thereto or any securities or instruments in which such 

Escrowed Funds are invested, together with each of the 

following rights which are essential for the 

protection and enjoyment of the foregoing: (1) the 

right to co-control the defense against any claims, 

allegations or proceedings that could result in the 

forfeiture, disgorgement or release of the Escrowed 

Funds, in whole or in part, and (b) the right to give 

instructions to the Escrow Agent with respect to the 

investment of the Escrowed Funds (provided that such 

investments are consistent with the Tobacco Escrow 

Statutes, Escrow Rules and Regulations and the Escrow 

Agreement) and any release of the Escrowed Funds only 

as described in (i) through (iv) above.

. . . .

“Qualified Settlement Fund” shall have the meaning set 

forth in the applicable Tobacco Escrow Statutes.

“Qualified Settlement Funds” means the Qualified 

Escrow Funds (comprised of the Escrowed Funds 

(including the Related Escrow Funds)) each as 

classified for tax reporting purposes as a qualified 

settlement fund by the Internal Revenue Service 
9

pursuant to a Private Letter Ruling dated January 11, 

2007.

The ERTA’s relevant provisions read,

Section 2.01. Purchase and Conveyance.

(a) Conveyance of Escrow Releases. The Seller 

does hereby agree to sell, transfer, assign, set over 

and otherwise convey to the Purchaser . . . , without 

recourse, all its right, title and interest in, to and 

under each and every Escrow Release with respect to 

the related Escrowed Funds described on Schedule B to 

this Agreement and all amounts received with respect 

thereto and all proceeds thereof from and after the 

Closing Date . . . .

(b) Compliance with Tobacco Escrow Statutes; 

Escrow Agreement. The Seller and the Purchaser hereby 

acknowledge and agree that notwithstanding anything 

contained herein to the contrary, the Related Escrowed 

Funds shall remain deposited with the applicable 

Escrow Agent . . . in the name of the Seller and be 

available to satisfy Released Claims in accordance 

with the terms and conditions of the applicable Escrow 

Agreement and the Tobacco Escrow Statutes.

(c) Ownership. As of the Closing Date . . . the 

Purchaser shall become the legal and equitable owner 

of the Assigned Escrow Releases, and shall be entitled 

to all of the rights, privileges, duties and remedies 

applicable to said ownership. . . .

. . . .

Section 3.03. Related Documents. Concurrently 

herewith and as a condition for closing the 

transaction, the parties shall execute and deliver the 

Indemnity Agreement and Acknowledgement Agreement.

. . . .

Section 5.01. . . .

. . . .
10

(m) Qualified Settlement Funds. The Seller 

shall pay all applicable federal and state taxes, if 

any, required to be paid by the Seller and the 

Qualified Settlement Funds accrued on or prior to the 

Closing Date with respect to the Escrowed Funds. . . . 

In the event that a final determination, judgment or 

settlement of any dispute between the Internal Revenue 

Service, any state taxing authority, the Seller and/or 

the Qualified Settlement Funds and the Purchaser, if 

applicable, with respect to any federal or state tax 

liability (including any penalties or fines) owed by 

the Seller and/or the Qualified Settlement Funds 

accrued on or prior to the Closing Date, the Seller 

shall indemnify the Purchaser and its Assignees for 

any loss of Assigned Escrow Releases or Related Escrow 

Funds proximately caused bye the Seller’s or the 

Qualified Settlement Funds’ failure to pay such 

liability and breach of this Section 5.01(m). In 

addition, the Seller shall also promptly pay all 

reasonable legal and other directly related expenses 

incurred by the Purchaser or its Assignees in 

connection with any such dispute as invoiced by the 

Purchaser or its Assignees to the Seller. . . . The 

Seller shall use its best efforts to cause the Escrow 

Agent to annually deliver to the Purchaser or its 

Assignee a Form 1099–INT with respect to the Assigned 

Escrow Releases. In the event that the Internal 

Revenue Service or any state taxing authority makes 

any claim that the Seller or the Qualified Settlement 

Funds owe any federal or state tax liability 

(including any penalties or fines) with respect to the 

Assigned Escrow Releases or Related Escrow Funds 

accrued after the Closing Date, the Seller shall use 

its best efforts to cooperate with the Purchaser or 

its Assignee to defend such claim, subject to Section 

5.01(e). For such disputes, the Purchaser or its 

Assignee shall promptly pay all reasonable legal and 

directly related expenses incurred by the Seller as 

invoiced by the Seller to the Purchaser or its 

Assignee.

. . . .

Section 5.02. . . .

(a) Taxes and Fees. The Purchaser shall pay all 

applicable federal and state taxes, if any, required 
11

to be paid by the Purchaser with respect to the 

Assigned Escrow Releases or Related Escrow Funds 

received by it. The Purchaser shall pay all fees and 

expenses of the Escrow Agent related to the 

maintenance of the Related Escrowed Funds.

. . . .

Section 8.12. Schedules, Annexes and Exhibits. The 

schedules, annexes and exhibits attached hereto and 

referred to herein, as the same may be supplemented 

and amended from time to time as contemplated herein, 

shall constitute a part of this Agreement and are 

incorporated into this Agreement for all purposes.

In addition, the ERTA provided options to purchase escrow 

releases in the future, subject to certain timing requirements. 

Finally, as noted above, section 2.01(b) requires that the 

Purchaser of the escrow releases comply with “the applicable 

Escrow Agreement and the Tobacco Escrow Statutes.” Relevant

here, the Escrow Agreement includes a provision that requires 

the Escrow Agent to “comply with all applicable tax filing, 

payment and reporting requirements, including, without 

limitation, those imposed under Treas. Reg. 

[section] 1.468B . . . .” As we already observed, Treasury 

Regulation section 1.468B stipulates that a QSF is a person 

subject to a tax on its modified gross income. 26 C.F.R.

§ 1.468B-2(a). 
12

3.

Following the ERTA’s execution, Kelly Capital assigned a 

portion of its immediate purchasing rights to Appellant SEI 

Private Trust Company (SEI), which purchased $30 million of 

escrow releases for $10.2 million. SEI is the “directed 

trustee” of a pension fund, and its purchases of the releases 

were directed by its Investment Committee, comprised only of 

Michael Kelly, the Chief Executive Officer of Kelly Capital, and 

Nick Spriggs, the former President of Kelly Capital. Kelly 

Capital assigned the remainder of its immediate purchasing 

rights to Appellant Kelly Escrow Fund V, LLC (Kelly Escrow), a 

special purpose vehicle that Kelly Capital had formed to 

purchase escrow releases. Kelly Escrow purchased $40 million of 

escrow releases for $13.6 million.

Soon thereafter, problems arose. “Kelly Capital sought to 

put together a securitization of the escrow release[s] already 

purchased by [Kelly Escrow] and SEI to sell interest in the 

package of escrow release[s] to third party purchasers.” But 

Kelly Capital’s investment bankers communicated that “the 

prospectus for the transaction would have to make a clear 

disclosure regarding the payment of the QSF taxes on the 

purchased escrow releases.” As a result, the securitization did 

not move forward. Of course, such struggles motivated Kelly to 

continue researching options for avoiding the QSF-level taxes, 
13

and it did just that, asking two different law firms to research 

the issue. Ultimately, however, these efforts proved

unavailing.

On September 9, 2010, Kelly Capital “took the position that 

it was not liable for the QSF[] taxes” and communicated its view 

to S & M. S & M disagreed, maintaining that Kelly had “assumed 

the risk of the QSF-level taxation in the ERTA.” On September 

13, 2010, Kelly Capital sought to extend its option to purchase 

additional releases; thus, it sent S & M a notice to that 

effect. S & M communicated that it would not extend the option 

period unless Kelly Capital provided assurance in writing that 

it would pay the QSF-level taxes. Kelly Capital responded by 

instituting this action, together with Kelly Escrow. The 

complaint asked the district court to, inter alia, (1) 

“[d]eclar[e] that [it] ha[d] not assumed in the ERTA or the 

amendments to the ERTA liability or responsibility for paying 

the QSF-related taxes, and that such liability was not 

transferred by S & M under the ERTA, as amended, or otherwise”; 

(2) “[o]rder[] S & M to specifically perform the ERTA . . . by 

selling to Kelly [Escrow] the additional income and remainder 

interests as to which it ha[d] indicated its intention to 

purchase”; (3) “preserv[e] Kelly [Escrow’s] options to purchase 

additional income and remainder interests in the future in 

accordance with the ERTA”; and (4) “enjoin[] S & M from selling 
14

the additional interests to another buyer without first allowing 

Kelly [Escrow] to do so in accordance with the ERTA . . . .”

S & M responded with counterclaims against Kelly Capital 

and Kelly Escrow, also naming SEI as a defendant to these 

claims. S & M sought, inter alia,

a declaratory judgment that Kelly Capital’s . . .

interpretation of the ERTA, the Escrow Agreement and 

associated documents [was] incorrect, that Kelly 

Capital . . . [was] obligated to pay, or to allow to 

be paid, all federal and state income taxes on the 

assigned Escrow Release(s), and that S & M Brands 

ha[d] no obligation to pay such taxes; [and]

a declaratory judgment that it [was] not in default 

under the ERTA, the Escrow Agreement[,] and associated 

documents, and that Kelly Capital . . . committed a 

material anticipatory breach of its ERTA, the Escrow 

Agreement and associated documents, thereby releasing 

S & M Brands from any remaining obligations under the 

ERTA, including as to the transfer of additional 

Escrow Release(s) pursuant to the Option.

The parties conducted discovery and filed cross-motions for 

summary judgment. The district court denied the motions and, in 

so doing, concluded that the ERTA was ambiguous. Therefore, 

during a three-day bench trial, the court consulted parol 

evidence and determined that Kelly Capital had obligated itself 

to pay the QSF-level taxes. The court also concluded that when 

Kelly Capital communicated to S & M that it “was not liable for 

the QSF[] taxes,” it committed a material anticipatory breach. 

Accordingly, the court released S & M from “all further 

obligation[] . . . to transfer additional escrow releases 
15

pursuant to the option provision of the [ERTA].” Kelly Capital, 

873 F. Supp. 2d at 680.

Kelly Capital, Kelly Escrow, and SEI (collectively, “Kelly 

Capital” or “Kelly”) appeal the district court’s order, 

contending that it erred in concluding that Kelly Capital (1) 

obligated itself to pay the post-closing QSF-level taxes and (2) 

anticipatorily breached the ERTA. For the reasons that follow, 

we affirm the district court’s decision.

II.

Per the terms of the ERTA, New York law applies in this 

case. Under New York law, “whether or not a writing is 

ambiguous is a question of law to be resolved by the court,” 

W.W.W. Assocs., Inc. v. Giancontieri, 566 N.E.2d 639, 642 (N.Y. 

1990).

“A contract is unambiguous if the language it uses has ‘a 

definite and precise meaning, unattended by danger of 

misconception in the purport of the [agreement] itself, and 

concerning which there is no reasonable basis for a difference 

of opinion.’” Greenfield v. Philles Records, Inc., 780 N.E.2d 

166, 170–71 (N.Y. 2002) (alteration in original) (quoting Breed 

v. Ins. Co. of N. Am., 385 N.E.2d 1280, 1282 (N.Y. 1978)). Said 

differently, “If the agreement on its face is reasonably 

susceptible of only one meaning, a court is not free to alter 
16

the contract to reflect its personal notions of fairness and 

equity.” Id. at 171; cf. US Oncology, Inc. v. Wilmington Trust 

FSB, 958 N.Y.S.2d 47, 48 (N.Y. App. Div. 2013) (“A contract is 

ambiguous when ‘on its face [it] is reasonably susceptible of 

more than one interpretation’” (alteration in original) (quoting 

Chimart Assoc. v. Paul, 489 N.E.2d 231, 233 (N.Y. 1986))). 

Furthermore, “[e]xtrinsic evidence of the parties’ intent may be 

considered only if the agreement is ambiguous.” Greenfield, 780 

N.E.2d at 170.

Both parties assert that the ERTA unambiguously supports 

their respective positions. Kelly maintains that the ERTA 

reflects no “affirmative assumption” on its part of a duty to 

pay the QSF-level taxes. S & M counters by citing portions of 

the ERTA that in its view “make[] clear . . . that Kelly assumed 

the burden of all QSF-level taxes after closing.” We agree with 

S & M.

A.

As is evident from our recounting above, the 

correspondence, ERTA drafts, and other documentation associated 

with negotiation of the final contract is extensive. Even a 

cursory review reveals that much wrangling occurred regarding 

which party would pay the post-closing QSF-level taxes. Thus, 

it is somewhat surprising that, as the district court 
17

recognized, “[N]owhere in any of the[] [ERTA] provisions does 

either party agree expressly to pay the QSF-level taxes.” Kelly 

Capital, LLC, 873 F. Supp. 2d at 671. Such absence tempts us to 

immediately rule the ERTA ambiguous as to this issue and resort 

to parol evidence. But our initial focus in determining 

ambiguity must concern the contractual language that exists, not 

the language that is absent. And if the language is “reasonably 

susceptible of only one meaning,” we must accord it such

meaning. See W.W.W. Assocs., Inc., 566 N.E.2d at 642 

(“[E]xtrinsic and parol evidence is not admissible to create an 

ambiguity in a written agreement which is . . . unambiguous upon 

its face.” (quoting Intercontinental Planning v. Daystrom, Inc., 

248 N.E.2d 576, 580 (N.Y. 1969)) (internal quotation marks 

omitted)). Thus, despite the ERTA’s failure to assign 

responsibility for the QSF-level taxes by actually using the 

term “Qualified Settlement Fund” in that context, we believe 

that it unambiguously places the responsibility for payment of 

these taxes with Kelly Capital.

According to section 2.01(c), when Kelly Capital signed the 

ERTA, it “bec[a]me the legal and equitable owner of the Assigned 

Escrow Releases” and, as such, became “entitled to all of the 

rights, privileges, duties and remedies applicable to said 

ownership.” One duty, as outlined in section 2.01(b), is 

compliance with the “terms and conditions of the applicable 
18

Escrow Agreement.” And the Escrow Agreement requires the Escrow 

Agent to “comply with all applicable tax filing, payment and 

reporting requirements, including, without limitation, those 

imposed under Treas. Reg. [section] 1.468B.” It seems to us 

that as to the issue here, these sections are “reasonably 

susceptible of only one meaning”—namely, that purchasing the 

escrow releases includes an assumption of the duty to pay the 

QSF-level taxes—i.e., the taxes “imposed under Treas. Reg. 

[section] 1.468B.” But if these sections leave doubt as to such 

a conclusion, sections 5.01(m) and 5.02(a) provide

clarification.

Section 5.01(m) states, “The Seller shall pay all 

applicable federal and state taxes, if any, required to be paid 

by the Seller and the Qualified Settlement Funds accrued on or 

prior to the Closing Date with respect to the Escrowed Funds.” 

Thus, it implies that S & M will not pay the required taxes 

after closing and begs the question of which party will. 

Section 5.02(a) answers that question: “The Purchaser shall pay 

all applicable federal and state taxes, if any, required to be 

paid by the Purchaser with respect to the Assigned Escrow 

Releases or Related Escrow Funds received by it.” It is true 

that section 5.02(a) omits the term “Qualified Settlement Funds” 

while section 5.01(m) includes it. Although we find this 

curious, we do not think that it renders the contract ambiguous 
19

as to the payment of the QSF-level taxes. Section 5.02(a) makes 

clear that the purchaser must pay all required “applicable 

federal and state taxes,” and as stated earlier, the Escrow 

Agreement, with which the purchaser must comply, requires 

payment of taxes “imposed under Treas. Reg. [section] 1.46B.” 

In short, although we recognize that the contract does not 

assign responsibility for the QSF-level taxes by explicit use of 

the term, we do not think that read as a whole it is susceptible 

to more than one meaning on this point.

B.

In spite of our conclusion that the ERTA unambiguously 

assigns responsibility for the QSF-level taxes to Kelly Capital, 

we note for the sake of argument that even if we were to find 

the contract ambiguous, Kelly would fare no better. “When a 

term or clause is ambiguous, ‘the parties may submit extrinsic 

evidence as an aid in construction, and the resolution of the 

ambiguity is for the trier of fact.’” Geothermal Energy Corp. 

v. Caithness Corp., 825 N.Y.S.2d 485, 489 (N.Y. App. Div. 2006) 

(quoting Pellot v. Pellot, 759 N.Y.S.2d 494, 497 (N.Y. App. Div. 

2003)). Here, the extrinsic evidence indicates the parties’ 

intent that Kelly assume the QSF-level tax obligations upon 

closing.
20

From the beginning of the negotiations, Kelly understood 

that it would be responsible for the QSF-level taxes. Indeed, 

the record indicates that S & M communicated that fact early in 

the process, such that Kelly was compelled to seek legal advice 

regarding avoidance options. Furthermore, section 5.01(m) of 

the ERTA indicates S & M’s intent to assist Kelly practically, 

by “caus[ing] the Escrow Agent to annually deliver” tax forms, 

should the IRS pursue it regarding the tax obligations. It also 

delineates Kelly’s agreement to reimburse S & M for expenses 

incurred as a result of such assistance. As the district court 

aptly noted, “If Kelly did not believe that it, not S & M, was

responsible for the QSF-level taxes, why would it agree to 

indemnify S & M for its ‘cooperation’ in opposing efforts by the 

IRS to collect those taxes from Kelly?” Kelly Capital, LLC, 873 

F. Supp. 2d at 674. Finally, Kelly’s post-closing conduct 

reveals that it believed it was responsible for the taxes. Not 

only did it continue researching methods of avoiding the QSFlevel taxes; it failed to communicate to potential investors the 

point it so adamantly argues here—namely, that S & M would pay 

the taxes. “If Kelly had believed that S & M was obligated by 

the ERTA to pay the QSF-level taxes, it simply could have so 

said in its disclosure to investors.” Id. at 675. But it did 

not. And its decision not to do so belies its claim against 

responsibility here.
21

Because the district court rested its decision on a finding 

of ambiguity, it addressed the intricacies of the parol evidence 

in much greater depth than we do here. We think it of some 

import to note, however, that in its brief to this Court, Kelly 

Capital does not contest the evidence on which the district 

court relied. Rather, it simply contests the district court’s 

determination of ambiguity and the methods by which it made that 

determination. Because our discussion of this issue rests on an 

assumption of ambiguity for the sake of argument only, we need 

not address Kelly’s allegations in this regard.

III.

Kelly also takes issue with the district court’s 

determination that it committed a material anticipatory breach 

of the ERTA when it communicated to S & M that “it was not 

liable for the QSF[] taxes.” “Anticipatory repudiation occurs 

when, before the time for performance has arisen, a party to a 

contract declares his intention not to fulfill a contractual 

duty.” Lucente v. Int’l Bus. Mach. Corp., 310 F.3d 243, 258 (2d 

Cir. 2002) (applying New York law); see also De Lorenzo v. Bac 

Agency Inc., 681 N.Y.S.2d 846, 908 (N.Y. App. Div. 1998) 

(indicating that repudiation occurs when one party “has 

indicated an unqualified and clear refusal to perform with 

respect to the entire contract.”). “The doctrine of 
22

anticipatory repudiation entitles the nonrepudiating party to 

immediately claim damages for a breach of contract where there 

is a renunciation of the contract in which the repudiating party 

has indicated an unqualified and clear refusal to perform with 

respect to the entire contract.” De Lorenzo, 681 N.Y.S.2d at 

907–08. 

Here, Kelly’s indication that “it was not liable for the 

QSF[] taxes” constituted repudiation of the contract. Kelly 

maintains otherwise, averring that it “indicated its readiness 

to perform the entire contract, subject only to a judicial 

declaration of a particular element of the parties’ 

obligations.” We disagree. Regardless of whether Kelly was 

ready to “perform the entire contract,” its determination not to 

pay the QSF-level taxes was a declination of material 

consequence. “[A] ‘material breach’ is a failure to do 

something that is so fundamental to a contract that the failure 

to perform that obligation defeats the essential purpose of the 

contract or makes it impossible for the other party to perform 

under the contract.” 23 Richard A. Lord, Williston on Contracts

§ 63:3 (4th ed. 2007) (footnotes omitted); see also Callanan v. 

Powers, 92 N.E. 747, 752 (N.Y. 1910) (counseling that rescission 

of a contract in the context of repudiation is reserved for 

breaches that are willful or “so substantial and fundamental as 

to strongly tend to defeat the object of the parties in making 
23

the contract”). S & M testified at trial that Kelly knew it was 

responsible for the QSF-level taxes and that S & M would not 

have entered into the ERTA unless it believed Kelly had assumed 

the QSF tax burden. The district court found this testimony 

credible, and we find no reason to conclude otherwise. 

Accordingly, Kelly’s failure in this regard was material and 

constituted a repudiation of the contract. Given such 

repudiation, S & M was entitled to terminate its own 

performance. Consequently, we affirm the district court’s 

decision as to this point.

IV.

For the reasons above, we affirm the decision of the 

district court.

AFFIRMED