Opinion ID: 729764
Heading Depth: 2
Heading Rank: 4

Heading: The EPI Accounting

Text: 72 Because we hold that the district court erred in vacating the Medcom I jury's award of damages, we need not reach the issues raised regarding Medcom II and Medcom III. It is appropriate, however, for this Court to address the cross-appeals relating to the EPI accounting. MHC claims that the judgment entered against Baxter after the EPI accounting does not account for all of the EPI benefits that Baxter improperly received. Baxter argues that the judgment entered against Baxter overcompensates MHC in connection with the EPI accounting. 73 In Medcom I, the jury found that Baxter's failure to transfer EPI to MHC on September 30, 1986, breached the SPA. The district court granted specific performance to plaintiff MHC, required Baxter to transfer and deliver all of its stock in EPI to MHC, and ordered Baxter to account for the benefits Baxter received from possession of EPI since September 30, 1986. This Court agreed with the district court that specific performance was an appropriate remedy. See Medcom Holding Co., 984 F.2d 223. On March 3, 1993, Baxter conveyed the EPI stock to MHC, and on August 31, 1993, the district court referred the EPI accounting to a magistrate judge. 74 The district court awarded approximately $1.1 million to MHC. The parties appeal several of the issues presented to the magistrate judge and the district court. The district court's award of equitable compensation following the accounting, like the award of specific performance, is an exercise of equitable discretion that we review for abuse of discretion. Medcom Holding Co., 984 F.2d at 227; see also Fleming v. O'Donohue, 138 N.E. 183, 185 (Ill. 1923).
75 MHC sought approximately $2.3 million in compensation for net cash received by EPI after September 30, 1986, but then transferred to Baxter before the 1993 EPI stock transfer. EPI collected a $2.7 million licensing fee paid by NBC for the rights to the film The Ted Kennedy, Jr. Story (the NBC Fee). MHC concludes that this cash belongs to it as the rightful owner of EPI after September 30, 1986. 76 EPI negotiated the NBC Fee in 1985 pursuant to a packaging agreement for the movie. The evidence indicated, however, that the fee really belonged to another Baxter subsidiary, Travenol Laboratories Limited (TLL), pursuant to an agreement between EPI and TLL. In early 1986, TLL and EPI entered into a contract that transferred EPI's right to the NBC Fee to TLL. TLL agreed to bear the production costs with respect to the movie. The primary purpose of the agreement was to take advantage of the tax benefits related to TLL's location in the United Kingdom. The district court adopted the magistrate judge's finding that MHC is not entitled to its $2.3 million net cash claim and that Baxter actually suffered a net cash detriment of $244,726 from its ownership of EPI after September 30, 1986. 77 MHC's argument that the evidence should be interpreted another way does not require discussion. Should does not mean must and does not evidence an abuse of discretion. One point raised by MHC does merit discussion, however: MHC claims that Baxter made several admissions that contradict the district court's findings. First, Baxter stipulated during the EPI accounting proceedings that the NBC Fee was reported as EPI income in the United States and was not reported as TLL income in the United Kingdom. Second, in 1988, when Baxter was resisting MHC's efforts to force it to transfer EPI, Baxter presented to the district court a balance sheet and affidavit that included the NBC Fee as an EPI asset. Third, in all of its U.S. tax returns from 1982 to 1993, Baxter used the same EPI financial statements upon which MHC's expert based his conclusion that the NBC fee was an EPI asset as of September 30, 1986. 78 We agree with the district court that EPI's financial statements are simply evidence, not admissions, that EPI actually owned the NBC Fee. Judicial admissions are formal concessions in the pleadings, or stipulations by a party or its counsel . . . Keller v. United States, 58 F.3d 1194, 1198 n.8 (7th Cir. 1995); see also In re Lefkas Gen. Partners, 153 B.R. 804 (N.D. Ill. 1993) (Binding judicial admissions are any 'deliberate, clear and unequivocal' statement, either written or oral, made in the course of judicial proceedings.). Because Baxter did not make a formal concession that the NBC fee was an EPI asset, it made no binding admission to this effect. 5 The financial statements were thus merely evidence to be considered. [O]rdinary evidentiary admissions . . . may be controverted or explained by the party. Keller, 58 F.3d at 1198 n.8. Baxter explained the evidence that was adverse to its defense, and the magistrate judge and the district court were free to accept this evidence.
79 MHC also sought compensation for certain EPI losses totalling $3.6 million. Baxter used these losses to reduce its 1989 federal tax liability by $1,362,371. MHC argued that Baxter gained this tax benefit as a result of its wrongful control over EPI after September 30, 1986. MHC requested an award of $2,275,929--an amount that MHC claims will leave it with a $1,362,371 gain after paying taxes on the award. 80 The district court found that MHC was entitled to $1,362,371 on the tax benefit claim less Baxter's $244,726 net cash loss as a result of owning EPI after September 30, 1986. The net award was $1,117,645. The court stated that this was an equitable award because it prevented Baxter's unjust enrichment and avoided undue speculation as to what would have occurred had EPI been transferred in 1986. The court also balanced the fact that the award might make MHC more than whole (because MHC had failed to show that use of the $3.6 million in EPI losses since 1986 would have translated into a tax benefit to MHC) against the fact that the court had diminished the award to reflect Baxter's losses. 81 MHC claims that the district court erred in its award. MHC argues that it is entitled to an award of $2,275,929 to reflect the taxes it will have to pay on the award. As a general matter, a court will not increase an award of damages to compensate for the expected tax liability on the damage award. Oddi v. Ayco Corp., 947 F.2d 257, 267 (7th Cir. 1991). We have noted, however, that courts have adopted a pragmatic approach to the award of damages where the defendant's error deprived the plaintiff of tax-free income, rather than taxable income. Id. MHC claims that the issue is the after-tax effect of Baxter's failure to transfer EPI to MHC. Thus, the proper measure of damages takes the after-tax effect of the judgment into account. In the instant case, MHC claims that the $2,275,929 figure is appropriate because it will result in an after-tax benefit to MHC of $1,362,371 and an after-tax loss for Baxter of $1,362,371. 82 We give great deference to the district court in exercising its equitable discretion. The district court concluded that compensating for tax effects was inappropriate and speculative. In Oddi, we noted that the party seeking an increase in an award to reflect tax effects bears the burden of presenting evidence that shows that he will be liable for the prescribed amount of taxes. Id. at 268. We cannot say that the district court abused its discretion in refusing to increase the damage award to reflect potential tax effects. 83 After noting the very deferential standard of review in contesting MHC's argument, Baxter argues that the district court's accounting was flawed because it awarded too much to MHC. Baxter argues that $2,753,076 of the EPI tax losses claimed by Baxter after September 30, 1986, occurred and were in existence prior to that date. Baxter did not do a balance sheet review of EPI in accordance with GAAP prior to the sale of Medcom to MHC because Baxter did not meet the terms of the SPA. Baxter claims that if it had conducted a balance sheet review as the SPA required, then $2,753,076 of the $3,612,772 in EPI tax losses claimed by MHC necessarily would have been taken by Baxter prior to closing. The district court rejected this reasoning, noting that to guess what Baxter would have done had Baxter met the terms of a contract that Baxter violated is unwarranted speculation. Moreover, it is clear that Baxter did indeed receive a tax benefit from its wrongful ownership of EPI after September 30, 1986. (MEMORANDUM OPINION AND ORDER, 10/10/95, 1995 WL 609125 at  6.) 84 When considering the equities of the situation, the district court was entitled to refuse to credit Baxter's speculation as to what it would have done if it had not violated the contract. In addition, the court was not required to speculate as to what effect a proper balance sheet review would have had on MHC's decision making process. The district court did not abuse its discretion.